BAR OPERATIONS COMMISSIONS

KARIZ ELIZABETH TEH

Chairman

Honey Joy Belen Vice-Chair for Academics, Kathleen Trine De Lara Vice-Chair for
Administration, Jhoanna Paula Bitor Operations Officer, Michael Angelo Tamayo Secretary,
Rhian Lee Tiangco Treasurer, Shianne Camille Dionisio Auditor, Gillian Albay Public
Relations Officers, Mikyla Cordero Volunteer Core Head, Ayla Monica Cristobal Creative
Director

Charles Bautista Secretary, John Paul Nanit Treasurer JOHN PAUL WANIA
Commissioner
Van Regine Perlas Auditor
Aldrin Chavez
Deputy Commisioner

Joefranz Bilo
Ma. Amalia Gumangan
Joseph Eric Pocholo Briones
Subject Heads

Camille Bianca Pinto, Mac

Vincent Javier, John Maxwel
Mendoza, Mariashem Gasatan,
Ma. Victoria Santiago, Riza
Andalan, Paul Joshua Rivera,
Kathleen Marcelo, John Freko
Dioquino, Kenken Lagutan, Mark
Anthony Camposuelo, Mike
Ferdinand Santos
Members

ACKNOWLEDGMENT
Justice Antonio E.B. Nachura, Retired
Dean Domingo M. Navarro
Asst. Dean Erik C. Lazo
Atty. Gabriel P. Dela Peña
Atty. Roberto Belarmino M. Lock
Atty. Rizalina V. Lumbera
Atty. Agnes B. Santos
Atty. Prime Ramos
Atty. Calai Fabie
Atty. Cris Tenorio

O
Atty. Victor Carlo Antonio V. Cayco

center
Atty. Roderick M. Villostas
for Director
legal
Atty. Antony J. Parreño, Atty. Lester Ople
CLEAR education Research Fellows

and Brando de Torres, Maricar Asuncion, Jayson Galapon

Research Staff
research
 TABLE OF CONTENTS

I. GENERAL PRINCIPLES OF TAXATION...................................................... 1

A. Concept and Purpose of Taxation...……………………………………………………………... 1

B. Distinguish: Power of Taxation, Police Power, and Eminent Domain………………… 4

C. Theory and basis of Taxation…………….………………………………………………………… 5

D. Jurisdiction Over Subjects and Objects…………………………………………………………. 5

E. Principles of a Sound Tax System...….………………….………………………………………. 6

F. Inherent and Constitutional Limitations on Taxation..……………………………………. 6

G. Stages or Aspects of Taxation……………………………………………………………………... 16

H. Requisites of a Valid Tax…………………………………………………………………………….. 16

I. Kinds of Taxes………………………...…………………………………………………………………. 16

J. General Concepts in Taxation….…………………………………………………………………… 18

K. Constructions and Interpretation of Tax Laws, Rules and Regulations……………... 27

II. NATIONAL INTERNAL REVENUE CODE…………………………………………. 29

A. Taxing Authority………………………………………………………………………………………… 28

B. Income Tax………………………………………………………………………………………………. 36

C. Estate Tax……………………………..………………………………………………………………….. 127

D. Donor‘s Tax……………….………………………………………………………………………………. 142

E. Value-Added Tax………………………………………………………………………………………… 150

F. Percentage Taxes: Concept and Nature……………………………..…………………………. 192

G. Excise Tax: Concept and Nature…………………………………………………………………… 198

H. Documentary Stamp Tax: Concept and Nature………………………………………………. 198

I. Tax Remedies Under the National Internal Revenue Code………………………………. 201

III. LOCAL TAXATION…………………………….……………………………………… 256

A. Local Government Taxation…………………………………………………………………………. 254

B. Real Property Taxation……………………………………………………………………………….. 282

IV. JUDICIAL REMEDIES…………………………….………………………………….. 298

A. Jurisdiction of the Court of Tax Appeals..………………………………………………………. 298

B. Procedure……………………………………………………………….…………………………………. 301
 Purple Notes
PART I. GENERAL PRINCIPLES
A. Concept and Purpose of Taxation
1. Definition
Taxation is the power by which the
sovereign, through its law-making body,
raises revenue to defray the necessary
expenses of the government. It is a way of
apportioning the cost of government among
those who, in some measure, are privileged
to enjoy its benefits and must bear its
burdens. (51 Am. Jur 34)
Taxation is a symbiotic relationship whereby
in exchange for the protection that the
citizens get from the Government, taxes are
paid. (CIR vs. Algue, Inc., G.R. No. L-28896,
February 17, 1988)
 Taxation refers to both the power to tax and
the act or process by which the taxing
power is exercised.
Nature, and Characteristics of Taxes
Nature
The nature of the State‘s power to tax is
two-fold. It is both an inherent power and a
legislative power.
 The power of taxation is sometimes called
also the power to destroy. Therefore, it
should be exercised with caution to
minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally
and uniformly, lest the tax collector kill the
"hen that lays the golden egg". And, in
order to maintain the general public's trust
and confidence in the Government this
power must be used justly and not
treacherously. It does not conform with our
sense of justice in the instant case for the
Government to persuade the taxpayer to
lend it a helping hand and later on to
penalize him for duly answering the urgent
call. (Roxas vs. CTA, G.R. No. L-25043 April 26,
1968)
1
Taxation Law
To say that ―the power to tax is the power
to destroy‖ is to describe not the purposes
for which the taxing power may be used but
the but the degree of vigor with which the
taxing power may be employed in order to
raise revenue. (1 Cooley 179-181)
1. Taxation as an Inherent Attribute of
Sovereignty
The power of taxation is based upon
necessity. Without this power, no sovereign
State can exist nor endure without the
means to pay its expenses. Its basis is the
Lifeblood Doctrine.
 The power of taxation is an inherent
attribute of sovereignty; the government
chiefly relies on taxation to obtain the
means to carry on its operations. Taxes are
essential to its very existence; hence, the
dictum that taxes are the lifeblood of the
government. (Commissioner of Internal
Revenue vs. Eastern Telecommunications Phils.,
Inc., G.R. No. 163835, July 7, 2010)
2. Taxation as Legislative in Character
Taxation is an inherent power of the State.
Thus, the State is free to select the object of
taxation through the Legislature, except
where the Constitution provides otherwise.
(Article VI, Sec 28 [2]; Art X, Sec 5)
The power of taxation is inherently
legislative and may be imposed or revoked
only by the legislature. Moreover, this
plenary power of taxation cannot be
delegated by Congress to any other branch
of government or private persons, unless its
delegation is authorized by the Constitution
itself. Hence, the discretion to ascertain the
following — (a) basis, amount, or rate of
tax; (b) person or property that is subject
to tax; (c) exemptions and exclusions from
tax; and (d) manner of collecting the tax —
may not be delegated away by Congress.
(La Suerte Cigarette Factory vs. CIR,G.R. No.
125346, November 11, 2014, penned by J.
Leonen)
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 Purple Notes
Taxation Law
Characteristics of Taxation (CUPS)
1. Comprehensive – It reaches to every
trade or occupation; to every object of
industry, use, or enjoyment; to every
species of possession; and it imposes a
burden which, in case of failure to discharge
it, may be followed by seizure and sale or
confiscation of property.
2. Unlimited - It is so unlimited in force and
searching in extent that courts scarcely
venture to declare that it is subject to any
restrictions, except those that such rests
into the discretion of the authority which
exercises it. (Tio vs. Videogram Regulatory
Board, G.R. No. L-75697, June 18, 1987)
3. Plenary – It operates on all persons and
property belonging to the body politic. This
is an original principle, which has its
foundation in society itself. It is granted by
all for the benefit of all.
4. Supreme – No attribute of sovereignty is
more pervading, and at no point does the
power of the Government affect more
constantly and intimately all the relations of
life than through the exactions made under
it(Tio vs. Videogram Regulatory Board, G.R. No.
L-75697, June 18, 1987)
Scope of Legislative Power to Tax
(PS2KA4T)
1. The determination of purposes for which
taxes shall be levied, provided it is for the
benefit of the public.
2. The determination of subjects of taxation
such as the person, property or occupation
within its jurisdiction.
3. The determination as to the amount or rate
of tax, unless constitutionally prohibited.
4. The determination as to the kind of tax to
be collected (i.e. property tax, income tax,
inheritance tax, etc.).
5. The determination of method, manner,
means, and agencies to collect the taxes.
6. The determination of the apportionment
of tax (whether for general application or
limited to a particular locality).
7. The determination of the situs of taxation.
2 Center for Legal Education and Research
8. The power to specify or 2018 provide for
administrative and judicial remedies.
9. The power to grant tax exemptions and
condonations. (Philippine Petroleum
Corporation vs. Municipality of Pililia, G.R. No.
85318, June 3, 1991)
2. Purpose of Taxation
1. Revenue-Raising
To provide funds with which the state
delivers the basic services to the people.
(ABAN, Law of Basic Taxation,2001 ,p.5)
2. Non-Revenue / Special or Regulatory
(P2R2E)
Regulation – Taxation has a regulatory
purpose as in the case of taxes levied on
excises or privileges like those imposed on
tobacco and alcoholic products, or
amusement places like night clubs, cabarets,
cockpits, etc.(Caltex Philippines vs. Commission
on Audit, G.R. 92585, May 8,1992)
Taxation is no longer envisioned as a
measure merely to raise revenue to support
the existence of government; taxes may be
levied with a regulatory purpose to provide
means for the rehabilitation and stabilization
of a threatened industry which is affected
with public interest as to be within the police
power of the State.
a. Promotion of General Welfare –
Taxation can be used to implement police
power in order to promote the general
welfare of the people.
 The SC upheld the validity of the Sugar
Adjustment Act, which imposed a tax on
milled sugar since the purpose of the law
was to strengthen an industry that is
undeniably vital to the economy- the sugar
industry. (Lutz vs. Araneta, G.R. No. L-7859,
December 22, 1955)
 While the funds collected under the OPSF
are referred to as taxes, they are extracted
in the exercise of the police power of the
State. From such fund, amounts are drawn
to reimburse oil companies when
 Purple Notes
Taxation Law
appropriate situations arise for increases in, Limitations
as well as under recovery of, cost of crude Inherent and Limited to costs of
oil importation. (Osmena vs. Orbos, G.R. No. constitutional limitations issuing the license;
99886, March 31, 1993).
Necessary inspection or
police surveillance.
b. Reduction of Social Inequity – This is
made possible through the progressive Effect of Non-payment
system of taxation where the objective is to Does not make the Makes the business
prevent the undue concentration of wealth business illegal illegal
in the hands of few individuals. Progressivity (Mamalateo, Reviewer on Taxation, 2014, p. 17)
is keystoned on the principle that those who
are able to pay should shoulder the bigger If the purpose is primarily revenue or if revenue
portion of the tax burden. Incidentally, the is at least one of the real and substantial
present rates of income, estate and donor‘s purposes, then the exaction is a tax. Hence, the
taxes show a good example of progressivity. motor vehicle registration fees are taxes
(ABAN, Law of Basic Taxation,2001,p.6) because the legislative intent is mainly to raise
funds for the construction and maintenance of
c. Encourage Economic Growth – In order highways and, to a much a lesser degree, to pay
to promote the country‘s economic growth, for the expenses of the Land Transportation
the law, at times, grants incentives or tax Office. (PAL v. Edu, et al. GR No. L-41383, August
exemptions to encourage investments(ABAN, 15, 1988)
Law of Basic Taxation,2001,p.6).
An ordinance imposing fees based on project
d. Protectionism – It protects local industries cost whose purpose is to regulate certain
from foreign competition i.e. protective construction activities of the identified special
tariffs and custom duties(ABAN, Law of Basic projects, which includes "cell sites" or
Taxation,2001,p.6-7). telecommunications towers, is not a tax because
the fees imposed in the said ordinance are
3. Tax as distinguished from other forms primarily regulatory in nature, and not primarily
of exactions revenue-raising. (Smart vs. Municipality of Malvar,
Batangas, GR No. 204429 dated February 18, 2014)
TAX TARIFF
All embracing term to A kind of tax imposed TAX SPECIAL
include various kinds of on articles which are ASSESSMENT
enforced contributions traded internationally Imposed on persons, Levied only on land
upon persons for the property and excises
attainment of public Personal liability Cannot be made a
purposes attaches on the person personal liability of the
TAX TOLL assessed in case of non- person assessed
A demand of A demand of payment
sovereignty for the proprietorship. A sum of
purpose of raising money for the use of Note: An exception
public revenue something, a may be provided in the
consideration which is case of real property tax
paid for the use of (RPT) which attaches to
property which is of the property subject to
public nature, e.g. road, RPT
bridge Not based on any Based wholly on benefit
(Mamalateo, Reviewer on Taxation, 2014, p. 16) special or direct benefit

TAX LICENSE FEE

Basis
Power of Taxation Police power
Purpose
To generate revenue Regulatory
3
Bar Operations C ommissions 3
 Purple Notes
Taxation Law
Exemption granted is Exemption does not 2018
No special No direct Direct benefit results
applicable (Section apply. or direct benefits are in the form of just
28(3), Article VI, 1987 benefit is received but compensation.
Constitution) Note: If property is received a healthy
exempt from Real other than economic
Note: The exemption Property Tax, it is also the standard of
under the Constitution exempt from Special government society is
is with respect only to Assessment. (See secures that attained
RPT Article 234(B) LGC) general known
benefit as―damnum
TAX DEBT resulting absque
An obligation imposed A sum of money due from the injuria‖.
by law. Tax is not a upon contract or one protection of
debt because it is not which is evidenced by taxpayer‘s
an obligation created by judgment. person and
contracts, express or property and
implied. Thus, if a welfare of all
taxpayer fails or refuses Non-Impairment of Contracts
to pay a local tax, he is
The non- Contracts Contracts may be
liable for criminal
impairment may be impaired.
prosecution.
rule impaired.
Not assignable. Assignable.
subsists.
Due to the sovereign Due to the government
government. acting in its corporate Transfer of Property of Rights
facility. Taxes paid Allows only Property is taken by
Mamalateo, Reviewer on Taxation, 2014, p. 16) become part restraints on the government upon
of public the exercise payment of just
B. Power of Taxation as distinguished from funds of property compensation.
Police Power and Power of Eminent rights exist.
Domain
Scope
Affects all Affects all Affects only a
TAXATION POLICE EMINENT DOMAIN
persons, persons, particular property.
POWER OR
property and property,
EXPROPRIATION
excises. privileges,
Purpose
and rights.
Levied for Exercised to Taking of private
the purpose promote property for public Basis
of raising public welfare use.
Public Public Necessity of the
revenue. through
necessity. necessity and public for private
regulations.
the right of property.
the State and
Amount of Exaction the public to
There is no Limited to No exaction; self-
limit. cover the cost compensation is paid protection
of regulation, by the government. and self-
issuance of preservation.
the license or
surveillance. (Mamalateo, Reviewer on Taxation, 2014, p. 13-14)

What is the determining factor in

Benefits Received by the Taxpayer distinguishing tax and regulation as a
form of police power?

In distinguishing tax and regulation as a form of

police power, the determining factor is the

4 Center for Legal Education and Research

 Purple Notes
purpose of the implemented measure. If the
purpose is primarily to raise revenue, then it will
be deemed a tax even though the measure
results in some form of regulation. On the other
hand, if the purpose is primarily to regulate,
then it is deemed a regulation and an exercise
of the police power of the state, even though
incidentally, revenue is generated. (Angeles
University vs. City of Angeles, G.R. No. 189999, July
27,2012)
C. Theory and Basis of Taxation
a. Lifeblood Theory – The government can
neither exist nor endure without taxation.
Taxes are the lifeblood of the
government and their prompt and certain
availability is an imperious need (Bull vs.
United States, 295 U.S. 247, 1935).
Taxes are important because they are the
lifeblood of the Government and so should
be calculated without unnecessary
hindrance. (CIR vs. Algue, Inc., et al., G.R. No.
L-28896, February 17, 1988)
b. Necessity Theory – The State cannot
continue without the means to pay its
expenses; and that for those means, it has
the right to compel all citizens and property
within its limit to contribute.
 The power to tax is an attribute of
sovereignty. It is a power emanating from
necessity. It is a necessary burden to
preserve the State's sovereignty and a
means to give the citizenry an army to resist
an aggression, a navy to defend its shores
from invasion, a corps of civil servants to
serve, public improvement designed for the
enjoyment of the citizenry and those which
come within the State's territory, and
facilities and protection which a government
is supposed to provide. (Phil. Guaranty Co.,
Inc. vs. CIR, GR No. L-22074, April 30, 1965).
 Due process of law under the Constitution
does not require judicial proceedings in tax
cases. This must necessarily be so because
it is upon taxation that the Government
chiefly relies to obtain the means to carry on
its operations and it is of utmost importance
5
Taxation Law
that the modes adopted to enforce the
collection of taxes levied should be summary
and interfered with as little as possible.
(Philippine Bank of Communications v. CIR, et al.,
GR No. 119024, January 28, 1999)
 But even as we concede the inevitability
and indispensability of taxation, it is a
requirement in all democratic regimes that
it be exercised reasonably and in
accordance with the prescribed procedure.
If it is not, then the taxpayer has a right to
complain and the courts will then come to
his succor. For all the awesome power of
the tax collector, he may still be stopped in
his tracks if the taxpayer can demonstrate
... that the law has not been observed. (CIR
vs. Avon Products Manufacturing, G.R. Nos.
201398-99, October 03, 2018,penned by J.
Leonen)
c. Benefits-Protection Theory (Symbiotic
Relationship) – In exchange for the
protection that State gives to its citizens,
taxes must be correspondingly paid to it.
Reciprocal duties of protection between
the State and its inhabitants.
Taxes are what we pay for civilization society.
Without taxes, the government would be
paralyzed for lack of the motive power to
activate and operate it. Hence, despite the
natural reluctance to surrender part of one's
hard earned income to the taxing authorities,
every person who is able to must contribute his
share in the running of the government. The
government for its part, is expected to respond
in the form of tangible and intangible benefits
intended to improve the lives of the people and
enhance their moral and material values. This
symbiotic relationship is the rationale of
taxation and should dispel the erroneous notion
that it is an arbitrary method of exaction by
those in the seat of power. (CIR vs. Algue, Inc., et
al., G.R. No. L-28896, February 17, 1988)
D. Jurisdiction over subject and objects
The limited powers of sovereignty are limited to
objects within the respective spheres of
governmental control. These objects are the
proper subjects of taxation and nothing else.
Bar Operations C ommissions 5
 Purple Notes
Taxation Law
E. Principles of A Sound Tax System (FAT)
1. Fiscal Adequacy
 It simply means that the sources of
revenues must be adequate to meet
government expenditures and their
variations. (AbakadaGuro Party List vs. Ermita,
G.R. No. 168056, September 1, 2005)
2. Theoretical Justice
The tax should be collected on the basis of
ability to pay through a progressive system
of taxation. Thus, the incidence or burden of
taxation should fall more on those who
could afford.
The rule of taxation shall be uniform and
equitable. The Congress shall evolve a
progressive system of taxation. (Section
28(1), Article VI, 1987 Constitution)
3. Administrative Feasibility
Tax laws must be capable of effective and
efficient enforcement. They must not
obstruct business growth and economic
development. They must also be convenient
as to the place and manner of payment.
(Diaz vs. Sec. of Finance, GR. No. 193007,July
19,2011)
―VAT law is Not Violative of Administrative
Feasibility‖
 The VAT law cannot be considered as
violative of the Administrative Feasibility
principle because it is principally aimed to
rationalize the system on taxing goods and
services;. simplify tax administration, and
make the system more equitable, to enable
the country to attain economic recovery.
(Kapatiran ng Mga Naglilingkod sa Pamahalaan
vs. Tan, G.R. No. 81311, June 30, 1988)
Note: Non-observance of Fiscal Adequacy and
Administrative Feasibility will not render the tax
imposition invalid. It will be an unsound tax but
legal. However, non-observance of the Principle
of Theoretical Justice is invalid because the
Constitution itself requires that taxation must be
equitable. (Diaz vs. Sec. of Finance, ibid.)
6 Center for Legal Education and Research
2018
F. Inherent and Constitutional
Limitations on Taxation
1. Inherent Limitations
The following are the inherent limitations of
taxation:(PI2TE)
a) Public Purpose;
b) Inherently Legislative;
c) Territorial;
d) International Comity; and
e) Exemption of Government Entities,
Agencies, and Instrumentalities.
a. Public Purpose
A revenue measure must be laid for public
purpose. It is the legislature who determines
―public purpose‖. (Dimaampao, Basic Approach
to Income Taxation; Tax Principles and
Remedies, p. 37)
 It is a general rule that the legislature is
without power to appropriate public revenue
for anything but a public purpose. It is the
essential character of the direct object of
expenditure which must determine its
validity as justifying a tax, and not the
magnitude of the interest to be affected nor
the degree to which the general advantage
of the community, and thus the public
welfare, may be ultimately benefited by
their promotion. Incidental to the public or
to the state, which results from the
promotion of private interest and the
prosperity of private enterprises or business,
does not justify their aid by the use of public
money. (Pascual vs Secretary of Public Works
and Communication, G.R. No. L-10405,
December 29, 1960)
The proceeds of the tax must be used for:
1. The support of the State; or
2. Some recognized object of government; or
3. Directly to promote the welfare of the
community.
 Purple Notes
Test in Determining Public Purpose in Tax
1. Duty Test – whether the thing to be
threatened by the appropriation of public
revenue is something which is the duty of
the State, as a government.
2. Promotion of General Welfare Test –
whether the law providing the tax directly
promotes the welfare of the community in
equal measure.
 Public purpose is not destroyed by the fact
that the tax law may not be beneficial to
one group. The fact that one sector is
benefited and in the process another sector
is being in a way prejudiced would not
diminish the public character of the tax. (Tio
vs. Videogram Regulatory Board, G.R. No. 75697,
June, 1987)
 The fact that it was donated after, does not
cure the defect that the tax was not for a
public purpose at the time the tax law was
passed. The public purpose must exist at
the time of the enactment of the tax
legislation. (Pascual vs. Sec of Public Works,
G.R. No. L-10405, December,29 1960)
b. Inherently Legislative
(i) General Rule
Congress could not re-delegate this
delegated power, since the power of
taxation is a power that is exercised by the
Congress as delegates of the People.
(ii) Exceptions
a. Delegation to Local Governments
The Constitution grants each LGU the power
to create its own sources of revenue and to
levy taxes, fees and charges which shall
accrue exclusively to the LGU. (Section 5,
Article X, 1987 Constitution)
b. Delegation to the President
Delegation by Congress to the President to
fix tariff rates, import and export quotas,
tonnage and wharfage dues; and other
7
Taxation Law
duties or imposts. (Section 28(2), Article VI,
1987 Constitution)
c. Delegation of Emergency Powers to
the President
Delegation to the President to enter into
executive agreements, and to ratify treaties
which may contain tax exemption provisions
subject to the concurrence by the majority
members of the Congress in the ratification
made by the President. (Section 28(4), Article
VI, 1987 Constitution)
c. Territorial
The power to tax is limited to the territorial
jurisdiction of the State (INGLES, Tax Made
Less Taxing, 2018, p.9).
d. International Comity
Posits that the property of a foreign state or
government may not be taxed by another.
States find it mutually advantageous for
themselves to create self-imposed restraints
on their taxing powers especially with
reference to the properties of foreign
governments within their territorial domain.
e. Exemption of Government Entities,
Agencies, and Instrumentalities
General Rule: Agencies performing
governmental functions are tax-exempt.
Exemption:
1. Agencies performing proprietary
functions.
2. When expressly provided by law or their
charter subjects them to tax
Government-owned and controlled corporations
which perform proprietary functions are subject
to tax. However, certain corporations have been
granted exemption under Section 27(c) of R.A.
8424 as amended by R.A. 9337 which took
effect on July 1, 2005 and R. A. 10026 which
lapsed into law in March 11, 2010 due to
absence of signature of the President, to wit:
1. Government Service Insurance System
(GSIS)
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 Purple Notes
Taxation Law
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation
(PHIC)
4. Local water districts
However, pursuant to Section 7 of R.A. 10963,
otherwise known as Tax Reform for Acceleration
and Inclusion (TRAIN) Law, PCSO is no longer
exempted from tax. Also, PAGCOR is removed
from income tax exemption under Sec. 1 of R.A.
9337, amending the 1997 NIRC.
 However, since PAGCOR is exempt from
VAT under RA 9337, the BIR exceeded its
authority in subjecting PAGCOR to VAT.
(PAGCOR vs. BIR, G.R. No. 172087, March 15,
2011)
 The exemption of PAL was expressly
removed by R.A. No. 7716. (PAL vs. Secretary
of Finance, G.R. No. 115852, October 30, 1995).
 Moreover, taxes are financial burdens
imposed for the purpose of raising revenues
to defray the cost of the operation of the
Government, and a tax on property of the
Government, whether national or local,
would merely have the effect of taking
money from one pocket to put it in another
pocket. (Board of Assessment of Appeals of
Laguna vs. CTA, G.R. No. L-35683, May 7, 1987)
 Notwithstanding the immunity of the
government from taxes, the principle is also
well recognized that the Government may
tax itself. In one case, the SC held that
there is no constitutional limitation on the
power of the Congress to tax the AFP if it
wishes to do so. (Bisaya Land Transportation
Co., Inc. vs. CIR, G.R. No. L-10114, November
26, 1957).\
2. Constitutional Limitations
a) Provisions Directly Affecting Taxation:
These are(PUPTONTSV):
(i) Prohibition Against Imprisonment for
Non – Payment of Poll Tax
(ii) Uniformity and Equality of Taxation
(iii) Progressive System of Taxation
(iv) Grant by Congress of Authority to the
President to Impose Tariff Rates
8 Center for Legal Education and Research
(v) Appropriation, revenue, tariff2018
bill must
exclusively originate in the House of
Representatives
(vi) Prohibition Against Taxation of
Religious, Charitable Entities, and
Educational Entities
(vii) Prohibition Against Taxation of Non-
Stock, Non-Profit Institutions
(viii) Majority Vote of Congress for Grant of
Tax Exemption
(ix) Prohibition on Use of Tax Levied for
Special Purpose
(x) President‘s Veto Power on
Appropriation, Revenue or Tariff
Bills
(xi) Non-Impairment of Jurisdiction of the
Supreme Court
(xii) Grant of Power to the Local
Government Units to Create its Own
Sources of Revenue
(xiii) No Appropriation or Use of Public
Money for Religious Purposes
(i) Prohibition Against Imprisonment for
Non-Payment of Poll Tax
No person shall be imprisoned for debt or
non-payment of a poll tax.‖ (Section 20,
Article III, 1987 Constitution)
Poll Tax, defined
A tax of fixed amount on individuals residing
within a specified territory, whether citizens or
not, without regard to their property. One
cannot be imprisoned for non-payment of poll
tax because payment thereof is not mandatory,
it is merely permissive.
While a person may not be imprisoned for non-
payment of poll tax, he may be imprisoned for
non-payment of other kinds of taxes where the
law expressly so provides.
(ii) Uniformity and Equality of Taxation
―The rule of taxation shall be uniform and
equitable.‖ (Section 28(1), Article VI, 1987
Constitution)
Uniformity means that all taxable articles or
kinds of property of the same classes shall be
taxed at the same rate. (Mamalateo, Reviewer in
 Purple Notes
Taxation, 2014, p. 58) A tax is uniform when it
operates with the same force and effect in every
place where the subject of it is found.
 A local tax on tenement houses does not
violate the rule of uniformity and equality of
taxation even if the tax in question is not
also levied on other classes of buildings in
the locality where such tax is imposed.
(Villanueva vs. City of Iloilo, G.R. No. L-26521,
December 28, 1968)
 Uniformity is not disregarded if a tax is
levied on admission to cinema, theaters,
vaudeville companies, theatrical shows and
boxing exhibitions but does not tax other
places of amusement such as race tracks,
cockpits, cabarets, concert halls, circuses
and other places of amusement. (Eastern
Theatrical Co. vs. Alfonso, G.R. No. L-1104, May
31, 1949)
 It must be stressed that the rule of uniform
taxation does not deprive Congress of the
power to classify subjects of taxation, and
only demands uniformity within the
particular class. (Abakada Guro Party List vs.
Ermita, G.R. No. 168056, September 1, 2005)
Uniformity vs. Equitability vs. Equality
Uniformity – All taxable property shall be alike
to be subjected to tax.
Equitability – The burden of taxation falls to
those better able to pay.
Equality – When the burden of the tax falls
equally and impartially upon all persons and
property subject to it.
 The law is also equitable even if it is
equipped with a threshold margin. The VAT
rate of 0% or 10% (now 12%) does not
apply to sales of goods or services with
gross annual sales or receipts not exceeding
P1,500,000.00 (now P3,000,000). Also,
basic marine and agricultural food products
in their original state are still not subject to
tax, thus ensuring that prices at the
grassroots level will remain accessible
(Abakada Guro Party List vs. Ermita, G.R. No.
168056, September 1, 2005)
9
Taxation Law
Note: Inequalities resulting from singling out of
one particular class for taxation or exemption
infringe no constitutional limitation. (Sison vs.
Ancheta, G.R. No. L-59431, July 25, 1984)
(iii)Progressive system of taxation
―The Congress shall evolve a progressive
system of taxation.‖ (Section 28(1), Article VI,
1987 Constitution)
Progressivity – Tax rate increases as the tax
base increases.
 Progressivity of taxation is also mandated by
the Constitution. Our income tax system is
one good example of such progressivity
because it is built on the principle of the
taxpayer‘s ability to pay. Taxation is
progressive when its rate goes up
depending on the resources of the person
affected (Reyes vs. Almanzor, G.R. Nos. 49839-
46, April 26, 1991).
 The Constitution does not really prohibit the
imposition of indirect taxes which, like the
VAT, are regressive. What it simply provides
is that Congress shall "evolve a progressive
system of taxation." The constitutional
provision has been interpreted to mean
simply that "direct taxes are to be preferred
[and] as much as possible, indirect taxes
should be minimized.‖ (Tolentino vs. Secretary
of Finance, GR No. 115455, October 30, 1995;
Abakada Guro Partylist vs. Ermita GR No.
168056, September 1, 2005)
(iv)Appropriation, revenue, tariff bill must
exclusively originate in the House of
Representatives
―All appropriation, revenue or tariff bills, bills
authorizing the increase of public debts, bills
of local application and private bills, shall
originate exclusively in the House of
Representatives, but the Senate may
propose or concur with amendments.‖
(Section 24, Article VI, 1987 Constitution)
 Indeed, what the Constitution simply means
is that the initiative for filing revenue, tariff
Bar Operations C ommissions 9
 Purple Notes
Taxation Law
or tax bills, bills authorizing an increase of
the public debt, private bills and bills of local
application must come from the House of
Representatives on the theory that, elected
as they are from the districts, the members
of the House can be expected to be more
sensitive to the local needs and problems.
On the other hand, the senators, who are
elected at large, are expected to approach
the same problems from the national
perspective. Both views are thereby made to
bear on the enactment of such laws
(Abakada Guro Party List vs. Ermita, G.R. No.
168056, September 1, 2005).
(v) Grant by Congress of Authority to the
President to Impose Tariff Rates
The Congress may, by law, authorize the
President to fix within specified limits and
subject to such limitations and restrictions
as it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues,
and other duties or imports within the
framework of the national development
program of the government. (Section 28 par.
2, Article VI, 1987 Constitution) – Flexible
Tariff Clause
Requisites of a valid imposition of tariff
rates by the President: (DCF)
1. Delegated by Congress through a law;
2. Subject to Congressional limits and
restrictions; and
3. Within the framework of the national
development program (Ibid.)
(vi)Prohibition Against Taxation of
Religious, Charitable Entities, and
Educational Entities
―Charitable institutions, churches and
parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries,
and all lands, buildings and improvements,
actually, directly and exclusively used for
religious, charitable, or educational purposes
shall be exempt from taxation.‖ (Section
28(3), Article VI of the 1987 Constitution)
 The tax exemption under this constitutional
provision covers REAL PROPERTY taxes
10 Center for Legal Education and Research
only. ―Exclusive‖ is defined as2018 possessed
and enjoyed to the exclusion of others;
debarred from participation or enjoyment;
and ―exclusively‖ is defined, in a manner to
exclude; as enjoying a privilege exclusively.
If real property is used for one or more
commercial purposes, it is not exclusively
used for the exempted purposes but is
subject to taxation. The words ―dominant
use‖ or ―principal use‖ cannot be substituted
for the words ―used exclusively‖ without
doing violence to the Constitution and the
law. (Lung Center of the Phil. vs. Quezon City,
G.R. No. 144104, June 29, 2004)
 What is meant by actual, direct and
exclusive use of the property for charitable
purposes is the direct and immediate and
actual application of the property itself to
the purposes for which the charitable
institution is organized. It is not the use of
the income from the real property that is
determinative of whether the property is
used for tax-exempt purposes. (Id.)
 Actual use is necessary. To be exempt
from tax, the lands, buildings and
improvements must not only be exclusively
but also actually and directly used for
religious and charitable purposes. (Province of
Abra vs. Hernando, G.R. No. L-49336, August 31,
1981)
Note: USE overrides OWNERSHIP that if
property, although actually owned by a religious,
charitable or educational institution, is actually
used for a non-exempt purpose, the exemption
from tax of said property vanishes.
 While the use of the second floor of the
main building for residential purposes of the
Director and his family may find justification
under the concept of incidental use, which is
complimentary to the main or primary
purpose, i.e., educational, the lease of the
first floor to the Northern Marketing
Corporation cannot be considered incidental
to the purpose of education. Since only a
portion is used for the purpose of
commerce, it is only fair that half of the
assessed tax be returned to the school
involved. (Abra Valley vs. Aquino, G.R. No. L-
39086, June 15, 1988)
 Purple Notes
Rule on Gifts in Favor of Charitable and
other Institutions
General Rule: The constitutional exemption
applies only to property tax. Gifts are subject to
donor‘s tax. (Rev. Casimiro Lladoc vs. CIR, G.R. No.
L-19201, June 16, 1965)
Exemption: Gifts made in favor of charitable
and other institutions may also be exempt from
Donor‘s tax, not under the Constitution, but
under the NIRC, provided certain conditions are
met. (Sections 101(A)(2) & 101(B)(2), NIRC as
amended by TRAIN Law)
(vii)Prohibition Against Taxation of Non-
Stock, Non-Profit Institutions
―All revenues and assets of non-stock, non-
profit educational institutions used actually,
directly and exclusively used for educational
purposes shall be exempt from taxes and
duties.‖(Section 4(3), Article XIV, 1987
Constitution)
 For a non-stock non-profit hospital to be
completely exempt from income tax, Sec.
30(E) and (G) of the Tax Code requires that
said institution should operate exclusively for
charitable or social welfare purposes. But in
case that non-stock non-profit hospital earns
income from its for-profit activities, the
subject hospital shall only be subject to
income tax insofar as the income derived
from its profit activities, but only at the
preferential income tax rate of 10% based on
its taxable income, regardless of the
disposition made of such income, pursuant to
Sec. 27(B), in relation to the last paragraph
of Sec. 30 of the Tax Code. (CIR vs. St. Luke‘s
Medical Center, G.R. No. 20-3514, February. 13,
2017)
 Revenues derived from assets used in
operations of cafeterias, canteens and
bookstores are also exempt if they are also
owned and operated by the educational
institution as ancillary activities and the
same are located in the school premises
(RMC 76-2003)
 The income derived by it for being a non-
stock non-profit educational institution,
11
Taxation Law
regardless of the source, which were used
actually, directly and exclusively for
educational purposes shall be exempt from
income tax. However, the income derived by
it from unrelated trade, business or activities
which were not used actually, directly and
exclusively for educational purposes shall be
subject to the preferential income tax rate
of 10% of its taxable income pursuant to
Sec. 27(B) of the Tax Code. (CIR vs. DLSU,
G.R. No. 196596, November 9, 2016)
 The crucial point of inquiry then is on the
use of the assets or on the use of the
revenues. These are two things that must
be viewed and treated separately. But so
long as the assets or revenues are used
actually, directly and exclusively for
educational purposes, they are exempt from
duties and taxes.
That the Constitution treats non-stock, non-
profit educational institutions differently
from proprietary educational institutions
cannot be doubted. The privilege granted to
the former (non – stock, non – profit
educational institution) is conditioned only
on the actual, direct and exclusive use of
their revenues and assets for educational
purposes. In clear contrast, the tax privilege
granted to the latter may be subject to
limitations imposed by law. Thus, it is
declaredthat the last paragraph of Section
30 of the Tax Code without force and effect
for being contrary to the Constitution insofar
as it subject to tax the income and revenues
of non-stock, non-profit educational
institutions used actually, directly and
exclusively for educational purpose.
The income tax exemption pertains only to
non-stock, non-profit educational institutions
and does not cover the other exempt
organizations under Section 30 of the Tax
Code.(DLSU vs. CIR, G.R. No. 196596,
November 9, 2016)
Proprietary educational institutions, including
those cooperatively owned may likewise be
entitled to such exemptions, subject to the
limitations provided by law, xxx‖ (Section 4(3),
Article XIV, 1987 Constitution)
Bar Operations C ommissions 11
 Purple Notes
Taxation Law
Proprietary educational institutions are,
however, taxable under Section 27 (B) of the
Tax Code. -See in -depth discussion in Income Tax
on Corporation Chapter
 By the Tax Code's clear terms, a proprietary
educational institution is entitled only to the
reduced rate of 10% corporate income tax.
The reduced rate is applicable only if: (1)
the proprietary educational institution is
nonprofit and (2) its gross income from
unrelated trade, business or activity does
not exceed 50% of its total gross income.
(DLSU vs. CIR, G.R. No. 196596, November 9,
2016)
(viii) Majority Vote of Congress for Grant
of Tax Exemption
―No law granting any tax exemption shall be
passed without the concurrence of a
majority of all the Members of the
Congress.‖ (Section 28 (4), Article VI, 1987
Constitution)
Reason: To prevent indiscriminate grant of tax
exemptions.
In granting tax exemptions, an absolute majority
of the members of the Congress is required,
while in cases of withdrawal of such tax
exemption, a relative minority is sufficient.
(Dimaampao, Tax Principles and Remedies, 2015)
(ix) Prohibition on Use of Tax Levied for
Special Purpose
―All money collected or any tax levied for
special purposes shall be treated as special
fund and paid out for such purpose only. If
the purpose for which a special fund was
created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the
general funds of the government.‖ (Section
29(3), Article VI of the 1987 Constitution)
(x) President‘s Veto Power on
Appropriation, Revenue or Tariff Bills
―The President shall have the power to veto
any particular item or items in an
appropriation, revenue or tariff bill but
12 Center for Legal Education and Research
2018
the veto shall not affect the item or items
which he does not object.‖ (Section 27 (2),
Article VI , 1987 Constitution)
(xi)Non-Impairment of Jurisdiction of the
Supreme Court
―The Congress shall have the power to
define, prescribe, and apportion the
jurisdiction of the various courts but may
not deprive the Supreme Court of its
jurisdiction over cases enumerated in
Section 5 hereof.‖ (Section 2, Article VIII, 1987
Constitution)
The Supreme Court shall have, among
others, the following powers:
a. Review, revise, reverse, modify, or
affirm on appeal or certiorari, as the law
or the Rules of Court may provide, final
judgments and orders of lower courts;
b. All cases involving the legality of any
tax, impost, assessment, or toll, or any
penalty
imposed in relation thereto.‖ (Section 5,
Article VIII, 1987 Constitution)
Under the principle of judicial non –
interference, the courts cannot inquire into
the wisdom of the taxing act unless there is
a violation of the Constitutional limitations or
restrictions. (CIR v. Lingayen Gulf Electric Power
Co., Inc. GR L 237771, August 4, 1968)
(xii) Grant of Power to the Local
Government Units to Create its Own
Sources of Revenue
―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.‖(Section 5, Article X,
1987 Constitution)
 When local governments invoke the power
to tax on national government
instrumentalities, the exercise of the power
is construed strictly against local
 Purple Notes
governments. The rule is that a tax is never
presumed and there must be a clear
language in the law imposing the tax. (MIAA
v. CA, G.R. No. 155650, July 20, 2006)
(xiii) No Appropriation or Use of Public
Money for Religious Purposes
No public money or property shall be
appropriated applied, paid or employed,
directly or indirectly, for the use, benefit or
support of any sect, church, denomination,
sectarian institution or system of religion, or
of any priest, preacher, minister, other
religious teacher, or dignitary as such,
except when such priest, preacher, minister,
or dignitary is assigned to the armed forces,
or to any penal institution, or government
orphanage or leprosarium. (Section 29(2),
Article VI, 1987 Constitution)
Exception to the limitation: Except if the
priest, preacher, minister or dignitary is
assigned to: (LAPG)
1. The Armed Forces
2. Any penal institution
3. Government orphanage or
4. Leprosarium
b) Provisions Indirectly Affecting
Taxation
These are (DENR):
(i) Due Process
(ii) Equal Protection
(iii) Religious Freedom
(iv) Non – impairment of obligations of contracts
(i) Due Process
―No person shall be deprived of life, liberty
or property without due process of law.‖
(Section 1, Article III ,1987 Constitution)
Generally, tax statutes are construed strictly
against the government and in favor of the
taxpayer. "Statutes levying taxes or duties are
not to extend their provisions beyond the clear
import of the language used"; and "tax burdens
are not to be imposed, nor presumed to be
imposed beyond what the statute[s] expressly
and clearly [import]. . . ." Similarly, we cannot
impose a penalty for non-payment of a tax
13
Taxation Law
greater than what the law provides.To do so
would amount to a deprivation of property
without due process of law. (National Power
Corporation vs. City of Cabanatuan,G.R. No. 177332,
October 01, 2014,penned by J. Leonen).
Requisites:
1. Procedural (N2PA)
 The interest of the public generally as
distinguished from those of a particular
class require the intervention of the
State
 Assessment and Collection must not be
arbitrary
 Right to notice and hearing
2. Substantive (RnHVT)
 The means employed must be
reasonably necessary to the
accomplishment of the purpose and not
unduly oppressive
 Assessment should not be harsh,
oppressive and confiscatory
 It must be by authority of a valid law
 It must be imposed within territorial
jurisdiction
 There is a denial of due process on account
of the passage of an ordinance in the City of
Manila which imposes a permit fee of P50.00
on aliens as a condition to employment or
engaging in any business or occupation,
where it appears that under said ordinance,
the City Mayor of Manila could withhold or
refuse issuance of such permit at will.
Aliens, once admitted in the Philippines,
cannot be deprived of life without due
process of law and this guarantee includes
the means of livelihood. (Villegas vs. Hiu
Chiong Tsai Pao Ho, G.R. No. L-29646, November
10, 1978)
 Due process was not observed when the
trial court, in an action for declaratory relief,
declared that certain property owned by the
Roman Catholic Church in Bangued, Abra
was tax-exempt under the 1973
Constitution, it appearing that no court
hearing was conducted. (Province of Abra vs.
Hernando, G.R. No. L-49336, August 31, 1981)
Bar Operations C ommissions 13
 Purple Notes
Taxation Law
 Due process was not violated when the VAT
Law (EO 273) was promulgated because
there was no grave abuse of discretion
incident to its promulgation. Further,
petitioners failed to show that EO 273 was
issued capriciously and whimsically or in
arbitrary or despotic manner by passion or
personal hostility since it appears that a
comprehensive study of the VAT was made
before EO 273 was issued. (Kapatiran vs. CIR,
G.R. No. L-81311, June 30, 1988)
 The modified schedular income tax whereby
individual income was classified into three
different classes under different tax rates
(compensation, business/other income and
passive investment income) is not a denial
of due process because there is no proof of
arbitrariness in the imposition of tax rates.
(Sison vs. Ancheta, G.R. No. 59431, July 25,
1984)
 Section 112(B) allows a VAT-registered
person to apply for the refund for any
unused input taxes, to the extent that such
input taxes have not been applied against
output taxes. Such unused input tax may be
used in payment of his other internal
revenue taxes. The input tax is not a
property or property right within the
constitutional purview of the due process
clause. A VAT-registered person‘s
entitlement to the creditable input tax is
merely a statutory privilege. (Abakada Guro
Party List vs. Ermita, G.R.No. 168056, September
1, 2005)
(ii) Equal Protection
―Nor shall any person be denied the equal
protection of laws.‖ (Section 1, Article III, 1987
Constitution)
 All persons subject to legislation shall be
treated alike under similar circumstances
and conditions both in the privileges
conferred and liabilities imposed. (1 Cooley
824-825; Sison vs. Ancheta, G.R. No. L-59431,
July 25, 1984)
The doctrine does not require that persons
or properties different in fact be treated in
laws as though they were the same. Indeed,
14 Center for Legal Education and Research
to treat them the same or alike2018may offend
the Constitution. What the Constitution
prohibits is class legislation which
discriminates against some and favors
others. As long as there are rational or
reasonable grounds for so doing, Congress
may, therefore, group the persons or
properties to be taxed and it is sufficient ―if
all of the same class is subject to the same
rate and the tax is administered impartially
upon them.‖ (1 Cooley 608).
Requisites for a Valid Classification:
(GEPS)
1. Must be based upon substantial
distinctions;
2. Must be germane to the purpose of law;
3. Must apply to both present and future
conditions; and
4. Must apply equally to all members of a
class.
Two ways of violating Equal Protection
1. When classification is made when there
should be none
2. When classification is not made when called
for
 If the ordinance is intended to apply to a
specific taxpayer and to no one else
regardless of whether or not other entities
belonging to the same class are established
in the future, it is a violation of the equal
protection clause, but if intended to apply
also to similar entities which may be
established in the future, then the tax
ordinance is valid. (Ormoc Sugar Central vs.
CIR, G.R. No. L-23794, February 17, 1968)
 The fact that the taxpayer is the only sugar
central or refinery in the municipality where
the tax ordinance is enacted does not make
said ordinance discriminatory. The reason is
that since other refineries to be established
in the future would also be taxable, no
singling out of the taxpayer to its
disadvantage has ever taken place. (Victorias
Milling Co., Inc. vs. Municipality of Victoria, G.R.
No. L-21183, September 27, 1968)
 Purple Notes
 The remission of taxes due and payable to
the exclusion of taxes already collected does
not constitute unfair discrimination. Each set
of taxes is a class by itself, and the law
would be open to attack as class legislation
only if all taxpayers belonging to one class
were not treated alike. (Juan Luna Subd. vs.
Sarmiento, G.R. No. L-3538, May 28, 1952)
 It is true that the uniformity essential to the
valid exercise of power of taxation does not
require identity or equality under all
circumstances, or negate the authority to
classify the objects of taxation.
 A local ordinance which levies an ad valorem
tax on motor vehicles registered in Manila
without also taxing those which are
registered outside the city but which enters
the city and uses its streets occasionally
violates the rule on the equality of taxation
(Assoc. of Customs Brokers vs. Municipality Board
of Manila, G.R. No. L-4375, May 22, 1953).
 There is no discrimination or class legislation
if a statute authorizes the City of Manila to
levy occupation taxes whereas that same
authority is withheld from other cities or
municipalities. It is not for the courts to
decide what cities or municipalities should
be so authorized for that is a matter for the
legislature to decide. (Punsalan vs. The
Municipal Board of Manila, G.R. No. L-4817, May
26, 1954)
 Taxpayers may be classified into different
categories. It is enough that the
classification must rest upon substantial
distinctions that make real differences
(Antero M. Sison, Jr. vs. Ruben B. Ancheta, G.R.
No. L-59431, July 25, 1984).
 With regard to the 5% creditable
withholding tax imposed on payments made
by the government for taxable transactions,
Section 114(C) merely provides a method of
collection, or as stated by respondents, a
more simplified VAT withholding system.
Since it has not been shown that the class
subject to the 5% final withholding tax has
been unreasonably narrowed, there is no
reason to invalidate the provision.
Petitioners, as petroleum dealers, are not
the only ones subjected to the 5% final
15
Taxation Law
withholding tax. It applies to all those who
deal with the government. (AbakadaGuro
Party List vs. Ermita, G.R.No. 168056, September
1, 2005)
(iii)Religious Freedom
―No law shall be made respecting an
establishment of religion, or prohibiting the
free exercise thereof. The free exercise and
enjoyment of religious profession and
worship, without discrimination or
preference, shall forever be allowed. No
religious test shall be required for the
exercise of civil or political rights.‖ (Section 5,
Article III , 1987 Constitution)
 Activities simply and purely for propagation
of faith are exempt (i.e., sale of bibles and
religious articles by non-stock, non-profit
organizations at minimal profit). A license
tax, which, unlike an ordinary tax, is mainly
for regulation. Its imposition on the press is
unconstitutional because it lays a prior
restraint on the exercise of its right. Hence,
although its application to others is valid, its
application to the press or to religious
groups, such as the Jehovah‘s Witnesses, in
connection with the latter‘s sale of religious
books and pamphlets, is unconstitutional
(American Bible Society vs. City of Manila, G.R. L-
9637, April 1957).
(iv) Non-Impairment of Obligations of
Contracts
―No law impairing the obligation of contracts
shall be passed.‖ (Section 10, Article III, 1987
Constitution)
The power of taxation cannot be exercised
in a manner that would impair the obligation
of contracts. What is prohibited is that a
taxing statute to be passed would alter the
relative rights of the parties with each other.
The mere fact that a tax makes the conduct
of a business more expensive or makes an
activity more difficult does not result in the
impairment of the obligations of contract.
Contract is impaired only if the relative
position of the parties to a contract is
disturbed by the operation of a taxing
Bar Operations C ommissions 15
 Purple Notes
Taxation Law
statute (Mamalateo, Reviewer in Taxation, 2014,
page 63 - 64).
G. Stages or Aspects of Taxation (LAPR)
1. Levy or Imposition
It pertains to the enactment of tax laws and
statute by Congress. These tax laws of
statutes determined the subject and object
of taxation, how much is to be collected, as
well as the rate and base of tax.
Note: This is NOT the ―Levy‖ under Sec. 207 of
NIRC, which refers to the remedy of the
Government to collect taxes.
2. Assessment and Collection
It refers to the acts of administration and
implementation of the tax law by the
executive department through its
administrative agencies(Bureau of Internal
Revenue or Bureau of Custom)
An assessment "refers to the determination
of amounts due from a person obligated to
make payments. "In the context of national
internal revenue collection, it refers to the
determination of the taxes due from a
taxpayer under the National Internal
Revenue Code of 1997. (CIR v. Fitness by
Design,G.R. No. 215957, November 09,
2016,penned by J.Leonen)
Rules governing assessment and
collection of taxes to prevent its abuse
1. The tax law must designate which
agency will collect the taxes
2. The circulars or regulations issued by
the Secretary of Finance or the
Commissioner of the Internal Revenue
must be in accordance with the tax
measures imposed by Congress
 Collection is the final stage and goal of
tax administration.
3. Payment
The act of compliance by the taxpayer,
including such options, schemes or remedies
as may be legally open or available to him.
4. Refund
16 Center for Legal Education and Research
The recovery of any tax alleged 2018 to be
erroneously or illegally collected, or of any
penalty claimed to have been collected
without authority or any sum alleged to
have been excessively or in any manner
wrongfully collected.
H. Requisites of a Valid Tax (PUWLN)
1. It must be for a public purpose;
2. It must be uniform;
3. The party being taxed must be within the
jurisdiction of the taxing authority;
4. The tax must not impugn on the inherent
and constitutional limitations on the power
of taxation; and
5. Assessment and collection of certain kinds of
taxes guarantee against injustice to
individuals, especially by providing notice
and opportunity for hearing.
I. Kinds of Taxes
1. As to Object
a) Personal tax – also known as
―capitalization‖ or ―poll taxes‖. These are
taxes of fixed amount upon all persons of a
certain class within the jurisdiction of the
taxing power without regard to the amount
of their property or their occupations or
businesses in which they may be engaged.
b) Property tax – taxes assessed on all
property or all property of a certain class
within the jurisdiction of the taxing power.
c) Privilege tax – imposed on the
performance of an act, the engaging in an
occupation, or the enjoyment of a privilege.
2. As to Burden or Incidence
a) Direct tax– demanded from the very
person who, as intended, should pay the tax
which he cannot shift to another. (e.g.
income tax, estate tax, donor‘s tax)
b) Indirect tax – demanded in the first
instance from one person with the
expectation that he can shift the burden to
someone else, not as a tax but as part of
the purchase price. (e.g. VAT)
 Purple Notes
Indirect tax is imposed upon goods BEFORE
reaching the consumer who ultimately pays
for it, not as a tax, but as a part of the
purchase price. (Maceda vs. Macaraig, G.R. No.
88291, June 8, 1993)
3. As to Tax Rates
a) Specific tax – imposed and based on a
physical unit of measurement, as by head or
number, weight, or length or volume (e.g.
taxes on distilled spirits and wines).
(Tan vs. Mun. of Pagbilao, G.R. L-14264, April
30, 1963)
b) Ad Valorem Tax – imposed on a fixed
portion of the value of property with respect
to which the tax is assessed; Needs an
independent appraiser to determine its
value.
c) Mixed– partially specific and partly ad
valorem. An example would be the excise
tax on fermented liquors which has a
separate specific tax rate based on the
selling price of the article.
4. As to Purpose
a) General tax– levied for ordinary or general
purpose of the government, to raise
revenue for governmental needs (e.g. motor
vehicle registration fees) (PAL vs. Edu, G.R.
No. 4138, August 15, 1988).
b) Special tax – levied for a special purpose,
to achieve some social or economic ends i.e.
for regulation or the exercise of police
power, irrespective of whether revenue is
actually raised. Example is Margin Fees,
which is a form of exchange control or
restriction designed to discourage imports
and encourage exports (ESSO Std Eastern vs.
CIR, G.R. No. 28608-9, July 1989), and Oil Price
Stabilization Fund. (Lozano vs. ERB, G.R. No.
95119-21, December 1990)
5. As to Scope or Authority to Impose
(i) National - Levied by the National
Government (e.g. internal revenue taxes)
17
Taxation Law
(ii) Local - Levied by the Local Government
(e.g. real property tax, municipal tax,
business tax)
6. As to Graduation
a) Progressive - whereby the rate or amount
of tax increases as the amount of the
income or earning to be taxed increases.
b) Regressive - whereby the tax rate
decreases as the amount of income or
earning to be taxed increases.
c) Proportionate - Tax rate is based on a
fixed percentage of the amount of the
property, receipts or other bases to be
taxed.
Indirect Tax vs. Withholding Tax
Indirect Tax Withholding Tax
(VAT and Excise Tax)
The incidenceof taxation The incidence and
falls only in one person but burden of taxation fall
the burden of paying can on the same entity, the
be shifted. statutory taxpayer
(LG Electronics vs. Philippines, Inc. vs. CIR,G.R. No.
165451, December 3, 2014, penned by J. Leonen)
Sources of Tax Laws
1.Constitution
2.Statutes passed by Congress
 National Internal Revenue Code of 1997,
as amended
3. Administrative Rulings and Regulations
 Administrative rulings refer to less general
interpretation of tax laws issued on a
timely basis by the Commissioner of the
Internal Revenue (CIR).
 Administrative Regulations are intended to
clarify or explain the law and carry into
effect its general provisions by providing
details of administration and procedure.
Such are issued by the Secretary of
Finance upon recommendation of the CIR.
Bar Operations C ommissions 17
 Purple Notes
Taxation Law
Kinds of Administrative Issuances
a. Legislative Rule. A legislative rule is in the
nature of subordinate legislation, designed
to implement a primary legislation by
providing the details thereof. In the same
way that laws must have the benefit of
public hearing, it is generally required that
before a legislative rule is adopted, there
must be hearing. (CIR vs. CA, G.R. No. 119761,
August 29, 1996)
b. Interpretative Rule. When an
administrative rule is merely interpretative in
nature, its applicability needs nothing
further than its bare issuance for it gives no
real consequence more than what the law
itself has already prescribed. When, upon
the other hand, the administrative rule goes
beyond merely providing for the means that
can facilitate or render least cumbersome
the implementation of the law but
substantially adds to or increases the burden
of those governed, it behooves the agency
to accord at least to those directly affected a
chance to be heard, and thereafter to be
duly informed, before that new issuance is
given the force and effect of law. (CIR vs. CA,
G.R. No. 119761, August 29, 1996)
Revenue Regulations (RR) are issuances
signed by the Secretary of Finance, upon
recommendation of the CIR, that
specify,prescribe or define rules and regulations
for the effective enforcement of the provisions
of the National Internal Revenue Code (NIRC)
and related statutes.
Revenue Memorandum Circular (RMCs) are
issuances that publish pertinent and applicable
portions, as well as amplifications, of laws, rules,
regulations and precedents issued by the BIR
and other agencies/offices.
Revenue Memorandum Orders (RMOs) are
issuances that provide directives or instructions;
prescribe guidelines; and outline processes,
operations, activities, workflows, methods and
procedures necessary in the implementation of
stated policies, goals, objectives, plans and
programs of the Bureau in all areas of
operations, except auditing.
18 Center for Legal Education and Research
Revenue Audit Memorandum 2018Orders
(RAMOs) are orders issued specifically stating
the audit programs of the BIR for a particular
taxable year.
Revenue Memorandum Rulings (RMRs) are
rulings, opinions and interpretations of the CIR
with respect to the provisions of the Tax Code
and other tax laws, as applied to a specific set
of facts, with or without established precedents,
and which the CIR may issue from time to time
for the purpose of providing taxpayers guidance
on the tax consequences in specific situations.
BIR Rulings cannot contravene duly issued
RMRs.
Revenue Bulletins are periodic issuances,
notices and official announcements of the CIR
that consolidate the BIR‘s position on certain
specific issues of law or administration in
relation to the provision of the Tax Code,
relevant tax laws and other issuances for the
guidance of the public. (Reviewer on Taxation,
2014 Edition, Atty. Victorino C. Mamalateo)
Kinds of Rulings
Rulings of First Impression - These refer to
the rulings, opinions and interpretations of the
CIR with respect to the provisions of the Tax
Code and other tax laws without established
precedent, and which are issued in response to
the specific request for ruling filed by a taxpayer
with the BIR. Provided, however, that the term
shall include reversal, modification or revocation
of any existing ruling. (Revenue Administrative
Order No. 2-2001, issued October 22, 2001)
Rulings of Established Precedents - These
are reiterations of previous rulings, opinions or
interpretations of the CIR. This power may be
delegated. (e.g. requests for rulings with the
BIR, Tax Treaty Relief Application with BIR
International Tax Affairs Division)
4. Judicial Decisions
 Decisions by the Supreme Court and Court
of Tax Appeals
J. General Concepts in Taxation
1. Prospectivity of Tax Laws
 Purple Notes
Taxation Law
General Rule: Tax Laws are prospective in doctrine of Lex rei sitae or
application. Lex situs.
Personal Property Where it was actually kept
Exceptions: or located, following the
doctrine of
a. Where no vested right will be impaired;
mobiliasequunturpersona
b. Where the law allows retroactive m (Movables follow the
application; and person)
c. If there is bad faith on the part of the Excise Tax On the place where the
taxpayer(Sec.246,NIRC) act is performed, or
occupation engaged in.
Note: Section 246 of the NIRC states that tax Value Added Tax The place where the
rulings or any revocation, modification, or transaction is made. If the
reversal of any of the rules and regulations transaction is made
promulgated by the Commissioner or any rulings (perfected and
consummated) outside of
or circulars promulgated by him shall not be
the Philippines, then we
given retroactive application if such revocation, can no longer tax such
modifications, or reversal is prejudicial to the transaction.
taxpayers except: Income Tax
Resident citizen Sources of income derived
1. When the taxpayer deliberately misstated or Domestic corporation from within and outside
omitted from his return certain facts or the Philippines
documents required by him by the BIR; Non-resident alien Sources of income derived
2. When the facts subsequently gathered are Non-resident foreign from within the Philippines
different from the facts on which the tax corporation
ruling was based; and Non-resident citizen
3. When the taxpayer is in bad faith. Resident alien
Resident foreign
corporation
2. Imprescriptibility of Taxes Estate and Donor‘s Tax
Resident/Non-resident Properties wherever
General Rule: Taxes are imprescriptible. citizen situated
Exceptions: When provided otherwise by the Resident alien
tax law itself. Non-resident Alien Properties situated within
the Philippines
Example: NIRC provides for statutes of limitation
on the assessment and collection of taxes f. International Comity
therein imposed (i.e. 3 year period to assess,
and 5 year period under Sec.222). Posits that the property of a foreign state or
government may not be taxed by another.
3. Situs of Taxation States find it mutually advantageous for
themselves to create self-imposed restraints
a. Meaning – the place or authority that has on their taxing powers especially with
the right to impose and collect taxes. reference to the properties of foreign
governments within their territorial domain.
Summary – Situs of Tax
4. Double Taxation
KIND OF TAX SITUS
Poll/Capitalization/ Residence of the taxpayer, It means taxing the same person for the same
Community Tax regardless of the source of tax period and the same activity twice, by the
income or location of the same jurisdiction.
property of the taxpayer.
Property Tax
Real Property Where the real property is
located, following the

19
Bar Operations C ommissions 19
 Purple Notes
Taxation Law
KINDS OF DOUBLE TAXATION jurisdiction; 1968) 2018
5. During the same i.e. VAT and LBT
a) Double Taxation in Strict Sense – same taxing period; imposed on same
property is taxed twice when it should be 6. Covering the same revenue
taxed only once; and that both taxes are kind or character
imposed on the same property or subject of tax.
matter for the same purpose, by the same
State, Government or taxing authority within Exception: Double taxation will not be allowed
the same jurisdiction or taxing district during if it results in a violation of the equal protection
the same taxing period and covering the clause.
same kind of character of tax. It violates the
equal protection clause of the constitution. There is no double taxation in the following
(Villanueva vs. City of Iloilo, G.R. No. L-26521, instances:
December 28, 1968) 1. By taxing the corporation income tax and
the stockholders‘ dividends from the same
Requisites: corporation;
1. Both taxes are imposed on the same 2. Tax imposed by the State and the local
property or subject matter; government upon the same occupation,
2. For the same purpose; calling or activity;
3. Imposed by the same taxing authority; 3. Real estate tax and income tax collected on
4. Within the same jurisdiction; the same real property leased for earning
5. During the same taxing period; purposes.(Villanueva vs. City of Iloilo,G.R. No. L-
6. Covering the same kind or character of 26521 December 28, 1968)
tax. 4. Taxes are imposed on taxpayer‘s final
product and the storage of raw materials
b) Double Taxation in Broad Sense – is the used in the production of the final product.
opposite of direct double taxation and is not (Procter and Gamble Philippines vs. Municipality
legally objectionable. The absence of one or of Jagna, G.R. No. L-24265, December 8,1979)
more of the foregoing requisites of
obnoxious direct tax makes it indirect. c) Modes of Eliminating Double Taxation

Constitutionality of Double Taxation (i) Tax Deduction – a subtraction from gross

Double taxation in its stricter sense is income in arriving at the taxable income:
unconstitutional, but that in the broader sense is
not necessarily so.  Section 4(a) of the Expanded Senior Citizens
Act of 2003, which provides that the 20%
General Rule: Our Constitution does not discount given to senior citizens shall be
prohibit double taxation, in broad sense. Hence, considered a tax deduction, rather than a
it may not be invoked as a defense against the tax credit on the part of the establishment
validity of tax laws. granting the same, is not unconstitutional.
While the Constitution protects property
DIRECT DOUBLE INDIRECT DOUBLE rights, the State, in the exercise of the
TAXATION TAXATION (Allowed) police power, can intervene in the
(Prohibited) operations of a business which may result in
1. Both taxes Extends to all cases in an impairment of property rights in the
areimposed on the which there are two or process.(Carlos Super Drug Corp. vs. DSWD,
same property or more pecuniary G.R. No. 166494, June 29, 2007)
subject matter; impositions but one or
2. For the more of the (ii) Tax Credit - an amount subtracted from an
samepurpose; requisites of direct individual‘s or entity‘s tax liability (tax due)
3. Imposed by the double taxation is
to arrive at the total tax liability.
same taxing missing. (Villanueva vs.
authority; City of Iloilo, G.R. No. L-
4. Within the same 26521, December 28,

20 Center for Legal Education and Research

 Purple Notes
Taxation Law
 A deduction differs from a tax credit, in income or capital. (CIR vs. SC Johnson and Son,
that a deduction reduces taxable income G.R. No. 127105, June 25, 1999)
while a credit reduces tax liability.
2.Credit Method-the tax paid in the estate of
 Under the Expanded Seniors Citizens Act source is credited against the tax levied in the
of 2003, the 20% discount shall be state of residence. (Id.)
considered as a tax deduction not as a
tax credit. The difference between exemption method and
credit method is that the former focuses on
Tax Deduction Tax Credit income or capital itself, while the latter focuses
An amount deducted An amount DIRECTLY on tax. (Id.)
from GROSS thus DEDUCTED from TAX
reduces TAXABLE BASE LIABILITY Note: The BIR issued RMO No. 1-2000, as
and reducing TAX DUE amended by RMO No. 72-2010, requiring
Example: Creditable
taxpayers to file for a Tax Treaty Relief
Example: Itemized Withholding Tax
Deductions/ Cost of
Application on or before the transaction date
Sales -Deducted first to before availing of the provisions of a tax treaty.
arrive at the TAXABLE
INCOME ―Failure to comply with the requirements
of RMO No. 1-2000, as amended by RMO
A tax deduction is used A tax credit is used by No. 72-2010, is not fatal to the availment
BEFORE tax is private establishment of tax treaty relief‖
computed only AFTER the tax has
(CIR v. Central Drug been computed  Tax treaties are entered into to minimize, if
Corporation, GR
not eliminate, the harshness of international
159647,April 15, 2005)
juridical double taxation, which is why they
are also known as double tax treaty or
double tax agreements.
(iii)Treaties with other states
Laws and issuances must ensure that the
 A tax treaty sets out the respective rights to
reliefs granted under tax treaties are
tax of the state of source (situs) and the
accorded to the parties entitled thereto. The
state of residence with regard to certain
BIR must not impose additional
cases, an exclusive right to tax is conferred
requirements that would negate the
on one of the contracting states; however,
availment of the reliefs provided for under
for other items of income or capital, both
international agreements more so, when the
states are given the right to tax, although
Tax Treaty does not provide for any pre-
the amount of tax that may be imposed by
requisite for the availment of the benefits
the state of source is limited.
under said agreement.
 It applies whenever the state of source is
given full or limited right to tax. The treaty
The obligation to comply with a tax treaty
makes it incumbent upon the state of
must take precedence over the objective of
residence to allow relief in order to avoid
RMO No. 1-2000. Logically, noncompliance
double taxation.
with tax treaties has negative implications
on international relations, and unduly
Two Methods of Relief
discourages foreign investors. While the
consequences sought to be prevented by
1.Exemption Method- the income or capital
RMO No. 1-2000 involve an administrative
which is taxable in the state of source or situs is
procedure, these may be remedied through
exempted in the state of residence, although it
other system management processes, e.g.,
may be taken into account in determining the
the imposition of a fine or penalty. But we
tax rate applicable to the taxpayer‘s remaining
cannot totally deprive those who are entitled
to the benefit of a treaty for failure to
21
Bar Operations C ommissions 21
 Purple Notes
Taxation Law
strictly comply with an administrative
issuance requiring prior application for tax
treaty relief. (Deutsche Bank AG Manila Branch
vs. CIR, GR No. 188550, August 19, 2013)
(iv)Tax Exemption - grant of immunity to
particular persons or entities from the
obligation to pay taxes.
(v)Reduction – Tax sparring rule on dividends
received by Non – Resident Foreign
Corporations (NRFCs) of 15% from
30%(Sec.28[B][5][b],NIRC)
5. Escape From Taxation
a. Shifting of Tax Burden
The transfer of the burden of tax by the original
payer or the one on whom the tax was assessed
or imposed to another.
(i) Ways of Shifting Tax Burden
1. Forward shifting- transfer of the tax
burden from a factor of production
through the factors of distribution until
finally rests on the consumer.
2. Backward shifting- transfer of the tax
burden from the consumer through the
factors of distribution to the factor of
production.
3. Onward shifting- transfer of the tax
burden two or more times either
forward or backward(Valencia & Roxas,
Income Taxation, 2016, p.34)
(ii) Taxes That Can Be Shifted - Indirect
taxes e.g., Value Added Tax
(iii) Meaning of Impact and Incidence of
Taxation
Impact of Taxation - The point on which
a tax is originally imposed.
Incidence of Taxation – the point on
which a tax burden finally rest or settle
down
Tax capitalization – it means the reduction in
the price of the taxed object equal to the
22 Center for Legal Education and Research
capitalized value of future taxes2018which the
purchaser expects to be called upon to pay.
A special form of backward shifting except that
while the latter involves the shifting back of a
single tax, the former involves the throwing
back of a whole series of taxes and taxes place
before any of them, with the exemption of the
first is paid.( Valencia & Roxas, Income Taxation,
2016, p.35)
Transformation – it is the method whereby
the manufacturer or producer upon whom the
tax has been imposed, fearing the loss of his
market if he should add the tax to the price,
pays the tax and endeavors to recoup himself by
improving his process of product at a lower
cost.(Valencia & Roxas, Income Taxation, p.35)
b. Distinguish: tax avoidance and tax
evasion
Tax avoidance/ Tax minimization
It is the use by the taxpayer of legally
permissible alternative tax rates or methods of
assessing taxable property or income in order to
avoid or reduce tax liability (e.g. termination of
deposits subject to 20% final tax and re-
investing it in tax-exempt government bonds). It
is a saving device within the means sanctioned
by law and should be used by the taxpayer in
good faith and at arms length.(CIR vs. Estate of
Benigno Toda, GR 147188, September 14,2004)
Tax evasion/ Tax Dodging
It is the use of taxpayer of illegal or fraudulent
means to evade or lessen the payment of a tax
(e.g. deliberate non-reporting or under-reporting
of an income). (Id.)
Indicia of Fraud in Tax Evasion
a) Failure to declare for taxation purposes true
and actual income derived from business for
2 consecutive years; or
b) Substantial under declaration of revenues in
the income tax returns of the taxpayer for 4
consecutive years coupled with intentional
overstatement of deductions. (see Sec.
248[B], NIRC)
Connotes the integration of 3 Factors:
(ESC)
 Purple Notes
Taxation Law

1. The end to be achieved, i.e. the payment of People v. Kintanar People v. Judy Ann
less than that known by the taxpayer to be Santos
legally due; All elements of tax The element of willfulness
2. An accompanying state of mind which is evasion are present absent
described as being ―evil‖, in ―bad faith‖, Involved non – filing of Involved failure to supply
returns correct and accurate tax
―willful‖, or ―deliberate and not merely
return
accidental‖, and Kintanar was known to Judy Anne relied on her
3. A course of action or failure of action which be a businesswoman to manager ever since she
is unlawful.(CIR vs.Estate of Benigno Toda, GR which the Court found was a child to handle her
147188, September 14,2004) she should have known finances.
her obligations
Note: See also Section 248(B) of NIRC
providing for prima facie evidence of filing a 6. Exemption From Taxation
false or fraudulent return.
a) Meaning of Exemption from Taxation
TAX AVOIDANCE TAX EVASION /TAX A grant of immunity, express or implied, to
/TAX DODGING particular persons or corporations from the
MINIMIZATION obligation to pay taxes.
The tax saving device A scheme used outside of
within the means those lawful means and
sanctioned by law. This when availed of, it usually
Basis of the Grant of Exemption: ―No law
method should be used subjects the taxpayer to granting any tax exemption should be passed
by the taxpayer in good further or additional civil or without the concurrence of a majority of all the
faith and at arm‘s criminal liabilities. Tax members of Congress (Section 28(4), Article VI,
length. evasion connotes (CIR vs. 1987 Constitution).
Estate of Toda, Jr., G.R.
No. 147188, September 14, b) Nature of Tax Exemption
2004) 1. It is a personal privilege of the grantee.
Legal Illegal 2. It is generally revocable by the
government unless the exemption is
Doctrine of Willful Blindness
founded on a contract, which is
protected from impairment, but the
Mere reliance on a representative or agent is not
contract must contain the other
a valid ground to justify any noncompliance in
essential elements of contracts.
tax obligations. The taxpayer must inquire,
 It implies a waiver on the part of the
check and validate whether or not his
government to collect what otherwise
representative or agent has complied with the
would be due, and in this sense is
taxpayer‘s tax responsibilities. (People vs.
prejudicial thereto.
Kintanar, CTA EB Crim. No. 006, December 3, 2010)
3. It is not necessarily discriminatory so
long as the exemption has a reasonable
However in the case of People v. Judy Ann
foundation or rationale basis.
Santos (CTA Case No. 012, 2013) affirmed by the
Supreme Court (G.R. No. 206001, April
Basic Principles Regarding Tax Exemption
17,2013)where the CTA Division acquitted
Santos despite the same circumstances as
 Exemptions are highly disfavored by law and
Kintanar. Santos was charged with failure to
he who claims an exemption must be able
supply correct and accurate information in her
to justify his claim by the clearest grant of
income tax return. She claimed that by virtue of
law. An exemption from the common
trust, respect and confidence, she entrusted her
burden cannot be permitted to exist upon
finances to her manager since she was a child.
vague implication. (Asiatic Petroleum Co. vs.
Here the CTA Division found that the element of
Llanes, G.R. No. 25386, October 20, 1926)
wilfiullness and motive to commit fraud were
wanting and that Santos was merely negligent.
23
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 Purple Notes
Taxation Law
Notes:
1. He who claims exemption should prove his
factual and legal basis for exemption.
(Commissioner of Internal Revenue vs. Acesite
Philippines Hotel Corporation, G.R. No. 147295,
February 16, 2007)
2. Tax exemptions are strictly construed
against the person claiming it. (Esso Standard
Eastern, Inc. vs. Acting Commissioner of
Customs, GR No. L-21841, October 28, 1966)
 Constitutional grant of exemptions is
self-executing.
 In the same way that taxes are
personal, tax exemptions are also
personal.
 Deductions from income tax purposes
partake of the nature of tax exemptions,
therefore should also be construed strictly
against the taxpayer. (Commissioner of
Internal Revenue vs. General Foods Phil., Inc.,
GR No. 143672, April 24, 2003)
 The same is true with regards tax refunds.
(Commissioner of Internal Revenue vs. Eastern
Telecommunications Phil., Inc., G.R. No. 163835,
July 7, 2010)
c) Kinds of Tax Exemption
As to Form:
(i) Express - Expressly granted by the
Constitution, statutes, treaties, franchises or
similar legislative acts.
(ii) Implied - When particular persons,
properties, or exercise are deemed exempt
as they fall outside the scope of the taxing
provision itself.
(iii)Contractual - Are those agreed to by the
taxing authority in contract lawfully entered
into by them under enabling laws.
As to Basis:
(i) Constitutional Exemptions – Immunities
from taxation which originate from the
Constitution.
(ii) Statutory Exemptions – those which
emanate from legislation.
24 Center for Legal Education and Research
As to Extent: 2018
(i) Total Exemption – connotes absolute
immunity.
(ii) Partial Exemption – one where a
collection of a part of the tax is dispensed
with.
d) Rationale/Grounds for Exemption
Being a waiver from its power to tax, the
government, in granting tax exemption,
should justify that the grant of such
exemption will benefit the body of people,
which is sufficient to offset the loss of
revenue occasioned thereby.
Grounds for Tax Exemption
(i) Contract – the grant of tax exemption is
usually contained in the charter of the
corporation to which the exemption is
granted.
(ii) Public policy -to encourage new and
necessary industries, or to foster charitable
institutions.
(iii)Reciprocity – to reduce the rigors of
international double or multiple taxation, tax
exemptions maybe granted in treaties. A tax
exemption is a personal privilege of the
grantee and therefore not assignable; it is
generally revocable by the government,
unless founded on contract and must not be
discriminatory.
e) Revocation of Tax Exemption
If the grant of an exemption does not constitute
a contract, but merely ―a spontaneous
concession by the legislature, not connected
with any service or duty imposed‖ it is
REVOCABLE by the power which made the
grant.
Thus, if the basis of the tax exemptions is by
virtue of a franchise granted by Congress, the
exemption may be revoked. However, if the tax
exemption constitutes a binding contract and for
a valuable consideration, the government cannot
unilaterally revoke the tax exemption.
 Purple Notes
Q: IS TAX EXEMPTION REVOCABLE?
A:It depends. A law which changes the terms of
the contract by making new conditions, or
changing those in the contract, or dispenses
with those expressed, impairs the obligation.
However, the non-impairment rule does not
apply to public utility franchises since a franchise
is subject to amendment, alteration or repeal by
the Congress when the public interest so
requires (Section 11, Article XII, 1987 Constitution).
 While the Court has, not too infrequently,
referred to tax exemptions contained in
special franchises as being in the nature of
contracts and a part of the inducement for
carrying on the franchise, these exemptions,
nevertheless, are far from being strictly
contractual in nature. Contractual tax
exemptions, in the real sense of the term
and where the non-impairment clause of the
Constitution can rightly be invoked, are
those agreed to by the taxing authority in
contracts, such as those contained in
government bonds or debentures, lawfully
entered into by them under enabling laws in
which the government, acting in its private
capacity, sheds its cloak of authority and
waives its governmental immunity. Truly,
tax exemptions of this kind may not be
revoked without impairing the obligations of
contracts.
These contractual tax exemptions, however,
are not to be confused with tax exemptions
granted under franchises. A franchise
partakes the nature of a grant which is
beyond the purview of the non-impairment
clause of the Constitution. Indeed, Article
XII, Section 11, of the 1987 Constitution,
like its precursor provisions in the 1935 and
the 1973 Constitutions, is explicit that no
franchise for the operation of a public utility
shall be granted except under the condition
that such privilege shall be subject to
amendment, alteration or repeal by
Congress as and when the common good so
requires. (Meralco vs. Province of Laguna, G.R.
No. 131359 May 5, 1999)
25
Taxation Law
Rules:
a. When the exemption is unilaterally granted
by law and the same is withdrawn by virtue
of another law, there is no violation.
b. When the exemption is bilaterally agreed
upon between the government and the
taxpayer, it cannot be withdrawn without
impairing the contract.
c. When the exemption is granted under a
franchise, it may be revoked because a
franchise is subject to amendment,
alteration, or repeal by Congress.
7. Doctrine of Equitable Recoupment
 Where the refund of a tax illegally or
erroneously collected or overpaid by a
taxpayer is barred by prescription, a tax
being assessed against a taxpayer may be
recouped or set-off against the tax whose
refund is now barred by prescription.
(Collector of Internal Revenue vs. University of
Santo Tomas and the Court of Tax Appeals, G.R.
No. L-11274, November 28, 1958)
 Note: This is NOT followed in the
Philippines. (Id.)
8. Compensation and Set-off
General Rule: Taxes cannot be the subject of
compensation or set-off.
Reasons:
1. Lifeblood Doctrine;
2. Taxes are not contractual obligation but
arise out of duty to the government;
3. The government and the taxpayer are not
mutually creditors and debtors of each
other. (Francia vs. IAC, G.R. No. L-67649, June
28, 1988)
Exception: Where both claims already became
overdue and demandable as well as fully
liquidated, or where the government and the
taxpayer are in their own right reciprocally
debtors and creditors of each other,
compensation takes place by operation of law.
Bar Operations C ommissions 25
 Purple Notes
Taxation Law
 Thus, a tax presently being assessed against
a taxpayer may not be recouped or set-off
against an overpaid tax the refund of which
is already barred by prescription
(DOMONDON, 11th ed, p. 46)
 A tax is not an obligation that is created by
contracts express or implied. It is an
obligation imposed by law. Inasmuch as
taxes are not debt, it follows that the two
obligations are not subject of set-off or
compensation under Art. 1279 of the New
Civil Code. (Domingo vs. Garlitos, G.R. No. L-
18994, June 29, 1963)
 Taxes could not be set-off against the
taxpayer‘s claim of refund for reforestation
charges it initially shouldered which should
have been the obligation of the government.
(Republic vs. Mambulao Lumber, G.R. No. L-
17725, February 28, 1962)
 The obligation to pay real estate tax
delinquency could not be set-off by the
amount which the government is indebted
to the former by way of expropriation that
was effected by the national government.
(Francia vs. IAC, G.R. No. L-67649, June 28,
1988)
 There can be no offsetting of taxes against
the claims that a taxpayer may have against
the government, such as reimbursement
from the Oil Price Stabilization Fund (OPSF).
(Caltex Phils. vs. COA, G.R. No. 92585, May 8,
1992)
 Philex cannot refuse the payment of its tax
liabilities on the ground that it has pending
claims for VAT input credit/refund. A
taxpayer cannot refuse to pay his taxes
when they fall due simply because he has a
claim against the government or that the
collection of the tax is contingent on the
result of the lawsuit it filed against the
government. (Philex Mining vs. Commissioner,
G.R. No. 125704, August 28, 1998)
9. Compromise and Tax Amnesty
Compromise
A contract whereby the parties, by making
reciprocal concessions, avoid litigation or put an
26 Center for Legal Education and Research
2018
end to one already commenced (Article 2028, New
Civil Code).
a) Requisites:
1. The taxpayer must have a tax liability.
2. There must be an offer (of the amount to
be paid by the taxpayer)
3. There must be an acceptance (by the
Commissioner or taxpayer as the case
maybe) of the offer in the settlement of the
original claim.
b) Persons Allowed to Enter into
Compromise of Tax Obligations:
1. BIR Commissioner – as expressly
authorized by the NIRC subject to the
following conditions.
a) When a reasonable doubt as to validity
of the claim against the taxpayer exist;
OR
b) The financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax.
2. Collector of Customs- with respect to
custom duties limited to cases where the
legitimate authority is specifically granted
such in remission of duties.
3. Customs Commissioner- subject to the
approval of the Secretary of Finance, in
cases involving the imposition of fines,
surcharges, and forfeitures.
10.Tax Amnesty
Definition
Tax amnesty is a general pardon or intentional
overlooking by the State of its authority to
impose
penalties on persons otherwise guilty of evasion
or violation of a revenue or tax law. It partakes
of an absolute forgiveness or waiver by the
government of its right to collect what is due it
and to give tax evaders who wish to relent a
chance to start with a clean slate. A tax
amnesty, much like a tax exemption, is never
favored nor presumed in law. The grant of a tax
amnesty, similar to a tax exemption, must be
 Purple Notes
construed strictly against the taxpayer and
liberally in favor of the taxing authority. (CIR vs.
Philippine-Aluminum Wheels, Inc., G.R. No. 216161,
August 9, 2017)
Effect of submission of documentary
requirements for availment of tax amnesty
The Court explained that the documentary
requirements and payment of the amnesty tax
operate as a suspensive condition, such that
completion of these requirements entitles the
taxpayer-applicant to immediately enjoy the
immunities and privileges under Republic Act
No. 9480.
However, the Court further stated that Section 6
of the law contains a resolutory condition.
Immunities and privileges will cease to apply to
taxpayers who, in their SALN, were proven to
have understated their net worth by 30% or
more.Republic Act No. 9480 provides that the
proceeding to challenge the SALN must be
initiated within one year following the date of
filing of the Tax Amnesty documents.50
Respondent asserts that it availed of the tax
amnesty program on January 25, 2008. Hence,
petitioner's challenge, made only in April 2009,
was already time-barred(CIR vs. Apo Cement
Corp.,G.R. No. 193381, February 8, 2017,penned by
J. Leonen)
Taxation Law
K. Construction and Interpretation of
1. Tax Laws
Tax laws must be construed reasonably to
carry out the purpose, the intent, and the
objective of the law.
General Rule: If the tax law is clear and
unambiguous, apply the law strictly against the
taxpayer and in favor of the government. (CIR v.
CA, CTA and Ateneo de Manila, GR 115349, April 18,
1997)
Exception: If the law is doubtful and
ambiguous, then the law must be construed
strictly against the Government and liberally in
favor of the taxpayer.
Burdens are not to be imposed nor presumed to
be imposed beyond the plain and express terms
of the law. "The general rule of requiring
adherence to the letter in construing statutes
applies with peculiar strictness to tax laws and
the provisions of a taxing act are not to be
extended by implication. (CIR vs. San Miguel
Corporation,G.R. No. 205045, January
25,2017,penned by J. Leonen)
2. Tax Exemption and Exclusion

Distinguish from tax exemption General Rule: Must be construed strictly

against the grantee and liberally in favor of the
TAX AMNESTY TAX EXEMPTION taxing authority.
Tax amnesty is an Tax exemption is an
immunity from all immunity or privilege, a  Taxation is a destructive power which
criminal, civil and freedom from a charge or interferes with the personal and property
administrative liabilities burden to which others rights of the people and takes from them a
arising from non- are subjected. portion of their property for the support of
payment of taxes. the government. And since taxes are what
Granted to all taxpayers. Granted only to taxpayers we pay for civilized society, or are the
covered by the specific tax
lifeblood of the nation, the law frowns
exemption statute.
against exemptions from taxation and
It is retroactive in It is generally prospective
application. in application. statutes granting tax exemptions are thus
There is a revenue loss There is no revenue loss construed strictissimi juris against the
since there were because there were no taxpayer and liberally in favor of the taxing
actually taxes due but actual taxes due as the authority. A claim of refund or exemption
the collection was just person or transaction is from tax payments must be clearly shown
waived by the protected by tax and be based on language in the law too
Government. exemption. plain to be mistaken. Elsewise stated,
taxation is the rule, exemption therefrom is
the exception. (Paseo Realty & Development

27
Bar Operations C ommissions 27
 Purple Notes
Taxation Law
Corporation vs. Court of Appeals, G.R. No.
119286, October 13, 2004)
 Tax Exemptions are not favored and are
construed strictissimi juris against the
taxpayer and liberally in favor of the taxing
authority. (Smart Communications Inc. vs City
of Davao, G.R. No. 155491, July 21, 2009)
 Taxation is the rule and exemption the
exception, and therefore, he who claims
exemption must be able to justify his claim
or right thereto, by a grant expressed in
terms ―too plain to be mistaken and too
categorical to be misinterpreted.‖(CIR vs. P.J.
Kiener Co., Ltd., G.R. No. L-24754, July 18, 1975)
Exceptions:
1. Where the statute granting exemption
expressly provides for a liberal
interpretation;
2. Special taxes relating to special cases and
affecting only special classes of persons (DE
LEON, Fundamentals of Taxation,2004,p.69);
3. Property held in public ownership
(DIMAAMPAO, Tax Principles and Remedies,
p.121);
4. Traditionalexemptees, such as those in
favor of religious and charitable institutions
(ABAN, Law of Basic Taxation,2001,p.119);
5. In favor of the government, its political
subdivisions or instruments (Maceda vs.
Macaraig, G.R.88291,May 31,1991); and
6. By clear legislative intent (CIR vs. Arnoldus
Carpentry Shop, G.R. No.7112,March 25,1988).
Implication of ―strictly construed‖
i. Tax exemptions must never be presumed. It
must be established and proved by the
taxpayer.
ii. The law must be limited to what it says. It
must be confined to the statutory language.
iii. Should be personal to the exemptee, or
personal to the tax beneficiary.
 Considering that respondent failed to
establish that [People Support] is registered
with PEZA as a facility-provider and that
[People Support]'s income from the lease of
physical plant space, infrastructure[,] and
other transmission facilities to respondent is
28 Center for Legal Education and Research
entitled to ITH incentive, it is 2018
my humble
view that the income received by PPI from
respondent is subject to regular corporate
income tax imposed under Section 27(A) of
the NIRC as amended. Tax incentives
partake of the nature of tax exemptions.
They are a privilege to which the rule that
tax exemptions must be strictly construed
against the taxpayer apply. One who seeks
an exemption must justify it by words "too
plain to be mistaken and too categorical to
be misinterpreted. (Commissioner of Internal
Revenue v. J.P. Morgan Chase Bank, N.A.-
Philippine Customer Care Center,G.R. No.
210528, November 28, 2018,penned by
J.Leonen)
3. Tax Rules and Regulations
The general principles in the construction of
tax laws applies in the interpretation of tax
rules and regulations. To be valid, the tax
rules must be consistent with the provisions
of the tax law which they seek to
implement.
Requisites for valid tax regulation: (PEG)
a) Publication;
b) Germane to the public purpose embodied in
the governing statute; and
c) Exercised within the authority.
4. Penal Provisions of Tax Laws
Strict construction of penal statutes, so as
not to extend the plain terms thereof that
might create offenses by mere implication
not so intended by the legislative
body(People vs. Martin,G.R. No. L-38019, May
16, 1980)
PART II. NATIONAL TAXATION
(National Internal Revenue Code of 1997,
as amended by R.A. No. 10963 or the Tax
Reform for Acceleration and Inclusion
Law)
A. Taxing Authority
1. Jurisdiction, Power and Functions of
the Commissioner of Internal Revenue
 Purple Notes
a) Powers and Duties of the Bureau of
Internal Revenue (E3A)
 The assessment and collection of all
internal revenue taxes, fees, and
charges;
 The enforcement of all forfeitures,
penalties, and fines connected
therewith;
 The execution of judgments in all
cases in its favor by the CTA and
ordinary courts;
 Giving effect to and administering the
supervisory and police powers conferred
to it by the Tax Code or other laws.(Sec.
2, NIRC)
b) Powers of the Commissioner of
Internal Revenue:
These are: (IDIOM ASAP -D)
1. Interpret tax laws (Sec. 4[1], NIRC).
2. Decide Tax Cases(Sec. 4[2], NIRC)
3. Obtain information and to summon
examine and take testimony of persons
(Sec. 5, NIRC as amended by TRAIN)
4. Make assessments and prescribe
additional requirements for tax
administration and enforcement(Sec.
6[A], NIRC, as amended by TRAIN)
5. Prescribe Real Property Values(Sec.
6[E], NIRC,as amended by TRAIN)
6. Make arrest and seizures(Sec. 15, NIRC,)
7. Delegate powers(Sec. 7, NIRC,)
8. Assign or reassign internal revenue
officers to establishments where articles
subject to excise tax are produced or
kept(Secs.95 &97 , NIRC)
9. Impose duties on certain officers
10. Suspend business operations(Sec. 115,
NIRC)
1. Power to interpret tax laws
 The CIR shall have the exclusive and
original jurisdiction to interpret the
provisions of the Tax Code and other
special tax laws, subject for review by
the Secretary of Finance.(Sec. 4, NIRC)
NOTE: A ruling by the CIR that interpret
provisions of the NIRC and other tax laws
shall be presumed valid unless modified,
reversed or superseded by the Secretary of
29
Taxation Law
Finance. A taxpayer who receives an
adverse ruling from the CIR may, within
thirty (30) days from the date of receipt of
such ruling, seek its review by the Secretary
of Finance. The Secretary of Finance may
also review the rulings motu proprio. (DOF
Order 7-02)
2. Power to decide tax cases
 The CIR shall also have the power to
decide the following tax cases but
subject to the exclusive appellate
jurisdiction of the CTA:(DROP)
i. Disputed assessments,
ii. Refunds of internal revenue taxes, fees
or other charges,
iii. The penalties imposed in relation
thereto, or
iv. Other matters arising under the Tax
Code, other tax laws or portions thereof
administered by the BIR. (Sec. 4, NIRC)
In any case, even if this Court were to
disregard the Collection Letter as a final
decision of the Commissioner on Avon's
protest, the Collection Letter constitutes
an act of the Commissioner on "other
matters" arising under the National
Internal Revenue Code, which, pursuant
to Philippine Journalists, Inc. v. CIR, may
be the subject of an appropriate appeal
before the Court of Tax Appeals(CIR vs.
Avon Products Manufacturing,G.R. Nos.
201398-99, October 03, 2018,penned by J.
Leonen).
3. Powerto Obtain Information, and to
Summon, Examine, and Take
Testimony of Persons. - In ascertaining
the correctness of any return, or inmaking a
return when none has been made, or in
determining the liability of any person for
any internal revenue tax, or in collecting any
suchliability, or in evaluating tax compliance,
the Commissioner is authorized:(E-COST)
(i) To examine any book, paper, record, or
other data which may be relevant or
material to such inquiry;
(ii) To obtain on a regular basis from any
person other than the person whose internal
revenue tax liability is subject to audit or
Bar Operations C ommissions 29
 Purple Notes
Taxation Law
investigation, or from any office or officer of
the national and local governments,
government agencies and instrumentalities,
including the BangkoSentral ng Pilipinas and
government-owned or -controlled
corporations, any information such as, but
not limited to, costs and volume of
production, receipts or sales and gross
incomes of taxpayers, and the names,
addresses, and financial statements of
corporations, mutual fund companies,
insurance companies, regional operating
headquarters of multinational companies,
joint accounts, associations, joint ventures
of consortia and registered partnerships,
and their members;
Provided, That the Cooperative
Development Authority shall submit to the
Bureau a tax incentive report, which shall
include information on the income tax,
value-added tax, and other tax incentives
availed of by cooperatives registered and
enjoying incentives under Republic Act No.
6938, as amended: Provided, further, That
the information submitted by the
Cooperative Development Authority to the
Bureau shall be submitted to the
Department of Finance and shall be included
in the database created under Republic Act
No. 10708, otherwise known as ‗The Tax
Incentives Management and Transparency
Act (TIMTA)‘.(Sec. 5(B) of NIRC, amended by
TRAIN Law)
(iii) 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 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;
(iv) To take such testimony of the person
concerned, under oath, as may be relevant
or material to such inquiry; and
30 Center for Legal Education and Research
(v) To cause revenue officers and2018
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 Section 6(F) of the NIRC.
(Sec. 5, NIRC)
It is the power to hear and determine questions
of fact to which the legislative policy is to apply
and to decide in accordance with the standards
laid down by the law itself in enforcing and
administering the same law. The administrative
body exercises its quasi-judicial power when it
performs in a judicial manner an act which is
essentially of an executive or administrative
nature, where the power to act in such manner
is incidental to or reasonably necessary for the
performance of the executive or administrative
duty entrusted to it(CIR vs. Avon Products
Manufacturing, G.R. Nos. 201398-99, October 03,
2018,penned by J. Leonen).
In carrying out these quasi-judicial functions,
the Commissioner is required to "investigate
facts or ascertain the existence of facts, hold
hearings, weigh evidence, and draw conclusions
from them as basis for their official action and
exercise of discretion in a judicial nature." Tax
investigation and assessment necessarily
demand the observance of due process because
they affect the proprietary rights of specific
persons.
4. Power Make Assessments and
Prescribe Additional Requirements for
Tax Administration and Enforcement
(Sec.6, NIRC)
 BIR Commissioner Caesar Dulay in 2018
thru a Tax Advisory made use of this
section when he obligated the taxpayer
to pay monthly withholding taxes rather
than quarter as per TRAIN Law.
 Purple Notes
(i) Examination of Returns and
Determination of Tax Due - After a
return has been filed as required under
the provisions of the NIRC, the
Commissioner or his duly authorized
representative may authorize the
examination of any taxpayer and the
assessment of the correct amount of
tax, notwithstanding any law requiring
the prior authorization of any
government agency or instrumentality:
Provided, however, That failure to file a
return shall not prevent the
Commissioner from authorizing the
examination of any taxpayer.(Sec. 6(A) of
NIRC, as amended by TRAIN Law)
(ii) 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.
(Best Evidence Obtainable Rule)
The law is specific and clear. The rule
on the "best evidence obtainable"
applies when a tax report required by
law for the purpose of assessment is not
available or when the tax report is
incomplete or fraudulent(Bonifacio Sy Po
vs CA, G.R. NO. 81446, August 18, 1988)
(iii) Authority to Conduct Inventory-
taking, Surveillance and to
Prescribe Presumptive Gross Sales
and Receipts;
(iv) Authority to Terminate Taxable
Period;
(v) Power to Prescribe Real Property
Values
The Commissioner is hereby authorized
to divide the Philippines into different
zones or areas and shall, upon
mandatory consultation with competent
appraisers both from the private and
31
Taxation Law
public sectors, and with prior notice to
affected taxpayers, determine the fair
market value of real properties located
in each zone or area, subject to
automatic adjustment once every three
(3) years through rules and regulations
issued by the Secretary of Finance
based on the current Philippine
valuation standards: Provided, That no
adjustment in zonal valuation shall be
valid unless published in a newspaper of
general circulation in the province, city
or municipality concerned, or in the
absence thereof, shall be posted in the
provincial capitol, city or municipal hall
and in two (2) other conspicuous public
places therein: Provided, further, That
the basis of any valuation, including the
records of consultations done, shall be
public records open to the inquiry of any
taxpayer. (Sec. 6(E) of NIRC, amended by
TRAIN Law)
To summarize: (PNP-MZ)
1. Mandatory consultation with both private
and public competent appraisers before
division of the Philippines into zones.
2. Prior Notice to affected taxpayers before the
determination of fair market values of the of
real properties.
3. Publication or posting of adjustments in
zonal value in newspaper of general
circulation in the province, city or
municipality concerned.
4. The basis of valuation and records of
consultation shall be public records open to
the inquiry of the taxpayer.
5. Zonal valuations shall be automatically
adjusted every three years.
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.‖
(vi)Authority of the Commissioner to
Inquire into Bank Deposit Accounts
Bar Operations C ommissions 31
 Purple Notes
Taxation Law
and Other Related information held by
Financial Institutions. - Notwithstanding
any contrary provision of Republic Act No.
1405, Republic Act No. 6426, otherwise
known as the Foreign Currency Deposit Act
of the Philippines, and other general or
special laws, the Commissioner is hereby
authorized to inquire into the bank deposits
and other related information held by
financial institutions of:
Q: May the CIR inquire in bank deposits of
taxpayers in relation to an on – going audit
investigation?
General Rule: No.
Exceptions:
a) A decedent to determine his gross
estate;
b) Any taxpayer who has filed an
application for compromise of his tax
liability under Section 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
Republic Act No. 1405, Republic Act No.
6426, otherwise known as the Foreign
Currency Deposit Act of the Philippines,
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;
and
c) A specific taxpayer or taxpayers subject
of a request for the supply of tax
information from a foreign tax authority
pursuant to an international convention
or agreement on tax matters to which
the Philippines is a signatory or a party
of: Provided, That the information
obtained from the banks and other
financial institutions may be used by the
32 Center for Legal Education and Research
Bureau of Internal Revenue2018for tax
assessment, verification, audit and
enforcement purposes. (Sec. 6[F], NIRC,
as amended)
Contents of the Request
(1) The identity of the person under
examination or investigation;
(2) A statement of the information being
sought, including its nature and the form in
which the said foreign tax authority prefers
to receive the information from the
Commissioner;
(3) The tax purpose for which the information is
being sought;
(4) Grounds for believing that the information
requested is held in the Philippines or is in
the possession or control of a person within
the jurisdiction of the Philippines;
(5) To the extent known, the name and address
of any person believed to be in possession
of the requested information;
(6) A statement that the request is in conformity
with the law and administrative practices of
the said foreign tax authority, such that if
the requested information was within the
jurisdiction of the said foreign tax authority
then it would be able to obtain the
information under its laws or in the normal
course of administrative practice and that it
is in conformity with a convention or
international agreement; and
(7) A statement that the requesting foreign tax
authority has exhausted all means available
in its own territory to obtain the information,
except those that would give rise to
disproportionate difficulties. (Sec. 7, RR 10-
2010)
The term "foreign tax authority," as used
herein, shall refer to the tax authority or tax
administration of the requesting State under
the tax treaty or convention to which the
Philippines is a signatory or a party of. (Sec.
6, NIRC, as amended by R.A. 10021)
(vi) Authority to Accredit and Register Tax
Agents;
 Purple Notes
(viii) Authority of the Commissioner to
Prescribe Additional Procedural or
Documentary Requirements. (Sec. 6,
NIRC, as amended)
6. Authority of Internal Revenue Officers
to Make Arrests and 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.
Taxation Law
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.
Organizational Chart

7. Authority of the Commissioner to

Delegate Power.
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 Can be
of Finance, upon recommendation of the delegated
Commissioner. CIR powers

However, 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,
33
Bar Operations C ommissions 33
 Purple Notes
Taxation Law
Q: Whether said demand letter indeed
attained finality despite the fact that it
was issued and signed by the Chief of
the Accounts Receivable and Billing
Division instead of the BIR
Commissioner?
A: It is clear from the above provision (Sec. 7
of NIRC) 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.(Oceanic
Wireless Network v. CIR, G.R.148380, December
9,2005)
8. The power to assign or reassign
internal revenue officers to
establishments where articles subject
to excise tax are produced or kept.(Sec.
16, NIRC)
9. Duties of Certain Officers and Debtors.
- 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
show, 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
nonpayment 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 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
34 Center for Legal Education and Research
creditor, unless the certification 2018of 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, NIRC)
Payment of Tax Antecedent to the
Transfer of Shares, Bonds or Rights. -
There shall not be transferred to any new owner
in the books of any corporation, sociedad
anonima, partnership, 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.
(Sec. 97, NIRC)
10. Power of the Commissioner to Suspend
the Business Operations of a Taxpayer.
- 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. -
(1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax return
as required under Section 114; or
(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 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.
 Purple Notes
2. Rule-making authority of the Secretary
of Finance
a) Authority of the Secretary of Finance
to Promulgate Rules and Regulations
Upon recommendation of the CIR, the Secretary
of Finance shall promulgate all needful rules and
regulations for the effective enforcement of the
provisions of the NIRC.(Sec. 244, NIRC, as
amended)
Requisites of a valid revenue regulation
To be valid, a revenue regulation must be within
the scope of statutory authority or standard
granted by the legislature. Specifically, the
regulation must (1) be germane to the object
and purpose of the law;(2) not contradict, but
conform to, the standards the law prescribes;
and (3) be issued for the sole purpose of
carrying into effect the general provisions of our
tax laws. (La Suerte Cigarette Factory vs. CIR,G.R.
No. 125346, November 11, 2014, penned by J.
Leonen)
How to contest a ruling of the BIR?
1.a. File a request for ruling review with the
Secretary of Finance (SOF) within thirty (30)
days from receipt of the CIR‘s ruling. (DOF
Department Order No. 23-2001 dated October 25,
2001)
Sec. 4 of the NIRC provides that the power to
interpret the provisions of the NIRC and other
tax laws is under the exclusive and original
jurisdiction of the CIR, subject to review by the
SOF.
1.b. Appeal to the SOF is in compliance with the
rule on exhaustion of administrative remedies.
Thus, appeal to the SOF may be dispensed with
if any of the exceptions to the rule on
exhaustion of administrative remedies is
present. The exceptions, among others, are the
following:
(1) exhaustion would be futile – The SOF
requesting a ruling from the CIR and later on
adopting the ruling as his own;
(2) issue is purely legal – Tax implications of the
PEACe Bonds; and,
35
Taxation Law
(3) when there are circumstances indicating the
urgency of judicial intervention – impending
maturity of the PEACe Bonds. (BDO vs. Republic,
GR No. 198756 dated January 13, 2015,penned by J.
Leonen)
b) Specific Provisions to be Contained in
Rules and Regulations
It must contain provisions specifying,
prescribing, or defining: (Sec. 245, NIRC, as
amended)
1. The time and manner in which Revenue
Regional Director shall canvass their
respective Revenue Regions to discover
persons and property liable to national
internal revenue taxes, and the manner
their lists and records of taxable persons
and taxable objects shall be made and kept.
2. The forms of labels, brands or marks to be
required on goods subject to excise tax, and
the manner how the labelling, branding or
marking shall be effected.
3. The condition under which and the manner
in which goods intended for export, which if
not exported would be subject to an excise
tax, shall be labelled, branded or marked.
4. The conditions to be observed by revenue
officers respecting the institutions and
conduct of legal actions and proceedings;
5. The conditions under which goods intended
for storage in bonded warehouses shall be
conveyed thither, their manner of storage
and method of keeping entries and records,
also the books to be kept by Revenue
Inspectors and the reports to be made by
them in connection with their supervision of
such houses.
6. The conditions under which denatured
alcohol may be removed and dealt in, the
character and quantity of the denaturing
material to be used, the manner in which
the process of denaturing shall be effected,
so as to render the alcohol suitably
denatured and unfit for oral intake, the
bonds to be given, the books and records to
Bar Operations C ommissions 35
 Purple Notes
Taxation Law
be kept, the entries to be made therein, the
reports to be made to the CIR, and the
signs to be displayed in the business or by
the person for whom such denaturing is
done or by whom, such alcohol is dealt in.
7. The manner in which revenue shall be
collected and paid, the instrument,
document or object to which revenue
stamps shall be affixed, the mode of
cancellation, the manner in which the proper
books, records, invoices and other papers
shall be kept and entries therein made by
the person subject to the tax, as well as the
manner in which licenses and stamps shall
be gathered up and returned after serving
their purposes.
8. The conditions to be observed by revenue
officers respecting the enforcement of Title
III imposing a tax on estate of a decedent,
and other transfers mortis causa, as well as
on gifts and such other rules and regulations
which the CIR may consider suitable for the
enforcement of the said Title III.
9. The manner in which tax returns,
information and reports shall be prepared
and reported and the tax collected and paid,
as well as the conditions under which
evidence of payment shall be furnished the
taxpayer, and the preparation and
publication of tax statistics.
10. The manner in which internal revenue taxes,
such as income tax, including withholding
tax, estate and donor's taxes, value-added
tax, other percentage taxes, excise taxes
and documentary stamp taxes shall be paid
through the collection officers of the BIR or
through duly authorized agent banks which
are hereby deputized to receive payments of
such taxes and the returns, papers and
statements that may be filed by the
taxpayers in connection with the payment of
the tax:
Provided, however, that notwithstanding the
other provisions of the NIRC prescribing the
place of filing of returns and payment of taxes,
the CIR may, by rules and regulations require
that the tax returns, papers and statements and
taxes of large taxpayers be filed and paid,
36 Center for Legal Education and Research
respectively, through collection 2018
officers or
through duly authorized agent banks:
Provided, further, That the CIR can exercise this
power within 6 years from the approval of RA
7646 or the completion of its comprehensive
computerization program, whichever comes
earlier:
Provided, finally, that separate venues for the
Luzon, Visayas and Mindanao areas may be
designated for the filing of tax returns and
payment of taxes by said large taxpayers.
Provided, however, That the Secretary of
Finance, upon recommendation of the CIR, may
modify or add to the above criteria for
determining a large taxpayer after considering
such factors as inflation, volume of business,
wage and employment levels, and similar
economic factors.
The penalties prescribed under Section 248
shall be imposed on any violation of the rules
and regulations issued by the Secretary of
Finance, upon recommendation of
the CIR, prescribing the place of filing of returns
and payments of taxes by large taxpayers.
B. Income Tax
1. Definition, Nature and General
Principles
Definition
Income Tax is a tax on all yearly profits arising
from property, professions, trade or offices or as
a tax on person‘s income, emolument, profits
and the like (LG Electronics Philippines, Inc. vs. CIR,
G.R. No. 16541, December 3,2014,penned by
J.Leonen).
Nature
Income tax is a kind of tax levied upon the
privilege of receiving income or profit. It is an
excise tax and not a property tax (DIMAAMPAO,
2015)
a) Income Tax Systems
 Purple Notes
(i) Global tax system
A system employed where the tax system
views indifferently the tax base and
generally treats in common all categories of
taxable income of the individual.
 It generally provides for uniform rules.
 It generally imposes uniform tax rate.
 It does not generally classify income.
(ii) Schedular tax system
A system employed where the income tax
treatment varies and is made to depend on
the kind or category of taxable income of
the taxpayer. It itemizes the different
incomes and provides for varied percentages
of taxes, to be applied thereto.
 It classifies income.
 It provides different tax rules.
 It imposes different tax rates.
(iii)Semi-Schedular or Semi-Global Tax
System (Others)
This is adapted in the Philippine setting. It is
a system which provides:
Taxation Law
(ii) Progressive: Tax rate increases as the tax
base increases.
(iii)Comprehensive: The income tax is
imposed on practically all forms of income
irrespective of nature, whether
compensation.
c) Criteria in imposing Philippine Income
Taxation (CRS)
(i) Citizenship Principle
A citizen taxpayer is subject to income tax:
 On his worldwide income (income within
and without the Philippines); or
 Only on his income from sources within
the Philippines, if he qualifies as a non-
resident citizen.
(ii) Residence Principle
A resident alien is liable to pay income tax
on his income from sources within the
Philippines but exempt from tax on his
income from sources outside the Philippines.
(iii)Source Principle

(a) Taxable Income for an individual is A non-resident alien is subject to Philippine

subjected to graduated rates; and
(b) Taxable Income for a Corporation is
subjected to one normal corporate
income tax rate. (MAMALATEO, Income
Tax, p.3-7)
income tax on his income from sources
within the Philippines such as dividend,
interest, rent or royalty.
d) General principles of income taxation

Global Schedular Under Section 23 of the NIRC, as amended, the

Rate Unitary or single Different tax following are the general principles of taxation.
rate rates The different kinds of taxpayers are taxed on
Categories No need for Different their income as follows:
of taxable classification as categories of  Citizen residing in the Philippines/
income all taxpayers are taxable income Resident Citizens (RC) - Taxable on all
subjected to a income from sources within and without
single rate
the Philippines.
Use Corporation Individuals  Non Resident Citizen (NRC) - Taxable
Rules Uniform rules Different rules only on income within the Philippines.

b) Features of Philippine Income Tax Law  An individual citizen of the Philippines

(i) Direct Tax: Tax burden is borne by the
income recipient upon whom the tax is
imposed.
who is working and deriving income
from abroad as an overseas contract
worker or a seaman who is a citizen of
the Philippines and who receives
compensation for services rendered

37
Bar Operations C ommissions 37
 Purple Notes
Taxation Law
abroad as a member of the complement (x) Capital Gains Tax (CGT) 2018
of a vessel engaged exclusively in (xi) Branch Profit Remittance Tax
international trade shall be treated as an (xii) Withholding Tax on Compensation
overseas contract worker - Taxable only
on income within the Philippines f) Kinds of Taxpayers

 An alien individual, whether a resident SUMMARY

or not of the Philippines - Taxable only Individuals Corporations Others
on income within the Philippines.
Resident Domestic Joint
Citizen (RC) corporation Venture and
 Domestic Corporations -taxable on all (DC) Consortium
income derived from sources within and
Nonresident Resident Partnership
without the Philippines
Citizen (NRC) foreign
corporation
 A foreign corporation, whether engaged (RFC)
or not in trade or business in the
Resident Alien Nonresident Estate
Philippines - taxable only on income (RA) foreign
derived from sources within the corporation
Philippines (NRFC)
Nonresident Trust
alien not
engaged in
trade or
business (NRA-
Taxable on income Taxable ONLY
NETB)
sourced within and income sourced
without within and without Nonresident
alien engaged
Citizen residing in the Non – Resident Citizens in trade or
Philippines / Resident business (NRA-
Citizens ETB)
Minimum wage
Domestic Corporations Overseas Contract earners (MWE)
Worker /Seamen Note: Detailed discussion on these can be found
aboard a vessel under Income Tax on Individuals and
engaged exclusively in Corporations
international Trade
g) Taxable Period
Aliens

Foreign Corporations (i) Calendar period: Accounting period

from January 1 to December 31.

e) Types of Philippine Income Taxes Taxable income is computed based on calendar

(i) Income Tax
(ii) Final Income Tax
(iii) Gross Income Tax
(iv) Improperly Accumulated Earnings Tax
(IAET)
(v) Minimum Corporate Income Tax (MCIT)
(vi) Optional Corporate Income Tax
(vii) Fringe Benefits Tax (FBT)
(viii)Creditable Withholding Tax (Expanded)
(ix) Special Income Tax on certain corporations
year if: (BONI)
 Accounting period is other than fiscal
year.
 Taxpayer has no accounting period.
 Taxpayer does not keep books.
 Taxpayer is an individual.
(ii) Fiscal period: Accounting period of 12
months ending on the last day of any

38 Center for Legal Education and Research

 Purple Notes
Taxation Law
month other than December. (e.g. July  An income may be defined as the gain
1, 2019-June 30, 2020) derived from capital, from labor, or from
both combined, provided it be understood to
(iii) Short period: A taxpayer may have a include profit gained through a sale or
taxable period of less than 12 months conversion of capital assets.(Eisner vs.
when: (D2NA -T) Macomber, 252 U.S., 189)

 Taxpayer dies  Income is a flow of service rendered by

 Corporation is newly organized capital by the payment of money from it or
 Corporation changes its accounting any other benefit rendered by the fund
period through a period of time. Income is the
 Corporation is dissolved ―fruit‖ of the capital or labor severed from
 Tax period has been terminated by the the ―tree‖.(Madrigal vs. Rafferty, GR 12287,
Commissioner by authority of August 7, 1918)
law(Sec.47, NIRC)
Income, Capital, Revenue, Receipts
Change of Accounting Period Distinguished

 If a taxpayer, other than an individual, Income Capital Revenue Receipts

changes his accounting period, the net As to Definition
income shall, with the approval of the it includes fund or may all funds or
flow, property constitute income
Commissioner, be computed on the basis of
service of existing capital as derived by
such new accounting period, subject to the wealth and at one well as the
provisions of Sec. 47 (Sec. 46, NIRC). fruits distinct income; government
 If the change is from fiscal year to calendar during a point of broader whether
year, a separate final or adjustment return definite time. scope than from tax or
shall be made for the period between the period of income. other
close of the last fiscal year for which the time. sources.
return was made and the following Dec. 31.
 If the change is from calendar year to fiscal b. When Income is Taxable:
year, a separate final or adjustment return
shall be made for the period between the i. Existence of income
close of the last calendar year for which ii. Realization of income
return was made and the date designated iii. Recognition of income
as the close of the fiscal year.
 If the change is from one fiscal year to i. Existence of Income
another fiscal year, a separate final or
adjustment return shall be made for the a. There must be gain or profit whether in
period between the close of the former fiscal cash or equivalent.
year and the date designated as the close of
the new fiscal year. Income tax only applies only when there is
income, gain or profit. (Mamalateo)
 BIR approval is necessary(Sec.46,NIRC).
 Case law provides that in order to constitute
2. Income "income," there must be realized "gain."
Clearly, because of the nature of
a. Definition: membership fees and assessment dues as
funds inherently dedicated for the
An income is the return in money from one's maintenance, preservation, and upkeep of
business, labor, or capital invested; gains, the clubs' general operations and facilities,
profit or private revenue. (Black‘s Law nothing is to be gained from their collection.
Dictionary) (Association of Non – Profit Clubs (ANPC) v.CIR,
G.R. No. 228539 , June 26, 2019)
39
Bar Operations C ommissions 39
 Purple Notes
Taxation Law
b. The gain must be realized or received
ii. Realization of Income
Realization Test: Unless the income is deemed
―realized,‖ there is no taxable income.
Under the realization principle, revenue is
generally recognized when both of the following
conditions are met:
1. The earning is complete or virtually
complete; and
2. An exchange has taken place.(Manila
Mandarin Hotels v. CIR, CTA Case. 5046,March
24 1997)
Sec. 38, RR No. 2-40, February 10, 1940
 A taxpayer is deemed to have received
items of gross income which have been
credited to or set apart for him without
restriction. On the other hand,
appreciation in value of property is not
even an accrual of income to a taxpayer
prior to the realization of such
appreciation through sale or conversion
of the property.
iii. Recognition of Income
 Receipt of income for purposes of
taxation may actual or constructive. (CIR
vs. BPI, G.R. No. 147375, June 25, 2006)
 Income is received not only when it is
actually handed to a person but also
when it is merely constructively received
by him. (See discussion in realization of
income)
 The gain must not be excluded by
law or treaty from taxation.
An income can be exempted either by:
- Tax Code
- Special law or Treaties
1. Requisites for an income to be taxable
1. There must be a gain or profit;
2. The gain must be realized or
received whether actually or
constructively; or
40 Center for Legal Education and Research
3. It is not exempted by law 2018
or treaty
for income tax. (CIR vs. Philippine
Daily Inquirer, Inc. G.R. No. 213943,
March 22,2017)
c. Tests in determining whether income is
earned for tax purposes:
i. Realization Test: Unless the income is
deemed ―realized,‖ there is no taxable
income.
Under the realization principle, revenue is
generally recognized when both of the following
conditions are met:
1. The earning is complete or virtually
complete; and
2. An exchange has taken place. (Manila
Mandarin Hotels v. CIR, CTA Case. 5046,March
24 1997)
Test of Realization
Actual Vis-À-Vis Constructive Receipt
Actual receipt – is the actual and physical
receipt.
Constructive receipt – occurs when money or
its equivalent is placed at the control of the
person who rendered the service without
restriction by the payor
Examples:
 Deposits in the bank which are made
available by the seller of service without any
restrictions.
 Issuance by the payor of a notice to offset
any debt or obligation and acceptance
thereof by the seller as payment of services
rendered.
 Transfer of amounts retained by the payor
for the account of the seller (RR 16-2005, Sec.
4.108 -4)
 An item of income must be included in gross
income if it is credited to the account of or
set apart for the taxpayer, or otherwise
made available to the taxpayer, although
not yet physically received or placed to his
actual possession.
 Purple Notes
The Assignment of Income doctrine holds
that income is taxable to the taxpayer even if he
did not receive the amount by reason of
assigning it to another person in a form of a gift
or donation. (see Lucas v. Earl, 281 U.S. 111)
ii. Claim of Right Doctrine or Doctrine
of Ownership, Command, or Control
 A taxable gain is conditioned upon the
presence of a claim of right to the alleged
gain and the absence of a definite
unconditional obligation to return or repay
(CIR vs. Wilcox, 286 U.S. 417, 424). This is also
called Doctrine of Ownership, Command or
Control(CIR vs. Melchor Javier, G.R. No. 78953,
July 31,1991).
 This doctrine provides that if a taxpayer
receives earnings under a claim of right and
without restriction as to its disposition, he
has received income even though one may
claim he is not entitled to the money.
Should it later appear that the taxpayer was
not entitled to keep the money; the
taxpayer would be entitled to a deduction in
the year of repayment. (BIR Ruling (C-168)
519-08, December 12, 2008)
Two branches of ―claim of right‖ doctrine:
(1) Income; and
(2) Deduction
iii. Economic Benefit Test or Doctrine of
Proprietary Interest
Income is earned when the recipient could enjoy
economic benefits over the gain that is received
(BIR Ruling 029-1988).
iv. Severance Test
 There is no taxable income until there is
a separation from capital of something
of exchangeable value, thereby
supplying the realization or
transmutation which would result in the
receipt of income (Eisner vs. Macomber,
252 U.S., 189).
41
Taxation Law
d. Methods of Accounting
i. Distinguish: Cash and Accrual
Accounting.
The accrual method relies upon the taxpayer‘s
right to receive amounts or its obligation to pay
them, in opposition to actual receipt or
payment, which characterizes the cash method
of accounting. Amounts of income accrue where
the right to receive them become fixed, where
there is created an enforceable liability.
Similarly, liabilities are accrued when fixed and
determinable in amount, without regard to
indeterminacy merely of time of payment. (CIR
vs. Isabel Cultural Corporation, G.R. No. 172231,
February 12, 2007)
For a taxpayer using the accrual method, the
determinative question is, when do the facts
present themselves in such a manner that the
taxpayer must recognize income or expense?
The accrual of income and expense is permitted
when the all-events test has been met. This test
requires: (1) fixing of a right to income or
liability to pay; and (2) the availability of the
reasonable accurate determination of such
income or liability(ING Bank N.V. vs. CIR,G.R. No.
167679, July 22, 2015,penned by J. Leonen)
Cash Method of Accounting
Under the cash method of accounts (cash
receipts and disbursements method), income is
realized upon receipt of cash or its equivalent
including those constructively received (such as
deposits to taxpayer‘s account by customers)
but not including gifts or donations.(Revenue
Audit Memorandum Order 1- 2000)
Accrual Method of Accounting
Under the Accrual method of accounting, income
is reportable when all the events have occurred
that fix taxpayer‘s right to receive the income,
and the amount can be determined by
reasonable accuracy. Thus, it is the right to
receive income and not the actual receipt, that
determines when to include the amount of gross
income.
Gleanable from this notion are the following
requisites of accrual method of accounting:
Bar Operations C ommissions 41
 Purple Notes
Taxation Law
1. That the right to receive the amount must
be valid, unconditional and enforceable (i.e.
not contingent upon future time)
2. The amount must be reasonably susceptible
of accurate estimate and
3. There must be reasonable expectation that
the amount will be paid in due course.
(Filipinas Synthetic Fiber Corp. vs. Court of
Appeals, G.R. Nos. 118498,October 12,1999)
Illustration:
To clearly understand the difference between
cash and accrual accounting, we illustrate as
follows:
Mr. A, a repairman, just finished fixing Mrs. B‘s
aircon. Mr. A then billed Mrs. B for his services
amounting to Php 2,000. However, Mrs. B told
Mr. A she that she will pay by next month. On
the same day, Mr. A received his electricity bill
for the previous but due to be paid next month
amounting to Php 1,500.
Q1: Under the Cash Method of accounting, how
much will be reported as income and
expenses for tax purposes today?
A1: Zero on both income and expense. The
recording of income and expenses is
predicated on the taxpayer‘s collection and
disbursement. He will only record the
income once collected and expense once
paid which will be next month.
Q2: Under the Accrual Method of accounting,
how much will be reported as income and
expenses for tax purposes?
A2: Mr. A will record an income of Php 1,000
regardless of the fact that he has not yet
received any payment. This is because he
has already the right to receive payment
upon completion of his service.
Mr. A will also record the expense of Php
2,000 as the utility expense has already the
right receive payment after it has provided
electricity last month.
For a taxpayer using the accrual method, the
determinative question is, when do the facts
present themselves in such a manner that the
taxpayer must recognize income or expense?
42 Center for Legal Education and Research
The accrual of income and expense 2018
is permitted
when the all-events test has been met. This test
requires:
(1) fixing of a right to income or liability to pay;
and
(2) the availability of the reasonable accurate
determination of such income or liability.
The all-events test requires the right to income
or liability be fixed, and the amount of such
income or liability be determined with
reasonable accuracy.
Thus, if the taxpayer is on cash basis, the
expense is deductible in the year it was paid,
regardless of the year it was incurred. If he is on
the accrual method, he can deduct the expense
upon accrual thereof. An item that is reasonably
ascertained as to amount and acknowledged to
be due has "accrued"; actual payment is not
essential to constitute "expense."(ING BANK N.V
vs. CIR, G.R. No. 167679, July 22, 2015,penned by J.
Leonen)
ii. Percentage of Completion
Applicable to whom :
 Persons who are engaged in long term
contracts or means building, installation
or construction contracts covering a
period in excess of one (1) year.
Accounting method to be used:
 Percentage of completion
Percentage of Completion Basis is a method
applicable in the case of a building,
installation or construction contract covering
a period in excess of one year whereby
gross income derived from such contract
may be reported upon the basis of
percentage of completion.
In determining the percentage of completion
of a contract, generally one of the following
methods is used:
1. The costs incurred under the contract as
of the end of the tax year are compared
with the estimated total contract costs; or
2. The work performed on the contract as
of the end of the tax year is compared with
 Purple Notes
the estimated work to be
performed.(Revenue Audit Memorandum Order
1- 2000)
What should accompany the income
tax return:
 Certificate of architects or engineers
showing the percentage of completion
during the taxable year of the entire work
performed under contract.
 There should be deducted from such
gross income all expenditures made
during the taxable year on account of the
contract, account being taken of the
material and supplies on hand at the
beginning and end of the taxable period
for use in connection with the work under
the contract but not yet so applied.
 If upon completion of a contract, it is
found that the taxable [net] income
arising thereunder has not been clearly
reflected for any year or years, the
Commissioner may permit or require an
amended return.(Sec. 48, Chapter VII-
Allowable Deductions, NIRC)
iii. Installment Basis Method
Applicable to whom:
 A person who regularly sells or
otherwise disposes of personal property
on the installment plan
Accounting Method to be used:
 Installment Basis is a method
considered appropriate when collections
extend over relatively long periods of
time and there is a strong possibility
that full collection will not be made. As
customers make installment payments,
the seller recognizes the gross profit on
sale in proportion to the cash collected.
(Revenue Audit Memorandum Order 1-
2000)
iv. Crop Year Basis Method
Applicable to whom:
 Farmers engaged in the production of
crops which take more than a year from
43
Taxation Law
the time of planting to the process of
gathering and disposal
How Implemented:
 Expenses paid or incurred are deductible
in the year the gross income from the sale
of the crops are realized. (Revenue Audit
Memorandum Order 1- 2000)
The crop method recognizes that the harvesting
and selling of crops do not fall within the same
year that they are planted or grown. This
method is especially relevant to farmers, or
those engaged in the business of producing
crops who, pursuant to RAM No. 2-95, would
then be able to compute their taxable income on
the basis of their crop year. The rule enjoins the
recognition of the expense (or the deduction of
the cost) of crop production in the year that the
crops are sold (when income is realized).(CIR vs.
Lancaster Philippines, Inc. G.R. No. 183408, July 12,
2017)
e. Situs of Taxation
Definition
The place or authority that has the right to
impose and collect taxes. (CIR vs. Marubeni, G.R.
No.137377, December 18,2001)
Factors that determine Situs:
1. Nature of the tax;
2. Subject matter of the tax(person,
property, act or activity);
3. Possible protection and benefit that may
accrue both to the government and the
taxpayer;
4. Citizenship of the taxpayer;
5. Residence of the taxpayer;
6. Source of income.
Summary – Situs of Tax
KIND OF TAX SITUS
Poll/Capitalization/ Residence of the taxpayer,
Community Tax regardless of the source of
income or location of the
property of the taxpayer.
Property Tax
Real Property Where the real property is
located, following the
doctrine of Lex rei sitae or
Bar Operations C ommissions 43
 Purple Notes
Taxation Law
Lex situs. from the 2018
Personal Property Where it was actually kept Philippines
or located, following the is more
doctrine of than 50%
mobiliasequunturpersona for the
m (Movables follow the past three
person) years
Excise Tax On the place where the Service Place of Performed Performed
act is performed, or performanc in outside the
occupation engaged in. e Philippines Philippines
Value Added Tax The place where the Rental Location of Property Property
transaction is made. If the Income Property located in located
transaction is made the outside the
(perfected and Philippines Philippines
consummated) outside of Royalty Place of Used in the Used
the Philippines, then we Income use or Philippines outside the
can no longer tax such location of Philippines
transaction. intangibles
Income Tax Gain on Location of Property Property
Resident citizen Sources of income derived sale of Property located in located
Domestic corporation from within and outside real the outside the
the Philippines property Philippines Philippines
Non-resident alien Sources of income derived Gain on Always
Non-resident foreign from within the Philippines sale of within
corporation shares of
Non-resident citizen Domestic
Resident alien Corporatio
Resident foreign n
corporation
Estate and Donor‘s Tax
Resident/Non-resident Properties wherever Income Partly within and without:
citizen situated
Resident alien Income covered:
Non-resident Alien Properties situated within  Services rendered partly within and
the Philippines
without the Philippines
 Sale of personal property produced
Rules on sources of income (Section 42 A- (wholly or partly) within and sold
C, NIRC) without Philippines
 Sale of personal property produced
Income Test of Sourced
(wholly or partly) within and sold within
Source Within Without
Philippines
Interest Debtor‘s Debtor‘s Debtor‘s
Residence residence residence
is in the is outside  The place of signing of a contract is
Philippines the NEVER an issue or factor for
Philippines determining source of income. (INGLES,
Dividends Dividends Dividend Tax Made Less Taxing, 2018, p.37)
paid by from
domestic foreign In CIR vs. Marubeni, (G.R. No.137377,
corporation corporation December 18, 2001), involved were turnkey
contracts. The Supreme Court turnkey
Dividends contracts were actually divisible contracts
paid by which each had different stages, with each
foreign stage having different tax implication:
corporation
whose  For the stage involving design,
income engineering, and procurement of

44 Center for Legal Education and Research

 Purple Notes
equipment and supplies, these were
considered outside the hands of
the Philippine taxing authority as
these were all done in Japan
 For the stages involving the actual
installation and construction, these
were all considered within the
jurisdiction of the Philippine
taxing authority as the
construction and installations were
all done in the Philippines
(INGLES, Tax Made Less Taxing, 2018,
p.10).
3 .Gross Income
(CTIR2ADP3)
a) Definition:
All income derived from whatever source,
including (but not limited to) the following
items:
1. Compensation for services in whatever
form paid, including, but not limited to fees,
salaries, wages, commissions, and similar
items;
2. Gross income derived from the conduct of
trade of business or the exercise of a
profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and,
11.
12. Partner‘s distributive share from the net
income of the general professional
partnership. (Sec. 32[A] of the NIRC)
 The definition of gross income is broad
enough to include passive income subject
to specific rates or final taxes. However,
since these passive incomes are already
subjected to different rates and taxed
finally at source, they are no longer
included in the computation of gross
income which determines taxable
45
Taxation Law
income.(CIR vs. Philippines Airlines, Inc., G.R.
No. 160628, October 9,2005)
b) Gross Income vs. Net Income vs.
Taxable Income
Gross income – All income, gains, or profit
subject to income tax. (Sec. 32 of NIRC)
Net income – Gross income less statutory
deductions (Sec. 26, R.R. 02-04, Sec. 36)
Taxable Income –Pertinent items of gross
income specified in this code (NIRC) less any
deductions, if any, authorized for such types of
income by this Code or another law (NIRC as
amended by TRAIN Law, Sec.31)
For Individuals:
Prior 2018 – Taxable income and Net Income
are different for the purposes of computation of
income tax.
Taxable income (income tax on individuals) –
Net Income less exemptions namely:
 Personal Exemption (Php 50,000)
 Additional Exemption (Php 25,000 per
qualified dependent, if any)
 Deduction on Premium on Health
Insurance (Php 2,400, if qualified)
Personal Property Income
Manufacturing
Produced within and Income partly within
sold without and partly without
Produced within and Income within
sold without
Produced without and Income partly within
sold within and partly without
Trading
Purchased without Income within
and sold within
Purchased within and Income without
sold without
Purchased within and Income within
sold without
2018 onwards
Taxable Income is equal to net income. No
more deduction for exemptions (personal,
Bar Operations C ommissions 45
 Purple Notes
Taxation Law
additional and premium for health insurance) as iii. Professional Income 2018
it has beenrepealed by TRAIN Law.
Fees derived from engaging in an endeavor
For Corporations: requiring special training as professional as a
means of livelihood such as but limited to fees
Taxable income is equal to net income. of C.P.A.s, doctors, lawyers and engineers.(R.R.
2-98)
Gross Sales/Revenue/Receipts Xxx
Add Other income Xxx Compensation Professional
Less: Cost of Sales or Cost of Xxx Income Income
Services Fees or renumeration Fees or renumeration
Total Gross Income Xxx under employer - without employer –
Less: Allowable Deductions Xxx employee relationship employee relationship
(Itemized)
Taxable Income Xxx iv. Income from business

c) Source of Income Subject to Tax It arises from habitual engagement in any

commercial activity involving regular sales of
Sources of income subject to tax may come goods or services by an individual or a
from the following (CP3 -FB-DRA2) corporation.
i. Compensation income
ii. Fringe benefit v. Income on Dealings of Properties
iii. Professional income
iv. Income from business Income on sale of properties whether ordinary
v. Income from dealings of property or capital asset.
vi. Passive investment income
vii. Annuities and proceeds from life a .Kinds of Asset for Tax Purposes
insurance or other types of insurance
viii. Prizes and awards Assets could either be Ordinary or Capital asset:
ix. Pension, retirement benefit or
separation pay Ordinary Asset Capital Asset
x. Income from any source Definition a. Stock in trade Includes all
of the taxpayer property held by
or other the taxpayer
i. Compensation income properties of a whether or not
kind which connected in
All renumerations for services performed by an would properly trade or business
employee under an employer – employee be included in but not including
relationship, unless expressly excluded by NIRC the inventory of those enumerated
(Sec. 2,R.R. 8- 2018) the taxpayer; as ordinary assets
b. Property held
Note:See detailed discussion under Income Tax by the taxpayer
on Individuals – Tax on Compensation Income primarily for
sale to
customers in
ii. Fringe Benefit the ordinary
course of
It means any good, service or or other benefit business;
furnished in cash or in kind by an employer to c. Property used
an individual employee (except rank and file in trade or
employee).(Sec.33 (B) – NIRC) business and
subject to
Note:See detailed discussion in Income Tax on depreciation;
and
Individuals – Tax on Compensation Income
d. Real property

46 Center for Legal Education and Research

 Purple Notes
Taxation Law
used in trade or Net loss Applicable only to
Applicable
business. carry over Individuals
*Real properties Capital losses can
Deductions
acquired by bank Yes be offset from
allowed
through capital gains
foreclosure sales Included in the
areconsidered as May be subject to
gross income
ordinary asset Capital Gains Tax
subject to
(Sec.2(b) of RR or may be subject
Tax effect graduated rate
No. 7-2003) to graduated or
(individuals) or
corporate income
Gain derived Ordinary gain Capital gain fixed rate
tax rates
Determinatio (corporations)
Actual Gain Presumed Gain
n of Income Those capital
Tax imposed May be subject to subject to Capital
Capital Gains Tax Gains Tax are no
Subject to
or may be subject longer reported in
graduated or
to graduated or the income tax
corporate income Reflected in
corporate income return, while the
tax the income Yes
tax rates rest are still
tax return
reported in the
Applicability income tax return
of Holding Not applicable Applicable with consideration
Period of the holding
Loss period
Limitation Not applicable Applicable
Rule
Net Capital Terminologies:
Loss Carry Not Applicable Applicable
over Net Capital Gain Net Capital Loss
Definition
The excess of the gains The excess of the losses
b. Types of Gains: Ordinary Income vis-a- from sales/exchanges of from sales or exchanges
vis Capital Gain capital assets over the of capital assets over
losses from such the gains from such
Depending on the kind of asset the gain can sales/exchanges. sales or exchanges.
could either be Ordinary or Capital:
Tax Treatment
Forms of part of the Does not form part of
taxable subject to allowable deductions –
Ordinary Gain Capital Gain
income tax because loss can be
Includes any
deducted only to the
gain from sale or
The gain derived extent of capital gain
exchange of
from the sale or
Definition property which is
exchange of Basis for Determining gain or loss in
not a capital
capital assets. exchange of properties (determination of
asset or
property. cost) as per Sec. 40B of NIRC:
Source Ordinary asset Capital asset
Some types of How the capital Basis
Holding
capital gains are asset was acquired
period, Not applicable
adjusted by the By Purchase Cost of the property
relevance
holding period By Inheritance Fair market price or
Only ordinary value as of date of
Certain types of
losses are acquisition
capital loss may
Deductibility deductible By Gift If the property was
be deducted as
against ordinary acquired by gift, the
ordinary losses
gains basis shall be the same
as if it would be in the
47
Bar Operations C ommissions 47
 Purple Notes
Taxation Law
hands of the donor or ii. Loss Limitation Rule 2018
the last preceding
owner by whom it was General Rule: Capital losses are allowed only
not acquired by gift, to the extent of capital gains;
except that if such basis
is greater than the fair
market value of the Exception: If a domestic bank or trust
property at the time of company, a substantial part of whose business
the gift then, for the is the receipt of deposits, sells any bond,
purpose of determining debenture, note or certificate or other evidence
loss, the basis shall be of indebtedness issued by any corporation
such fair market value (including one issued by a government or
For less than an The basis of such political subdivision), any loss shall not be
adequate property is the amount included in determining the applicability of the
consideration in paid by the transferee
limitation. (Sec. 39 (C) of NIRC)
money or money‘s for the property
worth
iii. Net Loss Carry Over
c. Special rules pertaining to the income
If any taxpayer, other than a corporation,
or loss from dealing in property held as
sustains in any taxable year a net capital loss,
Capital Asset
such loss (in an amount not in excess of the net
a. Capital assets not subject to Capital
income for such year) shall be treated in the
Gains Tax succeeding taxable year as a loss from the sale
or exchange of a capital asset held for not more
i. Holding Period than 12 months.(Sec. 39 (D) of NIRC)

Definition  Applicable to whom: Individuals only

Holding period is the length of time that the Capital Assets subject to Capital Gains Tax
asset has been held by the taxpayer. It covers
the period from date of acquisition to the date What are the two sale of capital assets
of sale of a particular asset. subject to capital gains tax?

What are the rules on Holding Period: If the seller is If the seller is a
individual corporation
 Rules applies to whom: Individual (Domestic
Taxpayers only. Corporation Only)
 To what kind of assets:Capital Assets Sale, exchange, or Sale, exchange or
except Sale of Real Property and Sale other disposition of real disposition of lands
of Shares of Tax (since subject to Capital property located in the and/or buildings
Philippines, classified as only
Gains Tax)
capital assets, including
pacto de retro sales and The NIRC does not
If Capital asset was If Capital asset was other forms of impose the capital gains
held for more than held for less than 12 conditional sales. tax of 6% from the sale
12 months (Long months (Short Term of machineries and
Term Gain) Gain) equipment (SMI -Ed
The net capital gain or The net capital gain or Philippines Technology
loss is reported at 50% loss is reported at vs. CIR, G.R. No.
of the amount realized 100% of realized gain 175410, November 12,
gain or loss or loss 2014,)
Sale of Shares of Stock Not Listed and Traded in
 For corporations, the net capital gain or loss the Stock Exchange
is always reported at 100%, as the holding
period does not apply. (Sec. 39[B],NIRC)

48 Center for Legal Education and Research

 Purple Notes
Taxation Law
Capital Gains Tax asset, the law presumes that there was a
capital gain realized.
Nature
The capital gains tax of 6% of actual
Capital gains tax is a tax on passive income, it is consideration (selling price) or the fair market of
the seller not the buyer, who generally shoulder the value at the time of sale of real property or
the tax. (Republic of the Philippines as represented land/building whichever is higher. This is called
by DPWH vs. Arlene Soriano, G.R. No. 211366, presumed gain.
February 25,2015)
Exception to the exception:
i. Sale of Real Property or Land and/or
Buildings
Does not apply to sale of shares of stock not
listed and traded thru the local stock exchange.
Applicable to: (DOMONDON, National Taxation)
 Individuals
o Resident Citizen To whom will the presumed gain on sale of
o Resident Alien real property or land and/or building
o Non – Resident Citizen apply:
o Non – Resident Alien Engaged in Trade
or Business Presumed Gain is Presumed Gain not
o Non – Resident Alien Not Engaged in applicable applicable hence
Trade or business gain must be actual
 Domestic corporation Citizens (Resident & Not
Tax Rate :6% Resident)
Non Resident Aliens
Resident Aliens
Tax Base: Domestic Corporations

Individual Corporation Sale of Real Property exempt from Capital

Sale, exchange, or Gains Tax
other disposition of
real property Exemption of certain individual from the capital
Sale, exchange or gains tax on the sale or disposition of a Principal
located in the disposition of lands
Philippines, classified Residence.
and/or buildings
as capital assets, only
including pacto de Requirements: (ON -18 -30 -CPU)
retro sales and other 1. Sale or disposition of the old principal
forms of conditional residence;
sales. 2. By natural persons – citizen or resident
alien individual taxable under Sec. 24 of the
Actual Gain v. Capital Gain Code (does not include an estate or a trust);
3. The proceeds of which is fully utilized in (a)
General Rule: acquiring or (b) constructing a new principal
residence within eighteen (18) calendar
The income tax law imposes on income when months from date of sale or disposition;
there is actual gain or profit after deducting the 4. Notify the Commissioner within thirty (30)
cost or adjusted basis of the property sold from days from the date of sale or disposition
the amount realized this is called actual through a prescribed return of his intention
gain.(Sec. 40 (A) of NIRC) to avail the tax exemption;
5. Can only be availed of only once every ten
Exception: (10) years;
6. The historical cost or adjusted basis of his
Where an individual or corporation sold a real old principal residence sold, exchanged or
property or land/ building held as capital
49
Bar Operations C ommissions 49
 Purple Notes
Taxation Law
disposed shall be carried over to the cost Resident Alien 2018
basis of his new principal residence. Domestic Corporation
7. If there is no full utilization, the portion
of the gains presumed to have been realized Resident Foreign
shall be subject to capital gains tax. Corporation On net capital gain:
8. Subject to the release upon certification the Non -Resident
Foreign Corporation Not over Php
Revenue District Officer that the proceeds 100,000 - 5%
from sale have been utilized(Sec. 24 (D) of
NIRC) On any amount in
excess of Php
 Sale of principal residence is subject to 100,000 – 10%
CGT, if the sale is made not for the
purpose of buying a new principal Dealings in Shares of Stocks Listed and
residence. Traded in the Local Stock Exchange

 In case a real property is sold in installment Sale made by a Sale made by a

(initial payment not exceeding 25% of the person Other Than Dealer of
contract price) wherein the initial payment a Dealer of Securities (Sec.
Securities (Sec. 24)
was paid in cash and the balance in the
127)
form of interest bearing promissory notes
Taxed at
and the seller discounted the promissory Tax Stock transactions
regular income
notes in the year of sale, the entire gain on effect tax
tax rates
the sale must be reported in the year of sale Individual –
(Bañas vs. Court of Appeals, G.R. No. 102967, subject to
February 10, 2000). graduated tax
rates
 The transfer of property through Tax rate 6/10 of 1%
Corporations
expropriation proceedings is a sale or
subject to
exchange within the meaning of corporate income
Sections 24(D) and 56(A)(3) of the tax of 30%
NIRC, and profit from the transaction Tax base Gross selling price Taxable income
constitutes capital gain. Since capital Still
gains tax is a tax on passive income, it subject
is the seller, or respondents in this case, to No. Yes
who are liable to shoulder the tax. income
(Republic vs. Spouses Salvador, GR No. tax
205428 dated June 7, 2017)
Dealer in Securities
ii. Sale of Shares of Stocks not listed and
traded thru local stock exchange Means a merchant of stocks or securities,
whether an individual, partnership or
Not listed and traded thru local stock corporation, with an established place of
exchange - shares of corporations not being business, regularly engaged in the purchase of
sold in the Philippine stock exchange securities and the resale thereof to customers;
that is, one who, as a merchant, buys securities
Tax Rate applicable: and re-sells them to customers with a view to
the gains and profits that may be derived
Taxpayer Tax Rate therefrom .(Sec. 22(U) of NIRC)
Resident Citizen
Non – Resident Citizen Securities
15% of net capital
Non – Resident Alien
gain
engaged or not Shares of stock in a corporation and rights to
engaged
subscribe for or to receive such shares. The

50 Center for Legal Education and Research

 Purple Notes
term includes bonds, debentures, notes or
certificates, or other evidence or indebtedness,
issued by any corporation, including those
issued by a government or political subdivision
thereof, with interest coupons or in registered
form.(Sec. 22(T) of NIRC)
Changes made in TRAIN Law
 Increase the rate of capital gains tax on sale
of stock transaction that is not
listed/traded in the local stock exchange
from 5-10% graduated rates to a flat rate of
15% with regards to individual taxpayers
and domestic corporations only.
 While the tax rate for sale of stock
transaction traded/listed in the local
stock exchange is increased from ½ of
1% to 6/10 of 1%.
d. Tax-Free Exchange
General Rule: In a sale or exchange of
property the entire amount of gain or loss is
recognized.
Exception:
Tax-free exchanges refer to those instances
enumerated in Section 40(C)(2) of the National
Internal Revenue Code (NIRC) of 1997 that are
not subject to Income Tax, Capital Gains Tax,
Documentary Stamp Tax and/or Value-added
Tax, as the case may be.
Two Kinds of Tax-Free Exchanges (Secs.
40[C][2] to 40[C][6])
1. Transfer to a controlled corporation
No gain or loss will be recognized if:
a.) The transferee is a corporation;
b) The transferee exchanges its shares of
stock for property of the transferor;
c) The transfer is made by a person, acting
alone or together with others, not
exceeding four persons; and
d) As a result of the exchange, the
transferor, alone or together with
others, not exceeding four persons,
gains control of the transferee.
51
Taxation Law
Example:
A and B are partners in a retail business who
decided to incorporate their business. They went
to the SEC to establish A & B Co. wherein the
properties of their existing business were
transferred to the newly established corporation.
2. Merger or Consolidation
No gain or loss will be recognized if,pursuant to
a plan of merger or consolidation:
a) A corporation, which is a party to a merger or
consolidation, exchanges property solely for
stock in a corporation, which is a party to the
merger or consolidation; or
b) A shareholder exchanges stock in a
corporation, which is a party to the merger or
consolidation, solely for the stock of another
corporation also a party to the merger or
consolidation; or
c) A security holder of a corporation, which is a
party to the merger or consolidation, exchanges
his securities in such corporation, solely for
stock or securities in such corporation, a party to
the merger or consolidation.
Definition:
The term ―merger‖ or ―consolidation‖, when
used in this Section, shall be understood to
mean:
(i) the ordinary merger or consolidation;or
(ii) the acquisition by one corporation of all or
substantially all the properties of another
corporation solely for stock:
Provided, that for a transaction to be
regarded as a merger or consolidation within
the purview of this Section, it must be
undertaken for a bona fide business
purpose and not solely for the purpose
of escaping the burden of taxation:
Provided, further, that in determining
whether a bona fide business purpose
exists, each and every step of the
transaction shall be considered and the
whole transaction or series of transaction
shall be treated as a single unit: Provided,
finally, that in determining whether the
Bar Operations C ommissions 51
 Purple Notes
Taxation Law
property transferred constitutes a 2018
substantial portion of the property of the
transferor, the term ―property‖ shall be
taken to include the cash assets of the
transferor.
The term ―control‖, when used in this
Section, shall mean ownership of stocks in a
corporation possessing at least fifty-one
percent (51%) of the total voting power of
all classes of stocks entitled to vote. (Section
40(C)(6), NIRC)
Example:
Q:AAA Co., BBB Co., and CCC Co. agreed to
merge, with AAA Co. as the surviving
corporation. Pursuant to the Plan of Merger, BBB
Co. and CCC Co. shall transfer all their assets
and liabilities to AAA Co. as a consequence of
the merger, for which AAA Co., by way of
original issue, shall issue common shares of
stocks to BBB Co. and CCC Co.
Is the statutory merger among AAA Co., BBB
Co., and CCC Co. a merger within the
contemplation of Section 40 (C) (2) (a) and (b)
in relation to Section 40 (C) (6) (b) of the Tax
Code?
A:Yes. The merger of AAA Co., BBB Co., and
CCC Co. is a merger within the contemplation of
Section 40 (C)(2)(a) and (b) in relation to
Section 40 (C)(6)(b) of the Tax Code, because
AAA Co. shall acquire and assume all the assets
and liabilities of BBB Co. and CCC Co. and the
same is advisable, expedient and in the best
interest of the merging corporations and their
respective stockholders. The merger, being
undertaken for a bona fide business purpose
and not for the purpose of escaping the burden
of taxation, qualifies for non-recognition of gain
or loss for income tax purposes in accordance
with Section 40(C)(2) of the Tax Code, where no
gain or loss shall be recognized by BBB Co. and
CCC Co. as the transferors of all assets and
liabilities to AAA Co. pursuant to the Plan of
Merger.
Is the transfer of properties subject to VAT
and DST?
52 Center for Legal Education and Research
No. Pursuant to Section 4.106-8(b)(3) of RR No.
16-2005, as amended, no VAT shall be due on
the transfer made pursuant to the Plan of
Merger. Likewise, no DST is due on the transfer
in accordance with Section 199 (m) in relation to
Section 40(C)(2) of the Tax Code. However, DST
shall be imposed on the original issuance of
shares by AAA Co. to the stockholders of BBB
Co. and CCC Co. as a consequence of the
merger as provided under Section 174 of the
Tax Code. (BIR Ruling No. 075-2018, January 29,
2018)
vi. Passive Investment Income
Passive income is income generated by the
taxpayer‘s assets. These assets can be in the
form of real properties that return rental
income, shares of stock in a corporation that
earn dividends or interest income received from
savings. (Chamber of Real Estate and Builders'
Associations, Inc. vs. Romulo, G.R. No. 160756,
March 9, 2010)
Passive income is derived from: (RRD-I)
a. Interest
b. Dividends
c. Royalty income
d. Rental Income
a. Interest
Conditions to be a passive income:
1. Derived from sources within the Philippines
2. Earned by:
a. Citizen
b. Resident Alien
c. Non Resident Alien Engaged in Trade or
Business
d. Domestic or Foreign Corporation
3. Derived from:
a. Any currency bank deposit or
b. Any other monetary benefit from
deposit substitutes and from trust funds
and similar arrangements.
Interest income may be:
Subject to final Tax Subject to Regular
Income Tax Rate
Interest income is Interest income is
sourced within source without
 Purple Notes
Taxation Law

Tax on Interest Income b. From long-term deposit or investment

in the form of savings, common or
a. From any currency bank deposit, yield, individual trust funds, deposit substitutes,
or any other monetary benefit from investment management accounts and
deposit substitutes and from trust funds other investments evidenced by
and similar arrangements derived from certificates in such form prescribed by the
sources within the Philippines: BangkoSentral ng Pilipinas (BSP)

Taxpayer Rate Final tax shall be imposed on the entire

Resident Citizen income and shall be deducted and withheld by
Non Resident Citizen the depository bank from the proceeds of the
Resident Alien long-term deposit or investment certificate
Non Resident Alien based on the remaining maturity thereof:
Engaged in Trade or 20% on interest income
Business
Pre -terminated Tax Implication
Domestic Corporation
On the 5th year or thereafter Exempt
Resident Foreign
Four (4) years to less than five 5%
Corporation
(5) years
Non Resident Alien Not 25% on Gross Income
Three (3) years to less than (4) 12%
Engaged in Trade or
years
Business
Less than three (3) years 20%
Non Resident Foreign 25% on Gross Income
(Secs.24[B],25[A][2] of NIRC)
Corporation
(Secs.24[B],25[A][2],25[B],27[D][1],28[A][7],&28[B][
1] of NIRC) Tax applicable to:
 Resident Citizens
Deposit substitutes  Resident Aliens
 Non – Resident Alien engaged in Trade or
Under the 1997 National Internal Revenue Code, Business
Congress specifically defined "public" to mean
"twenty (20) or more individual or corporate Conditions to be exempt from final tax:
lenders at any one time." Hence, the number of 1. Depositor or investor is an individual citizen
lenders is determinative of whether a debt (resident or not), resident alien and non –
instrument should be considered a deposit resident alien engaged in trade or
substitute and consequently subject to the 20% profession.
final withholding tax. (BDO vs. Republic of the 2. Long Term Deposits (LTD) or investment
Philippines, G.R. No. 198756, January 13,2015 certificates under the name of the
penned by J. Leonen) individual;
3. LTD or investment in the form of:
Tax implication on the 20 – Lender rule a. Savings;
b. common or individual trust funds;
Less than 20 lenders 20 or more lenders c. deposit substitutes;
(Deposit Substitute) d. investment management accounts; and
Interest income forms Interest income is e. and other investment evidenced
part of gross income subject to final tax of prescribed by BSP;
subject to regular 20% 4. Must be issued by banks only;
income tax rates
5. LTD or investment must have a maturity of
(Id.)
five (5) years;
6. Must be in denominations of Php 10,000 and
The provision for the 20% withholding only
other denominations prescribed by BSP;
applies to interest on banks and does not cover
7. Only interest income from LTD or
interest paid by cooperatives.(Castillo, Dumaguete
Cathedral Credit Cooperative vs.CIR, G.R. 187722,
investment certificates are covered by the
January 22, 2010) exemption;
53
Bar Operations C ommissions 53
 Purple Notes
Taxation Law
8. Does not cover other income; and When taxable 2018
9. Must not be pre -terminated before the 5th
year.(Revenue Memorandum Circular No. 7- Dividend income is taxable at the time of their
2015) declaration by the corporation, and not on the
time of actual payment of dividends, since
c. Interest in foreign currency depositary dividend is taxable, whether actual or
units constructively received. (MAMALATEO, Philippine
Income Tax, 2010, p.111)
Taxpayer Rate
Resident Citizen a. Dividends from Domestic Foreign
15 % on interest*
Resident Alien Corporation /Including shares of an
income
Domestic corporation individual in the distributable net income
Resident foreign after tax of a taxable partnership where
7.5% on interest income
corporation
the individual is a partner
Non Resident Alien
Engaged in Trade or
Business
Non Resident Alien NOT
engaged in trade or Exempt
business Taxpayer Rate
Non Resident Citizen Resident Citizen
Non Resident foreign Non – Resident Citizen 10%
corporation Resident Alien
Non Resident Alien
*Changes made by the TRAIN Law Engaged in Trade or 20%
Business
Non Resident Foreign
Increase the final tax on interest in foreign 30%*
Corporation
currency depositary units from 7.5% to 15% (Secs.24[B],25[A][2],25[B],&28[B][1] of NIRC)

b. Dividends *Subject to tax sparring rate of 15% or

applicable tax treaty rates.
Definition
Tax sparring rule
It refers to any distribution made by a
corporation to its shareholder out of its earnings A final withholding tax at the rate of fifteen
or profits and payable to its shareholders, percent (15%) is hereby imposed on the
whether in money or other property (Sec. 73[A] amount of cash and/or property dividends
of NIRC)
received from a domestic corporation, which
shall be collected and paid as provided in
Dividend income may be:
Section 57 (A) of this Code, subject to the
condition that the country in which the
Subject to final Tax Subject to Regular
Income Tax Rate
nonresident foreign corporation is domiciled,
Dividends came from shall allow a credit against the tax due from the
domestic corporation or nonresident foreign corporation taxes deemed to
partnership where the have been paid in the Philippines(Sec. 28(B)(5),
partner is an income NIRC; CIR vs. Procter and Gamble, G.R. No. 66838,
recipient. December 2, 1991)
Dividends from foreign
Dividend from foreign
corporation
corporation which earns b. Dividends from foreign corporation
more than 50% of its
income in the Since it is sourced outside the Philippines it
Philippine for the past will be subject to regular income tax rates
three years
for resident citizens and domestic
corporations only. (Sec. 23, NIRC)

54 Center for Legal Education and Research

 Purple Notes
Taxation Law
When is dividend foreign corporation 2. The recipient is other than the shareholder
considered source from within? (Brachrach vs. Seifert, G.R. No. L-2659, October
12, 1950).
From a foreign corporation, unless less than 3. Change in the stockholder‘s equity results by
fifty percent (50%) of the gross income of virtue of the stock dividend issuance.
such foreign corporation for the three-year
period ending with the close of its taxable b. Property dividend
year preceding the declaration of such
dividends or for such part of such period as Dividends given other than cash shall be
the corporation has been in existence) was subject to final tax similar to cash
derived from sources within the Philippines dividends, i.e., 10%. (Sec. 24 [B][2] of the
as determined under the provisions of this NIRC)
Section; but only in an amount which bears
the same ratio to such dividends as the c. Liquidating dividend
gross income of the corporation for such
period derived from sources within the When a corporation distributes all of its
Philippines bears to its gross income from all assets in complete liquidation or
sources.(Sec. 42 (2) (b) of NIRC) dissolution, the gain realized or loss
sustained by the stockholder, whether
individual or corporation, is taxable income
Example: or deductible loss, as the case may
A Chinese corporation derives more than be.(Section 73[A], NIRC)
50% of its gross income from the Philippines
from the sale of rubber shoes for the past 3 A liquidating dividend is not a
years. If it declares dividend income, it will dividend income. The transaction is
be considered sourced within the considered a sale or exchange of
Philippines. property between the corporation and
the stockholder.(Sec. 256, R.R. 2-1940)
a. Stock dividend
d. Royalty income
General Rule
Definition
Not subject to tax because it does not
constitute income; it represents transfer of It is the payment for the use and exhaustion of
surplus to capital account. (Sec. 73[B] of the property such as earnings from copyrights,
NIRC) patents, trademarks, formulas and natural
resources under lease.(Sec.42[4],NIRC)
Exceptions:
How taxed:
1. Under Sec. 73(B) when the following
concur: (RST) Subject to final Tax Subject to Regular
Income Tax Rate
a. There is redemption or cancellation Payment for use of When sale of royalty is
intellectual property on a regular basis.
of shares of stock;
(Passive income) (Active Income)
b. The transaction involves stock
Royalty income sourced Royalty source without
dividends; and within
c. The ―time and manner‖ of the
transaction makes it ―essentially Tax Rates:
equivalent to a distribution of taxable
dividends‖.(CIR vs. CA, CTA & ANSCOR, a. From literary works and musical
G.R. No. 108576, January 30, 1999)
compositions (Individuals Only )

55
Bar Operations C ommissions 55
 Purple Notes
Taxation Law
Taxpayer Rate In the If owned by a 2018 by a
If owned
Resident Citizen Philippines non – resident citizen, resident
Non – Resident alien not alien, non – resident
Citizen engaged in alien engaged in
Resident Alien 10% trade or non – trade or business,
Non Resident Alien resident foreign domestic
Engaged in Trade or corporation on corporation or
Business resident foreign
Non Resident Alien corporation
Not Engaged in Trade 25%
or Business
Outside the If owned by resident
b. Royalties, in general (passive income) Philippines citizen or domestic
corporation
Taxpayer Rate
Resident Citizen
Non – Resident Tax rates:
Citizen
Resident Alien 20%
a. On properties, in located in the
Domestic Corporation
Resident Foreign
Philippines:
Corporation
Non Resident Alien Taxpayer Rate
NOT Engaged in 25% Non Resident Alien
Trade or Business Engaged in Trade or 25%
Non Resident Foreign Business
30% Non Resident Foreign
Corporation 30%
(Secs.24[B],25[A][2],25[B],27[D][1],28[A][7],&28[B][ Corporation
1] of NIRC)

iv. Rental Income

b. On specific properties rented owned by
Definition non -resident foreign corporation:

It refers to the amount or compensation paid for Lease on Rate on Gross

the use or enjoyment of a thing or a right and income
implies a fixed sum or property amounting to be Cinematographic
25%
Films
paid at a stated time for the use of the
Foreign vessels 4.5%
property.(MAMALATEO, Philippine Income Taxation,
Aircraft machineries
2010, p.139) 7.5%
and equipment

How taxed:
Tax treatment on Leasehold Improvement
Location Subject to Subject to
of the final Tax Regular Income
(i) Leasehold Improvements by Lessee
Property Tax Rate
Method of reporting the value of permanent
improvements introduced by the lessee:

 Outright method – recognized as income

to lessor at the time when such buildings
improvements are completed at fair market
value.

56 Center for Legal Education and Research

 Purple Notes
Taxation Law
 Spread-out method – the lessor spread excess of premiums return OF capital
over the life (or remaining period) of the paid -return ON capital
lease, the estimated depreciated value of
such buildings or improvements at the (See detailed discussion on exclusions)
termination of the lease and report as an
income for each year of the lease, an aliquot viii. Prizes or Winnings
part thereof(Sec.49, R.R. 2-40)
Definition
(ii) VAT Added to Rental/Paid by the
Lessee Prizes refer to those obtained as a result of
effort while winnings are products of chance or
The amount of the VAT in a vatable lease luck. (De Leon, NIRC Annotated)
which the lessor passed on to the lessee
does not form part of the rental income of Refers to the amount of money in cash or in
the lessor, since such amount is to be paid kind received by chance or luck. Prizes and
by the lessor as output VAT on the sale of awards are generally taxable except specifically
leasing services to the BIR. mentioned under the exclusions from the
computation of gross income under (Sec. 32[B] of
the NIRC)
(iii)Advance Rental/Long Term Lease
How Taxed:
General rule: Accrual method will apply; thus,
it is taxable when earned and not when the Subject to Final Subject to regular
payment is received.(CASASOLA, NIRC, Annotated) Income Tax of 20% income tax rates

Prizes derived from Prizes derived from

Exception: when it isreceived under a claim of sources WITHIN and sources WITHIN
right and without restriction as to its use MORE than Php 10,000 amounting to Php
(taxed on a per 10,000 or less
 Security deposit applied to the rental of the transaction basis)
terminal month or period of contract must Other winnings derived Prizes and winning from
be recognized as income at the time it is MORE than Php 10,000 sources WITHOUT the
applied and not at the time paid. derived from sources PH by a RESIDENT
 If security deposit is to ensure contract within CITIZEN
compliance, it is not income to the lessor Philippine Charity Prizes and winnings of
Sweepstakes and Lotto corporations from
until the lessee violates any provision of the
winnings in EXCESS of whatever source
contract.(CASASOLA, NIRC, Annotated) Php 10,000

vii. Annuities proceeds from life insurance
or other types of insurance
Annuity refers to the periodic installment
payments of income or pension by insurance
companies during the lifetime of a person or for
a guaranteed fixed period of time, whichever is
longer, in consideration of capital paid by him. It
is paid annually, monthly or periodically,
computed upon the amount paid yearly but
necessarily of life. (Peralta vs. Auditor General, G.R.
No.. L-8480, March 29, 1957)
Taxable Not Taxable
Portion that represents Portion of the proceeds
interest or amounts in representing premium -
57
*Change made by the TRAIN Law
Winnings from PCSO of above Php 10,000 are
now subject to final tax of 20%
ix. Pension, Retirement Benefit or
Separation Pay
Pension in general – amount of money received
in lump sum or staggered basis in consideration
of service rendered given after an individual
reaches the age of retirement.(Peralta vs. Auditor,
G.R. No. L – 8480, March 29, 1957)
Pension, retirement benefits, gratuities are
generally taxable to the extent of the amount
Bar Operations C ommissions 57
 Purple Notes
Taxation Law
received, except if there is a BIR approved 2018
year, he realizes taxable income and must
pension plan and the requisites for exemption be included in his income tax return in the
have been met. (Sec. 32 (B)(6) of NIRC) year of receipt.

Separation Pay may or may not be taxable This principle does not apply to tax credits
depending on the voluntariness or or refunds of:
involuntariness of the cause of separation (Sec.
32 (B)(6) of NIRC) 1. Erroneously paid income tax,
2. Estate tax,
x. Income from any source 3. Donor‘s tax, and
4. Special assessments since they are not
a. Forgiveness/Condonationof deductible form gross income.
Indebtedness 5. Final Taxes in the nature of income tax
Income Tax imposed by authority of any
Forgiveness or condonation of one‘s foreign countries (except when the
indebtedness has the following effects: taxpayer signifies his desire to avail of
tax credit of foreign tax(Sec.34[C], NIRC)
Consideration Tax Implication d) Exclusions
Consideration of the services
performed by the debtor to Taxable (Income) Definition
the creditor
Without any consideration Taxable (Gift) Income received or earned but is not taxable as
Corporation forgives the debt income because it is exempted by law or
Taxable (Dividends)
of its stockholder
treaty.(De Leon, NIRC Annotated)
b. Recovery of Accounts Previously
i. Rationale
Written Off
 They represent return of capital or are not
The recovery of bad debts previously income, gain or profit. – (e.g. life insurance
allowed as deduction in the preceding year proceeds paid to the heirs or beneficiaries
or years shall be included as part of the upon death of insured)
taxpayer‘s gross income in the year of such  They are subject to another kind of
recovery to the extent of the income tax internal revenue tax (e.g. passive income
benefit of the said deduction, this is subject to final tax)
otherwise known as the Tax Benefit Rule.  They are income, gain or profit that is
expressly exempt from income
Bad Debts tax(MAMALATEO, Income Tax)

Refer to those debts resulting to from ii. Who may avail

worthlessness or uncollectibility in whole or
in part, of amounts due to the taxpayer by All kinds of taxpayers may avail of exclusions
others arising from money lent or from gross income
uncollectible accounts of income from goods
or services (R.R. 5 – 09, Sec. 2 [a] ) iii. Distinguish exclusion, deductions and
tax credits
c. Receipt of Tax Refunds or Credit
Exclusion vs. Deductions
If a taxpayer received a tax credit certificate
or refund for erroneously paid tax which Exclusion Deduction
was claimed as deduction from his gross
income that resulted in a lower net taxable Flow of wealth Amounts which the law
income or a higher net operating loss that (Income) to the allows to be subtracted
was carried over to the succeeding taxable taxpayer which is not from gross income in
treated as part of gross order to arrive at the

58 Center for Legal Education and Research

 Purple Notes
Taxation Law
income due to its net income o Prizes and awards in sports corporation
exemption by law or o 13th month pay
does not come within o GSIS, SSS, Medicare and other
the definition of income contributions
Pertains to the Pertains to the
o Gain from sale of bonds, debentures
computation of GROSS computation of
INCOME TAXABLE INCOME
with maturity of 5 years or more
o Gain on redemption of shares in mutual
Something received or Something spent or funds
earned by the taxpayer paid in earning gross
but do not form part of income (i.e. expenses) a. Proceeds of Life Insurance Policies
gross income
Proceeds are excluded if:
Exclusion vs. Tax Credits  Paid by reason by death of the insured
 To heirs or beneficiaries
Exclusion Tax Credits
 Whether lump sum or otherwise (Sec. 32B of
Amount received as an Amount representing a NIRC)
income or gain but tax previously paid
does not form part of which may be deducted Reason: Indemnity rather as gain or profit.
gross income from a tax liability to What are taxable portions:
arrive at the tax still  Payments for reasons other than death
due  Interest paid on life insurance

iv. Exclusions Under the Constitution: Instances where life insurance policies are not
excluded when
-(see discussion on General Principles,  Life insurance policy is used to secure
Constitutional Limitations) money obligation
 ―All revenues and assets of non-stock,  Life insurance was transferred for a valuable
non-profit educational institutions used consideration
actually, directly and exclusively used  Recipient is a business partner of the
for educational purposes shall be deceased. Insurance was taken to
exempt from taxes and duties.‖ (Section compensate the partnership that may cause
4(3), Article XIV, 1987 Constitution) the dissolution of the partnership
 Recipient is a corporation where the
v. Exclusions Under the Tax Code (LPG insured was employee or officer.(R.R.
CRIM) No. 02 -40)

Under the Tax Code the following are excluded
from gross income:
 Proceeds from life insurance policies
 Amounts received by insured as return of
premium paid
 Value of property acquired thru gift,
bequest, devise or descent
 Compensation from injuries and sickness
 Income Exempt under tax treaties
 Retirement benefits, pensions, gratuities
or separation pay
 Miscellaneous Items
o Income derived by foreign government
o Income derived by government or its
political subdivisions
o Prizes and awards
59
b. Return of Premium Paid
Excluded if:
 The amount received by the insured, as a
return of premiums paid by him
 Under life insurance, endowment, or
annuity contracts,
 Received during the term or at the
maturity of the term mentioned in the
contract or upon surrender of the contract.
 No death occurs in this case only a maturity
of the term.
 Only the amount of premium paid is
excluded. Any income on top of the said
premiums which are given to the
insured is taxable. ( DOMONDON, Taxation)
Bar Operations C ommissions 59
 Purple Notes
Taxation Law
Reason: Return of the premium is only a return
of capital and is not considered income.
c. Amounts Received under Life
Insurance, Endowment or Annuity
Contracts
1. Amounts received through accident or
health insurance or under workmen‘s
compensation acts, as compensation for
personal injuries or sickness, plus the
amounts of any damages received, whether
by suit or agreement, on account of such
injuries or sickness.
2. Compensations for damages to personal or
family rights, damages for slander and libel,
award for loss of life, damages for injuries
to the goodwill of a taxpayer‘s business
unless they exceeded its cost are not
taxable.
3. Damages received for patent infringement,
breach of contract or fiduciary duty and
recoveries (except punitive damages) under
the Clayton act for antitrust violations are
excluded from the gross income to the
extent that the losses to which the damages
relate did not give rise to a tax benefit either
in recovery year or earlier tax years.
d. Value of Property Acquired by Gift,
Bequest, Devise or Descent
Gifts, Bequests, and Devises are donations
because it is given gratuitously.
Reason: These are not the product of capital or
industry.
However, the income received by the donee
from the said property/item is subject to income
tax.
e. Amount Received Through Accident or
Health Insurance Compensation for
Injuries or Sickness Refers to:
(see discussion in Taxation on compensation
income – Exclusion)
f. Income Exempt Under Tax Treaty
 Income exempt under tax treaty with
foreign countries.
60 Center for Legal Education and Research
 Premised on adherence to the 2018generally
accepted principles of International Law.
Note: Not all countries have a tax treaty with
the Philippines.
g. Retirement Benefits, Pensions,
Gratuities, Etc.
i. Retirement Benefits under R.A. No. 7641
-An Act Amending Article 287 of P.D. No.
442 as amended, otherwise known as
Labor Code of the Philippines, by providing
for Retirement Pay to Qualified Sector in
the Absence of any Retirement Plan in the
Establishment:
When excluded:
i. Where the retirement plan is established in
the Collective Bargaining Agreement (CBA)
or other applicable employment contract.
a. Any employee may be retired upon
reaching the retirement age established
in the CBA or other applicable
employment contract
ii. In the absence of a retirement plan or
agreement providing for retirement benefits
of employees in the establishment. Any
employee may be retired under the
following:
a. Optional retirement the conditions are:
i. Any employee upon reaching the age
of 60 or more;
ii. Who has served at least 5 years in the
said establishment; and
iii. May retire and shall be entitled to
retirement pay equivalent of ½ month
salary for every year of service, a
fraction of at least 6 months being
considered as one whole year.
b. Mandatory Requirement the conditions
are:
i. Any employee upon reaching the
age of 65 which is compulsory
retirement age;
ii. Who has served at least 5 years;
and
iii. May retire and shall be entitled to
retirement pay equivalent of ½ of
month salary for every year of
service, a fraction of 6 months being
considered as one whole year
 Purple Notes
ii. Retirement Benefits under R.A. No.
4917 – An Act Providing that
Retirement Benefits of Employees of
Private Firms Shall not be Subject to
Attachment, Levy, Execution or any
Tax Whatsoever and those received by
officials and employees of private
firms, whether individual or corporate,
in accordance with a reasonable
private benefit plan maintained by the
employer
When excluded:
i. Retiree is employed by the same
employer for at least 10 years;
ii. Retiree is at least 50 years old;
iii. Retiree avails of the benefit only ONCE
iv. Benefit are given under a BIR approved
private benefit plan
Reasonable benefit plan:
A pension, gratuity, stock bonus or profit-
sharing plan maintained by an employer for
the benefit of some or all of his officials or
employees, wherein contributions are made
by such employer for the officials or
employees, or both, for the purpose of
distributing to such officials and employees
the earnings and principal of the fund thus
accumulated, and wherein its is provided in
said plan that at no time shall any part of
the corpus or income of the fund be used
for, or be diverted to, any purpose other
than for the exclusive benefit of the said
officials and employees. (Sec.32 [B] [6][a] of
NIRC)
Retirement under R.A. 4917 v. R.A. 7641
R.A. 7641
R.A. 4917
Optional Mandatory
Age Requirement
50 years old 60 years old 65 years old
Years of Service
10 years 5 years
BIR approval required
Yes Not required
iii. Personal and Equity Retirement
Account (PERA)
61
Taxation Law
Refers to the voluntary retirement account
established by and for the exclusive use and
benefit of the contributor for the purpose of
being invested solely in the Personal Equity and
Retirement Account investment products in the
Philippines (R.A. 9505, Personal Equity and
Retirement Account Act of 2008).
All income earned from the investments and re-
investments of PERA assets in PERA investment
products shall be exempt from income taxes
provided the said PERA investment products
have been duly accredited by the concerned
Regulatory Authority. Moreover, income from
investments and re-investments of PERA assets
in government securities is likewise exempt from
income taxes. (RMC No. 30-2017 in relation to RR
No. 17-2011)
f. Winnings, Prizes, and Awards,
Including Those in Sports Competition
1. Those made primarily in recognition of
Scientific, Charitable, Artistic, Religious,
Civic, Educational or Literary
achievement but only if the
recipient:(SCAR-CEL)
a. Was selected without any action on his
part to enter the contest or proceeding;
and
b. Is not required to render any substantial
future service as a condition to receiving
the prize or award.
2. Those granted to athletes in local and
international sports competitions and
tournaments whether held in the Philippines
or abroad provided sanctioned by their
national sports associations.
iii. Exclusions Under Special Law
a. Under R.A. No. 7916 (Philippine Export Zone
Authority Law), PEZA–registered enterprises
are given income tax holidays of six or four
years from the date of commercial
operation, depending on whether their
activities are considered as pioneer or non-
pioneer; after enjoying income tax holidays,
they are subject to the 5% gross income tax
on their gross income earned, in lieu of all
national and local taxes.
Bar Operations C ommissions 61
 Purple Notes
Taxation Law
b. Under R.A. No. 6657 (Comprehensive
Agrarian Reform Package Law), gain arising
from the transfer of the agricultural property
covered under the law shall be exempt from
capital gains tax for ten (10) years.
c. Under R.A. No. 7653 (New Central Bank
Act),
d. the BangkoSentral ng Pilipinas is exempt
from all national, provincial, municipal and
city taxes for five (5) years.
e. Under R.A. No. 7279 (Urban Development
Housing Act of 1992), the National Housing
Authority is exempt from all fees and
charges of any kind, whether local or
national, such as income and realty taxes.
4. Deductions
Aside from exclusions which are not part of
income to be taxed, the Tax Code also allows
the taxpayer certain amounts to be deducted
from the gross income in arriving at the net
income which will be the basis for the taxable
income to be taxed either at graduated tax table
or corporate income taxes.
Deductions from gross income refer to items
which the law allows to be subtracted from
pertinent items of gross income to arrive at the
taxable income.
Types of deductions:
1. Itemized deductions in Section 34(A) to
(J) and (M);
2. Optional Standard Deductions (40%)
under Sec. 34(L);
3. Special deductions in Sections 37 and 38 of
the NIRC, and in special laws like the BOI
law (E.O. 226).
Who are NOT allowed to claim deductions
from gross income
1. NRA-NETB and NRFC are subject to final tax
from their gross income from sources within the
Philippines.
2. RC, RA and NRC earning purely compensation
income
a) General Rules in Claiming Deductions
62 Center for Legal Education and Research
1. It must be ordinary and 2018
necessary
Expenses.
Ordinary Expenses – normal or usual in the
line of business and surrounding circumstances
(Atlas Mining Consolidated & Devt. Corp vs. CIR, G.R.
No. L-26911, January 27,1981).
Necessary Expenses – appropriate and
helpful in the development of taxpayer‘s
business(General Electric Inc. vs. CIR, CTA Case
No..1117, July 14, 1963)
 It must be reasonable.
 Not contrary against law, public policy or
public morals
2. Paid or incurred within the taxable
year.
 Cash Basis Method – deducts expenses in
the year in which they are paid
 Accrual Basis Method – recognizes
expenses in the year they accrue or when
incurred not when paid.
3. Paid or incurred in carrying on a trade
or business.
4. Directly attributable to the
development, management, operation
and/or conduct of business or exercise
of profession, including the following
reasonable allowance.
5. Substantiated with sufficient evidence,
such as official receipts or other
adequate records.
Cohan Rule
If there is a showing that expenses have been
incurred but the exact amount cannot be
ascertained due to lack of documentary
evidence, it is the duty of the BIR to make an
estimate of deduction that may be allowed.
(RMC 23-2000).
6. If subject to withholding taxes, proof
of payment to BIR
 Any amount paid or payable which is
otherwise deductible from, or taken into
 Purple Notes
account in computing gross income or for
which depreciation or amortization may
be allowed under this Section, shall be
allowed as a deduction only if it is shown
that the tax required to be deducted and
withheld therefrom has been paid to the
BIR. (Sec. 34[K] of the NIRC)
 The provision under RR No. 12-2013 stating
that no deduction will be allowed
notwithstanding the payments of
withholding tax at the time of audit
investigation or reinvestigation /
reconsideration in cases where no
withholding tax was made. Hence, the
provisions under RR No. 14-2002 as
amended by RR No. 17-2003 were
reinstated wherein any income payment
which is otherwise deductible under the
Code shall be allowed as a deduction from
the payor's gross income only if it is shown
that the income tax required to be withheld
has been paid to the Bureau in accordance
with Secs. 57 and 58 of the Code (RR No. 6-
2018, January 19, 2018)
b) Return of capital (cost of sales or
services)
Income tax is levied by law only on income,
which maybe gross income or net income;
hence amount representing return of capital
should be deducted from the proceeds of sales
of assets and should not be subject to income
tax.(Sec. 65 of R.R. No. 02-40)
Items that are closely related to the business or
profession that without which the sale would
have not occurred.
These items are deducted from the gross sales
or receipts to arrive at the gross income.
Gross Sales/Revenue/Receipts Xxx
Less: Cost of Sales or Cost of Xxx
Services
Gross income Xxx
Add Other income Xxx
Total Gross Income Xxx
Sale of Inventory of Goods by
Manufacturers and Dealers of Properties
63
Taxation Law
For a Manufacturing Concern:
Cost of Goods Manufactured and Sold = All
costs of production of finished goods, such as
1. Raw material used;
2. Direct labor;
3. Manufacturing overhead;
4. Freight cost;
5. Insurance premiums;
6. Other costs incurred to bring the raw
materials to the factory or warehouse.
For trading or merchandising concern, the Cost
of Goods Sold shall include:
1. Invoice cost of the goods sold;
2. Import duties;
3. Freight in transporting the goods to the place
where the goods are actually sold including
insurance while the goods are in transit.
Sale of stock in trade by a real estate
dealer and dealer in securities – generally,
the return of capital is not allowed to be
deducted from the gross sales. Taxpayers are
required to deduct the total cost specifically
identifiable to the real property or shares of
stocks sold or exchanged
Sale of Services - means the performance of all
kinds of services in the Philippines for other for a
fee, remuneration, or consideration. (Section 108,
NIRC)
Cost of Services - All direct costs and expenses
necessarily incurred to provide the services
required by the customers and clients including:
a. Salaries and employee benefits of personnel,
consultants and specialists directly rendering
the service;
b. Cost of facilities directly utilized in providing
the service. It shall not include interest
expense except for banks and other financial
institutions.
 Gross income excludes passive income
subject to final tax.
 Other income and Extraordinary Income are
included since RR 9-98 provides that gross
sales include sales contributory to income
taxable under the regular corporate tax.
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 Purple Notes
Taxation Law
These are items that are deductible from the tax imposed has been 2018 paid. The
gross income which are incidental in carrying relatedfringe benefit tax paid on such, if
out a business. applicable, are likewise deductible.

Gross Sales/Revenue/Receipts xxx Requisites: (TOP – RPS)

Less: Cost of Sales or Cost of xxx
Services 1. Ordinary and necessary;
Gross income xxx 2. Paid or incurred within the taxable year;
Add Other income Xxx 3. Must be incurred in carrying on a trade or
Total Gross Income Xxx business;
Less: Allowable Deductions Xxx 4. Must be in fact for salaries and wages;
(Itemized) 5. Must be for personal services actually
Taxable Income Xxx rendered;
6. Reasonable in amount(MAMALATEO, Income
Taxation)
c. Distinguish : Itemized Deduction vs.
Optional Standard Deduction (See
(2) Traveling/Transportation expenses
discussion at the end of this section [4.
Deductions])
It includes:
d. Requisites to be Deductible – Itemized
 Meals and lodging;
Deductions:
 Expenses from main office to branch or
branch to main office;(Secs. 65-66, RR 2-
Itemized Deductions
40)
(1) Salaries, wages and other forms of
Requisites:
compensation for personal services
actually rendered, including the
1. Incurred or paid while away from home;
grossed-up monetary value of the
2. Made in the pursuit of trade or business;
fringe benefit subjected to fringe
3. Reasonable and
benefit tax which tax should have been
necessary(Sec.34[A][1][a][iii])
paid.
(3) Cost of materials
It includes:
 Deductible only to the amount actually
 Salaries, wages, commissions,
consumed or used in operation during the
professional fees, vacation leave pay,
year.
retirement pay and other compensation.
 Bonus are deductible expenses if paid in
(4) Rentals and/or other payments for use
good faith as additional compensation
or possession of property
for services rendered and subjected to
withholding tax
Includes:
 Aliquot part of the amount to acquire
 In Aguinaldo vs. CIR, G.R. No. L-29790,
leasehold over the number of years
February 25, 1982, the bonus given to
 Taxes and other obligations of the lessor
corporate officers was disallowed as a
paid by the lessee
deduction.
 Annual depreciation of leasehold
improvements introduced by the lessee of
 Pensions and compensations for injuries,
the remaining term of the lease or over the
if not compensated for by insurance or
life the improvements, whichever is
otherwise.
shorter(Sec. 74, R.R. 2-40)
 Grossed-up monetary value of fringe
benefit provided for, as long as the final

64 Center for Legal Education and Research

 Purple Notes
Requisites of deductibility: (WT2C)
1. Made as a condition to the continued
use or possession of property.
2. Taxpayer has not taken or is not taking
title to the property or has no equity
other than that of a lessee, user or
possessor.
3. Property must be used in trade or
business.
4. Subjected to withholding tax of 5%
otherwise it shall be disallowed as a
deduction (Sec. 2.57.2[B] &[C], R.R. 2-98).
(5) Repairs and maintenance
Includes:
 Cost of incidental repairs which neither
materially add to the value of the property
nor prolong its life but keep it in an
ordinarily efficient operating condition, may
be deductible PROVIDED the property, plant
and equipment is not increased by the
amount of such expenditure (Sec.68, R.R. 2-
40).
(6) Expenses under lease agreements
For the lessor
It includes:
 All ordinary and necessary expenses paid or
incurred during the taxable year which are
attributable to the earning of income
 Cost of repairs and maintenance
 Salaries and wages of attendants to the
leased property
 Interest and
 Property taxes(Sec.2.01, R.R. 19-86)
For the lesseee
It includes:
 Rent paid or accrued including all expenses
which under the terms of agreement the
lessee is required to pay to or for the
account of the lessor. (Sec.3.01,R.R.. 19-86)
(7) Expenses for professionals
A professional may claim as deductions:
1. Cost of supplies used by him in the practice
of his profession,
65
Taxation Law
2. Expenses paid in the operation and repair of
transportation equipment used in making
professional calls,
3. Dues in professional societies and
subscription to professional journals, t
4. Rent paid for office rooms,
5. Expenses of the fuels, light, water,
telephone, etc., used in such offices, and
the hire of office assistant.
Amounts currently expended for books,
furniture, and professional instruments and
equipment, the use of which is short, maybe
deducted but the amounts expended for books,
furniture and professional instruments and
equipment of a permanent character are not
allowable as deduction. (Sec. 69, RR No. 2)
(8) Entertainment/ Representation
expenses
For entertainment or recreation connected to
the trade, business or profession or directly
related to or in furtherance of the conduct of the
business, PROVIDED however that expense
incurred contrary to law, morals, public policy or
public order shall not be deductible.
Presence of the client is required.
Limitation on the amount deductible:
Under Sec. 5 of RR No. 10-02, there shall be
allowed a deduction from gross income for
entertainment, amusement and recreation
expense in an amount equivalent to the actual
entertainment, amusement and recreation
expense paid or incurred within the taxable year
by the taxpayer, but in no case shall such
deduction exceed:
1. 0.50 percent (%) of net sales (i.e., gross
sales less sales returns/allowances andsales
discounts) for taxpayers engaged in sale of
goods or properties; or
2. 1.00 percent (%) of net revenue (i.e., gross
revenue less discounts) for taxpayers
engaged in sale of services, including
exercise of profession and use or lease of
properties
Requisites:
1. Directly connected to the development,
management and operation of the trade,
Bar Operations C ommissions 65
 Purple Notes
Taxation Law
business or profession of the taxpayer or
directly related to or in furtherance of the
conduct trade, business, or profession (Sec.
4[B], R.R. 10-02);
2. Reasonable;
3. Not contrary to laws, morals, policy or
public order(Sec. 4[C], R.R. 10-02);
4. Does not constitute bribe, kickback, or
other similar payments (Sec. 4[D], R.R. 10-
02);
5. Substantiated with adequate proof. The official
receipt or invoices or bills or statements of
accounts should be in the name of the taxpayer
claiming the deduction (Sec. 4[E], R.R. 10-02);
6. Must be paid or incurred during the taxable
year(Sec. 4[A], R.R. 10-02);
7. Withholding of appropriate withholding tax, if
applicable(Sec. 4[F], R.R. 10-02);
8. Does not exceed the arbitrage limit of .50% of
net sales or 1% of net revenues or if the
taxpayer is engaged in both in the sale of goods
or services it must use the apportionment
formula .(Sec. 5, R.R. 10-02);
(9) Political campaign expenses
Applicable only to: Political parties and
candidates of local and national election.
Only contributions spent and utilized during
the campaign period. Any contributions or
donations before or after the campaign
period set by the Commission on Elections
are subject to both donor‘s tax or income
tax.
Political contribution for campaign expenses
made by political parties and candidates of
local and national election are deductible
provided they are subject to the applicable
withholding tax rate of 5% whether goods or
services (Sec VI, RMC 30-2016)
Exception:
 No corporation, domestic or foreign, shall
give donations in aid of any political party
or candidate or for purposes of partisan
political activity. (Sec. 35[i], Revised
Corporation Code)
(10) Training expenses
Constitute ordinary and necessary expenses of a
taxpayer.
66 Center for Legal Education and Research
Specific Itemized Deductions: 2018
(a) Interest
(1) Requisites for deductibility
1. There must be indebtedness
2. Taxpayer is the debtor.
3. Interest expense was paid or incurred
upon such indebtedness
4. Debt must be related to the business
or
profession of the taxpayer.
5. Interest is stipulated in writing
6. Interest should be legally due.
7. Interest paid or accrued during the
taxable year(Sec.3 ,R.R. 13-2000).
(2) Non-deductible interest expense
Interest expense not allowed as deduction:
1. Individual taxpayer on the cash basis
paying interest in advance through
discount or otherwise. But interest is
allowed as deduction in the year the
indebtedness is paid; if payable in
amortization then an aliquot portion of
the interest corresponding to the ratio of
the principal paid is allowed as
deduction.(Sec.34[B][2][a], NIRC)
2. Interest in the form of dividends paid to
preferred shareholders (Sec.78, R.R. 02-
40; R.M.C. 17-71)
3. Interest on indebtedness incurred to
financepetroleum
exploration(Sec.34[B][2][c], NIRC).
4. Interest in Cost keeping on account of
capital or surplus invested in business
which does not represent charges
arising under interest bearing
obligations (Sec. 79,R.R. 2-40)
5. When there was no stipulation (CIR vs.
Prieto, G.R. No. L 13912, September
30,1960)
6. Interest on unclaimed
salary(Kuenzelle&Streiff, Inc. vs. CIR, G.R.
Nos. L-12010, October 20,1959)
7. Interest paid on indebtedness on
purchase securities by one who is not a
dealer in securities (Sec.34[B][2][b],
NIRC).
 Purple Notes
8. Interests on loans between related
parties referred in Section 36 (B).
Capitalized Interest/ Borrowing Cost
At the option of the taxpayer, interest incurred
maybe allowed on acquisition of property used
in trade, business or profession:
1. Outright deduction in gross income or
2. Treated as capital expenditure
Should the taxpayer elect to deduct the interest
payments at its gross income the taxpayer
cannot at the same time capitalize the interest
payments (Paper Industries Corp. vs. Court of
Appeals, G.R. No.106949-50, December 1, 1950)
Who are considered related parties
1. Between members of a family, i.e. brother
and sister(whether by the whole or half-blood,
spouse, ancestor, and lineal descendants; or
2. Except in case of distributions in liquidation,
between anindividual and corporation, where
the individual owns directly or indirectly more
than 50% of the outstanding stock of the
corporation.
3. Except in the case of distribution in
liquidation, between two corporations where:
Either one is a personal holding company with
respect to the taxable year preceding the date
of the sale or exchange; and
More than 50% of the outstanding stock of each
is owned, directly or indirectly, by or for the
same individual; or
4. Between parties to a trust- Grantor and
Fiduciary
5. Between fiduciary of trust and fiduciary of
another trust if the same person is a grantor
with respect to each trust
6. Between fiduciary and beneficiary .(Sec.36[b]
of NIRC)
(3) Interest subject to special rules
(a) Interest paid in advance
67
Taxation Law
Individual taxpayer on the cash basis paying
interest in advance through discount or
otherwise. But interest is allowed as
deduction in the year the indebtedness is
paid; if payable in amortization then an
aliquot portion of the interest corresponding
to the ratio of the principal paid is allowed
as deduction.
(b) Interest periodically amortized
General Rule: The interest period
commences at the date of the indebtedness
arises.
Exception: With respect to business
interests earned out of sales, lease or
supply or goods and services which are
considered as trade accounts or receivables
or payables.
(c) Interest expense incurred to
acquire property for use in trade,
business or exercise or a
profession.
It may be allowed as a deduction or treated
as a capital expenditure.
(d) Interest arbitrage rule
Taxpayer‘s allowable deduction for interest
expense shall be reduced by 33% of the
interest income subject to final tax.
Thus, if a taxpayer incurred P5,000 interest
expense and earned P10,000 interest
income form bank deposits subject to final
tax, his deduction for interest expense shall
only be P1,700 (P5,000 reduced by P3,300
[33% of P10,000]) and not the whole
P5,000.
(b) Taxes
a. Requisites for deductibility
1. Related to the business of the taxpayer.
2. Imposed by law on, and payable by,
3. taxpayer.
4. Paid or accrued during the taxable year.
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 Purple Notes
Taxation Law
Examples of deductible taxes:
1. Local business tax;
2. Real property tax;
3. Documentary stamp tax;
4. Fringe Benefit tax
5. Excise tax (Sec. 80,R.R. 2-40)
b. Non-deductible taxes
1. Income tax.
2. Income tax paid or incurred to any
foreign country, if the taxpayer is
claiming a tax credit for such foreign
tax.
3. Estate or donor‘s tax.
4. Taxes assessed against local benefits of
a kind tending to increase the value of
the property assessed (special
assessment).
5. Final taxes being in the nature of
income tax;
6. Stock transaction tax
7. Capital Gains Tax (DOMONDON, Taxation)
VAT is not among the deductible taxes for
income tax purposes. However, the portion of
the input VAT paid in relation to VAT-exempt
sales may be deducted as part of the expense to
which they relate.
c. Treatment of surcharges/
interests/fines for delinquency
General Rule: Surcharges and other penalties
are not deductible. But interest related to
delinquency are. (Sec. 80 of RR No. 2-40)
Exception: Interest on Deficiency Taxes.
However, under Sec. 4(C) of RR No. 13-00,
interest incurred or paid by the taxpayer on all
unpaid business-related taxes shall be fully
deductible from gross income and shall not be
subject to the limitation on deduction of interest
expense. Thus, such interest expense incurred
or paid shall not be diminished by the
percentage of interest income earned which had
been subjected to final withholding tax.
 The interest on deficiency donor‘s tax is
deductible. The SC explained that taxes here
are considered obligation or indebtedness
and ruled that we have to relax the
68 Center for Legal Education and Research
distinction between tax and 2018ordinary
obligation in this respect.
 Interest on deficiency income tax can also
be claimed as deductible interest expense
because taxes here are considered ordinary
obligations.
d. Tax credit vis-à-vis deduction
 Taxes as deductions maybe claimed as
allowable deductions from gross income.
 Tax credit is a deduction from income tax
due.
 Tax as a deduction includes those taxes
which are paid or incurred in connection
with the trade, business or profession of the
taxpayer. On the other hand, the sources of
a tax credit include foreign income tax paid,
war profit tax, excess profit tax paid to the
foreign country.
 The foreign income tax paid to the foreign
country is not always the amount that
maybe claimed as tax credit. Under Sec.
34(C)(4),the tax credit must not be more
than the ratio of foreign income to the total
income multiplied by the Phil. income tax.
(c) Losses
Kinds of Losses
a. Ordinary loss/Casualty Loss
b. Capital Loss – related to income from
dealings of property
c. Losses resulting to securities becoming
worthless
d. Special losses
a. Wash sales
b. Wagering loss
c. Abandonment of losses
e. Net Operating Loss Carry Over
a. Ordinary Loss/ Casualty Loss
(1) Requisites for deductibility – Ordinary
Loss
1. Loss of the taxpayer
2. Must be actual; nature of the loss must
be ―sudden‖;
3. Sustained in a close and completed
transaction;
4. Not be compensated for by insurance
or otherwise;
 Purple Notes
5. Must be liquidated and charged-off
during the taxable year.
6. Not claimed as a deduction for estate
tax purposes; and
7. If due to casualty, robbery, theft or
embezzlement, must be reported to the
BIR within 45 days from date of
discovery.
b. Capital losses
Capital loss can never be deducted from an
ordinary gain. Capital loss can only be deducted
from capital gain in accordance Section 39 (c) of
the NIRC.
1. Losses from sale or exchange of capital
assets
2. Losses resulting from securities becoming
worthless and which are capital assets
3. Losses from short sales of property
4. Losses due to failure to exercise privilege or
option to buy or sell property.
c. Securities becoming worthless
Requisites:
d. Special Losses
(a) Losses on wash sales of stocks or
securities
Wash sales, defined
It is a sale or disposition of stock or securities
where substantially identical securities are
acquired or purchased within a 61-day period
beginning 30 days before the sale and ending
30 days after the sale.(see Sec. 38(A), NIRC, as
amended)
Wash sales are NOT deductible because these
are considered to be artificial loss.
(b) Wagering losses
Deductible only to the extent of gain or
winnings; deemed to apply only to individuals.
A wager is made when the outcome depends
upon the CHANCE(Sec.34[D][6], NIRC)
e. Net Operating Loss Carry-over (NOLCO)
69
Taxation Law
The net operating loss of the business or
enterprise for any taxable year immediately
preceding the current taxable year, which has
not yet been previously offset as deduction from
gross income shall be carried over as a
deduction from gross income for the next three
consecutive taxable years immediately
following the year of such loss
―Net operating loss‖ means the excess of
allowable deduction over gross income of the
business in a taxable year.
To illustrate:
For the year 2019, Company AAA showed the
following results of operation:
Sale 1,000,000
Less: Cost of sales (850,000)
Gross Income 150,000
Less: Itemized Deductions (250,000)
Net Operating Loss (100,000)
The above net operating loss can be carried
over as part of the itemized deduction within 3
years provided the corporation is not liable to
pay the Minimum Corporate Income Tax (MCIT).
A corporation cannot enjoy the benefit of
NOLCO for as long as it is subject to MCIT in
any taxable year. The running of the three-year
period for the expiry of NOLCO is not
interrupted by the fact that such corporation is
subject to MCIT in any taxable year during such
three-year period (Section 6.5, RR No. 14-2001).
Applicable to:
a. Individuals engaged in trade or business or
profession
b. Domestic corporations subject to normal tax
c. Resident foreign corporations subject to
normal tax
d. Special Corporations subject to preferential
tax
e. Estates and Trust (Sec. 4, R.R. 13, -2001)
Said deduction, however, is subject to some
limitations, to wit:
1. It is necessary that the loss had not been
previously offset as deduction from gross
income;
Bar Operations C ommissions 69
 Purple Notes
Taxation Law
2. Any net loss incurred in a taxable year
during which the taxpayer was exempt from
income tax (as in the case of tax holiday)
shall not be allowed as a deduction;
3. A NOLCO shall be allowed only if there had
been no substantial change in the ownership
of the business or enterprise.
a. Can be carried over to the next 3 years
after the year the net operating loss was
sustained.
b. No substantial change in ownership
of the business or enterprise – (75%
interest retention rule) to avoid peddling
of losses purely for tax benefit
purposes.
 NOLCO shall be allowed as a deduction from
the gross income of the same taxpayer who
sustained and accumulated the net
operating losses regardless of the change in
its ownership.
This rule (no substantial change/ 75%
rule) shall also apply in the case of merger
where the taxpayer, which incurred the
losses, is the surviving entity.
Any individual (including estates and trusts)
engaged in trade or business or in the
exercise of his profession, and domestic and
resident foreign corporations subject to the
normal income tax (e.g., manufacturers and
traders) or preferential tax rates under the
Code (e.g., private educational institutions,
hospitals, and regional operating
headquarters) on their taxable income shall
be entitled to deduct from his/its gross
income for the current year his/its
accumulated net operating losses for the
immediately preceding three (3) consecutive
taxable years (Section 4, RR No. 14-2001).
The following shall not be entitled to claim
deduction of NOLCO:
a. Offshore Banking Unit (OBU) of a
foreign banking corporation, and Foreign
Currency Deposit Unit (FCDU) of a
domestic or foreign banking corporation,
duly authorized as such by the BankoSentral
ng Pilipinas (BSP);
b. An enterprise registered with the Board of
Investments (BOI) with respect to its
70 Center for Legal Education and Research
BOI-registered activity enjoying2018
the income
Tax Holiday incentive. Its accumulated net
operating losses incurred or sustained
during the period of such income Tax
Holiday shall not qualify for purposes of the
NOLCO;
c. An enterprise registered with the Philippine
Economic Zone Authority (PEZA), pursuant
to R.A. No. 7916, as amended, with respect
to its PEZA-registered business activity. Its
accumulated net operating losses incurred
or sustained during the period of its PEZA
registration shall not qualify for purposes of
the NOLCO;
d. An enterprise registered under R.A. No.
7227, otherwise known as the Bases
Conversion and Development Act of 1992,
e.g., SBMA-registered enterprises, with
respect to its registered business activity. Its
accumulated net operating losses incurred
or sustained during the period of its said
registered operation shall not qualify for
purposes of the NOLCO;
e. Foreign corporations engaged in
international shipping or air carriage
business in the Philippines; and
f. In general, any person, natural or juridical,
[who is] enjoying exemption from
income tax, pursuant to the provisions of
the Code or any special law, with respect to
its operation during the period for which the
aforesaid exemption is applicable. Its
accumulated net operating losses incurred
or sustained during the said period shall not
qualify for purposes of the NOLCO. (Sec. 4,
R.R. 14-2001)
Net Operating Loss Carry Over (NOLCO) vs. Net
Capital Loss Carry Over (NCLO)
NOLCO NCLC
Loss can be claimed by
Individual taxpayer Individual and
ONLY Corporations
Kind of Loss
Capital Loss or one Losses incurred from
that arose from a sale operation in the
of capital assets business
Period of Carry Over
Can only be carried Can be carried for a
forward for one year maximum of 3
consecutive years
d. Bad Debts
 Purple Notes
Definition: refer to those debts resulting from
the worthlessness or uncollectibility, in whole or
in part, of amounts due the taxpayer by others,
arising from money lent or from uncollectible
amounts of income from goods sold or services
rendered(Sec. 2[a],R.R. 05-99).
Requisites for deductibility
1. There must be an existing indebtedness
due to the taxpayer which must be valid and
legally demandable;
2. The same must be connected with the
taxpayer‘s trade, business or practice of
profession;
3. The same must not be sustained in a
transaction entered into between related
parties enumerated under Sec. 36(B) of the
Tax Code of 1997;
4. The same must be actually charged off the
books of accounts of the taxpayer as of the
end of the taxable year; and
5. The same must be actually ascertained to
be worthless and uncollectible as of the end
of the taxable year (Sec. 3, R.R. No. 5-1999 as
amended by R.R. 25-2002).
For debts to be considered as ―worthless,‖ and
thereby qualify as ―bad debts‖ making them
deductible, the taxpayer should show that:
1. There is a valid and subsisting debt.
2. The debt must be actually ascertained to be
worthless and uncollectible during the
taxable year;
3. The debt must be charged off during the
taxable year; and
4. The debt must arise from the business or
trade of the taxpayer. Additionally, before a
debt can be considered worthless, the
taxpayer must also show that it is indeed
uncollectible even in the future.(PRC vs. CA,
G.R. No. 118794, May 8, 1996)
Effect of recovery of bad debts
Tax Benefit Rule
The recovery of bad debts previously allowed as
deduction in the preceding years shall be
included as part of the taxpayer‘s gross income
in the year of such recovery to the extent of the
income tax benefit of said deduction.
71
Taxation Law
The total bad debts recovered will not
necessarily form part of the taxpayer‘s income
but only to the extent that he was benefited.
e. Depreciation
Definition: It is the gradual diminution in the
service or useful value of tangible property due
from exhaustion, wear and tear and normal
obsolescence. (Basilan Estates vs. CIR, G.R. No. L-
22492, September 5, 1967)
Requisites for deductibility
i. Must be reasonable;
ii. Must be on property used in the conduct of
the business; and
iii. Must be treated as expenditure for the
taxable year.
iv. Statement of allowance must be attached to
the return. (Sec. 115, R.R. 2-40)
Depreciation Deductible by Nonresident
Aliens Engaged in Trade or Business or
Resident Foreign Corporations.–
In the case of a nonresident alien individual
engaged in trade or business or resident foreign
corporation, a reasonable allowance for the
deterioration of Property arising out of its use
or employment or its non-use in the business
trade or profession shall be permitted only when
such property is located in the Philippines.
f. Depletion of oil and gas wells
In the case of oil and gas wells or mines, a
reasonable allowance for depletion or
amortization computed in accordance with the
cost-depletion method shall be granted
under rules and regulations to be prescribed by
the Secretary of finance, upon recommendation
of the Commissioner.
Provided, That when the allowance for depletion
shall equal the capital invested no further
allowance shall be granted: Provided, further,
That after production in commercial quantities
has commenced, certain intangible exploration
and development drilling costs:
Bar Operations C ommissions 71
 Purple Notes
Taxation Law
(a) shall be deductible in the year incurred if  Economic Development 2018
such expenditures are incurred for non-  Human Settlement
producing wells and/or mines, or
2. Donations to Certain Foreign Institutions or
(b) shall be deductible in full in the year paid or International Organizations.
incurred or at the election of the taxpayer, 3. Donations to Accredited Nongovernmental
may be capitalized and amortized if such Organizations whose purpose are
expenditures incurred are for producing exclusively for:(DECSHSCAR)
wells and/or mines in the same contract
area. (Sec. 34[G], NIRC) a. Scientific
b. Educational
g. Charitable and Other Contributions c. Character building and Youth and Sports
Development
a) Requisites for deductibility d. Cultural
e. Health
1. The contribution must actually be paid, or f. Research
made payable to the Philippine government g. Social Welfare
or any political subdivision thereof, or any h. Charitable and
domestic corporation or association i. Any combination of the above.
specified by the NIRC.(Sec. 34 [H][1],NIRC)
2. No part of the net income of the beneficiary Partial Deduction
must inure to the benefit of any private
stockholder or individual.(Sec. 34 10% (individual) or 5% (corporation) of the
[H][1],NIRC) taxable income of the donor, if made to the
3. It must be made within the taxable year. following donees:
4. It must not exceed 10% in case of an
individual, and 5% in case of a corporation, a. To Government of the RP or any of its
of the taxpayer‘s taxable income (except agencies / political subdivision thereof
when the donation is deductible in full) to exclusively for public purposes;
be determined without the benefit of the b. Accredited domestic corporations or
contribution.(Sec. 34 [H][1],NIRC) associations organized and operated
5. It must be evidenced by adequate records exclusively for:
or receipts.(Sec. 34 [H][4],NIRC) a. Religious;
b) Amount that may be deducted b. Charitable;
c. Scientific;
Full Deduction: d. Youth and sports development, cultural
e. Educational purposes
If made to the following: f. Rehabilitation of veterans,
g. Social welfare institutions, or
1. Donations to the Government of the h. Non-governmental organizations
Philippines and any of its agencies/political
subdivisions fully-owned government Subject to such terms and conditions as may be
corporation. prescribed by the Secretary of Finance, the term
―utilization‖ means:
The donation must be exclusively to
finance undertaking priority activities in i. Any amount in cash or in kind (including
accordance with the national priority plan administrative expenses) paid or utilized to
determined by the NEDA in the following accomplish one or more purposes for which
fields:(SEY CEH) the accredited non-government
 Science organization was created or organized.
 Education ii. Any amount paid to acquire an asset used
 Youth and Sport Development (or held for use) directly in carrying out one
 Culture or more purposes for which the accredited

72 Center for Legal Education and Research

 Purple Notes
Taxation Law
nongovernment organization was created h. Research and Development
or organized.
6. An amount set aside for a specific project A taxpayer may treat research or development
which comes within one or more purposes expenditures which are paid or incurred by him
of the accredited nongovernment during the taxable year in connection with his
organization may be treated as a utilization, trade, business or profession as ordinary and
but only if at the time such amount is set necessary expenses which are not chargeable to
aside, the accredited nongovernment capital account.
organization has established to the
satisfaction of the Commissioner that the The expenditures so treated shall be allowed
amount will be paid to be prescribed in as deduction during the taxable year when
rules and regulations to be promulgated by paid or incurred. (Sec.34[I][1],NIRC)
the Secretary of Finance, upon
recommendation of the Commissioner, but At the election of the taxpayer and in
not to exceed five (5) years, and the accordance with the rules and regulations to be
project is one which can be better prescribed by the Secretary of Finance, upon
accomplished by setting aside such amount recommendation of the Commissioner, the
than by immediate payment of funds.(Sec. following research and development
34 [H][C],NIRC) expenditures may be treated as deferred
expenses:
NOTE: No part of the net income of which inure
to the benefit of any private stockholder or (a) Paid or incurred by the taxpayer in
individual. connection with his trade, business or
profession;
Partial Deduction vs. Full Deduction on (b) Not treated as expenses under paragraph
Charitable Contributions (1) hereof; and
(c) Chargeable to capital account but not
Partial Deduction Full Deduction chargeable to property of a character which is
Allowable Deduction subject to depreciation or
Must not exceed 10% Deductible for the full depletion.(Sec.34[I][2],NIRC)
for Individual /5% for amount
corporation of Net
Income without benefit
of the contribution i. Contributions to Pension Trusts
Purpose if made to the Gov‘t
For public purpose In accordance with the (1) Requisites for deductibility
national priority plan
determined by the 1. The employer must have established a
NEDA pension or retirement plan to provide for
If made to Accredited NGO must be the payment of reasonable pensions to his
organized and operated EXCLUSIVELY for: employees.
Religious; Scientific 2. The pension plan is reasonable and
Charitable; Educational
sound.
Scientific; Character building and
Youth and sports Youth and Sports
3. It must be funded by the employer.
development, Development 4. The amount contributed must no longer be
Cultural Cultural subject to the control or dispositions of the
Educational purposes Health employer.
Rehabilitation of Research 5. The payment has not been allowed as
veterans, Social welfare Social Welfare deduction.
institutions, or Charitable and 6. The deduction is apportioned in equal parts
Non-governmental Any combination of the over a period of ten (10) consecutive
organizations above.
years beginning with the year in which
the transfer or payment was made.

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 Purple Notes
Taxation Law
The deduction to be apportioned in equal parts
over a period of 10 years pertains to the
contributions to the retirement fund pertaining
to past service cost.
8. Non – deductible taxes 2018
9. Non – deductible losses and
10. Losses from wash sales of sales of
stock or securities (Sec.38 of NIRC)

(e) Deductions under Special Laws Optional Standard Deduction

The following are institutions governed by In lieu of the above enumerated allowable
special laws that allow full deductions on deductions (expenses discussed above). Section
donations: 34(L) of the Tax Code provides for an optional
standard deduction (OSD) which is :
 National Museum, Library and Archives (P.D.
373)  For Individuals - 40% of Gross Sales/ gross
 Development Academy of the Philippines receipts
(P.D. 205)  For Corporations – 40% of Gross Income
 Intramuros Administration (P.D. 1616)
 The Cultural enter of the Philippines It is a fixed percentage deduction without to
 International Rice Research Institute regard to any actual expenditure in lieu of
 Ministry of Youth & Sports Commission itemized deduction
 Museum of Philippine Costumes Itemized Deduction vs. Optional Standard
 University of the Philippines and other state Deduction
colleges and universities
 The Integrated Bar of the Philippines (P.D. Itemized Deduction Optional Standard
81) Deduction
 Deductions under Expanded Senior Citizens Act Amount Allowable to be Deducted
of 2003 (R.A. 9257) Actual amount of 40% of Gross
expenses incurred Sales/Gross Receipts
e. Items not deductible (PN4R2-LW) (For Individual) or 40%
of Gross Income (For
The following are not – deductible in Corporation)
computing net income: Supporting Invoices/Receipts/Documents
1. Personal, living or family expenses; Yes. All expenses need No longer need to be
2. Amount paid out for new building of to be supported by supported by
invoices/receipt or other invoices/receipts
any property or estate (capital
competent supporting
expenditure); documents
3. Amount expended in restoring Audited Financial Statements
property in making good the exhaustion Individuals and No longer need to file
thereof for which an allowance has been Corporations are Audited Financial
made (major repairs); required to file audited Statements for BIR or
4. Premiums paid on any life insurance financial statements Income Tax Return
policy covering the life of any officer or filing purposes
employee, or any person financially Basis for Optional Standard Deduction
interested in any trade or business Individual Corporation
carried on by the taxpayer, individual or Basis
Gross Sales/Receipts Gross Sales/Receipts –
corporate when the taxpayer is directly
x40% = OSD Cost of Sales/Services +
or indirectly a beneficiary under such Other Income not
policy; (Sec. 36[A] of NIRC) subject to VAT= Total
5. Interest expense, bad debts and losses Gross income x40%=
from sale of property between related OSD
parties;(Sec. 36[B] of NIRC) How Applied
6. Losses from sales or exchange of Gross Sales/Receipts – Gross Sales/Receipts –
property OSD = Net Cost of Sales/Services +
7. Non – deductible interest Income/Taxable Income Other Income not
Subject to Final Tax =

74 Center for Legal Education and Research

 Purple Notes
Taxation Law
Total Gross Income – Optional Standard Neither itemized or
OSD = Net Deduction optional
Income/Taxable Income
If the partner also derives other income from
NOTES: trade, business or practice of profession apart
 Individuals availing OSD are not allowed to and distinct from the share in the net income of
deduct Cost of Sales/Services as the basis of the GPP, the deduction that can be claimed from
OSD is gross sales/receipts the other income would either be the itemized
deductions or OSD.
 While for Corporations, they are allowed to
deduct the cost of sales/services(Sec.34[L], Requirement for using OSD
NIRC)
Unless the taxpayer signifies in his return to
Who are allowed to deduct OSD? elect OSD, he is considered having availed of
 Individuals the itemized deduction.
o Allowed to all kinds of individual except
non – resident aliens Such election when made by the qualified
o Those who are under the graduated tax taxpayer, is irrevocable for the year in which the
table of 0-35% election was made; however he can choose
 General professional Partnership or its itemized deductions on the succeeding years
partners – however, they may avail of it (R.R. 16-2008, Sec.7)
only once.
 Domestic /Resident Corporations – only 5. Income Tax on Individuals
corporations whose income in whole or in
part is not exempt or preferential rate. The individual taxpayers can be classified as
follows:
Rules on OSD
o Taxpayer wishing to be deducted using OSD A. Citizens
shall signify its intention in its first quarter i. Resident Citizens (RC)
income tax return. ii. Non-Resident Citizens (NRC)
o Once exercise is irrevocable for the taxable
year the election was made B. Aliens
Rules on OSD on General Professional i. Resident Alien (RA)
Partnership ii. Non-Resident Alien
a. Engaged in trade or business (NRA-
The distributable net income of the partnership ETB)
may be determined by claiming either itemized b. Not engaged in trade or business
deductions or OSD. The share in the net income (NRA-NETB)
of the partnership, actually or constructively
received, shall be reported as taxable income of C. Special Class of Individual Employees
each partner. i. Aliens employed by regional
The partners comprising the GPP can no longer headquarters, regional operating
claim further deduction from their distributive headquarters, offshore banking units,
share in the net income of the GPP and are not and petroleum services contractors.
allowed to avail of the 8% income tax rate ii. Minimum wage earners
option since their distributive share from the
GPP is already net of cost and expenses. A. Citizens

Summary: i. Resident Citizen (RC)

If partnership Partners may claim:
chooses:  Are those citizens who reside in the
Itemized Deduction Itemized Deductions Philippines.
ONLY

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 Purple Notes
Taxation Law
 A citizen of the Philippines who stayed in the 2018 in the
Individual who is not a citizen but resides
Philippines or stay outside for less than 183 Philippines
days during the taxable year (VALENCIA &
ROXAS, Income Taxation, p. 583) An alien is considered as resident if:
1. He is not a mere transient or sojourner (R.R.
Coverage : Taxed on income sourced within No. 02-40, Sec. 5);
and without the Philippines and maybe taxed at 2. He has no definite intention as to his stay in
a rate of 0%-35% (effective 2018-2022) or 8% the Philippines; or
tax rate on gross annual sales or receipts (if 3. His purpose is of such nature that an
applicable). extended stay may be necessary for its
accomplishment and to that end, the alien
ii. Non-Resident Citizens (NRC) – Filipino makes home temporarily in the Philippines
citizen who: ELWoP (BIR DA -ITAD Ruling No. 153-06, December
(a) Establishes to the satisfaction of the 12,2006)
Commissioner the fact of his physical
presence abroad with a definite intention to When is residency lost?
reside therein. An resident alien who has acquired residence in
(b) Leaves the Philippines during the taxable the Philippines retains his status a resident alien
year to reside abroad, either as an until he abandons the same and actually departs
immigrant or for employment on a the Philippines. Mere intention to change his
permanent basis. residence is not enough.(R.R. No. 02-40, Sec. 5)
(c) Works and derives income from abroad and
whose employment thereat requires him to Coverage: Taxed on income sourced WITHIN
be physically present abroad most of the the Philippines. Based on the graduated rate of
time during the taxable year. ―Most of the 0%-35% of the NET taxable income.
time‖ meaning at least 183 days.
(d) Has been Previously considered as non- (i) Coverage
resident citizen and who arrives in the
Philippines at any time during the taxable
year to reside permanently in the Philippines Income Taxation on Individuals
shall likewise be treated as a non-resident Kinds of Taxable on How taxed?
citizen for the taxable year in which he Individuals income
arrives in the Philippines with respect to Resident Citizen Within and Graduated tax
his income derived from sources (RC) Without (Global) table (0% -
abroad until the date of his arrival in 35%) /8%
the Philippines (Section 22[E], NIRC). Gross
Sales/Receipt
Note: Taxpayer shall submit proof to the (if applicable)
Commissioner to show his intention of Nonresident Within ONLY Graduated tax
leaving the Philippines to reside permanently Citizen (NRC) table(0%-
abroad or to return to and reside in the 35%) /8%
Philippines as the case may be. Gross
Sales/Receipt
(if applicable)
Coverage: Taxed on income sourced within
maybe taxed at a rate of 0%-35% of net Resident Alien Within ONLY Graduated tax
(RA) table (0%-
taxable income (effective 2018-2022) or 8% tax
35%) /8%
rate on gross annual sales or receipts (if Gross
applicable). Sales/Receipt
(if applicable)
B. Aliens Nonresident Within ONLY Graduated tax
alien engaged table (0%-
i. Resident Aliens (RA) in trade or 35%) /8%
business (NRA- Gross

76 Center for Legal Education and Research

 Purple Notes
Taxation Law
ETB) Sales/Receipt a. Fees,
(if applicable) b. Salaries,
Nonresident Within ONLY 25% on Gross c. Wages
alien not Income d. Commission and
engaged in e. Similar items
trade or ii. Fringe Benefit given to rank and file
business (NRA- employees in excess of Php 90,000 limit
NETB) iii. Taxable portion of De Minimis Benefits in
excess of Php 90,000 limit
ii. Taxation on Compensation Income iv. A Taxable portion of 13th month pay and
other benefits in excess of Php 90,000
Purely Compensation Income earner
v. Representation and Transportation
Allowance of employees of the private
Individuals whose source of income is purely
sector (RATA)
derived from an employer-employee relationship
vi. Taxable Pension, Retirement and Separation
(Sec. 2(a), R.R. 8-2018)
Pay
These are all remuneration for services
vii. Voluntary contributions in excess of the
performed by an employee for his employer
mandatory contributions to SSS, GSIS,
under an employer-employee relationship,
PhilHealth and HDMF. (R.M.C. 27 -2011)
unless specifically excluded by the Tax Code.
Requisites for compensation to be taxable
Note: Gross compensation income does not
(APaR)
include compensation for services rendered by
an independent contractor since income is not
1. There must be personal services actually
derived from employer-employee relationship.
rendered
2. There must be payment for such services
TAXABILITY: Taxed on individuals earning
rendered
purely compensation income are taxed at 0%-
3. The payment made is reasonable
35% graduated tax table on their net taxable
compensation income (Sec. 3 (b), R.R. No. 8-2018)
(The manner and procedure on how
compensation income is taxed shall be discussed
(a) Inclusions
on the topic of Withholding Tax on
Compensation Income – all remuneration for
Compensation)
services performed by an employee for his
employer under an employee – employer
(b) Exclusions
relationship, unless specifically excluded by
i. Fringe Benefits subject to Fringe
theCode
Benefits Tax (FBT)
The name by which the remuneration for
ii. 13th month pay and other benefits not
services is designated is immaterial. Thus,
exceeding Php 90,000
salaries, wages, emoluments and honoraria,
iii. De Minimis Benefits within the limits
allowances, commissions (e.g. transportation,
iv. Convenience of the Employer
representation, entertainment and the like); fees
v. Amount received through accident or
including director's fees, if the director is, at the
health insurance
same time, an employee of the employer / vi. Separation Pay due to death sickness or
corporation; taxable bonuses and fringe
other disability or any other cause
benefits, except those which are subject to the
beyond the control of the employee or
fringe benefits tax under Sec. 33 of the Code
the official
and the allowable "de minimis" benefits; taxable
pensions and retirement pa-v; and other income i. Fringe benefits subject to fringe benefit
of a similar nature constitute
tax
compensationincome(Sec. 2(a), R.R. 8-2018)
i. Compensation for services in whatever from
Fringe Benefits
paid including but not limited to:
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 Purple Notes
Taxation Law
Definition — Any goods, services or benefits 2018
furnished or granted in cash or in kind by an 1. Expenses of Foreign travel
employer to an individual employee, in addition
to basic salaries, except a rank and file When subject to FBT:
employee. (Sec 2.33 (B), RR (3.98)) i. When no documentary evidence is shown
that the employee‘s travel was in connection
with business meetings or conventions
Fringe Benefit
Given to Rank and Given to Managerial What amount is subject to FBT
File Employees and Supervisory a. 30% of the cost of the first class airplane
employees tickets
Part of Compensation Income ? b. Lodging cost in a hotel or similar
Part of employee‘s Not part of taxable
establishment in excess of $ 300
compensation income compensation income
treated as other benefit. subject to graduated
c. Travel expenses paid by the employer for
tax rates. the family members of the employee
(BANGAWAN, Income Taxation, p. 374)
Subject to What Tax? When NOT subject to FBT:
May be subject to Subject to Fringe i. Foreign travel is in line with the trader or
regular income tax rates Benefit Tax business.
for individuals using the ii. Inland travel expenses such as food,
graduated tax table if beverages and local transportation.
it‘s 13th Month and iii. Lodging cost in a hotel or similar
other benefits has establishment amounting to an average of $
already exceeded the
300 or less
Php 90,000 limit.
iv. Cost of economy or business class airplane
Who pays for the tax?
The EMPLOYEE pays for EMPLOYER pays for the tickets
the tax which will be tax v. 70% of the cost of the first class airplane
withheld from the tickets
employee‘s
compensation To summarize:

Classification of employees for tax Travel Expense Subject to FBT

purposes: Inland Travel Expense No
Lodging cost in hotel or Yes, only if cost exceeds
Supervisory employees – are those who similar establish $300
recommend managerial actions if the exercise of Travel expenses for Yes
family members
such authority is not merely routinary or clerical
Airline tickets:
in nature but requires the use of independent
Economy or business No
judgment. class
First class Yes up to 30% of the
Managerial employees – those who are given cost of the ticket
the powers or prerogatives to lay down and
execute management policies and/or to hire, 2. Expense account
transfer, suspend, lay-off, recall, discharge,
assign or discipline employees. When subject to FBT:
i. Expenses incurred by the employee but
Rank and file employees – are those which are paid by his employer;
employees who are neither managerial nor ii. Expenses paid by the employee but
supervisory employees. Rank and file employees reimbursed by employer; and
are not subject to Fringe Benefit Tax. iii. Personal expenses of the employee paid
for or reimbursed regardless the fact it
Fringe benefits subject to fringe benefit is duly receipted and is under the name
tax (FBT) : of the employer. (R.R. 3-98)

78 Center for Legal Education and Research

 Purple Notes
Taxation Law
When NOT subject to FBT: When NOT subject to FBT:
i. Expenses incurred by the employee but
which are paid by his employer but is a. Cost for the premiums borne by the
duly receipted and is under the name of employer for group insurance of
the employer; employees.
ii. Expenses paid by the employee but b. Cost of contributions of the employer for
reimbursed by employer but is duly the benefits of the employee to the SSS,
receipted and is under the name of the GSIS and similar contributions arising
employer. (R.R. 3-98) from the provisions of law.
i. Voluntary contributions in excess of
To summarize: the mandatory are taxable. (R.M.C
27-2011)
Expense Duly receipted Subject
and under to FBT 5. Housing
employer‘s
name When subject to FBT:
Expense of the i. Employer leases a residential property
employee
for use of the employee;
whether paid or No Yes
reimbursed by the
ii. Employer owns a residential property
employer and assigns the same for use by the
Expense of the employee;
employee iii. Employer purchases a residential
whether paid or Yes No property on installment basis and allows
reimbursed by the the use by employee;
employer iv. Employer purchases a residential
Personal property and transfers ownership to the
expenses by the Regardless Yes employee;
employee
v. Employer provides a monthly
amount for the employee to pay his
3. Educational assistance to the employee or landlord.(R.R. 3-98)
his dependents.
When NOT subject to FBT:
When NOT subject to FBT: i. Housing privileges of military officials of
the AFP consisting officials of the
Educational Educational
Philippine Army, Philippine Navy and
assistance to assistance to
employee dependents Philippine Air Force;
1. Study is directly ii. Housing unit which is situated inside or
connected with adjacent (i.e. the unit is located within a
employer‘s trade or maximum of 50 meters from the
business and perimeter of the business premises) to
2. There is a written
Assistance was
the premises of a business or factory;
contract that the and
provided through a
employee shall iii. Temporary housing for an employee
competitive scheme
remain employed who stays in a housing unit for three
with the employer for
months or less. (R.R. 3-98)
a period mutually
agreed upon by the
parties. 6. Interest on loans

When subject to FBT:

4. Life or health insurance and other non-life i. When the employer interest free interest
insurance premiums. loans or at less than market rate to the
extent of the difference between the
market rate and the actual rate granted
79
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 Purple Notes
Taxation Law
7. Membership fees, dues and other expenses
borne by the employer for the employee in
social and athletic clubs, and similar
organizations
8. Vehicle of any kind.
When subject to FBT:
i. Employer provides a car to the employee
under his name either by:
a. purchasing in full payment or in
installment, or
b. providing cash for the purchase
vehicle in employee‘s name or
c. shouldering a portion of the purchase
price
ii. Employer either owns or leases a fleet
of motor vehicle for use of the business
and the employee
iii. Use of yacht whether owned and
maintained or leased by the employer
(CASASOLA, NIRC (2013), p 267-269)
9. Household personnel (maid or driver)
When subject to FBT:
a. Salaries of household help, personal
drivers of the employee or
b. Other similar personal expenses like
payment of homeowner‘s association
dues
10. Holiday and vacation expenses
Note: The manner and procedure for the tax on
fringe benefits or Fringe Benefit Tax shall be
discussed in Withholding Taxes
ii. 13th month Pay and other benefits not
exceeding Php 90,000
a. Thirteenth month pay equivalent to the
mandatory one (1) month basic salary of
official and employees of the government
(whether national or local), including
government-owned or controlled
corporations, and/or private offices received
after the twelfth month pay; and
b. Other benefits such as Christmas bonus,
productivity incentives, loyalty award, gift in
cash or in kind, and other benefits of similar
nature actually received by officials and
employees of both government and private
offices, including the Additional
80 Center for Legal Education and Research
Compensation Allowance (ACA) 2018
granted and
paid to all officials and employees of the
National Government Agencies (NGAs)
including State Universities and Colleges
(SUCs), Government-Owned and/or
Controlled Corporations (GOCCs),
Government Financial Institutions (GFIs)
and Local Government Units (LGUs).
The above stated exclusions under (a) and (b)
shall cover benefits paid or accrued during the
year, provided that the total amount shall not
exceed ninety thousand pesos (₱ 90,000),
which may be increased through rules and
regulations issued by the Secretary of Finance,
upon recommendation of the Commissioner,
after considering among others, the effect on
the same of the inflation rate at the end of the
taxable year.(Sec. 6, R.R. No. 11-2018)
iii. De Minimis Benefits
These facilities or privileges furnished to
employees that are of relatively small value and
are offered or furnished merely as a means of
promoting heath, goodwill, contentment or
efficiency of employees. Applicable to all types
of employees, whether Supervisory, Managerial
or Rank and File.
The following are the de minimis benefits,
as amended by the TRAIN LAW (M 3R.
DALEGUC)
1. Monetized unused vacation and sick leave
credits paid to government officials and
employees;
 The number and nature (both vacation
and sick leave) of monetized unused
leaves is NOT subject to any limitations
for employees of the GOVERNMENT
officials and employee.
2. Monetized unused vacation leave credits of
private employees not exceeding 10 days
during the year;
 Only monetized unused VACATION
LEAVE credits not exceeding days are
non – taxable. Monetized unused SICK
LEAVE credits shall be taxable
 Purple Notes
Taxation Law
regardless of days for employees of the 11. Benefits received by an employee by virtue
PRIVATE SECTOR. of a Collective Bargaining Agreement (CBA)
and productivity incentive schemes,
Non taxable unused provided the total annual monetary value
Employee monetized leave received from both CBA and productivity
Limit
of: Sick incentive schemes combined do not exceed
Vacation
Leave P10,000 per employee per taxable year.
Government None
Yes Yes on
The enumeration of De Minimis Benefits is
both
Private Up to
exclusive. (Section 2, RR-2011, May 11, 2012)
Sector 10
Yes No Changes Made in TRAIN Law:
days
only  The medical cash allowance was
increased from P750 to P1,500 per
3. Medical cash allowance to dependents of semester;
employees, not exceeding P1,500 per  The rice subsidy was increased from
employee per semester or P250 per month; P1,500 to P2,000 per month; and
4. Rice subsidy of P2,000 or one 50-kg sack of  The clothing allowance was increased
rice per month worth not more than P2,000; from P4,000 to P6,000 per annum.
5. Uniforms and clothing allowance not
exceeding P6,000 per annum; De minimis Benefits Fringe Benefits
6. Actual medical assistance not exceeding
Benefits given
P10,000 per annum;
7. Laundry allowance not exceeding P300 per Subject to limitations of No limitations as to
month; amounts amount
8. Employees‘ achievement awards, which
must be in the form of tangible personal Exclusivity of the List
property other than cash or gift certificates,
List is exclusive Any benefits can be
with an annual monetary value not
treated as fringe
exceeding P10,000 received by the
employee under an established written plan
which does not discriminate in favor of What happens when the given de minimis
highly paid employees; benefits exceeds the prescribed limit?
9. Gifts given during Christmas and major
anniversary celebrations not exceeding De minimis granted by an employer shall form
P5,000 per employee per annum; part of compensation income subject to
10. Daily meal allowance for overtime work and graduated rates but only to the amount in the
night/graveyard shift not exceeding 25% of excess of ceiling prescribed if given to rank and
the basic minimum wage; and file employee or if were given to managerial or
supervisory employees, the excess will be
 If the grant of meal allowance was not
subject to fringe benefit tax.(R.M.C No. 5- 2011)
for overtime work or night/graveyard
shift SHALL BE SUBJECT TO INCOME
TAX. (R.R.5-2011) Excess of De
Minimis Benefit Tax Implication
 Meal allowance and lodging furnished given to:
for the ―advantage or convenience of
the employer‖ shall be exempt from tax.
Meal should be furnished within the
premises of the employer. (TABAG,
Income Taxation with Special Topics in
Taxation, 2018, p.18)

81
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 Purple Notes
Taxation Law
Rank and file Excess will form part of 13th Benefit Amount Limit 2018
Amount of
month pay and other 13th month
benefit and any excess and other
from the Php 90,000 limit benefit
shall be taxable under
regular income tax rates 13th month Php 30,000
Pay
Managerial and Excess amount is subject to 14th month 30,000
Supervisory Fringe Benefit Tax pay

Productivity 15,000
Incentive
Illustration: Bonus

Mr. Juan, a rank and file employee, during 2019 Laundry 6,000 3,600 2,400
allowance
was given the following benefits:
Rice 36,000 24,000 12,000
allowance
Compensation Amount Classification
Uniform 10,000 6,000 4,000
13th Month Pay Php30,000 13th month
allowance
14th Month Pay 30,000 Other Benefit
Total 13th 93,400
Productivity 15,000 Other benefit month and
Incentive Bonus other
benefits
Laundry 6,000 De minimis
allowance, Php benefit Less :Non - (90,000)
500 per month Taxable
for 12 months 13thmonth
(limit is only Php and other
300 per month or benefit
Php 3,600 per
Taxable 13th Php 3,400
year)
month and
Rice Allowance, 36,000 De minimis other benefit
Php 3,000 per benefit
month for 12
months (limit is  As can be seen in the above computation,
only Php 2,000 or with regards to the de minimis benefits
Php 24,000 per given only the excess of the limit was
year) credited as part of 13th month pay and other
benefit which is reclassified as ―other
Uniform 10,000 De minimis
benefit.‖
allowance (limit benefits
Php 6,000) What is the tax implication on the excess?
Total Benefits Php112,000 Mr. Juan being a rank and file employee, the
Given
excess shall form part of his taxable
compensation income subject to regular income
tax rates together with all other taxable
Compute for the taxable portion of the benefits
compensation income.
givens, if any.

Solution:

82 Center for Legal Education and Research

 Purple Notes
Supposing, Mr. Juan is a manager, what
will be the tax implication on the excess?
Mr. Juan, being a managerial employee, such
excess shall be treated as fringe benefit subject
to fringe benefit tax.
iv. Convenience of the Employer Rule
Benefit given to the employee but proves to be
more advantageous to the employer.
Such as a housing unit which is situated inside
or adjacent (i.e. the unit is located within a
maximum of 50 meters from the perimeter of
the business premises) to the premises of a
business or factory;
v. Amount Received Through Accident or
Health Insurance Compensation for
Injuries or Sickness:
a. Any amount received by reason of
compensation for personal injury or sickness
through Accident or Health Insurance or
under Workmen‘s Compensation Acts.
b. Plus the amount of any damages received,
whether by suit or agreement, on
account of such injuries or sickness.
c. The injury or sickness must arise from an
employee – employer relationship.
Excluded Damages arising from personal
injuries and sickness:
 Actual and compensatory damages
 Moral, nominal, temperate or moderate,
liquidated
Punitive damages or exemplary damages
are taxable within the broad concepts of
gross income (Glenshaw glass vs. CIR, 75 US
473)
Compensation for lost profits is taxable.
(DOMOMDON)
Reason: Compensatory, not gain/profit.
vi. Separation Pay due to death sickness or
other disability or any other cause beyond
the control of the employee or the official
83
Taxation Law
When excluded:
i. Amount is received by an official, employee
or by his heirs;
ii. Received from the employer;
iii. It was received as a consequence of the
separation of such official or employee from
the service of the employer by reason of:
a. Because of death, sickness and/or other
disability; or
b. For any caused beyond the control of
such official or employee. (Sec. 32
[B][6][b] of NIRC)
The phrase ―any caused beyond the
control‖ connotes involuntariness on the
part of the official or employee. The
separation from service of the official or
employee must not be asked or initiated
by the employee (Sec. 2 [B], R.R. No. 12 -
1986 )
iii. Taxation of business income/income
from practice of profession
Terminologies:
Self-employed - a sole proprietor or an
independent contractor who reports income
earned from self-employment. S/he controls
who s/he works for, how the work is done and
when it is done. It includes those hired under a
contract of service or job order, and
professionals whose income is derived purely
from the practice of profession and not under an
employer - employee relationship.
Professional - a person formally certified by a
professional body belonging to a specific
profession by, virtue of having completed a
required examination or course of studies and/or
practice, whose competence can usually be
measured against an established set of
standards. It also refers to a person who
engages in some art or sport for money, as a
means of livelihood, rather than as a hobby. It
includes but is not limited to doctors, lawyers,
engineers, architects, CPAs, professional
entertainers, artists, professional athletes,
directors, producers, insurance agents,
insurance adjusters, management and technical
consultants, bookkeeping agents, and other
recipients of professional, promotional and
talent fees.
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 Purple Notes
Taxation Law
(a) Schedular 2018
Not Of Excess
Over Basic Additional
over over
In general, the income tax on the individual's
taxable income shall be computed based on the 0 250k Exempt
following schedules as provided under Sec. 250k 400k 0 20% 250,000
24(A)(2)(a) of the Tax. 400k 800k 30,000 25% 400,000
800k 2M 130,000 30% 800,000
Tax Due How Computed:
2M 8M 490,000 32% 2,000,000
8M - 2,410,000 35% 8,000,000
Step 1 : Determination of Taxable Income
K- hundred thousand
M -million
Taxable Income - refers to the pertinent items Effective January 1,2023 and onwards:
of gross income specified in the Code, less
deductions, if any, authorized for such types of Range of
income by the Code or other special laws. Income Tax Due a+(b x c)

If computed using itemized deductions: Not Of Excess

Over Basic Additional
over over
Gross or Net Sales Php 1,000,000
/Gross Receipts 0 250k Exempt
Less : Cost of Sales (350,000) 250k 400k 0 15% 250,000
Gross Income 650,000 400k 800k 22,500 20% 400,000
Less: Itemized (350,000) 800k 2M 102,500 25% 800,000
Deductions
2M 8M 402,500 30% 2,000,000
Taxable Income Php 300,000
8M - 2,202,500 35% 8,000,000
K- hundred thousand
If computed using Optional Standard Deductions M -million
(OSD):
Effect of being taxed under schedular
Gross or Net Sales / Php 1,000,000 rates (either opted to or failed to signify
Gross Receipts its option to be taxed at 8%: or failed to
Less: Optional (400,000) qualify)
Standard Deductions
(40% of Gross Sales i. Individual allowed to deduct itemized
or Gross Receipts deduction or optional standard deduction
Taxable Income Php 700,000 ii. Gross sales or gross receipts shall be subject
to business tax of:
The TRAIN Law, repealed the following a. If annual gross sales or gross receipt
exemptions: exceeds the VAT threshold or opted to
be a VAT payer – 12%
i. Personal Exemptions – Php 50,000 b. If annual gross sales or gross receipt
ii. Additional Exemptions – Php 25,000 per does not exceed the VAT threshold
qualified dependents (maximum of 4 AND does not opt or is not to be a
qualified dependents) VAT payer – 3% or other applicable
iii. Premium on Health Insurance – Php 2,400 percentage tax rates
iii. Individual shall be required to submit a
Step 2: Determination of tax due by using financial statement attached to the annual
the schedular/graduated tax rates: income tax return if:
a. Individual who opts to use itemized
Effective 2018 -2022: deduction or failed to signify or elect the
option to use the Optional Standard
Range of Deduction; or
Income Tax Due a+(b x c)

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 Purple Notes
Taxation Law
b. Individual exceeded the VAT - be liable to percentage tax of three
threshold(Sec.3[C], NIRC) percent (3%) on gross sales/receipts
- Individual shall be required to submit a
(b) 8% option financial statement attached to the
annual income tax return if:
Option is available to: (RSA -116) o Individual who opts to use itemized
i. Individual is a resident citizen or resident deduction or failed to signify or elect the
alien option to use the Optional Standard
ii. Individual‘s who earns Deduction.
a. purely from self-employment or
practice of profession and b) Option 2 -Taxed at 8%.
b. mixed income earner;
iii. Individual‘s annual gross sales or gross Under this option, an individual will:
receipts does not exceed the VAT threshold - be taxed at 8% on its gross sales or
or is not a VAT registered taxpayer and receipts (including other non-operating
iv. Individual‘s gross sales or gross receipt is income) in excess of Php250,000
under Section 116 of Title V of the Tax - NOT be allowed to deduct itemized or
Code as amended. optional deduction
- NO longer be liable to the 3%
a. Self-Employed Individuals Earning percentage tax on gross sales or
Income Purely from Self-Employment receipts as the 8% tax is already in lieu
or Practice of Profession. - Individuals of percentage tax.
earning income purely from self- - No longer required to attached financial
employment and/or practice of profession statements with the annual income tax
whose gross sales/receipts and other non- return
operating income does not exceed the
value-added tax (VAT) threshold as provided
under Section 109 (BB) of the Tax Code, as
amended, shall have the optionto avail of:

The graduated rates under Section 24(A)(2)(a) Summary:

of the Tax Code, as amended; OR Gross Annual Gross Annual
Receipts EXCEEDS Receipts DOES NOT
An eight percent (8%) tax on gross sales or Php 3M EXCEED Php 3M
receipts and other nonoperating income in Taxed at 0%-35% Option 1 -Taxed at
graduated tax rates. 0%-35% graduated tax
excess of two hundred fifty thousand pesos
Allowed to deduct rates. Allowed to deduct
(P250,000.00) in lieu of the graduated income itemized or optional itemized or optional
tax rates under Section 24(A) and the standard deduction. standard deduction.
percentage tax Subject to 12% VAT Subject 3% tax

The options available to the taxpayer are

as follows: Option 2- Taxed at 8%
of gross sales /receipts
a) Option 1 -Taxed at Graduated Tax including non –
table of 0%-35%. operating income in
excess of Php 250,000.
CANNOT deduct itemized
Under this option, an individual will: or optional standard
- be taxed on its taxable income using the deduction. NOT subject
graduated tax table (see letter a – to 3% percentage tax.
schedular)
- be allowed to deduct itemized
deductions or optional standard
deduction
85
Bar Operations C ommissions 85
 Purple Notes
Taxation Law
Option 1 v. Option 2 (Purely Self business and/or profession. 2018
(see letter a
Employed) – schedular)
Option 1 Option 2 - be allowed to deduct itemized
Tax Base deductions or optional standard
Net Income (Sales – Gross Sales/receipts + deduction
COS –Deductions) other non – operating - be liable to percentage tax of three
income in excess of Php percent (3%) on gross sales/receipts
250,000
- Individual shall be required to submit a
Tax Rate
financial statement attached to the
0%-35% 8%
Subject to 3% Percentage Tax on Gross annual income tax return if:
Sales/receipts and other non – operating o Individual who opts to use itemized
income? deduction or failed to signify or elect the
Yes No option to use the Optional Standard
Allowed to deduct expenses and Cost of Deduction.
Sales?
Yes No ii) Option 2 -Taxed at 8%.

b. Individual Earning Income Both Under this option, an individual will:

(business or practice of profession) -
For mixed income earners, the income
tax rates the applicable rates are
Mixed Income Earner - an individual earning
compensation income from employment, and
income from business, practice of profession
and/or other sources aside from employment.
Taxability
Taxpayers earning both compensation income
and income from business or practice of
profession shall be subject to the following
taxes:
- be taxed at 8% on its gross sales or
annual receipts (including non-
operating income)
- NOT be allowed to deduct itemized or
optional deduction
- NO longer be liable to the 3%
percentage tax on gross sales or
receipts as the 8% tax is already in lieu
of percentage tax.
- No longer required to attached financial
statements with the annual income tax
return
- Income earned from compensation will
be taxed at 0%-35% graduated tax
table.

All Income from Compensation – The b) If the Total Gross Sales and/or Gross
Graduated Tax Rates of 0%-35% Receipts and Other Non-operating Income
Exceed Php 3M VAT Threshold– Taxed at 0-
All Income from Business or Practice of 35% graduated tax rates
Profession -
Summary:
a. Income earners who are mixed income
earners that have gross sales or receipts Gross Annual Gross Annual
not exceeding the VAT threshold of Receipts EXCEEDS Receipts DOES NOT
Php 3M shall have the following options: Php 3M EXCEED Php 3M
Taxed at 0%-35% Option 1 -Taxed at 0%-
i) Option 1 -Taxed at Graduated Tax graduated tax rates. 35% graduated tax
Allowed to deduct table. Allowed to deduct
table of 0%-35%
itemized or optional itemized or optional
standard deduction. standard deduction.
Under this option, an individual will: Subject to 12% VAT Subject 3% tax
- be taxed on its taxable income using the
graduated tax table both for
compensation and income earned from Option 2- Taxed at 8%
of gross sales /receipts

86 Center for Legal Education and Research

 Purple Notes
Taxation Law
including non – its option on its 1st Quarter ITR and be
operating income. irrevocable and no amendment of option
CANNOT deduct itemized shall be made for the taxable year. (Section
or optional standard 3(C) RR 8-2018, )
deduction. NOT subject
to 3% percentage tax.
Failure to exercise or to signify its option shall
However the tax on
compensation income subject the income to the graduated tax rates of
will be taxed at 0%- 35% (i.e. it is as if Option 1 was chosen).
graduated tax table of
0%-35% What is the effect if the Php 3M gross
annual sales /receipts was breached
Option 1 v. Option 2 (Mixed Income within the year?
Earner)
A taxpayer shall automatically be subject to the
Option 1 Option 2 graduated rates under Section 24(A)(2)(a) of
Tax Base the NIRC, as amended, even if the flat 8%
Compensation Income Gross Sales/receipts + income tax rate option is initially selected, when
+ Net Income from other non – operating taxpayer's gross sales/receipts and other non-
business (Sales –COS – income operating income exceeded the VAT threshold
Deductions) during the taxable year.
Tax Rate
0%-35% on 8% on Business income
Compensation and Net only
In such case, his income tax shall be computed
Income from Business under the graduated income tax rates and shall
and/or profession 0%-35% - on be allowed a tax credit for the previous
Compensation income quarter/s income tax payment/s under the 8%
Subject to 3% Percentage Tax on Gross income tax rate option.
Sales/receipts and other non – operating
income? 8% Option not available to:
Yes No
Allowed to deduct expenses and Cost of a. Pure compensation income earners;
Sales? b. VAT registered taxpayers;
Yes No
c. Non-VAT taxpayers whose gross
receipts/sales exceed P3,000,000.00;
Purely Self employed Mixed income earner
d. Taxpayers subject to other percentage taxes
No compensation Earns from business except Sec. 116;
income being earned income and e. Partners of General Professional Partnerships;
compensation f. Individuals enjoying income tax exemption
Tax based on 8% option such as those registered with Barangay Micro
Gross sales/receipts + Gross sales/receipts + Business Enterprise since taxpayers are not
other non-operating other non-operating allowed to avail of double or multiple tax
income less first Php income exemptions under different tax laws unless
250,000 specifically provided by law. (RR 8-2018 and
Taxability of Compensation Income RMC 50-2018)
No separate tax Has separate tax Summary of Important Rules:
computation for computation for
compensation income compensation income
which will be taxed at 1. The 8% income tax rate shall be based on
0%-35% graduated the gross sales/receipts and other non-
income tax. operating income, net of returns and cash
discounts, in excess of P250,000.00.
How to avail of the option?
2. Taxpayer must signify his intention to avail of
Individual taxpayers who are eligible and would the 8% income tax rate in the 1st Quarter
like to be taxed at 8% (Option 2) shall signify
87
Bar Operations C ommissions 87
 Purple Notes
Taxation Law
ITR / Percentage Tax Return, or on the initial
quarter return of the taxable year after the
commencement of a new business/practice
of profession. Otherwise, taxpayer is
considered to have availed of the graduated
rates.
3. Such election shall be irrevocable and no
amendment of option shall be made for the
said taxable year.
4. The option to be taxed at 8% gross income
tax rate is not available to a VAT-registered
taxpayer, regardless of the amount of gross
sales/receipts, and to a taxpayer who is
subject to Other Percentage Taxes under the
Tax Code except Sec. 116.
5. Partners of a General Professional Partnership
(GPP) by virtue of their distributive share
from GPP which is already net of cost and
expenses cannot avail of the 8% income tax
rate option.
6. The Financial Statements is not required to be
attached in filing the final income tax return.
However, existing rules and regulations on
bookkeeping and invoicing/receipting shall
still apply.
7. The P250,000.00 exemption for those subject
to the 8% tax is not applicable to mixed
income earners since it is already
incorporated in the first tier of the graduated
income tax rates applicable to compensation
income. Under the said graduated rates‘ the
excess of the P250,000.00 over the actual
taxable compensation income is not
deductible/creditable against the taxable
income from business/practice of profession
under the 8% income tax rate option.
8.a. A taxpayer shall automatically be subject to
the graduated rates under Section
24(A)(2)(a) of the Tax Code, as amended,
even if the flat 8% income tax rate option is
initially selected, when taxpayer's gross
sales/receipts and other non-operating
income exceeded the VAT threshold during
the taxable year. In such case, his income
tax shall be computed under the graduated
income tax rates and shall be allowed a tax
credit for the previous quarter/s income tax
88 Center for Legal Education and Research
2018
payment/s under the 8% income tax rate
option.
8.b. The taxpayer is required to update his/her
registration immediately within the month
following the month s/he exceeded the VAT
threshold. S/he shall be liable to VAT
prospectively starting on the first day of the
month following the month when the
threshold is breached. The taxpayer shall pay
the required percentage tax covering the
sales/receipts and other non-operating
income, from the beginning of the taxable
year or commencement of business/practice
of profession until the time the taxpayer
becomes liable for VAT, without imposition of
penalty if timely paid on the immediately
succeeding month/quarter(Aty. Bobby Lock,
2019 Taxation Updates and Critical Areas,page 4)
iv. Taxation of partners in a general
professional partnership (GPP)
A general professional partnership as such shall
not be subject to the income tax imposed under
this Chapter. Persons engaging in business as
partners in a general professional
partnership shall be liable for income tax only
in their separate and individual capacities.
For purposes of computing the distributive share
of the partners, the net income of the
partnership shall be computed in the same
manner as a corporation.
Each partner shall report as gross income his
distributive share, actually or constructively
received, in the net income of the
partnership.(Sec.26,NIRC)
v. Taxation of Passive income
(See detailed discussion under B. 3. vi. Income
on Passive investment Income)
To summarize:
i. Interest
a. From any currency bank deposit, yield,
or any other monetary benefit from
deposit substitutes and from trust
funds and similar arrangements
 Purple Notes
Taxation Law
derived from sources within the
Philippines: b. Royalties, in general (passive income)

Taxpayer Rate Taxpayer Rate

Resident Citizen Resident Citizen
Non Resident Citizen Non – Resident
20%
Resident Alien Citizen
20% on interest income Resident Alien
Non Resident Alien
Engaged in Trade or
Business vi. Taxation of Capital Gains

b. From long-term deposit or investment (See detailed discussion under B. 3. v. Income

in the form of savings, common or from dealings in property)
individual trust funds, deposit
substitutes, investment management To summarize:
accounts and other investments
evidenced by certificates in such form a. Income from sale of shares of stocks of
prescribed by the BangkoSentral ng a Philippine Corporation
Pilipinas (BSP)
Taxpayer Tax Rate
Pre -terminated Tax Implication Resident Citizen
15% of net capital
On the 5th year or thereafter Exempt Non – Resident Citizen
gain
Four (4) years to less than five 5% Resident Alien
(5) years
Three (3) years to less than (4) 12% b. Income from sale of real property
years situated in the Philippines
Less than three (3) years 20%
6% of Gross Selling Price or Fair Market
c. Interest from foreign currency Value (FMV) whichever is higher
depositary units
c. Income from sale, exchange or other
Taxpayer Rate disposition of other capital assets
Resident Citizen
15%
Resident Alien
Holding Period Rule
Non Resident Citizen Exempt
If Capital asset was If Capital asset was
held for more than held for less than 12
ii. Dividends 12 months (Long months (Short Term
Term Gain) Gain)
Taxpayer Rate The net capital gain or The net capital gain or
Resident Citizen loss is reported at 50% loss is reported at
Non – Resident Citizen 10% of the amount realized 100% of realized gain
Resident Alien gain or loss or loss

iii. Royalty income Loss Limitation Rule

a. From literary works and musical Capital losses are allowed only to the extent of
compositions (Individuals Only ) capital gains;

Taxpayer Rate Net Capital Loss Carry Over

Resident Citizen
Non – Resident If any taxpayer, other than a corporation,
10%
Citizen sustains in any taxable year a net capital loss,
Resident Alien such loss (in an amount not in excess of the net
89
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 Purple Notes
Taxation Law
income for such year) shall be treated in the
succeeding taxable year as a loss from the sale
or exchange of a capital asset held for not more
than 12 months.(Sec. 39 (D) of NIRC)
b. Non – Resident Aliens Engaged in Trade
or Business
Coverage:From all income sourced within
a. Passive investment income
(See detailed discussion under B. 3. vi. Income
on Passive investment income)
i. Interest
a. From any currency bank deposit, yield,
or any other monetary benefit from
deposit substitutes and from trust funds
and similar arrangements derived from
sources within the Philippines -20% Final
Tax
b. From long-term deposit or investment
in the form of savings, common or
individual trust funds, deposit substitutes,
investment management accounts and
other investments evidenced by
certificates in such form prescribed by the
Bangko Sentral ng Pilipinas (BSP)
Pre -terminated Tax
Implication
On the 5th year or thereafter Exempt
Four (4) years to less than 5%
five (5) years
Three (3) years to less than 12%
(4) years
Less than three (3) years 20%
ii. Dividends -20%
iii. Royalties -
a. In General – 20%
b. Literary and Music Compositions – 10%
b. Capital Gains
(See discussion under B. 3. v. Income from
dealings in property)
90 Center for Legal Education and Research
2018
a. Income from sale of shares of stocks of
a Philippine Corporation-15% of net capital
gain
Income from sale of real property situated
in the Philippines
Final tax of 6% of Gross Selling Price or FMV
whichever is higher
d. Taxable income
Taxed on income sourced WITHIN the
Philippines. Based on the graduated rate of
0%-35% of the NET taxable income.
(see discussion on Tax Taxation of business
income/income from practice of profession – (a)
Schedular)
c. Non-Resident Alien NOT Engaged in
Trade or Business - Individual who is not a
citizen, with residence outside the Philippines
and does not perform any of the above-
mentioned.
TAXABILITY:
i. Passive investment income
(See detailed discussion under B. 3. vi. Income
on Passive investment income)
i. Interest
a. From any currency bank deposit, yield,
or any other monetary benefit from
deposit substitutes and from trust funds
and similar arrangements derived from
sources within the Philippines -25% Final
Tax
b. From long-term deposit or investment
in the form of savings, common or
individual trust funds, deposit substitutes,
investment management accounts and
other investments evidenced by
certificates in such form prescribed by the
BangkoSentral ng Pilipinas (BSP)– 25%
ii. Dividends -25%
iii. Royalties -25%
b. Capital Gains
 Purple Notes
(See discussion under B. 3. v. Income from
dealings in property)
a. Income from sale of shares of stocks of
a Philippine Corporation-15% of net capital
gain
Income from sale of real property situated
in the Philippines
Final tax of 6% of Gross Selling Price or FMV
whichever is higher
iii.Gross income other than (i) and (ii)
Taxed on income sourced WITHIN the
Philippines. Based on the fixed rate of 25% of
the GROSS income.
d. Aliens employed by regional
headquarters, regional operating
headquarters, offshore banking units, and
petroleum services contractors.
(AEHQ;OBU;PSC)
"The preferential income tax rate under
Subsection (C, D) and (E) of Section 25 of the
Tax Code, as amended, shall no longer be
applicable
without prejudice to the application of
preferential tax rates under existing international
tax treaties, if warranted. Thus, all concerned
employees of regional or area headquarters and
regional operating headquarters of multinational
companies, offshore banking units and
petroleum service contractor and subcontractor
shall be subject to the regular tax rate
under Sec. 24(A)(2)(a) of the Tax Code, as
amended.‖(Sec. 4 [C], R.R. No. 8-2018)
e. Individual taxpayers exempt from
income
i. Minimum Wage Earner (MWE) - Worker in
the private sector paid the statutory minimum
wage (SMW) or an employee in the public sector
with compensation income of not more than the
statutory minimum wage in the non-agricultural
sector where he/she is assigned (Sec. 2 [i]R.R.
No. 8 -2018)
TAXABILITY: MWEs shall be exempt from the
payment of income tax on their taxable income.
The holiday pay, overtime pay, night shift
91
Taxation Law
differential pay and hazard pay received by such
minimum wage earners shall likewise be exempt
from income tax (Sec.3[A] R.R. 8-2018)
Rules with regard to MWEs receiving 13th
month pay and other benefits? *
a. Statutory Minimum Wage (SMW), Holiday
Pay, Overtime Pay, Night Differential Pay
and Hazard Pay are exempt from income
and withholding tax;
b. Additional compensation such as
commissions, honoraria, fringe benefits,
benefits in excess of the allowable statutory
amount of P90,000.00, taxable allowances,
and other taxable income given to MWE by
the same employer other than those which
are expressly exempt from income tax shall
be subject to income tax and withholding
tax;
c. MWEs receiving other income from other
sources in addition to compensation income,
such as income from other concurrent
employers, from the conduct of trade,
business or practice of profession, except
income subject to final tax, are subject to
income tax only to the extent of income
other than SMW, holiday pay, overtime pay,
night shift differential pay, and hazard pay
earned during the taxable year; and
d. Any reduction or diminution of wages for
purposes of exemption from income tax
shall constitute misrepresentation and
therefore, shall result to the automatic
adisallowance of expense, i.e. compensation
and benefits account, on the part of the
employer. The offenders may be criminally
prosecuted under existing laws. (RR 11-
2018)
ii.Exemptions under international
agreements
Income of any kind [shall be exempted from
taxation], to the extent required by any treaty
obligation binding upon the Government of the
Philippines. (Sec. 32 [B][5] of NIRC)
Bar Operations C ommissions 91
 Purple Notes
Taxation Law
Summary of Tax Rates on Passive Income 2018
and Sale of Capital Assets as amended by
TRAIN LAW

Income RC/NRC/RA NRA ETB NRA NETB

I. Passive Income on sources WITHIN the
Philippines
i. Interest
a.From any currency bank deposit, yield, or any
other monetary benefit from deposit substitutes
Final tax of 20% Final Tax of 25%
and from trust funds and similar arrangements
derived from sources within the Philippin2es
b. From long-term deposit or investment in the
form of savings, common or individual trust funds,
deposit substitutes, investment management
0-20% Final Tax of 25%
accounts and other investments evidenced by
certificates in such form prescribed by the
BangkoSentral ng Pilipinas (BSP)
c. Interest from foreign currency deposits Final tax of 15%* Exempt
ii. Dividends from Domestic or Resident Final Tax of 20%
Final Tax of 10% Final Tax of 25%
Foreign Corporations
iii. Royalties
a. On literary works and musical compositions Final Tax of 25%
Final tax of 20%

b. Other royalties from use or lease of intellectual Final Tax of 25%

Final tax of 20%
properties
iv. Rentals Subject regular tax rates of 0-35% on Final Tax of 25%
income from properties leased
v. Prizes and winnings of more than Php
Final Tax of 20%* Final Tax of 25%
10,000 including winnings from PCSO
II. Tax on Dealings of Properties WITHIN
the Philippines
a. Sale of shares of stocks NOT listed and
Final Tax of 15% on net capital gains*
traded thru the local stock exchange
b. Sale of shares of stocks LISTED and Other Percentage Tax of 6/10 of 1% of gross selling price*
TRADED thru local stock exchange
c. Sale of real property held as capital asset 6% of Gross selling price or Fair Market Value whichever is
higher
d. Sale of other capital assets Final tax of
Subject to regular income tax rates
25%

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 Purple Notes
6.Income Tax on Corporations
Corporations for Tax Purposes
The term Corporation shall include: (J2AP)
1. Partnerships not matter how created or
organized;
2. Joint stock corporation;
3. Joint accounts (cuentasen participation)
4. Associations or Insurance Companies
The term Corporation shall not include:
1. General Professional Partnership (GPP)
Definition
Partnerships formed by persons for the sole
purpose of exercising their common
profession, no part of the income of which is
derived from engaging in any trade or
business.
2. Joint venture or corporation formed for the
purpose of undertaking :
a. Construction projects or,
b. engaging petroleum, coal, geothermal,
and other energy operations
c. pursuant to an operation or consortium
agreement under a service contract with
the government (Sec. 22(B) of NIRC)
Definition
It has been generally understood to mean
an organization formed for some temporary
purpose. (Philex Mining Corporation vs. CIR,
G.R. No. 148187, April 16,2008)
What constitute a joint venture:
A joint venture is:
a. Each party making a contribution, not
necessarily capital but by way of services,
skill or knowledge, material or money;
b. Profits must be shared among the
parties;
c. Profit must be a joint proprietary
interest
d. Right of mutual control over the subject
matter or enterprise
93
Taxation Law
e. Usually, there is a single transaction.
(MAMALATEO, Income Tax, p.41-42)
Kinds of Corporation and Tax implication:
i. Domestic Corporations (DC)
Definition
A corporation created or organized in the
Philippines or under its laws. (Sec. 27 of NIRC)
Coverage
Taxed on TAXABLE INCOME fromits income
from source within and without.
ii. Foreign Corporation (FC)
Definition
A corporation is one which is not a domestic
corporation (Sec. 22[D] of NIRC).
Foreign corporations could either be:
a. Resident Foreign Corporations (RFC)
Definition
A corporation which is not domestic and
engaged in trade or business in the Philippines.
(Sec. 22[H] of NIRC).
Coverage
Taxed on TAXABLE INCOME fromits income
from source within and without.
―Doing Business‖
 In order that a foreign corporation may
be regarded as doing business within a
State, there must be continuity of
conduct and intention to establish a
continuous business, such as the
appointment of a local agent, and not
one of a temporary character.(CIR vs.
British Airways Overseas Corp., G.R. Nos. L
-65773-74, April 30,1987)
Bar Operations C ommissions 93
 Purple Notes
Taxation Law
 The phrase ―doing business‖ shall include 2018
- 10% of improperly
soliciting orders, service contracts, opening accumulated earnings
offices, whether called ―liaison‖ offices or 5.Final tax on passive
branches; appointing representatives or income
distributors domiciled in the Philippines or
who in any calendar year stay in the country
for a period or periods totaling one hundred
eighty (180) days or more; participating in
the management, supervision or control of
any domestic business, firm, entity or
corporation in the Philippines; and any other
act or acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to that extent the performance RFC Within Phil 1. NCIT
of acts or works, or the exercise of some of Only - 30% on Net Income
the functions normally incident to, and in Tax Rates: 2. MCIT
progressive prosecution of, commercial gain 30%
2% of gross income, if
or of the purpose and object of the business effective
MCIT applies
organization. (Sec. 3[d] or R.A. 7042, Foreign January 1,
2009 3.GIT (Optional
Investments Act)
Corporate Income Tax)
b. Non - Resident Foreign Corporation Tax Base: 15% of gross income, if
qualified
(NRFC) Net taxable
income 4.Final tax on passive
Definition income
5.Interest from
A foreign corporation not engaged in trade or deposits and yields and
royalties
business with the Philippines. (Sec. 22[I] of NIRC)
6.Capital gains from
Coverage: sale of shares not
traded in the stock
exchange
Taxed on GROSS INCOME from income sourced
7.Income derived
within the Philippines
under the Expanded
Foreign Currency
Deposit System
Income Taxation on Corporations 8.Inter-corporate
Kinds Coverage Imposition of Tax dividends
9.Branch profit
DC Within and 1. NCIT remittance tax
Without - 30% on Net Income Non – Within Phil 30% on Gross
Tax rates: Phil Resident ONLY Income(GI)
2. MCIT
30% (Global) Foreign
effective - 2% of gross income,
Corporation
January 1, if MCIT applies
2009 3.GIT (Optional
Corporate Income Tax)
Tax Base: - 15% of gross income,
Net taxable if qualified
income.
4.Improperly
Accumulated Earnings
Tax

94 Center for Legal Education and Research

 Purple Notes
Taxation Law
 RCIT - Regular Corporate Income Tax Taxable Income Php 350,000
 MCIT - Minimum Corporate Income Tax
 GIT – Gross Income Tax If computed using Optional Standard Deductions
(OSD):
Common Tax Provisions for Domestic and
Resident Foreign Corporation Gross or Net Sales Php 1,000,000
/Gross Receipts
This section will cover the following items in the Less : Cost of Sales (350,000)
2020 Tax law bar syllabus: Gross Income 650,000
Add: Non -operating 50,000
6. Income Tax on Corporations income or other taxable
a. Domestic Corporations income
i. Taxation - in general Total Gross Income 700,000
(a) Regular Corporate Income Tax Less: Optional Standard (280,000)
(b) Minimum Corporate Income Tax Deduction (40% of
Total Gross Income)
b. Resident foreign corporations
Taxable Income Php 420,000
i. Taxation - in general
(a) Regular Corporate Income Tax
 The difference of the tax base for OSD for
(b) Minimum Corporate Income Tax
individuals and for corporations are:
(a) Regular Corporate Income Tax (RCIT)
OSD Rate 40% of
An income tax of thirty percent (30%) shall be For Individual For Corporation
imposed upon the taxable income derived during Gross sales or Gross Gross Income
the taxable year. Receipts
(no benefit of deducting (with the benefit of
 Domestic Corporations - all sources within allowable deductions) deducting Cost of
and without the Philippines Sales/Return on Capital
 RFC - all sources within the Philippines for only )
RFC (See discussion on Deductions under B.3.4)

Tax Due under Regular Corporate Income Step 2. Multiply the RCIT Rate of 30% tot
Tax (RCIT) How Computed: the Taxable Income:

Step 1: Compute the taxable income: If computed using itemized deductions:

Taxable Income - refers to the pertinent items Taxable Income Php 350,000
of gross income specified in the Code, less RCIT Tax Rate 30%
deductions, if any, authorized for such types of Tax Due under RCIT Php 105,000
income by the Code or other special laws.
If computed using itemized deductions: If computed using Optional Standard
Deductions:
Gross or Net Sales Php 1,000,000
/Gross Receipts Taxable Income Php 420,000
Less : Cost of Sales (350,000) RCIT Tax Rate 30%
Gross Income 650,000 Tax Due under RCIT Php 126,000
Add: Non -operating 50,000
income or other (b) Minimum Corporate Income Tax
taxable income (MCIT)
Total Gross Income 700,000
IMPOSITION
Less: Itemized (350,000)
Coverage DCs and RFCs
Deductions Amount to 2% of the Gross Income as

95
Bar Operations C ommissions 95
 Purple Notes
Taxation Law
be imposed opposed to normal corporate 2018
income tax which is imposed on Year Tax Due MCIT/NCIT
the taxable income. (Gross income
would mean gross sales/receipts 2016 42,000.00 NCIT
less cost of sales plus other income 2017 50,000.00 MCIT
not subject to final tax.) 2018 70,000.00 MCIT
When Starts on the fourth taxable year
imposed following the year in which such 2019 105,000.00 NCIT
corporation commenced its
business operations (date when (a) Carry Forward of Excess Minimum Tax
the corporation registers with the (CCF-N)
BIR as reflected in its Certificate of  Any excess of MCIT over the normal income
Registration). tax can be carried forward on an annual
basis.
*This is the tax due whenever the amount of  The excess can be credited against the
MCIT is greater than the Normal Corporate normal income tax due in the next 3
Income Tax (NCIT) due from such corporation immediately succeeding taxable years.
determined under Sec. 27[A].  Any amount of the excess MCIT which
cannot be credited against the normal
Example: income tax due in the next 3-year period
shall be forfeited.
X Company, Domestic Corporation,  The credit must be taken in a year where
incorporated and registered with the BIR NCIT is greater than MCIT.
in 2012. When would X Company be liable
to MCIT? Example:

In 2016 or 4 years after it commence its Following the example above:

operation (registered with the BIR). Which years would have an excess MCIT
and how much?
X Company had the following gross
income and net income for from 2016- Years 2017 and 2018 with amounts of 2,000 and
2019: 10,000 respectively. This is because there is only
excess MCIT if the tax due is MCIT for the
Year Gross Net Income taxable year. The excess MCIT is the difference
Income (GI) (NI) between MCIT and NCIT for the taxable year.
2016 2,000,000 140,000
2017 2,500,000 180,000
Year MCIT (2% NCIT (30% Excess
2018 3,500,000 200,000 of GI) of NI) MCIT?
2019 4,000,000 350,000 2016 40,000.00 42,000.00 Nil
2017 50,000.00 48,000.00 2,000
Compute the MCIT and NCIT. 2018 70,000.00 60,000.00 10,000
2019 80,000.00 105,000.00 Nil
A:
Year MCIT (2% of NCIT (30% For 2019, how much is the tax to be paid
GI) of NI) by X Co.?
2016 40,000.00 42,000.00
2017 50,000.00 48,000.00
93,000 (105,000 – 12,000). It is the NCIT due
2018 70,000.00 60,000.00
for the taxable year of Php 105,000 less the
2019 80,000.00 105,000.00
accumulated excess MCIT of 12,000.
How much is tax due?
Excess MCIT can be deducted from the tax due
ONLY if NCIT (30% CIT) is due the
A: Whichever is higher.

96 Center for Legal Education and Research

 Purple Notes
applicable taxable year. It is an asset in the
Company‘s books good for 3 consecutive years.
Are excess MCIT subject to expiration?
Yes. It is only good for 3 consecutive years.
After 3 years it cannot be used even it has a
balance.(Sec 27[E][2], NIRC)
(b) Relief From the MCIT under Certain
Conditions
The Secretary of Finance is authorized to
suspend the imposition of the MCIT on any
corporation which suffers losses because of:
(Pro-Fo-Le)
a. Prolonged labor dispute; Substantial losses
incurred from a labor dispute arising from a
strike staged by the employees which
lasted for more than six (6) months within
a taxable period and which has caused the
temporary shutdown of business operation
b. Force majeure; or a cause due to an
irresistible force as by ‗Act of God‘ like
lightning, earthquake, storm, flood and the
like. It shall also include armed conflicts like
war or insurgency.
c. Legitimate business reverses shall include
substantial losses due to fire, theft or
embezzlement or for other economic reason
as determined by the Secretary of
Finance(Sec.27[E][3],NIRC)
(c) Corporations Exempt from the MCIT
(HEDS-F3)
1. Those operating as proprietary educational
institutions subject to preferential tax of
10% on their taxable income; (Domestic)
2. Those engaged in hospital operations which
are non-profit subject to tax at 10% on their
taxable income; (Domestic)
3. Those engaged in business as depository
banks under the expanded foreign currency
deposit system subject to final income tax at
10% of such income; (Domestic)
4. Firms that are taxed under aspecial income
tax regime such as those in accordance with
RA 7916 and 7227 (The PEZA law and the
Bases Conversion Development Act,
respectively).
97
Taxation Law
5. Resident foreign international carrier
6. Resident foreign offshore banking units
7. Resident foreign ROHQ
(d) Applicability of the MCIT Where a
Corporation is Governed Both Under
the Regular Tax System and a Special
Income Tax
For Domestic Corporations, the MCIT shall apply
on operations covered by the regular tax system
only. (R.R. 9 -98)
Is MCIT a Tax on Capital?
The MCIT is imposed on gross income which is
arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost
of goods48 and other direct expenses from
gross sales. Clearly, the capital is not being
taxed. (Chamber of Real Estate and Builder‘s
Association vs. Alberto Romulo, G.R. No. 160756,
March 9,2010)
a. Domestic Corporations
i. Taxation in general
(a) Regular Corporate Income Tax (RCIT)
(b) Minimum Corporate Income Tax
(See preceding discussion under Common
Provisions for Domestic and Resident Foreign
Corporation)
(c) Tax on Passive Income
(See detailed discussion under B. 3. vi. Income
on Passive investment income)
i. Interest
a. From any currency bank deposit, yield,
or any other monetary benefit from
deposit substitutes and from trust funds
and similar arrangements derived from
sources within the Philippines: - 20%
b. Interest from foreign currency
depositary units -15%
ii. Dividends
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 Purple Notes
Taxation Law
 From Domestic and Resident Foreign
Corporations – Exempt
 From Foreign Corporations – subject to
RCIT or NCIT
iii. Royalty income – 20%
(d) Tax on Capital Gains
(See detailed discussion under B. 3. v. Income
from dealings in property)
To summarize:
a. Income from sale of shares of stocks of
a Philippine Corporation -15% of net
capital gain
b. Income from sale of land and/or
buildings
6% of Gross Selling Price or Fair Market Value
(FMV) whichever is higher
c. Income from sale, exchange or other
disposition of other capital assets
Subject to RCIT/MCIT on income from sale
of capital asset NOT subject to capital gains
tax without the benefit of Holding Period
and Net Capital Loss Carry Over
(e) Improperly Accumulated Earnings Tax
Definition
Improperly Accumulated Earnings
Profits of a corporation that are permitted to
accumulate instead of being distributed to its
shareholders for the purpose of avoiding the
income tax with respect to its share holders or
shareholders of another corporation (R.R. No. 2-
2001)
Improperly Accumulated Earnings Tax
10% of the Improperly Accumulated Taxable
Income (in addition to other taxes).
98 Center for Legal Education and Research
Nature and Purpose 2018
The underlying purpose of the additional tax in
question on a corporation's improperly
accumulated profits or surplus is as set forth in
the text of Section 25 of the Tax Code itself to
avoid the situation where a corporation unduly
retains its surplus instead of declaring and
paving dividends to its shareholders or members
who would then have to pay the income tax due
on such dividends received by them. (CIR v.
Ayala Securities Corp., G.R. No. L-29485, November
21,1980)
The tax which is essentially a penalty tax is
imposed for each taxable year in addition to the
other income taxes imposed on corporations.
Note: With the additional tax, corporations will
be compelled to distribute corporate gains or
earnings not necessary in the business to
stockholders in the form of dividends which are
now taxable.
Presumptions of Improper Accumulation
There is prima facie evidence of a purpose to
avoid the tax upon its shareholders where:
(1) The corporation is a mere holding company;
(2) The corporation is an investment company
and at any time during the taxable year
more than 50% in value of its outstanding
stocks is owned, directly or indirectly, by
one person; and
(3) The corporation permits its earnings or
profits to be accumulated beyond the
reasonable needs of the business.
 For purposes of RR No. 2-2001, the
term holding or investment company,
shall refer to a corporation having
practically no activities except holding
property, and collecting the income
therefrom or investing the same.
(CASASOLA, NIRC, Annotated)
 The touchstone of liability is the purpose
behind the accumulation of the income
and not the consequences of the
accumulation. If there is a determination
that a corporation has accumulated
income beyond the reasonable needs of
 Purple Notes
Taxation Law
the business, IAET shall be imposed. even if not declared as dividends. This
(Id.) notwithstanding, once finally declared, the
dividends shall still be subject to tax on
 To determine reasonable needs, dividends under NIRC.
Immediacy Test shall be applied.
The accumulated profits must be used Period of Payment
within a reasonable time after the close
of the taxable year. The taxpayer must Dividends must be declared and be paid not
establish by clear and convincing later than one (1) year following the close of the
evidence that such accumulation was for taxable year.
the immediate needs of the
business.(CASASOLA, NIRC Anotated) IAET should be paid fifteen (15) days thereafter.

How taxed: Example:

Step 1. Compute for Improperly For the close of the taxable year for 2018.
Accumulated Earnings: Dividends must be declared and be paid on or
before December 31,2019.
From the corporation‘s taxable income, add the
following: Otherwise, the company will be imposed a
liability under IAET which should be paid on or
Taxable Income (2018) Php 1,000,000
the 15th date from December 31, 2019 which is
Add:
January 15 (assuming that said date is not a
Income subject to final tax 100,000
non – working day).
Net Loss Carry Over (NOLCO) 200,000
Income exempt from income 50,000 Exempt Corporations
tax
Income excluded from gross 30,000 The tax shall not apply to the following kinds of
income corporation enumerated in Sec 29(B)(2):
Less: 1,380,000
Income tax paid (300,000)
Dividends declared or paid 0 a. Publicly-held corporations;
Total 1,080,000 b. Banks and other non-bank financial
Add: intermediaries; and
Retained Earnings, as of the 500,000 c. Insurance companies.
end of the year
Less:
and also the following:
100% Paid Capital (350,000)
Improperly Accumulated 1,230,000
Earnings
d. Taxable partnerships
Multiply: e. General Professional Partnerships
Improperly Accumulated 10% f. Non-taxable joint ventures
Earning Tax Rate g. Enterprises duly registered under the
Improperly Accumulated 123,000 Philippine Economic Zone Authority under
Earning Tax R.A. 7916
(R.MC. 35-2011) h. Enterprises registered pursuant to the
Bases Conversion and Development Act of
The tax is imposed for each taxable year on 1992 under R.A. 7227
the improperly accumulated taxable income i. Other enterprises duly registered under
equal to 10% of such income. special economic zones declared by law
which enjoy payment of special tax rate on
 Once the profit has been subject to IAET, their registered operations or activities (Sec
the same shall no longer be subject to it 4, RR No. 2-2001).

99
Bar Operations C ommissions 99
 Purple Notes
Taxation Law
j. Foreign corporations 2018 and
ii. Proprietary educational institutions
hospitals
 IAET shall not apply in cases where the
corporation is entitled to a preferential tax General Rule: Tax rate is 10%
rate. The retained earnings of a domestic
corporation with the Subic Bay Metropolitan Exceptions:
Authority (SBMA) from its gross income a. 30% NCIT rate if the gross income from
earned from registered activities which were unrelated trade, business or other activity
already subjected to 5% preferential tax rate exceeds 50% of the total gross income
are not subject to IAET.(BIR Ruling DA-587-09, derived from all sources.
Oct 2009) b. Exempt if a non-stock, non-profit
educational institution (Sec. 4, Art. XIV,
 Income derived by a subcontractor of a Constitution).
petroleum service contractor of the
Government from petroleum subcontracting What is meant by unrelated trade,
operations is exempt from the IAET. business or other activity?
However, the exemption shall be limited Any trade business or other activity, the conduct
only to income derived from petroleum of which is not substantially related to the
subcontracting under P.D. 1354. Income performance by such educational institution or
from other sources shall be subject to hospital of its primary purpose or function.(Sec
normal income tax rate or MCIT, as the case 27 (B), NIRC)
may be.(BIR Ruling 302-04, June 2004)
Distinguish Non – Stock, Non Profit
MCIT vs. IAET Educational Institution from Proprietary
Educational Institution
Improperly
Minimum Corporate Accumulated Earnings NON-STOCK, PROPRIETARY
Income Tax Tax NON-PROFIT, EDUCATIONAL
Tax Rate and Tax Base EDUCATIONAL INSTITUTION
2% of TOTAL GROSS 10% of IMPROPERLY Privilege granted is Tax privilege granted to
INCOME ACCUMULATED not subject to the latter may be
EARNINGS TAX limitations imposed subject to limitations
by law since it is imposed by law.
When Liable constitutionally
granted.
Whenever NORMAL Whenever there is an
INCOME TAX IS ZERO IMPROPERLY Income is tax Income is subject to
OR LESS THAN MCIT ACCUMULATED exempt provided income tax.
EARNINGS that the income it
seeks to be The rate shall be at 10%
How is the Tax Based computed? exempted from if gross income from
Total Gross Income is Improperly Accumulated taxation is used unrelated trade,
computed from Earnings is computed
actually, directly business or activity does
Gross/Net Sales less Cost from the TAXABLE
of Sales add other INCOME add all income
and exclusively for not exceed 50% of its
income not subject to not subjected or was educational total gross income,
final taxes exempted from tax and purposes. otherwise,30% RCIT.
other tax benefits less all (CIR vs. DLSU, G.R. (Predominancy Test)
tax income payments and No. 196596,
dividend payments or November 9, 2016)
declarations and less paid
up capital

100 Center for Legal Education and Research

 Purple Notes
 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 the
disposition made of such income, shall be
subject to tax." Prior to the introduction of
Section 27(B), the tax rate on such income
from for-profit activities was the ordinary
corporate rate under Section 27(A). With the
introduction of Section 27(B), the tax rate is
now 10%.(CIR vs. St. Luke‘s Medical Center,
Inc., GR No. 195909, September 26, 2012)
(ii) Non-Profit hospitals (same rules as those
imposed on proprietary educational institutions)
(See also Sec. 27 (B), NIRC)
Q: Is St. Luke‘s Medical Center Inc.,
organized as a non – stock and non profit
charitable institution making it entitled for
tax exemption?
A: There is no dispute that St. Luke's is
organized as a non-stock and non-profit
charitable institution. However, this does not
automatically exempt St. Luke's from paying
taxes.To be exempt from income taxes, Section
30(E) of the NIRC requires that a charitable
institution must be "organized and operated
exclusively" for charitable purposes. Likewise, to
be exempt from income taxes, Section 30(G) of
the NIRC requires that the institution be
"operated exclusively" for social welfare.
St. Luke's fails to meet the requirements under
Section 30(E) and (G) of the NIRC to be
completely tax exempt from all its income.
However, it remains a proprietary non-profit
hospital under Section 27(B) of the NIRC as long
as it does not distribute any of its profits to its
members and such profits are reinvested
pursuant to its corporate purposes. St. Luke's,
as a proprietary non-profit hospital, is
entitled to the preferential tax rate of
101
Taxation Law
10% on its net income from its for-profit
activities. (CIR vs. St. Luke‘s Medical Center
Inc., GR 195909,September 26, 2012)
(iii) Government-owned or controlled
corporations (GOCC), agencies or
instrumentalities
General Rule: The rules governing domestic
corporations engaged in similar business,
industry or activity shall apply.
Exceptions: (GS-PL)
a. Government Service Insurance System
b. Social Security System
c. Philippine Health Insurance Corporation
d. Local Water districts
Under the TRAIN Law, the Philippine Charity
Sweepstake is not anymore exempt from
payment of income tax.
Are GOCC not included in the list taxable?
No. Under Sec. 32 (B) (7)* of the NIRC, income
derived from any public utility or from the
exercise of essential government function
accruing to the government of the Philippines or
to any political subdivision are exempt from
income tax. Therefore, even if the GOCC is not
one of those enumerated in Sec. 27 (C), it may
still exempted under Sec. 32 (B)(7) due to its
governmental function.
*Income Derived by the Government or its Political
Subdivisions
(iv) Domestic Depository banks (foreign
currency deposit units)
Income derived by a depositary bank under the
expanded foreign currency deposit system from
foreign currency transactions with non-residents,
offshore banking units in the Philippines, local
commercial banks and other depositary banks
under the expanded foreign currency deposit
system shall be EXEMPT from all taxes.
Exception:
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 Purple Notes
Taxation Law
 Net income from such transactions which i. Interest 2018
shall be subject to the regular income tax
payable by banks. a. From any currency bank deposit, yield,
or any other monetary benefit from
Interest income from foreign currency loans deposit substitutes and from trust funds
granted by such depositary banks under said and similar arrangements derived from
expanded system to residents other than OBUs sources within the Philippines: - 20%
in the Philippines or other depository banks
under the expanded system shall be subject to a b. Interest from foreign currency
final tax of 10%(Sec. 27[D][3],NIRC) depositary units -7.5%

b. Resident Foreign Corporation ii. Dividends

i. Taxation – in general
 From Domestic and Resident Foreign
(a) Regular Corporate Income Tax Corporations – Exempt
(b) Minimum Corporate Income Tax  From Foreign Corporations-subject to
RCIT or MCIT
(See preceding discussion under Common
Provisions for Domestic and Resident Foreign iii. Royalty income – 20%
Corporation)
(e) Tax on Capital Gains
(c) Branch Profit Remittance Tax (BPRT)
(by a Resident Foreign Corporation) (See detailed discussion under B. 3. v. Income
from dealings in property)
Definition
Any profit remitted by a branch to its head office To summarize:
shall be subject to 15% BPRT on its head office
based on total profits applied or earmarked for d. Income from sale of shares of stocks of
remittance WITHOUT any deduction for the a Philippine Corporation -15% of net
tax component(Sec. 28[A][5],NIRC) capital gain

e. Income from sale of land and/or

Exception: Entities registered with the
Philippine Economic Zone Authority (PEZA) (Sec.
28 (A) (5), NIRC)
Rationale
The remittance tax was conceived in an attempt
to equalize the income tax burden on foreign
corporations maintaining, on the one hand, local
branch offices and organizing, on the other
hand, subsidiary domestic corporations where at
least a majority of all the latter's shares of stock
are owned by such foreign corporations.(Bank of
America NT &SA vs. Court of Appeals, G.R. No.
103092, July 21,1994)
(d) Tax on Passive Income
buildings
6% of Gross Selling Price or Fair Market
Value (FMV) whichever is higher
f. Income from sale, exchange or other
disposition of other capital assets
Subject to RCIT/MCIT on income from sale
of capital asset NOT subject to capital gains
tax without the benefit of Holding Period
and Net Capital Loss Carry Over
ii. Resident Foreign Corporations subject
to Preferential Tax Rates

(See detailed discussion under B. 3. vi. Income (a) International carrier doing business in
on Passive investment income) the Philippines

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 Purple Notes
Taxation Law
 Subject to 2.5% tax rate on its Gross
Philippine Billings. International Air International Carrier
 Gross Philippine Billings, defined: Carrier Maintaining with NO FLIGHTS or
to and from PH LANDING RIGHTS
but operate thru
General Sales Agent
in PH
International Air International Taxed as a SPECIAL Taxed as a RESIDENT
Carrier Shipping CORPORATION at a rate FOREIGN
The amount of gross The gross revenue of 2.5% on GROSS CORPORATION
revenue derived from whether for passenger, PHILIPPINE subject to normal
carriage of persons, cargo or mail originating BILLINGS income tax of 30% of
excess baggage, cargo from the Philippines up taxable income or
and mail originating from to final destination, minimum corporate
the Philippines in a regardless of the place income tax of 2% of
continuous and of sale or payments of total gross income.
uninterrupted flight, the passage or freight
irrespective of the place of documents. (Air Canada vs. CIR, GR 169507,January
sale or issue and the place 11,2016,penned by J. Leonen)
of payment of the ticket or
passage document.
(b) Resident foreign depositary banks
(foreign currency deposit units) and
 Basis for Gross Philippine Billings Tax
Offshore Banking units
exemption: Reciprocity may be invoked by
an international carrier, when its Home
Resident foreign depositary banks (foreign
Country grants income tax exemption to
currency deposit units)(same rules as those
Philippine carriers.
imposed on domestic depositary banks)(Sec.
27[D][3],NIRC)
 That international carriers doing business in
the Philippines may avail of a preferential Off-shore banking units
rate or exemption from the tax herein
imposed on their gross revenue derived General Rule: Income derived by OBUs from
from the carriage of persons and their foreign currency transactions with non-residents,
excess baggage on the basis of an other offshore banking units, local commercial
applicable tax treaty or international banks are exempt from all taxes
agreement to which the Philippines is a
signatory or on the basis of reciprocity such Exception:
that an international carrier, whose home
country grants income tax exemption to Income derived from (NF3):
Philippine carriers, shall likewise be exempt 1. Nonresidents;
from the tax imposed under this provision. 2. Foreign currency transactions with local
(Sec. 1, RA 10378) commercial banks;
3. Foreign currency transactions with branches
 An offline international air carrier selling of foreign banks authorized by the BSP
passage tickets in the Philippines, through a 4. Foreign currency transactions with OBUs in
general sales agent, is a resident foreign the Philippines
corporation doing business in the
Philippines. As such, it is taxable under Interest income from foreign currency loans
Section 28(A)(l), and not Section 28(A)(3) of granted to residents other than OBUs or local
the 1997 National Internal Revenue Code, commercial banks shall be subject to a final tax
subject to any applicable tax treaty to which of 10%.(Sec. 28[A][4],NIRC)
the Philippines is a signatory. (Air Canada vs.
CIR, GR 169507,January 11,2016, penned by J.
Leonen)
103
Bar Operations C ommissions 103
 Purple Notes
Taxation Law
(c) Regional or Area Headquarters and Income covered: 2018
Regional Operating Headquarters of i. Interests,
Multinational Companies ii. Dividends,
iii. Rents,
1. Regional or area headquarters – not subject iv. Royalties,
to tax v. Salaries,
2. Regional operating headquarters – 10% on vi. Premiums (except reinsurance premiums),
taxable income (Sec. 28[A][6],NIRC) annuities, emoluments or other fixed or
determinable annual, periodic or
Regional or Area Regional vii. Casual gains, profits and income, and
Headquarters OPERATING viii. Capital gains, except capital gains subject to
Headquarters tax(Sec. 28[B][1], NIRC)
Branch established in Branch established in
the Philippines by the Philippines by ii. NRFC subject to special rates:
multinational multinational On specific properties rented owned by
companies and which companies which are non -resident foreign corporation:
headquarters DO engaged in the
NOT EARN or DERIVE following: general Lease on Rate on Gross
INCOME from the administration, income
Philippines and which business planning and Cinematographic
25%
act as SUPERVISORY, coordination, sourcing Films
COMMUNICATIONS and procurement of Foreign vessels 4.5%
and COORDINATING raw materials and Aircraft machineries
7.5%
CENTER for their components, and equipment
affiliates, subsidiaries corporate finance
or branches. advisory services, (Sec.s 28[B][2],[3]&[4],NIRC)
(Sec.22[DD], NIRC) marketing control and
sales promotion, (d) Corporation Exempt From Income Tax
training and personnel (ABS -C2BN2 -GF2)
management, logistic
services, research and These are:
development and
product development, (A) Labor, agricultural or horticultural
technical support and organization not organized principally for
maintenance, data profit;
processing and
communications and Requisites to be exempt : B-E-N
business (1) No net income inuring to the benefit of
development. (Sec. any member;
22[EE], NIRC) (2) Educational or instructive in character;
Not Subject to tax Taxed at 10% in (3) Have as their objects the Betterment of
Taxable Income the conditions of those engaged in such
pursuits, the improvement of the grade
of their products and the development
of a higher degree of efficiency in their
c. Non – Resident Foreign Corporation respective occupations.
(NRFC)
(B) Mutual savings bank not having a capital
i. Taxation of NRFC in General stock represented by shares, and
cooperative bank without capital stock
Coverage: Taxable on GROSS income at 30%.

104 Center for Legal Education and Research

 Purple Notes
organized and operated for mutual purposes
and without profit;
Requisites to be exempt:
(1) It must appear that it is an organization
which has no capital stock
represented by shares; and
(2) whose earnings less only the expenses
of operation, are distributable whole
among the depositors.
If it appears that the organization has
shareholders who participate in the
profits, the organization will not be
exempt.
(C) A beneficiary society, order or association,
operating for the exclusive benefit of the
members such as a fraternal organization
operating under the lodge system, or
mutual aid association or a nonstock
corporation organized by employees
providing for the payment of life, sickness,
accident, or other benefits exclusively to
the members of such society, order, or
association, or nonstock corporation or their
dependents;
Requisite to be exempt:
(1) Operated for the exclusive benefit of the
members such as a fraternal
organization operating under the lodge
system.
(2) Established system for payment to its
members of life, sick, accident, or other
benefits.
(D) Cemetery company owned and operated
exclusively for the benefit of its members;
Requisite to be exempt:
(1) Owned by and operated exclusively for
the benefit of its lot owners; or if it is
(2) Not operated for profit.
(E)Nonstock corporation or association
organized and operated exclusively for
religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset
shall belong to or inure to the benefit of any
105
Taxation Law
member, organizer, officer or any specific
person;
Requisite to be exempt:
(1) It must be a non-stock and organized
and operated for one or more specified
purposes; and
(2) No part of its net income or asset shall
belong to or inure to the benefit of any
member.
―Charity‖ may be fully defined as a gift, to
be applied consistently with existing laws,
for the benefit of an indefinite number of
persons, either by bringing their minds and
hearts under the influence of education or
religion, by assisting them to establish
themselves in life or otherwise lessening the
burden of government ((CIR vs. St. Luke‘s
Medical Center, Inc., GR No. 195909, September
26, 2012)
Charitable institutions does not lose its
character as such because it derives income
from paying patients so long as the money
received is devoted or used altogether to
the charitable object which it is intended to
achieve.
(F) Business league chamber of commerce, or
board of trade, not organized for profit and
no part of the net income of which inures to
the benefit of any private stock-holder, or
individual;
Requisite to be exempt:
(1) An association of persons having some
common business interest, which limits
its activities to work for such common
interest; and
(2) Does not engage in a regular business
of a kind ordinarily carried on for profit.
(G) Civic league or organization not organized
for profit but operated exclusively for the
promotion of social welfare;
Bar Operations C ommissions 105
 Purple Notes
Taxation Law
Requisite to be exempt: 2018 of its
the purpose of marketing the products
(1) Not organized for profit but operated members and turning back to them the
exclusively for purposes beneficial to the proceeds of sales, less the necessary selling
community as a whole. expenses on the basis of the quantity of
produce finished by them;
NOTE:―For the promotion of social
welfare‖ covers activities that advance Notwithstanding the provisions in the
the common good and the general preceding paragraphs, the income of
welfare of the people of the community. whatever kind and character of the
foregoing organizations from any of their
(H) A non-stock and non-profit educational properties, real or personal, or from any of
institution; their activities conducted for profit
regardless of the disposition made of such
Non Stock Non Other non -stock non income, shall be subject to tax imposed
Profit Educational profit organization under this Code.
Institution under Sec. 30
What is exempt?  The last paragraph of Section 30 of the
Income REGARDLESS Only income from non – Tax Code is without force and effect
of source profit activities are subject
with respect to non-stock, non-profit
to exemption.
(whether the source of educational institutions, provided, that
income coming from the non-stock, non-profit educational
profit activity or not) institutions prove that its assets and
Other conditions for exemption revenues are used actually, directly and
Income must be No portion of the income exclusively for educational purposes(CIR
actually, directly or inures to the benefit of any vs. DLSU, G.R. No. 196596, November 9,
exclusively used for member, organizer, officer 2016)
educational purpose or any specific officer.  The tax exemption granted under Sec.
Source of Exemption 30 covers only income taxes for which
Article XIV, Section 4 Section 30 of the Tax Code it is directly liable. Such exemption
(3) of the Constitution does not cover indirect taxes such
as business taxes.

(I) Government educational institution;

May include associations whose sole
purpose is the instruction of the public.
Associations formed to disseminate
controversial or partisan propaganda are not
educational with the meaning of the law (Sec
30, RR No. 25).
(J) Farmers' or other mutual typhoon or fire
insurance company, mutual ditch or
irrigation company, mutual or cooperative
telephone company, or like organization of a
purely local character, the income of which
consists solely of assessments, dues, and
fees collected from members for the sole
purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like association
organized and operated as a sales agent for
Tax on Association /Condominium Dues:
 Condominium dues received from the unit
owners, which are merely held in trust and
which are used by the Condominium
Corporation solely for administrative
expenses, utilities, and maintenance of the
common areas for the benefit of the unit
owners and from which the Condominium
Corporation could not realize any gain or
profit are not subject to income and
consequently, to withholding tax (BIR Ruling
No. DA- 336-08, Oct 23, 2008).
 As long as these membership fees,
assessment dues, and the like are treated as
collections by recreational clubs from their
members as an inherent consequence of

106 Center for Legal Education and Research

 Purple Notes
their membership, and are, by nature,
intended for the maintenance, preservation,
and upkeep of the clubs' general operations
and facilities, then these fees cannot be
classified as "the income of recreational
clubs from whatever source" that are
"subject to income tax . (Association of Non –
Profit Clubs v.CIR, G.R. No. 228539 , June 26,
2019)
(e) Tax on other Business Entities: General
Partnerships, General Professional
Partnerships, Co-ownerships, Joint
Ventures and Consortia
General Partnership (Business
Partnership)
Partnerships - Under the Philippine setting on
taxation, the term ―corporation‖ likewise
includes partnerships no matter how created or
organized(Sec.22[B],NIRC)
General rule: Taxable as corporations
Exception: General professional partnerships
- EXEMPT from income tax (Sec. 26, NIRC).
General Professional Partnerships
Requisites for Exemption: SP-NT
a. Formed by persons for the sole purpose of
exercising their common profession.
b. No part of its income is derived from
engaging in any trade or business.
 If the conditions set by law are not met, the
exemption from corporate income tax is
withdrawn and the partnership is subjected
to tax as an ordinary corporation. (Tan vs.
Del Rosario, G.R. No. 109289, October 3, 1994)
The income tax is imposed on the partners
themselves in their separate and individual
capacity on their separate and respective
distributive shares of the net income of the
partnership computed in the same manner as
that of a corporation.
107
Taxation Law
 Unlike an ordinary business partnership
which is treated as a corporation for income
tax purposes and, therefore, subject to
corporate income tax, a general professional
partnership is not in itself an income
taxpayer.
 A General Professional Partnership, provided
that no part of its income is derived from
engaging in any other trade or business, is
exempt from corporate income tax.
 If it derives income from other sources, the
GPP nonetheless remains to be exempt from
the payment of corporate income tax if the
income from other sources has been
subjected to final income tax.
 They are required to file tax returns for the
purpose of furnishing information as to the
share in the net gains or profits which each
partner shall include in his individual return.
 A partner‘s share in the net profits of GPP is
not compensation income. (BIR Ruling No. 008,
Jan. 1989)
 Payments made to individual partners are
subject to 15% withholding tax, if the gross
income for the current year exceeds
Php720,000; and 10% if otherwise. (Sec.
2.57.2(E), RR. No. 11-18, January 31, 2018 )
Determination of the Optional Standard
Deduction for GPP and Partners of GPP
(Sec 8, RR 8-2018)
GPP is not subject to income tax imposed
pursuant to Sec. 26 of the Tax Code, as
amended. However, the partners shall be liable
to pay income tax on their separate and
individual capacities for their respective
distributive share in the net income of the GPP.
The GPP is not a taxable entity for income tax
purposes since it is only acting as a
"passthrough‖ entity where its income is
ultimately taxed to the partners comprising it.
Section 26 of the Tax Code, as amended,
likewise provides that"[f]or purposes of
computing the distributive share of the partners,
the net income of the GPP shall be computed in
the same manner as a corporation.'
Bar Operations C ommissions 107
 Purple Notes
Taxation Law
As such, a GPP may claim either the itemized Subject to CREDITABLE Subject to2018 FINAL
deductions allowed under Section 34 of the WITHHOLDING TAX of WITHHOLDING TAX of
Code or in lieu of it, can opt to avail of the OSD 15% (if income 10%. The payment
allowed to corporations in claiming the payments exceed Php thereof shall be deemed
720,000) or 10% if full and final and thus
deductions in an amount not exceeding forty
income payments no need to be included
percent (40 %) of its gross income. exceed Php 720,000) in the ITR

In computing taxable income defined under Co-ownership

Section 31 of the Tax code, as amended, the
following may be allowed as deductions:
a. itemized expenses which are ordinary and
necessary, incurred or paid for the practice of
Profession; OR
b. Optional Standard Deduction (OSD).
General Rule:
Co-ownerships are generally not taxable.
Reason: Because the activities of the co-owners
are usually limited to the preservation of the
property owned in common and collection of the
income therefrom.

The distributable net income of the partnership
may be determined by claiming either itemized
deductions or OSD. The share in the net income
of the partnership, actually or constructively
received, shall be reported as taxable income of
each partner.
The partners comprising the GPP can no longer
claim further deduction from their distributive
share in the net income of the GPP and are not
allowed to avail of the 8% income tax rate
option since their distributive share from the
GPP is already net of cost and expenses
General Professional Taxable Business
Partnership Partnership
When taxable:
 The co-ownership of inherited properties is
automatically converted into an unregistered
partnership the moment the said common
properties and/or the incomes derived
therefrom are used as a common fund with
intent to produce profits for the heirs in
proportion to their respective shares in the
inheritance as determined in a project
partition either duly executed in an
 Extrajudicial settlement or approved by the
court in the corresponding testate or
intestate proceeding. (Ona v. CIR, G.R. No. L-
19342, May 25, 1972)

How is the PARTNERSHIP is Taxed? Joint Venture

The partnership as As a juridical entity they
separte a juridical are taxed like a Joint Venture and Consortium- Under the
entity of its own its CORPORATION. Philippine setting on taxation, the term
income is EXEMPT from ―corporation‖ includes joint stock companies,
tax. joint ventures and consortia.

General rule: Taxable as corporations

Distributive Share of the PARTNER
Forms part of gross Not part of the partner‘s Exception: Joint ventures or consortium
income and forms part individual income tax formed for the purpose of undertaking a
of the individuals return. construction project or engaging in petroleum,
partner ITR to compute
coal, geothermal and other energy operation
for tax liability
Withholding Tax on Distributive Share of the
pursuant to an operating consortium agreement
PARTNER under service contract with the government -
EXEMPT from income tax.

108 Center for Legal Education and Research


Summary of Tax Rates on Passive Income and Sale of Capital Assets as
amended by TRAIN LAW
Transaction
Sale of Land and/or
Buildings held as a Capital
Asset
Sale of shares of stocks
not listed thru local stock
exchange
Interest Income on
currency bank deposit, or
other monetary benefits
from deposit substitute,
trust fund, and similar
arrangements
Other royalties, prizes and
winnings above Php
10,000
Cash or Property
Dividends from a domestic
corporation
Interest on Foreign
Currency Deposit
Purple Notes
Taxation Law
Domestic Corporations Resident Foreign Non Resident Foreign
Corporations Corporations
Tax on Capital Gains
6% of Gross Selling Price Subject to Regular 30% of Gross Income
or FMV whichever is Corporate Income Tax
higher (FMV – higher of (RCIT)/ Minimum
Zonal Value by BIR or Corpoate Income Tax
Assessed Value or LGU (MCIT) or Gross
Assessor) Income Tax whichever
is applicable
15% of Net Capital Gains 5%- First Php100,000 net capital gain
–Domestic Corporations
10% - In excess of Php 100,000
Tax on Passive Investment Income
20% 20% 30%
20% 20% 30%
20% 20% 20%
15% 7.5% Exempt
109
Bar Operations C ommissions 109
 Purple Notes
Taxation Law
7. Filing of Returns and Payment of
Income Tax
a) Definition of a Tax Return and
Information Return
A Tax Return is the tax form used to report
income and file income taxes with Bureau of
Internal Revenue.
It is a sworn written instrument in which the
taxpayer discloses the nature and extent of his
liability by formally making a report of his
income and allowable deductions for the taxable
year in the prescribed form.(Teodoro & De Leon)
An Information Return is an instrument
submitted by every withholding agent to the
Commissioner containing the list of payees
(employees) and income payments (total
amount of compensation of each), amount of
taxes withheld from each payee(employee) and
such other pertinent information as may be
deemed necessary. (Sec. 58[C]& Sec 83[B] of
NIRC)
General requirements of Income Tax
Returns (ITR)
ITR must be:
 Verified and under oath;
 Filed by the taxpayer or his authorized
agent/representative;
 In triplicate and in the form prescribed by
the BIR; and
 Covers a period not exceeding one year
except when specifically authorized by law.
a. Individual return
Individual Tax Returns - Maximum of four (4)
pages in paper form or electronic form, and shall
only contain the following information:
(A) Personal profile and information;
(B) Total gross sales, receipts or income from
compensation for services rendered, conduct of
trade or business or the exercise of a profession,
110 Center for Legal Education and Research
except income subject to final tax 2018
as provided
under this Code;
(C) Allowable deductions under this Code;
(D) Taxable income as defined in Section 31 of
this Code; and
(E) Income tax due and payable.
(i) Who are required to file; exceptions
Who are required:
a. Every Filipino citizen residing(CR) in the
Philippines;
b. Every Filipino citizen residing
outside(CRO) the Philippines on his
income from sources within the Philippines;
c. Every alien residing (AR) in the
Philippines on income derived from sources
within the Philippines; and
d. Every non-resident alien (NA) engaged in
trade or business or in the exercise of
profession in the Philippines. (Sec. 51 [A][1],
NIRC of 1997)
Who are not required:
1. Individuals whose gross compensation
income does not exceed Php 250,000.00
(Sec. 9 RR 8-2018);
2. Individuals with respect to pure
compensation income derived from sources
within the Philippines, the income tax on
which has been correctly withheld (tax due
equals tax withheld).
3. Individuals whose sole income has been
subjected to final withholding tax.
4. Minimum wage earner or individuals who
are exempt from income tax.
Questions and Answers on Filing Returns
Mr. C is employed as a Chief Executive Officer of
MNO Company, receiving an annual
compensation of ₱10,000,000.00, while Mr. S is
a security guard in the same company earning
an annual compensation of ₱200,000.00. Both of
them derive their income solely from their
employment with MNO Company.
Q1: At the end of the year, is Mr. C personally
required to file an annual income tax
return?
 Purple Notes
Taxation Law
A1:No. Mr. C is not personally required to file
his annual income tax return because Under the substituted tax filing system, the
individua taxpayers receiving pure employer‘s annual information return (BIR Form
compensation income, regardless of No. 1604-CF) may be considered as the
amount, from only one employer in the ―substitute‖ ITR of its employees.
Philippines for the calendar year, income
taxes of which has been correctly withheld Distinguished from Non-Filing (RMC 1-
by the said employer shall not be required 2003)
to file an annual income tax return.
The certificate of withholding (BIR Form
Substituted Filing Non-Filing
No. 2316) filed by the respective
employers, duly stamped 'received' by the An individual taxpayer Applicable to certain
BIR, shall be tantamount to the substituted although required types of individual
filing of income tax returns by said under the law taxpayers who are not
employees
to file his income tax required under the law
Q2: How about Mr. S? Is he personally required return, will no longer to file an income tax
to file an annual income tax return? have to personally file return. An example is
A2: No. Mr. S is not personally required to file his own income an employee
his annual income tax return because he is tax return but instead whose pure
exempted from income tax for the reason the employer‘s annual compensation income
that his annual gross income does not information return does not exceed
exceed P250,000. filed will be P60,000, and has only
considered as the one
(ii) Substituted filing ―substitute‖ income employer for the
tax return of the taxable year and
An individual may be qualified for substituted employee inasmuch as whose tax withheld is
filing if the following conditions are met:
the equivalent to his tax
 The employee receives purely compensation information in the due.
income (regardless of amount) during the employer‘s return is
taxable year; exactly the same
 The employee receives the income only from information contained
one employer in the Philippines during the in
taxable year; the employee‘s return.
 The amount of tax due from the employee
at the end of the year equals the amount of
tax withheld by the employer; b. Corporate Returns
 The employee's spouse also complies with
all three (3) conditions stated above; Corporate ITR: The ITR shall consist of a
 The employer files the annual information maximum of four (4) pages in paper form or
return (BIR Form No. 1604-CF) electronic form, be filed by the president, vice
president or other principal officer, shall be
sworn to by such officer and by the treasurer or
Note: Married individuals, who do not derive
assistant treasurer, and shall only contain the
income purely from compensation, shall file a
following information:
return for the taxable year to include the income
(1) Corporate profile and information; (2) Gross
of both spouses, but where it is impracticable for
sales, receipts or income from services
the spouses to file one return, each spouse may
rendered, or conduct of trade or business,
file a separate ITR.
except income subject to final tax as provided
under this Code; (3) Allowable deductions under
Once qualified, employees are no longer this Code; (4) Taxable income as defined in
required to file an ITR.

111
Bar Operations C ommissions 111
 Purple Notes
Taxation Law
Section 31 of this Code; and, (5) Income tax In case the corporation is entitled 2018
to a tax
due and payable. creditor refund of the excess estimated quarterly
Who are required: income taxes paid, the excess amount shown on
its final adjustment return may be carried over
 Domestic Corporations (including taxable and credited against the estimated quarterly
partnerships); and income tax liabilities for the taxable quarters of
 Resident Foreign Corporations. the succeeding taxable years(Sec.76, NIRC).

Who shall file the return Options when quarterly tax payments
(quarterly/annual) of the Corporation? made during the year is not equal to the
total tax due:
The return shall be filed by the:
 President; There is still a There were
 Vice-president or balance excess payments
 Other principal officer, and shall be Option 1: Carry
sworn to by such officer and by the over the excess to
treasurer or assistant treasurer be credited against
the to taxable
i. Quarterly income Tax quarters of the
Pay the balance still
succeeding taxable
due
Every corporation subject to the tax herein years
imposed, except foreign corporations not Option2: Be
engaged in trade or business in the Philippines credited or
(Sec.75, NIRC) refunded with the
excess
Manner and Procedure
Irrevocability Rule
In duplicate, a true and accurate quarterly
income tax return and final or adjustment return Once the option to carry-over and apply the
in accordance with the provisions of Chapter XII excess quarterly income tax against income tax
of this Title. due for the taxable quarters of the succeeding
taxable years has been made, such option shall
ii. Final Adjustment Return be considered irrevocable for that taxable period
and no application for cash refund or issuance of
Every corporation liable to tax under Section 27 a tax credit certificate shall be allowed therefor.
shall file a final adjustment return covering the
total taxable income for the preceding calendar When does it apply?
or fiscal year.
1. There was an excess credit;
Manner and Procedure 2. The taxpayer opted to carry over the excess
credit; or
If the sum of the quarterly tax payments made 3. The taxpayer failed to signify his intention to
during the said taxable year is not equal to the refund said excess credit.
total tax due on the entire taxable income of
that year, the corporation shall either: What is the effect of such option?

(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess
amount paid, as the case may be.
Taxpayer shall be barred from applying the
excess credit for refund.
(This topic shall be lengthily discussed in Tax
Remedies)

112 Center for Legal Education and Research

 Purple Notes
iii.) When and where to file Income Tax
Return of Individuals and Corporations
Individuals:
On or before the fifteenth (15th) day of April of
each year covering income for the preceding
taxable year. (Sec. 51 [C] of NIRC)
Those deriving mixed income or purely
business/professional income, or other income
must file his quarterly ITR (BIR Form 1701Q)
and Annual ITR (BIR Form 1701) as follows:
Period Due Date for Filing Return
st On or before May 15 of the
1 Qtr
current taxable year (CTR)
On or before August 15 of
2ndQtr
CTR
On or before November 15 of
3rdQtr
CTR
On or before the fifteenth
(15th) day of April of each year
Annual ITR
covering income for the
preceding taxable year.
(Sec.74, NIRC)
Changes made in the TRAIN Law:
The due date for the filing was moved to May 15
from the previous April 15 deadline
Corporations:
Quarterly Income Tax Return (BIR Form
1702Q)
The corporate quarterly ITR shall be filed within
sixty (60) days following the close of each of
the first three (3) quarters of the taxable
year(Sec.75, NIRC).
Final Adjusted Return (BIR Form 1702)
The final adjusted return (annual ITR) on the
other hand shall be filed on or before the 15th
day of the 4th month following close of the
taxpayer's taxable year(Sec.76,NIRC)
Note: f due date falls on a Saturday, Sunday or
a holiday, the act of filing and payment of the
tax due shall be done on the next business day.
(RMC 65-2016)
113
Taxation Law
Granting of extension of filing returns
The Commissioner may, in meritorious cases,
grant a reasonable extension of time for filing
returns of income (or final and adjustment
returns in case of corporations), subject to the
provisions of Section 56 of this Code. (Sec. 53 of
NIRC)
Installment Payment of Tax Due
When the tax due is in excess of Two thousand
pesos (P2,000.00), the individual may elect to
pay the tax in two (2) equal installments, in
which case, the first installment shall be paid at
the time the annual income tax return is filed
and the second installment paid on or before
October 15 following the close of the calendar
year.
If any installment is not paid on or before the
date fixed for its payment, the whole amount of
the unpaid tax becomes due and payable,
together with the delinquency penalties to be
reckoned on the original date when the tax is
required to be paid. (Section 11, RR 8-2018)
Where to File and Pay Income Tax Returns
No payment returns - Revenue District Office
(RDO) where the taxpayer payer is registered.
With payment returns – Authorized Agent
Bank (AAB) of the RDO where the taxpayer is
registered.
Pay as you File
The payment of taxes is simultaneous with the
filing of returns(pay as you file) except in cases
of those who are required thru Electronic Filing
and Payment System (eFPS).
For Large Taxpayers:
All large taxpayers are required to file their
returns using Electronic Filing and Payment
System (eFPS).
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Taxation Law
Who are Large Tax Payers
For the purpose of this Section, 'large
taxpayer' means a taxpayer who satisfies any
of the following criteria:
a) Value-Added Tax (VAT) - Business
establishment with VAT paid or payable of at
least P200,000 for any quarter of the
preceding taxable year;
b) Excise tax - Business establishment with
excise tax paid or payable of at least
P1,000,000 for the preceding taxable year;
c) Income Tax - Business establishment with
annual income tax paid or payable of at
least P1,000,000 for the preceding taxable
year; and
d) Withholding tax - Business establishment
with withholding tax payment or remittance
of at least P1,000,000 for the
e) preceding taxable year.
f) Percentage tax– Any taxpayer with
percentage taxes paid or payable of at least
P 200,000 per quarter for the preceding
year .
g) Documentary Stamp Tax – Any taxpayer
with aggregate annual documentary stamp
taxes of at least Php 1 million. (Sec. 5, R.R.17
-2010)
Penalties for Non -Filing of Returns
Should the taxpayer fail to file and/or pay on
time the penalties that will be imposed on top of
the basic tax due will be as follows:
 25% surcharge on the basic tax due
 12% interest per annum on basic tax due
(R.R. 21-2018)
 Compromise penalty for failure to file
(Revenue Memorandum Order 7-2015)
Penalties on amended returns
Thus, in an amendment of a return where an
additional tax is due per amended return, 25%
penalty and 12% interest shall be imposed
based on the additional tax to be paid
iv. Return of Corporation Contemplating
Dissolution or Reorganization. (Sec. 52 [C]
of NIRC)
Applicable to whom:
114 Center for Legal Education and Research
1. Corporation Contemplating 2018
Dissolution
(Whole or in part or Reorganization;
including
2. A corporation which has been notified of
possible involuntary dissolution by the
Securities and Exchange Commission
What should be filed?
1. Render a correct return (short period
income tax return) to the Commissioner that
is
2. Verified under oath
3. Setting forth the terms of such resolution or
plan and such other information as the
Secretary of Finance, upon recommendation
of the commissioner, shall, by rules and
regulations, prescribe.
When to file?
Within 30 days after the adoption by the
corporation of a resolution or plan for its
dissolution, or for the liquidation of the whole or
any part of its capital stock:
What must be secured prior to the
issuance of Certificate of Dissolution or
Reorganization given by the Securities
Exchange Commission (SEC)?
Secure a certificate of tax clearance from
the Bureau of Internal Revenue which certificate
shall be submitted to the Securities and
Exchange Commission
c. Return on Capital Gains Realized from
sale of shares of stock and real estate
Capital Gains Tax -Realized from Sale of
Shares of Stock not Traded in the Local
Stock Exchange (Sec. 51[C][2] and Sec. 52
[D] of NIRC)
Applicable to whom:
Individual/Corporation deriving capital gains
from the sale or exchange of shares of stock not
traded thru a local stock exchange
 Purple Notes
What should be filed:
BIR Form 1707 -Capital Gains Tax Return for
Onerous Transfer of Shares of Stocks Not
Traded Through the Local Stock Exchange
BIR Form 1707A -Annual Capital Gains Tax
Return for Onerous Transfer of Shares of Stock
Not Traded Through the Local Stock Exchange
When due to be filed and paid?
Individual:
 Within thirty (30) days after each
transaction (BIR FOR and
 a final consolidated return on or before
April 15of each year covering all stock
transactions of the preceding taxable
year(BIR Form 1707A);
Corporation:
 Within thirty (30) days after each
transactions and a
 Final consolidated return of all transactions
during the taxable year on or before the
fifteenth (15th) day of the fourth (4th)
month following the close of the taxable
year.
Capital Gains Tax Return for Onerous
Transfer of Real Property Classified as
Capital Asset (both Taxable and Exempt) –
(Sec.51[C])
Applicable to whom:
This return is filed by all persons (natural or
juridical) whether resident or non-
resident, including Estates and Trusts, who
sells, exchanges, or disposes of a real property
located in the Philippines classified as capital
asset as defined under Sec. 39 (A)(1) of RA
8424 for the purpose of securing a Tax
Clearance Certificate to effect transfer of
ownership (title) of the property from the seller
to the buyer.
What should be filed:
BIR Form 1706 - Capital Gains Tax Return for
Onerous Transfer of Real Property Classified as
Capital Asset
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Taxation Law
Who are not required:
However, filing of the return is no longer
required when the real property transaction
involves the following:
- it is not classified as a capital asset
- not located in the Philippines
- disposition is gratuitous
- disposition is pursuant to the Comprehensive
Agrarian Reform
When is it due to be filed and paid
- Filed within thirty (30) days following each
sale, exchange or disposition of real property
- In case of installment sale, the return shall
be filed within thirty (30) days following the
receipt of the 1st downpayment and within thirty
(30) days following each subsequent installment
payment
- One return is filed for every transfer
document regardless of the number of each
property sold, exchanged or disposed of.
8. Withholding of Taxes
a. Concept of withholding taxes
 The concept of a withholding tax on income
obviously and necessarily implies that the
amount of the tax withheld comes from the
income earned by the taxpayer. Since the
amount of the tax withheld constitutes
income earned by the taxpayer, then that
amount manifestly forms part the taxpayer‘s
gross receipt. Because the amount withheld
belongs to the taxpayer, he can transfer its
ownership to the government in payment of
his tax liability. (China Banking Corporation vs.
CA, G.R. No. 146749, June 10, 2003).
 The incidence and burden of taxation fall on
the same entity, the statutory taxpayer.
The burden of taxation is not shifted to the
withholding agent who merely collects, by
withholding, the tax due from income
payments to entities arising from certain
transactions and remits the same to the
government. (Asia International Auctioneers,
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 Purple Notes
Taxation Law
Inc. (AIA) vs. Commissioner of Internal Revenue
(CIR), G.R. No. 179115, September 26, 2012)
 Withholding tax is a method of collecting
income tax in advance. "In the operation of
the withholding tax system, the payee is
the taxpayer, the person on whom the tax
is imposed, while the payor, a separate
entity, acts no more than an agent of the
government for the collection of the tax in
order to ensure its payment. (LG Electronics
Philippines, Inc. vs. CIR, December 3, 2014
penned by J. Leonen)
The duty to withhold is different from the duty
to pay income tax. The revenue officers
generally disallow the expenses claimed as
deduction from gross income, if no withholding
of tax as required by law or the regulations was
withheld and remitted to the BIR within the
prescribed dates. (MAMALATEO, Philippine Income
Taxation, 2010, p.380)
Purpose: The withholding tax system was
devised for three primary reasons:
 To provide the taxpayer a convenient
manner to meet his probable income tax
liability;
 To ensure the collection of income tax
which can otherwise be lost or substantially
reduced through failure to file the
corresponding returns; and
 To improve the government‘s cash flow.
(LG Electronics Philippines, Inc. vs. CIR, December 3,
2014 penned by J. Leonen)
Indirect taxes v. Withholding Tax
In indirect taxes, the incidence of taxation falls
on one person but the burden thereof can be
shifted or passed on to another person, such as
when the tax is imposed upon goods before
reaching the consumer who ultimately pays for
it.
On the other hand, in case of withholding taxes,
the incidence and burden of taxation fall on the
same entity, the statutory taxpayer. The
burden of taxation is not shifted to the
withholding agent who merely collects, by
withholding, the tax due from income
payments to entities arising from certain
116 Center for Legal Education and Research
2018to the
transactions and remits the same
government.
Due to this difference, the deficiency VAT and
excise tax cannot be "deemed" as withholding
taxes merely because they constitute indirect
taxes. (LG Electronics Philippines, Inc. vs. CIR,
December 3, 2014 penned by J. Leonen).
a) Kinds of withholding taxes
1) Withholding tax at source (Sec. 34K, 57-
59, NIRC);
i) Final withholding tax
ii) Creditable withholding tax
2) Withholding tax on employer‘s
compensation or wages (Sec. 78-83,
NIRC);
3) Withholding of value-added tax (Sec
114c, NIRC); and
4) Withholding of percentage tax (Sec.
116-128, NIRC).
Parties to Withholding
Withholding Agent – the buyer/payor who is
required to withhold a certain portion of its
payment to its vendor/supplier/payee which
shall represent the income tax paid on the
vendor/supplier/payee‘s behalf
Payee – persons withheld a portion of its
income which represent his payment of taxes
due paid by the withholding agent on payee‘s
behalf.
Requirement for Deductibility
Any income payment which is otherwise
deductible under the Code shall be allowed as a
deduction from the payor's gross income only if
it is shown that the income tax required to be
withheld has been paid to the Bureau in
accordance with Secs. 57 and 58 of the Code.
A deduction will also be allowed in the following
cases where no withholding of tax was made:
a. The payee reported the income and the
withholding agent/taxpayer pays the tax,
including the interest incident to the failure
 Purple Notes
to withhold the tax, and surcharges, if
applicable, at the time of the original audit
and investigation;
b. The recipient/payee failed to report the
income on the due date thereof, but the
withholding agent/taxpayer pays the tax,
including the interest incident to the failure
to withhold the tax and surcharges, if
applicable, at the time of the original audit
and investigation;
c. The withholding agent erroneously
underwithheld the tax but pays the
difference between the correct amount and
the amount of tax withheld, including the
interest,incident to such error, and
surcharges, if applicable, at the time of the
original audit and investigation.
Effect of Failure of a Withholding Agent to
Collect and Remit Tax
Any person required to withhold, account for,
and remit any tax imposed by the Tax Code or
who willfully fails to withhold such tax, or
account for and remit such tax, or aids or abets
in any manner to evade any such tax or the
payment thereof, shall, in addition to interest,
surcharges and compromise penalties, be liable
upon conviction to a penalty equal to the total
amount of the tax not withheld, or not
accounted for and remitted. (Sec. 251, NIRC)
Time of Withholding
The obligation of the payor to deduct and
withhold the tax arises at the time an income
payment is:
 Paid, or
 Payable, or
 Accrued or recorded as an expense or asset,
whichever is applicable, in the payor‘s books
(Section 2.57.4, RR No. 2-98, as amended by Section
4, RR No. 12-2001)
Nature of liability of withholding agent
 The obligation to withhold is compulsory, as
it makes such withholding agent personally
liable for payment of the tax
117
Taxation Law
 The withholding agent is the agent both of
the government and of the taxpayer, and
that the withholding agent is not an ordinary
government agent
 The liability of the withholding agent is
direct and independent from the liability of
the income recipient
The law sets no condition for the personal
liability of the withholding agent to attach. The
reason is to compel the withholding agent to
withhold the tax under all circumstances. In
effect, the responsibility for the collection of the
tax as well as the payment thereof is
concentrated upon the person over whom the
Government has jurisdiction. (Commissioner vs.
Procter & Gamble PMC and CTA, G.R. No. 66838, Dec.
2, 1991)
Under the withholding system, however, the
agent-payor becomes a payee by fiction of law.
His (agent) liability is direct and independent
from the taxpayer, because the income tax is
still imposed on and due from the latter. The
agent is not liable for the tax as no wealth
flowed into him — he earned no income. The
Tax Code only makes the agent personally liable
for the tax arising from the breach of its legal
duty to withhold as distinguished from its duty
to pay tax since: "the government's cause of
action against the withholding agent is not for
the collection of income tax, but for the
enforcement of the withholding provision of
Section 53 of the Tax Code, compliance with
which is imposed on the withholding agent and
not upon the taxpayer."(Rizal Commercial Banking
Corporation vs. Commissioner of Internal
Revenue,G.R. No. 170257, September 7, 2011)
b. Withholding of Final Tax of Certain
Income
The amount of income tax withheld by the
withholding agent is constituted as a full and
final payment of the income tax due from
the payee on the said income.
The liability for payment of the tax rests
primarily on the payor as a withholding agent. In
case of the withholding agent's failure to
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 Purple Notes
Taxation Law
withhold the tax or in case of under-withholding,
the deficiency tax shall be collected from him
The finality of the withholding tax is limited only
to the payee‘s income tax liability on the
particular income. It does not extend to the
payee‘s other tax liability on said income, such
as when the said income is further subject to a
percentage tax, such as gross receipts tax in the
case of a bank. (Sec. 2.57, R.R. No. 2-98)
of actual payment by payee-refund2018
claimant to
the government itself and are declared under
perjury.
Thus, this Court sees no reason why it should
not rule the same way. (Philippine Airlines, Inc. v.
Commissioner of Internal Revenue, G.R. Nos. 206079-
80, January 17, 2018, penned by J.Leonen)
c. Withholding of Creditable Tax at Source

Income subject to final withholding tax: Taxes withheld on certain income payments are
1. Capital gains on sale of real property held as intended to equal or at least approximate
capital asset; the tax due from the payee on said income.
2. Capital gains on sale of shares of stocks not
listed and traded through the local stock The income recipient is still required to file
exchange; an income tax return, as prescribed in Sec.
3. Tax on Income of Non Resident Alien Not 51 and 52, to report the income and/or pay the
Engaged in Trade or Business difference between the tax withheld and the tax
4. Tax on Non Resident Foreign Corporation due on the income. (Sec. 2.57, R.R. No. 2-98).
5. Tax on Passive Investment income:
a. Dividends Income subject to creditable withholding
b. Royalties tax
c. Rentals
d. Interest General Rule: All income subject to regular
e. Prizes and Winnings income tax rates is subject to creditable
withholding tax.
Income subjected need not be reported in
Income Tax Return as final withholding tax Final Withholding Tax (FWT) and
being a full and final payment of the tax on the Creditable Withholding Tax (CWT)
income. distinguished

Claiming Refund for Final Tax Withheld Creditable Final Withholding

Withholding Tax Tax
Payee is required to Tax withheld is full and
This Court notes that the case of Commissioner
declare the income at final payment of income
of Internal Revenue v. Philippine National Bank gross in the income tax tax due. Thus payee is
involves a refund of creditable withholding tax return. no longer needed to
and not of final withholding tax. declare taxes withheld
for income tax
However, its ruling that proof of remittance is purposes`
not necessary to claim a tax refund applies to Tax withheld from the The tax withheld can no
final withholding taxes. The same principles payee can be creditable longer be deducted
used to rationalize the ruling apply to final against the income tax against income tax due
withholding taxes: (i) the payor-withholding due
The liability of payment The liability rest upon
agent is responsible for the withholding and
still rest upon the the withholding agent
remitting of the income taxes; (ii) the payee- taxpayer
refund claimant has no control over the Withholding agent shall Withholding agent shall
remittance of the taxes withheld from its issue a BIR Form 2307 issue a BIR Form 2306
income; (iii) the Certificates of Final Tax to its payee as evidence to its payee as evidence
Withheld at Source issued by the withholding of its payment of of its payment of
agents of the government are prima facie proof withholding tax withholding tax

118 Center for Legal Education and Research

 Purple Notes
Taxation Law
b. Tax base of the income to be withheld:
 Note, however, that payees of income The withholding tax shall be based on the
subject to FWT are required to secure a income payment which shall be net of VAT.
copy of the Certificate of Final Income Tax
Withheld (BIR Form No. 2306). Otherwise, c. Income payments subject to expanded
the income subjected to final tax may be withholding tax
deemed subject still to normal income tax, (See table of income payments subject to
as if it was not yet subjected to the FWT. expanded withholding tax at the end of this
(Philippine Bank of Communications vs. chapter)
Commissioner of Internal Revenue, CTA Case
No.6177, June 30, 2008) d. Effect of withholding tax on the amount
to be paid to vendor/supplier
 FWT is imposed on the sale of capital The amount to be withheld being part of the
assets. CWT is imposed on the sale of gross contract price of the transaction hence
ordinary assets. (Chamber of Real Estate and the amount to be received by shall be
Builder‘s Assocs., Inc vs. Romulo, G.R. No. reduced.
160756, March 9, 2010)
For example:
Types of creditable withholding tax
AAA Company leases his offices from BBB Realty
i. Expanded withholding tax on certain
Corp., the rental contract provides that the price
income payments made by private
of rent per month shall be 112,000 gross of
persons to resident taxpayers
VAT. Lease contract started only in December
ii. Withholding tax on compensation
2018
income for services done in the
Philippines
How much would be the amount withheld?
Income payment on Rent, net of Php 100,000*
i. Expanded withholding tax on certain vat
income payments made by private persons Expanded withholding tax rate 5%
to resident taxpayers for rent (Php 112,000 x
12%/112%)
Under the existing withholding tax system, the Expanded Withholding Tax Php 5,000
withholding agent retains a portion of the Due
amount received by the income earner. In turn,
the said amount is credited to the total income
tax payable in transactions covered by the EWT.
(CIR vs. La Flor Dela Isabela Inc,G.R. No. 211289,
January 14,2019)
How much would be the amount due to
a. Essential Requirements BBB Realty?
Gross contract price Php 112,000
1. An expense is paid or payable by the
Less: Expanded Withholding Tax (5,000)
taxpayer, which is income to the recipient
thereof subject to income tax;
2. The income is fixed or determinable at the Amount due to be paid to Php 107,000
time of payment; BBB Realty
3. The income is one of the income payments
listed in the regulations that is subject to
withholding tax; e. Filing and payment of Expanded
4. The income recipient is a resident of the Withholding Tax
Philippines liable to income tax; and
5. The pay or-withholding agent is also a Applicable to whom:
resident of the Philippines

119
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 Purple Notes
Taxation Law
All taxpayers who has a transaction subject to
withholding
What must be filed and paid when:
BIR Form 0619E – be filed and the tax
remitted on or before the 10th day following the
month in which withholding was made. This
shall be filed for the first two (2) months of each
calendar quarter.
BIR Form 1601EQ - This quarterly withholding
tax remittance return shall be filed and the tax
paid/remitted not later than the last day of the
month following the close of the quarter during
which withholding was made.
Change in TRAIN LAW
 Section 18 of R.A. 10963 or TRAIN Law
amended Section 58 of the NIRC as to the
deadline for filing and payment from
monthly to quarterly.
 However, in a tax advisory dated January
31,2018 and signed by BIR Commissioner
Caesar Dulay,pursuant to his power as
Commissioner under Section 6 which was to
prescribe additional requirements for tax
administration and enforcement, he obliged
taxpayers to revert back to monthly filing
citing imperious necessity as his reason for
such change.
What happens if a taxpayer overpays in
his withholding tax?
Under R.M.C 27-2018, which circularizes the
new tax form BIR Form 160EQ it now allows
taxpayers to carry over the excess or any over-
remitted expanded withholding taxes to the next
quarter, at least within the same calendar year.
Only the over-remittance in the first to third
quarters can be carried forward to the
succeeding quarter.
In the event of over-remittance in the fourth or
last quarter, the taxpayer‘s option would be to
file for a refund claim.
Duty of the withholding agent to present
Certificate of Withholding Tax to payee
120 Center for Legal Education and Research
Every payor required to deduct and 2018withhold
taxes under these regulations shall:
 Furnish each payee, whether individual or
corporate, with a withholding tax statement,
using the prescribed form (BIR Form 2307)
showing the income payments made and
the amount of taxes withheld therefrom,
 When due: for every month of the quarter
within twenty (20) days following the
close of the taxable quarter employed by the
payee in filing his/its quarterly income tax
return or
 Upon request of the payee, however, the
payor must furnish such statement to the
payee simultaneously with the income
payment.
 This BIR Form 2307 is conclusive
evidence of withholding tax and shall be
duly attached to the payee‘s income tax
return proper crediting against income
tax due. 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(CIR vs. Philippine National Bank,G.R.
No. 180290, September 29, 2014,penned by
J.Leonen).
 The certificate of creditable tax withheld
at source is the competent proof to
establish the fact that taxes are
withheld. It is not necessary for the
person who executed and prepared the
certificate of creditable tax withheld at
source to be presented and to testify
personally to prove the authenticity of
the certificates(Id.)
 The probative value of BIR Form 2307,
which is basically a statement showing
the amount paid for the subject
transaction and the amount of tax
withheld therefrom, is to establish only
the fact of withholding of the claimed
creditable withholding tax (Philippine
National Bank vs. CIR, G.R. 206019, March
18,2015).
 Purple Notes
Taxation Law
Effect of Failure to furnish BIR Form 2307 Less: Creditable Withholding (5,000)
to payee Tax – evidenced by a BIR
Failure to furnish the same (BIR Form 2307) Form 2307
shall be a ground for mandatory audit of payor‘s (Amount withheld by AAA)
Tax Due and Payable/ Php (1,400)
income tax liability (including withholding tax)
(Excess Credits or
upon verified complaint of the payee. (R.R. 3- Overpayment)
2002)

f. Tax credit on amount withheld
Income upon which any creditable tax is
required to be withheld at source shall be
included in the return of its recipient.
The excess of the withheld tax over the tax due
on his return shall be refunded to him subject to
the authority of the Commissioner to refund
taxes under Sec. 204 of the NIRC.
If the income tax collected at source is less than
the tax due on his return, the difference shall be
paid in accordance with the provisions of Sec. 56
of the Code. (Sec. 2.58.1, R.R. 2-98)
To scenarios with creditable withholding
tax either:
1. Refund the excess credit (Credits > Tax
Due); or
2. Offset the amount to reduce the tax due
(Credits <Tax Due)
 The amount of Php 100,000 was used for
gross receipts as amounts reported in the
income tax return should be net of VAT
 As can be observed, the amount withheld
from BBB Realty by AAA Company was used
to reduce tax due and therefore resulting to
an excess credits in the process which
illustrates the 1st scenario. This excess credit
can either be refunded or carried over the
next taxable year
Scenario 2
Supposing BBB Realty Corp‘s only lease income
for 2018 comes from AAA Company he would
report the income and compute for the income
tax due and payable as follows. (Assume BBB
Realty has cost of services of Php 30,000 uses
Optional Standard Deduction)

To illustrate: Gross receipts, net of VAT Php 100,000

Less: Cost of Service (30,000)
Scenario 1 Gross Income 70,000
Less: Optional Standard (28,000)
Supposing BBB Realty Corp‘s only lease income Deduction -40% of Gross
for 2018 comes from AAA Company he would Income
report the income and compute for the income Taxable Income 42,000
tax due and payable as follows. (Assume BBB RCIT Tax Rate 30%
Realty incurred cost of services of Php 80,000 Tax Due 12,600
uses Optional Standard Deduction) Less: Creditable Withholding (5,000)
Tax – evidenced by a BIR
Gross receipts, net of VAT Php 100,000 Form 2307
Less: Cost of Service (80,000) (Amount withheld by AAA)
Gross Income 20,000 Tax Due and Payable Php 7,600
Less: Optional Standard (8,000)
Deduction -40% of Gross  As can be observed the amount of Php
Income
5,000 that was withheld from BBB Realty
Taxable Income 12,000
RCIT Tax Rate 30% was used to reduced his tax due and
Tax Due 3,600 payable illustrating the 2nd Scenario.

g. Exemption from Withholding of CWT.

The withholding of creditable
121
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 Purple Notes
Taxation Law
withholding tax prescribed in these
Regulations shall not apply to income
payments made to the following:
i. Sales of real property by a corporation
which is registered with and certified by
the Housing and Land Use Regulatory
Board (HLURB) or the Housing and
Urban
Development Coordinating Council
(HUDCC) as engaged in socialized
housing project where the selling price
of the house and lot or only lot does not
exceed the socialized housing price
applicable to the area as prescribed and
certified by the said board/council as
provided under Republic Act No. 7279
and its implementing regulations.
ii. Corporations registered with the Board
of Investments and enjoying exemption
from the income tax provided by
Republic Act No. 7916 and the Omnibus
Investment Code of 1987;
iii. Corporations which are exempt from the
income tax under Sec. 30 of the Tax
Code, as amended, and government-
owned or controlled corporations
exempt from income tax under Section
27(A)(C) of the same Code, to wit: the
Government Service Insurance System
(GSIS), the Social Security System SSS),
the Philippine Health Insurance
Corporation (PHIC); and the Local Water
Districts (LWD). However, the income
payments arising from any activity
which is conducted for profit or income
derived from real or personal property
shall be subject to withholding tax as
prescribed in these regulations;
vi.
iv. General Professional Partnerships;
v. Joint ventures or consortium formed for
the purpose of undertaking construction
projects or engaging in petroleum, coal,
geothermal and other energy operations
pursuant to an operating or consortium
agreement under a service contract with
122 Center for Legal Education and Research
the government. Provided, 2018
however,
joint ventures or consortium formed for
the purpose of undertaking construction
projects shall comply with the following
conditions to be considered as joint
venture not taxable as a corporation:
a. Should involve joining or pooling of
resources by licensed local
contracts; that is, licensed as
general contractor by the Philippine
Contractors Accreditation Board
(PCAB) of the Department of Trade
and Industry (DTI);
b. These local contractors are engaged
in construction business; and
c. The Joint Venture itself must
likewise be duly licensed as such by
the PCAB of the DTI.
Joint ventures involving foreign
contractors may also be treated as a
nontaxable corporation only if the
member foreign contractor is covered by
a special license as contractor by the
PCAB of the DTI; and the construction
project is certified by the appropriate
Tendering Agency (government office)
that the project is a foreign
financed/internationally-funded project
and that international bidding is allowed
under the Bilateral Agreement entered
into by and between the Philippine
Government and the
foreign/international financing institution
pursuant to the implementing rules and
regulations of Republic Act No. 4566
otherwise known as Contractor‘s License
Law.
Individuals who earn ₱250,000.00 and
below from a lone income payor upon
compliance with the following
requirements:
a.The individual has executed a payee‘s
sworn declaration of gross receipts in
b.The sworn declaration has been
submitted to the lone
 Purple Notes
incomepayor/withholding agent on or
before January 15 of each year or
before the initial income payment,
whichever is applicable.(Sec.2.57.5, R.R.
2018)
ii. Withholding Tax on Compensation
The withholding of tax on compensation income
is a method of collecting the income tax at
source upon receipt of the income. It applies to
all employed individuals whether citizens or
aliens, deriving income from compensation for
services rendered in the Philippines. The
employer is constituted as the withholding
agent. (Sec. 2.78, R.R. No. 2-98)
Nature of Withholding Tax on
Compensation
The tax on compensation income is withheld at
source under the creditable withholding tax
system wherein the tax withheld is intended to
equal or at least approximate the tax due of the
payee on the said income. It was designed to
enable (a) the individual taxpayer to meet his or
her income tax liability on compensation earned;
and (b) the government to collect at source the
appropriate taxes on compensation. Taxes
withheld are creditable in nature(ING BANK N.V
vs. CIR, G.R. No. 167679, July 22, 2015,penned by J.
Leonen)
Compensation Income - in general, means all
remuneration for services performed by an
employee for his employer under an employer-
employee relationship, unless specifically
excluded by the Code.
The discussion on what are the included and
excluded compensation can be found in the
topic of Income Tax on Individuals
Taxable base for Withholding Tax on
Compensation Income
Taxable income for compensation earners is the
gross compensation income less non taxable
income/benefits such as but not limited to the
Thirteenth (13th) month pay and other benefits
(subject to limitations, see Section 6(G)(e) of
these Regulations), de minimis benefits, and
123
Taxation Law
employee's share in the SSS, GSIS, PHIC, HDMF
contributions and union dues. Minimum wage
earners shall be exempt from the payment of
income tax based on their statutory minimum
wage rates. The holiday pay, overtime pay,
night shift differential pay and hazard pay
received by such earner are likewise exempt.
(Sec.3, R.R. 8-2018)
Requirement of Withholding
Every employer must withhold from
compensation paid an amount computed in
accordance with these Regulations, whether the
employee is
i. a citizen or
ii. an alien, except non-resident alien not
engaged in trade or business.
Provided, that no withholding of tax shall be
required on the SMW, including holiday pay,
overtime pay, night shift differential and hazard
pay of MWEs in the private/public sectors as
defined in these Regulations. (Sec.7[A], R.R. 8-
2018)
Computation of Withholding Tax on
Compensation Income in General.
The procedures prescribed in R.R. 11-2018 shall
govern the computation of withholding tax on
the taxable compensation income of the
employees. Provided, however, that taxable
fringe benefits received by employees other than
rank and file, as defined in the Labor Code of
the Philippines, as amended, shall be subject to
Fringe Benefits Tax pursuant to Section 33 of
the Tax Code, as amended.(Sec.7[B], R.R. 8-2018)
Use of Exceptional Computations
i. Cumulative Average Method
To whom applicable:
a. Particular employee, the regular
compensation is exempt from withholding
tax but supplementary compensation is paid
during the calendar year;
b. The supplementary compensation is equal to
or more than the regular compensation to
be paid;
Bar Operations C ommissions 123
 Purple Notes
Taxation Law
c. The employee was newly hired and had a
previous employer/s within the calendar
year, other than the present employer doing
this cumulative computation.(Sec.7[B][5][a],
R.R. 8-2018)
ii. Annualized withholding tax method
When applicable:
a. When the employer-employee
relationship is terminated before
end of the calendar year; and
b. When computing for the year-end
adjustment, the employer shall
determine the amount to be
withheld from the compensation on
the last month of employment or in
December of the current calendar
year (Sec.7[B][5][a], R.R. 8-2018)
Exemption from withholding tax on
compensation.
All items under exclusions for taxpayer earning
compensation income.
When are income from bonuses supposed
to be withheld?
The duty to withhold the tax on compensation
arises upon its accrual.Petitioner ING Bank
accrued or recorded the bonuses as deductible
expense in its books. Therefore, its obligation to
withhold the related withholding tax due from
the deductions for accrued bonuses arose at the
time of accrual and not at the time of actual
payment.(ING BANK N.V vs. CIR, G.R. No. 167679,
July 22, 2015,penned by J. Leonen)
Filing and payment of withholding tax on
compensation
Applicable to whom:
Employers
What must be filed and paid?
BIR Form 1601C -Withholding Tax Return for
Compensation
When must it be filed?
124 Center for Legal Education and Research
2018
For the months covering January – November:
On or before the tenth (10th) day of the
following month in which withholding was made.
For the month covering December
On or before January 15 of the following year
d. Fringe Benefit Tax (FBT)
Definition
The fringe benefit tax (FBT) is a final income tax
on the employee that shall be withheld and paid
by the employer on a quarterly or calendar basis
(CIR v. Sec. of Justice and PAGCOR, G.R. No. 177387,
November 9,2016)
Who is liable to pay the tax?
The employee but paid in behalf by the
employer. When the employer pays the FBT in
behalf of the employee, the tax becomes an
additional benefit of the employee. Thus , the
need to gross up the monetary value of the
fringe benefit received in computing the FBT due
thereon.(Sec.2.33 [A] ,R.R. 3-98; DE LEON, NIRC
Annotated, p.239)
Scope of FBT
Covers only taxable fringe benefits of managerial
and supervisory employees. (BANGGAWAN,
Income Taxation (2017),p.362)
Fringe Benefits subject to FBT
These are:
1. Foreign Travel
2. Expense Account
3. Educational assistance to the employee or
his dependents
4. Life or health insurance or other non – life
insurance premiums
5. Housing
6. Interest on loans
7. Membership Fees
8. Vehicle on any kind, except aircraft
9. Household Personnel
10. Holiday or vacation expenses
 Purple Notes
Taxation Law
How Fringe Benefit Tax is computed Employer purchases a (Acquisition x 5%) x
Step 1: Compute for the Gross up residential property on 50%
monetary value of the benefit installment basis for the use
of the employee as place of
residence
Gross monetary value of the benefit is the
monetary value divided by: Employer purchases property Acquisition cost or
 65% for Resident citizen, Resident Alien, and TRANSFERS ownership to FMV whichever is
Non -Resident Citizen, Non Resident Alien- the employee higher.
Engaged Trade and Business If property belongs to (Market value or
 75% -for Non – Resident Alien Not Engaged employer and employee uses zonal value x 5%) x
50%
in Trade or Business
For Resident citizen, Resident Alien, Non -
Resident Citizen, Non Resident Alien-Engaged Motor vehicle
Trade and Business:
Monetary Value of Php 650,000 Benefit Monetary
benefit – Vehicle Value
Divide by 65% Employer purchases the vehicle in 100% of the
Grossed up monetary Php 1,000,000 the name of the employee value
value Employer shoulders a portion of Amount
the amount of the purchase price shouldered by
The grossed up monetary value of the benefit of the vehicle the employer
granted to the employee can be part of the Employer owns and maintains a 50% of the
employer‘s business expense and as a fleet of vehicle for the use of the value
business or use of the employees‘
deductible for determining taxable income
Use of yacht Value based on
provided that the FBT was paid. The employer depreciation
can claim the fringe benefit and the FBT related
to it as a deductible expense. (DIMAAMPAO, p.40)
Foreign Travel
Valuation of benefits: Benefit Value
How was the Value Cost of Airline Ticket 30% of the value
benefit granted
Travel expense of the 100% of the value
Money or directly paid the value is the amount family
by the employer granted
Property other than Fair market value
money and ownership determined by the BIR Step 2 : Multiply the FBT Rate
is transferred to the Commissioner or Provincial
employee /City Assessor whichever is The computed grossed up monetary value shall
higher be the tax base to which the FBT rate will be
Use only Equal to the depreciation applied. The FBT rate shall be:
value of the property
 35% for Resident citizen, Resident Alien,
Computation of Fringe Benefit Tax for Non -Resident Citizen, Non Resident Alien-
certain benefits Engaged Trade and Business
 25% for Non – Resident Alien Not Engaged
Housing Privilege in Trade or Business

Benefit Monetary Value Monetary Value of Php 650,000

Employer leases residential 50% of the monthly benefit – Vehicle
property for the use of the rental Divide by 65%
employee as residence Grossed up monetary Php 1,000,000
value

125
Bar Operations C ommissions 125
 Purple Notes
Taxation Law
Multiply FBT Rate 35%
FBT 350,000
Changes in TRAIN Law
 Increased FBT rate from 32% to 35%
 FBT for employees of area or regional
headquarters of multinational corporations,
ROHQs, OBUs and petroleum service
contractors and sub-contractors is now
taxed similarly to citizens or resident
individuals
Non Taxable Fringe Benefits
1. Those which are authorized and exempted
from income under the NIRC;
2. Contributions of the employer for the benefit
of the employee to retirement, insurance
and benefit plans
3. Benefits given to rank and file employees
whether granted through collective
bargaining agreement
4. De minimis benefits
5. If required by nature or necessary for the
trade or business of the employer
6. If it is for the convenience or advantage of
the employer
7. Benefits received by an employee by virtue
of a CBA and productivity bonus schemes
provided that the total annual monetary
value received from both CBA and
productivity bonus incentive schemes
combined does not exceed Php 10,000.
e. Duties of a withholding agent
(i) Filing of quarterly withholding tax returns;
(ii) Submission to the payee, in respect of his
or its receipts during the calendar quarter
or year, of a written statement showing
the income or other payments made by
the withholding agent during such quarter
or year made and the amount of tax
deducted and withheld therefrom; and
(iii) The filing with the BIR of a reconciliation
statement of quarterly payments and a list
of payments and income payments.
The rules on withholding tax are mandatory and
must be complied with by the withholding agent.
A taxpayer cannot be compelled to answer for
the non – performance by the withholding agent
126 Center for Legal Education and Research
2018
of its legal duty to withhold unless there is
collusion or bad faith. Further, the taxpayer
could not be deemed to have evaded taxes had
the withholding agent performed its duty (Far
East Bank and Trust Company vs. Court of Appeals,
G.R. 129130, December 9, 2006).
PART II. NATIONAL TAXATION
(National Internal Revenue Code of 1997,
as amended. by R.A. No. 10963 or the Tax
Reform for Acceleration and Inclusion
―TRAIN‖ Law)
Preliminaries
Transfer Tax
Transfer taxes - taxes imposed upon the
privilege of passing ownership of the property
without any valuable consideration.
Kinds of Transfer taxes:
1. Estate Tax – Tax on the gratuitous transfer
upon the death of the decedent.
2. Donor‘s Tax – Tax on the gratuitous
transfer during the lifetime of the
donor.
Theories regarding the purpose of transfer
taxes
1. Benefit-Received Theory- the tax is in
return for the protection and services
rendered by the State in the accumulation of
properties transferred gratuitously, resulting
to benefits received by the estate and the
recipient (heirs or donee).
2. Equitable Recoupment Theory- the State
imposes transfer taxes to counter- act tax
evasion or to reasonably recover the current
and future anticipated reduction of
government‘s income tax collection.
3. Ability-to-Pay Theory- the tax is based on
the act that the receipt of inheritance and
gifts creates an ability to pay and thus
contribute to government income.
4. Redistribution-of-Wealth Theory- the
properties given for free contributes to the
unequal distribution of wealth and earnings
 Purple Notes
because the recipient (heir or donee) has
not actually worked for it. Thus, the
imposition of transfer taxes helps the
equitable distribution of wealth to attain
social progress and stability.
5. State- Partnership Theory- the tax is in
the share of the State as a passive and
silent partner in the accumulation of
property. (VALENCIA & ROXAS, Transfer Taxes
and Basic Succession (2016), p. 42-43)
C. Estate Tax
(as amended by TRAIN Law and
implemented thru RR 12-2018)
1. Basic Principles, Concept and
Definition
Definition
An excise tax on the right of transmitting
property at the time of death and on the
privilege that a person is given in controlling to a
certain extent the disposition of his property to
take effect upon death.
Note: It is a tax imposed on the right to
transfer property by death. Thus, an estate tax
is levied on decedent‘s estate and not on the
heir receiving the property. (Black‘s Law
Dictionary, 6th ed. p. 550)
Nature of estate tax
Estate tax is:
1.A transfer tax imposed upon the gratuitous
disposition of private property; and
2.A privilege or excise tax, not a property tax
because their imposition does not rest upon
general ownership but rather, they are imposed
on the act of passing ownership of property(
DOMONDON, Taxation)
When does estate tax accrue?
It accrues upon the death of the decedent. 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. (R.R. No. 12-2018, Sec, 3)
127
Taxation Law
Note: The accrual of the tax is distinct from the
obligation to pay the same, which shall be paid
at the time the return is filed by the executor.
administrator or the heirs. (R.R. No. 12-2018, Sec.
3)
Rate:
There shall be levied, assessed, collected and
paid upon the transfer of the net estate,
whether resident or non-resident, a tax at the
rate of six percent (6%) based on the value of
such net estate. (Sec. 84, NIRC) (Sec. 2 RR 12-
2018)
Taxes levied on the transmission of properties of
the decedent to his heirs.
Note: Estate tax is tax imposed upon the basis
of net estate considered as a unit, regardless of
the number of shares into which it may be
divided or the relationship of the beneficiaries.
Itis paid by the estate represented by the
administrator or executor. (Report of the Tax
Commission of the National Internal Revenue Law,
Vol. II, p. 113)
Upon the effectivity of TRAIN Law the estate tax
rate is now fixed at 6% and the graduated
schedule with a rate of 5-20% under the Tax
Reform Act of 1997 is now repealed.
Governing Law
Estate taxation is governed by the statue in
force at the time of the death of the decedent.
(R.R. No. 12-2018, Sec. 3)
Note: The tax rates and procedures prescribed
by R. A. No. 10963. otherwise known as the
"Tax Reform for Acceleration and Inclusion Law"
(TRAIN Law) and R. R. No. 12the estate of
decedent who died on or after the effectivity
date of the
TRAIN Law which is January 1, 2018.
2. Classification of Decedent
Taxpayers liable to pay estate tax
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 Purple Notes
Taxation Law
Determination of Gross Estate and Net 2018
a transfer tax of any character in
Estate respect of intangible personal property
of citizens of the Philippines not residing
The value of the gross estate of the decedent in the foreign country, or
shall be determined by including the value at b. The laws of the foreign country allow a
the time of his death of all property, real or similar exemption from transfer or death
personal, tangible or intangible, wherever taxes of every character owned by
situated. citizens of the Philippines not residing in
that foreign country (NIRC. Sec., 104):
In case of a nonresident alien decedent who at
the time of his death was not a citizen of the 2. Without reciprocity shall be included in the
Philippines, only that part of the entire gross gross estate.
estate which is situated OR deemed situated
(Sec 104) in the Philippines shall be included in Note: Reciprocity must be total if any of the
his taxable estate. (Sec. 85, NIRC) two states or countries collects or imposes
and does not exempt any transfer, death,
legacy, or succession tax of any character,
DECEDENT SCOPE/SITUS reciprocity does not apply (CIR v. Fisher, G.R.
 Resident Citizen All properties, real or No. L-11622, January 28, 1961).
 Non-resident personal, tangible or
Citizen intangible, wherever Basis for the valuation of gross estate:
 Resident Alien situated, plus items
includible in gross estate Properties comprising the gross estate shall be
 Non-resident Alien Only properties situated
valued based on their fair market value as of the
in the Philippines.
provided that with
time of death. (Sec. 5, RR 2-03)
respect to intangible
personal property, its
inclusion in the gross PROPERTY VALUATION
estate is subject to the (Sec. 5, RR 12-18, Promulgated January 25, 2018)
rule of reciprocity under As to real property Whichever is higher
Section 104 of the NIRC between the fair market
(R.R. No. 12-2018, Sec. value:
4)
1. As determined by the
Commissioner (zonal
value) or
2. As shown in the
For estate tax purposes, residence refers to the schedule of values fixed
domicile of the person (CIR vs. de Lara, G.R. No. L by the provincial and city
– 9456. January 6,1958) assessors
*If there is no zonal
Rule of reciprocity in relation to intangible value, use the FMV in the
personal property of a non-resident alien latest tax declaration.
individual As to personal Whether tangible or
property intangible, appraised at
The intangible personal property of a non- FMV. ―Sentimental value‖
resident alien individual, if: is practically disregarded.
As to shares of stock 1. Unlisted
a. Unlisted common -
1. With reciprocity — shall not be included in
book value
the gross estate if: b. Unlisted preferred -
a. The laws of the foreign county to which par value. The value of
the decedent was a citizen and resident the unlisted shares shall
at the time of his death, did not impose be exempt from the

128 Center for Legal Education and Research

 Purple Notes
Taxation Law
provisions of Revenue ii. Shares, obligations or bonds issued by any
Regulation No. 6-2013. corporation or sociedad anonima organized
or constituted in the Philippines in
2. Listed accordance with its laws;
Arithmetic mean
Shares, obligations or bonds by any foreign
betweenthe highest and
lowest quotation at a corporation eighty-five percent (85%) of the
date nearest the date of business of which is located in the
death, if none is available Philippines;
on the date of death iii. Shares, obligations or bonds issued by any
itself. foreign corporation if such shares,
obligations or bonds have acquired a
As to right to Shall be taken into business situs in the Philippines;
usufruct, use or account the probable life iv. Shares or rights in any partnership, business
habitation, as well as of the beneficiary in
or industry established in the Philippines,
that of annuity accordance with the
shall be considered as situated in the
latest basic standard
mortality table, to be Philippines
approved by the
Secretary of Finance, 3. Composition of Gross Estate
upon recommendation of
the Insurance The gross estate shall be composed of the
Commissioner. following:
If the decedent is a If the decedent is a
resident citizen, non- non-resident alien 1. Properties existing at the time of death are
resident citizen, or
included in the gross estate with respect to
resident alien
situs of taxation;
Value at the time of Value at the time of
death of all: death of all: 2. Properties not yet existing at the time of
death but nonetheless included in the gross
1. Real property 1. Real property situated estate:
wherever situated in the Philippines
2. Personal property, 2.Tangible personal Composition of gross estate
tangible or intangible, property situated in the
wherever situated Philippines i. Decedent‘s Interest
3. To the extent of the 3. Intangible personal ii. Transfer in Contemplation of Death
interest therein of the property with situs in the
iii. Revocable Transfer
decedent at the time of Philippines unless
his death wherever exempted on the basis of iv. Property Passing Under General Power of
situated. reciprocity Appointment
4. To the extent of the v. Proceeds of Life Insurance
interest therein of the vi. Prior Interests
decedent at the time of vii. Transfers of Insufficient Consideration
his death which is only viii. Capital of the Surviving Spouse
situated in the
Philippines. a. Items to be included in determining
gross estate
i. Decedent‘s Interest [Sec. 85(A)],
However, for taxation purposes, Sec. 104 of the
NIRC]
NIRC enumerates intangible personal properties
of a non-resident alien decedent which have a
In general, decedent‘s interest is
situs in the Philippines, hence, treated as part of
commonly thought of as a person‘s
the gross estate:
estate, the wealth that he would have
possessed, enjoyed and disposed of,
i. Franchise which must be exercised in the
had he lived. However, it also refers to
Philippines;
129
Bar Operations C ommissions 129
 Purple Notes
Taxation Law
the value of any interest in property or iii. 2018
Properties whose transfer can be
rights accrued in favor of the decedent revoked (revocable transfer) [Sec.
on or before his death, which have been 85(C), NIRC]
received only after his death, such as:
General rule: a transfer is revocable
i. Dividends declared on or before the transfer where;
death of the stockholder, and i. There is a transfer by trust or
received by the estate after said otherwise;
stockholder‘s death. ii. The enjoyment thereof was
ii. Partnership‘s profit earned prior to subject at the time of his death to
the death of the partner, received by any change through the exercise
the estate after the death of the of a power (in whatever capacity
partner. exercisable) by:
iii. Accrued interest and rents on or 1. The decedent alone
before the time of death, but 2. The decedent in conjunction
collected until after death. with any other person
iv. Proceeds of life insurance policy without regard to when or
payable to a revocable beneficiary from what source the
v. Rights of usufruct if transferable to decedent acquired such
the heirs power, to alter, amend,
revoke, or terminate; or
ii. Properties transferred in 3. Where any such power is
contemplation of death [Sec. 85(B), relinquished in contemplation
NIRC] of decedent‘s death
The term ―in contemplation of death‖, as Exception: Bona fide sale for an
used in estate taxation, does not refer to adequate and full consideration in
the general expectation of death. The money or money‘s worth.
thought of death must be the must be
the compelling cause of the transfer iv. Properties that passed under the
which includes the disposition of general power of appointment [Sec.
property for the purposes of avoiding 85(D), NIRC]
tax and not merely in contemplation of
an imminent death. Power of Appointment refers to the
right to designate the person or property
The following are transfers NOT in which shall enjoy and possess certain
contemplation of death: property from a donor or prior decedent.
i. To relieve the donor from the
burden of management; General Special
ii. To save income or property taxes; Who can be
appointed
The decedent has The decedent has
iii. To settle family litigated and the power to the power to
appoint any person appoint ONLY
unlitigated disputes;
he pleases, among designated
iv. To provide independent income for including himself class of persons
dependents; other than himself,
v. To see the children enjoy the his estate, the
property while the donor is still creditors of his
alive; estate
vi. To protect the family from hazard Whose favor exercisable
of business operations; and Exercisable in Expressly not
vii. To reward services rendered. favor of himself, exercisable in
his creditors, or favor of the
creditors of his decedent, his

130 Center for Legal Education and Research

 Purple Notes
estate estate, his
creditors, or
creditors of his
estate
General rule: Property over which the
decedent held a power of appointment
is excluded in his gross estate.
Exception: If the property arises 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 –
i. The possession or enjoyment
of, or the right to the income
from the property; or
ii. The right either alone or in
conjunction with any person,
to designate the persons who
shall enjoy or possess the
property or the income
therefrom.
v. Proceeds of life insurance taken out
by the decedent upon his life [Sec.
85(E), NIRC]
When included in the gross estate
Proceeds of life insurance taken out by
the decedent on his own life shall be
included in the gross estate in the
following cases:
1. The beneficiary is the estate of the
deceased, his executor or
administrator, irrespective of
whether or not the insured retained
the power of revocation; or
2. The beneficiary is other than the
decedent‘s estate, executor or
administrator, when designation of
beneficiary is not expressly made
irrevocable.
When not taxable
Proceeds of insurance shall not be
included in the gross estate of the
decedent, when:
131
Taxation Law
1. The policy is an accident insurance
policy;
2. Proceeds of group insurance policy
taken out by a company for its
employees;
3. When the policy is irrevocable and
the proceeds received by the
beneficiary
Irrevocable designation; how
done
i. By expressly stating it in the
policy
Note:Under the Insurance Code
of the Philippines, a designation
of beneficiary is revocable
unless stated expressly by the
insured, and indicated in the
policy, that the designation is
irrevocable.
ii. By not changing the beneficiary
during the lifetime of the
insured. Note: Under Sec. 11,
RA 10607, the insured shall
have the right to change the
beneficiary he designated in the
policy, unless he has expressly
waived this right in said policy.
Notwithstanding the foregoing,
in the event the insured does
not change the beneficiary
during his lifetime, the
designation shall be deemed
irrevocable.
vi. Prior interests [Sec. 85(F), NIRC]
Prior interests refer to all transfers,
trusts, estates, interests, rights, power
and relinquishment of powers made,
created, arising, existing, exercised or
relinquished before or after the
effectivity of the NIRC.
vii. Transfers for insufficient
consideration [Sec. 85(G), NIRC]
When the transfers, trusts, interests,
rights, or powers (denominated as
transfer in contemplation of death,
revocable transfer and property passing
Bar Operations C ommissions 131
 Purple Notes
Taxation Law
under general power of appointment) RA 4817 2018
were made, created, exercised or included in the
relinquished for a consideration in gross estate
money or money‘s worth, but NOT a 9. Net share of the
surviving spouse
bona fide sale for an adequate and full
in the conjugal
consideration in money or money‘s property.
worth, they shall be included in the
gross estate.
1. Ordinary Deductions:
The value to be included in the gross
estate is only the EXCESS of the fair a. Claims against the estate
market value of the property at the time
of death over the consideration The word ―claim‖ is generally construed to
received. mean debts or demands of a pecuniary nature
which could have been enforced against the
Net Estate - The value of the net estate shall deceased in his lifetime and could have been
be determined after taking into consideration reduced to simple money judgments.
the gross estate and the allowable deductions
Claims against the estate or indebtedness
in respect of property may arise out of:
Deductions and Exclusions from Estate (CTO)

b. Deductions from the Gross Estate (Sec. 1. Contract;

86) (Sec. 6 & 7, RR 12-18) 2. Tort; or
3. Operation of Law. (Sec. 6 (A)[2], R.R. No. 2-
If the decedent is If the decedent is a non- 2018)
a resident citizen, resident alien
non-resident
citizen, or
 ―Date-of-death Valuation‖ Rule – where
resident alien a lien claimed against the estate was certain
1. Standard 1. Standard Deduction of and enforceable on the date of the
Deduction of P500 thousand; decedent‘s death, the fact that the claimant
P5.0 million; 2. Claims against the estate, subsequently settled for lesser amount did
2. Claims against claims against insolvent not preclude the estate from deducting the
the estate; persons included in the entire amount of the claim for estate tax
3. Claims against gross estate and unpaid purposes. These pronouncements essentially
insolvent mortgages, taxes and
confirm the general principle that post-death
persons included casualty losses subject to
developments are not material in
in the gross pro-rata formula, to wit:
estate; determining the amount of the
4. Unpaid deduction.(Dizon vs. CTA, G.R. No. 140944,
mortgages, April 30, 2008)
taxes and
casualty losses; 3. Property previously taxed;  The appropriate deduction is the ―value‖
5. Property 4. Transfers for public use;
that the claim had at the decedent‘s death.
previously and
(Smith vs CIR, 82 TCM 909, 2001 US case)
taxed; 5. Net share of surviving
6. Transfers for spouse in the conjugal
property.  The claims against the estate which the law
public use;
allows as deduction from the gross estate
7. Family Home
are existing claims against the estate. An
(up to P10.0
million); indebtedness that has been condoned is in
8. Amount received legal effect no indebtedness at all. If there is
by heirs under no more indebtedness by reason of the

132 Center for Legal Education and Research

 Purple Notes
condonation, there is no more claim against
the estate which may be allowed as a
deduction. (Dizon, et. al v. CA, G.R. No.140944,
Apr. 30, 2008)
Requisites for deductibility: (PEN-Gf)
1. The liability represents a personal
obligation of the deceased existing at the
time of his death;
2. The liability was contracted in good faith
and for adequate and full consideration in
money or money‘s worth;
3. The claim must be a debt or claim which is
valid in law and enforceable in court;
4. The indebtedness must not have been
condoned by the creditor or the action to
collect from the decedent must not have
prescribed(Sec. 6(2.1), R.R. No. 12-2018).
b. Claims against insolvent person
(as defined under RA 10142 or Financial
Rehabilitation and Insolvency Act ―FRIA‖)
(Section 6 (3) –RR 12-2018)
The amount thereof has been initially included
as part of his gross estate.
 Insolvency – the financial capacity of the
debtor to pay his liabilities as they fall due in
the ordinary course of business or whenever
his liabilities when they respectively fall due
 Kinds of Insolvency:
 Voluntary
 Involuntary
 The incapacity of the debtors to pay their
obligation is proven and not merely alleged.
(Monserat vs. Collector, CTA Case No. 11,
December 28, 1955, as cited in Mamalateo,
Reviewer in Taxation, 2014, at p. 291)
c. Unpaid mortgages
Requisites for deductibility:
1. In all instances:
133
Taxation Law
a. The value of the property, undiminished
by such mortgage or indebtedness is
included in the gross estate; and
b. The mortgage indebtedness was
contracted bona fide and for an
adequate and full consideration in
money or money‘s worth;
2. In case unpaid mortgage is being claimed by
the estate, verification must be made as to
who was the beneficiary of the loan
proceeds;
3. 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; and
4. 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 (4), R.R. 12-2018)
d. Taxes
Taxes which have accrued as of the death of the
decedent which were unpaid as of the time of
death are likewise deductible. This deduction will
not include the following taxes(Sec. 6(4.2), RR
12-2018):
a. Income tax upon income received after
death, or
b. Property taxes which have not accrued
before his death, or the
c. Estate tax due from the transmission of his
estate.
The following are not deductible [Sec.
6)[4.2], R.R. 12-2018]
1. Income tax on income received after
death
2. Property taxes not accrued before death
3. Estate tax
Bar Operations C ommissions 133
 Purple Notes
Taxation Law
e. Casualty 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) of Section 91. (Sec. 6(4.3), RR
12-2018)
Requisites:
1. It should arise from fire, storm, shipwreck,
or other casualty, robbery, theft or
embezzlement;
2. Not compensated by insurance or
otherwise;
3. Not claimed as deduction in an income tax
return of the taxable estate;
4. Incurred during the settlement of the
estate; and
5. Occurred before the last day for the
payment of the estate tax (last day to
pay: six months after the decedent‘s
death).(Sec. 6(4.3), R.R. 12-2018)
Casualty loss can be allowed as deduction in one
instance only, either for income tax purposes or
estate tax purposes.
f. Property Previously Taxed (Vanishing
Deductions)
For property previously taxed to be deductible
under this section, the following requisites must
concur:
1. The decedent must have previously
acquired the property either by:
a. Donation, or
b. Succession
2. The time interval between the:
134 Center for Legal Education and Research
2018OR the
a. Death of the previous decedent,
donation, and the
b. Death of the current decedent must be
at most five (5) years.
3. The property must be situated in the
Philippines.
4. The previous Estate tax or Donor‘s tax
must have been previously paid
5. There was no previous vanishing
deduction on the property
The provision is commonly called the ―vanishing
deduction‖ because as time goes by, the amount
of deductible tax that was previously paid also
diminishes, based on the table below:
PERIOD DEDUCTION
Within 1 year or less 100%
More than 1 year but 80%
not more than 2 years
More than 2 years but 60%
not more than 3 years
More than 3 years but 40%
not more than 4 years
More than 4 years but 20%
not more than 5 years
 The purpose of vanishing deduction is to
lessen the harsh effects of double taxation.
 In property previously taxed, there are
two (2) transfers of property. Within a
periodof 5 years, the same property has
been transferred from the first to the second
decedent or from a donor to the decedent.
 In such case, the first transfer has been
subjected to a transfer tax. The second
transfer would now be subject to a
vanishing deduction as provided in the code.
Illustration:
Eugene Domingo (Eugene) inherited a land from
his father, Raizen, with a fair market value
(FMV) of Php 500,000 during the time it was
inherited. Two and half years later Eugene died
after crashing into Vincent‘s car. The FMV of the
land was Php 600,000 at that time. The gross
 Purple Notes
Taxation Law
estate of Eugene was Php 2M including the land 4. Transfer for public use
that Eugene inherited from Raizen. Deductions
from gross estate (not including family home, Solution:
amounts receivable from R.A. 4917 and
standard deduction) amounted to Php 400,000.
Php
How much is vanishing deduction? Basis
500,000
400,000 = Php
x
Steps: (Deductions) 100,000

Step 1: Get the basis. Gross

Php 2M
Estate
The LOWER value between the value of the
property of the prior estate OR the value of the Php 500,000 (Step 2) minus 100,000 (Step 3)
SAME property in the present estate. the final basis for determination of vanishing
deduction shall be Php 400,000.
Solution:
Step 4: Multiply the respective % of vanishing
FMV of Land on 500,000 deduction respective of the period was actually
Raizen‘s Death (Prior held.
Death)
FMV of Land on 600,000 Solution:
Eugene‘s Death
PERIOD DEDUCTION
Choose what amount is lower: Php 500,000. Within 1 year or less 100%
This will be your basis.
More than 1 year but 80%
Step 2: Reduction of the basis against any not more than 2 years
mortgaged or lien on the property. More than 2 years 60%
but not more than 3
years
If the property subject to the vanishing
More than 3 years but 40%
deduction has a mortgaged it shall be reduced not more than 4 years
by such mortgage or lien. More than 4 years but 20%
not more than 5 years
Solution:
Since Eugene died two years after Raizen‘s
Php 500,000 – 0 = Php 500,000 death, thus the amount that will be credited as
vanishing deduction is 60% only or the third
Since there were no mention of any mortgaged bracket:
paid in the facts the amount to be deducted is
ZERO (0) Vanishing Deduction = (Php 500K-100K)x 60%
= Php 400,000 x 60%
Basis is still at Php 500,000. = Php 240,000

Step 3: Further reduction of the basis: (INGLES, Tax made less Taxing,2018)

Value arrived at Step 2 divided by Total Gross g. Transfer for Public Use
estate multiplied by:
1. Claims against the estate Requisites: (PLDG)
2. Claims against insolvent person
3. Unpaid mortgages, taxes and casualty losses
135
Bar Operations C ommissions 135
 Purple Notes
Taxation Law
1) The disposition is in a last will and Requisites for deductibility(Sec. 62018
[7], R.R. 12-
testament 2018):
2) To take effect after death
3) For the use of the government of the 1. The family home must be the actual
Philippines, or any political subdivision residential home of the decedent and his
thereof family at the time of his death, as certified
by the Barangay Captain of the locality
4) For exclusive public purposes(Sec. 86 (A) where the family home is situated;,
(32), NIRC)
2. The total value of the family home must be
Note: This provision should be construed with included as part of the gross estate of the
Sec. 87(D), providing for an exclusion of all decedent; and
bequests, devices, or transfers to social welfare,
cultural and charitable institutions, where not 3. Allowable deduction must be in the amount
more than 30% of said bequests, devises, equivalent to:
legacies or transfers were to be used by such
institutions for administration purposes. In Sec. a. The current FMV of the family home as
87(D), the primary determining factor is the declared or included in the gross estate,
recipient, while it is the use in Sec. 86 (A)(6). or
b. The extent of the decedent‘s interest
(whether conjugal/community or
exclusive property), whichever is lower,
Sec. 86(A)(6) Sec. 87(D) but not exceeding P10,000,000.
It contemplates It contemplates transfers to The family home must be part of the
transfers by a citizen social welfare, cultural and properties of either:
or resident of the charitable institutions which
Philippines in favor of are exempted from estate
the Government of tax.
1. The absolute community or of the conjugal
the Philippines or any partnership, or of the exclusive properties of
political subdivision either spouse depending upon the
thereof, for public classification of the property (family home)
purpose which is and the property relations prevailing on the
deducted from the properties of the husband and wife, or
gross estate.
2. An unmarried head of a family on his or her
2. Special Deductions own property. (Sec. 6(7), RR 12-2018)

a. Family Home  Actual occupancy of the house or house and

Family home, constituted jointly by the husband
and the wife or by an unmarried head of the
family, is the dwelling house where they and
their family reside, and on the land on which it is
situated. (Article 152 of the Family Code)
Family home is deemed constituted on the
house and lot from the time that it is constituted
as a family residence and is considered as such
so long as any of the beneficiaries actually
resides therein. (Article 153 of the Family Code)
lot as the family residence shall not be
considered interrupted or abandoned in such
cases as the temporary absence fromthe
constituted family home due to travel or
studies or work abroad, etc. Thus, while an
overseas foreign worker (OFW) is
considered a non-resident citizen of the
Philippines, in his estate may be deducted
the family home.
 The family home is generally characterized
by permanency, that is, the place to which,
whenever absent for business or pleasure,

136 Center for Legal Education and Research

 Purple Notes
one still intends to return. (Sec. 6(7), RR 12-
2018)
 For purposes of availing of a family home
deduction to the extent allowable, a person
may constitute only one family home.
 The estates of non-resident decedents are
not allowed to avail the family home
deduction because they do not have a family
home in the Philippines since they are non-
residents.
b. Standard Deduction
A deduction in the amount of Five Million Pesos
(P5,000,000) shall be allowed as an additional
deduction without need of substantiation. The
full amount of P5,000,000 shall be allowed as
deduction for the benefit of the decedent.(Sec.
86 (A)[5])
Standard Deduction for Non Resident Alien
Decedent
Nonresident alien-decedent is now entitled to
standard deduction amounting to P500, 000.
c. Amounts Received by Heirs under RA
4917
Any amount received by the heirs from the
decedent‘s employer as a consequence of the
death of the decedent-employee in accordance
with Republic Act No. 4917 is allowed as a
deduction provided that the amount of the
separation benefit is included as part of the
gross estate of the decedent.(Sec. 6(G), RR 2-
2003)
RA No. 4917 is an Act providing that the
retirement benefits of employees of private firms
shall not be subject to attachment, levy,
execution, or any tax whatsoever.
It provides that retirement benefits received by
officials and employees of private firms, whether
individual or corporate, in accordance with a
reasonable private benefit plan maintained by
the employer shall be exempt from all taxes and
shall not be liable to attachment, garnishment,
137
Taxation Law
levy or seizure by or under any legal or
equitable process whatsoever except to pay a
debt of the official or employee concerned to the
private benefit plan or that arising from liability
imposed in a criminal action.
Requisites for deductibility:
1. Amounts received by the heirs from the
decedent‘s employer;
2. Received as a consequence of the death of
the decedent-employee; and
3. Amount is included in the gross estate of the
decedent. (Sec. 86[A][7], NIRC)
c. Exclusions from Estate
In deductions, the deductible items should have
been first included in the gross estate of the
decedent before actually subtracted. Exclusions,
as distinguished from deductions, are not
included at all in the gross estate.
The following are excluded from the Gross
Estate
a) The capital (exclusive property) of the
surviving spouse;
b) GSIS proceeds/benefits;
c) Accrual from SSS;
d) Proceeds of life insurance where the
beneficiary is irrevocably appointed;
e) War damage payments;
f) Transfer by way of bona fide sales;
g) Properties held in trust by the decedent; and
h) Acquisition and/or transfer expressly
declared as not taxable.
Properties excluded under Special Laws:
1. Benefits received by members from the
Government Service Insurance System
(PD 1146) and the Social Security
System (RA 1161, as amended) by
reason of death.
2. Amounts received from the Philippine
and United States governments for
damages suffered during the last war
(RA 227).
3. Benefits received by beneficiaries
residing in the Philippines under laws
Bar Operations C ommissions 137
 Purple Notes
Taxation Law
administered by the U.S. Veterans
Administration (RA 360).
4. Bequests, legacies or donations mortis
causa to social welfare, cultural, or
charitable organizations (PD 307); but
bequests to religious and educational
institutions are not exempt. (BIR Ruling
75-001, Jan. 15, 1975).
5. Grants and donations to the Intramuros
Administration (PD 1616). (Mamalateo,
Reviewer in Taxation, 2008 pp. 288-289)
i) Exemption of Certain Acquisitions and
Transmissions
Under Sec. 87 of NIRC, the following are
exempted from the gross estate of the
decedent:
1. The merger or usufruct in the owner of the
naked title.
2. Fideicommissary substitutions. Provided
that:
a. the substitution must not go beyond one
degree from the heir originally
instituted;
b. the fiduciary or the first heir must be
both living at the time of death of the
testator.
3. Transmission in accordance with the
predecessor‘s desire.
4. Transfers for social welfare, cultural, and
charitable institutions. Provided that:
a. No part of the net income of which
inures to the benefit of any individual;
and
b. Not more than thirty percent
(30%) of the said bequests, devises,
legacies or transfers shall be used by
such institutions for administration
purposes.
d. Tax Credit for Estate Tax paid to a
foreign country (Sec. 86 [E], NIRC)
It is a remedy against international double
taxation. To minimize the onerous effect of
138 Center for Legal Education and Research
taxing the same property twice,2018 tax credit
against Philippine estate tax is allowed for estate
taxes paid to foreign countries.
General Rule: The tax imposed by the NIRC
shall be credited with the amounts of any estate
tax impose by the authority of a foreign country.
Exception: Limitations on tax credit. The
amount of the credit taken under this Section
shall be subject to each of the following
limitations:
1. For Estate Taxes paid to one foreign
country (Per Country limitation)
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 the NIRC bears to his entire
net estate.
Net Estate (Foreign country) x Ph Estate tax
Entire Net Estate
2. For Estate Taxes paid to two (2) or
more foreign countries (Global
Limitation)
The total amount of 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 the NIRC bears to
his entire net estate.
Net Estate (All Foreign country) x Ph Estate tax
Entire Net Estate
Who may claim?
Only the estate of a decedent who was a
citizen or a resident of the Philippines at
the time of his death can claim tax credit for any
estate tax paid to a foreign country.
f. Filing and Payment of Estate Tax
Returns (Sec. 9, RR 12-2018)
 Purple Notes
When filing is required
Regardless of the gross value of the estate,
when said estate consists of registered or
registrable property such as:
 real property,
 motor vehicle,
 shares of stocks 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, an estate tax
return shall be filed.
Certification of a Certified Public
Accountant
For estate tax returns, showing a gross value
EXCEEDING Php 5 Million Pesos it shall be duly
certified to by a Certified Public Accountant
containing the following:
1. Itemized assets of the decedents with the
corresponding gross value at the time of his
death or in the case of a non resident alien,
properties situated in the Philippines
2. Itemized deductions from gross estate
3. The amount of tax due whether paid or still
due and outstanding. (Sec.
The requirement of filing of Notice of Death is
now repealed by the TRAIN Law.
Note: Prior to TRAIN law, estate which has net
value of P200,000 and below is exempted from
estate tax, hence, not required to file estate tax
return.
Period for filing:
General Rule: The estate tax return shall be
filed within one (1) year from the decedent‘s
death.
Exception: The CIR shall have the authority to
grant, in meritorious cases, a reasonable
extension, not exceeding 30 days.
The application for extension to file the estate
tax return must be filed with the Revenue
District Office (RDO) where the estate is
139
Taxation Law
required to secure its own Tax Identification
Number (TIN) and file tax returns of the estate.
Who shall file
The estate tax returns shall be filed by the
executor, administrator, or any of the legal
heirs, as the case may be, under oath. If there is
no executor or administrator appointed, qualified
and acting within the Philippines, any person in
actual or constructive possession of any property
of the decedent may file this return.
Where to file and pay
1. Resident decedent (RC/RA)
The executor or administrator shall register
the estate of the decedent and secure a new
TIN from the RDO where the decedent was
domiciled at the time of his death and shall
file the estate tax return and pay the
corresponding estate tax with:
i. An authorized agent bank (AAB); or
ii. Revenue District Officer; or
iii. Collection Officer; or
iv. Duly authorized Treasurer of the city or
municipality in which the decedent was
domiciled at the time of his death
2. Non-resident decedent (NRC/NRA)
The estate tax return shall be filed with and
the TIN for the estate shall be secured from
the RDO where such executor or
administrator is registered.
If the executor or administrator is not
registered, the estate tax return shall be
filed with and the TIN for the estate shall be
secured from the RDO having jurisdiction
over the executor or administrator‘s legal
residence.
Note: If the non-resident decedent does not
have an executor or administrator in the
Philippines, the estate tax return shall be file and
the TIN for the estate shall be secured from the
Office of the Commissioner through RDO 39 QC.
The foregoing provisions notwithstanding, the
CIR may continue to exercise his power to allow
a different venue/place in the filing of tax return.
Bar Operations C ommissions 139
 Purple Notes
Taxation Law
Payment
The estate tax imposed under the NIRC shall be
imposed under NIRC shall be paid by the
executor or administrator before the delivery of
the distributive share in the inheritance.
Two or more executors or administrator,
liability – severally liable
Primary liability – executor or administrator
Secondary liability - heir or beneficiary. The
extent of liability, however shall in no case
exceed the value of his/her share in the
inheritace.
All told, the Government has two ways of
collecting the tax in question. One, by going
after all the heirs and collecting from each one
of them the amount of the tax proportionate to
the inheritance received. This remedy was
adopted in Government of the Philippine Islands
v. Pamintuan, supra. In said case, the
Government filed an action against all the heirs
for the collection of the tax. This action rests on
the concept that hereditary property consists
only of that part which remains after the
settlement of all lawful claims against the estate,
for the settlement of which the entire estate is
first liable.
Another remedy, pursuant to the lien created by
Section 315 of the Tax Code upon all property
and rights to property belonging to the taxpayer
for unpaid income tax, is by subjecting said
property of the estate which is in the hands of
an heir or transferee to the payment of the tax
due, the estate(CIR vs.Pineda,G.R. No. L-22734,
September 15, 1967)
i. Extension of Payment
a. Basis
A finding of the Commissioner that the payment
of tax or any part thereof would cause undue
hardship upon the estate or any of his heirs;
b. Time extended
For judicial settlements – not to exceed 5 years
140 Center for Legal Education and Research
For extra judicial settlement – not 2018
to exceed 2
years
c. Bond
In case the request for extension is granted, the
Commissioner or its duly authorized
representative may require the executor or
administrator or beneficiary, as the case maybe,
to furnish a bond in such amount, NOT
EXCEEDING DOUBLE AMOUNT of the tax and
with such sureties as the Commissioner deems
necessary, conditioned upon the payment of the
said tax in accordance with the terms of
extension
d. Non – payment
Any amount paid after the statutory due date of
the tax but with the extension period, shall be
subject to interest but not surcharge.
ii. Payment of Estate Tax by installment
and partial disposition of estate:
a. Cash installment
i. The cash installments shall be made
within two (2) years from the date of filing
of estate tax return;
ii. Estate tax return shall be filed within 1
year from date of decedents death;
iii. The frequency (monthly, quarterly, semi –
annually, or annually) deadline and
amount of each installment shall be
indicated in the estate tax return, subject
to the prior approval of the BIR;
iv. In case of lapse of 2 years, without the
entire tax due, the remaining balance
thereof shall be due and demandable
subject to the applicable penalties and
interest reckoned from the prescribe
deadline for filing the tax return and
payment of tax;
v. No civil penalties or interest may be
imposed on estates permitted to pay the
estate tax due by installment. Nothing in
this subsection, however, prevents the
Commissioner from executing
enforcement action against the estate
after the due date of the estate tax
 Purple Notes
provided that all the applicable laws and
required procedures are followed or
observed.
b. Partial Disposition of estate
i. The disposition, for purposes of this
option, shall refer to the conveyance of
property, whether real or personal or
intangible property with equivalent cash
consideration;
ii. The estate tax return shall be filed with
one year from the decedent‘s death;
iii. The written request for the partial
disposition shall be approved by the
BIR. The request shall be filed together
with a notarized undertaking that the
proceeds thereof shall be exclusively
used for payment of the total tax due;
iv. The computed estate tax due shall be
allocated in proportion of the value of
each property;
v. The estate shall pay the BIR the
proportionate estate tax due of the
property intended to be disposed of;
vi. An electronic Certificate of Authorizing
Registration (eCAR) shall be issued upon
presentation of proof of payment of the
proportionate estate tax due of the
property intended to be disposed.
Accordingly, eCARs shall be issued as
many as there are properties intended
to be disposed to cover the total estate
tax due, net of proportionate estate
tax(es) previously paid under this
option; and
vii. In case of failure to pay the total estate
tax due out from the proceeds of the
said disposition, the estate tax shall be
immediately due and demandable
subject to the applicable penalties and
interest reckoned from the prescribed
deadline of filing the return and
payment of estate tax, without prejudice
of withholding the issuance of eCAR on
the remaining properties until the
payment of remaining properties until
payment of remaining balance of estate
tax due including penalties and interest.
141
Taxation Law
Payment of Tax Antecedent to the transfer
of shares, bonds or rights, and bank
deposits (Sec. 10, RR 12-2018)
A bank has knowledge of the death of a person,
who maintained a bank deposit account alone or
jointly with another, it shall allow the withdrawal
from the said deposit SUBJECT to a FINAL
WITHHOLDING TAX of 6% of the amount to
be withdrawn, provided that the withdrawal shall
only be made WITHIN ONE YEAR from the
date of decedent.
Other requirements:
The executor, administrator or any legal heirs
withdrawing from the deposit shall provide the
bank the following:
 TIN of the estate of the decedent;
 Presentation of BIR 1904 of the estate duly
received by the BIR;
 All withdrawal slips shall contain the
following terms and conditions:
o Sworn statement by any one of the
joint depositors to the effect that all
of the joint depositors are still living
at the time of withdrawal and
o Statement that the withdrawal is
subject to the final withholding tax
of 6%
Instance where the 6% Final withholding
tax need not be paid
Where the bank deposit accounts have been
duly included in the gross estate of the decedent
and the estate tax due thereon is paid, the
executor, administrator or any of the legal heirs
shall present the eCAR for the said estate prior
withdrawing from the bank deposit account.
Such withdrawal shall no longer be subject to
withholding tax.
Summary of Changes made by TRAIN Law
for Estate Tax
NIRC NIRC,as amended
by TRAIN Law
As to Rate
Graduated Tax of 5- Flat rate of 6% (Sec.
Bar Operations C ommissions 141
 Purple Notes
Taxation Law
20% (Sec. 84) 84) 2018
Amount exempted D. Donor‘s Tax
Php 200,000 (Sec.84) None (Sec. 84) (As amended by TRAIN Law and
Allowed deductions implemented thru RR 12-2018)
Funeral, Judicial and No longer allows
Medical Expenses deductions for Funeral, 1. Basic Principles, Concept and Definition
(Sec. 86(A)(1)) Judicial and Medical
Expenses (Sec. 86(A))  Donor‘s tax shall be imposed upon the
Family Home transfer by any person, Resident or Non-
Maximum of Php 1M Maximum of Php 10M Resident, of any property by gift.
(Sec 86(A) (4)) (Sec. 86(A)(7) ))  Tax shall apply whether the property is by
trust or otherwise and whether the gift is
Standard Deduction
direct or indirect and whether the property
Php 1M for RA and Php 5M for RA and
is real or personal, tangible or intangible.
Citizens; Zero for NRA Citizens and Php 500K
 The law in force at the time of the
(Sec.86(A)(5)) for NRA (Sec. 86(A)(1)
perfection/completion of the donation shall
& Sec. 86(B)(1))
govern the imposition of the Donor‘s Tax.
Notice of Death
 The Donor‘s Tax is imposed on Donations
Required in certain No longer
inter vivos
instances (Sec.89) required.(Sec. 89)
 Donations mortis causa partake of the
Filing of Estate Tax Return nature of testamentary dispositions and are
(1)In all cases where (1)In all cases where subject to estate tax.
transfers are subject transfers are subject  Imposed a tax of 6% on total gifts in excess
to Estate Tax. to Estate Tax. of Php 250,000.(Sec. 11, RR 12-18)
(2)Where though (2)In case where
exempt from estate registered or Definition
tax GV of Estate registrable properties
exceedsP200k are involved (Sec. 90) Donation is an act of liberality whereby a person
(3)In case where (donor) disposes gratuitously of a thing or right
registered or in favor of another (donee) who accepts it. (Art.
registrable properties 725, Civil Code)
are involved (Sec.90)
Certificate of Independent CPA Donor‘s tax is an excise tax imposed on the
Gross estate >Php 2M Gross estate> Php 5M privilege to transfer property by way of gift inter
(Sec. 90(A)) (Sec. 90(A)) vivos based on a pure act of liberality without
Period to File any, or less than adequate, consideration and
Within 6 months from Within 1 year form without any legal compulsion to give.
decedent‘s death (Sec. decedent‘s death.
90(B) ) (Sec. 90(B) ) The Tax Reform Act of 1997 does not provide a
Installment Payment definition of donor‘s tax. It simply subjects a
Not provided for by Expressly provided for ―gift‖ to donor‘s tax.
NIRC but allowed (Sec. 91(C) )
under RR 2-2003 A gift that is incomplete because of reserved
Partial Disposal of Assets powers becomes complete when either:
Not provided Provided by RR 12-
2018 Sec.9 6.2 1. The donor renounces the power; or
Withdrawal from Decedent‘s Bank Account
Not allowed Allowed provided that 2. His right to exercise the reserved power
amount withdrawn is ceases because of the happening of some
subject to Final Tax of event or contingency or the fulfillment of
6% (Sec. 97)

142 Center for Legal Education and Research

 Purple Notes
some condition, other than because of the
donor‘s death.
Nature of Donor‘s Tax
Donor‘s tax is not a property tax, but is a tax
imposed on the transfer of property by way of
gift inter vivos.(Sec. 11 of RR No. 2-2003 dated
December 16, 2002, citing Lladoc vs. CIR, G.R. No. L-
19201, June 16, 1965)
2. Requisites of a Valid Donation
[ACID-Form]
(1) Capacity of the donor
All persons who may contract and dispose of
their property may make a donation (Art 735,
NCC).The donor‘s capacity shall be determined
as of the time of the making of the
donation.(Art. 737, NCC)
(2) Donative intent
Donative intent is necessary only in cases of
direct gift. If the gift is indirectly taking place by
way of sale, exchange or other transfer of
property as contemplated in cases of transfers
for less than adequate and full consideration,
donative intent is not always essential to
constitute a gift.
 FACTS: Pursuant to various Supreme Court
decisions, X Bank shares issued in the
names of various corporate shareholders
were sequestered by the Philippine
Government for being purchased out of
coco levy funds. As ordered by the
Supreme Court, the X Bank shares issued
in favor of the corporate stockholders were
cancelled and new shares were issued in
favor of the Philippine Government.
ISSUE: Is the transfer subject to donor‘s
tax?
HELD: No. The donor‘s tax under Section 98
of the Tax Code is generally imposed on the
transfer by any person of property by gift.
Here, there is no intention to donate as the
143
Taxation Law
transfer was only made in compliance with
the Supreme Court decisions. The transfer
of legal titles to the Philippine Government is
only a confirmation of its ownership over
said shares. (BIR Ruling No. 816-18 dated 15
May 2018)
 FACTS: ABC Co., a domestic corporation,
was being liquidated in order to fully settle
and finally close all of its corporate affairs.
For this purpose, a liquidator was
apppointed to liquidate ABC Co.‘s remaining
properties, settle its obligations and
distribute its remaining assets. Pursuant to a
court decision, the assets of ABC Co. were
ordered to be transferred to the liquidator.
ISSUE: Whether the transfer of the assets to
the liquidator suibject to donor‘s tax.
HELD: No. Since the transfer was not
motivated by a donative intent in
transferring properties to the liquidator and
it only acted in pursuant to a court order.
(BIR Ruling No. 522-2017 dated 7 November
2017)
(3) Delivery, whether actual or
constructive
There is delivery if the subject matter is
within the control and dominion of the
donee.
(4) Acceptance by the donee
The donor‘s tax shall not apply unless and
until there is a completed gift(Sec. 11,R.R. 2-
2003). The transfer 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.
 The acceptance is necessary because
nobody is obliged to receive a gift against
his will. And once the acceptance is made
known to the donor, the will of the donor
Bar Operations C ommissions 143
 Purple Notes
Taxation Law
and donee concur, and the donation, as a
mode of transferring ownership, becomes
perfect. (Osorio vs. Osorio, G.R. No. L-16544,
March 30, 1921)
(5) Form prescribed by law
The donation of a movable may be made
orally or in writing. In oral donation
requires the simultaneous delivery of the
thing or of the document representing the
right donated. If the value of the personal
property donated exceeds five thousand
pesos, the donation and the acceptance
shall be made in writing, otherwise, the
donation shall be void. (Art. 748, Civil Code)
In order that the donation of an
immovable may be valid, it must be made
in a public document, specifying therein
the property donated and the value of the
charges which the done must satisfy. 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. (Art. 749,
Civil Code)
Property Donated Form
Movable LESS THAN Php Oral or in writing
5,000
Movable MORE THAN In writing
Php 5,000
Immovable Donation: In public
document
Acceptance may be
made in a separate
instrument, the
donor shall be
notified thereof in
an authentic form,
and this step shall
be noted in both
instruments
3. Transfers which may be Constituted as
Donation (Sec.16 – RR 12-18)
a. Sale/Exchange/Transfer of2018 Property
for Insufficient Consideration
General Rule: The property is transferred for
less than adequate and full consideration in
money or money‘s worth, the amount by which
the FMV exceeds the consideration shall be
deemed a gift and be included in computing the
amount of gifts made during the year. It is as if
the property was donated but in order to avoid
paying donor‘s tax, the donor opted to transfer
the property for inadequate consideration. (Sec.
100 of the NIRC)
Exceptions:
1. Where property transferred is real property
located in the Philippines considered as
capital asset, the donor‘s tax is not
applicable but the final income tax of 6% of
the fair market value or gross selling price,
whichever is higher. (Sec. 24(D)(1), NIRC)
Note: 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 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. (Sec. 12, RR No. 12-
2018)
Rationale: The NIRC considers the transfer as
a donation since what motivated the transferor
in transferring his property is his generosity.
Note: Where the consideration is fictitious, the
entire value of the property transferred shall be
subject donor‘s tax. (De Leon and De Leon, Jr., The
National Internal Revenue Code, Vol. I, 2011 ed., p.
760)
 Dividend distribution an equity transaction,
not a disposition of shares of stock
Dividends comprise any distribution whether in
cash or other property in the ordinary course of

144 Center for Legal Education and Research

 Purple Notes
business by a domestic or resident corporation
out of its earnings and profits, even though
extraordinary in amount. In recording the
property dividends at their carrying/book value,
there was no profit or gain realized or
recognized in the transaction. Distribution of
dividends is a non-reciprocal transfer. There was
no consideration given nor received during the
transfer which would have triggered the
assessment of deficiency donor‘s tax. (Trans-Asia
Oil and Energy Development Corporation vs
Commissioner of Internal Revenue, CTA Case No.
9078, September 28, 2018)
Bona fide arm‘s length transaction
(Exception to the rule on insufficient
consideration) (Sec 16, RR 12-18)
Where the transaction arises from a sale,
exchange, or other transfer of property made in
the ordinary course of business (a transaction
which is a bona fide, at arm‘s length, and free
from any donative intent), will be considered as
made for an adequate and full consideration in
money or money‘s worth. (Sec. 100, NIRC, as
amended by TRAIN Law)
Note: The above provision inserted in the
TRAIN law prescribes an exception to the
general rule that a sale/exchange or transfer
done with an inadequate consideration shall be
imposed donor‘s tax. For the exception to apply
the following must be present:
 Bona fide transaction
 Arm‘s length and
 Free from any donative intent
b. Condonation/Remission of Debt
If the creditor condones the indebtedness of the
debtor the following rules apply:
 On account of debtor‘s services to the
creditor the same is in taxable income to
the debtor;
 If no services were rendered but the
creditor simply condones the debt, it is
taxable gift and not a taxable income.
c. Renunciation of Inheritance (Sec. 12,
RR 12-2018)
145
Taxation Law
General Rule: Renunciation of inheritance in
favor of other heirs is subject to Donor‘s tax:
1. Renunciation by the surviving spouse of
his/her share in the ACP/CGP after the
dissolution of the marriage in favor if the
heirs of the deceased spouse or any other
persons.
2. Renunciation by an heir, specifically and
categorically in favor of identified heir/s to
the exclusion or disadvantage of the other
co-heirs in the hereditary estate.
Exception: The general renunciation by an
heir, including the surviving spouse, of their
share in the hereditary estate left by the
decedent is not subject to Donor‘s tax.
4. Classification of Donor
Donor‘s tax applies to individuals and
corporations (in their secondary purpose). They
may be classified into:
1. Residents
i. Resident Citizens
ii. Resident Aliens
iii. Domestic Corporation
iv. Resident Foreign Corporation
2. Non-residents
i. Non-resident Citizen
ii. Non-resident Alien
iii. Non-resident Foreign Corporation
Such classification is important in determining
the deductions from the gross gift of the donor,
and in filing the return.
5. Determination of Gross Gift
a. Composition of Gross gift
All property, real or personal, tangible or
intangible, that was given by the donor to the
donee by way of gift, without the benefit of any
deduction. (Sec. 104, NIRC)
Bar Operations C ommissions 145
 Purple Notes
Taxation Law
All gifts made directly or indirectly whether in
trust or otherwise as long as there is no
consideration or the same is gratuitously made
shall form part of a donation.
Note: If the donor is:
1. RC/NRC/RA – liable for donor‘s tax
regardless of where the gift was made or
where the property is located.
2. NRA – liable for donor‘s tax only if the
property donated is within the Philippines.
b. Valuation of gifts made in property
1. Personal property – The FMV of the
property given at the time of the
donation(Sec.13,R.R. 12-2018, as amended by
R.R. 17-2018)
2. Real property – The FMV as determined
by the CIR at the time of donation (zonal
value), or the FMV as shown in the
schedule of values fixed by the provincial
and city assessors (assessed value),
whichever is higher(Id.)
Note: If there is no zonal value, the taxable
base is the FMV that appears in latest tax
declaration. If there is an improvement, the
value of the improvement is the
construction cost per building permit and/or
occupancy permit plus 10% per year after
the year of construction, or the market
value per latest tax declaration.
Exemptions of Gifts from Donor‘s Tax
Exempt Transfers
a. If the decedent at the time of his death or
the donor at the time of the donation was a
citizen and resident of a foreign country
which at the time of his death or donation
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,
b. If the laws of the foreign country of which
the decedent or donor was a citizen and
resident at the time of his death or donation
allows a similar exemption from transfer or
146 Center for Legal Education and Research
death taxes of every character or2018
description
in respect of intangible personal property
owned by citizen of the Philippines not
residing in that foreign country(Sec. 104,
NIRC)
c. Exempt Donations
1. Gifts Made By Resident
a. Gifts made to or for the use of national
government or any entity created by its
agency which is not conducted for profit, or
any political subdivision of the said
government(Sec. 17, R.R. 12-2018)
b. Gifts made in favor of educational and or
charitable, religious, cultural, social welfare
institution, provided however, not more than
30% of the said donation is devoted by the
donee for administrative purposes.(Id.)
c. Athlete‘s prizes and awards given to athletes
in local and international tournaments and
competitions held in the Philippines or
abroad; and sanctioned by their respective
sport association. (Sec. 1, R.A. 7549)
d. Exempted from donor‘s tax under other
special laws:
1. International Rice Research Institute
(IRRI)
2. Ramon Magsaysay Award Foundation
3. Philippines Inventors Convention (PIC)
4. Integrated Bar of the Philippines (IBP)
5. The Development Academy of the
Philippines
6. Aquaculture Department of the
Southeast Asian Fisheries
7. Development Center of the Philippines
8. National Museum
9. National Library
10. National Social Action Council
11. Philippine American Cultural Foundation
12. Task Force on Human Settlement on the
donation of equipment, materials, and
services.
Note: As amended by TRAIN law, donations
made on account of marriage (dowries) are no
longer exempt from donor‘s tax.
 Purple Notes
Gifts given by a Non-resident Alien
a. Gifts made to or for the use of the national
government or any entity created by its
agency which is not conducted for profit, or
any political subdivision of the said
government.
b. Gifts made in favor of educational and or
charitable, religious, cultural, social welfare
institution, accredited NGO, trust or
philanthropic organization for research
institution, provided however that not more
than 30% of the said donation is devoted by
the donee for administrative purposes.
Rule on Political Contributions (Sec. 99 (B))
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.
The election law involved on the matter is
Republic Act No. 7166, promulgated November
23, 1991, particularly Sec. 13 and 14.
Section 13. Authorized Expenses of
Candidates and Political Parties. – The
agreement amount that a candidate or
registered political party may spend for election
campaign shall be as follows:
(1) For candidates. – Ten pesos (P10.00) for
President and Vice-President; and for other
candidates Three Pesos (P3.00) for every
voter currently registered in the
constituency where he filed his certificate of
candidacy: Provided, That a candidate
without any political party and without
support from any political party may be
allowed to spend Five Pesos (P5.00) for
every such voter; and
(2) For political parties. – Five pesos (P5.00) for
every voter currently registered in the
constituency or constituencies where it has
official candidates.
Any provision of law to the contrary
notwithstanding any contribution in cash or in
kind to any candidate or political party or
147
Taxation Law
coalition of parties for campaign purposes, duly
reported to the Commission shall not be subject
to the payment of any gift tax.
Section 14. Statement of Contributions
and Expenditures: Effect of Failure to File
Statement. – Every candidate and treasurer of
the political party shall, within thirty (30) days
after the day of the election, file in duplicate
with the offices of the Commission the full, true
and itemized statement of all contributions and
expenditures in connection with the election.
Only those contributions that have been spent
during the campaign period are exempt from
donor‘s tax. As such, donations utilized before or
after the campaign period, as well as campaign
contributions made by corporations, are subject
to donor‘s tax and are not deductible as political
contributions on the part of the donor. (Revenue
Memorandum Circular No. 30-2016 dated March 14,
2016)
General Rule:Campaign contributions are not
included in the taxable income of the candidate
to whom they were given, the reason being that
such contributions were given not for the
personal expenditure/enrichment of the
concerned candidate, but for the purpose of
utilizing such contributions for his/her campaign.
Thus, to be considered as exempt from income
tax, these campaign contributions must have
been utilized to cover a candidate‘s expenditures
for his/her electoral campaign (Sec. 2, RR No. 7-
2011, February 16, 2011).
Exception:
 Unutilized/excess campaign funds, that is,
campaign contributions net of the
candidate‘s campaign expenditures, shall be
considered as subject to income tax, and as
such, must be included in the candidate‘s
taxable income as stated in his/her Income
Tax Return (ITR) filed for the subject
taxable year.(Sec. 2, RR No. 7-2011, February
16, 2011)
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 Purple Notes
Taxation Law
 No foreign corporation shall give donations
in aid of any political party or candidate or
for purposes of partisan political activity.
(Sec. 35(i), Revised Corporation Code)
 Political contributions made prior to the
passage of RA No. 7166 on November 25,
1991 were subject to donor‘s tax. (Abello vs
CIR, G.R. No. 129721, February 23, 2005)
Donations between spouses
General Rule: Donation during marriage is
void. (Art. 87, NCC)
Void donations are not subject to donor‘s tax.
However, if the donor‘s tax was already paid,
the taxpayer only has two years from the date
of payment to ask or file for a claim for refund,
regardless of any supervening event.
Exceptions:
a. Donations mortis causa;
b. Moderate gifts which the spouses may give
each other on the occasion of any family
rejoicing.
Donations by one of the spouses
If what was donated is a conjugal or community
property and only the husband signed the deed
of donation, there is only one donor for donor‘s
tax purposes, without prejudice to the right of
the wife to question the validity of the donation
without her consent. (Sec. 14, RR No. 12-2008)
Husband and wife are considered separate and
distinct taxpayers for purposes of donor‘s tax.
6. Tax Credit for Donor‘s tax paid in
foreign country
General Rule: The tax imposed by the NIRC
upon a donor at the time of donation shall be
credited with the amounts of any donor‘s tax
imposed by the authority of a foreign country.
Exception: Limitations on tax credit. The
amount of the credit taken under this Section
148 Center for Legal Education and Research
2018
shall be subject to each of the following
limitations:
1. For Donor‘s taxes paid to one foreign
country (Per Country limitation)
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 gift
situated within such country taxable under
the NIRC bears to his entire net gifts.
Net Gift (Foreign country) x Ph Donor‘s tax
Entire Net Gift
2. For Donor‘s taxes paid to two (2) or
more foreign countries (Global
Limitation)
The total amount of credit shall not exceed
the same proportion of the tax against
which such credit is taken, which the net
gift situated outside the Philippines taxable
under the NIRC bears to his entire net gift.
Net Gift (All Foreign country) x Ph Donor‘s tax
Entire Net Gift
Who may claim?
Only a donor who was a citizen or a resident
of the Philippines at the time of donation can
claim tax credit for any donor‘s tax paid to a
foreign country.
7. Filing of return and payment(Sec. 103,
NIRC; Sec. 15, RR 12-2018)
When filing is required
Any individual who makes any transfer by gift
shall make a return under oath in duplicate and
include the following:
a. Each gift made during the calendar year
which is to be included in computing net
gifts;
b. The deductions claimed and allowable;
c. Any previous net gifts made during the
same calendar year;
d. The name of the done; and
e. Such further information as maybe required
by the Commissioner.
 Purple Notes
Taxation Law
Note: As amended by the TRAIN Law, the net business ; (2) at arm‘s
gift exempt from donor‘s tax is now increased to length NOT subject to
P250,000. donor‘s tax and (3)
free from donative
Period for filing intent (RR 13-2018,
The return shall be filed within 30 days after the Sec.16)
date the gift was made or completed. Dowries
Donations on account No longer exempt.
Place of filing of marriage of his/her Sec. 101(A)
Unless the Commissioner otherwise permits, the children are exempt
return shall be filed and paid to: from donor‘s tax up to
a. Authorized Agent Bank; Php 10,000 (Sec. 101
b. Revenue District Officer; (A)(1))
c. Revenue Collection Officer;
d. Duly authorized treasurer of the city or Difference between Donor‘s tax and Estate
municipality where the donor was tax (effecting TRAIN Law provisions):
domiciled at the time of the transfer; or
e. If there be no legal residence in the DONOR‘S TAX ESTATE TAX
Philippines, with the Office of the Nature of transfer
Commissioner During the lifetime of the After death of decedent
donor
Note: In case of gifts made by non-resident, Transfer takes place only
the return may be filed with the Philippine May take place between between natural persons
natural and juridical
Embassy or Consulate in the country where he is
persons
domiciled at the time of transfer, or directly with
Amount exempt
the Office of the Commissioner. P250,000 Nil
Rate of tax
Payment 6% of Taxable Net Gifts 6% of Taxable NetEstate
The donor‘s tax shall be paid upon filing of the in excess of Php 250,000
return. No extension is allowed as compared to Grant of exemption
estate tax. Sec. 101, NIRC Sec .87, NIRC
Grant of deductions
Summary of Changes made by TRAIN Law None Yes. Sec 86, NIRC
for Donor‘s Tax Notice requirement
General Rule:
NIRC, as amended Notice of donation is not Notice of death is no
NIRC required longer required
by TRAIN Law
As to Rate
0-15% for relatives; Flat tax rate of 6% Exceptions:
30% for strangers regardless whether or
(Sec.99 (B)) not donation is made 1. Donations to NGO
to a relative or worth at least P50,000.
stranger (Sec. 99 (A)) Provided, not more than
Amount of Exempt Gifts 30% of which will be
used for administration
Php 100,000 (Sec.99 Php 250,000 (Sec. 99
purposes.
(A)) (A))
Transfer less than Adequate and Full 2. Donation to any
Consideration candidate, political party,
Automatically subject If such transaction is or coalition of parties
to donor‘s tax (Sec. made (1) in the (RR No. 13-2018)
100) ordinary course of the Filing of return

149
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 Purple Notes
Taxation Law
All transfers by gift 1. A transfer subject to
except those which under estate tax
Sec. 101 of the NIRC
which are exempt from 3. Estate consists of
tax (Sec. 103, NIRC) registered or registrable
property, regardless of
value of gross estate
Contents of return
1. Each gift made during 1. Value of the gross
the calendar year which estate
is to be included in 2. Deductions under Sec.
computing net gifts 86, NIRC
2. The deductions 3. Other pertinent
claimed and allowable information
3. Any previous net gifts 4. If Gross estate
made during the same exceeds P5M, certified by
calendar year a CPA as to assets,
4. The name of the deductions, tax due,
donee whether paid or not
5. Such further
information as may be
required by rules and
regulations made
pursuant to law
Time of filing Return
Within 30 days after Within 1 year from death
donation was made of decedent.
Extension for filing return
None 30 days in meritorious
cases
Payment of tax due
Pay as you file Pay as you file or could
be paid in installments
Extension of payment
None General Rule:
Extension of payment is
not allowed
Exception:
When it would impose
undue hardship upon the
estate or any of the
heirs, extension may be
allowed but not to
exceed 5 years in case of
judicial settlement or
2years in case of extra
judicial settlement.
Exception to the
exception:
When taxpayer is guilty
of:
1. Negligence
150 Center for Legal Education and Research
2018
2. Intentional disregard
of rules and regulations
3. Fraud
E. VALUE-ADDED TAX (VAT)
(as implemented by RR 13-2018)
1. Nature and characteristics of value
added tax
a)Tax on value added or mark-up
―Value added‖ is the difference between the
total sales of the taxpayer for the taxable
quarter subject to VAT and his total
purchases for the same period subject also
to value added tax (Mamalateo, 2014).
b) Sales tax
VAT is a tax on the taxable sale, barter or
exchange of goods, properties or services. A
barter or exchange has the same tax
consequence as a sale. A sale may be an
actual or deemed sale, or an export sale or
local sale. (Mamalateo, Reviewer on Taxation,
2014, p.401)
c) Tax on consumption
VAT is ultimately a tax on consumption,
even though it is assessed on many levels of
transactions on the basis of a fixed
percentage. It is the end user of consumer
goods or services which ultimately shoulders
the tax, as the liability therefrom is passed
on to the end users by the providers of
these goods or services who in turn may
credit their own VAT liability (or input VAT)
from the VAT payments they receive from
the final consumer (or output VAT). The
final purchase by the end consumer
represents the final link in a production
chain that itself involves several transactions
and several acts of consumption. (CIR vs.
Magsaysay Lines, GR No. 146984; July 28, 2006)
A tax which is imposed only on the increase
in the worth, merit or importance of goods,
properties, or services being sold or
rendered.
 Purple Notes
A tax levied on a wide range of goods and
services. It is a tax on the value, added by
every seller, with aggregate annual sale of
articles and/or services exceeding
P3,000,000.00.
 VAT is computed at the rate of 0% or 12%
of the gross selling price of goods or gross
receipts realized from the sale of service.
The VAT system of taxation is aimed at
realizing the services, simplifying tax
administration and to make the tax system
more equitable and to enable the country to
attain economic recovery (Kapatiran ng
Naglilingkod sa Pamahalaan ng Pilipinas vs. Tan
etc., G.R. No. 81311, June 30, 1988)
 It is an indirect tax that may be shifted or
passed on to the buyer, transferee or
lessee of the goods, properties or services.
(CIR vs. Seagate Technology (Philippines), G.R.
No. 153866, February 11, 2005)
 VAT is a uniform tax of 0% or 12% levied
on every importation of goods, whether or
not in the course of trade of 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.(Sec. 106)
d) Indirect: Impact and Incidence of
taxation
VAT is an indirect tax. As such, the
amount of tax paid on the goods, properties
or services bought, transferred,
or leased may be shifted or passed on by
the seller, transferor, or lessor to the buyer,
transferee or lessee. Unlike a direct tax,
such as the income tax, which primarily
taxes an individual‘s ability to pay based on
his income or net wealth, an indirect tax,
such as the VAT, is a tax on consumption of
goods, services, or certain transactions
involving the same.
Further, in indirect taxation, there is a need
to distinguish between the liability for
the tax (impact) and the burden of the
tax (incidence). In adding or including the
151
Taxation Law
VAT due to the selling price, the seller
remains the person primarily and legally
liable for the payment of the tax. What is
shifted only to the intermediate buyer and
ultimately to the final purchaser is the
burden of the tax. Stated differently, a seller
who is directly and legally liable for payment
of an indirect tax, such as the VAT on goods
or services is not necessarily the person who
ultimately bears the burden of the same tax.
It is the final purchaser or consumer of such
goods or services who, although not directly
and legally liable for the payment thereof,
ultimately bears the burden of the tax.
(Contex vs. CIR, G.R. No. 151135, July 2, 2004).
Impact Incidence
The impact of tax in incidence of tax in VAT
VAT is with the seller is with the buyer
Directly and legally Burden of the same tax
liable for payment
Impact (LIABILITY)
The impact of tax in VAT is with the seller, who
is the one statutorily liable to remit the said tax
to the BIR.
The tax is limited only to the value added to
goods, properties or services by the seller,
transferor or lessor. 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.
Incidence (BURDEN)
The incidence of tax in VAT is with the buyer,
since it is him who shoulders the said tax
passed-on by the seller, it is upon him where the
liability for VAT finally rests.
Illustration:
Co. A, a VAT registered corporation/individual,
operating a small grocery in Makati sold to B,
consumer who would use the items bought for
personal consumption.
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 Purple Notes
Taxation Law
From whose pocket will the payment of
output tax come from? Co. A, (the
business) or B, (the consumer)?
Since VAT is an indirect tax. Such liability can be
shifted to the consumer of the goods and
services. Hence, it is B as the consumer who will
shoulder or bear the tax. (Incidence)
Who will be liable to pay the Output VAT
to the BIR?
Co. A, as the seller of goods will be liable to pay
the Output VAT. (Impact)
Co. A will retain the amount of output tax
collected from B and shall remit to the BIR when
it falls due for payment.
Note:
Exempt from the tax are sales of farm and
marine products, so that the costs of basic food
and other necessities, spared as they are from
the incidence of the VAT, are expected to be
relatively lower and within the reach of the
general public. (VAT exempt Transactions)
e. Tax Credit Method
There are two main methods of calculating VAT
across the world, namely: (1) the tax credit
method (also known as: credit-invoice or
invoice-based method) and (2) the subtraction
or accounts-based method.
Under the VAT method of taxation (in the
Philippines), 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 (CIR v. Seagate, G.R. No.
153866, Feb. 11, 2005)
.i.e.
The tax credit system allows a VAT-registered
entity to "credit against or subtract from the VAT
charged on its sales or outputs the VAT paid on
its purchases, inputs and imports."96
The VAT paid by a VAT-registered entity on its
imports and purchases of goods and services
from another VAT-registered entity refers to
152 Center for Legal Education and Research
input tax.97 On the other hand, 2018
output tax
refers to the VAT due on the sale of goods,
properties, or services of a VAT-registered
person.98
Ordinarily, VAT-registered entities are liable to
pay excess output tax if their input tax is less
than their output tax at any given taxable
quarter. However, if the input tax is greater than
the output tax, VAT-registered persons can carry
over the excess input tax to the succeeding
taxable quarter or quarters(CE Luzon Geothermal
Power Co., Inc. vs. CIR,G.R. No. 197526,July 26,
2017, penned by J. Leonen)
i.e.
a) There is NETVAT Payable when Output Tax
exceeds input Tax.
Or
b) There is Excess Input Tax when input tax
exceeds Input Tax
f. Destination Principle; Cross Border
Doctrine
Destination Principle
As a general rule, the VAT system uses the
Destination Principle as a basis for the
jurisdictional reach of the tax. Goods and
services are taxed only in the country
where they are consumed. Thus, exports are
zero-rated, while imports are taxed. (Domondon,
2014)
No VAT shall be imposed to form part of
the cost of goods destined for
consumption outside of the territorial
border of the taxing authority. Hence, actual
export of goods and services from the
Philippines to a foreign country must be free
from VAT. Conversely, those destined for use or
consumption within the Philippines shall be
imposed with the 12% VAT.
Output Tax – Input Tax = Net VAT Payable
or Excess Input Tax
 Purple Notes
Exception to the Destination Principle
However, the law clearly provides for an
exception to the destination principle; that is, for
a zero percent VAT rate for services that are
performed in the Philippines, "paid for in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of the
BSP." Thus, for the supply of service to be zero-
rated as an exception, the law merely requires
that first, the service be performed in the
Philippines; second, the service fall under any of
the categories in Section 102(b) of the Tax
Code; and, third, it be paid in acceptable foreign
currency accounted for in accordance with BSP
rules and regulations (CIR vs American Express, GR
No. 152609, June 29, 2005).
Cross Border Doctrine
In connection with the Destination Principle, the
Philippine VAT system adheres to the Cross
Border Doctrine, according to which, no
VAT shall be imposed to form part of the
cost of goods destined for consumption
outside of the territorial border of the
taxing authority. Hence, actual export of
goods and services from the Philippines to a
foreign country must be free from VAT.
Conversely, those destined for use or
consumption within the Philippines shall be
imposed with the 12% VAT. (CIR v. Seagate, G.R.
No. 153866, Feb. 11, 2005)
Technical Importation
An application of the cross border doctrine
where goods sold by a person located in a
special economic zone to a person out of
the customs territory or economic zone
will be treated as importation. In the same
manner, that a person selling to another inside
the customs territory or special economic zone
such shall be treated as exportation and subject
to subject to zero –rating.
In relation the above, Section 8 of Rep. Act No.
7916, as amended, mandates that the Philippine
Economic Zone Authority (PEZA) shall manage
and operate the ECOZONES as a separate
customs territory; thus, creating the fiction that
153
Taxation Law
the ECOZONE is a foreign territory. As a result,
sales made by a supplier in the Customs
Territory to a purchaser in the ECOZONE shall
be treated as an exportation from the Customs
Territory.
VAT Zero-rating on sales of goods/services to
Philippine Economic Zone Authority locators shall
remain in full force and effect.
The TRAIN Law does not affect the current VAT
zero-rating of sales of goods/services to PEZA
locators. Accordingly, Section 8 of Republic Act
No. 7916, otherwise known as the ―Special
Economic Zone Act of 1995‖, which provides
that special economic zones are to be operated
and managed as separate customs territory, has
not been amended or repealed by the
TRAIN.(PEZA Memorandum Circular No. 2018-003)
2. PERSONS LIABLE TO PAY VAT (SoT-Lor-
Ser-I)
1. Any person who, in the course of trade
or business,
a. sells, barters, or exchanges goods
or properties (seller or
transferor)
b. leases goods or properties (lessor)
c. renders services (service
provider)
2. Imports goods (importer) – the person
who brings goods into the Philippines,
whether or not made in the course of
trade or business
As an indirect tax, VAT-registered sellers may
pass on or shift the burden of the VAT to the
buyers. However, the amount of VAT is still to
be remitted to the BIR by the seller as he is the
one statutorily liable for its payment.
―In the course of trade or business‖
The phrase means the regular conduct or
pursuit of a commercial or economic activity,
including
transactions incidental thereto, by any person
regardless of whether or not the person
Bar Operations C ommissions 153
 Purple Notes
Taxation Law
engaged therein is a non-stock, non-profit
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.
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.
(Sec. 4.105-3, RR No. 16-05)
Transactions Incidental Thereto
The term ―incidental‖ means something
necessary, appertaining to, or depending upon
another which is termed the principal,
something incident to the main purpose. [Davis
vs Pine Lumber Co., 273 C.A.2d 218, 77 Cal. Rptr.
825; Magsaysay Lines Inc., et.al. vs Commissioner of
Internal Revenue (CTA Case No. 4353 dated April 27,
1992)].
One time or isolated transaction can be
considered ―incidental‖ to the main
business if the asset sold was used in
business and recorded under Property,
Plant and Equipment: It does not follow that
an isolated transaction cannot be an incidental
transaction for purposes of VAT liability. Indeed,
a reading of Section 105 of the 1997 Tax Code
would show that a transaction "in the course of
trade or business" includes "transactions
incidental thereto." In which case, the sale of a
fully-depreciated vehicle by a company
principally engaged in the conversion of steam
to electricity was held to be subject to VAT since
the vehicle was used in business and recorded
under property, plant and equipment. (Mindanao
Geothermal II vs. Commissioner of Internal
Revenue,G.R. No. 193301, March 11, 2013)
Main business must be VATable to
consider transactions ―incidental‖ thereto
VATable as well: otherwise, if the main line of
business is VAT-exempt, such as sale of copra,
then transactions incidental thereto are
considered VAT-exempt as well. e.g., sale of
delivery truck by the one who sells copra.
However, if the sale is VAT zero-rated, the
incidental transactions thereto, not considered
154 Center for Legal Education and Research
2018
zero-rated, are treated as subject to 12% VAT.
This is because a zero-rated sale is actually
subject to VAT, although at 0% rate.
The requirement of ―in the course of trade
or business‖ or ―incidental thereto‖ is NOT
applicable to:
a. Importations – in fact, even if the importation
is personal and not for business purposes,
the same will be considered subject to VAT,
unless the importer is an exempt importer
like the BOI-registered enterprise or PEZA-
registered entities enjoying exemption from
taxes on their importations under their
registration.
b. Sale of service by non-residents in the
Philippines – as long as the services are
rendered in the Philippines, the same will be
subject to withholding VAT. The last
paragraph of Sec. 105 provides that they
―shall be considered as being in the course of
trade or business.‖
Services rendered on a reimbursement-at-
cost basis still subject to VAT even if no
profit is realized therefrom: even a non-
stock, non-profit, organization or government
entity is liable to pay VAT on the sale of goods
or services. 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.
Sec. 108 of the National Internal Revenue Code
of 1997, as amended, defines the phrase "sale
of services" as the "performance of all kinds of
services for others for a fee, remuneration or
consideration." It includes "the supply of
technical advice, assistance or services rendered
in connection with technical management or
administration of any scientific, industrial or
commercial undertaking or project.‖
A domestic corporation that provided technical,
research, management and technical assistance
to its affiliated companies and received
payments on a reimbursement-of-cost basis,
without any intention of realizing profit, was
subject to VAT on services rendered. In fact,
even if such corporation was organized without
 Purple Notes
any intention realizing profit, any income or
profit generated by the entity in the conduct of
its activities was subject to income tax.(BIR
Ruling No. 010-98 dated February 5, 1998)
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. (CIR vs. CA and
Commonwealth Management Services (COMASERCO);
GR No. 125355; March 30, 2000)
Subsidized expenses where there is no
sale of service is not subject to VAT: In the
case of CIR vs. Sony Philippines, Inc., SIS paid
for Sony Philippines an advertising expense
which was later on returned by Sony to SIS.
Sony Philippines was assessed by the BIR of
deficiency VAT for reimbursing the advertising
expenses advanced by SIS. The Supreme Court
held that ―[t]o begin with, the said subsidy
termed by the CIR as reimbursement was not
even exclusively earmarked for Sony's
advertising expense for it was but an assistance
or aid in view of Sony's dire or adverse
economic conditions, and was only "equivalent
to the latter's (Sony's) advertising
expenses.‖Under Sec. 106, ―there must be a
sale, barter or exchange of goods or properties
before any VAT may be levied. Certainly, there
was no such sale, barter or exchange in the
subsidy given by SIS to Sony. It was but a dole
out by SIS and not in payment for goods or
properties sold, bartered or exchanged by
Sony.‖
Unlike in COMASERCO case, Sony did not render
any service to SIS at all. The services rendered
by the advertising companies, paid for by Sony
using SIS dole-out, were for Sony and not SIS.
SIS just gave assistance to Sony in the amount
equivalent to the latter's advertising expense but
never received any goods, properties or service
from Sony. (CIR vs. Sony Philippines, Inc., GR No.
178697 dated November 17, 2010)
3. Imposition of VAT
155
Taxation Law
VAT is computed at the rate of 0% or 12% of
the gross selling price of goods or gross receipts
realized from the sale of service. The VAT
system of taxation is aimed at realizing the
services, simplifying tax administration and to
make the tax system more equitable and to
enable the country to attain economic recovery
(Kapatiran ng Naglilingkod sa Pamahalaan ng
Pilipinas vs. Tan etc., G.R. No. 81311, June 30,
1988)
The following are the three (3) categories of
transactions subject to a VAT rate of 12%, vis-à-
vis their tax bases (Sagap-GSP, Igo-TLC,
Serlop-GR), zero rated transactions are to be
discussed later on:
Nature of Transaction Tax Base
1. On sale of goods Gross Selling Price (GSP)
and properties
(Sagap)
2. On importation of Total Landed Cost (TLC)
goods (Igo)
3 On sale of services Gross receipts (GR)
and use and lease of
properties (Serlop)
Determination of Tax
1. If the amount provided is exclusive of VAT,
that amount is simply multiplied by 12% to
arrive at the amount of VAT;
2. If the amount provided is inclusive of VAT,
that amount is divided by 112% and then
multiplied by 12% to arrive at the amount of
VAT.
The amount indicated in the official receipt or
the invoice amount is presumably inclusive of
VAT. Thus, if the official receipt or invoice price
states P112,000 as the amount of sales, the VAT
amount is 12/112 of P112,000 which is P12,000.
a. VAT on sale of goods or properties
The term "goods" or "properties" shall mean all
tangible and intangible objects which are
capable of pecuniary estimation and shall
include:
Bar Operations C ommissions 155
 Purple Notes
Taxation Law
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 television time.
i. Tax base: gross selling price
Gross Selling Price is 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, NIRC)
In short, the gross selling price is the invoice
price less any allowable discounts and excluding
the VAT.
Allowable deductions to gross selling
prices
a. Sales returns and allowances
b. Sales discounts, provided:
(1) The sales discount granted is indicated in
the invoice at the time of sale; and
(2) The grant of which does not depend upon
the happening of a future event.
(3) The discount is expressly indicated in the
invoice/OR. (Sec. 4.106-9, RR No. 16-05)
Accordingly, a cash discount which is based on
the prompt payment of the buyer is not
allowable as a deduction from gross sales
because it is dependent on the timing of
payment. Trade discounts, however, which are
granted at the time of sale and are based,
usually, on the bulk of the orders, is allowable
since it is not dependent on a future event.
156 Center for Legal Education and Research
2018
Sale or exchange of Real Property
In case of barter, sale or exchange of real
property subject to VAT, gross selling price shall
mean the consideration stated in the sales
document or the fair market value whichever is
higher.
The term ―fair market value (FMV)‖ shall
meanwhichever is higher of the:
(1) FMV as determined by the Commissioner
(zonal value);
(2) FMV as shown in schedule of values of the
Provincial or City Assessors (real property
tax declaration). (Sec. 4.106-4, RR No. 16-
05)
VAT accrues on the consummation of the
sale
1. All installment payments made or is
expected to be received during the year of
sale; and
2. When the amount of mortgage is more than
the cost to the seller, the excess shall form
part of the initial payments (e.g., the
mortgage on the real property is
P1,000,000, where the cost to the seller is
P800,000 – the excess of P200,000 is
considered part of the initial payments).
The term does not include any notes or other
evidence of indebtedness issued by the
purchaser to the seller or the mortgage when
the same is lower than the cost to the seller.
Sale on deferred payment basis(Initial
Payment>25% of GSP)
If the initial payments exceed 25% of the gross
selling price/contract price, the transaction shall
be considered as a sale on a deferred-payment
basis and will be treated as a cash sale which
makes the entire selling price taxable in the
month/quarter of sale.
ILLUSTRATION:
A land was sold for P3,000,000, exclusive of VAT
payable in 20 monthly instalments of P150,000
each.
 Purple Notes
Scenario No. 1
If the lot was sold on March 1, 2020, the total
monthly installment payments or the ―initial
payments‖ would be P1,500,000 (i.e., P150,000
installments for 10 months).
Since the initial payments is 50% of the selling
price, this would be considered as a sale on
―deferred-payment‖ basis and accordingly, the
whole P360,000 (P3,000,000 * 12%) VAT on
the sale of lot would be due in the
month/quarter of sale which is on March.
Scenario No. 2:
If the lot was sold on Nov. 1, 2020, the total
monthly instalment payments for 2020 would be
P300,000 (equivalent to two months), which is
10% of the selling price and thus would qualify
as installment sale.
Here, only 12% of the P300,000 would be the
VAT due, which isP18,000 for November and
P18,000 for December, or P36,000 for the
quarter.
Scenario No. 3:
If in (b) above, the fair market value of the land
is P4,000,000, then this amount will be the basis
of the VAT computation, which in the case of
real property is based on the FMV or Selling
Price whichever is higher. Hence, the VAT
computation and the VAT due will be different.
Sale of real property used in business of a
non – real estate dealer may still be
subject to VAT as an incidental transaction
Under Sec. 106(1)(a), the sale of real property,
to be considered as goods subject to VAT, must
be made by a real estate developer or dealer, or
one who holds such real property primarily for
sale. A real estate dealer includes any person
engaged in the business of buying, developing,
selling, exchanging real properties as principal
and holding himself out as a full or part-time
dealer in real estate. However, under Sec.
14(p)(1) of RR No. 16-05, as amended by RR
No. 4-2007, real property used in business is
considered ordinary asset and its sale will be
157
Taxation Law
regarded as incidental to the business and thus
subject to VATeven if the seller is not
considered a real estate dealer.
ii. Transactions deemed sale
This kind of sale entails no actual sale, but by
their nature, they are considered as ―sales‖
subject to VAT.
Rationale
In these kinds of transactions, input VAT was
already used by the seller as a credit against
output VAT. To recoup from the input VAT
already claimed on such goods which are not
subsequently subjected to output VAT since they
are not sold, the Law considered them as sold
and an output VAT shall be computed
therefrom. Note that the input VAT on purchase
of raw materials can be claimed on the month of
purchase with the expectation that the goods
will relate to output VAT upon their sale; if the
above transactions do not result in a VATable
transaction, or if not deemed sale, then the
taxpayer would have benefited from the input
VAT without any corresponding output VAT
liability.
The following shall be considered
transactions deemed sale (TDCR):
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.
This can take place when VAT-registered person
withdraws goods from his business for his
personal use. (Sec. 4.106-7[a][1] of RR No. 16-
05)
2. Distribution or transfer to:
a. Shareholders or investors as share in
the profits of the VAT-registered
persons
Property dividends which constitute stocks in
trade or properties primarily held for sale or
lease declared out of retained earnings and
Bar Operations C ommissions 157
 Purple Notes
Taxation Law
distributed by the company to its shareholders
shall be subject to VAT. (Sec. 4.106-1[a][2][i] of
RR No. 16-05)
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
Consignment of goods in itself is not a VAT
taxable transaction. Only if actual sale is not
made within sixty (60) days following the date
such goods were consigned will it be treated as
a transaction deemed sale subject to VAT.
Consigned goods returned by the consignee
within the 60-day period are not deemed
sold.
4. Retirement from or cessation of business,
with respect to inventories of taxable goods
existing as of such retirement or cessation.
(Sec. 106[B])
Retirement from or cessation of business with
respect to all goods on hand, whether capital
goods, stock-in-trade, supplies or materials as of
the date of such retirement or cessation,
whether or not the business is continued by the
new owner or successor.
Transactions that are considered
retirement or cessation of business under
Sec. 4.106-7(a), RR 16-05):
i. 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.
ii. Dissolution of a partnership and creation of
a new partnership which takes over the
business.
Tax base
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 under Sec.
4.106-7 paragraph (a), or where the gross
158 Center for Legal Education and Research
selling price is unreasonably lower 2018
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 or the nearest date of sale. In case of
such, the actual market value shall be the tax
base. (Sec. 4.106-7 (b), RR No. 16-05)
For Item Nos. 1-3, the output tax shall be
(generally) based on the market value of the
goods deemed sold as of the time of the
occurrence of the transaction.
However, in case of retirement or cessation of
business (Item No. 4), 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.
Nonetheless, if one of the parties in the
transaction is the government as defined and
contemplated under the Administrative Code,
the output VAT on the transaction shall be
based on the actual selling price. (Sec. 7, R.R. 4-
2007)
iii. Change or cessation of status as VAT
tax registered person
The VAT shall also apply to goods disposed of or
existing as of a certain date if under
circumstances to be prescribed in rules and
regulations to be promulgated by the Secretary
of Finance, upon recommendation of the
Commissioner, the status of a person as a VAT-
registered person changes or is terminated.
The following change in or cessation of
status of a VAT registered person are
subject to VAT:
The VAT shall apply to goods or properties
originally intended for sale or use in business,
 Purple Notes
and capital goods which are existing as of the
occurrence of the following (ACVE):
1. Change of business activity from VAT
taxable status to VAT-exempt status;
2. Approval of a request for cancellation of
registration due to reversion to exempt
status;
3. Approval of request for cancellation or
registration due to a desire to revert to
exempt status after the lapse of 3
consecutive years from the time of
registration by a person who voluntarily
registered despite being exempt under Sec.
109(2) of the Tax Code;
4. Approval of request for cancellation of
registration of one who commenced
business with the expectation of gross
sales or receipts exceeding P3,000,000
(P1,919,500 prior to the TRAIN), but who
failed to exceed this amount during the first
12 months of operation. (Sec. 4.106-8(a), RR
No. 16-05)
The following change in or cessation of
status of a VAT registered person are NOT
subject to Output Tax:
The VAT shall not apply to goods or properties
existing as of the occurrence of the following
(CNM):
1. Change of control of a corporation by the
acquisition of the controlling interest of such
corporation by another stockholder or group
of stockholders. The goods or properties
used in business or those comprising the
stock-in-trade of the corporation, having a
change in corporate control, will not be
considered sold, bartered or exchanged
despite the change in the ownership interest
in the said corporation.
The goods or properties used in the business or
those comprising the stock-in-trade of the
corporation will not be considered sold, bartered
or exchanged despite the change in the
ownership interest. However, the exchange of
real estate properties held for sale or for lease,
for shares of stocks, whether resulting to
159
Taxation Law
corporate control or not, is subject to VAT,
subject to exceptions provided under Section
4.106-3 (Sale of real properties) hereof. On the
other hand, if the transferee of the transferred
real property by a real estate dealer is another
real estate dealer, in an exchange where the
transferor gains control of the transferee-
corporation, no output VAT is imposable on the
said transfer. (Sec. 8, R.R. 4-2007)
2. Change in the trade or corporate name of
the business;
3. Merger or consolidation of corporations.
The unused input tax of the dissolved
corporation, as of the date of the merger or
consolidation, shall be absorbed by the
surviving or new corporation. (Sec. 4.106-8
(b), RR No. 16-05)
The unused input tax of the dissolved
corporation, as of the date of merger or
consolidation, shall be absorbed by the surviving
or new corporation.
b. VAT on importation of goods
Importation is the act of bringing goods and
merchandise into the Philippines from a foreign
country.
Importer refers to any person who brings
goods into the Philippines, whether or not made
in the course of trade or business. (Sec. 4.107-
1(b), RR No. 16-05)
Tax base: Total value used by the Bureau
of Customs (BOC) or landed Cost
The total value used by the Bureau of
Customs (BOC) in determining tariff and
customs duties, plus customs duties, excise
taxes, if any, and other charges, such as
postage, commission, and similar charges, prior
to the release of the goods from customs
custody.
In case the valuation used by the BOC in
computing customs duties is based on volume or
quantity, the landed cost shall be the basis for
computing VAT.
Bar Operations C ommissions 159
 Purple Notes
Taxation Law
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.
Note:
Those amounts paid which are contrary to law,
morals or public policy shall not be included in
the VAT base and likewise are not deductible for
income tax purposes, such as facilitation fees or
bribe.
The same rule applies to technical importations.
(see zero-rated sales)
Sale of tax-free goods to non -exempt
persons
In the case of tax-free importation of goods into
the Philippines 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 purchasers, transferees or recipients
shall be considered the importers thereof, who
shall be liable for any internal revenue tax on
such importation. The tax due on such
importation shall constitute a lien on the goods
superior to all charges or liens on the goods,
irrespective of the possessor thereof. (Section
107(B) of NIRC)
Illustration:
Xavi Passing Academy, is a tax exempt entity
who imported high–end soccer balls. Xavi
Passing Academy, Inc. then sold it to Diego
Dribblers, Inc. a non –exempt entity. Diego has
to pay for the VAT. However, Diego having paid
the VAT on his purchase can claim the VAT paid
as creditable input tax.
c. VAT on sale of services and use or lease
of properties (Sec. 108, NIRC)
Sale or exchange of services, as well as the use
or lease of properties, shall be subject to VAT,
160 Center for Legal Education and Research
2018
equivalent to 12% of the gross receipts
(excluding VAT).(RR 16-2005)
The phrase "sale or exchange of services"
means the performance of all kinds or services
in the Philippines for others for a fee,
remuneration or consideration, including those
performed or rendered by:
1. construction and service contractors;
2. stock, real estate, commercial, customs and
immigration brokers;
3. lessors of property, whether personal or
real;
4. warehousing services;
5. lessors or distributors of cinematographic
films;
6. persons engaged in milling processing,
manufacturing or repacking goods for
others;
7. proprietors, operators or keepers of hotels,
motels, resthouses, pension houses, inns,
resorts;
8. proprietors or operators of restaurants,
refreshment parlors, cafes and other eating
places, including clubs and caterers;
9. dealers in securities;
10. lending investors;
11. 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;
12. common carriers by air and sea relative to
their transport of passengers, goods or
cargoes from one place in the Philippines to
another place in the Philippines;
13. sales of electricity by generation companies,
transmission, and distribution companies;
14. services of franchise grantees of electric
utilities, telephone and telegraph, radio and
television broadcasting and all other
franchise grantees except those under
Section 119 of this Code and non-life
insurance companies (except their crop
insurances) including surety, fidelity,
indemnity and bonding companies; and
15. similar services regardless of whether or not
the performance thereof calls for the
 Purple Notes
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 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 commercial 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 non-resident
person or his employee in connection with
the use of property or rights belonging to, or
the installation or operation of any brand,
machinery or other apparatus purchased
from such non-resident person.
6. The supply of technical advice, assistance or
services rendered in connection with
technical management or administration of
any scientific, industrial or commercial
undertaking, venture, project 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, television, satellite transmission and
cable television time.
Services must be performed in the
Philippines
If the services were performed outside the
Philippines, the same is not subject to VAT.
Note, however, that even though the services
are performed in the Philippines but for a
foreign client/customer, the same may be
treated as zero-rated. (see zero-rated sale of
service)
161
Taxation Law
VAT on Services: Accrues at the time of
Payment
Unlike sale of goods, where the VAT accrues
upon consummation of the sale independent of
the timing of payment, in sale of services, the
VAT accrues at the time of payment
independent of whether the services has been
performed or not, or in short, following the cash
basis of accounting.
As such, even if the services were already
performed, but the same remain unpaid, no VAT
is due yet. On the other hand, if payment is
already received but no services has been
performed yet, the VAT is already due.
Tax base: Gross Receipts
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
quarter for the services performed or to be
performed for another person, excluding value-
added tax,‖ (Sec. 108, NIRC) except those
amounts earmarked for payment to unrelated
third (3rd) party or received as reimbursement
for advance payment on behalf of another which
do not redound to the benefit of the payor. (Sec.
4.108-4, RR No. 16-05, as amended by RR No. 4-07)
Pass-through transactions
For the above exceptions to apply, the receipt
must be issued for the third person who will
ultimately shoulder the expense, in order to be
excluded from the gross receipts of the person
receiving the reimbursement or the advances.
Constructive receipt
It occurs when the money consideration or its
equivalent is placed at the control of the person
who rendered the service without restrictions by
the payor. The following are examples of
constructive receipts:
Bar Operations C ommissions 161
 Purple Notes
Taxation Law
a) Deposits in banks which are made available
to the seller of services without restrictions;
b) Issuance by the debtor of a notice to offset
any debt or obligation and acceptance
thereof by the seller as payment for services
rendered; and
c) Transfer of the amounts retained by the
payor to the account of the contractor. (Sec.
4.108-4, RR No. 16-05)
Professionals
As compared to the Local Government Code
which covers only lawyers and those who are
PRC licensed, for VAT purposes, professionals
include Actors, Professional Athletes, Singers,
Broadcasters, Directors, etc.
General Professional Partnerships (GPP)
Deposits received by the GPP should be booked
as income at that time and a VAT Official
Receipt issued, thus subject the same to VAT
upon receipt, regardless if the GPP will only use
the same for out of pocket expense to be paid
to third parties. (RMC No. 89-2012)
The same rule applies to other service providers,
other than GPPs. (RMC No. 16-2013)
However, the receipts for such expenses must
be in the name of the GPP in order to claim the
same as an expense for income tax purposes.
Sale of cinema tickets not subject to VAT
While the enumeration of services under Sec.
108 is merely by way of example only and not
exclusive, the legislative intent is not to impose
VAT on gross receipts of cinema/theater houses
on their admission tickets, only to lessors of
cinematographic films. Instead, the same is
subject to the 10% amusement tax under the
Local Government Code, as amended. Only
lessors or distributors of cinematographic films
are included in the coverage of VAT. (CIR vs. SM
Prime Holdings, GR No. 183505 dated February 26,
2010)
Toll fess subject to VAT
162 Center for Legal Education and Research
2018 for
Fees paid by the public to tollway operators
use of the tollways, are not taxes in any sense.
A tax is imposed under the taxing power of the
government principally for the purpose of raising
revenues to fund public expenditures. Toll fees,
on the other hand, are collected by private
tollway operators as reimbursement for the
costs and expenses incurred in the construction,
maintenance and operation of the tollways, as
well as to assure them a reasonable margin of
income. Although toll fees are charged for the
use of public facilities, therefore, they are not
government exactions that can be properly
treated as a tax. Taxes may be imposed only by
the government under its sovereign authority,
toll fees may be demanded by either the
government or private individuals or entities, as
an attribute of ownership.
Parenthetically, VAT on tollway operations
cannot be deemed a tax on tax due to the
nature of VAT as an indirect tax. In indirect
taxation, a distinction is made between the
liability for the tax and burden of the tax. The
seller who is liable for the VAT may shift or pass
on the amount of VAT it paid on goods,
properties or services to the buyer. In such a
case, what is transferred is not the seller‘s
liability but merely the burden of the VAT.
Thus, the seller remains directly and legally
liable for payment of the VAT, but the buyer
bears its burden since the amount of VAT paid
by the former is added to the selling price. Once
shifted, the VAT ceases to be a tax and simply
becomes part of the cost that the buyer
must pay in order to purchase the good,
property or service.
Consequently, VAT on tollway operations is not
really a tax on the tollway user, but on the
tollway operator. Under Section 105 of the
Code, VAT is imposed on any person who, in the
course of trade or business, sells or renders
services for a fee. In other words, the seller of
services, who in this case is the tollway
operator, is the person liable for VAT. The latter
merely shifts the burden of VAT to the tollway
user as part of the toll fees.
 Purple Notes
For this reason, VAT on tollway operations
cannot be a tax on tax even if toll fees were
deemed as a "user‘s tax." VAT is assessed
against the tollway operator‘s gross receipts and
not necessarily on the toll fees. Although the
tollway operator may shift the VAT burden to
the tollway user, it will not make the latter
directly liable for the VAT. The shifted VAT
burden simply becomes part of the toll fees that
one has to pay in order to use the tollways. (Diaz
vs. the SOF and the CIR, GR No. 193007 dated July
19, 2011)
Dealers in securities and lending investors
Dealers in Securities mean merchants of stock or
securities regularly engaged in the purchase of
securities and their resale.(Sec. 22 (U), NIRC)
Lending Investors includes all persons other
than banks, non-bank financial intermediaries,
finance companies and other financial
intermediaries not performing quasi-banking
functions who make a practice of lending money
for themselves or others at interest.
Tax Base:
1. Dealer in Securities – gross selling price less
cost of the securities sold;
2. Lending Investor – gross receipts. (Sec.
4.108-3(g), RR No. 16-05)
Franchise grantees
Generally, telephone and telegraph, radio and/or
television broadcasting and all other franchise
grantees, except gas and water utilities, shall be
subject to VAT in lieu of franchise tax.
However, franchise grantees of radio and/or
television broadcasting whose annual gross
receipts of the preceding year do not exceed
P10,000,000 shall not be subject to VAT but to
the 3% franchise tax imposed under Sec. 119 of
the NIRC.
Franchise grantees of gas and water utilities
shall be subject to the 2% franchise tax on their
gross receipts and not to VAT.
163
Taxation Law
Gross receipts of other franchise grantees, other
than those covered by Sec. 199 of the Tax Code,
shall be subject to the VAT, subject to the
threshold requirement and optional registration
availment. (Sec. 4.108-3(h), RR No. 16-05)
Sale to PAGCOR is zero-rated
PAGCOR is exempt from the payment of VAT
because PAGCOR‘s charter, P.D. No. 1869, is a
special law that grants petitioner exemption
from taxes. Although R.A. No. 9337
(amendment to the Tax Code) introduced
amendments to Section
108 of R.A. No. 8424 by imposing VAT on other
services not previously covered, it did not
amend the portion of Section 108 (B)(3) that
subjects to zero percent rate services performed
by VAT-registered persons to persons or entities
whose exemption under special laws or
international agreements to which the
Philippines is a signatory effectively subjects the
supply of such services to 0% rate. (PAGCOR vs.
BIR; GR No. 172087; March 15, 2011)
Non-life insurance companies
These are the companies engaged in the
business of property insurance, as distinguished
from insurance on human lives, health, accident
and insurance appertaining thereto or connected
therewith which shall be subject to the
percentage tax under Sec. 123 of the NIRC.
(Sec. 4.108-3(i), RR No. 16-05)
Tax Base: Premiums collected, whether paid in
money, notes, credits or any substitute for
money.
1. Reinsurance premiums are subject to
VAT.
2. Commissions: whether related to life or
non-life, insurance or reinsurance, are
subject to VAT.
3. VAT due from reinsurance companies is
to be withheld by the local insurance
company and to be remitted to the BIR in
accordance with [the withholding VAT (to be
discussed later)].
Bar Operations C ommissions 163
 Purple Notes
Taxation Law
Premiums paid to life insurance companies to rentals shall be subject to VAT2018
at the time
are subject to the 2% premiums tax which is a of its application.(Id.)
percentage tax. Accordingly, they are exempt
from the VAT. Lease of Properties

Use or lease of properties The rule on lease of RESIDENTIAL UNITS

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. (Sec. 108)
Lessors of property
Unless considered exempt under Sec. 109 of the
Tax Code, shall be considered liable for VAT on
the gross rentals, regardless of the place where
the contract of lease or licensing agreement was
executed if the property leased or used is
located in the Philippines.
VAT on rental and/or royalties payable to non-
resident foreign corporations or owners for the
sale of service and use or lease of properties in
the Philippines shall be based on the contract
price agreed upon by the licensor and licensee.
The licensee shall be responsible for the
payment of VAT on such rentals and/or royalties
in behalf of the non-resident foreign corporation
or owner in the manner prescribed under
[withholding VAT on payments to non-
residents]. (Sec. 4.108-3(a), RR No. 16-05)
Advance payment
If the advance payment constitutes prepaid
rental, then such payment is taxable to the
lessor in the month when received, irrespective
of the accounting period employed by the lessor.
The following do not constitute advance
payment of rentals subject to VAT:
1. Loan to the lessor;
2. An option money for the property; or
3. A security deposit for the faithful
performance of certain obligations of the
lessee, such advance payment is not subject
to VAT. However, a security deposit applied
may be summarized as follows:
Lease>15k? Receipts>3M? Treatment
No VAT/
NO NO
No PT
No VAT/
NO YES
No PT
Subject to 3%
YES NO Percentage
Tax
YES YES Subject to VAT
The table could also be applied for lessors
having several RESIDENTIAL UNITS where some
are leased for rental not exceeding Php 15,000
and some are leased for rental exceeding Php
15,000.
In cases where a lessor has several residential
units for lease, some are leased out for a
monthly rental per unit of not exceeding
P15,000.00 while others are leased out for more
than P15,000.00 per unit, his tax liability will be
as follows:
1. The gross receipts from rentals not
exceeding P15,000.00 per month per unit
shall be exempt from VAT regardless of the
aggregate annual gross receipts. It is also
exempt from the 3% percentage tax.
2. The gross receipts from rentals exceeding
P15,000.00 per month per unit shall be
subject to VAT if the aggregate annual gross
receipts from said units only exceeds
P3,000,000.00. Otherwise, the gross
receipts will be subject to the 3% tax
imposed under Section 116 of
the Tax Code.
The term ‗residential units‘ shall refer to
apartments and houses & lots used for
residential purposes, and buildings or parts or
units thereof used solely as dwelling places
(e.g., dormitories, rooms and bed spaces)
except motels, motel rooms, hotels and
hotel rooms, lodging houses, inns and
pension houses.

164 Center for Legal Education and Research

 Purple Notes
Taxation Law
transaction for VAT purposes but shall not result
The term ‗unit‘ shall mean: in any output tax. However, the input tax on
purchase
 an apartment unit in the case of:
apartments, of goods, properties or services, related to such
 house in the case of residential houses; zero-rated sale, shall be available as:
 per person in the case of dormitories,
boarding houses and bed spaces; and per 1. A tax credit (input VAT); or
room in case of rooms for rent. 2. Refund or for the issuance of a Tax Credit
Certificate. (Sec. 4.106-5, RR No. 16-05)
Where the lessor has both commercial and
residential units for leased: If the VAT is not billed separately in the
document of sale, the selling price or the
 If the gross annual receipts for the lease of consideration stated therein shall be deemed
the commercial unit exceeds Php 3M then inclusive of VAT. (Sec. 106-4, RR No. 16-05, as
the gross receipts coming from its rental amended by RR No. 4-07)
would be subject to VAT. Otherwise, the
gross receipts would 1. ZERO-RATED SALE OF GOODS OR
PROPERTIES (Ex-SL-SCT/TEZ)
not be subject to VAT but subject to
3% percentage tax. The Php 15,000 per Under Section 106(A)(2) of the amended Tax
month rule as to determination if such rental Code, the following sale of goods shall be
income is VATable or not DOES NOT subject to zero percent (0%) VAT rate:
APPLY to COMMERCIAL UNITS. a. Export sales
 For the residential units refer to the above b. Sales to persons or entities whose
summarized rule. exemption under special laws or
international agreements to which the
(Sec 4.109-1 [q], RR 13-2018, see illustrations) Philippines is a signatory effectively subjects
such sales to zero rate.(see discussion on
effective zero-rating under AUTOMATIC VS.
VAT on Sale of Goods VAT on Sale of EFFECTIVE ZERO-RATING below)
Services
VAT Base The provision regarding Foreign Currency
Gross selling price Gross receipts Denominated Sale under the enumeration of
Allowed deductions sales by VAT-registered persons which shall be
The VAT base of gross No allowable deductions subject to zero percent (0%) rate has been
selling price is allowed removed under the TRAIN. Accordingly, they are
to be net of deductions now subject to VAT.
for sales returns and
sales discounts(subject
to conditions) The phrase "foreign currency denominated sale"
VAT output is recognize upon: means sale to a non-resident of goods, except
Upon Sale Upon Collection those mentioned in Sections 149 and 150,
Invoicing Requirement assembled or manufactured in the Philippines for
Sales Invoice is issued Official Receipt is issued delivery to a resident in the Philippines, paid for
for every SALES made for every PAYMENT in acceptable foreign currency and accounted for
in accordance with the rules and regulations of
4. Zero Rated and effectively zero-rated the Bangko Sentral ng Pilipinas (BSP).
sales of goods and services
Export Sales
Zero rated sale of goods or properties/services
by a VAT-registered person is a taxable

165
Bar Operations C ommissions 165
 Purple Notes
Taxation Law
Under Section 106(A)(2)(a), 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 and delivery of goods to:
(i) Registered enterprises within a separate
customs territory as provided under
special laws; and
(ii) Registered enterprises within tourism
enterprise zones as declared by the
Tourism Infrastructure and Enterprise
Zone Authority (TIEZA) subject to the
provisions under Republic Act No. 9593
or The Tourism Act of 2009.
Note:
Items (2[i] and [2ii]) above were vetoed by the
President and as per RR No. 13-18 were not
included among those considered subject to
zero-rating. In the veto message of the
President, it is opined that these are subject to
VAT by virtue of the veto. However, it must be
noted that our VAT system follows the cross-
border doctrine, and economic zones are
managed as separate customs territory under
Section 8 of the Special Economic Zone Act.
Accordingly, sales from domestic suppliers to
PEZA-registered entities inside the economic
zone should remain to be considered zero-rated
despite the removal of the above provisions.
3. *Sale of raw materials or packaging
materials to anon-resident 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
foreign currency and accounted for in
accordance with the rules and regulations of
166 Center for Legal Education and Research
the Bangko Sentral ng Pilipinas2018
(BSP);(see
note after the enumeration)
4. *Sale of raw materials or packaging
materials to export-oriented enterprise
whose export sales exceed seventy
percent (70%) of total annual
production;(see note after the enumeration)
5. *Those considered export sales under
Executive Order No. 226, otherwise known
as the Omnibus Investment Code of
1987, and other special laws.(see note
after the enumeration)
Export sales under the Omnibus Investment
Code of 1987 (E.O. No. 226) means export sales
provided under Sec. 106(A)(2)(a)(5) of the NIRC
―shall mean the Philippine port F.O.B. value of
export products exported directly by a registered
export producer, or 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 including sales to export processing zones.
(Sec. 4.106-5, RR No. 16-05)
6. The sale of goods, supplies, equipment and
fuel to persons engaged in international
shipping or international air transport
operations: Provided, That the goods,
supplies, equipment and fuel shall be used
for international shipping or air
transportoperations.
7. Sale of goods, supplies, equipment and fuel
to persons engaged in international shipping
or international air transport operations.
However, under the TRAIN, it is required
that they shall be used exclusively for
international shipping or air transport
operations.
The sale of goods, supplies, equipment and fuel
to persons engaged in international shipping or
international air transport operations is limited to
goods, supplies, equipment and fuel that shall
be used in the transport of goods and
passengers from a port in the Philippines directly
to a foreign port, or vice versa, without docking
or stopping at any other port in the Philippines
unless the docking or stopping at any other
 Purple Notes
Philippine port is for the purpose of unloading
passengers and/or cargoes that originated from
abroad, or to load passengers and/or cargoes
bound for abroad: Provided, further, that if any
portion of such fuel, goods, supplies or
equipment is used for purposes other than that
mentioned in this paragraph, such portion of
fuel, goods, supplies, and equipment shall be
subject to 12% VAT.
Note:
Item Nos. 3, 4 and 5 are no longer subject to
zero-rating under the TRAIN upon satisfaction of
the following conditions:
a. The successful establishment and
implementation of an enhanced VAT refund
system that grants refunds of creditable
input tax within 90 days from the filing of
the VAT refund application with the Bureau:
Provided, that, to determine the effectivity
of item no. 1, all applications filed from
January 1, 2018 shall be processed and
must be decided within 90 days from the
filing of the VAT refund application;
The 90-day period to process and decide,
pending the establishment of the enhanced VAT
Refund System shall only be up to the date of
approval of the Recommendation Report on
such application for VAT refund by the
Commissioner or his duly authorized
representative.
However, all claims for refund/tax credit
certificate filed prior to January 1, 2018 shall still
be governed by the one hundred twenty (120)-
day processing period.
b. All pending VAT refund claims as of
December 31, 2017 shall be fully paid in
cash by December 31, 2019.
Provided, that the DOF shall establish a VAT
refund center in the BIR and in the BOC that will
handle the processing and granting of cash
refunds of creditable input tax.
Q&A
167
Taxation Law
Q: Is the above proviso excluding sub–
paragraphs 3, 4 and 5 from zero-rating already
effective?
A: No, the proviso not yet effective because the
second condition is not yet fulfilled which states:
―All pending VAT refund claims as of December
31, 2017 shall be fully paid in cash by December
31,2019.‖
The sale of gold to the Bangko Sentral ng
Pilipinas, which was zero-rated prior to TRAIN,
is now considered VAT-exempt under the
TRAIN. Accordingly, any input VAT attributable
thereto will no longer be allowed as input tax
credits but rather will be closed to expense for
income tax purposes.
Zero Rated Sales of Service
Under Section 108(B) of the Amended Tax Code,
the following services performed in the
Philippines by VAT- registered persons shall be
subject to zero percent (0%) VAT 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);(see note no. 2 after the
enumeration)
2. Services other than those mentioned in the
preceding paragraph, 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);
c. Services rendered to persons or entities
whose exemption 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; (see discussion on effective zero-
rating under AUTOMATIC VS. EFFECTIVE ZERO-
RATING below)
3. Services rendered to persons engaged in
international shipping or air transport
Bar Operations C ommissions 167
 Purple Notes
Taxation Law
4. operations, including leases of property for
use thereof: Provided, that these services
shall be exclusively for international shipping
or air transport operations. Thus, the
services referred to herein shall not pertain
to those made to common carriers by air
and sea relative to their transport of
passengers, goods or cargoes from one
place in the Philippines to another place in
the Philippines, the same being subject to
twelve percent (12%) VAT under Sec. 108
of the Tax Code;
5. *Services performed by subcontractors
and/or contractors in processing, converting,
of manufacturing goods for an enterprise
whose export sales exceed seventy percent
(70%) of total annual production; (see note
no. 2 after the enumeration)
6. Transport of passengers and cargo by
domestic air or sea vessels from the
Philippines to a foreign country. Gross
receipts of international air or shipping
carriers doing business in the Philippines
derived from transport of passengers and
cargo from the Philippines to another
country shall be exempt from VAT; however,
they are still liable to a percentage tax of
three percent (3%) based on their gross
receipts derived from transport of cargo
from the Philippines to another country as
provided for in Sec. 118 of the Tax Code;
and
7. Sale of power or fuel generated through
renewable sources of energy such as, but
not limited to, biomass, solar, wind,
hydropower, geothermal and steam, ocean
energy, and other emerging sources using
technologies such as fuel cells and hydrogen
fuels: Provided, however, that zero-rating
shall apply strictly to the sale of power or
fuel generated through renewable sources
of energy, and shall not extend to the sale
of services related to the maintenance or
operation of plants generating said power.
8. Services rendered to:
(i) Registered enterprises within a separate
customs territory as provided under
special law; and
(ii) Registered enterprises within tourism
enterprise zones as declared by the
TIEZA subject to the provisions under
168 Center for Legal Education and Research
2018
Republic Act No. 9593 or The Tourism
Act of 2009.(see note no. 1 after the
enumeration)
Note:
1. Items (8[i] and [2ii]) above were vetoed by
the President and as per RR No. 13-18 are
not included among those considered
subject to zero-rating. In the veto message
of the President, it is opined that these are
subject to VAT by virtue of the veto.
However, it must be noted that our VAT
system follows the cross-border doctrine;
and economic zones are managed as
separate customs territory under Section 8
of the Special Economic Zone Act.
Accordingly, sales from domestic suppliers
to PEZA-registered entities inside the
economic zone should remain to be
considered zero-rated despite the removal of
the above provisions.
2. Items No. 1 and 5 above shall be subject to
the 12% VAT and no longer subject to zero
percent under the following conditions:
a. The successful establishment and
implementation of an enhanced VAT refund
system that grants refunds of creditable
input tax within 90 days from the filing of
the VAT refund application with the Bureau:
Provided, that, to determine the effectivity
of item no. 1, all applications filed from
January 1, 2018 shall be processed and
must be decided within 90 days from the
filing of the VAT refund application;
The 90-day period to process and decide,
pending the establishment of the enhanced
VAT Refund System shall only be up to the
date of approval of the Recommendation
Report on such application for VAT refund
by the Commissioner or his duly authorized
representative.
However, all claims for refund/tax credit
certificate filed prior to January 1, 2018 shall
still be governed by the one hundred twenty
(120)-day processing period.
 Purple Notes
b. All pending VAT refund claims as of
December 31, 2017 shall be fully paid in
cash by December 31, 2019.
Provided, that the DOF shall establish a VAT
refund center in the BIR and in the BOC that
will handle the processing and granting of
cash refunds of creditable input tax.
Facilitation of collection of receivables for
foreign counterpart - zero-rated under sec.
108(b)(2)
Services performed by VAT-registered persons in
the Philippines (other than the processing,
manufacturing or repacking of goods for persons
doing business outside the Philippines), when
paid in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the BSP, are zero-rated. The
taxpayer in this case is a VAT-registered person
that facilitates the collection and payment of
receivables belonging to its non-resident foreign
client, for which it gets paid in acceptable
foreign currency inwardly remitted and
accounted for in conformity with BSP rules and
regulations. Certainly, the service it renders in
the Philippines is not in the same category as
"processing, manufacturing or repacking of
goods" and should, therefore, be zero-rated. In
reply to a query of respondent, the BIR opined
in VAT Ruling No. 080-89 that the income
respondent earned from its parent company‘s
regional operating centers (ROCs) was
automatically zero-rated effective January 1,
1988.(CIR vs. American Express, GR No. 152609,
June 29, 2005)
To be considered zero-rated under Sec.
108(b)(2), the recipient of the service
must be doing business outside the
Philippines 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 Section
108(b)(2) is that the recipient of such services is
doing business outside the Philippines. While
this requirement is
169
Taxation Law
not expressly stated in the second paragraph of
Section 108(b), this is clearly provided in the
first paragraph of Section 108(b) where the
listed services must be "for other persons doing
business outside the Philippines." The phrase
"for other persons doing business outside the
Philippines" not only refers to the services
enumerated in the first paragraph of Section
102(b), but also pertains to the general term
"services" appearing in the second paragraph of
Section 102(b). In short, services other than
processing, manufacturing, or repacking of
goods must likewise be performed for persons
doing business outside the Philippines. (CIR vs.
Burmeister and Wain; GR No. 153205; Jan. 22, 2007)
Rationale for zero-rating of exports
Cross border doctrine: The Philippine VAT
system adheres to ―cross border doctrine‖,
according to which, no VAT shall be imposed to
form part of the cost of goods destined for
consumption outside of the territorial border of
the taxing authority. (CIR vs. Toshiba Information
Equipment Philippines, Inc., G.R. No. 150154, August
9, 2004)
Automatic vs. Effective Zero-Rating
An automatically zero-rated sale refers to a sale
of goods, properties and services to a Freeport
Zone-registered enterprise by a VAT-registered
seller/supplier that is regarded as either an
export sale or (a foreign currency denominated
sale, prior to TRAIN) under Section 106 of the
Tax Code of 1997.
An effectively zero-rated sale, on the other
hand, refers to the local sale of goods,
properties and services by a VAT-registered
person to an entity that was granted indirect tax
exemption under special laws or international
agreements. Since the buyer is exempt from
indirect tax, the seller cannot pass on the VAT
and therefore, the exemption enjoyed by the
buyer shall extend to the seller, making the sale
effectively zero-rated. (Q4, RMC No. 50-2007)
Bar Operations C ommissions 169
 Purple Notes
Taxation Law
Automatically Zero Effectively Zero
Rated Rated
As to Rate
Both are VATable transaction a VAT rate of 0%
As to Source/ Transactions Covered
Transactions arising from Transaction arising
EXPORT sale of goods from LOCAL sale of
and/or services goods and/or
services to an entity
that was granted
indirect tax
exemption under
special laws or
international
agreements.
Treatment of Input Taxes
Both are allowed to refund the input taxes
attributable to Zero/Effectively Zero Rated Sales
under Section 112.
No need for an approved application
Under RR No. 16-05, those considered
effectively zero-rated [i.e., zero-rated sale of
goods under Sec. 106(A)(2)(b) and sale of
services under Sec. 108(B)(3)] 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. However, this
paragraph was deleted under RR No. 4-
07.(Remember that under a VAT-exempt sale
transaction by a VAT-registered taxpayer, the
taxpayer cannot claim an input tax related to the
sale)
However, such requirement of prior ruling has
been struck down in the case of CIR vs. Seagate
Technology (Philippines), wherein the Court held
that a VAT-registered status, as well as
compliance with the invoicing
requirements, is sufficient for the effective
zero rating of the transactions of a
taxpayer. Hence, transactions of a VAT-
registered taxpayer cannot be exempted by its
mere failure to apply for their effective zero
rating. Otherwise, their VAT exemption would be
determined, not by their nature, but by the
taxpayer‘s negligence-a result not at all
contemplated. Administrative convenience
cannot thwart legislative mandate.
170 Center for Legal Education and Research
2018
The BIR regulations additionally requiring an
approved prior application for effective zero
rating cannot prevail over the clear VAT nature
of a taxpayer‘s transactions. The scope of such
regulations is not within the statutory authority x
xx granted by the legislature.
Other than the general registration of a taxpayer
the VAT status of which is aptly determined, no
provision under our VAT law requires an
additional application to be made for such
taxpayers‘ transactions to be considered
effectively zero-rated. An effectively zero-rated
transaction does not and cannot become exempt
simply because an application therefor was not
made or, if made, was denied. To allow the
additional requirement is to give unfettered
discretion to those officials or agents who,
without fluid consideration, are bent on denying
a valid application. Moreover, the State can
never be estopped by the omissions, mistakes or
errors of its officials or agents. (CIR vs Seagate
Technology (Phils), GR. No. 153866, February 11,
2005)
Sale within the Freeport Zone (Q6, RMC
No. 50-2007)
Such sale, exchange, barter or lease of goods,
properties and services within the Freeport
Zones shall be exempt from VAT. The following
transactions are covered under this exemption:
a. All transactions between and/or among two
registered Freeport Zone Enterprises or
Residents;
b. Consumer goods purchased and consumed
within the Freeport Zones;
c. Sale/supply of services, including power or
electricity, by a Freeport Zone-registered
enterprise or resident within the Freeport
Zone, regardless of whether or not the
buyer or customer is a registered Freeport
Zone enterprise or Zone Resident, provided
that said power/electricity or services are
rendered, used or consumed within the
Freeport Zone; and
d. The lease of properties owned by Freeport
Zone-registered enterprises or Residents,
 Purple Notes
provided that such properties are located
within the subject Freeport Zones.
A freeport zone, or economic zone, is considered
as outside the customs territory of the
Philippines for VAT purposes, following the
destination principle, transactions within the
same are considered exempt from VAT,
including those made between PEZA-registered
entities.
Taxation Law
Academy, Inc. then sold it to Diego Dribblers,
Inc. a non –exempt entity. Diego has to pay for
the VAT. However, Diego having paid the VAT
on his purchase can claim the VAT paid as
creditable input taxes.
5. VAT Exempt Transactions
a) VAT exempt transactions; in general;
enumeration

Summary of changes made in the TRAIN
LAW
1. Sale of Gold to BSP is NOT a zero-rated
transaction anymore but is already a VAT-
exempt transaction.
2. Transactions paid thru foreign currency
denominated sales are no longer considered
as zero rated.
3. A proviso for excluding some zero-rated
transactions upon establishment of
―Enhanced VAT refund system‖ has been
included.
When a person who was exempt from the VAT
on his importation subsequently sells (transfers
or exchanges) in the Philippines such imported
article to a non – exempt person or entity, the
purchaser (transferee or assignee) will be
required to pay the VAT
 These refer to the sale of goods or
properties and/or services and the use or
lease of properties that is not subject to
VAT. The person making the exempt sale of
goods, properties or services shall not bill or
pass on any output tax to his customers
because the said transaction is not subject
to VAT. However, the seller is not allowed to
credit the VAT (input tax) passed to him on
his purchases of taxable goods, properties
or services, because he has no output tax to
deduct it from.(Sec. 109, NIRC)
 In other words, since the seller is not
subject to output tax, it is likewise not
allowed any tax credit of input tax from
purchases.
Difference between VAT zero-rated vs.
VAT-exempt sales

In fine, the above section applies when: While the zero rating and the exemption are
a. Tax-free importation of goods into the computationally the same, they actually differ in
Philippines by persons, entities or agencies several aspects, to wit:
exempt from tax;
b. Where such goods are subsequently sold, Basis Zero-rated Exempt
transferred or exchanged in the Philippines; Nature of Taxable, but does Not taxable, not
c. To non-exempt persons or entities; transaction not result in an subject to output
d. The purchasers, transferees or recipients output tax tax
shall be considered the importers thereof; VAT- Required Optional
registration
and
Input tax The input VAT on The seller in an
e. Who shall be liable for any internal revenue the purchases of exempt
tax on such importation. a VAT-registered transaction is not
person with zero- entitled to any
Illustration: rated sales may input tax on his
be allowed as tax purchases despite
Xavi Passing Academy, is a tax exempt entity credits or the issuance of a
who imported high – end soccer balls. Xavi refunded VAT invoice or
Passing receipt
Tax credit Can claim or Cannot avail of tax
refund enjoy tax credit or refund
171
Bar Operations C ommissions 171
 Purple Notes
Taxation Law
Basis Zero-rated Exempt 2018
Exempt person vs. Exempt transaction
credit/refund which may result
in increased prices Exempt Person Exempt Transaction
Transactions that are Exemption on the
Example: Company A sells and exports bags ordinarily subject to transactions (not on the
(zero rated) made out of emptied tetra packs VAT were not subjected person) which are
and exports them to Europe. In 2018, it made to 12% VAT because of specifically exempt by
total sales of Php 2M. It also bought a delivery the status of one of the law.
van costing Php 1M from a VAT registered parties.
supplier.
Aside from exporting bags, the said company
also sells fashion magazines (VAT exempt
transaction). As part of its operations, it bought Exemption is on the Hence, a person even
Php 500,000 worth of glossy papers. Company A parties either they are: registered as VAT can
was able to sell magazines amounting to Php  Exempted by a still have VAT –exempt
2.5M. special law sales. That it would also
 Exempted by be possible that one
Q: How much is the VAT payable(excess of input international entity can have one
or refund)? agreement transaction subject to
VAT and one that is not
Transactio Sol. VAT Remarks subject to VAT as this is
n
specified by law.
Export Sale Php 2M x - Zero rated
of bags 0% Sales VAT is
0% Examples:
Sale of Php 2.5M - VAT exempt Groceries selling can
magazines x0 transaction no goods (subject to 12%)
Output VAT and also selling raw
Purchase of Php 1M 120k Input tax can meat and vegetable
Delivery x12% be credited (VAT exempt)
Truck since it is
related to a Bookstores selling
Zero Rated
school supplies (subject
Sale
to 12%) which also
Purchase of Php 500k 0 The VAT
glossy x0 passed on sells of books,
papers cannot be magazines except
credited classified ads (VAT
against any exempt)
output. Hence it is not available Applicable to all
VAT payable (120k) Since this input to all taxpayers taxpayers provided
(Excess/refu arises from a such transaction fall
nd) zero –rated within (Sec.109)
sale this can
be refunded.
 The object of exemption from the VAT may
either be the transaction itself or any of the
A VAT-registered person is given the option
parties to the transaction.
under Sec. 109 either to:
 An exempt transaction, on the one hand,
1) Be VAT-exempt under Sec. 109(1); or
involves goods or services which, by their
2) Be subject to VAT. But such election shall
nature, are specifically listed in and
be irrevocable for a period of three years
expressly exempted from the VAT under the
from the quarter the election was made.
Tax Code, without regard to the tax status –

172 Center for Legal Education and Research

 Purple Notes
VAT-exempt or not – of the party to the
transaction. Indeed, such transaction is not
subject to 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
Philippine 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. (CIR vs. Seagate
Technology (Phils), G.R. No. 153866, February
11, 2005)
Exempt transactions, enumerated
(Sec. 109 as implemented by Sec. 4.109-1 (B) of RR
16-05 as amended by TRAIN LAW – RA 10963, and as
implemented by RR 13-2018)
a. Sale or importation of agricultural and
marine food products in their original
state, livestock and poultry of a kind
generally used as, or yielding or
producing foods for human
consumption; and breeding stock and
genetic materials therefor.
Products classified under this paragraph
shall be considered in their original state
even if they have undergone the simple
process 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 and molasses, ordinary salt, and copra
shall be considered in their original state.
b. Sale or importation of fertilizers; seeds,
seedlings and fingerlings; fish, prawn,
livestock and poultry feeds, including
ingredients, whether locally produced or
imported, used in the manufacture of
finished feeds (except specialty feeds for
race horses, fighting cocks, aquarium fish,
zoo considered as pets);
173
Taxation Law
c. Importation of personal and household
effects belonging to the residents of the
Philippines returning from abroad and non-
resident citizens corning to resettle in the
Philippines: Provided, that such goods are
exempt from customs duties under the Tariff
and Customs Code of the Philippines;
d. Importation of professional instruments and
implements, 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 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 said items, for their own use and
not for barter or sale, accompanying such
persons, or arriving within a reasonable
time; Provided, that the Bureau of Customs
may, upon the production of satisfactory
evidence that such persons are actually
coming to settle in the Philippines and that
the goods are brought from their former
place of abode; Provided further, that
vehicles, vessels, aircrafts, machineries and
other similar goods for use in manufacture,
shall not fall within this classification and
shall therefore be subject to duties, taxes
and other charges.(Sec. 109(1)(D) of NIRC as
amended by RA 109163, RR 13-2018)
e. Services subject to percentage tax under
Title V;
Note: Change in Threshold for Services
Subject to Percentage Tax under TRAIN
Law:
Lease of goods or properties or the
performance of services of non-VAT-
registered persons, other than the
transactions mentioned in paragraph (A) to
(BB) of Sec. 109(1) of the Tax Code, the
gross annual sales and/or receipts of which
does not exceed the amount of
P3,000,000.00;
Bar Operations C ommissions 173
 Purple Notes
Taxation Law
f. Services by agricultural contract growers 2018 and
n. Sales by non-agricultural, non-electric
and milling for others of palay into rice, corn non-credit cooperatives duly registered with
into grits and sugar cane into raw sugar; the Cooperative Development Authority:
Provided, That the share capital contribution
g. Medical, dental, hospital and veterinary of each member does not exceed P15,000
services except those rendered by and regardless of the aggregate capital and
professionals; net surplus ratably distributed among the
members;
h. Educational services rendered by private
educational institutions, duly accredited by o. Export sales by persons who are not VAT-
the Department of Education (DEPED), the registered;
Commission on Higher Education (CHED),
the Technical Education and Skills p. Sale of real properties not primarily held for
Development Authority (TESDA) and those sale to customers or held for lease in the
rendered by government educational ordinary course of trade or business, or real
institutions; property utilized for low-cost and socialized
housing as defined by Republic Act No.
i. Services rendered by individuals pursuant to 7279, otherwise known as the Urban
an employer-employee relationship; Development and Housing Act of 1992, and
other related laws, residential lot valued at
j. Services rendered by regional or area P1,919,500 and below, house and lot, and
headquarters established in the Philippines other residential dwellings valued at now
by multinational corporations which act as P3,199,200and below. (R.R. 16-2011, January
supervisory, communications and 1, 2012)
coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific Provided, that beginning January 1,
Region and do not earn or derive income 2021,the VAT exemption shall only apply to
from the Philippines; sale of real properties not primarily held for
sale to customers or held for lease in the
k. Transactions which are exempt under ordinary course of trade or business, sale of
international agreements to which the real property utilized for socialized housing
Philippines is a signatory or under special as defined by R.A.7279, sale of house and
laws, except those under Presidential Decree lot, and other residential dwellings with
No. 529; selling price of not more than
P2,000,000.00; Provided, further, that every
l. Sales by agricultural cooperatives duly 3 years thereafter, the amount therein
registered with the Cooperative stated shall be adjusted to its present value
Development Authority to their members as using Consumer Price Index, as published by
well as sale of their produce, whether in its Philippine Statistics Authority (TRAIN Law);
original state or processed form, to non-
members; their importation of direct farm
inputs, machineries /and equipment, q. Lease of a residential unit with a monthly
including spare parts thereof, to be used rental not exceedingP15,000 (TRAIN Law);
directly and exclusively in the production
and/or processing of their produce; r. Sale, importation, printing or publication of
books and any newspaper, magazine,
m. Gross receipts from lending activities by review or bulletin which appears at regular
credit or multi-purpose cooperatives duly intervals with fixed prices for subscription
registered with the Cooperative and sale and which is not devoted principally
Development Authority; to the publication of paid advertisements;

174 Center for Legal Education and Research

 Purple Notes
s. Transport of passengers by international
carriers; (As amended by RA No. 10378)
t. Sale, importation or lease of passenger or
cargo vessels and aircraft, including engine,
equipment and spare parts thereof for
domestic or international transport
operations;
u. Importation of fuel, goods and supplies by
persons engaged in international shipping or
air transport operations; Provided, that the
fuel, goods, and supplies shall be used for
international shipping or air transport
operations (TRAIN Law);
v. Services of bank, non-bank financial
intermediaries performing quasi-banking
functions, and other non-bank financial
intermediaries;
w. Sale or lease of goods and services to senior
citizens and persons with disability, as
provided under Republic Act Nos. 9994
(Expanded Senior Citizens Act of 2010) and
10754 (An Act Expanding the Benefits and
Privileges of Persons with Disability),
respectively;(TRAIN Law)
x. Transfer of property pursuant to Section
40(C)(2) of the NIRC, as amended;(TRAIN
Law)
y. Association dues, membership fees, and
other assessments and charges collected by
homeowners associations and condominium
corporations;(TRAIN Law)
z. Sale of gold to the Bangko Sentral ng
Pilipinas (BSP);(TRAIN Law)
aa. Sale of drugs and medicines prescribed for
diabetes, high cholesterol, and hypertension
beginning January 1, 2019; and(TRAIN Law)
bb. 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 Three million
175
Taxation Law
pesos (P3,000,000).(TRAIN Law)
Note:
Self-employed individuals and professionals
availing of the 8% on gross sales and/or receipts
and other non-operating income, under Sections
24 (A)(2)(b) and 24 (A)(2)(c)(2) of the NIRC
shall also be exempt from the payment of twelve
(12%) VAT
Rule on exempt sale of real property used
in business – Sec. 14 of RR 4-07, which
amended RR 16-05
Even if real property is not primarily held for sale
to customers or held for lease in the ordinary
course of trade or business but the same is
used in the trade or business of the seller,
the sale thereof shall be subject to VAT being a
transaction incidental to the taxpayer‘s main
business.
 However, in the case of CIR vs. Magsaysay
Lines, the sale of real properties that
constitute an isolated transaction, such as
sale of real properties that are used by
entities but not held primarily for sale or
lease, are not subject to VAT. They were not
used either in the course of trade or
business. The transactions were not
considered incidental to seller‘s main
business. (CIR vs. Magsaysay Lines, G.R. No.
146984, July 28, 2006)
6. Input and Output Tax
a) Definition
Output Tax - 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. (Sec. 110 (A)(3)(B), NIRC)
It is a liability to be paid by the seller of goods and
/or services to the BIR. In short, output tax is derived
only from sales or transaction deemed sales which are
vatable at 12%.
Input Tax - 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
Bar Operations C ommissions 175
 Purple Notes
Taxation Law
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. (Sec. 110 (A)(3)(B), NIRC)
b) Sources of Input Tax
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 (Sec. 110, NIRC)
(1) Purchase or Importation of Goods
(i) For sale; or
(ii) For conversion into or intended to form
part of a finished product for sale
including packaging materials; or
(iii) For use as supplies in the course of
business; or
(iv) For use as materials supplied in the sale
of service; or
(v) For use in trade or business for which
deduction for depreciation or
amortization is allowed under this Code.
(2) Purchase of real properties for which a
VAT has actually been paid
(3) Purchase of services in which VAT has
actually been paid
(4) Transactions deemed sale
The following transactions shall be deemed sale:
A. 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;
Donations or gifts
In general, taxable, unless exempt.
 If ordinary asset of the donor, the same
shall be considered deemed sales subject to
VAT.
 Corresponding input VAT attributed to the
VAT portion of the cost of the donation must
176 Center for Legal Education and Research
be deducted from the accumulated2018 input
VAT of the donor.
 Exempt if donor or donated properties are
VAT-exempt [BIR Ruling [DA-(DT-016) 116-10]
B. Distribution or transfer to:
(a) Shareholders or investors as share in the
profits of the VAT-registered persons; or
(b) Creditors in payment of debt;
C. Consignment of goods if actual sale is not
made within sixty (60) days following the
date such goods were consigned; and
D. Retirement from or cessation of business,
with respect to inventories of taxable goods
existing as of such retirement or cessation.
 All goods on hand shall be deemed sold (1)
whether capital goods, stock-in-trade,
supplies or materials as of the date of
retirement or (2) whether or not the
business is continued by the new owner or
successor (Sec 106 (B), NIRC)
(5) Presumptive Input
Persons or firms engaged in the processing of
sardines, mackerel and milk, and in
manufacturing refined sugar, cooking oil and
packed noodle-based instant meals, shall be
allowed a presumptive input tax, creditable
against the output tax, equivalent to four
percent (4%) of the gross value in money of
their purchases of primary agricultural products
which are used as inputs to their production.
‗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), NIRC)
(6) Transitional Input
A person who becomes liable to value-added tax
or any person who elects to be a VAT-registered
 Purple Notes
person shall, subject to the filing of an
inventory, 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.
 Prior payment of taxes is not necessary
before a taxpayer could avail of the
transitional input tax credit, all that is
required from the taxpayer is to file a
beginning inventory with the BIR.
The contention that the 8% transitional input
tax credit in Section 105 presumes that a
previous tax was paid, whether or not it was
actually paid, requires a transaction where a tax
has been imposed by law, is utterly without
basis in law. The rationale behind the provisions
of Section 105 was aptly elucidated in the
Decision sought to be reconsidered, thus:
It is apparent that the transitional input tax
credit operates to benefit newly VAT-registered
persons, whether or not they previously paid
taxes in the acquisition of their beginning
inventory of goods, materials and supplies.
During that period of transition from non-VAT to
VAT status, the transitional input tax credit
serves to alleviate the impact of the VAT on the
taxpayer. At the very beginning, the VAT-
registered taxpayer is obliged to remit a
significant portion of the income it derived from
its sales as output VAT. The transitional input
tax credit mitigates this initial diminution of the
taxpayer‘s income by affording the opportunity
to offset the losses incurred through the
remittance of the output VAT at a stage when
the person is yet unable to credit input VAT
payments(Fort Bonifacio Development Corporation
vs. CIR,G.R. No. 158885, April 2,2009)
Claim for Input Tax on Capital Goods
Capital goods or properties – refers to goods
or properties with estimated useful life greater
than 1 year and treated as depreciable assets
used directly or indirectly in the production or
177
Taxation Law
sale of taxable goods or service (Section 4.110-3,
RR 16-05 as amended by RR 13-2018)
(1) For capital goods where aggregate costs
exceed 1 Million regardless of the acquisition
cost of each capital good, the input VAT
shall be spread even evenly over a period of
sixty (60) months or useful life, whichever is
lower, and the claim for input tax credit will
commence in the calendar month when the
capital good is acquired;
(2) If aggregate acquisition cost does not
exceed 1Million - the total input taxes will be
allowable as credit against output tax in the
month of acquisition.
Aggregate Useful life is 5 Amortize?
Cost of CG> years or
Php 1M (net more?
of VAT
Yes Yes Yes over 60
months
Yes No Yes over
equivalent no.
of months
No. Regardless No.
Provided, further, that the amortization of
the input VAT shall be only allowed until
December 31, 2021 after which taxpayers
with unutilized input VAT on capital goods
purchased or imported shall be allowed to apply
the same as scheduled until fully utilized. (Sec.
110, NIRC, as amended by TRAIN Law)
 If the depreciable capital good is
sold/transferred within a period of five (5)
 years or prior to the exhaustion of the
amortizable input tax thereon, the entire
unamortized input tax on the capital goods
sold/transferred can be claimed as input tax
credit during the month/quarter when the
sale or transfer was made.
c) Persons who can avail input tax credits
The input tax credit on importation of goods or
local purchases of goods, properties or services
by a VAT-registered person shall be creditable:
Bar Operations C ommissions 177
 Purple Notes
Taxation Law
a. To the importer upon payment of VAT prior b. Sale of services – computed 2018by
to the release of goods from customs multiplying the gross receipts by 12%
custody;
b. To the purchaser of the domestic goods or c. Amount of VAT is erroneously billed in
properties upon consummation of the sale; the invoice - the total invoice amount
or shall be presumed to be comprised of
c. To the purchaser of services or the lessee or the gross selling price/gross receipts
licensee upon payment of the compensation, plus the correct amount of VAT.
rental, royalty or fee. (Sec. 4.110-2, RR 16-
2005)

Provided, that the invoicing requirements
was completely complied with. (Sec. 113)
Non - compliance shall disallow the input
tax for crediting regardless if it was
purchased from a VAT registered supplier.
d) Determination of output/input tax,
VAT payable, excess input tax credits
(1) Determination of Output Tax (Section
4.110-6, RR 16-2005 )
a. Sale of goods - Computed by multiplying the
gross selling price by 12%; (regardless if
such amount is collected or not)
- computed by multiplying the
gross receipts by 12%;
(2) Determination of Creditable Input Tax
(Section 4.110-5, RR 16-2005
The amount of input taxes creditable during
a month or quarter shall be determined by
adding all creditable input taxes arising from
transactions (see 11(b) Sources of input tax)
during the month or quarter plus any
amount of input tax carried-over from the
preceding month or quarter, reduced by the
amount of claim for VAT refund or tax
credit certificate (whether filed with the BIR,
DOF, Board of Investments or the BOC) and
other adjustments, such as purchases
returns and allowances, input tax
attributable to exempt sales and input tax to
sales subject to final VAT withholding

(3) Allocation of Input Tax on Mixed Transactions (Section 4.110-4, RR 16-2005)

 All the input taxes that can be directly attributed to transactions subject to VAT may be
recognized for input tax credit. Input taxes that can be directly attributable to VAT taxable sales
of goods and services to the Government shall not be credited against output taxes arising from
sales to non-Government entities;

Transaction Amount of input tax that can be credited

VATable Sales Actual purchase of goods and service paid x 12% + input tax on
importation (if any) + Transitional Input Tax (if applicable)
+Presumptive Input Tax (if applicable) + amortized portion of
input tax on CG

VAT exempt sales Not allowed to credit any input tax

Zero rated Sale

(Section Same as VATable Sales but input tax can be refunded under Sec.
4.110-5, RR 16-2005)
112

Sales to Government Only up to 7% of amount of sales to government (Standard

Input VAT)
178 Center for Legal Education and Research
 Purple Notes
 if any input tax cannot be directly attributed
to either a VAT taxable or VAT-exempt
transaction, the input tax shall be pro-
rated to the VAT taxable and VAT-
exempt transactions and only the
ratable portion pertaining to
transactions subject to VAT may be
recognized for input tax credit.
 The input tax attributable to VAT-exempt
sales shall not be allowed as credit against
the output tax but should be treated as part
of cost or expense.
VAT Payable (Excess Output) or Excess
Input Tax (Section 4.110-7, RR 16-2005)
a. Output tax exceeds the input tax - the
excess shall be paid by the VAT-registered
person.
b. Input tax inclusive of input tax carried
over from the previous quarter
exceeds the output tax - the input tax
inclusive of input tax carried to the
succeeding quarter or quarters.
 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.
 Unutilized creditable input taxes attributable
to zero-rated sales can only be recovered
through the application for refund or tax
credit. Hence, unapplied input taxes cannot
be treated outright as deductible expense
for income tax purposes. (RMC 57-2013 and
BIR Ruling No. 123-2013)
7. Refund or tax credit of excess input;
procedure
Grounds
In a nutshell, there are only two grounds when
taxpayer may claim for a VAT refund, to wit:
 Excess input VAT attributable to effectively
zero-rated sales (Sec. 112[a]), and
 Excess input VAT at the time of cancellation
of the VAT registration (Sec. 112[b]).
179
Taxation Law
Excess input vs. Excessively collected tax
The distinction between "excess input tax" and
"excessively collected taxes" can be understood
further by examining the production process vis-
a-vis the VAT system. In Commissioner of
Internal Revenue v. San Roque:
The input VAT is not "excessively" collected as
understood under Section 229 because at the
time the input VAT is collected the amount paid
is correct and proper. The input VAT is a tax
liability of, and legally paid by, a VAT-registered
seller of goods, properties or services used as
input by another VAT-registered person in the
sale of his own goods, properties, or services.
This tax liability is true even if the seller passes
on the input VAT to the buyer as part of the
purchase price. The second VAT-registered
person, who is not legally liable for the input
VAT, is the one who applies the input VAT as
credit for his own output VAT (CE Luzon
Geothermal Power Co., Inc. v. Commissioner of
Internal Revenue,G.R. No. 197526,July 26,
2017,penned by J. Leonen)
Requirements to be submitted for a claim
for VAT refund
1. The taxpayer is engaged in sales which are
zero-rated or effectively zero-rated;
2. The taxpayer is VAT-registered;
3. The claim must be filed within two years
after the close of the taxable quarter when
such sales were made;
4. The input taxes are incurred or paid;
5. The input taxes are not transitional input
taxes;
6. The input taxes have not been applied
against output taxes during and in the
succeeding quarters;
7. The input taxes claimed are attributable to
zero-rated or effectively zero-rated sales;
8. In certain types of zero-rated sales, the
acceptable foreign currency exchange
proceeds thereof had been duly accounted
for in accordance with BSP rules and
regulations;(Secs. 106[A][2][a][1] and [2]; Sec.
106[B]; Secs 108[B][1] and [2])
9. Where there are both zero-rated and
effectively zero-rated sales and taxable or
exempt sales, and the input taxes cannot be
Bar Operations C ommissions 179
 Purple Notes
Taxation Law
directly and entirely attributable to any
these sales, the input taxes shall
proportionately allocated on the basis
sales volume.(Intel Technology Philippines
CIR, G.R. No. 166732, April 27, 2007)
Who may claim for refund?
The following can avail of refund or tax credit:
1. A VAT-registered person whose sales of
goods, properties or services are zero-rated
or effectively zero-rated (Sec. 4.112-1 [a], RR
16-05).
The input tax that may be subject of the claim
shall exclude the portion of input tax that has
been applied against the output tax. The
application should be filed within two (2) years
after the close of the taxable quarter when such
sales were made.
In case of zero-rated sales, the payments for
the sales must have been made in acceptable
foreign currency duly accounted for in
accordance with the BSP rules and regulations.
Where the taxpayer is engaged in both zero-
rated or effectively zero-rated sales and in
taxable(including sales subject to final
withholding VAT) or exempt sales of goods,
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, only the proportionate share of
input taxes allocated to zero-rated or effectively
zero-rated sales can be claimed for refund or
issuance of a tax credit certificate.
2. VAT-registered 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 the Tax Code, within two (2) years from
the date of cancellation (Sec. 4.112-1 [b] of
RR 16-05).
 Since the seller is the one directly liable for
VAT, the Supreme Court held that the Seller
him/her/itself must claim for refund, and
thereafter return the same to the buyer.
(Contex vs. CIR G.R. No. 151135, July 2, 2004)
180 Center for Legal Education and Research
of 2018 for a
 The taxpayer must prove the following
be tax refund to prosper:
of (1) That it is a VAT-registered entity and
vs.
(2) It must substantiate the input VAT paid
by purchase invoice or official receipt
(Team Energy Corporation vs. CIR,G.R. No.
197663, March 14, 2018,penned by J.
Leonen)
Enhanced VAT Refund system
The Commissioner shall grant a refund or issue
the tax certificate for creditable input taxes
within 90 days from the date of submission of
the official receipts or invoices and other
documents in support of the application filed in
accordance with Section (A) and (B) hereof;
Provided, That should the Commissioner find
that the grant is not proper, the Commissioner
must state in writing the legal and factual basis
for denial.
In case of full or partial denial of the claim for
tax refund, the taxpayer affected may, within 30
days from the receipt of the decision denying
the claim, appeal the decision with the Court of
Tax Appeals: Provided, however, That failure on
the part of any official, agent, or employee of
the BIR to act on the application within 90-day
period shall be punishable under Section 269 of
this Code. (Sec. 112, NIRC, as amended)
Five percent of the total VAT collection of the
BIR and BOC from the immediately preceding
year shall be automatically appropriated
annually and shall be treated as a special
account in the General Fund or as trust receipts
for the purpose of funding claims for VAT
refund.
Period to file claim for refund
1. An administrative claim must be filed
with the CIR within two years after the
close of the taxable quarter when the zero-
rated or effectively zero-rated sales were
made.
2. The CIR has 90 days (as amended) from
the date of submission of complete
documents in support of the administrative
claim within which to decide whether to
 Purple Notes
grant a refund or issue a tax credit
certificate. The 90-day period may extend
beyond the two-
year period from the filing of the
administrative claim if the claim is filed in
the later part of the two-year period. If the
90-day period expires without any decision
from the CIR, then the administrative claim
may be considered to be denied by inaction.
RR 13-2018
The enhanced VAT refund system grants and
pays refunds of creditable input tax within
ninety (90) days from the filing of the VAT
refund application with the Bureau. All
applications filed from January 1, 2018 shall be
processed and decided within ninety (90) days
from the filing of the VAT refund application.
However, all claims for refund/tax credit
certificate filed prior to January 1, 2018 shall
still be governed by the one hundred
twenty (120)-day processing period.
All pending VAT refund claims as of December
31, 2017 shall be fully paid in cash by December
31, 2019.
Provided, That Department of Finance (DOF)
shall establish a VAT refund center in the BIR
and in the Bureau of Customs (BOC) that will
handle the processing and granting of cash
refunds of creditable input tax.
RR No. 26-2018
The 90-day period to process and decide shall
start from the filing of the application/claim for
refund up to the release of the payment of the
VAT refund. Provided, that the claim/application
is considered to have been filed only upon
submission of the official receipts or invoices
and
other documents in support of the application as
prescribed under pertinent revenue issuance.
Provided further, in the event that the 90-day
period has lapsed without having the refund
released to the taxpayer-claimant, the VAT
refund claim may still continue to be processed
administratively. Provided, however, that the
BIR official, agent or employee who was found
181
Taxation Law
to have deliberately caused the delay in the
processing of the VAT refund claim may be
subjected to penalties.
The enhanced VAT refund system also
implements a risk-based post-audit, as well as
an electronic invoicing and receipts system.
Other implications:
Upon the successful establishment and
implementation of an Enhanced VAT Refund
System, the following shall be subject to the
twelve percent (12%) VAT and no longer be
subject to zero percent (0%) VAT rate:
• 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 BSP;
• Services performed by subcontractors
and/or contractors in processing, converting,
or manufacturing goods for an enterprise
whose export sales exceed seventy percent
(70%) of the total annual production;
(Sec.33, RA No. 10963 – TRAIN)
3. Failure to comply with the 90-day waiting
period violates a mandatory provision of
law. It violates the doctrine of exhaustion of
administrative remedies and renders the
petition premature and thus without a cause
of action, with the effect that the CTA does
not acquire jurisdiction over the taxpayer‘s
petition. Philippine jurisprudence is replete
with cases upholding and reiterating these
doctrinal principles. (San Roque case, supra)
4. A judicial claim must be filed with the CTA
within 30 days from the receipt of the
CIR‘s decision denying the administrative
claim. When a taxpayer prematurely files a
judicial claim for tax refund or credit with
the CTA without waiting for the decision of
the Commissioner, there is no "decision" of
the Commissioner to review and thus the
CTA as a court of special jurisdiction has no
jurisdiction over the appeal. (San Roque case,
supra)
Bar Operations C ommissions 181
 Purple Notes
Taxation Law
Clearly, the thirty (30)-day statutory period
within which to file a petition for review is
jurisdictional. Non-compliance bars the
Court of Tax Appeals from taking cognizance
of the appeal and determining the veracity
of the tax refund or credit claim(CE Casecnan
Water and Energy Company, Inc. v.
Commissioner of Internal Revenue,G.R. No.
203928, July 22, 2015,penned by J. Leonen)
5. All taxpayers, however, can rely on BIR
Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its
reversal by this Court in Aichi on 6 October
2010, as an exception to the mandatory and
jurisdictional 120+30 day periods. (Mindanao
ii Geothermal Partnership vs. CIR, G.R. No.
193301, March 11, 2013)
San Roque Doctrine
In a claim for refund or credit of "excess" input
VAT under Sec. 110(B) (Tax Credits) and Sec.
112(A) (Refunds or Tax Credits of Input Tax),
the input VAT is not "excessively" collected as
understood under Sec. 229. At the time of
payment of the input VAT the amount paid is
the correct and proper amount. Under the VAT
System, there is no claim or issue that the input
VAT is "excessively" collected, that is, that the
input VAT paid is more than what is legally due.
The person legally liable for the input VAT
cannot claim that he overpaid the input VAT by
the mere existence of an "excess" input VAT.
182 Center for Legal Education and Research
The term "excess" input VAT simply2018means that
the input VAT available as credit exceeds the
output VAT, not that the input VAT is
excessively collected because it is more than
what is legally due. Thus, the taxpayer who
legally paid the input VAT cannot claim for
refund or credit of the input VAT as
"excessively" collected under Section 229. (CIR v.
San Roque Power Corporation, G.R. No. 187485,
February 12, 2013)
A claim for tax refund or credit, like a claim for
tax exemption, is construed strictly against the
taxpayer. One of the conditions for a judicial
claim of refund or credit under the VAT System
is compliance with the 120 (now 90)+30 day
mandatory and jurisdictional periods. Thus, strict
compliance with the 120+30 day period is
necessary for such a claim to prosper, whether
before, during, or after the effectivity of the
Atlas doctrine, except for the period from the
issuance of BIR Ruling No. DA-489-03 on 10
December 2003 to 6 October 2010 when the
Aichi doctrine was adopted, which again
reinstated the 120+30 day period as mandatory
and jurisdictional (CIR vs. San Roque Power
Corporation/Taganito Mining Corporation vs.
Commissioner of Internal Revenue G.R. 187485,
October 8, 2013; Steag State Power vs. CIR,G.R. No.
205282, January 14, 2019, penned by J. Leonen).
 Purple Notes
Taxation Law

Periods to file a VAT refund PRIOR to TRAIN vs. VAT refund under TRAIN (Enhance VAT Refund)
Prior TRAIN TRAIN Law
Period to file Admin Claim
Same, within 2 years from the close of sale of the taxable quarter
Period to Decide on the Claim
120 days from date of receipt of the written claim for 90 days from date of receipt of the written claim for
refund refund
Deemed Denial, applicable?
Yes, after the lapse of the 120 days to decide on the
refund claim taxpayer. Such inaction shall be considered No, this has been deleted by TRAIN Law
as ―deemed denial‖
Action after lapse of the period to decide
The taxpayer may elevate the refund claim to the CTA
The taxpayer has no recourse to elevate, taxpayer shall
within 30 days after the lapse of the 120 day period to
wait or compel the BIR officer to decide on the claim.
decide
Should there be a denial by the BIR on the claim
Same, taxpayer must elevate its claim to the CTA within 30 days after the receipt of the denial.

VAT Refund Doctrines summarized

(CBK Power Company Limited vs. CIR,G.R. No. 202066, September 30, 2014,penned by J. Leonen)

Atlas Mirant/San Roque Aichi

Period the doctrine applies

June 8, ‘07 –Sept. 12 ‘08 Sept. 12 ‘08 until present Feb 12,2013 until present

What does the doctrine say?

Reckoning date for the running
of the prescriptive period to file
for refund is the filing of the
return and payment of tax – this
doctrine has been
abandoned by Mirant/San
Roque
Reckoning date for the running of It is only the administrative claim
the prescriptive period to file for that must be filed within 2-year
refund is the close of the taxable prescriptive period.
quarter where the relevant sales
were made regardless when the The 30-day period to appeal isboth
input tax was paid mandatory and jurisdictional.
120+30 rule

183
Bar Operations C ommissions 183
 Purple Notes
Taxation Law
2018
VAT refund Timeline for Refund for Excess Input VAT PRIOR TRAIN LAW (applying
SAN ROQUE -AICHI DOCTRINE)- 120+30 RULE

A. Denial made by the Commissioner

The refund claim must be first filed within 2 years from the close of sales of taxable quarter
(ADMIN CLAIM) .The 2-year period rule applies only for filing of ADMIN CLAIM.PRIOR the
TRAIN Law, the BIR officer has only 120 days to decide from the date of receipt on the input
VAT refund claim by the taxpayer which is July 29,2016.Here, the BIR denied the claim within
the 120 day period which was on April 15, 2016.After denial and receipt thereof, the taxpayer
has 30 days from the receipt of the denial or until June 15,2016 to file a JUDICIAL CLAIM.

184 Center for Legal Education and Research

 Purple Notes
Taxation Law

VAT refund Timeline for Refund for Excess Input VAT PRIOR TRAIN LAW (applying
SAN ROQUE -AICHI DOCTRINE)- 120+30 RULE

B. Inaction by the Commissioner

The refund claim must be first filed within 2 years from the close of sales of taxable
quarter(ADMIN CLAIM).The 2 year period rule applies only for filing of ADMIN CLAIM.PRIOR
TRAIN Law, the BIR officer has only 120 days to decide from the date of receipt on the input
VAT refund claim by the taxpayer which is July 29,2016.The taxpayer has to wait for the
decision of the BIR or the lapse of the 120-day period to decide (here July 29,2016) BEFORE
filing a judicial claim with the BIRAfter the LAPSE of the 120 period which is considered (then)
DEEM DENIAL, only then can the taxpayer proceed to file the JUDICIAL CLAIM within 30 days
from the last lapse of the 120 day period, here until August 8,2016.The waiting of the lapse on
the 120 day period is MANDATORY and JURISDICTIONAL before filing a JUDICIAL CLAIM with
the CTA. Filing with the CTA, prior to the lapse of the 120 day period is a cause for dismissal for
the claim.

185
Bar Operations C ommissions 185
 Purple Notes
Taxation Law
2018

VAT refund Timeline for Refund for Excess Input VAT under TRAIN LAW -ENHANCE
VAT REFUND SYSTEM

The refund claim must be first filed within 2 years from the close of sales of taxable
quarter(ADMIN CLAIM)Under the TRAIN Law, the BIR officer has only 90 days to decide on the
input vat refund claim by the taxpayer. Under RR 13-2018 and RR 26-2018 the officers are
compelled to decide within the 90 day decide failure to decide within the shall be cause for
criminal and administrative charges. There is no deemed denial under the TRAIN Law hence
failure to act by the BIR within the 90 day period the taxpayer does not have any recourse but to
await decision or compel the BIR officer and file charges. After denial and receipt thereof, the
taxpayer has 30 days from the receipt of the denial to file a JUDICIAL CLAIM with the CTA this is
REGARDLESS of the fact that the period is BEYOND the 2 YEARS.T he 2 year period rule applies
only for filing of ADMIN CLAIM.

Changes made by TRAIN Law:

 The option to be given a Tax Credit Certificate has been now repealed and only refund by
means of cash is allowed.
 The proviso with regards to the implementation of an enhanced 90- day VAT refund
system.
 If the BIR does not act on the application within the 90-day period, the relevant official,
agent, or employee shall be liable under Sec.269 of NIRC.

186 Center for Legal Education and Research

 Purple Notes
8. Compliance requirements
a. Registration
SEC. 236. Registration Requirements. –
(A) Requirements. - Every person subject to any
internal revenue tax shall register once with the
appropriate Revenue District Officer:
(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.
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
therefor.
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 Section,
the term 'facility' may include but not be limited
to sales outlets, places of production,
warehouses or storage places.
(B) Annual Registration Fee - An annual
registration fee in the amount of Five hundred
pesos (P500) 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:
Provided, however, That cooperatives,
individuals earning purely compensation income,
whether locally or abroad, and overseas workers
are not liable to the registration fee herein
imposed.
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.
187
Taxation Law
Persons Required to Register for Value-
Added Tax. -
(1) Any person who, in the course of trade or
business, sells, barters or exchanges goods
or properties, or engages in the sale or
exchange of services, shall be liable to
register for value-added tax if:
(a) His gross sales or receipts for the past
twelve (12) months, other than those that
are exempt under Section 109(A) to (V),
have exceeded One million five hundred
thousand pesos (P3,000,000); or
(b) 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 Section 109(A) to (V), will
exceed One million five hundred thousand
pesos (P3,000,000); or
(2) Every person who becomes liable to be
registered under paragraph (1) of this
Subsection 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
prescribed in Subsection (B) hereof. If he
fails to register, he shall be liable to pay the
tax under Title IV 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[H],
NIRC, as amended)
(H) Optional Registration for Value-Added
Tax of Exempt Person. -
(1) Any person who is not required to register
for value-added tax under Subsection (G)
hereof may elect to register for value-added
tax by registering with the Revenue District
Office that has a jurisdiction over the head
office of that person, and paying the annual
registration fee in Subsection (B) hereof.
(2) Any person who elects to register under this
Subsection shall not be entitled to cancel his
registration under Subsection (F) (2) for the
next three (3) years.
For purposes of Title IV of this code, any person
who has registered value-added tax as a tax
type in accordance with the provisions of
Subsection (C) hereof shall be referred to as a
"VAT-registered person" who shall be assigned
only one Taxpayer Identification Number (TIN).
Bar Operations C ommissions 187
 Purple Notes
Taxation Law
b. Invoicing Requirements
SEC. 113. Invoicing and Accounting
Requirements for VAT-Registered Persons.
- address and Taxpayer Identification Number
(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.
(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); and
(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 known
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 involved 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 break-down 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
known 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 description of the goods or properties or
nature of the service; and
188 Center for Legal Education and Research
2018of One
(4) In the case of sales in the amount
thousand pesos (P1,000) or more where the
sale or transfer is made to a VAT-registered
person, the name, business style, if any,
(TIN) of the purchaser, customer or client.
Clarifying the Phrase ―Business Style‖:
Business style
Refers to the business name with the concerned
regulatory body used by the taxpayer other than
its registered name or company name. For
example:
 For Corporation – with a corporate name of
XYZ Entertainment Corporation on its
Certificate of Registration issued by the
Securities of Exchange is operating under
the business name of ―Bozo the Clown.‖ In
this case the business style would be its
business name which is ―Bozo the Clown.‖
For Individuals - A single proprietor named
Juanita M. Ricafrente, registered with a
business name with the Department of
Trade and Industry (DTI). Reflected in her
DTI Certificate of Registration is the
business name of ―JMR Trading‖. Hence the
business style is ―JMR Trading.‖(R.M.C. 55-
2019)
c. Filing of Return and Payment
In general, every person liable to pay the VAT
imposed under this Title shall file a quarterly
return of the amount of his gross sales or
receipts within 25 days following the close of the
quarter. Provided however that VAT-registered
persons shall pay the VAT on a monthly basis:
Provided finally, that beginning January 1, 2023,
the filing and payment shall be done within 25
days after the close of taxable quarter.
(Sec.114, NIRC as amended by Sec.37 of RA No.
10963 - TRAIN).
Monthly VAT Return filling and payment
 Manual Taxpayers - every 20th day following
the end of the month (filing and payment)
 Purple Notes
Quarterly VAT returns – every 25th day
following the end of the quarter. (Both EFPS and
manual taxpayers, filing and payment).
Beginning January 1, 2023, the filing and
payment shall be done within 25 days after the
close of taxable quarter. (TRAIN Law)
The term "taxable quarter" shall mean the
quarter that is synchronized to the income tax
quarter of the taxpayer (i.e., the calendar
quarter or fiscal quarter).
Amounts reflected in the monthly VAT
declarations for the first two (2) months of the
quarter shall still be included in the quarterly
VAT return which reflects the cumulative figures
for the taxable quarter. Payments in the monthly
VAT declarations shall, however, be credited in
the quarterly VAT return to arrive at the net VAT
payable or excess input tax/over-payment as of
the end of a quarter. (Sec. 4.114-1, RR 16-2005)
Strict Compliance with substantiation
requirement
Strict compliance with substantiation and
invoicing requirements is necessary considering
VAT's nature and VAT system's tax credit
method, where tax payments are based on
output and input taxes and where the seller's
output tax becomes the buyer's input tax that is
available as tax credit or refund in the same
transaction. It ensures the proper collection of
taxes at all stages of distribution, facilitates
computation of tax credits, and provides
accurate audit trail or evidence for BIR
monitoring purposes(Team Energy Corporation vs.
CIR,G.R. No. 197663, March 14, 2018,penned by J.
Leonen)
Where to file and pay
a. Manual Filing - AAB under the jurisdiction
of the Revenue District/BIR Office where the
taxpayer (head office of the business
establishment) is required to be registered.
- For NIL returns, BIR mandates the use of
the electronic BIR (eBIR) forms by non-
EFPS.(RR 6-2014)
189
Taxation Law
b. EFPS - shall comply with the provisions of
the EFPS Regulations (Filing and payment is
thru EFPS to avoid wrong venue filing and
payment)
Attachments to VAT Declarations/Returns
Under Revenue Regulation 1-2012, effective
January 1, 2012, ALL VAT-registered taxpayers
or persons liable to VAT such as manufacturers,
wholesalers, service providers, among others,
regardless of the amount of the transaction,
must submit the following:
i. Summary list of sales (SLS)
ii. Summary list of purchases
(SLP)Summary list of Importations
(SLI)
 Non-submission covers late submission and
submission of erroneous, incomplete,
falsified information in a SLS/SLP - P1,000
for each failure but aggregate should not
exceed P25,000.
 Non-submission of both the SLS and SLP is
considered two separate violations.(RMC 51-
09, September 15, 2009)
d. Final Withholding VAT on Sales to
Government
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 f are subject to the
value-added tax imposed in Sections 106 and
108 of this Code, deduct and withhold the value-
added tax imposed in Sections 106 and 108 of
this 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.
The value-added tax withheld under this Section
shall be remitted within ten (10) days following
Bar Operations C ommissions 189
 Purple Notes
Taxation Law
the end of the month the withholding was 2018for
fuel are to be used
made.(Sec.114, NIRC) international shipping or air
transport operations (Sec.
e. Administrative and Penal Sanctions 106(A)(2)(a)(6))
Foreign Currency Denominated Sales
Zero –Rated (Sec. 106 Deleted
Power of the Commissioner to Suspend the
(A)(2)(b))
Business Operations of a Taxpayer. - The Enhanced VAT refund system
Commissioner or his authorized representative is No provision Sunset provisions where
hereby empowered to suspend the business certain transactions will be
operations and temporarily close the business subject to 12% VAT, hence,
establishment of any person for any of the no longer considered export
following violations: sales subject to zero rating
upon satisfaction of the
(a) In the case of a VAT-registered Person. - following conditions:

(1) Failure to issue receipts or invoices; 1. The successful

establishment and
(2) Failure to file a value-added tax return as implementation of an
required under Section 114; or enhanced VAT refund
Understatement of taxable sales or receipts by system that grants
thirty percent (30%) or more of his correct refunds of creditable
taxable sales or receipts for the taxable quarter. input tax within 90 days
from filling of the VAT
(b) Failure of any Person to Register as Required refund application.
under Section 236. 2. Provided that all
The temporary closure of the establishment shall applications filed from
January 1,2018 shall be
be for the duration of not less than five (5) days
processed and must be
and shall be lifted only upon compliance with decided within the 90
whatever requirements prescribed by the days from the filing of
Commissioner in the closure order(Sec. 105,NIR the VAT refund
application
NIRC, as amended by 3. All pending VAT refund
IRC
TRAIN Law claims as of December
VAT Threshold 31, 2017 shall be fully
General: Gross annual General: Gross annual paid in cash by
receipts/ revenues receipts / revenues December 31,2019.(Sec.
exceeding Php exceeding Php 3M (Sec. 106(A)(2)(a)(6))
1,919,500 (Sec. 236(G)(1))
236(G)(1)) These transactions are:
1. sale of raw materials or
Exception: Exception: packaging materials to a
Rental Income (RR Rental Income (RR 13- nonresident buyer for
16-2011, Sec. 109(P) 2018) delivery to a resident
NIRC) Sale of house and lot (RR local export-oriented
Sale of house and lot 13 -2018) enterprise to be used in
(RR 16 – manufacturing,
2011)(Sec.109(P)) processing, packing or
Sale of Gold to BSP repacking in the
Zero –Rated (Sec. 106 VAT exempt (Sec 109(1)(z)) Philippines of the said
(A)(2)(a)(4)) buyer‘s goods, paid for
Sale of Good, supplies, equipment and fuel to in acceptable foreign
persons engaged in international shipping or currency, and accounted
international air transport operations for in accordance with
Zero –Rated (Sec. 106 Retained and added proviso the rules and regulations
(A)(2)(a)(6)) that the sale of goods, of the BSP
supplies, equipment and 2. Sale of raw materials or

190 Center for Legal Education and Research

 Purple Notes
packaging materials to
an export-oriented
enterprise whose export
sales exceed 70% of the
total annual production
3. Transactions considered
export sales under
Omnibus Investments
Code of 1987 (EO No.
226) and other special
laws
4. Processing,
manufacturing or
repacking goods for
other persons doing
business outside the
Philippines which goods
are subsequently
exported, where the
services are paid in
acceptable foreign
currency and accounted
for in accordance with
the rules and regulations
of the BSP
5. Services performed by
subcontractors and/or
contractors in
processing, converting
or manufacturing goods
for an enterprise whose
export sales exceed
70% of total annual
production
DOF shall establish a VAT
refund center in the BIR
and in the BOC that will
handle the processing and
granting of cash refunds of
creditable input tax.
5% of the total collection of
BIR and BOC from the
immediately preceding year
shall be automatically
appropriated annually and
shall be treated as a special
account in the general fund
or as trust receipts for the
purpose of funding claims
for VAT refund. Any unused
fund at the end of the year
shall revert to the general
fund.
BIR and BOC shall be
required to submit to the
191
Taxation Law
Congressional Oversight
Committee in the
Comprehensive Tax Reform
Program a quarterly report
of all pending claims for
refund and any unused
fund.
Threshold of Exempt Monthly Rental on
Residential Units
VAT exempt if monthly VAT exempt if monthly
rental does not exceed rental does not exceed Php
Php 12,800 (RR 16- 15,000 (RR 13-2018)
2011)
Threshold on Sale of Residential Lot and House
& Lot
VAT exempt if value
does not exceed
P1,919,500and Staring Jan 1, 2021, sale of
P3,199,200 for house & lot is VAT exempt
residential lot and if selling price does not
house and lot, exceed P2,000,000
respectively (RR 16-
2011)
Sale of Real Properties Utilized for Low-Cost
and Socialized Housing
Starting Jan 1, 2021 Sale of
socialized housing –
VAT exempt (Sec. exempt;
109(P) Sale of low cost housing -
subject to VAT
(Sec. 109(P))
Other VAT exempt transactions
(1)Saleof goods & (1) Sale of goods & services
services to Senior to Senior Citizens;
Citizens –VAT exempt (2) Transfer of property
but not found in the pursuant to Sec 40(C)(2);
Tax Code; (3) Association Dues,
membership fees, and other
(2)Association Dues, assessments and charges
membership fees, and collected by homeowners
other assessments and associations and
charges collected by condominium corporation;
homeowners (4) Sale of Gold to BSP
associations and (5) Sale of Drugs and
condominium medicines prescribed for:
corporation; - VATable (a)diabetes, (b) high
cholesterol (c)hypertension
(3)Sale of Gold to BSP beginning Jan. 1, 2019
– Zero Rated (6) Sale of goods or
services, leases which gross
annual sales or receipts do
not exceed Php 3M
Amortization of Input Vat on Capital Goods
Shall be spread evenly Retained but with added
over the month of proviso that the
acquisition and the amortization of the input
fifty-nine (59) VAT shall be only allowed
Bar Operations C ommissions 191
 Purple Notes
Taxation Law
succeeding months until December 31, 2021 Other percentage taxes are imposed 2018by the
after which taxpayers with NIRC, as amended, on the following persons or
if the aggregate unutilized input VAT on business:
acquisition cost capital goods purchased or 1. Tax on persons exempt from value-added
exceeds Php 1M or imported shall be allowed to
over its estimated apply the same as
tax (Sec. 116)
useful life if such is scheduled until fully utilized. 2. Percentage tax on domestic carriers by land
less than 5 years (Sec. (Sec. 110(A)(2)) and keepers of garages (Sec. 117)
110(A)(2)) 3. Percentage tax on international carriers (Sec.
Refund or Tax Credit of Input Taxes 118)
The Commissioner The Commissioner shall 4. Tax on franchises (Sec. 119)
shall grant a refund or grant a refund for creditable
issue the tax credit input taxes within ninety
5. Tax on overseas dispatch, message or
certificate for (90) days from the date of conversation originating from the Philippines
creditable input taxes submission of the official (Sec. 120)
within 120 days from receipts or invoices and 6. Tax on banks and non-bank financial
the date of submission other documents in support intermediaries (Sec. 121)
of complete of the application. Sec.
7. Tax on finance companies (Sec. 122)
documents in support 112(C))
of the application (Sec. The option to be given a 8. Tax on life insurance premiums (Sec. 123)
112(C)) Tax Credit Certificate is now 9. Tax on agents of foreign insurance
repealed and only refund by companies (Sec. 124)
means of cash is allowed. 10. Amusement Taxes (Sec. 125)
Filing of VAT Return and Payment 11. Tax on winnings (Sec. 126)
Filing of Quarterly
12. Tax on sale, barter or exchange of shares of
Return is within 25
Beginning January 1, 2023, stock listed and traded through the local
days following the
the filing and payment shall
close of each taxable stock exchange or through initial public
be done within 25 days
quarter, however, offering (Sec. 127)
after the close of each
payment for VAT-
taxable quarter.(Sec.
registered persons is
114(A))
1. Tax on persons exempt from value-
on a monthly basis. added tax (Sec. 116)
(Sec. 114(A))
Who are liable for this percentage tax?
F. Percentage Taxes: Concept and Nature
Any person whose gross annual sales and/or
CONCEPT receipts do not exceed the amount of Three
million Pesos (P3,000,000), and who is not VAT-
A percentage tax is a national tax measured registered.(Sec. 116, NIRC, as amended by RA.
by a certain percentage of the gross selling price 10963)
or gross value in money of goods sold, bartered
or imported; or of the gross receipts or earnings Note:
derived by any person engaged in the sale of
services. It is not subject to withholding. (CIR v. A marginal income earner is an individual
Solidbank Corp., G.R. No. 148191, November 25, deriving gross sales or receipts of not exceeding
2003) P100,000 during any 12-month period(Rev. Reg.
11-2000)
NATURE Marginal income earners are not subject to
business taxes because they are not considered
Percentage tax is also a type of business tax as engaged in trade or business.(RMC No. 7-2014)
imposed on the gross sales/receipts of a
taxpayer. Percentage tax is a deductible tax 2.Percentage tax on domestic carriers by
under Sec. 34(C) of the Tax Code, except for land and keepers of garages (Sec. 117)
stock transactions tax and percentage tax on
initial public offerings. [Sec. 127(D), NIRC, as Common carriers refer to individuals,
amended by TRAIN] corporations, firms or associations engaged in

192 Center for Legal Education and Research

 Purple Notes
Taxation Law
the business of carrying or transporting air carriers having no flight operations to and
passengers or goods, or both, by land, water, or from the Philippines.
air, for compensation, offering their services to
the public, and shall include transportation International sea carrier shall refer to a
contractors(Rev. Reg. 15-13) foreign shipping corporation doing business in
the Philippines, having touched or intention of
Subject touching any Philippine port to perform
1. Cars for rent or hire driven by the lessee; international sea transportation
2. Transportation contractors, including services/activities from the Philippines to
persons who transport passengers for anywhere in the world and vice versa, in the
hire; case of on-line carrier, or having maintained
3. Other domestic carriers by land for the business establishment, agent or representative
transport of passengers; and office in the Philippines for the sale of owned
4. Keepers of garages. tickets/passage documents or tickets/passage
Exempt documents of other shipping companies, which
1. Owners of bancas; and shipping companies operate without touching
2. Owners of animal-drawn two wheeled any Philippine port, in the case of off-line
vehicles. carrier. (R.A. No. 10378; Rev. Reg. No. 15-2013)
This tax is imposed together with the income tax
Gross receipts of common carriers derived from on international carriers of 2.5% of gross
their incoming and outcoming freight shall billings.[Sec. 28,(A)(3), NIRC, as amended by R.A.
notbe subject to the local taxes imposed under No. 10963]
the LGC. (Sec. 117, Par. 2, NIRC of 1997)
Transporting goods or cargoes by land, air, and Carri Mode
water by transportation contractors, as well as age
Land Air Sea
DOMESTIC common carriers including persons of:
Dom Dom Intern Dom Intern
who transport goods or cargoes for hire, in the estic estic ational estic ational
course of business is subject to VAT.
Transport network companies, such as but not Passe CCT* VAT TIC* VAT TIC*
limited to the likes of UBER, GRAB TAXI, their ngers (3%) (12% (3%) (12% (3%)
Partners/suppliers and similar arrangements, ) )
which are holders of a valid and current Good VAT
s / (12%
Certificate of Public Convenience are known as
Cargo )
common carrier subject to the 3% common
carrier tax. Otherwise, they are classified as land
transportation service contractors subject to the
4. Tax on franchises (Sec. 119)
12% VAT. (RMC No. 70-2015)

3. Percentage tax on international carriers

(Sec. 118)
This tax is imposed on gross receipts of
international air carriers and international sea
carriers doing business in the Philippines.
International air carrier shall refer to a
foreign airline corporation doing business in the
Philippines having been granted landing rights in
any Philippine port to perform international air
transportation services/activities or flight
operations anywhere in the world. On-line
carriers refer to international air carriers having
or maintaining flight operations to and from the
Philippines. Off-line carriers refer to international
193
Franchise is a special privilege or right
conferred on an individual or corporation by the
State through the lawmaking body, to operate a
public utility.
Who are covered:
1. Gas and water utilities from the business
covered by the law granting the franchise;
2. Radio and/or television broadcasting
companies whose annual gross receipts of
the preceding year do not exceed P10
Million;
3. National Grid Corporation on all its gross
receipts derived from its operation covered
by the law granting the franchise.
Bar Operations C ommissions 193
 Purple Notes
Taxation Law
Electric utilities are subject to VAT. (Sec. 108(A),
NIRC, as amended by R.A. 10963)
Radio and/or television broadcasting
companies
Gross annual sales or receipts Franchise tax
do notexceed P10 Million
Gross annual sales or receipts VAT
exceeds P10 Million
The radio and/or television broadcasting
companies whose gross annual receipts during
the preceding year did not exceed P10,000,000
shall have an option to be registered as a value-
added taxpayer and pay the tax due thereon.
Provided that once the option is exercised, it
cannot be revoked anymore. (Sec. 119, Par. 1,
NIRC, as amended)
Gross receipts derived by the National Grid
Corporation from its transmission operation, in
effect, amended the VAT on transmission
companies under R.A. No. 9337 by reverting the
taxation of transmission companies to the
franchise tax. (Sec. 9, R.A. No. 9511)
Franchise holders other than those enumerated
above shall be subject to value-added tax
regardless of the amount of their gross receipts.
If they are subject to VAT, they are no longer
subject to franchise tax.
5.Tax on overseas dispatch, message or
conversation originating from the
Philippines (Sec. 120)
This is known as ―overseas communication tax‖.
This tax 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 the tax and pay within twenty
(20) days after the end of each quarter.[Sec.
120(A), NIRC as amended by R.A. 10963]
The overseas communication tax shall not apply
to: (DGIN)
1. Government
Amounts paid for messages transmitted by
the Government of the Republic of the
Philippines or any of its political subdivisions
or instrumentalities.
194 Center for Legal Education and Research
2. Diplomatic services 2018
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, exemptions and
immunities which the Government of the
Philippines is committed to recognize
pursuant to an international agreement.
4. News services
Amounts paid for messages from any
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 time
through, public press, radio or television
broadcasting or a newsticker service
furnishing a general news similar to that of
a public press.
6. Tax on banks and non-bank financial
intermediaries (Sec. 121)
Banks or banking institutions are persons
and entities engaged in the lending of funds
obtained from the public through the receipt of
deposits or the sale of bonds, securities, or
obligations of any kind, and all entities regularly
conducting such operations.
7. Tax on finance companies (Sec. 122)
Non-bank financial intermediariesshall refer
to persons or entities whose principal functions
include the lending, investing or placement of
funds or evidence of indebtedness or equity
deposited with them, acquired by them or
otherwise coursed through them, either for their
own account or for the account of others. ( Rev.
Reg. No. 09-2004)
Quasi-banking activities shall refer to the
borrowing of funds from twenty (20) or more
 Purple Notes
Taxation Law
personal corporate lenders at any one time,
through the issuance, endorsement or 9.Tax on agents of foreign insurance
acceptance of debt instruments of any kind companies (Sec. 124)
other than deposits for the borrower‘s own
account, or through the issuance of certificates This percentage tax shall be imposed upon:
of assignment or similar instruments, with
Transaction Tax
recourse, or of repurchase agreements for
purposes of relending or purchasing receivables 1. Every fire, marine or of the total
and other similar obligations. (Id.) miscellaneous insurance premium
agent authorized under the collected -
8. Tax on life insurance premiums (Sec. Insurance Code to procure 10%
123) policies of insurance as he
may have previously been
A percentage tax shall be collected from every legally authorized to
transact on risks located in
person, company or corporation (except purely
the Philippines for
cooperative companies or associations) doing companies not authorized
life insurance business of any sort in the to transact on risks located
Philippines. in the Philippines

The following shall not be included in the 2. On owners of property who on

taxable receipts: obtain insurance directly premiums
1. Premiums refunded within six (6) months with foreign companies. paid - 5%
after payment on account of rejection of risk
or returned for other reasons to be insured. This tax shall not apply to reinsurance
2. Reinsurance premiums where tax has premiums. (Sec. 124, NIRC, as amended by R.A.
previously been paid. 10963)

3. Premiums collected or received by any 10.Amusement Taxes (Sec. 125)

branch of a domestic corporation, firm, or
association doing business outside the
Philippines on account of ANY LIFE
insurance of a NON-RESIDENT insured, if
any tax on such premium is imposed by a
foreign country where the branch is
established.
4. Premiums collected or received on account
of REINSURANCE, if the insured, in case of
personal insurance resides
Night clubs are resorts frequented by pleasure
seekers at night where foods and wines and
drinks are served and music furnished and the
patrons allowed to dance whether with their
own partners or professional hostesses
furnished by such resorts.
Videoke bars, KTV bars, music lounges and
other places of similar nature are subject to
amusement tax and not value-added
tax.(RMC No. 18-2010)

outside the Philippines, if any tax on such Boxing exhibitions wherein World or Oriental
premiums is imposed by a foreign country Championships in any division is at stake shall
be exempt from amusement tax. Provided, that:
where the original insurance has been
1. at least one of the contenders is a citizen of
issued or perfected.
the Philippines; and
5. Portion of the premiums collected or
2. said exhibitions promoted by citizen/s of the
received by the insurance companies on
Philippines or by a corporation or association
variable contracts in excess of the amounts
at least 60% of the capital of which is
necessary to insure the lives of the variable
owned by such citizens. [Sec. 125(C) NIRC, as
contract workers.
amended by R.A. 10963]

Effective March 2015, no tax on life insurance

premium shall be collected.
195
Bar Operations C ommissions 195
 Purple Notes
Taxation Law
11.Tax on winnings (Sec. 126) 2018for sale
Secondary offering refers to an offer
to the investing public by the existing
shareholders of their securities which is
Winnings in horse races 10%
conducted during an IPO or a follow-on/follow-
Winnings from double, 4% through offering.
forecast/quinella and trifecta bets
Follow-on/follow-through offering of shares
Owners of winning race horses 10% of the refers to an offering of shares to the investing
prizes public subsequent to an IPO.
Closely-held corporation means any
The tax is based on the actual amount paid for corporation at least 50% in value of the
every winning ticket after deducting the cost of outstanding capital stock or at least 50% of the
the ticket.
total combined voting power of all classes of
The tax shall be deducted from the dividends stock entitled to vote is owned directly or
corresponding to each winning ticket or the indirectly by or for not more than twenty (20)
prize of each winning race horse owner and individuals.
withheld by the operator, manager or person in
charge of the horse races before paying the Filing of return and payment of tax (Sec.
128)
dividends or prizes to the persons entitled
thereto.
Every person liable to pay shall file a quarterly
In ―daily double‖ the bettor selects a number in
return of the amount of his gross sales, receipts
or earnings and pay the tax due thereon within
each of the two consecutive races and the
selection in each race must finish first, while in 25 days after the end of each taxable quarter.
―extra double‖ the bettor selects a number in
(Except stock transaction tax and tax on IPO)
each of two selected races and the selection in
each race must finish first.
Beginning Jan. 1, 2018, there is no longer
Double quinella is an event where the bettor
monthly filing of the percentage taxes.
selects the numbers in each of two selected
races, and the selection in each race must finish
first and second in either order.
Trifecta is an event wherein the bettor selects
the numbers in a selected race and the
selections must finish first, second and third in
the correct order.

12.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)

Listed and trade through Local Stock Exchange

Initial public offering (IPO)refers to a public

offering of shares of stock made for the first
time in the Local Stock Exchange.

Primary Offering refers to the original sale

made to the investing public by the issuer
corporation of its unregistered shares of stock.

196 Center for Legal Education and Research

 Purple Notes
Taxation Law
Summary of Percentage Taxes under Title V of the Tax Code

Line of Business Tax Base Tax Rate Reference

Common Carriers Domestic Carriers and Gross Receipts 3% Sec. 117

Tax Keepers of Garage
Tax on International International air and Gross Receipts 3% Sec. 118
air and shipping shipping carriers – CARGO
carriage of cargo
Franchise Tax Franchises

Radio and/or Television Gross Receipts (not 3% Sec. 119

Broadcasting exceeding P10M for
Gas and Water Utilities Radio/TV 2%
Broadcasting
Gross Receipts Tax Banks, Non-Bank Financial Gross Receipts 0%/1%/5%/7%
Intermediaries and Depending on
Financing Companies the type of
income
Overseas Overseas Dispatch, Gross Receipts 10% Sec. 120(A)
Communications Tax Message or Conversation
Originating from the
Philippines
Premiums Tax Life Insurance Premiums 2% Sec. 123

Agents of Foreign Premiums 4% Sec. 124

Insurance Companies
Life Insurance directly Premiums 5% Sec. 124
taken from foreign
insurance companies
Amusement Tax Cockpits Gross Receipts 18% Sec. 125
Boxing Exhibitions 10%
Cabarets, Night or Day 18%
Clubs
Professional Basketball 15%
Games
Jai-Alai and Racetracks 30%
Tax on Winnings Winnings in horse races Winnings or 10% Sec. 126
―dividends‖ after
deducting the cost

Winnings from double, 4%

forecast/quinella and
trifecta bets

In the case of owners of 10%

winning race horses
Stock Transactions Sale of shares through the Gross selling price or 6/10 of 1% Sec. 127
Tax local stock exchange gross value in
money
Tax on Initial Public Initial Public Offerings Gross Proceeds from 4%/2%/1%
Offering (IPO) the IPO depending on
the ratio of the
shares sold over
the outstanding
capital shares
after IPO

197
Bar Operations C ommissions 197
 Purple Notes
Taxation Law
G. Excise Tax
Concept and Nature
Excise taxes apply to goods manufactured or
produced in the Philippines for domestic sales or
consumption or for any other disposition and to
things imported as well as services performed in
the Philippines.
In addition to the VAT, this tax is imposed under
NIRC. (Sec. 129, NIRC, as amended by RA 10963).
NB: To compute for the excise tax, the VAT is
not included in the tax base. However, to
compute for the VAT, the excise tax is included
in the tax base.
Excise taxes are essentially taxes on property
because they are levied on certain specified
goods or articles manufactured or produced in
the Philippines for domestic saleor consumption
or for any other disposition, and on goods
imported. (La Suerte Cigarette Factory vs. CIR,G.R.
No. 125346, November 11, 2014, penned by J.
Leonen)
FILING AND PAYMENT OF RETURNS (Sec.
130-A2, NIRC)
WHO SHALL FILE AND PAY:
 Manufacturer or producer (before removal
of domestic products from place of
production)
 Importer (before removal of the importation
from the custom warehouse)
 First buyer/Purchaser/Transferee of local
sale (in the case of indigenous petroleum,
natural gas or liquefied natural gas)
 Owner/Lessee/Concessionaire/Operator of
mining claim (in the case of exported
products)
In the refund of indirect taxes, the proper party
to question or seek a refund of the tax is the
statutory taxpayer, the person on whom the tax
is imposed by law and who paid the same even
when he shifts the burden thereof to another.
The tax liability remains with the manufacturer/
producer/importer that is primarily, directly, and
legally liable for the payment of excise taxes.
(Silkair (Singapore) Pte. Ltd. v. Commissioner of
198 Center for Legal Education and Research
Internal Revenue, G.R. Nos. 1713832018
& 172379,
November 14, 2008 )
CLASSIFICATIONS
1. Specific - an excise tax based on weight or
volume capacity or any other physical unit of
measurement.(Sec. 129, NIRC, as amended by
RA 10963)
2. Ad-valorem - an excise tax based on selling
price or other specified value of the goods
or service performed. (Sec. 129, NIRC, as
amended by RA 10963)
PURPOSE
1. To curtail consumption of certain
commodities, excessive or indiscriminate
use of which is considered harmful to the
individual or community. Taxes of this kind
are sumptuary in nature and are exemplified
by the taxes on alcoholic beverages and
tobacco products.
2. To protect domestic industries from
competition caused by similar imported
products.
3. To distribute the tax burden in
proportion to benefit derived from a
particular government service,
4. To raise revenue. The excise taxes have
on many occasions have been justified on
the pretext of any of the three mentioned
above to minimize the opposition to the tax.
In reality, however, the main purpose is to
raise revenue. (Id.)
H. Documentary Stamp Tax
Concept and Nature
Documentary stamp tax is a tax on
documents, instruments, loan agreements and
papers evidencing the acceptance, assignment,
sale or transfer of an obligation, right, or
property thereto. [Sec. 173, NIRC]
The amount of tax is either fixed or based on
the par or face value of the document or
instrument.
The tax is paid by the person making, signing,
issuing, accepting or transferring the
documents. However, whenever one party to
the taxable document enjoys exemption from
 Purple Notes
the tax, the other party thereto who is not
exempt shall be the one directly liable for the
tax. (Sec. 173, NIRC)
Tax return shall be filed and the tax due shall be
paid at the same time within 5 days after the
close of the month when the taxable
document was signed, issued, accepted or
transferred. [Sec. 200(B), NIRC, as amended by RR
06-01]
Failure to stamp a taxable document shall not
invalidate the same. However, it shall not be
recorded (i.e. in the Registry of Deeds) or
admitted or used as evidence in any court until
the requisite stamp is affixed thereto and
cancelled. Furthermore, no notary or other
officer authorized to administer oaths shall add
his jurat or acknowledgment to the document
unless the proper DST is affixed thereto and
cancelled. (Sec. 201, NIRC)
Nature
DST is levied on the exercise by persons of
certain privileges conferred by for the creation,
revision, or termination of specific legal
relationships through the execution of specific
instruments. Hence, in imposing the DST, not
only the document but also the nature and
character of the transaction is considered. (Phil.
Banking Corp. v. CIR, G.R. No. 170574, January 30,
2009)
Being an excise tax, it is paid only once. Since
DST is not a tax on income, an exemption from
income tax does not include DST. (BIR Ruling No.
DA-106-08, August 4, 2008)
The tax base is the document itself, not the
transaction or the property described in the
document. (Commissioner of Internal Revenue vs.
Heald Lumber Co., G.R. No. L-16340, February 29,
1964) Thus, the validity or invalidity of the
transaction, or the extent of the right to the
property is not affected by payment or non-
payment of the DST.
Is DST considered passed on tax?
Documentary stamp taxes on special savings
accounts are direct liabilities of petitioner and
not simply "[t]axes passed-on and collected
from customers for remittance to the [Bureau of
199
Taxation Law
Internal Revenue]" as argued by respondent.
Under Section 173 of the 1997 National Internal
Revenue Code, the documentary stamp tax due
is paid by the person "making, signing, issuing,
accepting, or transferring" the instrument.
Revenue Regulations No. 9-2000 clarifies that all
parties to a transaction, and not only the person
making, signing, issuing, accepting, or
transferring the document, are primarily liable
for the documentary stamp tax. (ING N.V. vs. CIR,
G.R. No. 167679, April 20, 2016, penned by J.
Leonen)
Purpose
The purpose of the law imposing stamp taxes on
documents, instruments, and papers is to raise
revenue and not to invalidate contracts or inflict
penalties, and courts should give it a liberal
construction. [33 C.J.S. 315-316]
Documents and Papers Not Subject to
Stamp Tax. (Sec. 199, NIRC, as amended by R.A.
10963)
The following instruments, documents and
papers shall be exempt from DST.
a) Policies of insurance or annuities made
or granted by a fraternal or beneficiary
society, order, association or 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.
b) 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
Bar Operations C ommissions 199
 Purple Notes
Taxation Law
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 (PhP200) in value
assessed, furnished by the provincial, city
or municipal Treasurer to applicants for
registration of title to land
c) 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: Provided, however, That any
borrowing or lending of securities
agreement as contemplated hereof shall be
duly covered by a master securities
borrowing and lending agreement
acceptable to the appropriate regulatory
authority, and which agreements is duly
registered and approved by the Bureau of
Internal Revenue.
d) Loan agreements or promissory notes,
the aggregate of which does not exceed
Two hundred fifty thousand pesos (Php
250,000), 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 a 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
200 Center for Legal Education and Research
shall remain in force at least for 2018three (3)
years.
e) Sale, barter or exchange of shares of
stock listed and traded through the local
stock exchange(as amended by R.A. No. 9648)
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 exemption, repurchase agreements and
reverse repurchase agreements shall be
treated similarly as derivatives.
i) Interbranch or interdepartmental
advances within the same legal entity.
j) All forbearances 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 maturity.
l) All contracts, deeds, documents and
transactions related to the conduct of
business of the Bangko Sentral ng Pilipinas.
m) Transfer of property pursuant to Section
40(c)(2) of the National Internal Revenue
Code of 1997, as amended.
n) Interbank 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.
Notably, RA 9243, entitled "An Act Rationalizing
the Provisions of the Documentary Stamp Tax of
the National Internal Revenue Code of 1997"
was enacted and took effect on April 27, 2004
which exempts the transfer of real property of a
corporation, which is a party to the merger or
consolidation, to another corporation, which is

also a party to the merger or consolidation, from
the payment of documentary stamp tax.
The enactment of the said law nowremoves any
doubt and had made clear that the transfer of
real properties as a consequence of merger or
consolidation is not subject to documentary
stamp tax. (CIR vs. Pilipinas Shell,GR No. 192398
Sept 29, 2014)
I. Taxes Remedies under the National
Internal Revenue Code
Notes to Bar Examinees:
1. Assessment of internal revenue taxes
a. Procedural due process in tax
assessments
i. Letter of authority and tax audit
ii. Informal conference
iii. Preliminary assessment notice
iv. Formal letter of demand and final
assessment notice
v. Disputed assessment
vi. Administrative decision on
disputed assessment
vii. Appeal from an administrative
decision on disputed assessment
b. Requisites of a valid assessment
c. Tax delinquency and tax deficiency
d. Prescriptive period for assessment
i. General rule
ii. Distinguish: false returns, fraudulent
returns, and non-filing of returns
iii. Suspension of statute of limitations
2. Taxpayer's remedies
a. Protesting an assessment
i. Period to file protest
ii. Kinds of protest - request for
reconsideration or reinvestigation
iii. Submission of supporting
documents
iv. Effect of failure to file protest
v. Action of the Commissioner on the
protest filed
(a) Period to act upon or decide on
protest filed
(b) Remedies of the taxpayer in
case of denial or inaction of the
Commissioner
(c) Effect of failure to appeal
Purple Notes
Taxation Law
As the above foregoing topics listed in the bar
syllabus are closely intertwined, the Committee
has decided to merge and rearrange the topics
in the usual order as per actual practice to
provide for a clearer and holistic understanding
of the topics.
Preliminaries
Tax Remedies
It refers to procedural steps that may be
undertaken by the government or a taxpayer for
the resolution of disputes concerning the levy or
imposition, assessment, collection, and refund of
taxes. (DOMONDON, Taxation, Tax Remedies 2014)
Kinds of Remedies
Government Remedies
A. Administrative Remedies
1. Assessment and
2. Collection.
a. Enforcement of tax lien
b. Distraint of personal property and
a garnishment of bank deposits
c. Levy of real property
d. Compromise and abatement
e. Penalties and fines
f. Non availability of injunction to
restraint collection of tax
g. Forfeiture and
h. Suspension of business operations
B. Judicial remedies
1. Civil and
2. Criminal
Taxpayer‘s Remedies
1. Assessment:
a. Protest and
b. Compromise and abatement
2. Collection
a. Tax refund and
b. Tax Credit
Basis
Power of the Commissioner to Make
Assessments and Prescribe Additional
Requirements for Tax Administration and
Enforcement (Section 6 of the NIRC)
201
Bar Operations C ommissions 201
 Purple Notes
Taxation Law
1. Examination of return and determination of Assessment. The taxpayer in 2018
turn by way
tax due; of due process responds through filing of
2. Use of the best evidence available; protest. (Id.)
3. Authority to conduct inventory taking,
surveillance and prescribe gross sales and
Procedure for BIR Assessment
receipts if there is reason to believe that the
1. Issuance of a Letter of Authority (LoA);
taxpayer is not declaring his correct income,
2. Tax Audit or Investigation;
sales or receipts for internal revenue
3. Issuance of Notice of Informal Conference –
purposes;
NIC (RR 7-2018);
4. Issuance of Preliminary Assessment Notice
The assessment process starts with the filing of
(PAN);
tax return and payment of tax by the taxpayer.
5. Issuance of Final Assessment Notice (FAN)
The initial assessment evidenced by the tax
or Formal Letter of Demand (FLD); and
return is a self-assessment of the taxpayer. The
Administrative action / Inaction on Disputed.
tax is primarily computed and voluntarily paid by
the taxpayer without need of any demand from
a. Procedural due process in tax
government. If tax obligations are properly paid,
assessments
the Bureau of Internal Revenue may dispense
with its own assessment.
Procedure for BIR Assessment
After filing a return, the Commissioner or his or
1. Issuance of a Letter of Authority (LoA)
her representative may allow the examination of ( II.I.1.a.i in the 2020 Bar Tax syllabus)
any taxpayer for assessment of proper tax
liability. (Commissioner vs. Fitness by Design,G.R. A Letter of Authority (LOA) is the authority given
No. 215957, November 09, 2016,penned by J.
to the appropriate revenue officer to examine
Leonen).
the books of account and other accounting of
the taxpayer in order to determine the
An assessment, however, is not altogether
taxpayer's correct internal revenue liabilities95
inconsequential; it is relevant in the proper
and for the purpose of collecting the correct
pursuit of judicial and extra judicial remedies to
amount of tax, in accordance with Section 5 of
enforce taxpayer liabilities and certain matters
the Tax Code, which gives the CIR the power to
that to enforce taxpayer liabilities and certain
obtain information, to summon/examine, and
matters that relate to it, such as the imposition
take testimony of persons. The LOA commences
of surcharges and interest, and in the
the audit process and informs the taxpayer that
application of statutes of limitations and
it is under audit for possible deficiency tax
establishment of tax liens. (Tupaz v. Ulep, G.R.
127777, October 1, 1999) assessment .(CIR vs. De La Salle University,
Inc.,G.R. No. 196596,November 9,2016)
 NOTE: concept of assessments: As the
Requisites of a VALID LOA (RMO 44-2010)
above jurisprudence mentions, the filing of
(PETTA-30)
tax returns is voluntary and self – assessing, 1. It must be issued by the proper approving
meaning it is up to the taxpayer whether to official
file their own taxes and what amount will be a. Regional Director (RD) – in cases of LOA
reported in the tax returns. The Bureau of made by Regional District Offices (RDO)
Internal Revenue (BIR) in turn, has the vital b. Assistant Commissioner – Large
role of checking whether the amounts Taxpayer Services (ACIR – LTS) and its
divisions
reported by the taxpayer is correct through
c. Deputy Commissioner Legal and
an audit which is initiated through a BIR Inspection Group – Enforcement
document called Letter of Authority Services and
(LOA). Any findings made shall be d. CIR or any authorized official – Task
communicated to the taxpayer by way of an Force and Special Teams

202 Center for Legal Education and Research

 Purple Notes
2. It must not contain any manually –
written character, notation or erasure;
3. Must cover only one (1) taxable
year, except in tax fraud cases
authorized by the CIR or Deputy
Commissioner and excise taxes;
 A Letter of Authority [LOA] should cover
a taxable period not exceeding one
taxable year. The practice of issuing
[LOAs] covering audit of unverified prior
years is hereby prohibited. If the audit
of a taxpayer shall include more than
one taxable period, the other periods or
years shall be specifically indicated in
the [LOA] The requirement to specify
the taxable period covered by the LOA is
simply to inform the taxpayer of the
extent of the audit and the scope of the
revenue officer's authority. Without this
rule, a revenue officer can unduly
burden the taxpayer by demanding
random accounting records from
random unverified years, which may
include documents from as far back as
ten years in cases of fraud audit(CIR vs.
De La Salle University, Inc.,G.R. No.
196596,November 9,2016).
 Effect of issuing a LOA stating
―Fiscal Year Ending 2003 and
Unverified Prior Years‖
In the present case, the LOA issued to
DLSU is for Fiscal Year Ending 2003 and
Unverified Prior Years. The LOA does
not strictly comply with RMO 43-90
because it includes unverified prior
years. This does not mean, however,
that the entire LOA is void.As the CTA
correctly held, the assessment for
taxable year 2003 is valid because this
taxable period is specified in the LOA.
DLSU was fully apprised that it was
being audited for taxable year 2003.
Corollarily, the assessments for taxable
years 2001 and 2002 are void for having
been unspecified on separate LOAs as
required under RMO No. 43-90. (Id.)
4. Must indicate the taxes covered by
the LOA;
203
Taxation Law
5. Must indicate the names of authorized
BIR officers to audit said entity;
In case officers are replaced, a new LOA should
be issued indicating the new names of the
officers handling said case. (Nikken Philippines v.
CIR, CTA EB No. 1569, June 7, 2018)
6. It must be served to the taxpayer within
thirty (30) days).
 It must be served to the taxpayer within 30
days from its date of issuance; otherwise, it
shall become null and void. The taxpayer
shall then have the right to refuse the
service of this LA, unless the LA is
revalidated. It can be revalidated through
the issuance of a new LA. It can be
revalidated only once, if issued by the
Regional Director; twice, if issued by the
CIR. The suspended LA(s) must be attached
to the new issued LA. (RMO 38-88)
The absence of a LOA is a violation of the
right to due process
In the absence of such an authority, the
assessment or examination is a
nullity.(Medicard v. CIR, G.R. No. 222743, April 5,
2017)
Cases which need not be covered by a
valid LOA:
1. Cases involving civil or criminal tax fraud
which fall under the jurisdiction of the tax
fraud division of the Enforcement Services;
and
2. Policy cases under audit by the Special
Teams in the National Office.(RMO 36-99)
Effect of Issuance LOA:
Once a LOA has been issued to a taxpayer, the
taxpayer will be precluded to amend its
return.
 Letter Notices are NOT LOAs.
Letter Notice Letter of Authority
(1) Only for the (1) Addressed to a
purpose of notifying revenue officer is
the taxpayer that specifically required
Bar Operations C ommissions 203
 Purple Notes
Taxation Law
discrepancy is found under the NIRC before Beginning June 1, 2010, there is 2018no need for
based on the BIR's an examination of a revalidation of the LOA if the prescribed period
RELIEF taxpayer may be had to audit has been exceeded. However, failure of
(2) No such limitation (2) LOA is valid only the Revenue Officer to complete audit shall be
as to validity until the period being subject to the applicable administrative sanction.
audited is prescribed.
(3 years) and have to Number of times a taxpayer may be
be issued within 30 audited
days to the TP to be
valid. General rule: A taxpayer can be subjected to
(3) Does not have a (3) LOA gives the examination and inspection for the same taxable
period of examination revenue officer only a year ONLY ONCE.
period of 10days from
receipt of LOA to EXCEPTIONS:
conduct his 1. When the CIR determines that fraud,
examination of the irregularities, or mistakes were committed
taxpayer by the taxpayer;
2. When the taxpayer himself requests for the
Simply put, LN is entirely different and serves a re-investigation or re-examination of his
different purpose than a LOA. (Medicard v. CIR, books of accounts and it was granted by the
G.R. No. 222743, April 5, 2017) Commissioner;
3. When there is a need to verify the
2. Tax Audit or Investigation taxpayer‘s compliance with regard to
withholding and other internal revenue
 A Revenue Officer is allowed only 120 days taxes as prescribed in a Revenue
to conduct the audit and submit the Memorandum Orders issued by the
required report of investigation from the Commissioner;
date of receipt of an LOA by the taxpayer. If 4. When the taxpayer‘s capital gains tax
the RO is unable to submit his final report of liabilities must be verified; and
investigation within the 120-day period, he 5. When the commissioner chooses to exercise
must then submit a Progress Report to his his power to obtain information relative to
Head of Office, and surrender the LOA for the examination of other taxpayers (Secs. 5
revalidation. and 235, NIRC)

BIR Audit Program
The report of investigation/verification of cases
covered by electronic letter of authority (eLA)
pursuant to this Order shall be submitted by the
RO within the following prescribed number of
calendar days:
Cases covered by eLA: 180 days for Regional
cases and 240 days for LT cases, from the date
of issuance of eLA;
VAT Audit: Within 60 to 90 days from the date
of issuance of eLA covering 1 or 2 quarters,
respectively.
Effect of failure to complete audit within
120 days
Powers that can be used by the BIR during
a BIR audit
The failure of a taxpayer to file his or her return
will not hinder the Commissioner from
permitting the taxpayer's examination. The
Commissioner can examine records or other
data relevant to his or her inquiry in order to
verify the correctness of any return, or to make
a return in case of noncompliance, as well as to
determine and collect tax liability. (Commissioner
vs. Fitness by Design,G.R. No. 215957, November 09,
2016,penned by J. Leonen)
i. Power of the Commissioner to
Obtain Information, and to
Summon/ Examine, and Take
Testimony of Persons(Sec 5, NIRC)

204 Center for Legal Education and Research

 Purple Notes
In ascertaining the correctness of any return, or
in making a return when none has been made,
or in collecting any such liability, or in evaluating
tax compliance, the Commissioner is authorized:
a. To examine any book, paper, record, or
other date which may be relevant or
material to such inquiry;
b. To obtain on a regular basis from any
person other than the person whose internal
revenue tax liability is subject to audit or
investigation, or from any office or officer of
the national and local governments,
government agencies and instrumentalities,
including the BangkoSentral ng Pilipinas and
government-owned-
or–controlled corporations, any information
such as, but not limited to, costs and
volume of production, receipts or sales and
gross incomes of taxpayers, and the names,
addresses, and financial statements of
corporations, mutual fund companies,
insurance companies, regional operating
headquarters of multinational companies,
joint accounts, associations, joint ventures
or consortia and registered partnerships,
and their members;
The TRAIN Law further requires the submission
to BIR of ―Tax Incentive Report‖ by Cooperative
Development Authority (CDA), which shall
include information on the income tax, VAT, and
other tax incentives availed of by cooperatives
registered and enjoying incentives under RA
6938, as amended. Provided, further, that the
information submitted by the CDA to the BIR
shall be submitted to the Dept. of Finance and
shall be included in the database created under
RA No. 10708, otherwise known as the ―Tax
Incentives Management and Transparency Act
(TIMTA)‖
 Note: Sec. 5(B) is also known as the Third
Party Information Rule.
 Sec. 5 of NIRC allows the BIR access to all
relevant or material records and data in the
person of the taxpayer, and the BIR can
accept documents which cannot be admitted
in a judicial proceeding where the Rules of
Court are strictly observed. The consent of
the taxpayer is NOT necessary for the
205
Taxation Law
procurement of the books of accounts
needed for it to be given an assessment. To
require the consent of the taxpayer would
defeat the intent of the law to help the BIR
assess and collect the correct amount of
taxes (Fitness By Design, Inc. vs. CIR, G.R. No.
177982).
 The above notwithstanding, nothing in Sec.
5 shall be construed as granting the
Commissioner the authority to inquire into
bank deposits other than that provided for
in Section 6(F) of the NIRC, as earlier
enumerated.
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 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;
Subpoena Duces Tecum (SDT):
After 10 days from receipt of the Second and
Final Notice and the taxpayer still did not
comply, the authorized BIR officer shall request
for the issuance of a subpoena. Non-compliance
with the SDT may eventually lead to criminal
prosecution for contempt.
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.
Prescriptive Period for Assessment
(II.I.1.d.i in the 2020 Bar Tax Syllabus)
Bar Operations C ommissions 205
 Purple Notes
Taxation Law
(1) General Rule:
Taxes shall be assessed within three (3)
years after either:
(a) The last day prescribed by law for the
filing of the return;
(b) The actual filing of the return,
whichever is later (Sec. 203, NIRC).
Example:
Co. A filed its 2014 Annual Income Tax Return
early on April 10, 2015.
When would the prescriptive period start to run
for Co. A?
Answer: Regardless of the early filing of Co. A,
the prescriptive period will only start on April 15,
2015, as the Tax Code provides.
Supposed Co. A belatedly filed its 2014 Income
Tax Return where it was only filed on May 15,
2015.
When would the prescriptive period start to run
for Co. A?
Answer: The prescriptive period will start to run
on May 15, 2015.
Effect of Amendment of Returns on
reckoning of the Prescriptive period
Taxpayers have the right to amend taxes as
many times so long as it is done within (3)
years from the date it was filed, provided
no notice for audit or investigation was
received from the BIR.
However, an amendment of a return may or
may not affect the running of the prescriptive
period:
 If such amendment is considered a
―substantial amendment‖ – one that would
decrease or increase the tax payable. The
three-year prescriptive period will start to
run from the date when the amended return
was filed. (CIR vs. Phoenix Assurance Co., Ltd.,
G.R. No. L-19727, May 20, 1965)
206 Center for Legal Education and Research
Example: 2018
A filed its 2014 Income Tax Return on April
15, 2015. However, it was verified that such
return was not correct as A was not able to
deduct an expense (or was not able to
report a material amount of sales) which
was material in amount.
A thus amended its return on January 10,
2016. When will be the reckoning point of
the prescriptive period?
Answer: The running of the three (3) year
prescriptive period shall start on January 10,
2016 being that such amendment can be
considered as a ―substantial amendment‖
which will adjust the running of the
prescriptive period.
 Otherwise, if such amendment was just
superficial, then the prescriptive period for
assessment will start from the date when
the original return was filed.
Counting of periods
 A year is composed of 12 calendar months.
The Administrative Code of 1987, being the
more recent law than the New Civil Code,
governs the computation of legal periods
(CIR vs. Primetown. Property Group, G.R. No.
162155, August 8, 2007)
 Where the government has not by express
statutory provision provided a limitation
upon its right to assess unpaid taxes, such
right is imprescriptible. Thus, there is no
such time limit on the right of the
Commissioner of Internal Revenue to assess
the IAET under Section 29 of the Tax
Code.(CIR vs. Ayala Securities, G.R. No. L-
29485, November 21, 1980)
2. Extra-ordinary prescription. 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 either of the
following (Sec. 222(a), NIRC):
 False return, (regardless of intent to evade
tax);
 Purple Notes
Taxation Law
 Fraudulent return with intent to evade tax; with the provisions of any tax amnesty law or
or decree.
 Failure to file a return, as in the case of:
i. A wrong return; Rationale for the 10-year prescriptive
ii. A grossly defective return period on false or fraudulent return with
intent to evade taxes and failure to file a
return:
ii. Distinguish: False return vs. fraudulent
return vs. non-filing of returns (II.I.1.d.ii‖ in  The ordinary period of prescription of 5
the 2020 Bar Tax syllabus) years within which to assess tax liabilities
under Sec. 222 of NIRC should be applicable
False Fraudulent Non-Filing to normal circumstances, but where the
Returns Returns of Returns government is placed at a disadvantage so
There is a Implies Failure/Omissi as to prevent its lawful agents from proper
deviation from intentional or on to file a assessment of tax liabilities due to false
the truth, deceitful entry return return, fraudulent returns intended to evade
whether with intent to payment of tax or failure to file returns, the
intentional or evade the period of 10 years provided in Sec. 222(a)
not. It may be taxes due of NIRC, from time of discovery of the
due to falsity, fraud or omission even if it seems to
mistake, be inadequate, should be the one
ignorance, or enforced.(Aznar vs. CTA, & CIR, G.R. No.
carelessness 20569, August 23, 1974)

Fraud is a question of fact that should be
alleged and duly proven. "The willful neglect to
file the required tax return or the fraudulent
intent to evade the payment of taxes,
considering that the same is accompanied by
legal consequences, cannot be presumed."
Fraud entails corresponding sanctions under the
tax law. Therefore, it is indispensable for the
Commissioner of Internal Revenue to include the
basis for its allegations of fraud in the
assessment notice. Here, he (the BIR
investigating officer) admitted that the gathered
information did not show that respondent
deliberately failed to reflect its true income in
1995. (Commissioner vs. Fitness by Design, G.R. No.
215957, November 09, 2016,penned by J. Leonen)
For the ten-year period under Section 222(a) to
apply, it is not enough that fraud is alleged in
the complaint, it must be established by clear
and convincing evidence.55 The petitioner,
having failed to discharge the burden of proving
fraud, cannot invoke Section 222(a)(Republic v.
GMCC United Development Corp, G.R. No.
191856,December 7, 2016,penned by J. Leonen)
Note: Nothing in Sec. 222(A) shall be construed
to authorize the examination and investigation
or inquiry into any tax return filed in accordance
207
What must be issued before the expiration
of the prescriptive period? Is it the
Preliminary Assessment Notice (PAN) or
the Final Assessment Notice (FAN)?
Finally, CIR‘s contention that the assessment
required to be issued within the three (3)-year
or extended period provided in Sections 203 and
222 of the National Internal Revenue Code
refers to the PAN is untenable.
Considering the functions and effects of a PAN
vis a vis a FAN, it is clear that the
assessment contemplated in Sections 203
and 222 of the National Internal Revenue
Code refers to the service of the FAN upon
the taxpayer. (CIR vs. Transition Optical
Philippines, G.R. No. 227544, November 22,
2017,penned by J.Leonen)
Counting of the 10-year period:
The omission was discovered only in 1971. CIR
has 10 years from 1971 or until 1981 within
which to assess. The assessment of deficiency
income tax was issued on 1973, which is well
within the period prescribed by law. (CIR vs. CTA,
G.R. No. 44007, March 20, 1991)
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 Purple Notes
Taxation Law
Filing of Fraudulent Return
Fraud must be alleged and proved as a fact. It
must be the product of a deliberate intent to
evade taxes. It may be established by the
integration of three factors:
a. Intentional and substantial understatement
of tax liability by the taxpayer;
b. Intentional and substantial overstatement of
deductions of exemptions; and/or
c. Recurrence of the above circumstances. (CIR
vs. Estate of Benigno Toda Jr, G.R. No. 147188,
September 14, 2004)
Fraud-related decisions:
1. Fraud must be the product of a deliberate
intent to evade taxes; (Commissioner vs.
Fitness by Design, G.R. No. 215957, November
09, 2016,penned by J. Leonen)
2. Simple statement that the return filed was
not fraudulent does not disprove existence
of fraud; and
3. Presence of fictitious expenses, with no
evidence presented, proves existence of
fraud.
However, the courts did not consider the tax
returns filed as false or fraudulent with intent to
evade payment of tax in the following cases:
a. Mere understatement in the tax return will
not necessarily imply fraud;
b. Sale of a real property for a price less than
its fair market value is not necessarily a
false return;
c. Fraud is a question of fact and the
circumstances constituting fraud must be
alleged and proved in the trial court;
d. Fraud is never imputed and the courts never
sustain findings of fraud upon circumstances
that only create suspicion; and
e. Mistakes of revenue officers on three
different occasions remove element of
fraud.
Rule on wrong returns or amended
returns:
 An income tax return cannot be considered
as a return for compensating tax for
208 Center for Legal Education and Research
purposes of computing the 2018 period of
prescription under Section 222 of the Tax
Code, and that the taxpayer must file a
return for the particular tax required by law
in order to avail himself of the benefits of
Sec. 222 of the Tax Code; otherwise, if he
does not file a return, an assessment may
be made within the time stated in Sec.
222(a) of the same Code (Butuan Sawmill Inc.
vs. CTA, G.R. No. L-20601, February 28, 1966).
 The filing of a wrong return is equivalent to
no return at all – the third situation in Sec.
229. Therefore, in this case, the 10 year
prescriptive period would apply.
No Prescription for assessing Improperly
Accumulated Earnings Tax
The SC is persuaded by the fundamental
principle invoked by CIR that limitations upon
the right of the government to assess and
collect taxes will not be presumed in the
absence of clear legislation to the contrary and
that where the government has not by express
statutory provision provided a limitation upon its
right to assess unpaid taxes, such right is
imprescriptible. The SC, therefore, reconsiders
its ruling in its decision under reconsideration
that the right to assess and collect the
assessment in question had prescribed after 5
years, and instead rules that there is no such
time limit on the right of the CIR to assess
the 25% (Now 10%) tax on unreasonably
accumulated surplus provided in Sec. 25 of
NIRC, since there is no express statutory
provision limiting
such right or providing for its prescription.
The underlying purpose of the additional tax in
question on a corporation‘s improperly
accumulated profits or surplus is as set forth in
the text of Sec. 25 of NIRC itself to avoid the
situation where a corporation unduly retains its
surplus instead of declaring and paving
dividends to its shareholders or members who
would then have to pay the income tax due on
such dividends received by them. The record
amply shows that Ayala Securities is a mere
holding company of its shareholders through its
mother company, a registered co-partnership
then set up by the individual shareholders
belonging to the same family and that the prima
 Purple Notes
facie evidence and presumption set up by the
Tax Code, therefore applied without having
been adequately rebutted by the Ayala
Securities.(CIR vs. Ayala Securities Co., G.R. No. L-
29485, November 21, 1980)
Effect of Extraordinary Prescription
Under Sec. 222 of the NIRC, in the case of false
or fraudulent return with intent to evade tax, or
of failure to file a return, either:
1. Assessment and Collection:
a. The tax may be assessed within 10
years after discovery of the falsity, fraud
or omission (Sec. 222[a], NIRC), and
b. Collected within five (5) years following
the assessment of the tax (Sec. 222[c],
NIRC);
2. Collection only: A proceeding in court for
the collection of tax is filed within ten (10)
years after the discovery of the falsity, fraud
or omission. (Sec. 222(a), NIRC)
Defective Return
A wrong return, however, is different from a
defective return. Defective returns may be
sufficient if there is a substantial compliance.
There is substantial compliance when:
1. The return is made in good faith and is not
false or fraudulent;
2. It covers the entire period involved; and
3. It contains information as to the various
items of income, deduction and credit with
such definiteness as to permit the
computation and assessment of the tax (CIR
vs. Lilia Gonzales, G.R. No. L-19495, April 2,
2019).
3. Suspension of Running of Statute of
Limitations (P2OLA2R) (II.I.1.d.iii in the 2020
Bar Tax syllabus)
i. When taxpayer cannot be located in the
address given by him in the return, unless
he informs the CIR of any change in his
address thru a written notice to the BIR;
209
Taxation Law
 The suspension of the three-year period
to assess applies only if the BIR
Commissioner is not aware of the
whereabouts of the taxpayer. Hence,
despite the absence of a formal written
notice of respondent's change of
address, the fact remains that petitioner
became aware of respondent's new
address as shown by documents replete
in its records. As a consequence, the
running of the three-year period to
assess respondent was not suspended
and has already prescribed. (CIR vs. BASF
Coating + Inks Phils., GR No.
198677,November 26, 2014)
ii. When the taxpayer is out of the Philippines
(Sec. 223, NIRC);
iii. Where the CIR is prohibited from making
the assessment or beginning distraint or
levy or a proceeding in court for 60 days
thereafter, such as where there is a
pending petition for review in the CTA from
the decision on the protested assessment
(Republic v. Ker & Co., GR L-21609, September
29, 1966);
iv. Where CIR and the taxpayer agreed in
writing for the extension of the assessment,
the tax may be assessed within the period
so agreed upon (Sec. 222 [b], NIRC);
v. When the taxpayer requests for
reinvestigation which is granted by the
Commissioner (Collector v. Suyoc Consolidated
Mining Co., GR L-11527, Nov. 25, 1958);
Note: A request for reconsideration alone
does not suspend the period to
assess/collect.
vi. When there is an answer filed by the BIR
to the petition for review in the CTA
(Hermanos v. CIR, GR. No. L-24972. Sept. 30,
1969) where the court justified this by saying
that in the answer filed by the BIR, it prayed
for the collection of taxes.
vii. When the Warrant of distraint and levy is
duly served upon the taxpayer, his
authorized representative or a member of
his household with sufficient discretion and
Bar Operations C ommissions 209
 Purple Notes
Taxation Law
no property is located (proper only for
suspension of the period to collect);
Waiver of Prescription
1. Compromise/Waiver (waiver through
agreement) If before the expiration of the
time prescribed in Section 203 for the
assessment of the tax [3 years], both the
Commissioner and taxpayer have agreed in
writing to its assessment after such time,
the tax may be assessed within the period
agreed upon, extendible by subsequent
agreements (Sec. 222(b), NIRC).
A waiver of statute of limitations, to a certain
extent, is a derogation of the taxpayer‘s right to
security against prolonged and unscrupulous
investigations and must therefore be carefully
and strictly construed. The waiver of statute of
limitations is not a waiver of a right to invoke
the defense of prescription. 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
unequally particular where the language of the
document is equivocal. For the purpose of
safeguarding taxpayers from an unreasonable
examination, investigation or assessment, our
tax law provides a statute of limitations in the
collection of taxes. The law of prescription being
a remedial measure should be liberally
construed in order to afford such protection. The
exception to the law on prescription should
perforce be strictly construed. (Philippine
Journalists, Inc. vs. CIR, G.R. No. 162852, December
16, 2004)
Does not include taxes which has already
prescribed
The waiver of the statute of limitations executed
by the taxpayer cannot be deemed to include
taxes already prescribed. (Republic v. Lim De Yu,
G.R. No. L-17438, April 30, 1964)
Waiver should include a valid effectivity
date
The indefinite extension of the period for
assessment is unreasonable because it deprives
210 Center for Legal Education and Research
the said taxpayer of the assurance 2018
that he will
no longer be subjected to further investigation
for taxes after the expiration of a reasonable
period of time. (Philippine Journalists, Inc. vs.
Commissioner of Internal Revenue, G.R. No. 162852,
December 16, 2004)
Next Mobile Case – Bad Faith
In the case of Commissioner of Internal
Revenue vs. Next Mobile, Inc. (G.R. No. 212825,
December 7, 2015), the Supreme Court held
that a taxpayer who is in bad faith cannot
impugn the validity of the waiver. While the
Supreme Court reiterated that a waiver must
strictly comply with the requirements prescribed
by the regulations, it qualified and held that a
taxpayer cannot impugn the validity of the
waiver on the basis of the defects he himself
has caused after benefiting from it, as he will be
deemed estopped by his bad faith. Despite the
waiver‘s non-compliance with the requirements
in the regulations, the Supreme Court ruled in
favor of the BIR and treated the waiver as valid
and binding upon the taxpayer since the defect
was attributable to the latter‘s deliberate acts.
Next Mobile Case not Applicable
In Commissioner of Internal Revenue v. Next
Mobile, Inc. (formerly Nextel Communications
Phils., lnc.), this Court recognized the doctrine
of estoppel and upheld the waivers when both
the taxpayer and the Bureau of Internal
Revenue were in part de lie to. The taxpayer's
act of impugning its waivers after benefitting
from them was considered an act of bad faith.
But, even as respondent is estopped from
questioning the validity of the Waivers, the
assessment is nonetheless void because it was
served beyond the supposedly extended
period(CIR vs. Transition Optical Philippines,G.R. No.
227544, November 22, 2017,penned by J.Leonen).
Revised policies on the execution of
waiver pursuant to Revenue Memorandum
Order No. 14-2016 dated April 4, 2016
RMO 14-2016 dated Apr. 4, 2016 repeal the very
strict requirements for a valid waiver prescribed
in RMO No. 20-1990, RDAO No. 05-2001 and
RMC No. 06-2005.
 Purple Notes
Taxation Law
RMO 20 -1990 RMO 14 -2016 acceptance by the [Bureau of Internal Revenue]
Form and the perfection of the agreement. (CIR vs.
Must STRICTLY May or may not Avon Products Manufacturing,G.R. Nos. 201398-99,
conform with the conform with the October 03, 2018,penned by J. Leonen)
requirements set in requirements set out in
RMO 20-90 RMO 20-90
Taxes covered?
Must clearly indicate Can simply state ―all
what taxes are internal revenue taxes‖
included in the waiver
When executed?
Must be EXECUTED BEFORE the expiration of the
3-year prescriptive period to audit or lapse of the
previously agreed upon date (in cases where
there was a previous issuance of audit)
Signed by the taxpayer Signed by the taxpayer
or duly authorized or duly authorized
representative. For representative. For
corporations by any of corporations by any of
its responsible officials its responsible officials.

Taxpayer CANNOT now

impugn the validity of
the waiver as to the
signatory of the
waiver.
Material Dates
1. Date of execution 1. Date of Execution
2.Expiration of the 2. Expiration of issued
waiver waiver
3. Notarization
4. Acceptance by the
BIR
BIR officials authorized to accept
The CIR or authorized Can be accepted by
revenue official shall the group supervisors
sign the waiver, designated LOA
indicating the indicate the thee
agreement to the acceptance by signing
waiver the waiver.
Number of copies and duly accepted copy
of waiver
Executed in three (3) Taxpayer shall have
copies and taxpayer the duty to retain a
must have a receiving copy of the waiver
copy of the waiver duly
signed by the BIR
Notarization
Required Not required

Waiver of the Defense of Prescription is a

bilateral agreement between a taxpayer and the
Bureau of Internal Revenue to extend the period
of assessment and collection to a certain date.
"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
211
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 Purple Notes
Taxation Law
2018

Invalidity of the Waiver cannot be raised if the taxpayer partially paid the assessment:

Had petitioner truly believed that the waiver was invalid and that the assessments were issued
beyond the prescriptive period, then it should not have paid the reduced amount of taxes in the

revised assessment. RCBC‘s subsequent action effectively belies its insistence that the waiver is
invalid. The records show that on December 6, 2000, upon receipt of the revised assessment,
RCBC immediately made payment on the uncontested taxes. Thus, RCBC is estopped from
questioning the validity of the waivers.

To hold otherwise and allow a party to gainsay its own act or deny rights which it had previously
recognized would run counter to the principle of equity which this institution holds dear.
(RCBC vs. CIR, GR No. 170257, September 7, 2011)

BIR Assessment Procedures and Reglementary Procedure incorporated with Tax

payer‘s Remedies (Applications of RR 12-99, as amended by RR 18-13, RR 11-
2014,RMO 26-2016, and RR 7-2018)

212 Center for Legal Education and Research

 Purple Notes
Taxation Law
Background of Related Issuances: Options given to Taxpayer (TP) after
receipt of NIC
Assessment Stage Related Issuance
Notice of Informal RR 7-2018 1. Pays ALL the amount assessed – will
Issuance (NIC) result to the termination of the
Preliminary Assessment RR 12-99, RR 18-2013, assessment process and close the
Notice (PAN) RMC 11-2014, RMO 26- taxable year for audit.
2016
2. Does not pay all, or only some of
Final Assessment Notice RR 12-99, RR 18-2013,
(FAN)/ Formal Letter of RMC 11-2014, RMO 26-
the amount assessed–The tax paid
Demand (FLD) 2016 for will be settled and terminated while
Final Decision on RR 12-99, RR 18-2013, for those taxes not yet paid the TP will
Disputed Assessment RMC 11-2014, RMO 26- discuss with the BIR examiner and
2016 submit supporting documents and legal
to reduce assessed deficiency tax.
 RR 12-99 was the first issuance which first In this case the BIR can:
sets out the rule on BIR Assessment  Accept all supporting documents
Procedure (NIC,PAN,FAN/FLD,FDDA) and legal justifications presented
 RR 18-2013 abolished the NIC as a stage in and agree that there is no tax
the due process requirements deficiency to be assessed which
(PAN,FAN/FLD,FDDA) terminates the assessment process.
 RR 11-2014 and RMO 26-2016 provides  Accept some supporting documents
further clarification to the due process and legal justifications presented
requirement. and agree to reduce the amount
 RR 7-2018 restored NIC as part of due assessed with the remaining
amounts will be presented as
a) Issuance of Notice of Informal findings in the Preliminary
Conference Assessment Notice (PAN)
(II.I. 1.a.ii in the 2020 Tax Bar Syllabus)  Not accept all justifications the TP
has presented and issues the PAN at
RR No. 7-2018 has now restored the the original assessed amount
requirement of issuance of the Notice of
Informal Conference as a due process
requirement in the issuance of a deficiency tax
assessment. However, unlike the old provision
of RR No. 12-1999 which did not expressly
provide for the period within which the informal
conference may extend RR No. 7-2018 now
provides that the informal conference shall not
extend beyond thirty (30) days from the
taxpayer‘s receipt of the Notice for Informal
Conference. Further, if the taxpayer is found to
still be liable for deficiency taxes after
presenting his side or if the taxpayer is not
amenable, the case will be endorsed to the
Assessment Division of the Revenue Regional
Office or to the Commissioner or his duly
authorized representative within seven (7) days
from conclusion of the informal conference for
issuance of a deficiency tax assessment. Finally,
failure of the revenue officers to comply with the
periods shall subject them to penalties as
provided under existing rules and regulations.

213
Bar Operations C ommissions 213
 Purple Notes
Taxation Law
2018

214 Center for Legal Education and Research

 Purple Notes
Issuance of Preliminary Assessment
Notice (PAN); General rule and
exceptions:
(under 1.a.iii of the 2020 Tax Bar syllabus)
The PAN is a communication issued by the
Regional Assessment Division or any other
concerned BIR office, informing a taxpayer who
has been audited of the findings of the Revenue
Officer, following the review of these findings.
The requirements of a valid PAN:
1. In writing; and
2. Should inform the taxpayer of the law and
the facts on which the assessment is made.
(Sec. 228, NIRC)
Under RR No. 12-99, as amended by RR No. 18-
13, the PAN shall show in detail the facts and
the law, rules and regulations, or jurisprudence
on which the proposed assessment is based.
(Sec. 3.1.1)
Exceptions to Issuance of PAN:(TRIM)
(a) When the finding for any deficiency tax is
the result of MATHEMATICAL ERROR in
the computation of the tax as appearing on
the face of the return; or
(b) When a discrepancy has been determined
between the TAX WITHHELD and the
amount ACTUALLY REMITTED by the
withholding agent; or
(c) When a taxpayer 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 excisable
articles has not been paid; or
(e) When an article locally purchased or
IMPORTED by an exempt person, such
as, but not limited to, vehicles, capital
equipment, machineries and spare parts,
has been sold, traded or transferred to a
non-exempt person. (Sec. 228, NIRC)
NOTE: In the above-cited cases, a FLD/FAN
shall be issued outright. (RR No. 18-13)
215
Taxation Law
Absence of PAN:
The issuance of the PAN is part of the due
process requirement under RR No. 18-13. Thus,
if the BIR did not issue a PAN or did not give the
taxpayer an opportunity to respond within 15
days, this will be a violation of the due process
right of a taxpayer.
 The Supreme Court has already ruled that if
a taxpayer is not given an opportunity to
respond to a PAN, any resulting assessment
will be considered null and void. (Metro Star
Superama, Inc. vs. Commissioner of Internal
Revenue, G.R. No. 185371, December 8, 2010)
Procedure
If after review and evaluation 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
a Preliminary Assessment Notice (PAN) for the
proposed assessment. It shall show 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 (Reply to PAN)
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
Final Assessment Notice (FLD/FAN) shall be
issued calling for payment of the taxpayer's
deficiency tax liability, inclusive of the applicable
penalties.
If the taxpayer, within fifteen (15) days from
date of receipt of the PAN, responds that he/it
disagrees with the findings of deficiency tax or
taxes, an FLD/FAN shall be issued within fifteen
(15) days from filing/submission of the
taxpayer‘s
response, calling for payment of the taxpayer's
deficiency tax liability, inclusive of the applicable
penalties. (RR 18-13)
Bar Operations C ommissions 215
 Purple Notes
Taxation Law
Is the reply to PAN mandatory?
No. A Formal Letter of Demand and Final
Assessment Notice shall be issued whether the
PAN is protested or not. (RMO 26-2016)
Given that a reply to PAN is not
mandatory, would you still advice your
client to prepare a PAN?
Yes, all means to reduce the assessment must
be exhausted.
In summary the options given to the
taxpayer after receipt of PAN are:
1. Pay the whole amount assessed – the
audit is close is terminated upon payment of
the whole amount.
process. They give both the taxpayer 2018and the
Commissioner the opportunity to settle the case
at the earliest possible time without the need for
the issuance of a Final Assessment Notice.
Indeed, Section 228 of the Tax Code clearly
requires that the taxpayer must first be
informed that he is liable for deficiency taxes
through the sending of a PAN. He must be
informed of the facts and the law upon which
the assessment is made. The law imposes a
substantive, not merely a formal, requirement.
To proceed heedlessly with tax collection
without 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. (CIR vs. Avon Products
Manufacturing,G.R. Nos. 201398-99, October 03,
2018,penned by J. Leonen)

2. Does not pay all, or only some of the

amount assessed – The tax paid for will
be settled and terminated while for those
taxes not yet paid the TP will discuss with
the BIR examiner and submit supporting
documents and legal to reduce assessed
deficiency tax.

A reply to the PAN shall be prepared and

filed with the BIR having jurisdiction over
the audit within 15 days AFTER the
receipt of the PAN.

In this case the BIR can:

 Accept all supporting documents and

legal justifications presented and agree
that there is no tax deficiency to be
assessed which terminates the
assessment process.
 Accept some supporting documents and
legal justifications presented and agree
to reduce the amount assessed with the
remaining amounts will be presented as
findings in the Final Assessment Notice
(FAN)/Formal Letter of Demand (FLD)
 Not accept all justifications the TP has
presented and issues the FAN/FLD at
the original assessed amount

The Notice of Informal Conference and the

Preliminary Assessment Notice are a part of due

216 Center for Legal Education and Research

 Purple Notes
Taxation Law
Flow Chart for Issuance of Preliminary Assessment Notice (Flow Chart B)

B BIR Issues PAN

END

Yes
Agree, Pay
TP Pay
agrees? all?

Disagrees

Pay some, refute

some

Submit
Reply?

No Yes, submit

BIR Issues FLD/FAN after 15 days

receipt of PAN C

217
Bar Operations C ommissions 217
 Purple Notes
Taxation Law
Assessment 2018
also be the one who signed the LOA
namely:
An assessment is a formal notice to the taxpayer
stating that the amount thereon is due as tax a. Regional Director (RD) – in cases of LOA
and contains a demand for the payment thereof. made by Regional District Offices
An assessment contains not only a computation (RDO);
of tax liabilities but also a demand for payment b. Assistant Commissioner – Large
within a prescribed period. (Alhambra Cigar v. Taxpayer Services (ACIR – LTS) and its
Cigarette, G.R. No. L-13573, February 20, 1960) divisions;
c. Deputy Commissioner Legal and
Inspection Group – Enforcement
Kinds of Assessment Services; and
d. CIR or any authorized official – Task
Self - Deficiency Disputed Jeopardy Force and Special Teams.
Assess Assessme Assessme assessment
ment nt nt 2. It contains the law and the facts on
Made by A demand Takes place Assessment which the assessment is based;
the made after when a made by an
taxpayer due taxpayer authorized The formal letter of demand and
himself investigatio questions Revenue assessment notice shall state the facts,
n,showing an Officer jurisprudence, and law on which the
the correct assessment without the assessment was based; otherwise, these
amount to and asks benefit of shall be void. The word "shall" in Section
of tax that the complete or 228 of the National Internal Revenue Code
should Commission partial and Revenue Regulations No. 12-99 means
have been er to audit(R.R. 7- the act of informing the taxpayer of both the
paid plus reconsider 2001) legal and factual bases of the assessment is
interest, or cancel mandatory. The law requires that the
surcharges the bases be reflected in the formal letter of
and assessment demand and assessment notice. This cannot
compromis be presumed. Otherwise, the express
e penalties mandate of Section 228 and Revenue
if any Regulations No. 12-99 would be nugatory.
The requirement enables the taxpayer
Substantive Due Process to make an effective protest or appeal
of the assessment or decision.
The concept of due process in assessment can (Commissioner vs. Fitness by Design,G.R. No.
be summarized as follows: 215957, November 09, 2016,penned by J.
Leonen)
1. Taxpayer should be notified that there is an
 The alleged ―factual basis‖ in the advice,
assessment.
preliminary letter and ―audit working
2. In such notice he must be informed of the
papers‖ did not suffice. There was no going
legal and factual basis of assessment, for
around the mandate of the law that the
both PAN and FAN (CIR vs. Metro Star
Superama, Inc, G.R. No. 185371, December 8, legal and factual bases of the assessment
2010). be stated in writing in the formal letter of
demand accompanying the assessment
Requisite of a VALID Assessment(II.I.1.b in notice. (CIR vs. Enron Subic, G.R. No. 166387,
January 19, 2009)
the 2020 Bar Tax Syllabus)
 The old requirement of merely notifying the
1. It must be in writing and signed by the
taxpayer of the CIR‘s findings was changed
BIR; The signatory in the authorized shall
in 1998 of informing the taxpayer of not

218 Center for Legal Education and Research

 Purple Notes
only the law, but also of the facts on which
an assessment would be made, otherwise,
the assessment itself would be invalid.(CIR
vs. Azucena Reyes, G.R. No. 159694, January 27,
2006)
 Just because the CIR issued an advice, a
preliminary letter during the pre-assessment
stage and a final notice, in the order required
by law, does not necessarily mean that Enron
was informed of the law and facts on which
the deficiency tax assessment was made.
The law requires that the legal and factual
bases of the assessment be stated in the
formal letter of demand and assessment
notice. Thus, such cannot be presumed. (CIR
vs. Enron Subic Power Corporation, GR No.
166387, January 19, 2009)
 The formality of a control number in the
assessment notice is not a requirement for
its validity but rather the contents thereof
should inform the taxpayer of the
declaration of deficiency tax against the
taxpayer.(CIR vs. Gonzales, G.R. No. 177279,
October 13, 2010)
3. Contains a demand for payment
within the prescribed period;
A final assessment is a notice "to the effect
that the amount therein stated is due
as tax and a demand for payment
thereof." This demand for payment signals
the time "when penalties and interests begin
to accrue against the taxpayer and enabling
the latter to determine his remediesThus, it
must be "sent to and received by the
taxpayer, and must demand payment of the
taxes described therein within a specific
period."[ The disputed Final Assessment
Notice is not a valid assessment.First, it
lacks the definite
amount of tax liability for which
respondent is accountable. It does not
purport to be a demand for payment of tax
due, which a final assessment notice should
supposedly be.Second, there are no due
dates in the Final Assessment Notice. This
negates petitioner's demand for payment.
(Commissioner vs. Fitness by Design,G.R. No.
219
Taxation Law
215957, November 09, 2016,penned by J.
Leonen)
Accordingly, an affidavit which was
executed by the revenue officer 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 CTA. The fact that
the complaint itself was specifically directed
and sent to DOJ and not to Pascor shows
that the intent of the CIR was to file a
criminal complaint for tax evasion and not
to issue an assessment.(CIR vs. Pascor Realty
and Development Corporation, G.R. No. 128315,
June 29, 1999)
4. Must be served on and received by
the taxpayer.
Modes of Service of Assessments
Three ways to serve PAN/FAN/FDDA are as
follows:
1. Personal;
2. Registered mail; or
 An assessment is deemed made when the
demand letter or notice is released, mailed
or sent by the BIR to the taxpayer. The law
does not require that the taxpayer receive
the notice within the three-year or ten-year
period.(CIR vs. Bautista, G.R. No. L-2250, May
27, 1959)
Note: If the notice to the taxpayer 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 (Sec. 3.1.7, RR 12-99).
 When a mail matter is sent by registered
mail, there exists a presumption set forth
under Sec. 3(v) Rule 131 of the Rules of
Court, that it was received in the regular
Bar Operations C ommissions 219
 Purple Notes
Taxation Law
course of mail. The facts to be proved in
order to raise this presumption are: a) The
letter was properly addressed with postage
prepaid; and b) That it was mailed. While a
mailed letter is deemed received by the
addressee in the ordinary course of mail,
this is still merely a disputable presumption
subject to contravention, and a direct denial
of the receipt thereof shifts the burden upon
the party favored by the presumption to
prove that the mailed letter was indeed
received by the addressee (BarcelonRoxas
Securities v. CIR, G.R. No. 157064, August 7,
2006).
 The presumption that a letter duly
directed and mailed was received in the
regular course of mail cannot apply
where none of the required facts to
raise this presumption, i.e., that the
letter was properly addressed with
postage prepaid and that it was mailed,
has been shown. Mere notations on the
records of the tax collector of the
mailing of a notice of a deficiency tax
assessment to a taxpayer, made without
the supporting evidence, cannot suffice
to prove that such notice was sent and
received; otherwise, the taxpayer would
be at the mercy of the revenue officers,
without adequate protection or
defense.(Nava vs. CIR (G.R. No. L-19470,
January 30, 1965)
3. Substituted delivery (RR 18- 2013)
 Service of assessment notice on the
trust officer/agent of the decedent made
after the death is invalid since at that
time the legal relationship between the
principal and his agent had been
automatically severed by the death of
the principal even if the agent continued
to act as such by filing the decedent‘s
ITR (Estate of Late Julian Diez V. CIR, G.R.
No. 155541, January 27, 2004).
 Sending of PAN and assessment notice
to the wrong address may only be seen
as an attempt to mislead or confuse
ABC. In the observance of procedural
due process, the SC is always mindful
that a taxpayer being made liable with
220 Center for Legal Education and Research
2018
his property be given an opportunity to
be heard which is one of its essential
elements. With the failure of CIR to
strictly comply with the procedure
prescribed by law, and failure of ABC to
receive a copy of the alleged
assessment, the latter was not afforded
its right to be heard for it was denied
the opportunity to protest or dispute the
alleged assessment.(A Brown Co., Inc. vs.
CIR, CTA 6357, June 07, 2004)
b) Issuance of Formal Letter of Demand
/Final Assessment Notice
(II.I.1.a.iv in the 2020 Bar Tax Syllabus)
Notice of Assessment (Final Assessment
Notice ―FAN‖ and/or Formal Letter of
Demand ―FLD‖)
After 15 days from the DATE OF RECEIPT OF
PAN a FAN/FLD is issued.
FAN issued by the BIR even before the lapse of
15-day period within which the taxpayer could
file a reply or protest to PAN is void. (Missouri
Square v. CIR, CTA Case No. 87070, September 8,
2016)
Non – service of PAN amounts to denial of due
process. Thus, the FAN/FLD were deemed void.
(Bloat and Ogle v. CIR, CTA Case No. 8682,
September 2, 2016)
BIR was found to violate the due process
requirement when it served both the PAN and
FAN/FLD on the same day. (CIR v. Yumex, CTA
EB No. 1139, September 7, 2011)
A Formal Letter of Demand (FLD) and Final
Assessment Notice (FAN) shall be issued by the
Commissioner or his duly authorized
representative. The FLD/FAN 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 assessment shall be void.
(RR 12-99)
A notice of assessment is a declaration of
deficiency taxes issued to a taxpayer who fails
to respond to a pre-assessment notice within
the prescribed period of time, or whose reply to
the PAN was found to be without merit. This is
 Purple Notes
commonly known as the Final Assessment
Notice (FAN). An assessment contains not only a
computation of tax liabilities, but also a demand
for payment with a prescribed period.
A FAN/FLD was considered void for not having
an assessment notice attached even though the
FLD stated the following:
 Computation or tabulation of the alleged
deficiency tax, together with interest and
penalties and their respective basis.
 A request to pay deficiency taxes thru a an
authorized agent bank
 A note that the interest will be adjusted if
the total amount is paid beyond February 8.
The above statements did not amount to an
―assessment notice‖ – as there was no
mention of a definite time when payment
was due and demandable. (Derek Ramsay v.
CIR, CTA Case 8456, September 17, 2015)
PAN vs. FAN
A PAN merely informs the taxpayer of the initial
findings of the Bureau of Internal Revenue. It
contains the proposed assessment, and the
facts, law, rules, and regulations or
jurisprudence on which the proposed
assessment is based. It does not contain a
demand for payment but usually requires the
taxpayer to reply within 15 days from receipt.
Otherwise, the Commissioner of Internal
Revenue will finalize an assessment and issue a
FAN.
The PAN is a part of due process. It gives both
the taxpayer and the Commissioner of Internal
Revenue the opportunity to settle the case at
the earliest possible time without the need for
the issuance of a FAN.
On the other hand, a FAN contains not only a
computation of tax liabilities but also a demand
for payment within a prescribed period. As soon
as it is served, an obligation arises on the part
of the taxpayer concerned to pay the amount
assessed and demanded. It also signals the time
when penalties and interests begin to accrue
against the taxpayer.
221
Taxation Law
PAN FAN
Contents
Contains PROPOSED Computation of tax
assessments liabilities
Does not contain a Contains demand for
demand for payment payment within a
prescribed period
(CIR vs. Transition Optical Philippines,G.R. No.
227544, November 22, 2017,penned by J.Leonen).
Disputed Assessment
(I.II.1.a.v in the 2020 Bar Tax Syllabus)
The taxpayer or its authorized representative or
tax agent may protest administratively against
the aforesaid FLD/FAN within thirty (30) days
from date of receipt thereof. The taxpayer
protesting an assessment may file a written
request for reconsideration or reinvestigation.
(Sec. 3.1.4 of RR No. 12-99 as amended by RR No.
18-13)
A protested assessment or a disputed
assessment is where the taxpayer questions an
assessment and asks the BIR to reconsider or
cancel the same because he believes he is not
liable therefore.
It is the act by the taxpayer of questioning the
validity of the imposition of the corresponding
delinquency increments for internal revenue
taxes as shown in the notice of assessment and
letter of demand.
An assessment becomes a ―disputed‖
assessment when petitioner requests for
the cancellation and or withdrawal of the
same.
Protest to Final Assessment Notice (FAN)/
Formal Letter of Demand – (Taxpayer‘s
Remedies)
(II.I.2.a. in the 2020 Bar Tax Syllabus)
a) Period to file protest
(II.I.2.a.i in the 2020 Bar Tax Syllabus)
An assessment may be protested
administratively by filing a request for
reconsideration or reinvestigation within thirty
(30) days from receipt of the assessment.
(Section 228, NIRC)
Bar Operations C ommissions 221
 Purple Notes
Taxation Law
b) Kind, content and validity of protest
Kind of Protest
(Letter ―2.a.i in the 2020 Bar Tax syllabus)
1. Request for reconsideration- a claim for
re-evaluation of the assessment based on
existing records without need of additional
evidence. It may involve a question of fact
or law or both. It does not toll the statute of
limitations.
2. Request for reinvestigation- a claim for
re-evaluation of the assessment based on
newly-discovered or additional evidence. It
may also involve a question of fact or law or
both. It tolls the statute of limitations.
Under Sec. 223 of the NIRC, the running of the
prescriptive period can only be suspended by a
request for reinvestigation, not a request for
reconsideration.
In a request for reinvestigation, the taxpayer is
given 60 days from the filing of the protest to
provide all relevant supporting documents.
Reinvestigation Reconsideration
a plea of re-evaluation refers to a plea of re-
of an assessment on evaluation of
the basis of newly assessment on
discovered or basis of existing
ADDITIONAL EVIDENCE records WITHOUT
that a taxpayer intends need of additional
to present in the evidence. It
reinvestigation. It may involve both a question
also involve a question of fact or of law or
of fact or of law or both.
both.
Need to submit Relevant Supporting
Documents
Yes within 60 days No need
FROM date of filing of
protest to FAN/FLD
Effect of Non-Filing of Relevant Supporting
Documents
Failure to file within 60 Not Applicable
days of relevant
supporting documents
renders the assessment
final, executory, due
and demandable
Reckoning day of 180 days inaction by CIR
or its duly authorized representative
From the date of filing From the date of filing
of the relevant of the protest
222 Center for Legal Education and Research
supporting documents 2018
(Sec. 3.1.4., RR 18-2013)
Content and validity of protest
A protest is considered validly made if it satisfies
the following conditions:
1. In writing;
2. Addressed to the CIR;
3. Accompanied by a waiver of the Statute of
Limitations in favor of the Government.
Without the waiver, the prescriptive period
will not be tolled; (BPI v. CIR, GR 139736,
October 17, 2005)
4. State the facts, applicable law, rules and
regulations or jurisprudence on which the
protest is based otherwise the protest would
be void; and
5. Must contain the following:
a. Name of the taxpayer and address for
the immediate past 3 taxable years;
b. Nature of the request, specifying the
newly discovered evidence to be
presented;
c. Taxable periods covered by the
assessment;
d. Amount and kind of tax involved and the
assessment notice number;
e. Date of receipt of the assessment notice
an or letter of demand;
the f. Itemized statement of the finding to
which the taxpayer agrees (if any) as
basis for the computation of the tax
due, which must be paid upon filing of
may
the protest;
g. Itemized schedule of the adjustments to
which the taxpayer does not agree;
h. Statements of facts or law in support of
the protest; and
i. Documentary evidence as it may deem
necessary and relevant to support its
protest to be submitted 60 days from
the filing thereof.
Note: RR 18-13 mandates that protests
should include the facts, law, rules,
regulations on which the protest is based.
Otherwise, the protest is void and of no
effect. For items in the assessment not
properly protested, these shall become final and
demandable and a collection letter shall be
issued immediately.
 Purple Notes
Taxation Law
c) Submission of Documents Within 60
Days From Filing of Protest (Allowed
Only in Reinvestigation)(Letter ―2.a.iii in
the 2020 Bar Tax syllabus)

Within sixty (60) days from filing of the

protest, all relevant supporting documents
must be submitted, otherwise the
assessment shall become final. (Section 228
of the NIRC)

NOTE: RR 18-13 requires an identification of

the kind of protest filed – whether a
reconsideration or reinvestigation. The
submission of additional documents within 60
days from filing of protest is allowed only in the
case of reinvestigation. For motion for
reconsideration, the decision of the BIR will be
based only on documents already submitted to
the BIR prior to the issuance of FAN and no new
evidence will be accepted.

Relevant Supporting Documents:

 The CIR cannot demand other supporting

documents, particularly if they do not exist
and eventually hold that failure to provide
within the 60-day period makes the
assessment final and executory. ―The term
"relevant supporting documents"
should be understood as those documents
necessary to support the legal basis in
disputing a tax assessment as determined
by the taxpayer. The BIR can only inform
the taxpayer to submit additional
documents. The BIR cannot demand what
type of supporting documents should be
submitted. Otherwise, a taxpayer will be at
the mercy of the BIR, which may require the
production of documents that a taxpayer
cannot submit.‖ (CIR vs. First Express
Pawnshop Company, Inc.; GR No. 172045-46;
June 16, 2009)

223
Bar Operations C ommissions 223
 Purple Notes
Taxation Law
2018
Flow Chart for Issuance and Protest of FAN/LFLD (Flow Chart C)

C BIR issues FAN/FLD End

Agree, Pay Yes

Agree or Pay all?

Dispute?

Protest Pay some, dispute

some
File protest within 30 days from date of
receipt of FAN/FLD

Reinvestigation
Reconsideration

Reconsideration
or
Reinvestigation?

Submit supporting documents within 60

days from date of submission of Protest
to FAN

224 Center for Legal Education and Research

 Purple Notes
d) Effect of Failure to file Protest
(II.I.2.a.iv in the 2020 Bar Tax syllabus)
When no protest is seasonably made by the
taxpayer, the assessment shall become
final, executory and demandable, and no
request for reconsideration or
reinvestigation shall be granted thereon.
(Sec. 3.1.4 of RR No. 12-99, as amended by RR No.
18-13)
In summary the FAN/FLD Procedure are as
follows:
1. Fifteen (15) days after the issuance of
PAN the BIR shall issue the FAN/FLD.
Be reminded that such FAN/FLD MUST
be issued BEFORE the prescriptive
period to ASSESS or the expiry of
the WAIVER if one has been issued.
2. The taxpayer has the following options
in dealing with the received FAN/FLD
a. Pay the amount assessed –
terminates and settle the audit for
the taxable period.
b. Pay some or Dispute some or all
the findings - requires filing of a
protest within 30 days from
receipt of FAN/FLD, asserting the
TP‘s factual and legal justification on
why such finding has no basis
should be dismissed.
Be reminded that EACH and EVERY
finding must be protested,
otherwise, such finding shall be
deemed final and executory and due
for payment.
TP must indicate also if the item
being protested is for
RECONSIDERATION or
REINVESTIGATION for each and
every item or findings. Failure to
indicate REINVESTIGATION will
deem the request to be only as
RECONSIDERATION.
c. For protest for REINVESTIGATION –
the TP requesting for reinvestigation
MUST submit within sixty (60) days
225
Taxation Law
―relevant supporting documents‖.
Failure to do so shall make the
FAN/FLD final, executory, due and
demandable.
Reply to PAN v. Protest to FAN
Reply to PAN Protest to FAN/FLD
Number of Days to Respond
15 days AFTER receipt 30 days AFTER receipt
of PAN of FAN/FLD
Mandatory?
No. Merely directory. Yes.
Effect of Non – Filing
No effect. BIR will still Renders the
proceed with the assessment final,
serving of FAN/FLD executory, due and
regardless if there is a demandable and not
response or not. subject to dispute.
(see Sec. 3.1.4, RR No. 18-13)
Final Decision on a Disputed Assessment
(FDDA) /Administrative Decision on
Disputed Assessment(II.I.1.a.vi in the 2020
Bar Tax Syllabus)
The decision of the Commissioner or his duly
authorized representative shall state the (i)
facts, the applicable law, rules and regulations,
or jurisprudence on which such decision is
based, otherwise, the decision shall be void; and
(ii) that the same is his final decision. (Sec. 3.1.5
of RR No. 12-99, as amended by RR No. 18-13)
It is true that the Commissioner is not obliged to
accept the taxpayer's explanations, as explained
by the Court of Tax Appeals. However, when he
or she rejects these explanations, he or she
must give some reason for doing so. He or she
must give the particular facts upon which his or
her conclusions are based, and those facts must
appear in the record.
Indeed, the Commissioner's inaction and
omission to give due consideration to the
arguments and evidence submitted before her
by Avon are deplorable transgressions of Avon's
right to due process. The right to be heard,
which includes the right to present evidence, is
meaningless if the Commissioner can simply
ignore the evidence without reason. (CIR vs.
Avon Products Manufacturing, G.R. Nos. 201398-99,
October 03, 2018,penned by J. Leonen)
Bar Operations C ommissions 225
 Purple Notes
Taxation Law
Action of the Commissioner in the Protest
Filed
(II.I.2.a.v. in the 2020 Bar Tax syllabus)
(1) Period to act upon or decide on
protest filed
(II.I.2.a.v.[a] in the 2020 Bar Tax
syllabus)
The CIR has 180 days from the date of:
1. Filing of the protest, in case of a request
for reconsideration; or
2. Submission by the taxpayer of the
required documents within 60 days from
filing of the protest, in case of a request
for reinvestigation.
(2) Decision on the Protest Filed by the
CIR or its duly authorized
representative.
a) Approval of the protest – Based on
the justification provided by the
taxpayer, the BIR grants the protest and
dismisses its claim against the taxpayer
terminating the audit case against
him/her.
b) Denial of the Protest – this could
either be:
a. Direct Denial of Protest– The
protest may be denied by an
administrative decision on
disputed assessment, stating the
facts, 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 that the same is his
final decision. (RR 12-99)
b. Indirect Denial of Protest:
An indirect denial of protest results
if the CIR through its actions, in
relation to a pending protest, does
either of the following:
226 Center for Legal Education and Research
1. Inaction by the CIR within the 2018180-day
period (Sec. 228, last par., NIRC) provided to
act upon a protest.
Commissioner did not rule on the taxpayer‘s
motion for reconsideration of the
assessment, the period to appeal will only
start when the respondent would receive
the summons for the civil action for
collection of deficiency tax. (BIR v. Union
Shipping Corp., G.R. No. 66160, May 21, 1990)
2. Filing of a collection case before the
regular courts for the collection of the tax.
(Yabes vs. Flojo, G.R. No. L-46954, July 20,
1982)
Civil collection can also be considered as
denial of protest of assessment (BIR v. Union
Shipping Corp., G.R. No. 66160, May 21, 1990)
3. Issuance of a warrant of distraint or
levy, except:
a. When the protest was not taken into
account before the warrant of distraint
and levy was issued
b. When the taxpayer is left in the dark as
to which action of the Commissioner is
appealable
Issuance of warrant of distraint and levy to
enforce collection of deficiency assessment
is outright denial of the request for
reconsideration (Hilado v. CIR. CTA case 1256,
February 25, 1964)
a
4. Sending of a Final Notice before seizure,
indicating that the CIR is giving the taxpayer
―the LAST OPPORTUNITY to settle the
assessment‖.
5. Sending of a Demand letter, containing a
text with the words ―final decision‖ and
―appeal‖, similar to the tenor of the
following:
a. ―This constitutes our final decision on
the matter. If you are not agreeable,
you may appeal to the CTA within 30
days from receipt of this letter.‖
b. ―This is our final decision based on the
investigation. If you disagree, you may
appeal this final decision within 30 days
 Purple Notes
from receipt hereof, otherwise said
deficiency tax assessment shall become
final, executory and demandable.‖
6. Referral by the Commissioner of the
request for reinvestigation to the Solicitor
General because this shows the insistence of
the Commissioner to collect tax.
 The filing of a criminal action against a
taxpayer after the filing of a protest is
deemed a denial of such protest. However,
the institution of a criminal action cannot in
itself be considered as an assessment. In
the first instance, there is already an
assessment made by the BIR, and the
protest thereon is denied through the
criminal action. In the latter, there is no
assessment yet, and the criminal charges
filed, cannot be deemed an assessment in
itself. (see Pascor Realty case under [E] Tax
Remedies under the NIRC, [a] Assessment)
7. Service of a Preliminary Collection
Letter, since it presupposes the existence
of a valid assessment notice.
Preliminary collection letter may serve as
assessment notice. (United International
Pictures v. CIR, G.R. No. 110318, August 28,
1996)
Collection Letter demonstrated a character
of finality such that there can be no doubt
that the Commissioner had already made a
conclusion to deny Avon's request and she
had the clear resolve to collect the subject
taxes. (CIR vs. Avon Products Manufacturing,
G.R. Nos . 201398-99, October 03, 2018,penned
by J. Leonen)
In all these cases, the 30-day period is reckoned
from such implicit denial of protest.
Remedies of Taxpayer to Action by
Commissioner
(II.I.2.a.v.[b] in the 2020 Bar Tax syllabus)
(a) In Case of Denial of Protest
The remedy is to appeal such decision to the
CTA within 30 days from receipt of the decision.
227
Taxation Law
Otherwise, the assessment will become final,
executory and demandable.
Note: If the taxpayer elevates his protest to the
CIR within 30 days from date of receipt of the
final decision of the CIR‘s duly authorized
representative, such decision will not be final
and executory.
Two Kinds of Denial and how appealed?
1. Denial made by authorized
representative of the CIR –
TP can appeal within 30 days from
receipt either thru:
a.1) A motion for reconsideration with the
Commissioner of Internal Revenue or;
a.2) Appeal to the Court of Tax Appeals
(CTA) thru a Petition for Review
2. Denial made by the Commissioner of
Internal Revenue – only remedy is to file
an appeal with the CTA within 30 days
from receipt of FDDA
Proper venue for the filing of the request
of reconsideration – (Denial made by CIR‘s
duly Authorized Representative)
Request for reconsideration to the Commissioner
within thirty (30) days from date of receipt of
the said decision. No request for reinvestigation
shall be allowed in administrative appeal and
only issues raised in the decision of the
Commissioner‘s duly authorized representative
shall be entertained by the Commissioner.
The request for reconsideration should be filed
to the Office of the Commissioner and NOT with
the Office of the concerned Regional Director
(RD), Assistant Commissioner-Large Taxpayers
Service (ACIRLTS) and Assistant Commissioner-
Enforcement Service (ACIR-ES), who signed the
assessment notices. (RR No. 18-2013)
Bar Operations C ommissions 227
 Purple Notes
Taxation Law
(b) In Case of Inaction by Commissioner 2018
Within 180 Days From Submission of
Documents

The taxpayer has two alternative options:

1. File a petition for review with the CTA within

30 days after the expiration of the 180-day
period; or
2. Wait for the final decision of the CIR on the
disputed assessment and appeal the final
decision to the CTA within 30 days from the
receipt of the decision.

The above recourse for INACTION by the CIR

or its duly authorized representative is
MUTUALLY EXCLUSIVE and resort to one
BARS the application of the other.

 Jurisdiction of the CTA has been expanded

to include not only decisions or rulings, but
also inaction of the CIR. Decisions, rulings,
inaction of the CIR are necessary to vest the
CTA with jurisdiction to entertain appeal,
provided it is filed within 30 days after
receipt of decision or ruling or within 30
days after expiration of the 180-day period
fixed by law for the CIR to act on a disputed
assessment. The 30-day period is
jurisdictional and failure to comply bars
appeal and deprives the CTA of jurisdiction.
In case the CIR failed to act on a disputed
assessment within the 180-day period, the
taxpayer can either: (1) file petition for
review with CTA within 30 days, or (2) await
the final decision of the CIR on disputed
assessments and appeal such final decision
to CTA within 30 days after receipt of the
copy of the decision. These options are
mutually exclusive. (RCBC vs. CIR, G.R. No.
168498, June 16, 2006; CIR vs. Avon Products
Manufacturing, G.R. Nos. 201398-99, October 03,
2018,penned by J. Leonen)

228 Center for Legal Education and Research

Purple Notes
Taxation Law

229
Bar Operations C ommissions 229
 Purple Notes
Taxation Law
Effect of Failure to Appeal
(II.I.2.a.v.[c] in the 2020 Bar Tax Syllabus)
1. The decision or assessment becomes final
and executory.
2. In an action for the collection of the tax by
the government, the taxpayer is barred from
re-opening the question already decided.
3. The assessment is considered correct which
may be enforced by summary or judicial
remedies.
4. In a proceeding for collection of tax by
judicial action, the taxpayer‘s defenses are
similar to those of the defendant in a case
for the enforcement of a judgment by
judicial action.
Recovery of tax erroneously or illegally
collected (II.I.2.b in the 2020 Bar Tax
Syllabus)
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.
(Sec.229, NIRC)
i. Grounds, requisites, and periods for
filing a claim for refund or issuance of a
tax credit certificate
Grounds
1. Tax is erroneously or illegally collected.
2. Sum collected is excessive or in any manner
wrongfully collected.
3. Penalty is collected without
authority.(Sec.229, NIRC)
Requisites of Tax Refund
1. There must be a written claim with the CIR,
as it would enable the CIR to correct the
230 Center for Legal Education and Research
errors of his subordinate and to2018
notify the
government;
2. Must be a categorical claim for refund or
credit;
3. Must be filed within 2 years after the
payment of the tax or penalty otherwise no
refund or credit could be taken. No suit or
proceeding shall be instituted after the
expiration of the 2-year period regardless of
any supervening cause that may arise after
payment; and
4. Present proof of payment of the tax.
 It partakes of the nature of an exemption
and is strictly construed against the
claimant. The burden of proof is on the
taxpayer claiming the refund that he is
entitled to the same.(Commissioner of Internal
Revenue vs. Tokyo Shipping Co., Ltd., G.R. No.
68282, May 26, 1995)
Necessity of proof for claim or refund
Claim for refund partakes the nature of an
exemption, hence it is strictly construed against
the claimant and the failure to discharge said
burden is fatal to the claim.(CIR vs. S.C. Johnson
and Son, Inc., et al., G.R. No. 127105, June 25, 1999)
Burden of proof for claim of refund -
Burden of proof for claim of refund rests with
the claimant. Hence, it is strictly construed
against him
Prescriptive Period for Recovery of Tax
Erroneously or Illegally Collected
The filing of an administrative case for refund or
a case in court must be done within (2) years
from the date of payment of the tax or penalty
regardless of any supervening cause that may
arise after payment:
Provided, however, that the Commissioner may,
even without a written claim therefore, 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.
 Purple Notes
Commencement of the two (2) year period
(Jurisprudence)
1. Tax sought to be refunded is illegally
or erroneously collected
 From the date the tax was
paid.(Commissioner vs. Victorias Milling, G.R.
No. L-24108, January 31, 1968)
2. Tax is paid only in installments or only
in part
 From the date the last or final installment
or payment because for tax purposes, there
is no payment until the whole or entire tax
liability is fully paid.(Collector vs. Prieto, G.R.
No. L-11976, August 29, 1961)
3. Taxpayer merely made a deposit
 Counted from the conversion of the deposit
to payment.(Union Garment vs. Collector, CTA
Case No. 416, November 17, 1958)
Note: Merely making a deposit is not equivalent
to payment until the amount is actually applied
to the specific purpose for which it was
deposited.
4. Tax has been withheld from source
(through the withholding tax system)
Counted from the date it falls due at the end of
the taxable year
 A taxpayer who contributes to the
withholding tax system does not really
deposit an amount to the government, but
in truth, performs and extinguishes his tax
obligation for the year concerned (Gibbs vs.
Commissioner, G.R. No. L-17406, November 29,
1965).
5. End of taxable year vs. date of the
filing of the final adjusted return
From the date when the final adjusted return
was filed.
 The rationale in computing this period is
the fact that it is only then the corporation
can ascertain whether it made profits or
231
Taxation Law
incurred losses in its business operations.
(ACCRA Investments vs. Court of Appeals, G.R.
No. 96322, December 20, 1991)
6. Date when quarterly income tax was
paid vs. date when final adjusted
return was filed
From the date when final adjusted return was
filed
 The filing of the quarterly income tax return
(Sec. 68) and payment of quarterly income
tax should only be considered mere
installments of the annual tax
due.(Commissioner vs. TMX Sales, G.R. No.
83736, January 15, 1992)
7. Date when the final adjustment return
was actually filed (e.g. Apr. 2) vs. Last
day when the adjustment return could
still be filed (e.g., April 15)
 From the date the final adjustment return
was actually filed.(Commissioner vs. Court of
Appeals, G.R. No. 117254, January 21, 1999)
8. Tax was not erroneously or illegally
paid but the taxpayer became entitled
to refund because of supervening
circumstances
 From the date the taxpayer becomes
entitled to refund and not from the date of
payment.(Commissioner vs. Don Pedro Central
Azucarera, GR No. L-28467, February 28, 1973)
Other Consideration Affecting Tax Refunds
Refunds of Corporate Taxpayers
 The two-year prescriptive period within
which to claim a refund commences to run,
at the earliest, on the date of the filing of
the adjusted final tax return.(ACCRA
Investments Corp vs. CA, G.R. No. 96322,
December 20, 1991)
There is a need to file a return first before a
claim for refund can prosper inasmuch as
the Commissioner by his own rules and
regulations mandates that the corporate
taxpayer opting to ask for a refund must
show in its final adjustment return the
Bar Operations C ommissions 231
 Purple Notes
Taxation Law
income it received from all sources and the
amount of withholding taxes remitted by its
withholding agents to the BIR. ACCRA filed
its final adjustment return for its 1981
taxable year on April 15, 1982. The 2-year
prescriptive period within which to claim a
refund commences to run at the earliest, on
the date of the filing of the adjusted final
tax return. Hence, ACCRA had until April 15,
1984 within which to file its claim for refund.
(id.)
 The filing of quarterly ITRs required in Sec.
68 and implemented per BIR Form 1702-Q
and payment of quarterly income tax should
only be considered mere installments of the
annual tax due. These quarterly tax
payments which are computed based on the
cumulative figures of gross receipts and
deductions in order to arrive at a net taxable
income, should be treated as advances or
portions of the annual income tax due, to be
adjusted at the end of the calendar or fiscal
year. This is reinforced by Sec. 69 which
provides for the filing of adjustment returns
and final payment of income tax.
Consequently, the 2-year prescriptive period
provided in Sec. 230 of the Tax Code should
be computed from the time of filing of the
Adjustment Return or Annual ITR and final
payment of income tax.(CIR vs. TMX Sales
Inc., & CTA, G.R. No. 83736, January 15, 1992)
 In exercising its option either to carry over
the excess credit or to claim for tax refund,
the corporation must signify in its annual
corporate adjustment return (by marking
the option box provided in the BIR Form) its
intention either to carry over the excess
credit or to claim a refund. (Systra Philippines,
Inc. vs. CIR, G.R. No. 176290, September 21,
2007).
Payment under protest is NOT necessary
under NIRC
A suit or proceeding for tax refund may be
maintained ―whether or not such tax, penalty or
sum has been paid under protest or duress.‖
(Sec. 229, NIRC)
1. The fact of withholding must be established
by a copy of a statement duly issued by the
232 Center for Legal Education and Research
payor to the payee showing 2018 the amount
paid and the amount of the tax withheld
therefrom.(CIR vs. Team [Philippines]
Operations Corp. [formerly Mirant (Phils.)], G.R.
No. 179260, April 2, 2014)
ii. Proper party to claim for refund or tax
credit
A claim for tax refund or issuance may be filed
by:
1. Taxpayer
2. Statutory taxpayer
3. Withholding Agent
A ―taxpayer‖ is any person subject to tax
imposed by the Tax Code. Under Sec. 53(c),
the withholding agent who is required to
deduct and withhold any tax is made
―personally liable for such tax‖ and is
indemnified against any claims and demands
which the stockholder might wish to make in
questioning the amount of payments
effected by the withholding agent in
accordance with the provisions of NIRC. The
withholding agent, P&G-Phil., is directly and
independently liable for the correct amount
of the tax that should be withheld from the
dividend remittances. The withholding agent
is, moreover, subject to and liable for
deficiency assessments, surcharges and
penalties should the amount of the tax
withheld be finally found to be less than the
amount that should have been withheld
under the law. A ―person liable for tax‖ has
been held to be a ―person subject to tax‖
and ―subject to tax‖ both connote legal
obligation or duty to pay a tax. By any
reasonable standard, such a person should
be regarded as a part-in-interest or as a
person having sufficient legal interest, to
bring a suit for refund of taxes he believes
were illegally collected from him. (CIR vs.
Procter & Gamble Philippines Manufacturing
Corporation & CTA, G.R. No. 66838, December 2,
1991)
The proper party to question or seek a
refund of an indirect tax is the statutory
taxpayer, the person on whom the tax is
imposed by law and who paid the same
even if he shifts the burden thereof to
another. Even if Petron Corporation passed
 Purple Notes
on to Silkair the burden of the tax, the
additional amount billed to Silkair for jet fuel
is not a tax but part of the price which
Silkair had to pay as purchaser. (Silkair vs.
CIR, G.R. Nos. 171383 & 172379, November
14, 2008)A withholding agent has a legal
right to file a claim for refund for two
reasons: first, he is considered a ―taxpayer‖
under the NIRC as he is personally liable for
the withholding tax as well as for deficiency
assessments, surcharges and penalties; and
second, as an agent of the taxpayer, his
authority to file the necessary income tax
return and to remit the tax withheld to the
government impliedly includes the authority
to file a claim for refund and to bring an
action for recovery of such claim. (CIR vs.
Smart Communications, Inc., G.R. Nos. 179045-
46, August 25, 2010)
Irrevocability Rule (For Claim for Excess
Credits of Withholding Tax related to
Income Tax Returns)
If the sum of the quarterly tax payments made
during the said taxable year is greater than the
total tax due on the entire taxable income of
that year, the corporation is entitled to a refund
and under Section 76 has two (2) options:
a. Carry-over the excess credit [Tax Credit]; or
b. Be credited or refunded with the excess
amount paid [Tax Refund].
Taxation Law
from the date of payment of the tax or
penalty;
ii. However, the CIR 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.
b. Judicial Claim
i. After filing an administrative claim, file a
judicial claim for refund with the CTA
WITHIN the same 2-year period from
the date of payment of the tax or
penalty regardless of any
supervening cause that may arise
after payment. It is only important that
the administrative claim should be
priorly filed;
But if the administrative claim is denied
during the 2-year period, the judicial
claim should be filed within 30 days
from the receipt of the CIR‘s denial but
within the 2-year period from the date
of payment. (Section 229, NIRC, CIR vs.
Goodyear Philippines, Inc, G.R. No. 216130,
August 3, 2016)

NOTE: The irrevocability rule is limited only to

the option of carry-over such that a taxpayer is
still free to change its choice after electing a
refund of its excess tax credit. However, in case
the taxpayer decides to shift its option to
carryover, it may no longer revert to its original
choice due to the irrevocability rule. As Sec. 76
provides, once the option to carry over has been
made, it shall be irrevocable. (University
Physicians Services, Inc. vs. CIR, G.R. No. 205955,
March 7, 2018)

Explain briefly the procedures and time

periods applicable in the case of claiming
Refund of erroneously or illegally paid
taxes or penalties under the Tax Code.

a. Administrative Claim
i. File with the CIR an administrative claim
for refund/TCC within two (2) years

233
Bar Operations C ommissions 233
 Purple Notes
Taxation Law
2018
A. No action made by the BIR on claim for refund (Scenario 1) refund (Scenario 1)

In claiming refund under Section 229, for erroneous or illegally collected tax what is important is
that an administrative claim and judicial claim should be filed WITHIN 2 years from the date of
the erroneously or illegally paid tax.

B. Decision on the refund made 30 days from denial is WITHIN the 2 year period
(Scenario 2)

Here, taxpayer filed his claim its administrative claim with the BIR but was denied. The taxpayer here
has 30 days from the receipt of the denial or until March 29,2016, to file the judicial claim this
despite the fact that the last day of the 2 year period is on April 15,2016.

234 Center for Legal Education and Research

 Purple Notes
Taxation Law
C. Decision on the refund made however 30 days from receipt of denial is BEYOND the
2 year period (Scenario 3)

Here, taxpayer filed his claim its administrative claim with the BIR but was denied. The taxpayer here
has 30 days from the receipt of the denial or untilApril 27,2016. However since April 27, is beyond
the 2 year prescriptive period , the taxpayer should still file the petition on April 15,2016 and not
on the 27th.

235
Bar Operations C ommissions 235
 Purple Notes
Taxation Law
iii. Distinguish from input VAT from refund 2018 MUST
Be reminded that such FAN/FLD
be issued BEFORE the prescriptive
Section Section 229- period to ASSESS or the expiry of
112 A – Refund for the WAIVER if one has been issued.
Input VAT Erroneous
refund payment or 2. The taxpayer has the following
Tax Illegally
options in dealing with the received
Collecte
Reckoning Reckoned Reckoned from
FAN/FLD
Period from the the date of a. Pay the amount assessed –
close of the payment of the terminates and settle the audit
taxable tax or penalty. for the taxable period.
quarter b. Pay some or Dispute some
when the or all the findings - requires
relevant filing of a protest within 30
zero-rated days from receipt of
sales or
FAN/FLD, asserting the TP‘s
transactions
were.
factual and legal justification on
Object Refund of Refund of why such finding has no basis
excess erroneous should be dismissed.
creditable payment or
input tax. illegal collection Be reminded that EACH and
of internal EVERY finding must be
revenue taxes. protested, otherwise, such
Elevation to The claimant If denied:30 finding shall be deemed final
the CTA can go to days after and executory and due for
the CTA receipt of denial
payment.
within 30 but in no case
days from be beyond the 2
the receipt year period TP must indicate also if the item
of denial In case of being protested is for
within the inaction, cases, RECONSIDERATION or
90-day it must be filed REINVESTIGATION for each and
period. before the every item or findings. Failure to
expiration of Idicate REINVESTIGATION will
the 2-year deem the request to be only as
period from
RECONSIDERATION.
payment.

c. For protest for

Effect of Failure to file Protest
REINVESTIGATION – the TP
(Letter ―2.a.iv in the 2020 Bar Tax syllabus)
requesting for reinvestigation
When no protest is seasonably made by the MUST submit within sixty (60)
taxpayer, the assessment shall become days ―relevant supporting
final, executory and demandable, and no documents‖. Failure to do so
request for reconsideration or reinvestigation shall make the FAN/FLD final,
shall be granted thereon. (Sec. 3.1.4 of RR No. executory, due and
12-99, as amended by RR No. 18-13) demandable.

In summary the FAN/FLD Procedure are as

follows:

1. Fifteen (15) days after the issuance of PAN

the BIR shall issue the FAN/FLD.

236 Center for Legal Education and Research

 Purple Notes
Reply to PAN v. Protest to FAN
Reply to PAN Protest to FAN/FLD
Number of Days to Respond
15 days AFTER receipt 30 days AFTER receipt
of PAN of FAN/FLD
Mandatory?
No. Merely directory. Yes.
Effect of Non – Filing
No effect. BIR will still Renders the
proceed with the assessment final,
serving of FAN/FLD executory, due and
regardless if there is a demandable and not
response or not. subject to dispute.
Final Decision on a Disputed Assessment
(FDDA) /Administrative Decision on
Disputed Assessment(II.I.1.a.vi in the 2020
Bar Tax Syllabus)
The decision of the Commissioner or his duly
authorized representative shall state the (i)
facts, the applicable law, rules and regulations,
or jurisprudence on which such decision is
based, otherwise, the decision shall be void; and
(ii) that the same is his final decision. (Sec. 3.1.5
of RR No. 12-99, as amended by RR No. 18-13)
It is true that the Commissioner is not obliged to
accept the taxpayer's explanations, as explained
by the Court of Tax Appeals. However, when he
or she rejects these explanations, he or she
must give some reason for doing so. He or she
must give the particular facts upon which his or
her conclusions are based, and those facts must
appear in the record.
Indeed, the Commissioner's inaction and
omission to give due consideration to the
arguments and evidence submitted before her
by Avon are deplorable transgressions of Avon's
right to due process. The right to be heard,
which includes the right to present evidence, is
meaningless if the Commissioner can simply
ignore the evidence without reason. (CIR vs.
Avon Products Manufacturing, G.R. Nos. 201398-99,
October 03, 2018,penned by J. Leonen)
237
Taxation Law
Power of Commissioner of Internal
Revenue to compromise
Basis
The power of the Commissioner 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.
What is a tax compromise?
Involves the reduction of taxpayer‘s liability.
(ABAN, Law of Basic Taxation, p.235)
Requisites for the compromise of taxes
1. Taxpayer has a liability
2. There must be an offer (by the taxpayer or
Commissioner)
3. A reasonable doubt as to validity of claim
against taxpayer exists or the financial
position of the taxpayer demonstrates a
clear inability to pay the assessed tax
4. There must be an acceptance (by the
taxpayer or Commissioner, as the case
maybe) of the offer in settlement of the
original claim
Cases which could be subject to
Compromise (RR 30-2002)
1. Delinquent accounts;
2. Cases under administrative protest after
issuance of the Final Assessment Notice to
the taxpayer which are still pending in the
Regional Offices, Revenue District Offices,
Legal Service, Large Taxpayer Service (LTS),
Collection Service, Enforcement Service and
other offices in the National Office;
Bar Operations C ommissions 237
 Purple Notes
Taxation Law
3. Civil tax cases being disputed before the
courts;
4. Collection cases filed in courts;
5. Criminal violations, other than those already
filed in court or those involving criminal tax
fraud.(Sec. 204,NIRC)
Cases that can‘t be subject for
compromise
1. Withholding tax cases, unless the applicant-
taxpayer invokes provisions of law that cast
doubt on the taxpayer‘s obligation to
withhold;
2. Criminal tax fraud cases confirmed as such
by the Commissioner of Internal Revenue or
his duly authorized representative;
3. Criminal violations already filed in court;
4. Delinquent accounts with duly approved
schedule of installment payments;
5. Cases where final reports of reinvestigation
or reconsideration have been issued
resulting to reduction in the original
assessment and the taxpayer is agreeable to
such decision by signing the required
agreement form for the purpose. On the
other hand, other protested cases shall be
handled by the Regional Evaluation Board
(REB) or the National Evaluation Board
(NEB) on a case to case basis;
6. Cases which become final and executory
after final judgment of a court, where
compromise is requested on the ground of
doubtful validity of the assessment; and
7. Estate tax cases where compromise is
requested on the ground of financial
incapacity of the taxpayer.
Basis for Acceptance of Compromise
Settlement (RR No. 30-2002):
a. Doubtful Validity of Assessment
b. Financial Capacity
A. Doubtful validity of the assessment
The offer to compromise a delinquent account
or disputed assessment under these Regulations
on the ground of reasonable doubt as to the
validity of the assessment may be accepted
when it is shown that:
238 Center for Legal Education and Research
1. The delinquent account or2018 disputed
assessment is one resulting from a jeopardy
assessment (For this purpose, ―jeopardy
assessment‖ shall refer to a tax assessment
which was assessed without the benefit of
complete or partial audit by an authorized
revenue officer, who has reason to believe
that the assessment and collection of a
deficiency tax will be jeopardized by delay
because of the taxpayer‘s failure to comply
with the audit and investigation
requirements to present his books of
accounts and/or pertinent records, or to
substantiate all or any of the deductions,
exemptions, or credits claimed in his
return); or
2. The assessment seems to be arbitrary in
nature, appearing to be based on
presumptions and there is reason to believe
that it is lacking in legal and/or factual
basis; or
3. The taxpayer failed to file an administrative
protest on account of the alleged failure to
receive notice of assessment and there is
reason to believe that the assessment is
lacking in legal and/or factual basis; or
4. The taxpayer failed to file a request for
reinvestigation/reconsideration within 30
days from receipt of final assessment notice
and there is reason to believe that the
assessment is lacking in legal and/or factual
basis; or
5. The taxpayer failed to elevate to the Court
of Tax Appeals (CTA) an adverse decision of
the Commissioner, or his authorized
representative, in some cases, within 30
days from receipt thereof and there is
reason to believe that the assessment is
lacking in legal and/or factual basis; or
6. The assessments were issued on or after
January 1, 1998, where the demand notice
allegedly failed to comply with the
formalities prescribed under Sec. 228 of the
National Internal Revenue Code of 1997; or
7. Assessments made based on the ―Best
Evidence Obtainable Rule‖ and there is
reason to believe that the same can be
disputed by sufficient and competent
evidence; or
8. The assessment was issued within the
prescriptive period for assessment as
extended by the taxpayer‘s execution of
Waiver of the Statute of Limitations the
 Purple Notes
validity or authenticity of which is being
questioned or at issue and there is strong
reason to believe and evidence to prove that
it is not authentic.
B. Financial incapacity - The offer to
compromise based on financial incapacity
may be accepted upon showing that:
1. The corporation ceased operation or is
already dissolved. Provided, that tax
liabilities corresponding to the Subscription
Receivable or Assets
distributed/distributable to the stockholders
representing return of capital at the time of
cessation of operation or dissolution of
business shall not be considered for
compromise; or
2. The taxpayer, as reflected in its latest
Balance Sheet supposed to be filed with the
Bureau of Internal Revenue, is suffering
from surplus or earnings deficit
resulting to impairment in the original
capital by at least 50%, provided that
amounts payable or due to stockholders
other than business-related transactions
which are properly included in the regular
―accounts payable‖ are by fiction of law
considered as part of capital and not
liability, and provided further that the
taxpayer has no sufficient liquid asset to
satisfy the tax liability; or
3. The taxpayer is suffering from a net worth
deficit (total liabilities exceed total assets)
computed by deducting total liabilities (net
of deferred credits and amounts payable to
stockholders/owners reflected as liabilities,
except business related transactions) from
total assets (net of prepaid expenses,
deferred charges, pre-operating expenses,
as well as appraisal increases in fixed
assets), taken from the latest audited
financial statements, provided that in the
case of an individual taxpayer, he has no
other leviable properties under the law
other than his family home; or
4. The taxpayer is a compensation income
earner with no other source of income
and the family‘s gross monthly
compensation income does not exceed the
239
Taxation Law
levels of compensation income provided for
under Sec. 4.1.1 of these Regulations, and it
appears that the taxpayer possesses no
other leviable or distrainable assets, other
than his family home; or
5. The taxpayer has been declared by any
competent tribunal/ authority/ body
/government agency as bankrupt or
insolvent.
Note: The Commissioner shall not consider any
offer for compromise settlement by reason of
financial incapacity unless and until the taxpayer
waives in writing his privilege of the secrecy of
bank deposits under R.A. No. 1405 or under
other general or special laws, and such waiver
shall constitute as the authority of the
Commissioner to inquire into the bank deposits
of the taxpayer.
The compromise settlement is subject to the
following minimum amounts:
1. For cases of financial incapacity, a
minimum compromise rate of 10% of the
basic assessed tax;
2. For other cases, a minimum
compromise rate equivalent to 40% of
the basic tax assessed.
Where the basic tax involved exceeds
P1,000,000.00 or the settlement offered is less
that the prescribed minimum rates, the
compromise shall be subject to the approval of
the Evaluation Board composed of the
Commissioner and the four (4) Deputy
Commissioners.
Mandatory Payment of Compromise
Application
The compromise offer shall be paid by the
taxpayer upon filing of the application for
compromise settlement. No application for
compromise settlement shall be processed
without the full settlement of the offered
amount. In case of disapproval of the
application for compromise settlement, the
amount paid upon filing of the aforesaid
application shall be deducted from the total
outstanding tax liabilities. (RR 9-2013)
Bar Operations C ommissions 239
 Purple Notes
Taxation Law
ABATEMENT
An abatement is a diminution or decrease in the
amount of tax imposed such that to abate is to
nullify or reduce in value or amount.
Grounds:
1. The tax or any portion thereof appears to
have been unjustly or excessively assessed;
or
2. The administration and collection costs
involved do not justify collection of the
amount due
d. Non-retroactivity of rulings (Sec. 246,
NIRC, as amended)
General Rule: The rulings of the BIR are not
retroactive. Any revocation, modification or
reversal of any of the rules and regulations
promulgated or any of the rulings or circulars
promulgated by the CIR shall not be given
retroactive application if it will be prejudicial to
the taxpayers.
Exceptions:
1. Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by the BIR;
2. Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the ruling is based; or
3. Where the taxpayer acted in bad faith. (Sec.
246, NIRC, as amended)
 Rulings, circulars, 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 vs. CA, et
al., G.R. No. 117982, 6 February 1997).
Cases related to Non-retroactivity of
rulings:
1. In order for Sec. 246 to apply, the ruling
must be issued to the taxpayer invoking the
same. (CIR vs. Filinvest Development
Corporation, GR No. 163653, July 19, 2011)
240 Center for Legal Education and Research
2. But, if the ruling issued is2018 a general
interpretative rule, all taxpayers may rely on
the ruling and invoke Sec. 246 if proper.
(CIR vs. San Roque, GR No. 187485, February
12, 2013)
3. Section 246 is not limited to a reversal only
by the Commissioner because this Section
expressly states, "Any revocation,
modification or reversal" without specifying
who made the revocation, modification or
reversal. Hence, a reversal by the Supreme
Court is covered under Section 246. (CIR vs.
San Roque, GR No. 187485, February 12, 2013)
Government remedies for collection of
delinquent taxes
(II.I.3‖ in the 2020 Bar Tax Syllabus)
a. Requisites:
Except as provided in Section 222, internal
revenue taxes shall be assessed within three (3)
years after the last day prescribed by law for the
filing of the return, and no proceeding in court
without assessment for the collection of such
taxes shall be begun after the expiration
of such period: Provided, That in 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. (Sec. 203,
NIRC)
Generally, the government can only file a
proceeding in court to collect once the
assessment has become final and
unappealable:
Instances when an assessment becomes
FINAL, EXECUTORY AND DEMANDABLE
1. Failure of the taxpayer to file a VALID
protest within 30 days from receipt of the
FINAL ASSESSMENT NOTICE(FAN)/ FORMAL
LETTER OF DEMAND(FLD);
2. Failure of the taxpayer to submit all relevant
documents in support of his protest by way
of reconsideration within 60 days from the
date of filing of the protest;
 Purple Notes
3. Failure of the taxpayer to appeal to the
Commissioner of Internal Revenue (CIR) or
Court of Tax Appeals (CTA) within 30 days
from date of receipt of FDDA issued by the
Commissioner‘s duly authorized
representative;
4. Failure of taxpayer to appeal to CTA within
30 days from date of receipt of the FDDA
issued by the CIR;
5. Failure of taxpayer to timely file a motion of
reconsideration or new trial before the CTA
Division or failure to appeal to the CTA En
Banc and Supreme Court based on existing
Rules of Procedures; or
6. Failure of taxpayer to receive any
assessment notices because it was served
in the address indicated in the BIR‘s
registration database and the taxpayer
transferred to a new address or
closed/ceased operations WITHOUT
updating and transferring BIR registration or
cancelling its BIR registration as the case
may be, through the accomplishment and
filing of BIR Form 1905 – Application for
Registration Information Updated, as
prescribed by pertinent issuance and/or
amendments thereto. (RMO 26-2016)
b. Prescriptive Period to Collect
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.(Sec.222[c], NIRC)
Exceptions:
a. False or fraudulent return with intent to
evade taxes
b. Failure or omission to file a return
c. Waiver
c. Administrative remedies
i. Tax lien
A tax lien is a charge on all leviable property of
the taxpayer to secure the proper payment of
the tax, surcharges, interests and costs.
241
Taxation Law
It is a legal claim or charge on property, real or
personal, established by law as security in
default of the payment of tax. (HSBC vs. Rafferty,
G.R. No. L- 13188, November 15,1916)
The tax lien attaches not only from the service
of the warrant of distraint of personal property
but from the time the tax became due and
payable. (HSBC vs. Rafferty, G.R. No. L- 13188,
November 15,1916)
For real properties – from the time of
registration with the Registered of Deeds. (CIR v.
NLRC, G.R. No. 74965, November 9,1994)
Notice required
The lien is not valid against any mortgagee,
purchaser, or judgment creditor until notice of
such lien shall have been filed in the proper
register of deeds of the province or city where
the property of the taxpayer is located. (Sec.
219, NIRC)
Superiority of Tax Lien
It is settled that the claim of the government
predicated on a tax lien is superior to the claim
of a private litigant predicated on a judgment.
(CIR v. NLRC, G.R. No. 74965, November 9,1994)
Preference of credit
A tax (not due on specific property) due the
National Government come 9th, and taxes due
cities or municipalities come 10th in the order of
preference of credits on the other assets of the
debtor. (Art. 2244, Civil Code)
Distinguished from Distraint:
Distraint of the property seized must be that of
the taxpayer, although it need not be the
property in respect to which the tax is assessed;
a tax lien, however, is directed to the property
subject to the tax regardless of its owner.
When applicable:
1. With respect to personal property– Tax lien
attaches when the taxpayer neglects or
refuses to pay tax after demand and not
from the time the warrant is served (Sec.
219, NIRC)
2. With respect to real property– from time of
registration with the register of deeds.
Bar Operations C ommissions 241
 Purple Notes
Taxation Law
Tax lien is extinguished:
1. By payment or remission of the tax
2. By prescription of the right of government to
assess or collect
3. By failure to file notice of such tax lien in the
office of Register of Deeds
4. By destruction of property subject to tax lien
5. By replacing it with a bond
ii. Distraint and Levy
Distraint
Seizure by the government of personal
properties, tangible or intangible, to enforce
payment of taxes, to be followed by a public
sale, if taxes are not voluntary paid. (DE LEON,
NIRC Annotated, p.475)
Garnishment
Taking of property usually cash or sum of
money, owned by the delinquency taxpayer
which is in the possession of a third party.
Two kinds of Distraint
1. Actual Distraint – wherein ACTUAL
DELIQUENCY in tax payment is necessary
2. Constructive Distraint – wherein NO ACTUAL
DELIQUENCY is necessary
1. Actual Distraint
Procedure for Actual distraint
1. Commencement of distraint
proceedings:
a. By the Commissioner or his duly
authorized representative where the
amount exceeds Php 1 million
b. By the Revenue District Officer where
amount is equal to or less than Php
1 million
What will be distrained?
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
2. Warrant of distraint
a. How served:
i. To the owner or person from whose
possession such goods, chattels, or
242 Center for Legal Education and Research
2018
effects or other personal property
were taken, or at the dwelling or
place of business of such person
and with someone of suitable age
and discretion.
ii. Stocks and other securities - upon
the taxpayer and upon the
president, manager, treasurer or
other responsible officer of the
corporation, company or
association, which issued the said
stocks or securities.
iii. Debts and credits - by leaving with
the person owing the debts or
having in his possession or under
his control such credits, or with his
agent
iv. Bank accounts - upon the taxpayer
and upon the president, manager,
treasurer or other responsible officer
of the bank
3. Reporting
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
4. Notice of Sale of Distrained Properties
Posting of Notices
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.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.
Date of Sale
The time of sale shall not be less than
twenty (20) days after notice to the
owner or possessor of the property as above
specified and the publication or posting of
such notice.
 Purple Notes
5. Notice of Sale of Distrained Properties
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.
Excess
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(Secs. 207-
209, NIRC).
Right of Preemption
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, NIRC)
6. Report after the sale
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, NIRC)
243
Taxation Law
Purchase and resale by the Government
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(Sec. 212,
NIRC).
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.
2. Constructive Distraint
Applicable if taxpayer is: (HOLRR)
1. Retiring its business
2. Intending to leave the Philippines
3. Intending to remove his properties
therefrom
4. Intending to hide
5. Intending to perform any act to obstruct
the proceedings for collecting the tax due or
which may due for him (Sec. 206, NIRC)
How effected?
Taxpayer will be required to sign a receipt
covering the property distrained and obligate
himself to:
1. Preserve it intact and unaltered; and
2. Not disposed of it any manner without
express authority of the CIR
If the taxpayer refuse , the officer will prepare a
list of the properties distrained and will leave a
copy thereof in the premises, in the presence of
two witnesses. (Sec.206,NIRC)
Levy (Sec. 207(B), NIRC)
Levy of real property refers to the same act of
seizure as in distraint, but in this case, of real
property, an interest in or rights to such
property in order to enforce the payment of
taxes.
Bar Operations C ommissions 243
 Purple Notes
Taxation Law
When made:
1. Before, simultaneously or after the distraint
of personal property belonging to the
delinquent;
2. 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.
Procedure
1. Warrant of Levy
Duly authenticated certificate showing:
a. Name of the taxpayer
b. Amounts of the tax and penalty due
from him
c. Description of the property upon
which levy is made
2. Notice
To whom sent:
Written notice of the levy shall be mailed to
or served upon:
1. Register of Deeds for the province or
city where the property is located and
2. 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 if there be
none, to the occupant of the property in
question.
3. Report of receipt of warrant
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
244 Center for Legal Education and Research
2018
Secretary of Finance, upon recommendation
of the Commissioner, shall have the
authority to lift warrants of levy issued in
accordance with the provisions hereof.
4. Advertisement
Within twenty (20) days after levy, the
officer conducting the proceedings shall
proceed to advertise the property or a
usable portion thereof as may be necessary
to satisfy the claim and cost of sale
How long will it be posted?
Such advertisement shall cover a period of at
least thirty (30) days
What will it contain? (ANTS)
The advertisement shall contain:
1. Amount of taxes and penalties so due;
2. Time and place of sale,
3. Name of the taxpayer against whom taxes
are levied; and
4. Short description of the property to be sold.
Where will it be posted?
By posting a notice at the:
1. Main entrance of the municipal building or
city hall and in public and
2. Conspicuous place in the barrio or district in
which the real estate lies
Publication
Publication once a week for three (3) weeks
in a newspaper of general circulation in the
municipality or city where the property is
located.
5. Sale
Where and when will the sale take place?
1. At the main entrance of the municipal
building or city hall; or
2. On the premises to be sold, as the officer
conducting the proceedings shall determine
and as the notice of sale shall specify.
 Purple Notes
Discontinuation of proceedings
At any time before the day fixed for the sale,
the taxpayer may discontinue all proceedings by
paying the taxes, penalties and interest.
Certificate of sale
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 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.
Excess
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.
Right of Redemption
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
245
Taxation Law
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 from the lien of such
taxes and penalties.
6. Final Deed to Purchaser
In case the taxpayer shall not redeem the
property as herein provided, the Revenue
District Officer shall, as grantor, execute a
deed conveying to the purchaser so much
of the property as has been sold, free from all
liens of any kind whatsoever, and the deed shall
succinctly recite all the proceedings upon which
the validity of the sale depends. (Sec. 202,NIRC)
Forfeiture to Government for Want 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.
Redemption
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
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.
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,
Bar Operations C ommissions 245
 Purple Notes
Taxation Law
penalties or costs arising under this Code or in of failure of any person to2018
register as
compromise or adjustment of any claim required under Sec. 236, the
therefore; and said Commissioner may, upon temporary closure of the
the giving of not less than twenty (20) days establishment shall be for the
notice, sell and dispose of the same of public duration of not less than five (5) days
auction or with prior approval of the Secretary of and shall be lifted only upon compliance
Finance, dispose of the same at private sale. In with whatever requirements prescribed
either case, the proceeds of the sale shall be by the Commissioner in the closure
deposited with the National Treasury, and an order
accounting of the same shall rendered to the b. Failure of any Person to Register as
Chairman of the Commission on Audit. Required under Section 236.
a. The temporary closure of the
The real property under levy shall be sold in establishment shall be for the
a public sale, if the taxes involved are not duration of not less than five (5)
voluntarily paid following such levy. days and shall be lifted only upon
compliance with whatever
Distraint vs. Levy requirements prescribed by the
Commissioner in the closure order.
DISTRAINT LEVY (Sec. 115, NIRC)
Personal property only Real property only
Pre-emption only (no Pre-emption and v. Judicial Remedies –
right of redemption) redemption (w/in 1 year a. Civil or
from sale) available. b. Criminal Action
No forfeiture in favor of Sec. 215 provides that
government in case forfeiture is available in Either of these remedies or both (Administrative
there is no bidder/bid is case there is no
and Judicia Remedies) simultaneously may be
insufficient, but BIR bidder/bid is
may purchase the insufficient. pursued in the discretion of the authorities
property. charged with the collection of such taxes.
There is constructive There is NO (Sec.205,NIRC)
distraint constructive levy
Form
Further distraint and levy
Civil and criminal action and proceedings :
The remedy by distraint of personal property  Shall be brought in the name of the
and levy on realty may be repeated if necessary Government of the Philippines
until the full amount due including all expenses,  Shall be conducted by legal officers of the BIR.
is collected. (Sec. 217, NIRC)
The required approval can be delegated to and
iv. Suspension of business operation issued by subordinate officials because the
approval of filing of a criminal action is not one
The Commissioner or his authorized of the non-delegable functions of the CIR under
representative is hereby empowered to Sec. 7 of the NIRC. (People v. Valeriano, G.R. No.
suspend the business operations and 199480, October 12, 2016.)
temporarily close the business
establishment of any person: No civil or criminal action for the recovery of
a. In the case of VAT-registered person, taxes or the enforcement of any fine, penalty or
a. Failure to issue receipts or invoices, forfeiture under the NIRC shall be filed in court
b. Failure to file a VAT return as required without the approval of the Commissioner . (Sec.
220, NIRC)
under Sec. 114, or
c. Understatement of taxable sales or
receipts by thirty percent (30%) or
more of his correct taxable sales or
receipts for the taxable quarter; in case

246 Center for Legal Education and Research

 Purple Notes
Suit to Recover Tax Based on False or
Fraudulent Returns
Aside from the summary remedy of distraint and
levy, the BIR may also avail of the remedy of
collecting delinquent taxes through the filing of
a civil or criminal action. (Sec. 205[b], NIRC)
a. Civil Action
A civil action is resorted to when a tax liability
becomes collectible, that is, the assessment
becomes final and unappealable, or the decision
of commissioner has become final and executory
(DIMAAMPAO)
Where the assessment has already become final
and executory, the action to collect is akin to an
action to enforce a judgment. No inquiry can be
made therein as to the merits of the original
case or the justness of the judgment relied
upon, other than fraud in the party was
committed in the doing of the act.(Mambulao
Lumber Company vs. RP, G.R. No. L-37061,
September 5, 1984)
Civil action NOT deemed instituted
Rule 111, Section 1(a) of the Rules of Court
provides that what is deemed instituted with the
criminal action is only the action to recover civil
liability arising from the crime. Civil liability
arising from a different source of
obligation, such as when the obligation is
created by law, such civil liability is not
deemed instituted with the criminal action.
It is well-settled that the taxpayer's
obligation to pay the tax is an obligation
that is created by law and does not arise
from the offense of tax evasion, as such, the
same is not deemed instituted in the criminal
case. (Macario Lim Gaw vs. CIR, G.R. No. 222837,
July 23,2018)
Note: The conviction or acquittal obtained
under this Section [Sec. 254] shall not be a bar
to the filing of a civil suit for the collection of
taxes.(Sec. 254, NIRC)
b. Criminal Action
The remedy for enforcement of statutory
penalties of all sorts shall be by criminal or civil
247
Taxation Law
action, as the particular situation may require,
subject to the approval of the Commissioner.
(Sec.221,NIRC)
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,NIRC)
Crimes punishable under NIRC
The following are punished under Sec. 254 and
255 of the NIRC:
1. Attempt to evade or defeat tax
2. In case of a person required to (a) Make a
return, (b) keep any record, or (c) Supply
correct and accurate information who at the
time or times required by law or rules and
regulations willfully fails to do either of
the following:
a. pay such tax,
b. makes such return,
c. keep such record, or
d. supply correct and accurate information,
or
e. withhold or remit taxes withheld, or
f. refund excess taxes withheld on
compensation.
3. Attempting to make it appear for any reason
that he or another has in fact filed a return
or statement, or
4. Actually filing a return or statement and
subsequently withdraws the same return or
statement after securing the official
receiving seal or stamp of receipt of internal
revenue office wherein the same was
actually filed.
Assessment not requirement for criminal
charges
Under Sections 254 and 255 of the NIRC, the
government can file a criminal case for tax
evasion against any taxpayer who willfully
attempts in any manner to evade or defeat any
tax imposed in the tax code or the payment
thereof. The crime of tax evasion is committed
by the mere fact that the taxpayer
knowingly and willfully filed a fraudulent
return with intent to evade and defeat a part or
all of the tax. It is therefore not required that a
tax deficiency assessment must first be issued
Bar Operations C ommissions 247
 Purple Notes
Taxation Law
for a criminal prosecution for tax evasion to
prosper(Macario Lim Gaw vs. CIR, G.R. No. 22837,
July 23,2018) In plain words, for criminal
prosecution to proceed before assessment,
there must be a prima facie showing of willful
attempt to evade taxes (CIR vs. CA, 257 SCRA
2000).
Is an institution of criminal action be
considered as an implied assessment
Accordingly, an affidavit which was executed
by the revenue officer 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 CTA. The fact that the complaint itself was
specifically directed and sent to DOJ and not to
Pascor shows that the intent of the CIR was to
file a criminal complaint for tax evasion and not
to issue an assessment (CIR vs. Pascor Realty and
Development Corporation, G.R. No. 128315, June 29,
1999).
Prescription of Criminal Action
Criminal violations of the tax code prescribed
after 5 five years, to be counted either from:
1. The commission of the violation of the law,
if known at that time, or
2. From: (a) The discovery and (b) The
institution of judicial proceeding for its
investigation and punishment (Lim vs. CA,
190 SCRA 616)
Payment of tax not a defense:
Payment of the tax due after a case has been
filed shall not constitute a valid defense in any
prosecution for violation of the provisions under
the Code. (Sec. 253 [a], NIRC)
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 Section 73 of the 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
248 Center for Legal Education and Research
2018 of the
extinction of criminal action. The failure
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
of the Philippines vs. Ildefonso Tierra,G.R. No. L-
17177-80, December 28, 1964).
d. Non-availability of injunction 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 the NIRC. (Sec. 218, NIRC)
Exception:
Only the CTA can issue an injunction and it is
only allowed when the following conditions
concur:
1. There is an appeal to the CTA, and
2. In the opinion of the court, the collection by
the government agencies may jeopardize the
interest of the Government and/or the
taxpayer, and
3. Taxpayer either to deposit the amount
claimed or to file a surety bond for not more
than the double the amount with the Court.
(Sec. 11 of R.A. 1125, as amended by R.A.
9282)
4. There is an appeal to the CTA, and
5. In the opinion of the court, the collection by
the government agencies may jeopardize the
interest of the Government and/or the
taxpayer, and
6. Taxpayer either to deposit the amount
claimed or to file a surety bond for not more
than the double the amount with the Court.
(Sec. 11 of R.A. 1125, as amended by R.A.
9282)
Tax Delinquency vs. Tax Deficiency
(under 1.c of 2020 Bar Tax Syllabus)
DEFICIENCY DELIQUENCY
Exists when: Exists when:
Amount imposed by The self-assessed tax is
law (as determined by not paid at all or was
CIR or his authorized only partially paid on
representative) the prescribed date, or
exceeds amount shown
 Purple Notes
Taxation Law
as tax upon taxpayer‘s When the deficiency Interest Rate NIRC v. TRAIN
return tax assessed by the NIRC TRAIN Law (Sec. 75
BIR has become final of RA 10963)
An amount is and executory Interest imposed on Interest imposed on
determined by the BIR unpaid amount of unpaid amount of taxes
as a tax liability, where taxes (deficiency/delinquency)
there is no amount (delinquency/deficiency) is at DOUBLE THE
stated in the return is at twenty percent LEGAL INTEREST
To be collected, has to Can be immediately (20%) per annum RATE* for loans or
go through the collected forbearance of any
assessment process. money as set by the
Filing of a civil action Filing of a civil action BangkoSentral ng
during pendency of for the collection of Pilipinas
protest is a ground for taxes is the proper
a motion to dismiss remedy *As the law stands now
Subject to 25% Is subject to – the legal interest rate
surcharge, although surcharges and is at 6%. Thus the
subject to interest and administrative current interest on
compromise penalty. penalties. unpaid amount of
taxes is at 12%
Civil Penalties (double the current
(II.I.4. in the 2020 Bar Tax Syllabus) legal interest rate)

Aside from the deficiency tax being assessed the When Applicable?
BIR is allowed to impose the following civil From the date From effectivity of RA
penalties namely: prescribed payment of 10963 which is January
 Interest; tax due until December 1,2018
 Surcharges and 2017
 Compromise Penalty
How imposed?
a. Deficiency Interest v. Delinquency Before TRAIN Law :
Interest Section 249 of the Tax Code states that
the period of imposition is as follows
Deficiency Interest - Imposed for the (see table):
shortage of taxes paid. Sec. 249 (B) & (C)

Delinquency Interest – Imposed for the delay Deficiency Interest Delinquency Interest
for the payment of taxes. (Taenaka v. CIR, CTA EB From the date prescribed From the date of
745) by law until the full prescribed until full
payment thereof payment of the unpaid
In order delinquency to exist there must have amount
been a demand thru FAN/FLD.

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 Purple Notes
Taxation Law
2018
Example: Imposition of Deficiency & Delinquency Interest BEFORE TRAIN LAW
(A) Taxpayer was audited by the BIR thru a LOA issued in 2014 covering all taxes for 2013. BIR
issued an assessment for Income Tax (IT) during 2016 and which was timely protested but
however denied by the CIR thru an FDDA. By Jan 2017 the taxpayer decided to pay the assessed
amount. What interest are to be imposed from 2013 -2017 and at what rates?

Explanatory Note:

As can be observed from the above example (A), the DEFICIENCY INTEREST is to be computed
from the date the tax was prescribed (supposed) to be paid until its full payment in 2017. While
the DELIQUENCY INTEREST is to be paid from the demand by the BIR which was the FAN/FLD
until its full payment.

Effectively, before TRAIN LAW there was double imposition of interest (interest on interest)

250 Center for Legal Education and Research

 Purple Notes
Taxation Law
Upon Effectivity of TRAIN LAW – (New Rule on Deficiency and Delinquency Interest):

No imposition of Double Imposition of Interest

There shall be assessed and collected on any unpaid amount of tax, interest at the rate of double
the legal interest rate for loans or forbearance of any money in the absence of an express
stipulation as set by the BangkoSentral ng Pilipinas from the date prescribed for payment until the
amount is fully paid; Provided that in no case shall the deficiency and the delinquency
interest p rescribed… be imposed simultaneously.(Sec. 249(A) of NIRC as amended by
RA No. 10963 or TRAIN Law)

Example: Imposition of Deficiency & Delinquency Interest AFTER TRAIN LAW

(B) Taxpayer was audited by the BIR thru a LOA issued in 2019 covering VAT from January –
December 2018. BIR issued an assessment for VAT during 2019 and which was timely protested
but however denied by the CIR thru an FDDA. By Jan 2020 the taxpayer decided to pay the
assessed amount. What interest are to be imposed from 2018 -2019 and at what rates?

Explanatory Note:

Compared to the first example (Example A), here, the DEFICIENCY INTEREST is to be imposed
only from the date the tax was supposed to be paid until the issuance of the demand by the BIR
(FAN/FLD). While the DELIQUENCY INTEREST is to be computed from the ISSUANCE OF
FAN/FLD until the payment thereof.

And as could be observed the interest rate effective TRAIN Law (January 1, 2018).

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 Purple Notes
Taxation Law
2018
Q: What about those ASSESSED/ ISSUED FAN/FLD prior to the effectivity of TRAIN
Law (Prior 2018) but are to be paid during TRAIN Law‘s effectivity (2018 onwards)?

Company A filed its 2015 Annual Income Tax Return on April 14, 2016. On January 2, 2017, the
BIR issued a Letter of Authority covering all taxes for taxable year 2015. By June 20, 2017, BIR
issued the Preliminary Assessment Notice (PAN) and issued the Final Assessment Notice 15 days
after on July 5, 2017. Company A filed its protest by way of reinvestigation on August 4, 2017.
Company A was able to submit the supporting documents on October 3,2017. BIR issued a Final
Decision on Disputed Assessment issued by the CIR on December 31, 2017. On March 2018,
Company A decided to pay the assessed tax deficiency.

What interest are to be imposed and at what rate?

Answer:The provisions of TRAIN Law will apply on the imposition of interest BUT insofar as
that portion of interest will run starting January 1, 2018.(Moog Controls v. CIR, CTA Case 9077, February
22, 2018, RMC)

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 Purple Notes
Taxation Law

Deficiency Interest Delinquency Interest

As to definition
Imposed for the shortage of taxes paid Imposed for the delay of payment of taxes (legal
delay –―with demand‖ thru FAN/FLD)
Tax Based (as amended by Sec. 75 TRAIN Law)
Basic Tax Basic Tax +Deficiency Interest + Surcharge
Reckoning Date (as amended)
From the date prescribed by law until the full From date of FAN/FLD until full payment thereof.
payment thereof or UPON ISSUANCE OF A
NOTICE AND DEMAND BY THE
COMMISSIONER WHICHEVER COMES
EARLIER

b. Surcharge and Fraud Penalty

(under 4b & 4d of the 2020 Bar Tax Syllabus)

25% Surcharge 50% Surcharge (Fraud Penalty)

(1) Failure to file any return and pay the tax due (1) Willful neglect to file a return
thereon as required under the provisions of the NIRC (2) False or Fraud return willfully made – prima
or rules and regulations on the date prescribed; facie evidence where there is ―substantial
(2)Unlessotherwise authorized by the Commissioner, underdeclaration of taxable income or substantial
filing a return with an internal revenue officer other overstatement of deductions.
than those with whom the return is required to be
filed. ―Substantial under declaration of taxable income or
(3) Failure to pay the deficiency tax within the time Substantial overstatement of deductions‖ – Failure
prescribed for its payment in the notice of to declare an amount exceeding 30% for taxable
assessment. income or actual deductions.
(4)Failure to pay the full or part of the amount of tax
shown on any return required to be filed under the
provisions of the NIRC or rules and regulations, or
the full amount of tax due for which no return is
required to be filed, on or before the date prescribed
for its payment.

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 Purple Notes
Taxation Law
PART III. LOCAL TAXATION (LOCAL 2018powers
of the taxing and other revenue-raising
3- 2
GOVERNMENT CODE (LGC) OF 1991, as of local government units:(P C LUE)
amended)
1. Taxation shall be uniform in each local
A. LOCAL GOVERNMENT TAXATION government unit;

Preliminaries
2. Taxes, fees, charges and other impositions
Distinguish local taxation vs. national shall:
Taxation
i. be equitable and based as far as
Local Taxation National Taxation practicable on the taxpayer‘s ability to
Scope of Taxation pay;
Bound only up to the Covers the whole ii. be levied and collected only for public
territorial limits of the Philippine Island purposes;
implementing local iii. not be unjust, excessive, oppressive, or
government unit confiscatory;
(province, city, iv. not be contrary to law, public policy,
municipality, or national economic policy, or in restraint
barangay) of trade;
Governing Laws
Constitution, Constitution, 3. The collection of local taxes, fees, charges
Local Government Code National Internal and other impositions shall in no case be let
of 1991 Revenue Code as to any private person;
Ordinances amended by R.A.
Jurisprudence 10963 4. The revenue collected pursuant to the
Revenue Issuances, provisions of the LGC shall inure solely to
Jurisprudence the benefit of, and be subject to the
Legislated by: disposition by, the local government unit
Respective Congress levying the tax, fee, charge or other
sanggunianpanglungsod imposition unless otherwise specifically
or panlalawigan (thru provided herein; and
the delegated power of
the congress) 5. Each local government unit shall, as far as
Taxes Imposed practicable, evolve a progressive system
Local Business Tax, Income Tax, Value of taxation.
Real Property Tax Added Tax, Capital
Local Transfer Tax Gains Tax, 3. Nature and Source of Taxing Power
Documentary Tax,
Excise Tax a. Not inherent;
Exercised only if delegated to them by law or
1. Fundamental Principles Constitution;

Section 1, Article X, 1987 Constitution. b. Not absolute; subject to limitations provided

for by law.
―The territorial and political subdivisions of the
 Under the present constitutional rule,
Republic of the Philippines are the provinces,
cities, municipalities, and barangays.‖ ―where there is neither a grant nor a
prohibition by statute, the tax power must
Section 130, LGC. be deemed to existalthough Congress may
provide statutory limitations and
guidelines.(Manila Electric Co. vs. Province of
―Fundamental Principles. – The following
Laguna, G.R. No. 131359, October 4, 1999)
fundamental principles shall govern the exercise

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 Purple Notes
 The fundamental law did not intend the
delegation to be absolute and unconditional.
The legislature must still see to it that:
1. the taxpayer will not be over-burdened
or saddled with multiple and
unreasonable impositions;
2. each LGU will have its fair share of
available resources;
3. the resources of the national
government will not be unduly
disturbed; and
4. local taxation will be fair, uniform, and
just.(Film Development Council of the
Philippines vs. Colon Heritage Realty
Corporation, G.R. No. 203754, June 16,
2015)
 There is no validity to the assertion that the
delegated authority can be declared
unconstitutional on the theory of double
taxation. It must be observed that the
delegating authority specifies the limitations
and enumerates the taxes over which local
taxation may not be exercised.The reason is
that the State has exclusively reserved the
same for its own prerogative.(Pepsi Cola
Bottling vs. Municipality of Tanuan, G.R. No. L-
31156, February 27, 1976)
 Congress cannot abolish the local
government‘s power to tax as it abrogate
what is expressly granted by the
fundamental law. The only authority granted
to Congress is to provide guidelines and
limitations on the local government‘s
exercise of the power to tax. (DIMAAMPAO,
Tax Principles and Remedies,2015, p.132)
a) Grant of local taxing power under the
Local Government Code
Each local government until shall exercise its
power to create its own sources of revenue 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 government
units.(Sec. 5, Art. X, 1987 Constitution and Sec. 129,
LGC)
It is settled that a municipal corporation unlike a
sovereign state is clothed with no inherent
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Taxation Law
power of taxation. The charter or statute must
plainly show an intent to confer that power or
the municipality, cannot assume it. And the
power when granted is to be construed in
strictissimi juris. Any doubt or ambiguity arising
out of the term used in granting that power
must be resolved against the municipality.
Inferences, implications, deductions – all these –
have no place in the interpretation of the taxing
power of a municipal corporation.
Therefore, the power of a province to tax is
limited to the extent that such power is
delegated to it either by the Constitution or by
statute. Section 5, Article X of the 1987
Constitution is clear on this point. (Pelizloy Realty
Corp. v. Province of Benguet,G.R. No. 183137, April
10, 2013,penned by J. Leonen)
b) Authority to prescribe penalties for tax
violations
Vested in the Sanggunian
Limited as to the amount of imposable fine as
well as the length or period of imprisonment;
The Sanggunian is authorized to prescribe fines
or other penalties for violation of tax ordinances,
but in no case shall fines be less than
(P1,000.00) nor more than (P5,000.00) nor shall
the imprisonment be less than one (1) month
nor more than six (6) months; Such fine or
other penalty shall be imposed at the discretion
of the court. The Sangguniang Barangay may
prescribe a fine of not less than P100 nor more
than P1,000.(Sec. 516, LGC)
 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 Section 5, Article X of
the Constitution.22 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
Authority vs. Ferdinand Marcos, G.R. No. 120082,
September 11,2006)
Bar Operations C ommissions 255
 Purple Notes
Taxation Law
Principle of Exclusionary Doctrine
Preemption in the matter of taxation simply
refers to an instance where the national
government elects to tax a particular area,
impliedly withholding from the local government
the delegated power to tax the same field. This
doctrine primarily rests upon the intention of
Congress. Conversely, should Congress allow
municipal corporations to cover fields of taxation
it already occupies, then the doctrine of
preemption will not apply. (Victoria‘s Milling Co.,
Inc. vs. Municipality of Victorias, G.R. No. L -21183,
September 27, 1968)
When does the principle of exclusionary
doctrine apply?
1. Taxes levied under NIRC;
2. Taxes imposed under the Tariff and
Customs Code;
3. Taxes under special laws (DIZON, Taxation
(2006), p.130)
c) Authority to grant local tax exemptions
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)
d) Withdrawal of exemptions
General rule: Unless otherwise provided, tax
exemptions or incentives granted to, or
presently enjoyed by all persons, whether
natural or juridical, including government-owned
or –controlled corporations are withdrawn upon
the effectivity of the LGC.
Exception: (Exemptions not withdrawn)
1. Local water districts;
2. Cooperatives duly registered under R.A.
No. 6938; and
3. Non-stock and non-profit hospitals and
educational institutions. (Sec. 193, LGC)
4. Business enterprises certified by BOI as
a pioneer or non – pioneer for a period
of 6 or 4 years, respectively, from date
of registration;
5. Business entity, association, or
cooperatives registered under R.A. 6810
or Countryside and Barangay Business
Enterprise; and
256 Center for Legal Education and Research
6. Printer and/or publisher of 2018books or
other reading materials prescribed by
the Department of Education as school
texts or references insofar as receipts
from printing and/or publishing thereof
are concerned. (Art.283, IRR of LGC)
Unless otherwise repealed by law, business
and economic enterprises operating within
Export Processing Zone Authority shall
continue to enjoy exemption privileges and
tax incentive granted in P.D.66, as amended
(IRR of LGC, Art. 283)
 The withdrawal of tax exemptions or
incentives provided in R.A. 7160 can only
affect those franchises granted priorto the
effectivity of the law. (Smart Communications
vs. City of Davao, G.R. No. 155491, September
16, 2008)
 One of the most significant provisions of the
LGC is the removal of the blanket exclusion
of instrumentalities and agencies of the
National Government from the coverage of
local taxation.
Although as a general rule, LGUs cannot
impose taxes, fees, or charges of any kind
on the National Government, its agencies
and instrumentalities, this rule now admits
an exception, i.e. when specific provisions of
the LGC authorize the LGUs to impose taxes,
fees, or charges on the aforementioned
entities.
The legislative purpose to withdraw tax
privileges enjoyed under existing laws or
charter is clearly manifested by the
language used on Sec. 137 and 193,
categorically withdrawing such exemptions
subject only to the exceptions enumerated.
Since it would be tedious and impractical to
attempt to enumerate all the existing
statutes providing for special tax exemptions
or privileges, the LGC provided for an
express, albeit general, withdrawal of such
exemptions or privileges. No more
unequivocal language could have been
used.(NPC vs. City of Cabanatuan, G.R. No.
149110, April 9, 2003)
 Purple Notes
Taxation Law
e) Authority to adjust local tax rates

Local government units shall have the authority

to adjust the tax rates as prescribed herein not
oftener than once every five (5) years, but in no
case shall such adjustment exceed ten percent
(10%) of the rates fixed under the LGC. (Sec.
191, LGC)

When should tax rates be adjusted?

Every 5 years.

Is there a limit to the adjustment?

It should not exceed 10% of the rates fixed by
LGC.

f) Residual taxing power of local

governments

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.

Residual Power of LGUs

The power to levy taxes, fees, or charges on any
base or subject, PROVIDED, the taxes are:
1. Not specifically enumerated;
2. Not taxed under the provisions of NIRC, as
amended; and
3. Not taxed under other applicable laws. (Sec.
186, LGC)

Requisites:(CUP-F)
1. Not unjust, excessive, oppressive,
confiscatory, or contrary to declared national
policy;
2. Not against the fundamental principles of
local taxation;
3. Pursuant to an ordinance enacted with
public hearing conducted for the purpose
(Sec. 186, LGC); and
4. Subject to the limitations provided under not
one of the prohibited impositions under the
common limitations. (Sec. 186, LGC)

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Taxation Law
3. Scope of Taxing Power (with related LGC provision)
2018

Taxing Power Prov. Mun. City Brgy

Tax on Transfer of Real Property (135) (151)
Tax on Business of Printing and Publication (136) (136)
Franchise Tax (137) (137)
Tax on sand, gravel and other quarry resources (138) (138)
Professional tax (139) (139)
Amusement tax (140) (140)
Annual Fixed Tax for Every Delivery Truck or Van of (141) (141)
Manufacturers or Producers, Wholesalers, Dealers,
Retailers
Tax on Business (143) (143)
Fees and charges on regulation/licensing of business and (147) (147)
occupation
Fees for Sealing and Licensing of Weights and Measures (148) (148)
Fishery Rentals, Fees and charges (149) (149)
Community Tax (156) (156)
Services Fees and Charges (153) (153) (153) (153)
Public Utility Charges (154) (154) (154) (154)
Toll Fees or Charges (155) (155) (155) (155)
Tax on Gross Sales or Receipts of Small-Scale (152a)
Stores/Retailers
Services Fees on the use of Barangay-owned properties (152b)
Barangay Clearance (152c)
Other Fees and Charges (on commercial breeding of (152d)
fighting cocks, cockfights, cockpits; places of recreation
which charge admission fees; outside ads)
Real Property Tax -do- -do- -do- -do-
May exceed the maximum rates allowed for the province or municipality (more than) or (equal to) 50%,
except rates of professional and amusement taxes (Sec. 151, LGC)

Quick Rules with regards to scope taxing power

Cities may tax all business and services that a province and municipality can.
A municipality cannot tax a business or services that is already being taxed by the province

A barangay may only exclusively tax these following items: (BOTS)

1. Barangay Clearance
2. Other Fees and Charges (on commercial breeding of fighting cocks, cockfights, cockpits;
places of recreation which charge admission fees; outside ads)
3. Tax on Gross Sales or Receipts of Small-Scale Stores/Retailers
4. Services Fees on the use of Barangay-owned properties

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Taxation Law
4. Specific taxing powers of local government units

4.1 Taxing powers of PROVINCES

Taxing Power Imposed on Rate and Base Exemptions
Tax on Transfer of Real Sale, donation, barter, or any Not more than (50%) of Sale, transfer, or other
Property (Sec. 135, other mode of transfer of (1%)of the total disposition of real property
LGC) ownership or title to real consideration involved or pursuant to R.A. 6657
property fair market value if (Comprehensive Agrarian
monetary value is not Reform Law)
substantial, whichever is
higher
Tax on Business of On the business of persons Not more than (50%) of Receipts from the printing
Printing and engaged in the printing and/or (1%)of the gross annual and/or publishing of books
Publication (Sec. 136, publication of books, cards, receipts for the preceding or other reading materials
LGC) posters, leaflets,
calendar year. prescribed by the
handbills,certificates, receipts, Department of Education,
pamphlets, and others of Newly started business: Culture and Sports as
similar nature Not exceeding (1/20) of school texts or references
1% of the capital
investment

In the succeeding calendar

Franchise Tax (Sec.
137, LGC)
Franchise – In its
specific sense, franchise
may refer to (1) a general
or primary franchise or
(2) to a special or
secondary franchise. The
former relates to the right
to exist as a corporation
by virtue of duly
approved Articles of
Incorporation, or a investment.
charter pursuant a special
law creating the
corporation. The right is
vested with the
individuals composing the
corporation. On the other
hand, the latter refers to
the right or privileges
conferred upon existing
corporation such as the
right to use the streets of
a municipality to lay pipes
of tracks, erect poles or
year, regardless of when
the business started to
operate, the tax shall be
based on the gross receipts
for the preceding calendar
year, or any fraction
thereof.
On businesses Not more than (50%) of
enjoying a franchise one percent (1%) of the
gross annual receipts for
the preceding calendar
year based on the
incoming receipt, or
realized, within its
territorial jurisdiction.
Newly started business:
Not exceeding (1/20) of
(1%) of the capital
In the
succeeding calendar year,
regardless of when the
business started to
operate, the tax shall be
based on the gross
receipts for the preceding
calendar year, or any
fraction thereon.
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 Purple Notes
Taxation Law
string wires. This right is 2018
vested with the
corporation itself.

Section 137 is categorical

in stating that franchise
tax can only be imposed
on businesses enjoying a
franchise. This goes
without saying that
without a franchise, a
local government unit
cannot impose franchise
tax(National Power
Corporation vs. Provincial
Government of
Bataan,G.R. No. 180654,
March 06, 2017,penned
by J. Leonen)

Tax on sand, gravel
and other quarry
resources (Sec. 138
LGC)
Professional tax (Sec.
139, LGC)
To be paid to the
province where the
profession is practiced, or
where a principal office is
maintained.
Ordinary stones, sand, Not more than (10%) of
gravel, earth, and other fair market value in the
quarry resources, as defined locality per cubic meter
under the National Internal
Revenue Code, as amended,
extracted from public lands or
from the beds of seas, lakes,
rivers, streams, creeks, and
other public waters within its
territorial jurisdiction.
On each person engaged in Such amount and Professionals exclusively
the exercise of a profession reasonable classification employed by the
requiring government as the government
examination sangguniangpanlalawigan
may determine but shall
in no case exceed Three
hundred pesos (P300.00

A person who pays for

professional tax may
practice his profession
anywhere in the country
without being subjected
to similar taxes.
Employers shall require
payment of professional
tax as a condition for
employment and annually
thereafter.

Payable annually, on or
before Jan 31.

Any person first beginning

to practice a profession
after January must pay
the full tax before

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Taxation Law
engaging therein.

The professionals subject to the professional tax are only those who have passed the
bar examinations, or any board or other examinations conducted by the Professional
Regulation Commission (PRC). For example, a lawyer who is also a Certified Public
Accountant (CPA) must pay the professional tax imposed on lawyers and that fixed for
CPAs, if he is to practice both professions (Sec. 228 (f), IRR of LGC).
Amusement tax (Sec. Proprietors, lessees, or Not more than 10% of Holding of operas,
140, LGC) operators of theaters, Gross receipts from concerts, dramas, recitals,
cinemas, concert halls, admission fees (As painting and art
In case of theaters or circuses, boxing stadia, and amended by R.A. 9640, exhibitions, flower shows,
cinemas, tax shall first be other places of amusement 2009) musical programs, literary
deducted and withheld by and oratorical
their proprietors, lessees presentations, except pop,
and operators rock, or similar concerts.
Professional basketball games do not fall under the same category as theaters,
Proceeds to be shared cinematographs, concert halls and circuses as the latter basically belong to artistic forms
equally by the province of entertainment while the former caters to sports and gaming.(PBA vs. CA, G.R. No.
and municipality where 119122, August 8, 2000)
amusement places are
located Resorts, swimming pools, bath houses, hot springs and tourist spots cannot be
considered venues primarily ―where one seeks admission to entertain oneself by seeing
or viewing the show or performances‖. While it is true that they may be venues where
people are visually engaged, they are not primarily venues for their proprietors or
operators to actively display, stage or present shows and/or performances. Thus, they
do not belong to the same category or class as theaters, cinemas, concert halls,
circuses, and boxing stadia. It follows that they cannot be considered as among the
‗other places of amusement‘ contemplated by Section 140 of the LGC and which may
properly be subject to amusement taxes (Pelizloy Realty Corp. vs. The Province of
Benguet, G.R. No. 183137, April 10, 2013,penned by J. Leonen).
Tax on Delivery Vehicles used for the Not exceeding Five
Truck/Vanor delivery of distilled spirits, hundred pesos (P500.00)
Producers, fermented liquors, soft on every truck, van or any
Wholesalers of, drinks, cigars and vehicle used by
Dealers, or Retailers cigarettes, and other manufactuers, producers,
in, Certain products as may be wholesalers, dealers or
Products(Sec. 141, determined by the retailers.
LGC) sanggunian, to sales
outlets, or consumers in
the province, whether
directly or indirectly
The manufacturers, producers, wholesalers, dealers and retailers shall be exempt from
the tax on peddlers prescribed elsewhere in the LGC.

261
Bar Operations C ommissions 261
 Purple Notes
Taxation Law
 Manufacturers:
1. Manufacturing involves a physical or
chemical process that:
a. Alters the exterior texture or form, or
b. Alters the quality of any raw materials,
or
c. Combines raw materials with other
materials to put to a special use to
which such raw material in their original
condition could not have been put
2. For the purpose of sale or distribution to
others and not for own use or consumption
3. Manufacturers who export all of its products
are only subject to tax on exporters. (DOF-
BLGF Opinion dated February 16, 1994)
 Wholesalers/Distributors:
Wholesale means a sale where the purchaser
buys or imports the commodities for resale to
persons other than the end user regardless of
the quantity of the transaction.
Distributor is the middleman between the
manufacturer and retailer.
 Exporters:
Exporters shall refer to those who are principally
engaged in the business of exporting goods and
services, as well as manufacturers and
producers whose goods or services are both sold
domestically and abroad.
The 1991 LGC does not embody any provision or
classification for sale made by an ―indirect
exporter‖. Accordingly, a business engaged in
the sale of goods may only be classified as a
(direct) exporter, manufacturer,
wholesaler/distributor, dealer or retailer.
 Retailers:
Retail is the sale where the purchaser buys the
commodity for his own consumption,
irrespective of the quantity of the commodity
sold.
Test to determine if company is wholesaler or
262 Center for Legal Education and Research
dealer: 2018
 Wholesaler -invoices are issued to
companies or business establishments for
re-sale to end-users;
 Retailer – sales receipts are issued to
individual consumers or end-users.
 Contractors:
Include persons, natural or juridical, not subject
to professional tax whose activity consists
essentially of the sale of all kinds of service for a
fee, regardless of whether or not the
performance of a service calls for the exercise or
use of the physical or mental faculties of such
contractor or of his employees.
 A company rendering management services
is subject to contractors‘ tax. (DOF-BLGF
Opinion dated September 18, 2002)
 Banks and other financial institutions:
Include non-bank financial intermediaries,
lending investors, finance and investment
companies, pawnshops, money shops, insurance
companies, stock markets, stock brokers and
dealers in securities and foreign exchange.
 Peddlers:
Peddlers mean any person who, either
for himself or on commission, travels
from place to place and sells his goods
or offers to sell and deliver the same.
Note that the tax on Peddlers under Sec. 143(h)
does not apply to those already subject to Sec.
141.
 Others: Any other business not specified in
preceding clusters (1-7) which the
Sanggunian may tax.
b) Ceiling on business taxes imposable by
LGU within Metro Manila
The municipalities within the Metropolitan
Manila Area may levy taxes at rates which
shall not exceed by fifty percent
(50%) the maximum rates prescribed in
the preceding section. (Sec. 144, LGC)
 Purple Notes
c) Tax on different periods of business
Tax on New Businesses
 A newly-started business is already liable
for business taxes (i.e. license fees) at the
start of the quarter when it commences
operations. In computing the amount of tax
due for the first quarter of operations, the
business capital investment is used as
the bases.
 For the subsequent quarters of the first
year, the tax is based on the gross
sales/receipts for the previous quarter.
(Mobil Phils. vs. City Treasurer of Makati, G.R.
No. 15092, July 14, 2005).
Tax on Renewal
 In the following year(s), the business then
taxed based on the gross sales or receipts
of the previous year. (Mobil Phils. vs. City
Treasurer of Makati, G.R. No. 15092, July 14,
2005).
Tax on Retirement of Business
A business subject to tax pursuant to the
preceding sections shall, upon termination
thereof:
 Submit a sworn statement of its gross sales
or receipts for the current year.
If the tax paid during the year be less thanthe
tax due on said gross sales or receipts of the
current year, the difference shall be paid before
the business is considered officially retired.
(Section 145, LGC)
d) Rules on payment of business tax
i. The taxes imposed under Section 143
shall be payable for every separate or
distinct establishment or place
where business subject to the tax
is conducted and one line of business
does not become exempt by being
conducted with some other businesses
for which such tax has been paid. The
tax on a business must be paid by the
person conducting the same.
263
Taxation Law
For example:
AAA Corp owns is a big convenience
store chain which operates branches in
Quezon City, Manila, Pasig and Cavite.
Section 143 provides that:
 AAA pays for the business taxes for
each branch
 Payment of business tax in the City
of Manila does not exempt him from
paying the other local government
units where the business operates
(Quezon City, Pasig and Cavite)
ii. In cases where a person conducts or
operates two (2) or more of the
businesses mentioned in Section 143 of
the LGC which are subject to the same
rate of tax, the tax shall be computed
on the combined total gross sales or
receipts of the said two (2) or more
related businesses.
iii. In cases where a person conducts or
operates two (2) or more businesses
mentioned in Section 143 of the LGC
which are subject to different rates of
tax, the gross sales or receipts of each
business shall be separately reported for
iv. the purpose of computing the tax due
from each business. (Section 146, LGC)
Fees and charges for regulation &
licensing
The municipality may impose and collect such
reasonable fees and charges on business and
occupation and, except as reserved to the
province in Section 139 of the LGC, on the
practice of any profession or calling,
commensurate with the cost of regulation,
inspection and licensing before any person may
engage in such business or occupation, or
practice such profession or calling. (Section 147,
LGU).
e) Situs of tax collected
For purposes of collection of the taxes under
Section 143 of the LGC, manufacturers,
assemblers, repackers, brewers, distillers,
rectifiers and compounders of liquor, distilled
spirits and wines, millers, producers, exporters,
Bar Operations C ommissions 263
 Purple Notes
Taxation Law
wholesalers, distributors, dealers, contractors, 2018
banks and other businesses, maintaining or
operating branch or sales outlet elsewhere shall
record the sale in the branch or sales outlet
making the sale or transaction, and the tax
thereon shall accrue and shall be paid to the
municipality where such branch or sales outlet is
located. In cases where there is no such branch
or sales outlet in the city or municipality where
the sale or transaction is made, the sale shall be
duly recorded in the principal office and the
taxes due shall accrue and shall be paid to such
city or municipality. (Sec. 150 [a], LGC)

1. Sales made by branches or sales

outlets

 Sales shall be recorded in the branch or

sales outlet making the sale.
 Taxes accrue and shall be paid in the
city or municipality where the said
branch or sales outlet is located.

2. Sales made by head or principal office

 30% - city or municipality where the

principal office is located
 70% - city or municipality where the
factory, project office, plant or
plantation is located.

In case of a plantation located at a place other

than the place where the factory is located, the
70% shall be divided as follows:
To summarize the above rule:

 60% - city or municipality

where the factory is located (if
there are two or more factories,
60% is divided pro-rata based
on volume of production)
 40% - city or municipality
where the plantation is located
(if there are two or more
plantations, 40% is divided pro-
rata based on volume of
production)

264 Center for Legal Education and Research

 Purple Notes
Taxation Law
To summarize the above rule:

Situs Rules Table

Sales of
Sales recorded in Principal Office Branches or
Sales Outlets

70% - factory, project office, plant or plantation 100% - place

where the branch
30% - principal office
or sales outlet is
40%- plant or located
60% - factory
plantation
FactoryFactoryPlantPlant
A B A B

Where to pay business tax?

 It is the place of the consummation of the sale, associated with the delivery of the things which
are the subject matter of the contract that determines the situs of the contract for purposes of
taxation, and not merely the place of the perfection of the contract (Shell Co vs. Mun. of Sipocol, L-
12680, March 20, 1959).

 The city can validly tax the sales of matches to customers outside of the city as long as the
orders were booked and paid for in the company‘s branch office in the city. (Phil. Match vs. City of
Cebu, G.R. No. L-30745, January 18, 1978).

 It is not the place where the contract was perfected, but the place of delivery which determines
the taxable situs of the property sought to be taxed. (Municipality of Jose Panganiban vs. The Shell
Company of the Philippines, Ltd., G.R. No. L-18349, July 30, 1966) Thus, it is all inconsequential where
the subject transactions were perfected and consummated or paid.

265
Bar Operations C ommissions 265
 Purple Notes
Taxation Law
4.4 Taxing powers of BARANGAYS
The barangays may levy the following taxes,
fees, and charges which shall exclusively accrue
to them:
(a) Taxes – On stores or retailers with fixed
business establishments with gross sales of
receipts of the preceding calendar year of
Fifty thousand pesos (P50,000.00) or less, in
the case of cities and Thirty thousand pesos
(P30,000.00) or less;
(b) Service Fees of Charges. – Barangays may
collect reasonable fees or charges for
services rendered in connection with the
regulations or the use of barangay-owned
properties or service facilities such as palay,
copra, or tobacco dryers;
(c) Barangay Clearance. – No city or
municipality may issue any license or permit
for any business or activity unless a
clearance is first obtained from the barangay
where such business or activity is located or
conducted. For such clearance, the
Sanggunian Barangay may impose a
reasonable fee. The application for clearance
shall be acted upon within seven (7)
working days from the filing thereof. In the
event that the clearance is not issued within
the said period, the city or municipality may
issue the said license or permit;
(d) Other fees and Charges. – The barangay
may levy reasonable fees and charges:
(1) On commercial breeding of fighting
cocks, cockfights and cockpits;
(2) On places of recreation which charge
admission fees; and
(3) On billboards, signboards, neon signs,
and outdoor advertisements. (Sec. 152,
LGC)
4. Common revenue raising powers
a) Service fees and charges
266 Center for Legal Education and Research
Local government units may impose2018
and collect
such reasonable fees and charges for
services rendered. (Sec. 153, LGC)
b) 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)
c) 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.
Exempt from toll charges:
Provided, that no such toll fees or charges shall
be collected from:(P2AD)
 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.
Discontinuance of payment of toll
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)
5. Community tax
Definition
A tax of a fixed amount upon all
persons, or upon all persons of a certain
class, resident
 Purple Notes
within a specified territory, without regard to Who shall cause
Taxation Law
the printing of
their property or the occupations in which they community tax certificates?
may be engaged(Eusebio Villanueva vs. City of The Bureau of Internal Revenue shall cause the
Iloilo,G.R. No. L-26521, December 28, 1968) printing of community tax certificates. (Sec.
164,LGC)
Who may levy: Cities and
Municipalities(Sec.156, LGC)
To whom will the funds accrue?
Imposed upon:
The proceeds of the tax shall accrue to the
1. Individual (18-RIB -EI) general funds of the:
a. Every inhabitant of the Philippines 1. Cities;
b. 18 years or over 2. Municipalities; and
c. Regularly employed for at least 30 3. Barangays; except
consecutive days or
d. Engaged in business or occupation; or A portion thereof which shall accrue to the
e. Owns a real property with an aggregate general fund of the national government to
value of Php 1,000 or more; or cover the actual cost of printing and distribution
f. Required by law to file an income tax of the forms and other related
return (Sec.157, LGC) expenses(Sec.164[a],LGC)

2. Corporation Duty of the City/Municipal Treasurer

a. Domestic; or
b. Resident Foreign engaged in or doing The city or municipal treasurer concerned shall
business in the Philippines (Sec. 158, remit to the national treasurer the said share of
LGC) x within ten (10) days after the end of each
quarter.
Taxable Basic Additional Tax not
Persons Tax to Deputized Barangay Treasurer
exceed
Individual Php Php 1.00 Php 5,000
The city or municipal treasurer shall deputize the
5.00 per Php
1,000 of
barangay treasurer to collect the community tax
earning in their respective jurisdictions:
Corporation Php Php 2.00 Php Provided,however, That said barangay treasurer
500 per 10,000 shall be bonded in accordance with existing
Php5,000 laws.
of earning
Proceeds of the community tax collected
Those Exempted: through the barangay treasurers shall be
1. Diplomatic and consular representatives; apportioned as follows:
and
2. Transient visitors when their stay in the (1) Fifty percent (50%) shall accrue to the
Philippines does not exceed 3 months. general fund of the city or municipality
concerned; and (2) Fifty percent (50%) shall
When Paid: accrue to the barangay where the tax is
Accrues on the 1st day of January of each year collected
and must be paid on or before February of each
year 6. Common Limitation on the Taxing
Powers of LGUs
Printing of Community Tax Certificates –
Unless otherwise provided in the LGC, the
exercise of the taxing powers of provinces,

267
Bar Operations C ommissions 267
 Purple Notes
Taxation Law
cities, municipalities, and barangays shall not
extend to the levy of the following listed below,
or in other words,an LGU could not impose the
following taxes: (EDIT-MPEG-CBPM)
(a) Income tax, except when levied on
banks and other financial institutions;
(Correlate with Sec. 143 (f) On banks
and other financial institutions, at a rate
not exceeding fifty percent (50%) of one
percent (1%) on the gross receipts of the
preceding calendar year derived from
interest, commissions and discounts from
lending activities, income from financial
leasing, dividends, rentals on property and
profit from exchange or sale of property
insurance premium);
(b) Documentary stamp tax;
(c) Taxes on Estates, inheritance, gifts, legacies
and other acquisitions mortis causa,
except as otherwise provided herein;
(Correlate with Sec. 135. Transfer of Real
Property Ownership. – (a) 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 transfer is not substantial,
whichever is higher. The sale, transfer or
other disposition of real property pursuant
to R.A. No. 6657 shall be exempt from this
tax);
(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
268 Center for Legal Education and Research
charges in any form whatsoever2018
upon such
goods or merchandise;
(Correlate with Sec. 155. 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)
 SC annulled an ordinance of Tacloban City
levying inspection fees, which were in
reality, taxes, upon animals exported or
taken away from the City. The inspection
fee sought to be collected – upon every
head of specified animals to be transported
out of the City of Tacloban (P2.00 per hog,
P10.00 per cow and P20.00 per carabao) –
was in reality an export tax specifically
withheld from municipal taxing power under
Section 2287 of the Revised Administrative
Code.(Panaligan vs. City of Tacloban, G.R. No. L-
9319, September 27, 1957)
(f) Taxes, fees or charges on agricultural and
aquatic products when sold by Marginal
farmers or fishermen;
―Marginal Farmer or Fisherman‖ refers to an
individual engaged in subsistence farming or
fishing which shall be limited to the sale, barter
or exchange of agricultural or marine products
produced by himself and his immediate family
(Sec. 122, LGC).
(g) Taxes on business enterprises certified to by
the Board of Investments as pioneer or non-
 Purple Notes
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;
Exception:
However, provinces are not barred from
levying amusement taxes even if
amusement taxes are a form of percentage
taxes. Section 133 (i) of the LGC prohibits
the levy of percentage taxes "except as
otherwise provided" by the LGC. Evidently,
Section 140 of the LGC carves a clear
exception to the general rule in Section 133
(i). Section 140 expressly allows for the
imposition by provinces of amusement taxes
on "the proprietors, lessees, or operators of
theaters, cinemas, concert halls, circuses,
boxing stadia, and other places of
amusement(Pelizloy Realty Corp. v. Province of
Benguet,G.R. No. 183137, April 10, 2013,penned
by J. Leonen)
 The limitation applies particularity to the
prohibition against municipalities and
municipal districts to impose ―any
percentage tax or other taxes in any form
based thereon nor impose taxes on articles
subject to specific tax except gasoline,
under the provisions of the NIRC‖. (Sec. 133,
LGC)
(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 the
LGC;
(k) Taxes on premiums paid by way of
reinsurance or retrocession;
269
Taxation Law
(l) 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;
 It has been the perception that local
governments are in good position to achieve
the end desired by the law-making body
because of their proximity to the situation
that can enable them to address that serious
concern better than the national
government. It may not be amiss to state,
nevertheless, that under Article 458 (a)[3-
VI] of the Local Government Code, the
power of LGUs to regulate the operation of
tricycles and to grant franchises for the
operation thereof is still subject to the
guidelines prescribed by the DOTC. In
compliance therewith, the Department of
Transportation and Communications
(―DOTC‖) issued ―Guidelines to Implement
the Devolution of LTFRBs Franchising
Authority over Tricycles-For-Hire to Local
Government units pursuant to the Local
Government Code.‖ Such as can be gleaned
from the explicit language of the statute, as
well as the corresponding guidelines issued
by DOTC, the newly delegated powers
pertain to the franchising and regulatory
powers theretofore exercised by the LTFRB
and not to the functions of the LTO relative
to the registration of motor vehicles and
issuance of licenses for the driving
thereof.(LTO vs. City of Butuan, G.R. No.
131512, January 20, 2000).
(m) Taxes, fees, or other charges on Philippine
products actually exported, except as
otherwise provided herein;
(Correlate with Sec. 143 (c) On
exporters, and on manufacturers,
millers, producers, wholesalers,
distributors, dealers or retailers of
essential commodities enumerated
hereunder at a rate not exceeding one-half
(1/2) of the rates prescribed under
subsections (a), (b) and (d) of this Section)
(n) Taxes, fees, or charges, on Countryside
and Barangay Business Enterprises and
cooperatives duly registered under R.A. No.
Bar Operations C ommissions 269
 Purple Notes
Taxation Law
6810 and R.A. No. 6938 otherwise known as
the ―Cooperative Code of the Philippines‖
respectively; and
(o) Taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities, and local government
units.
 The Authority should be classified as an
instrumentality of the national government
which is liable to pay taxes only with respect
to the portions of the property, the
beneficial use of which were vested in
private entities. When local governments
invoke the power to tax on national
government instrumentalities, such power is
construed strictly against local governments.
The rule is that a tax is never presumed and
there must be clear language in the law
imposing the tax. Any doubt whether a
person, article or activity is taxable is
resolved against taxation. This rule applies
with grater force when local governments
seek to tax national government
instrumentalities. (Philippine Fisheries Dev‘t
Authority vs. CA, G.R. No. 169836, July 31, 2007)
 The exercise of the taxing power of local
government units is subject to the limitations
enumerated in Section 133 of the Local
Government Code. Under Section 133(o) of
the Local Government Code, local
government units have no power to tax
instrumentalities of the national government
like the MIAA. (MIAA vs. City of Pasay G.R. No.
163072, April 2, 2009)
Collection of Business Tax
a) Tax period and manner of payment
Unless otherwise provided in the LGC, the tax
period of all local taxes, fees and charges shall
How imposed?
Respondent's computation of the surcharge, as
sustained by the trial court and the Court of
Appeals, varies the terms of the judgment
sought to be executed and contravenes Section
168 of the Local Government Code. There is
nothing in the Court of Appeals' decision that
270 Center for Legal Education and Research
be the calendar year. Such taxes,2018
fees and
charges may be paid in quarterly
installments. (Sec. 165, LGC)
b) Accrual of tax
Unless otherwise provided in the LGC, all local
taxes, fees, and charges shall accrue on the first
(1st) day of January of each year.
However, new taxes, fees or charges, or
changes in the rates thereof, shall accrue on the
first (1st) day of the quarter next following the
effectivity of the ordinance imposing such new
levies or rates. (Section 166, LGC)
c) Time of payment
Unless otherwise provided in the LGC, all local
taxes, fees, and charges shall be paid within the
first twenty (20) days of January or of each
subsequent quarter, as the case may be. The
sanggunian concerned may, for a justifiable
reason or cause, extend the time for payment of
such taxes, fees, or charges without surcharges
or penalties, but only for a period not exceeding
six (6) months. (Sec. 167, LGC)
d) Penalties on unpaid taxes, fees or
charges
1. Surcharge - not exceeding twenty-five
(25%) of the amount of taxes, fees or
charges not paid on time; and
2. Interest - at the rate not exceeding two
percent (2%) per month of the unpaid
taxes, fees or charges including surcharges,
until such amount is fully paid but in no case
shall the total interest on the unpaid amount
or portion thereof exceed thirty-six (36)
months. (Sec. 168, LGC)
would justify the interpretation that the
statutory penalty of 25% surcharge should be
charged yearly from due date until full payment.
If that was the intention of the Court of Appeals,
it should have so expressly stated in the
dispositive portion of its decision.
 Purple Notes
Taxation Law
Distinguish from penalties imposed for In case the examination herein authorized is
non – payment of national taxes made by a duly authorized deputy of the local
treasurer, the written authority of the deputy
BIR Local Tax concerned shall specifically state the name,
12% per ANNUM 2% per MONTH address, and business of the taxpayer whose
Maximum Period when Interest can be books, accounts, and pertinent records are to be
imposed examination and the procedure to be followed in
No maximum Only up to 36th month conducting the same.
Imposition of Compromise Penalty
Non payment shall also No imposition of For this purpose, the records of the revenue
make the taxpayer compromise
district office of the Bureau of Internal Revenue
liable for compromise
penalties shall be made available to the local treasurer,
Surcharge Imposed his deputy or duly authorized representative.
(Sec. 171, LGC)
Same rate of 25% of tax to be paid
The surcharge is a civil penalty imposed once for
e) Authority of treasurer in collection and late payment of a tax. Contrast this with the
inspection of books
succeeding provisions on interest, which was
imposable at the rate not exceeding 2% per
Collection:
month of the unpaid taxes until fully paid. The
All local taxes, fees, and charges shall be fact that the interest charge is made
collected by the provincial, city, municipal, or proportionate to the period of delay, whereas
barangay treasurer, or their duly authorized the surcharge is not, clearly reveals the
deputies legislative intent for the different modes in their
The provincial, city or municipal treasurer may application(National Power Corporation vs. City of
designate the barangay treasurer as his deputy Cabanatuan,G.R. No. 177332, October 01,
to collect local taxes, fees, or charges. 2014,penned by J. Leon

In case a bond is required for the purpose, the

provincial, city or municipal government shall 7. Requirements for a Valid Tax
pay the premiums thereon in addition to the Ordinance
premiums of bond that may be required under
the LGC. (Section 170, LGC) Requisites for substantive validity of an
ordinance:(GOD-PC)
Inspection of Books: 1. It must not contravene the
Constitution or any statute;
The provincial, city, municipal or barangay 2. It must not be unfair or oppressive;
treasurer may, by himself or through any of his 3. It must not be partial or
deputies duly authorized in writing, examine the discriminatory;
books, accounts, and other pertinent records of
4. It must not prohibit but may regulate
any person, partnership, corporation, or
association subject to local taxes, fees and trade;
charges in order to ascertain, assess, and collect 5. It must be general and consistent with
the correct amount of the tax, fee, or charge. public policy; and
Such examination shall be made during regular 6. It must not be unreasonable (Magtajas v.
business hours, only once for every tax period, Pryce Properties, G.R. No. 111097, July 20, 1994)
and shall be certified to by the examining Incentive or relief granted by any local
official. Such certificate shall be made of record government unit pursuant to the provisions of
in the books of accounts of the taxpayer the LGC shall be construed strictly against the
examined. person claiming it. (Section 5(b), LGC)

Procedure for the approval and effectivity

of tax ordinances
271
Bar Operations C ommissions 271
 Purple Notes
Taxation Law
1. Filing of proposal 2018
2. Publication or posting
3. Notification
4. Mandatory public hearing

No tax or ordinance or revenue shall be enacted

or approved in the absence of a public hearing.

No public hearing shall be required before the

enactment of a local tax ordinance levying the
basic real property tax(Art. 324,IRR of LGC)

5. Approval of tax ordinance and revenue

measure
6. Publication of approved tax ordinance
a. If the tax ordinance or revenue measure
falls under Article 280 of this Rule, the
gist of such tax ordinance or revenue
measure shall be published in a
newspaper of general circulation within
the province where the Sanggunian
concerned belongs. In the absence of (60-60-30-15-15 Rule)
any newspaper of general circulation
within the province, posting of such 1. After receipt of the notice of assessment
ordinance or measure shall be made in from the treasurer, the taxpayer may file a
accessible and conspicuous public places written protest within 60 days to contest the
in all municipalities and cities of the assessment, otherwise the same will be final
province to which the Sanggunian and executory;
enacting the ordinance or revenue
measure belongs. 2. The local treasurer shall decide the protest
within 60 days from its filing;
7. Furnishing of copies tax ordinance and  If protest is meritorious – treasurer shall
revenue to respective local treasurers
issue notice cancelling wholly or partially
concerned for public dissemination. (Art.
the assessment.
276,IRR of LGC)
 If not meritorious – treasurer shall deny
the protest with notice to the taxpayer.
8. Taxpayer‘s Remedies
 The protest may likewise be considered
denied if not acted upon within the 60-
a. Protest of assessment
day period.

3. The taxpayer shall have 30 days from the

receipt of denial or from the lapse of the 60-
day period to appeal with the court of
competent jurisdiction. Otherwise, the
assessment becomes conclusive and
unappealable. (Sec. 195, LGC)

Contents Notice of the Assessment

The notice of assessment, which stands as the

first instance the taxpayer is officially made
aware of the pending tax liability, should be
sufficiently informative to apprise the taxpayer

272 Center for Legal Education and Research

 Purple Notes
Taxation Law
the legal basis of the tax. Section 195 of the Form of Protest
Local Government Code does not go as far as to In a FAN: Taxpayer No form is required only
expressly require that the notice of assessment (TP) MUST indicate if a protest in written
specifically cite the provision of the ordinance the protest is either for form
REINVESTIGATION or
involved but it does require that it state the
RECONSIDERATION
nature of the tax, fee or charge, the amount of
deficiency, surcharges, interests and penalties. Also each finding must
be protested otherwise
However in this case, the Revenue Code any finding not protest
provides multiple provisions on business taxes, will be deemed
and at varying rates. Hence, we could admitted
appreciate the Corporation's confusion, as Period of filing of supplementary documents
expressed in its protest, as to the exact legal to support protest
basis for the tax. Reference to the local tax In case of a period of No requirement of filing
ordinance is vital, for the power of local REINVESTIGATION: A supplementary
TP shall submit documents
government units to impose local taxes is
supplementary
exercised through the appropriate ordinance documents within 60
enacted by the sanggunian, and not by the days from filing of
Local Government Code alone. What determines protest
tax liability is the tax ordinance, the Local Period to decide by the officer
Government Code being the enabling law for the In a FAN: the BIR has The local treasurer has
local legislative body. (Luz R. Yamane vs. BA 180 days to decide on 60 days to decide
Lepanto Condominium, G.R.154993,October 25,2005) the protest
Payment under protest NOT required Recourse incase of denial of proper officer
TP shall either within 30 Within 30 days from
Where an assessment is to be protested or days from receipt of receipt of denial TP
disputed, the taxpayer may proceed: denial: shall file an appeal with
(a) without payment, or 1. File a motion for the competent court of
reconsideration with the jurisdiction
(b) with payment.
CIR*
(City of Manila vs. Cosmos Bottling Corporation,G.R.
2.Elevate protest to the
No. 196681, June 27, 2018)
Court of Tax appeal
thru a petition for
The law does not prescribe any formal review
requirement to constitute a valid protest. To Recourse incase of inaction
constitute a valid protest, it is sufficient that it Upon the lapse of the Within 30 days from
contains the spontaneous declaration made 180 day period to receipt of denial TP
to acquire or keep some right or to prevent an decide,TP can either: shall file an appeal with
impending damage. Accordingly, a protest is 1. Wait for the decision the competent court of
valid so long as it states the taxpayer‘s objection of the CIR or his jurisdiction
to the assessment and the reasons therefor. representative; or
(China Banking Corporation vs. City Treasurer of 2.File a Petition for
Manila, G.R. No. 204117, July 1, 2015) Review to the CTA

Protest in a BIR Protest in b. Claim for refund of tax credit for

assessment assessment in a LGU erroneously or illegally collected tax, fee
for Local business or charge
tax
Governing Law No case or proceeding shall be maintained in
National Internal Local Government Code any court for the recovery of any tax, fee, or
Revenue Code charge erroneously or illegally collected until a
Period to file protest written claim for refund or credit has been filed
From date of receipt of From date of receipt of with the local treasurer. No case or proceeding
Final Assessment Notice Notice of Assessment: shall be entertained in any court after the
(FAN): 30 days to file 60 days to file
expiration of two (2) years from the date of the
273
Bar Operations C ommissions 273
 Purple Notes
Taxation Law
payment of such tax, fee, or charge, or from the exempt status is useless unless2018the City is
date the taxpayer is entitled to a refund or enjoined from enforcing its demand.(City of
credit. (Sec. 196, LGC) Lapu-Lapu v. Phil. Economic Zone Authority, G.R.
No. 184203,November 26,2014,penned by J.
What is required for a claim for an Leonen)
administrative refund:
Distinguish the remedies provided in Sec.
1. Written Claim filed with; 195 vs. Sec. 196 as provided in LGC
2. Filed within 2 years from:
a. Date of payment; or Section 195 Section 196
b. Date when taxpayer is entitled to a Remedy covered
refund or credit. (INGLES, Tax made less Protest of an Claim for refund of tax
taxing, 2018, p. 541) assessment credit for erroneously or
illegally collected tax, fee
To be entitled to a refund under Section 196 of or charge
the Local Government Code, the taxpayer must Precursory event
comply with the following procedural Receipt of an Erroneous payment or tax
requirements: first, file a written claim for assessment illegally collected from
taxpayer
refund or credit with the local treasurer; and
Is assessment required
second, file a judicial case for refund within two
Yes Not required, only the fact
(2) years from the payment of the tax, fee, or of payment
charge, or from the date when the taxpayer is Period and reckoning point of filing
entitled to a refund or credit(International administrative claim
Container Services, Inc. vs. City of Manila, G.R. No. 60 days from the date 2 years from date the tax
185622, October 17, 2018,penned by J. Leonen) the assessment was was erroneously or
received illegally collected.
Injunction available in LGU assessments Period to decide by Local Treasurer
60 days No deadline provided by
Unlike the National Internal Revenue Code, the LGC
Local Tax Code does not contain any specific (International Container Services, Inc. vs. City of
provision prohibiting courts from enjoining the Manila, G.R. No. 185622, October 17, 2018, penned
collection of local taxes. Such statutory lapse or by J. Leonen)
intent, however it may be viewed, may have
allowed preliminary injunction where local taxes Can a taxpayer, in filing a protest assailing
are involved but cannot negate the procedural the validity of the assessment, at the same
rules and requirements under Rule 58. (Angeles time pray for a refund in that same protest
City vs. Angeles Electric Corporation, G.R. No. letter?
166134. June 29, 2010)
Yes.Where payment was made, the taxpayer
 In the present case, the PEZA did not avail may thereafter maintain an action in court
itself of any of the remedies against a notice questioning the validity and correctness of the
assessment (Section 195, LGC) and at the
of assessment. A petition for declaratory
same time seeking a refund of the taxes.
relief is not the proper remedy once a notice In truth, it would be illogical for the taxpayer to
of assessment was already issued .Instead only seek a reversal of the assessment without
of a petition for declaratory relief, the PEZA praying for the refund of taxes. Once the
should have directly resorted to a judicial assessment is set aside by the court, it follows
action. The PEZA should have filed a as a matter of course that all taxes paid under
complaint for injunction, the ―appropriate the erroneous or invalid assessment are
refunded to the taxpayer.
ordinary civil action‖ to enjoin the City from
enforcing its demand and collecting the It must be understood, however, that in such
assessed taxes from the PEZA. After all, a latter case, the suit for refund is
declaratory judgment as to the PEZA‘s tax- conditioned on the prior filing of a written

274 Center for Legal Education and Research

 Purple Notes
claim for refund or credit with the local
treasurer. In this instance, what may be
considered as the administrative claim for refund
is the letter-protest submitted to the treasurer.
Where the taxpayer had paid the assessment, it
can be expected that in the same letter-protest,
he would also pray that the taxes paid should be
refunded to him. As previously mentioned,
there is really no particular form or style
necessary for the protest of an assessment
or claim of refund of taxes. What is
material is the substance of the letter
submitted to the local treasurer.
Equally important is the institution of the
judicial action for refund within thirty (30)
days from the denial of or inaction on the
letter-protest or claim, not any time later,
even if within two (2) years from the date of
payment (as expressly stated in Section 196).
Notice that the filing of such judicial claim for
refund after questioning the assessment is
within the two-year prescriptive period specified
in Section 196. Note too that the filing date of
such judicial action necessarily falls on the
beginning portion of the two-year period from
the date of payment. Even though the suit is
seemingly grounded on Section 196, the
taxpayer could not avail of the full extent
of the two-year period within which to
initiate the action in court.
Simply put, there are two conditions that must
be satisfied in order to successfully prosecute an
action for refund in case the taxpayer had
received an assessment.
One, pay the tax and administratively assail
within 60 days the assessment before the local
treasurer, whether in a letter-protest or in a
claim for refund. Two, bring an action in court
within thirty (30) days from decision or inaction
by the local treasurer, whether such action s
denominated as an appeal from assessment
and/or claim for refund of erroneously or
illegally collected tax.
To reiterate, Cosmos, after it had protested and
paid the assessed tax, is permitted by law to
seek a refund having fully satisfied the twin
conditions for prosecuting an action for refund
before the court. (City of Manila vs. Cosmos Bottling
Corporation,G.R. No. 196681, June 27, 2018)
275
Taxation Law
While the non-filing of a written claim for refund
may not be a jurisdictional requirement, it
results to non-exhaustion of administrative
remedies which renders the action premature
such that ―the claimed cause of action is not ripe
for judicial determination. (China Banking
Corporation vs. The Treasurer of the City of Manila,
CTA EB No. 525, February 21, 2011)
Effect of granting a claim for refund
The tax credit granted a taxpayer shall not be
refundable in cash but shall only be applied to
futuretax obligations of the same taxpayer for
the same business.
If a taxpayer has paid in full the tax duefor
the entire year and he shall have no other tax
obligation payable to the LGU concerned during
the year, his tax credits, if any, shall be
applied in full during the first quarter of
the next calendar year onthe tax due from
him for the same business of said calendar year.
Exception:
Any unapplied balance of the tax credit shall
be refunded in cash in the event that he
terminates operation of the business involved
within the locality. (Sec. 286, IRR of LGC)
Enforcement of the grant of refund
Instead of moving for the issuance of a writ of
execution relative to the aforesaid Decision,
petitioner should have merely requested for the
approval of the City of Manila in implementing
the tax refund or tax credit, whichever is
appropriate. In other words, no writ was
necessary to cause the execution thereof,
since the implementation of the tax refund will
effectively be a return of funds by the City of
Manila in favor of petitioner while a tax credit
will merely serve as a deduction of petitioner‘s
tax liabilities in the future. (Coca – cola bottlers vs.
City of Manila, G.R. 197561, April 7,2014)
c. Action before the Secretary of Justice
[T]he law requires that the dissatisfied taxpayer
who questions the validity or legality of a tax
ordinance must file his appeal to the Secretary
of Justice, within 30 days from effectivity
thereof. In case the Secretary decides the
appeal, a period also of 30 days is allowed for
an aggrieved party to go to court. But if the
Bar Operations C ommissions 275
 Purple Notes
Taxation Law
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 seeking redress in a
competent court. Such statutory periods are set
to prevent delays as well as enhance the orderly
and speedy discharge of judicial functions. For
this reason the courts construe these provisions
of statutes as mandatory(Aala vs. Uy,G.R. No.
202781, January 10, 2017,penned by J. Leonen)
Procedure:
1. Appeal within 30 days from effectivity of the
ordinance to the Secretary of Justice
2. Secretary must render a decision within 60
days from receipt of appeal
3. Within 30 days from the lapse of the 60
days without any action from the Secretary
of Justice, or within 30 days from receipt of
decision, the aggrieved taxpayer may resort
to court(Sec. 187,LGC)
RTC
Appeal within 30 days
from denial or after 60
days to decide has lapse
DOJ Secretary
(60 days to decide)
Appeal within 30 days
Date of Effectivity
 When disputing an ordinance, the appeal to
the DOJ is MANDATORY, the RTC will
dismiss the case. (Jardine Davies Insurance
Brokers vs. Aliposa, G.R. 118900, February
27,2003)
Exception: In pure questions of law, the
appeal to the DOJ is NOT MANDATORY.
It can brought to straight to the RTC. (Alta
Vista Golf and Country Club vs. Cebu, G.R. No.
180235, January 20,2016)
276 Center for Legal Education and Research
 A taxpayer may file a complaint 2018
assailing the
validity of the ordinance praying for a
refund of its perceived overpayments
without first filing a protest to the payment
of taxed due under the ordinance (Jardine
Davies Insurance Brokers vs. Aliposa, G.R.
118900, February 27,2003).
 Secretary of Justice can only review the
constitutionality or legality of the tax
ordinance, and, if warranted, to revoke it on
either or both of these grounds and there is
no need for a written protest when disputing
an ordinance (Ingles, p. 537)
9. Assessment and collection of local
taxes
a. Remedies by the LGU for Collection
of Revenues
Local government‘s lien for delinquent
taxes, fees or charges
Local taxes, fees, charges and other revenues
constitute a lien, superior to all liens, charges or
encumbrances in favor of any person,
enforceable by appropriate administrative or
judicial action, not only upon any property or
rights therein which may be subject to the lien
but also upon property used in business,
occupation, practice of profession or calling, or
exercise of privilege with respect to which the
lien is imposed.
Extinguishment of lien
The lien may only be extinguished upon full
payment of the delinquent local taxes, fees and
charges including related surcharges and
interest. (Sec. 173, LGC)
(1) Civil remedies, in
general(Sec.174,LGC)
The civil remedies for the collection of local
taxes, fees, or charges, and related surcharges
and interest resulting from delinquency shall be:
1. Administrative Action thru:
i. Distraint of Personal Property (Sec. 175,
LGC);
ii. Levy upon real property (Sec.176, LGC);
and
 Purple Notes
iii. Compromise (Sec.148[b], LGC)
2. Judicial Action
1. Administrative action
By administrative action through:
i. 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
ii. By levy upon real property and interest
in or rights to real property;
Procedure for administrative action
(i) Distraint of personal property
What may be distrained:
1. Distraint of goods;
2. Chattels, or effects, and
3. Other personal property of whatever
character including:
a. stocks and other securities;
b. debts, credits, bank accounts; and
c. interest in and rights to personal
property(Sec.174[a],LGC)
How is distraint done?
1. Seizure (Sec.175[a], LGC)
When does the right of seizure accrue to
the Local Government?
Upon failure of the person owing any local tax,
fee, or charge to pay the same at the time
required.
Who should notify the taxpayer and how is
notice made?
The local treasurer or his deputy may notify the
taxpayer upon written notice.
What may be seized?
Seize or confiscate any:
a. Personal property belonging to that person;
or
b. Any personal property subject to the lien in
sufficient quantity
277
Taxation Law
What needs to be satisfied?
To satisfy the tax, fee, or charge in question,
together with any increment thereto incident to
delinquency and the expenses of seizure.
What will the local treasurer or his
deputy?
In such case, the local treasurer or his deputy
shall issue:a duly authenticated certificate
based upon the records of his office
What will the authenticated certificate
contain?
Showing the fact of:
1. delinquency and
2. the amounts of the tax, fee, or charge and
penalty due.
What is the purpose of the certificate?
Such certificate shall serve as sufficient
warrant for the distraint of personal property
aforementioned, subject to the taxpayer‘s right
to claim exemption under the provisions of
existing laws.
What will be done to the distrained
properties?
Distrained personal property shall be sold at
public auction in the manner herein provided
for.
2. Accounting of distrained goods.
(Sec.175[b], LGC)
What will the officer executing the
distraint do?
The officer executing the distraint shall make or
cause to be made an account of the goods,
chattels or effects distrained.
How many copies and for whom will it be?
A copy of which signed by himself shall be left
either with the:
(a) Owner or
(b) Person from whose possession the goods,
chattels or effects are taken, or
(c) At the dwelling or place of business of that
person and with someone of suitable age
and discretion
What will it contain?
A statement of the sum demanded and a note of
the time and place of sale.
Bar Operations C ommissions 277
 Purple Notes
Taxation Law
3. Publication(Sec.175[c], LGC)
How will the auction be publicized?
The officer shall forthwith cause a 6. Disposition
notification to be exhibited in :
Where will the notice be posted?
(a) Not less than three (3) public and
conspicuous places in the territory of the
local government unit where the distraint is
made, specifying the time and place of sale,
and the articles distrained.
(b) One place for the posting of the notice shall
be at the office of the chief executive of the
local government unit in which the property
is distrained.
Date of auction
a. The time of sale shall not be less than
twenty (20) days after notice to the
owner or possessor of the property as above
specified; and
b. the publication or posting of the notice.
4. Sale at Public Auction(Sec.175[d][e],
LGC)
What will be the effect of the payment
of the delinquent if made before the
sale?
If at any time prior to the consummation of
the sale, all the proper charges are paid to
the officer conducting the sale, the goods or
effects distrained shall be restored to
the owner.
What happens if the property is not
sold within 120 days?
Should the property distrained be not
disposed of within one hundred and twenty
(120) days from the date of distraint,
the same shall be considered as sold to
the local government unit concerned for
the amount of the assessment made
thereon by the Committee on Appraisal and
to the extent of the same amount, the tax
delinquencies shall be cancelled.
5. Report to Local Chief
Executive(Sec.175[d], LGC)
To whom shall the report be made?
Within five (5) days after the sale, the local
treasurer shall make a report of the
278 Center for Legal Education and Research
proceedings in writing to the 2018
local chief
executive concerned.
of proceeds(Sec.175[f],
LGC)
How will the proceeds be applied?
The proceeds of the sale shall be applied to
satisfy the tax, including the surcharges,
interest, and other penalties incident to
delinquency, and the expenses of the
distraint and sale.
What happens if there was a balance
after settling all dues?
The balance over and above what is
required to pay the entire claim shall be
returned to the owner of the property
sold.
What are the expenses that could be
charged?
The expenses chargeable upon the 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 officer or his deputy.
What if the proceeds are insufficient to
satisfy the claim of the local
government?
Where the proceeds of the sale are
insufficient to satisfy the claim, other
property may, in like manner, be
distrained until the full amount due,
including all expenses, is collected.
(ii) Levy of real property, procedure
1. Levy (Sec. 176, LGC)
When may levy of real property take
place?
After the expiration of the time required to pay
the delinquent tax, fee, or charge,
Is it required that a distrained be made
first before levying the real property?
No. Real property may be levied on before,
simultaneously, or after the distraint of personal
property belonging to the delinquent taxpayer.
 Purple Notes
What will be issued by the provincial, city
or municipal treasurer?
The provincial, city or municipal treasurer, as
the case may be, shall prepare a duly
authenticated certificate showing
What will the authenticated certificate
contain?
A duly authenticated certificate showing:
(a) the name of the taxpayer
(b) and the amount of the tax, fee, or charge,
and penalty due from him.
Said certificate shall operate with the force of a
legal execution throughout the Philippines.
Levy shall be effected by writing upon said
certificate the description of the property
upon which levy is made.
Who shall be notified?
At property the same time, written notice of the
levy shall be mailed to or served upon the
a. assessor and the Register of the Deeds
of the province or city where the property is
located who shall annotate the levy:
i. On the tax declaration; and
ii. Certificate of title of the property,
respectively, and
b. the delinquent taxpayer or, if he be
absent from the Philippines:
i. To his agent or the manager of the
business in respect to which the liability
arose; or
ii. If there be none, to the occupant of
the property in question.
Prior Distraint of Real Property insufficient
In case the 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 delinquency, the provincial, city or
municipal treasurer, as the case may be, shall
within thirty (30) days after execution of the
distraint, proceed with the levy on the
taxpayer‘s real property.
Report to Sanggunian
A report on any levy shall, within ten (10) days
after receipt of the warrant, be submitted by the
levying officer to the sanggunian concerned.
279
Taxation Law
2. Advertisement (Sec.178,LGC)
Periods to consider in advertising the
auction of real property ?
Within thirty (30) days after the levy, the local
treasurer shall proceed to publicly advertise for
sale or auction the property or a usable portion
thereof as may be necessary to satisfy the claim
and cost of sale;
How long would be the advertisement
cover?
Advertisement shall cover a period of at least
thirty (30) days.
Where will the notice be posted?
It shall be effected by posting a notice:
a. At the main entrance of the municipal
building or city hall; and
b. In a public and conspicuous place in the
barangay where the real property is located.
Publication
By publication once a week for three (3)
weeks in a newspaper of general circulation in
the province, city or municipality where the
property is located.
What will the advertisement contain?
The advertisement shall contain:
a. the amount of taxes, fees or charges, and
penalties due thereon, and
b. the time and place of sale,
c. the name of the taxpayer against whom the
taxes, fees, or charges are levied, and
d. a short description of the property to be
sold.
3. Public Sale
Stay of proceedings of the sale
At any time before the date fixed for the sale,
the taxpayer may stay the proceedings by
paying the taxes, fees, charges, penalties and
interests.
Auction proper
If he fails to settle thetaxes, fees, charges,
penalties and interests before the sale , the sale
shall proceed.
Where will it be held?
Shall be heldeither:
Bar Operations C ommissions 279
 Purple Notes
Taxation Law
a. At the main entrance of the provincial, city
or municipal building; or
b. On the property to be sold; or
c. At any other place as determined by the
local treasurer conducting the sale and
specified in the notice of sale.(Sec.178, LGC)
How made?
Upon payment to the local treasurer of the total
amount of taxes, fees, or charges, and related
surcharges, interests or penalties from the date
of delinquency to the date of sale, plus interest
of not more than two percent (2%) per month
on the purchase price from the date of purchase
to the date of redemption.(Sec.179, LGC)
4. Report to Sanggunian
To whom shall be the report be made?
Within thirty (30) days after the sale, the local
treasurer or his deputy shall make a report of
the sale to the sanggunian concerned, and
which shall form part of his records. (Sec.178
par.2, LGC)
5. Delivery of the Certificate of Sale
After consultation with the sanggunian, the local
treasurer shall make and deliver to the
purchaser a certificate of sale, 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, fees,
charges, and related surcharges, interests, or
penalties.
Owner not deprived
The owner shall not, however, be deprived of
the possession of said property and shall be
entitled to the rentals and other income
thereof until the expiration of the time allowed
for its redemption.
Period of Redemption by
owner/delinquent taxpayer
Within one (1) year from the date of sale, the
delinquent taxpayer or his representative shall
have the right to redeem the property upon
payment to the local treasurer of the total
amount of taxes, fees, or charges, and related
surcharges, interests or penalties from the date
of delinquency to the date of sale.
280 Center for Legal Education and Research
Interest on delinquency sale 2018
Interest of not more than two percent (2%) per
month on the purchase price from the date of
purchase to the date of redemption.
Surrender of certificate of sale in case of
redemption
The provincial, city or municipal treasurer or his
deputy, upon surrender by the purchaser of
the certificate of sale previously issued to
him, shall forthwith return to the latter the
entire purchase price paid by him plus the
interest of not more than two percent
(2%) per month herein provided for, the
portion of the cost of sale and other legitimate
expenses incurred by him, and said property
thereafter shall be free from the lien of such
taxes, fees, or charges, related surcharges,
interests, and penalties.
Effect of redemption
Such payment shall invalidate the certificate
of sale issued to the purchaser and the owner
shall be entitled to acertificate of
redemption from the provincial, city or
municipal treasurer or his deputy.
6. Disposition of the Proceeds
Any excess in the proceeds of the sale over the
claim and cost of sales shall be turned over to
the owner of the property.(Sec.178,LGC)
7. Final Deed of Purchase
In case the taxpayer fails to redeem the
property as provided herein, the local treasurer
shall execute a deed conveying to the
purchaser so much of the property as has been
sold, free from liens of any taxes, fees, charges,
related surcharges, interests, and penalties. The
deed shall succinctly recite all the proceedings
upon which the validity of the sale
depends.(Sec.179,LGC)
Purchase of Property By the Local
Government Units for Want of Bidder
In case there is no bidder for the real property
advertised for sale as provided herein, or if the
highest bid is for an amount insufficient to
pay the taxes, fees, or charges, related
surcharges, interests, penalties and costs, the
local treasurer conducting the sale shall
purchase the property in behalf of the
 Purple Notes
Taxation Law
local government unit concerned to satisfy select, of a value not exceeding Ten
the claim and within two (2) days thereafter thousand pesos (P10,000.00);
shall make a report of his proceedings which 5. Provisions, including crops, actually
shall be reflected upon the records of his office. provided for individual or family use
sufficient for four (4) months;
Duty of Registrar of Deeds if LGU bought 6. The professional libraries of doctors,
the levied property engineers, lawyers and judges;
It shall be the duty of the Registrar of Deeds 7. One fishing boat and net, not exceeding the
concerned upon registration with his office of total value of Ten thousand pesos
any such declaration of forfeiture to (P10,000.00), by the lawful use of which a
transfer the title of the forfeited property fisherman earns his livelihood; and
to the local government unit concerned 8. Any material or article forming part of a
WITHOUT the necessity of an order from a house or improvement of any real property.
competent court.
Distinguish Distraint and Levy:
Resale of Real Estate Taken for Taxes,
Fees, or Charges. – Distraint Levy
The sanggunian concerned may, by Property being seized/levied
ordinance duly approved, and upon notice of Personal Real
not less than twenty (20) days, sell and Reporting of sale: To whom made
dispose of the real property acquired under the Local Chief Executive Sanggunian
preceding section at public auction. Right of Redemption
The proceeds of the sale shall accrue to the No right of With right to redeem
general fund of the local government unit redemption within 1 year from the
date of sale
concerned.
Notice made to
Owner/Delinquent tax Assessor
Further distraint or levy payer or possessor of Owner of the property or
The remedies by distraint and levy may be personal property in absence in the
repeated if necessary until the full amount due, Philippines:
including all expenses, is collected. (Sec. 184, 1. His agent
LGC) 2.Occupant of the
property
Exemption of personal property from
distraint or levy
The following property shall be exempt from Penalty on local treasurer for failure to
distraint and levy, attachment or execution issue and execute warrant of distraint or
thereof for delinquency in the payment of any levy
local tax, fee or charge, including the related Without prejudice to criminal prosecution under
surcharge and interest: the Revised Penal Code and other applicable
laws, any local treasurer who fails to issue or
1. Tools and implements necessarily used by execute the warrant of distraint or levy after the
the delinquent taxpayer in his trade or expiration of the time prescribed, or who is
employment; found guilty of abusing the exercise thereof by
2. One horse, cow, carabao, or other breast of complement authority shall be automatically
burden, such as the delinquent taxpayer dismissed from the service after due notice and
may select, and necessarily used by him in hearing.(Section 177, LGC)
his ordinary occupation;
3. His necessary clothing, and that of all his (iii)Compromise
family;
4. Household furniture and utensils necessary Only insofar relation to Sec. 148(b) of the LGC
for housekeeping and used for that purpose with regard to, fraudulent practices and unlawful
by the delinquent taxpayer, such as he may possession or use of instruments of weights and
measures and prescribe the criminal penalty
281
Bar Operations C ommissions 281
 Purple Notes
Taxation Law
therefor in accordance with the provisions of this 2018
Code. Provided, however, That the sanggunian Distinguish with period of assessment of
concerned may authorize the municipal national taxes:
treasurer to settle an offense not involving the
commission of fraud before a case therefor is NIRC LGC
filed in court, upon payment of a compromise Period to assess (Ordinary)
penalty of not less than Two hundred pesos 3 years from the date of 5 years from the date
filing they become due
(P200.00).
Waiver of Prescription
Allowed Not allowed
(2) Judicial action
As compared to periods to assess national taxes,
Procedure for judicial action
the period is only 3 years but can be extended
virtue of a written waiver executed by the
The local government unit concerned may
taxpayer.(Sec.222[b], NIRC)
enforce the collection of delinquent taxes, fees,
charges or other revenues by civil action in any
The LGC did not provide for such equivalent
court of competent jurisdiction. The civil action
provision as can be seen in Section 195 of the
shall be filed by the local treasurer within the
LGC.
period prescribed in Section 194 of the LGC.
(Sec. 183, LGC)
Period of Collection: 5 years from date of
Where will the judicial action be filed? assessment by administrative or judicial action.

Suspension of Periods:(PRO)
Principal amount of taxes,
fees, exclusive of charges Court The running of the periods of prescription
and penalties provided in the preceding paragraphs shall be
Less than 300,000 if outside suspended for the time during which:
manila or less than 400,000 if MTC
within Metro Manila 1. The treasurer is legally prevented from
More than 300,000 if outside making the assessment of collection;
manila or more than 400,000 if RTC 2. The taxpayer requests for a
within Metro Manila reinvestigation and executes a waiver in
Above Php 1M CTA Division writing before expiration of the period within
which to assess or collect; and
Can the local government simultaneously 3. The taxpayer is out of the country or
avail of the administrative and judicial otherwise cannot be located. (Sec. 194[d],
remedies? LGC)
Yes. Either of these remedies or all may be
pursued concurrently or simultaneously at the B. REAL PROPERTY TAXATION
discretion of the local government unit
concerned(Sec.174,LGC) Preliminaries

b. Prescriptive Period Distinguish Local Taxation against

Real Property Taxation
Period of Assessment: Local taxes, fees or
charges shall be assessed within 5 years from Local Tax Real property Tax
the date they become due. No action for the Subject being Taxed
collection of such shall be instituted after the Tax on Businesses or Tax on Real Property
expiration of such period. occupation

Except: In case of fraud or intent to evade 1. Fundamental Principles (C-BLUE)

payment of taxes, fees or charges, the same
may be assessed within 10 years. (Sec. 194[a] a) All real property, whether taxable or
and [b]) exempt, shall be appraised at the

282 Center for Legal Education and Research

 Purple Notes
CURRENT AND FAIR MARKET
VALUE prevailing in the locality where
the property is situated. (Sec. 201, LGC)
b) Real property shall be classified, valued
and assessed on the basis of its
actual use regardless of where located,
whoever owns it, and whoever uses it.
(Sec. 212 and 217, LGC)
 Actual use – refers to the purpose for
which the property is principally or
predominantly utilized by the person in
possession thereof. (Sec. 199(b), LGC)
 ―Usage‖ means direct, immediate and
actual application of the property(MCLAA
vs. Marcos G.R. No. 120082, September 11,
1996)
c) The appraisal, assessment, levy and
collection of real property tax shall not be
let to any private person
d) Uniform classification within each local
government unit shall be observed
e) Equitable appraisal and assessment are
required. (Sec. 197, LGC)
Valuation of Real Property
 Fair market value is the amount which a
purchaser willing but not compelled to buy
would pay an owner of the property, and
the latter willing but not compelled to sell
would accept as the consideration or price
therefor. (Sec. 199 (L), LGC)
 Appraisal and Assessment of Real
Property Tax
Section 5 of PD 464 provides unequivocally
that "all real property, whether taxable or
exempt, shall be appraised at the current
and fair market value prevailing in the
locality where the property is situated."
Contrary to petitioner's contention,
acquisition cost cannot be and is not the
sole basis of the current and fair market
value of a property. The current value of like
properties and their actual or potential uses,
among others, are also considered (Sesbreño
vs. CBAA, G.R. No. 106588, March 24, 1997)
283
Taxation Law
Declaration of real property
The duty of the owner, persons administering
real property including improvements therein or
their duly authorized representative are required
to prepare and file with the provincial, city or
municipal assessor:
(i) a sworn statement declaring the true value
of their property, whether previously
declared or undeclared, taxable or exempt,
(ii) which shall be the current and fair market
value of the property, as determined by the
declarant.
(iii) Such declaration shall contain a description
of the property sufficient in detail to enable
the assessor or his deputy to identify the
same for assessment purposes.
(iv) The sworn declaration of real property
herein referred to shall be filed with the
assessor concerned once every three (3)
years during the period from January 1 to
June 30 (Sec. 202, LGC)
Listing of real property in assessment rolls
a. In every province and city, including the
municipalities within the Metropolitan Manila
Area, there shall be prepared and
maintained by the provincial, city or
municipal assessor an assessment roll
wherein shall be listed all real property,
whether taxable or exempt, located within
the territorial jurisdiction of the local
government unit concerned. Real property
shall be listed, valued and assessed in the
name of the owner or administrator, or
anyone having legal interest in the property.
b. The undivided real property of a deceased
person may be listed, valued and assessed
in the name of the estate or of the heirs and
devisees without designating them
individually; and undivided real property
other than that owned by a deceased may
be listed, valued and assessed in the name
of one or more co-owners: Provided,
however, that such heir, devisee, or co-
owner shall be liable severally and
proportionately for all obligations imposed
by this Title and the payment of the real
property tax with respect to the undivided
property.
Bar Operations C ommissions 283
 Purple Notes
Taxation Law
c. The real property of a corporation,
partnership, or association shall be listed,
valued and assessed in the same manner as
that of an individual.
d. Real property owned by the Republic of the
Philippines, its instrumentalities and political
subdivisions, the beneficial use of which has
been granted, for consideration or
otherwise, to a taxable person, shall be
listed, valued and assessed in the name of
the possessor, grantee or of the public
entity if such property has been acquired or
held for resale or lease. (Sec. 205, LGC)
2. Nature
Definition of Real Property
The LGC does not carry a definition of real
property. The Supreme Court however in
several decisions suggested that in
understanding what ―real property‖ is refence
may be made to Art. 415 of the Civil Code.
(ABAN, Law of Basic Taxation in the Philippines,
Revised 2011 edition, pp.444-445.)
Moreover, Article 415 (9) of the New Civil Code
provides that "[d]ocks and structures which,
though floating, are intended by their nature and
object to remain at a fixed place on a river, lake,
or coast" are considered immovable property.
Thus, power barges are categorized as
immovable property by destination, being in the
nature of machinery and other implements
intended by the owner for an industry or work
which may be carried on in a building or on a
piece of land and which tend directly to meet the
needs of said industry or work. (FELS, Energy
Inc., v. Province of Batangas and Office of the
Provincial Assessor of Batangas,G.R. No. 168557,
February 16, 2007)
What is real property tax?
Real property taxes are annual taxes levied on
real property such as lands, buildings,
machinery, and other improvements not
otherwise specifically exempted under the Local
Government Code. Real property taxes are ad
valorem, with the amount charged based on a
fixed proportion of the value of the
property.(City of Lapu-Lapu v. Phil. Economic Zone
284 Center for Legal Education and Research
Authority, G.R. No. 184203, 2018
November
26,2014,penned by J. Leonen)
Characteristics of Real Property Tax
(PASED2)
1. Direct tax on the ownership or use of real
property
2. Ad valorem tax. The value is based on the
tax base.
3. Proportionate – the tax is calculated on
the basis of a certain percentage of the
value assessed
4. It creates a single, indivisible obligation
5. It attaches on the property (i.e. lien) and is
enforceable against it.
6. With respect to LGUs, it is levied thru a
delegated power (ABAN, Law of Basic
Taxation in the Philippines)
Who should be liable to the real property
tax?
a. Owner
The liability for taxes generally rests on the
owner of the real property at the time the
tax accrues. This is a necessary
consequence that proceeds from the fact of
ownership.
b. Person who has the beneficial use.
The entity with the beneficial use of the real
property, such as the tax on property owned
by the government but leased to private
persons or entities, or when the tax
assessment is made on the basis of the
actual use of the property. In either case,
the unpaid realty tax attaches to the
property but is directly chargeable against
the taxable person who has actual and
beneficial use and possession of the
property regardless of whether or not that
person is the owner.(National Power
Corporation vs. Province of Quezon and
Municipality of Pagbilao, G.R. No. 171586, July
15, 2009)
If the owner and the possessor of the real
property are two different persons, who
will pay the real property tax?
 Unpaid realty taxes attach to the property
and are chargeable against the person who
 Purple Notes
had actual or beneficial use and possession
of it regardless of whether or not he is the
owner.
To impose the real property tax on the
subsequent owner which was neither the
owner nor the beneficial user of the
property during the designated periods
would not only be contrary to law but also
unjust.(Estate of Lim vs. City of Manila, G.R. No.
90639, February 21, 1990)
c. Vendee
In Baguio case, the assumption by the
vendee of the liability for real estate taxes
prospectively due was in harmony with the
tax policy that the user of the property
bears the tax. (City of Baguio vs. Busuego, G.R.
No. L-29772, September 18, 1980)
In Estate of Lim case, the interpretation that
the [vendee] assumed the liability for
overdue real estate taxes for the periods
prior to the contract of sale is incongruent
with the said policy because there was no
immediate transfer of possession of the
properties previous to full payment of the
repurchase.(Estate of Lim vs. City of Manila,
G.R. No. 90639, February 21, 1990)
Assumption of liability without any
transfer of title nor beneficial use of the
property
In the Baguio and Limcases, the vendors still
retained ownership, and the effectiveness of the
tax liabilities assumed by the vendees turned on
the possession and use of the property subject
to tax. In other words, the contractual
assumption of liability was supplemented by an
interest that the party assuming liability had on
the property taxed. In the present case, NPC is
neither the owner nor the possessor or user of
the property taxed. No interest on its part thus
justifies any tax liability on its part other than its
voluntary contractual undertaking. Only Mirant
as the contractual obligor, not the local
government unit, can enforce the tax liability
that NPC contractually assumed (National Power
Corporation vs. Province of Quezon and Municipality
of Pagbilao, G.R. No. 171586 dated July 15, 2009).
3. Imposition of real property tax
285
Taxation Law
a. Power to levy real property taxes
Who may levy?
The following may levy real property tax:
(1) a province or
(2) city or
(3) a municipality within the Metropolitan
Manila Area. (Sec. 232, LGC)
What are the properties covered by real
property tax?
The following shall be the coverage of
imposition by a province, or a city or
municipality within Metro Manila:(LBM -O)
(1) Land;
(2) Building;
(3)Machinery; and
(4) Other improvements not specifically
exempted (Sec. 232, LGC)
Rates of imposition
The rates shall be as follows:
1. Province: not exceeding one percent (1%)
of the assessed value of real property; and
2. City or municipality within Metro
Manila: not exceeding two percent (2%) of
the assessed value of real property. (Sec.
233, LGC)
Personal Properties taxed as real property
It is undeniable that the parties to a contract
may by agreement treat as personal property
that which by nature would be real property; and
it is a familiar phenomenon to see things classed
as real property for purposes of taxation.
(Standard Oil Co. of New York v. Joaquin
Jaramillo,G.R. No. L-20329, March 16, 1923)
Real property tax on machineries
Machinery Defined
Embraces machines, equipment, mechanical
contrivances, instruments, appliances or
apparatus which may or may not be attached,
permanently or temporarily, to the real property.
It includes the physical facilities for production,
the installations and appurtenant service
facilities, those which are mobile, self-powered
or self-propelled, and those not permanently
attached to the real property which are actually,
directly, and exclusively used to meet the needs
Bar Operations C ommissions 285
 Purple Notes
Taxation Law
of the particular industry, business or activity
and which by their very nature and purpose are
designed for, or necessary to its manufacturing,
mining, logging, commercial, industrial or
agricultural purposes(Section 199[o], LGC)
The Court reiterates that the machinery subject
to real property tax under the Local Government
Code ―may or may not be attached, permanently
or temporarily to the real property;‖ and the
physical facilities for production, installations,
and appurtenant service facilities, those which
are mobile, self- powered or self-propelled, or
are not permanently attached must:
(a) be actually, directly and exclusively used
to meet the needs of the particular industry,
business, or activity; and
(b) by their very nature and purpose, be
designed for, or necessary for
manufacturing, mining, logging, commercial,
industrial, or agricultural purposes. (Manila
Electric Company vs. The City Assessor and City
Treasurer of Lucena City, G.R. No. 166102,
August 5, 2015)
 The underground tanks although installed
by the lessee, Shell and Caltex, are taxable
as necessary fixtures of the gasoline station
without which the gasoline station would not
be operational.(Caltex Phils. Inc. vs. CBAA, G.R.
No. L-50466, May 31, 1982)
 While the two storage tanks are not
embedded in the land, they may,
nevertheless, be considered as
improvements on the land, enhancing its
utility and rendering it useful to the oil
industry. It is undeniable that the two tanks
have been installed with some degree of
permanence as receptacles for considerable
quantities of oil needed by MERALCO for its
operations. (MERALCO v. Central Board of
Assessment Appeals, G.R. No. L-47943, May 31,
1982)
Instances when machineries are not
subject to RPT
 Where the business is one of transportation,
which is carried on without a repair or
service shop, and its rolling equipment is
repaired or serviced in a shop belonging to
286 Center for Legal Education and Research
another, the tools and equipment 2018 in its
repair shop which appear movable are
merely incidentals and may not be
considered immovables, and, hence, not
subject to assessment as real estate for
purposes of the real estate tax.(Mindanao Bus
Co. vs. City Assessor and Treasurer, G.R. No. L-
17870, September 29, 1962)
 MERALCO‘s steel towers were held not to be
subject to realty tax, is not in point because
in that case the steel towers were regarded
as poles and under its franchise MERALCO‘s
poles are exempt from taxation. Moreover,
steel towers were not attached to any land
or building. They were removable from their
metal frames.(Manila Electric Company vs.
CBAA, G.R. No. L-47943, May 31, 1982)
Rule on RPT on Machineries
 Machinery is permanently attached -
subject to RPT
 Machinery is not permanently attached
 Essential and necessary to the business –
subject to RPT(See Manila Electric 2015
Case and Caltex Case)
Special Levy on Properties
The following are special levies on real property
a. Special Levy on idle lands
b. Special Levy on public works
c. Special Education Fund (SEF)
Special Levy on Idle Lands
A province, or city or municipality within Metro
Manila may levy an annual tax on idle lands at
the rate not exceeding five percent (5%) of
the assessed value of the property in addition to
the basic tax. The lands covered are the
following:
1. Agricultural lands
 More than 1 hectare in area if more
than ½ of which remain uncultivated or
unimproved by the owner of the
property or person having interest
therein
Exceptions
 Purple Notes
 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.(Sec. 237,[a] LGC)
2. Other than agricultural lands
 Lands, other than agricultural, located in
a city or municipality, more than one
thousand (1,000) square meters in area
one-half ½ of which remain unutilized
or unimproved by the owner of the
property or person having legal interest
therein.(Sec. 237,[b] LGC)
3. Residential lots in subdivision.(Sec.
237,par. 3 LGC)
Exemptions: (FAN-C)
Lands are exempted from special levy by reason
of:
1. Force majeure
2. Civil disturbance
3. Natural calamity or
4. Any cause or circumstance which physically
or legally prevents improving, utilizing or
cultivating the same. (Sec. 238, LGC)
Special Levy for Public Works
A province, city or municipality may impose a
special levy on the lands comprised within its
territorial jurisdiction specially benefited by
public works projects or improvements funded
by the local government unit concerned
Requisite for a valid special levy for public
works:
1. A tax ordinance shall describe with
reasonable accuracy the nature, extent and
location of the public works to be
undertaken, the estimated cost, the metes
and bounds by monuments and lines;(Sec.
241, LGC)
2. State the number of annual installments
which should not be less than 5 nor more
than 10 years(Sec. 241, LGC); and
3. Notice to the owners and public hearing.
(Sec. 242, LGC)
287
Taxation Law
The Sanggunian may fix different rates for
different parts or sections thereof, depending on
whether such land is more or less benefited by
the proposed work. (Sec. 241, LGC)
Limit on the Special levy
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.
Exemption:
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)
Special Education Fund (SEF)
A province, or city or municipality within Metro
Manila 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).
Date of effectivity of assessment or
reassessment
All assessments or reassessments made after
the first (1st) day of January of any year shall
take effect on the first (1st) day of January of
the succeeding year: Provided, however, That
the reassessment of real property due to its
partial or total destruction, or to a major change
in its actual use, or to any great and sudden
inflation or deflation of real property values, or
to the gross illegality of the assessment when
made or to any other abnormal cause, shall be
made within ninety (90) days from the date any
such cause or causes occurred, and shall take
effect at the beginning of the quarter next
following the reassessment. (Sec. 221, LGC)
b. Exemption to real property taxes
Bar Operations C ommissions 287
 Purple Notes
Taxation Law
The exemptions are based on the ownership,
character, and use of the property:
(a) Ownership. Exemptions from real property
taxes on the basis of ownership are real
properties owned by:
(i) Republic of the Philippines or any of its
political subdivisions except when the
beneficial use thereof has been
granted, for consideration or
otherwise, to a taxable person;,
(ii) a province,
(iii) a city,
(iv) a municipality,
(v) a Barangay, and
(vi) registered cooperatives.
 To be exempted, the government agencies
should not have separate and distinct
personalities, meaning unincorporated
agencies.(NDC vs. Cebu City, G.R. No.
51593,November 5, 1992)
 GOCCs are not covered by the exemption
since the exemption only refers to
instrumentalities without personalities
distinct from the government. (Philippine
Ports Authority vs. City of Iloilo G.R. No.
109791,July 14, 2003)
Beneficial Use Doctrine
 In sum, the Court finds that GSIS enjoys
under its charter full tax exemption.
Moreover, as an instrumentality of the
national government, it is itself not liable to
pay real estate taxes assessed by the City of
Manila against its Katigbak and Concepcion-
Arroceros properties. Following the
"beneficial use" rule, however, accrued real
property taxes are due from the Katigbak
property, leased as it is to a taxable entity.
But the corresponding liability for the
payment thereof devolves on the
taxable beneficial user. This means that
the City of Manila has to satisfy its tax claim
by serving the accrued realty tax
assessment on MHC, as the taxable
beneficial user of the Katigbak property
and, in case of nonpayment, through means
other than the sale at public auction of the
leased property .(GSIS vs. City of Manila, G.R.
No. 186242,December 23, 2009)
288 Center for Legal Education and Research
2018
Metropolitan Waterworks and Sewerage
System is not subject to RPT
 The Executive and Legislative Branches,
therefore, have already categorized
petitioner not as a government-owned and
controlled corporation but as a Government
Instrumentality with Corporate
Powers/Government Corporate Entity like
the Manila International Airport Authority
and the Philippine Fisheries Development
Authority. Privileges enjoyed by these
Government Instrumentalities with
Corporate Powers/Government Corporate
Entities should necessarily also extend to
petitioner. Hence, petitioner's real property
tax exemption under Republic Act No.
6234is still valid as the proviso of Section
234 of the Local Government Code is only
applicable to government-owned and -
controlled corporations. Thus, petitioner is
not liable to respondent Local Government
of Quezon City for real property taxes,
except if the beneficial use of its properties
has been extended to a taxable person.
(Metropolitan Waterworks and Sewerage System
vs. Local Government of Quezon City,G.R. No.
194388,November 7, 2018,penned by J. Leonen)
Philippine Economic Zone Authority
(PEZA) is an instrumentality of the
Government hence exempt from tax
All told, the PEZA is an instrumentality of the
national government. Furthermore, the lands
owned by the PEZA are real properties owned
by the Republic of the Philippines. The City of
Lapu-Lapu and the Province of Bataan cannot
collect real property taxes from the PEZA.(City of
Lapu-Lapu v. Phil. Economic Zone Authority, G.R. No.
184203, November 26,2014,penned by J. Leonen)
(b) Character. Exempted from real property
taxes on the basis of their character are:
(i) charitable institutions,
(ii) houses and temples of prayer like
churches, parsonages or convents
appurtenant thereto, mosques, and
(ii) nonprofit or religious cemeteries.
 Under the 1987 Constitution and R.A. No.
7160 in order to be entitled to the
exemption, the petitioner is burdened to
 Purple Notes
Taxation Law
prove, by clear and unequivocal proof, that 8748, ―THE SPECIAL ECONOMIC ZONE ACT
(a) it is a charitable institution; and (b) OF 1995‖)
its real properties are ACTUALLY,
DIRECTLY and EXCLUSIVELY used for Real Under Under 5%
charitable purposes. If real property is used Property Tax Income Tax Gross
for one or more commercial purpose, it is on Holiday Income Tax
not exclusively used for the exempted On buildings (if Subject to Exempt
owned) and RPT
purposes but is subject to taxation. The
leased
words ―dominant use‖ or ―principal use‖ improvements
cannot be substituted for the words ―used On machinery Exempt only Exempt
exclusively‖ without doing violence to the and equipment for the 1st
Constitution and the law.(Lung Center of the three years of
Philippines vs. Quezon City and Rosas, G.R. No. operation
144104, June 29, 2004) Land owned by ECOZONE Developer is subject
(c) Usage. Exempted from real property taxes to RPT
on the basis of the actual, direct and
exclusive use to which they are devoted are: Except as provided under Sec. 234 of the LGC,
(i) all lands buildings and improvements any exemption from payment of real property
which are actually, directed and tax previously granted to, or presently enjoyed
exclusively used for religious, charitable by, all persons, whether natural or judicial,
or educational purpose; -See DLSU including all government-owned or –controlled
Case corporations are hereby withdrawn upon the
effectivity of the LGC. (Sec. 234, LGC)
(ii) all machineries and equipment actually,
directly and exclusively used or by local  All revenues and assets of non-stock, non-
water districts or by government-owned profit educational institutions used actually,
or controlled corporations engaged in directly, and exclusively for educational
the supply and distribution of water purposes shall be exempt from taxes and
and/or generation and transmission of duties. Upon the dissolution or cessation of
electric power; and the corporate existence of such institutions,
their assets shall be disposed of in the
(iii) all machinery and equipment used for manner provided by law.
pollution control and
environmental protection.  Proprietary educational institutions,
including those cooperatively owned, may
"Pollution control and infrastructure devices" likewise be entitled to such exemptions,
refers to infrastructure, machinery, equipment subject to the limitations provided by law,
and/or improvements used for impounding, including restrictions on dividends and
treating or neutralizing, precipitating, filtering, provisions for reinvestment. (Sec. 4(3),Art.
conveying and cleansing mine industrial waste XIV, 1987 Constitution)
and tailings as well as eliminating or reducing
hazardous effects of solid particles, chemicals,  The mere undertaking of petitioner NPC, a
liquids or other harmful byproducts and gases government-owned and controlled
emitted from any facility utilized in mining corporation engaged in the supply,
operations for their disposal (Sec.3[am], R.A. 7942 generation, and transmission of electric
- AN ACT INSTITUTING A NEW SYSTEM OF MINERAL power, under Section 10.1 of the
RESOURCES EXPLORATION, DEVELOPMENT, Agreement, that it shall be responsible
UTILIZATIONAND CONSERVATION -as mentioned in
forthe payment of all real estate taxes and
Provincial Assessor of Marinduqe v. CA,G.R. No.
170532, April 30, 2009) assessments, does not justify the
exemption. The privilege granted to
Real Property Taxes for PEZA - Registered petitioner NPC cannot be extended to FELS.
Entities(R.A. 7916, as amended by R.A. The covenant is between FELS and NPC and
does not bind a third person not privy
289
Bar Operations C ommissions 289
 Purple Notes
Taxation Law
thereto, in this case, the Province of
Batangas.(FELS Energy, Inc., vs. Province of
Batangas, G.R. No. 168557, February 16, 2007)
Claim for Exemption:
Every person who claims exemption from real
property tax shall file with the assessor:
What will be filed?
Documentary evidence in support of such claim
including: (BATA-C2AM)
1. Corporate charters;
2. Title of ownership;
3. Articles of incorporation;
4. By-laws;
5. Contracts;
6. Affidavits certifications; and
7. Mortgage deeds, and similar documents.
When should it be filed?
Within 30 days from the date of declaration of
real property sufficient
Effect of non – filing
If the required evidence is not submitted within
the period prescribed, the property shall be
listed as taxable in the assessment roll.
However, if the property shall be proven to be
tax exempt, the same shall be dropped from the
assessment roll of taxable properties. (Sec. 206,
LGC)
4. Appraisal and assessment
a. Classes of real property
For purposes of assessment, real property shall
be classified as: (RACIST -M)
1. Residential,
2. Agricultural,
3. Commercial,
4. Industrial,
5. Special,
6. Timberland or
7. Mineral.
(Sec.215,LGC)
Who has the power of classifying lands?
The city or municipal within the Metropolitan
Manila Area, through their respective
290 Center for Legal Education and Research
2018
Sanggunian, shall have the power to classify
lands as residential, agricultural, commercial,
industrial, mineral, timberland with their zoning
ordinances. (Sec. 215, LGC)
What are the activities or entities
considered special for RPT purposes?
All lands, buildings, and other improvements
thereon actually, directly and exclusively
used for:(HOGS -CWE)
1. Hospitals;
2. Cultural; or
3. Scientific purposes;
4. Owned and used by local water districts;
5. Government-owned or controlled
corporations rendering essential public
services in the supply and distribution of
water and/or generation and transmission
of electric power.(Section 216, LGC)
b. Assessment based on actual use
Real property shall be classified, valued and
assessed on the basis of its actual use
regardless of where located, whoever owns it,
and whoever uses it. (Sec. 217, LGC)
―Actual Use‖ refers to the purpose for which
the property is principally or predominantly
utilized by
the person in possession thereof.
 The present law on real property taxation
adopts actual use of real property as basis
of assessment. (Sec. 199(b), LGC)
 When Presidential Decree 464 was issued it
changed the basis of real property taxation.
It adopted the policy of taxing real property
on the basis of actual use, even if the user
is not the owner.(Province of Nueva Ecija vs.
Imperial Mining Inc., G.R. No. L-59463,November
19, 1982)
 Appraisal and assessment are based on
actual use irrespective of any previous
assessment or taxpayer‘s valuation thereon
which is based on the taxpayer‘s valuation
thereon which is based on the taxpayer‘s
declaration. (Patalinghug vs. CA, G.R. No.
104789, January 27, 1994)
 Purple Notes
Taxation Law
―Appraisal‖ is the act or process of determining the When real property is assessed for the first time
value of property as of a specified date for a specific or when an existing assessment is increased or
purpose. (Sec. 199(e), LGC) decreased, the local assessor shall within thirty
(30) days give written notice of the new or
"Assessment" is the act or process of determining
revised assessment to the person in whose
the value of a property, or proportion thereof subject
to tax, including the discovery, listing, classification, name the property is being declared.
and appraisal of properties. (Sec. 199(f), LGC)
Notice may be given personally or by registered
mail or through the assistance of the punong
barangay to the last known address of the
person to be served. (Sec. 223, LGC)
General revisions of assessments and 5. COLLECTION
proper classification
a. Date of accrual of real property tax
The provincial, city or municipal assessor shall
Date of Accrual of Tax
undertake a general revision of real property
assessments within two (2) years after the
The real property tax for any year shall accrue
effectivity of the LGC and every three (3) years
on the first (1st) day of January and from
thereafter. (Sec. 219, LGC)
that date it shall be superior to any other
Date of effectivity of assessment or lien, mortgage, or encumbrance of any kind
reassessment whatsoever, and shall be extinguished only upon
the payment of the delinquent tax. (Sec. 246,
LGC)
Generally, all assessments or reassessments
made after the first (1st) day of January of any
Accrual of Special Levy
year shall take effect on the first (1st) day of
January of the succeeding year.
The special levy shall accrue on the first day of
the quarter next following the effectivity of the
Exceptions: Reassessments due to:
ordinance imposing such levy(Sec. 245, LGC)
1. Partial or total destruction
.
2. Major change in actual use;
Collecting authority
3. Great and sudden inflation or deflation of
real property values;
It shall be the responsibility of the city or
4. Gross illegality of the assessment made; or
municipal treasurer concerned. The city or
5. Any other abnormal cause.
municipal treasurer may deputize the
barangay treasurer to collect all taxes on real
The reassessment of real property shall be made
property located in the barangay. Provided, that
within ninety (90) days from the date any cause
the barangay treasurer is properly bonded for
or causes occurred, and shall take effect at the
the purpose.
beginning of the quarter next following the
reassessment. (Sec. 221, LGC)
Provided, further, that the premium on the bond
shall be paid by the city or municipal
Assessment of property subject to back
government concerned. (Sec. 247, LGC)
taxes
Duty of assessor to furnish local treasurer
Property declared for the first time: assessed for
with assessment rolls
taxes for the period during which it would have
been liable but in no case for more than ten
The provincial, city or municipal assessor
(10) years prior to the date of initial assessment
shall prepare and submit to the treasurer of
(Sec. 222, LGC)
the local government unit, on or before the
Notification of new or revised assessment thirty-first (31st) day of December each year, an
assessment roll containing a list of all persons

291
Bar Operations C ommissions 291
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Taxation Law
whose real property have been newly assessed
or reassessed and the values of such properties.
(Sec. 248, LGC)
b. Periods to collect
Basic real property tax and any other tax levied
under the title on Real Property Taxation – Five
(5) years from the date they became due.
When there is fraud or intent to evade the
payment – Ten (10) years. (Sec. 270, LGC)
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.
(Note: these are the same as the prescriptive
period to collect and instance for suspension of
local taxes)
Special rules on payment
a) Payment of real property tax in
installment
Payment of real property taxes and the
additional tax for the Special Education
Fund, without interest, may be made in four
(4) equal instalments:
 1st instalment – March 31st;
 2nd instalment – June 30th;
 3rd instalment – September 30th;
th st
 4 instalment – December 31 .
This shall not apply to special levies which
shall be governed by ordinance of the
sanggunian concerned(Sec. 250, LGC).
Application of Payment: Payments of real
property taxes shall first be applied to prior
year‘s delinquencies, interests and penalties,
if any, and only after the delinquencies are
292 Center for Legal Education and Research
2018for the
settled the tax payments be credited
current period.(Sec. 250, LGC)
Discount: The Sanggunian concerned may
grant a discount:
a.) Not exceeding 20% of annual tax due -
when paid in advance the basic RPT
and additional tax accruing to the
Special Education Fund (Section 251,
LGC)
b.) 10% - in case of prompt payment
(Section 342, IRR of LGC)
b) Interest on unpaid real property
tax
In case of failure to pay the basic real
property tax or any other tax levied under
the Title of Collection of Real Property Tax
upon the expiration of the periods as
provided in Section 250, or when due, as
the case may be, shall subject the taxpayer
to the payment of interest at the rate of 2%
per month on the unpaid amount or a
fraction thereof, until the delinquent tax
shall have been fully paid:
Provided, however, that in no case shall the
total interest on the unpaid tax or portion
thereof exceeds thirty-six (36) months.(Sec.
255, LGC)
Note: Non-payment of RPT, unlike any
other taxes, does not result in the
imposition of a surcharge, only interests.
Distinguish from penalties imposed for
non – payment of national taxes
BIR Real Property
Interest Rate imposed
12% per ANNUM 2% per MONTH
Maximum Period when Interest can be
imposed
No maximum Only up to 36th month
Imposition of Compromise Penalty
Non payment shall also No imposition of
make the taxpayer compromise
liable for compromise
penalties
Surcharge Imposed
25% imposed on basic No imposition of
tax surcharge
 Purple Notes
c) Condonation of real property tax
 By SANGGUNIAN: in case of a
(i) general failure of crops or
(ii) substantial decrease in the price
of agricultural or agri-based
products, or
(iii) calamity in any province, city or
municipality; (Sec. 276, LGC)
 By the President of the Philippines:
when public interest so requires. (Sec.
277, LGC)
C. Remedies of LGUs for collection of real
property tax
a) Remedies in general
The treasurer concerned may avail of:
1. Administrative action by levy on real
property
2. Judicial action. (Sec. 256, LGC)
Distinguished from the remedies of local
government for non – payment of local
business taxes
As compared to the remedies by the remedies of
local government for non – payment of local
business taxes, remedies for real property
DOES NOT HAVE DISTRAINT ON
PERSONAL PROPERTIES.
Local government‘s lien
The basic real property tax and any other tax
levied under this Title constitute 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).
Administrative action by levy on property
(Sec. 258, LGC)
After the expiration of the time required to pay
the basic real property tax or any other tax
levied under this Title, real property subject to
such tax may be levied upon through:
How may a real property be levied?
293
Taxation Law
1. The issuance of a warrant on or before,
or simultaneously with,
2. The institution of the civil action for the
collection of the delinquent tax.
1. Warrant of Levy
The provincial or city treasurer, or a treasurer of
a municipality within the Metropolitan Manila
Area, as the case may be, when issuing a
warrant of levy shall prepare a duly
authenticated certificate showing: (DAN)
1. Name of the delinquent owner of the
property or person having legal interest
therein,
2. Description of the property,
3. Amount of the tax due and the interest
thereon.
Effect of warrant
The warrant shall operate with the force of a
legal execution throughout the province, city or
a municipality within the Metropolitan Manila
Area.
2. Mailing of Warrant
The warrant shall be mailed to or served upon
the:
1. Delinquent owner of the real property; or
2. Person having legal interest therein; or
3. In case he is out of the country or cannot be
located;
4. The administrator or occupant of the
property.
At the same time, written notice of the levy with
the attached warrant shall be mailed to or
served upon:
1. The assessor and the Registrar of Deeds
of the province, city or municipality within
the Metropolitan Manila Area where the
property is located, who shall annotate
the levy on the tax declaration and
certificate of title of the property,
respectively.
Reporting to Sanggunian
Bar Operations C ommissions 293
 Purple Notes
Taxation Law
The levying officer shall submit a report on the
levy to the sanggunian concerned within ten
(10) days after receipt of the warrant by the
owner of the property or person having legal
interest therein.
3. Advertisement and Sale (Sec. 260, LGC)
Periods to consider in advertising the
auction of real property
2018
the interest due thereon and the expenses
of sale.
Auction Proper
The sale shall be held either at the
1. Main entrance of the provincial, city or
municipal building, or
2. On the property to be sold, or
3. At any other place as specified in the notice
of the sale.

Within thirty (30) days after service of the Report to Sanggunian

warrant of levy, the local treasurer shall proceed
to publicly advertise for sale or auction the
property or a usable portion thereof as may be
necessary to satisfy the tax delinquency and
expenses of sale.
Within thirty (30) days after the sale, the local
treasurer or his deputy shall make a report of
the sale to the sanggunian concerned, and
which shall form part of his records.

Where will the notice be posted? Delivery of Certificate of sale

The advertisement shall be effected by posting a
notice at:
1. The main entrance of the provincial, city or
municipal building,
2. and in a publicly accessible and conspicuous
place in the barangay where the real
property is located, and
Publication
By publication once a week for two (2) weeks
in a newspaper of general circulation in the
province, city or municipality where the property
is located
The local treasurer shall likewise prepare and
deliver to the purchaser a certificate of sale
which shall contain the name of the purchaser, a
description of the property sold, the amount of
the delinquent tax, the interest due thereon, the
expenses of sale and a brief description of the
proceedings:
Provided, however, That proceeds of the sale in
excess of the delinquent tax, the interest
due thereon, and the expenses of sale shall be
remitted to the owner of the real property
or person having legal interest therein.
Owner not deprived

Distinguished with publication From the date of sale until the expiration of the
requirement of levy on real properties as period of redemption, the delinquent real
provided in Section 178 of LGC property shall remain in the possession of
the owner or person having legal interest
Section 178 (Local Section 260 (Real therein who shall be entitled to the income
Business Tax) Property Taxation) and other fruits thereof.
Once a week for three Once a week for two
(3) weeks (2) weeks
Period of Redemption

Within one (1) year from the date of sale,

Stay of Proceedings
the owner of the delinquent real property or
person having legal interest therein, or his
At any time before the date fixed for the sale,
representative, shall have the right to redeem
the owner of the real property or person having
the property upon payment to the local
legal interest therein may stay the
treasurer of the amount of the delinquent tax,
proceedings by paying the delinquent tax,
including the interest due thereon, and the

294 Center for Legal Education and Research

 Purple Notes
expenses of sale from the date of delinquency to
the date of sale. (Sec. 261, LGC)
Interest on delinquency sale
Interest of not more than two percent (2%)
per month on the purchase price from the date
of sale to the date of redemption. (Id.)
Surrender of certificate of sale in case of
redemption
The local treasurer or his deputy, upon receipt
from the purchaser of the certificate of
sale, shall forthwith return to the latter the
entire amount paid by him plus interest of
not more than two percent (2%) per
month. Thereafter, the property shall be free
from the lien of such delinquent tax, interest
due thereon and expenses of sale.
Effect of redemption
Such payment shall invalidate the certificate
of sale issued to the purchaser and the owner
of the delinquent real property or person having
legal interest therein shall be entitled to a
certificate of redemption which shall be
issued by the local treasurer or his deputy.
Final deed to purchaser
In case the owner or person having legal
interest therein fails to redeem the delinquent
property as provided herein, the local treasurer
shall execute a deed conveying to the
purchaser said property, free from lien of the
delinquent tax, interest due thereon and
expenses of sale. The deed shall briefly state the
proceedings upon which the validity of the sale
rests. (Sec. 262, LGC)
Purchase of Real Property by LGU for want
of bidder
In case there is no bidder for the real property
advertised for sale as provided herein, or if the
highest bid is for an amount insufficient to
pay the taxes, fees, or charges, related
surcharges, interests, penalties and costs, the
295
Taxation Law
local treasurer conducting the sale shall
purchase the property in behalf of the
local government unit concerned to satisfy
the claim and within two (2) days thereafter
shall make a report of his proceedings which
shall be reflected upon the records of his office.
(Sec. 263, LGC)
Duty of Registrar of Deeds if LGU bought
the levied property
It shall be the duty of the Registrar of Deeds
concerned upon registration with his office of
any such declaration of forfeiture to
transfer the title of the forfeited property
to the local government unit concerned
WITHOUT the necessity of an order from a
competent court. (Id.)
Period of Redemption still applies.
Within one (1) year from the date of such
forfeiture, the taxpayer or any of his
representatives, may redeem the property by
paying to the local treasurer the full amount of
the taxes, fees, charges, and related surcharges,
interests, or penalties, and the costs of sale.
If the property is not redeemed as provided
herein, the ownership thereof shall be fully
vested on the local government unit
concerned. (Sec. 181, LGC)
Resale
The sanggunian concerned may, by
ordinance duly approved, and upon notice of
not less than twenty (20) days, sell and
dispose of the real property acquired in a public
auction under Sec. 260.
The proceeds of the sale shall accrue to the
general fund of the local government unit
concerned. (Sec. 182, LGC)
Further levy until full payment of amount
due
The remedies by distraint and levy may be
repeated if necessary until the full amount due,
including all expenses, is collected. (Sec. 184,
LGC)
6. Taxpayer‘s remedies
Bar Operations C ommissions 295
 Purple Notes
Taxation Law
to LBAA, appeal if enjoin the 2018
LGU from
a. Contesting an assessment denied appeal to CBAA collecting real property
taxes
i. Payment under protest
 (City of Lapu-Lapu vs. PEZA, GR No. 184203,
November 26, 2014, penned by J. Leonen)
No protest shall be entertained unless the
ii. File protest with treasurer
taxpayer first pays the tax. There shall be
annotated on the tax receipts the words ―paid
 The protest in writing must be filed within
under protest‖. (Sec.252, LGC)
thirty (30) days from payment of the tax to
the provincial, city treasurer or municipal
 The tax or a portion thereof paid under
treasurer, in the case of a municipality
protest shall be held in trust by the
within Metropolitan Manila Area, who shall
treasurer concerned.
decide the protest within sixty (60) days
 The requirement of "payment under
from receipt.
protest" is a condition sine qua non before
a protest or an appeal questioning the
Appeal to Local Board of Assessment
correctness of an assessment of real
Appeals (LBAA)
property tax may be entertained. (Camp
John Hay vs. CBAA, G.R. No. 169234, October
2, 2013) In case of denial or lapse of the 60 day period
for the Local Treasurer, the taxpayer may
 Should the taxpayers question the appeal to the LBAA within 60 days from receipt.
excessiveness of the amount of tax, he must The LBAA will then have 120 days to decide
first pay the amount due, in accordance with
Section 252 of R.A. 7160. Then, he must Appeal to Central Board of Assessment
request the annotation of the phrase ―paid Appeals (CBAA)
under protest‖ and accordingly appeal to the
Board of Assessment Appeals by filing a If the taxpayer is unsatisfied with the decision of
petition under oath together with copies of the LBAA, the taxpayer may appeal to the CBAA
the tax declarations and affidavits or within 30 days from receipt of decision
documents to support his appeal. (Lopez vs.
City of Manila, G.R. No. 127139, February 19, Appeal to the Court of Tax Appeals (CTA)
1999) En Banc

Is payment under protest ALWAYS If CBAA rejects protest, owner may appeal to
required when assailing validity of CTA En Banc within 30 days from receipt of
assessment? decision.

No, in City of Lapu Lapu v. PEZA , it emphasized Appeal to the Supreme Court (SC)
the need to distinguish between an erroneous
assessment and illegal assessment. Any adverse decision by the CTA En Banc may
be appealed to the Supreme Court within 15
Erroneous days from receipt of decision
Illegal Assessment
Assessment
What is in dispute? In case the protest is granted:
The correctness of the The authority of the
amount assessed assessment In the event that the protest is finally decided in
Initial Remedy favor of the taxpayer, the amount or portion of
Administrative Remedy Judicial Remedy the tax protested shall be (1) refunded to the
Payment under protest required
protestant, or (2) applied as tax credit
Yes Not required
against his existing or future tax liability.
Procedure
Payment under protest , File for an injunction
Protest, if denied appeal before the RTC to

296 Center for Legal Education and Research

 Purple Notes
iii. Refunds or credits of real property
taxes
Procedure
1. File with the Local Treasurer
Written Claim to the provincial or city treasurer
– within 2 years from date the taxpayer is
entitled to such reduction or adjustment
2. Approval / Denial of Protest
The provincial or city treasurer shall decide the
claim for tax refund or credit within sixty (60)
days from receipt thereof.
3. Appeal to Local Board of Assessment
Appeals (LBAA)
In case of denial or lapse of the 60 day period
for the Local Treasurer, the taxpayer may
appeal to the LBAA within 60 days from receipt.
The LBAA will then have 120 days to decide
4. Appeal to Central Board of Assessment
Appeals (CBAA)
If the taxpayer is unsatisfied with the decision of
the LBAA, the taxpayer may appeal to the CBAA
within 30 days from receipt of decision
5. Appeal to the Court of Tax Appeals
(CTA) En Banc
If CBAA rejects protest, owner may appeal to
CTA En Banc within 30 days from receipt of
decision.
6. Appeal to the Supreme Court (SC)
Any adverse decision by the CTA En Banc may
be appealed to the Supreme Court within 15
days from receipt of decision
b. Contesting a valuation of real property
297
Taxation Law
When availed:
To question an act of the assessor
Who may avail:
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
i.Appeal to the Local Board of
Assessment Appeals (LBAA)
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. 226, LGC)
The LBAA shall decide the appeal within 120
days
ii. Appeal to the Central Board of
Assessment Appeals (CBAA)
If unsatisfied with the decision of the LBAA,
the owner or person having legal interest may
appeal to the Central Board of Assessment
Appeals (CBAA) within 30 days from receipt of
such decision. The decision of the CBAA shall
be final and executory. (Sec. 229, LGC)
Bar Operations C ommissions 297
 Purple Notes
Taxation Law
Appeal to the CTA
The CTA shall exercise exclusive appellate
jurisdiction to review by appeal the decisions
of the Central Board of Assessment Appeals
in the exercise of its appellate jurisdiction
over cases involving the assessment and
taxation of real property originally decided by
the provincial or city board of assessment
appeals;
Appeal to the SC
Petitions for certiorari, prohibition or
mandamus against CBAA and CTA.
iii. Effect of payment of tax
Appeal on assessments of real property made
under the provisions of the LGC 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)
3. Compromising real property tax
assessments
The city resolution allowing for the petitioner to
compromise its real property taxes is valid. Art.
1306 of the Civil Code of the Philippines
provides that contracting parties may establish
such conditions, as they may deem convenient,
provided they are not contrary to law, morals,
customs, public order, or public policy.
According to the Court, the said resolution was
validly executed and not contrary to law, morals,
good customs, public order, or public policy.
(California Manufacturing vs Las Pinas, G.R. No.
178461, June 22, 2009)
PART IV. JUDICIAL REMEDIES (R.A 1125,
as amended by R.A. 9282, and further
amended by R.A. 9503, and the Revised
Rules of the Court of Tax Appeals)
A. JURISDICTION OF THE COURT OF TAX
APPEALS
1. Exclusive original and appellate
jurisdiction over CIVIL CASES
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1.1 CTA en banc
1.1.1 Exclusive Original Jurisdiction
(a) The Court shall sit en banc in the exercise of
its administrative, ceremonial and non-
adjudicative functions. (Sec. 2 Rule 2, Revised
Rules of the Court of Tax Appeals [A.M. No. 05-11-
07-CTA])
1.1.2 Exclusive Appellate Jurisdiction
(a) Decisions or resolutions on motions for
reconsideration or new trial of the Court in
Divisions in the exercise of its exclusive
appellate jurisdiction over:
i. Cases arising from administrative agencies
– Bureau of Internal Revenue, Bureau of
Customs, Department of Finance,
Department of Trade and Industry,
Department of Agriculture;
ii. Local tax cases decided by the Regional
Trial Courts in the exercise of their original
jurisdiction; and
iii. Tax collection cases decided by the
Regional Trial Courts in the exercise of
their original jurisdiction involving final and
executory assessments for taxes, fees,
charges and penalties, where the principal
amount of taxes and penalties claimed is
less than one million pesos;
(b) Decisions, resolutions or orders of the
Regional Trial Courts in local tax cases
decided or resolved by them in the exercise
of their appellate jurisdiction;
(c) Decisions, resolutions or orders of the
Regional Trial Courts in tax collection
cases decided or resolved by them in the
exercise of their appellate jurisdiction;
(d) Decisions, resolutions or orders on motions
for reconsideration or new trial of the
Court in Division in the exercise of its
exclusive original jurisdiction over tax
collection cases;
(e) Decisions of the Central Board of
Assessment Appeals (CBAA) in the
exercise of its appellate jurisdiction over
cases involving the assessment and
 Purple Notes
taxation of real property originally decided
by the provincial or city board of
assessment appeals.
1.2 CTA division
1.2.1 Exclusive Original Jurisdiction
(a) Cases involving final and executory
assessments for taxes, fees, charges and
penalties, where the principal amount of
taxes and fees, exclusive of charges and
penalties, claimed is one million pesos or
more. (Sec. 3(c)(1), Rule 4, RRCTA)
1.2.2 Exclusive Appellate Jurisdiction
(a) Decisions of the Commissioner of
Internal Revenue in cases involving
disputed assessments, refunds of internal
revenue taxes, fees or other charges,
penalties in relation thereto, or other
matters arising under the National Internal
Revenue Code or other laws administered
by the Bureau of Internal Revenue;
(b) Inaction by 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 NIRC or other
laws administered by the BIR, where the
NIRC or other applicable law provides a
specific period for action, in which case the
inaction shall be deemed a denial.
 Section 36 of R.A. No. 10963 (TRAIN
Law) deleted the inaction of the CIR to
act on the application for the VAT
refund. Thus, this item has lost its
efficiency. (Boado, 2018 Compact Reviewer
in Taxation, p. 394)
(c) Decisions, resolutions or orders of the
Regional Trial Courts in local tax cases
decided or resolved by them in the exercise
of their original jurisdiction;
(d) Decisions of the Commissioner of
Customs in cases involving liability for
customs duties, fees or other money
charges, seizure, detention or release of
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Taxation Law
property affected, fines, forfeitures of other
penalties in relation thereto, or other
matters arising under the Customs Law or
other laws administered by the Bureau of
Customs;
(e) Decisions of the Secretary of Finance
on customs cases elevated to him
automatically for review from decisions of
the Commissioner of Customs adverse to
the Government under Section 2315 of the
Tariff and Customs Code; and
(f) Decisions of the Secretary of Trade and
Industry, in the case of nonagricultural
product, commodity or article, and the
Secretary of Agriculture, in the case of
agricultural product, commodity or article,
involving dumping and countervailing duties
under Section 301 and 302, respectively, of
the Tariff and Customs Code, and safeguard
measures under Republic Act No. 8800,
where either party may appeal the decision
to impose or not to impose said duties (Sec.
2 Rule 4, RRCTA)
Republic Act No. 9282, a special and later law
than Batas Pambansa Blg. 12968 provides an
exception to the original jurisdiction of the
Regional Trial Courts over actions questioning
the constitutionality or validity of tax laws or
regulations. Except for local tax cases, actions
directly challenging the constitutionality or
validity of a tax law or regulation or
administrative issuance may be filed directly
before the Court of Tax Appeals.
Furthermore, with respect to administrative
issuances (revenue orders, revenue
memorandum circulars, or rulings), these are
issued by the Commissioner under its power to
make rulings or opinions in connection
with the implementation of the provisions of
internal revenue laws. Tax rulings, on the other
hand, are official positions of the Bureau on
inquiries of taxpayers who request clarification
on certain provisions of the National Internal
Revenue Code, other tax laws, or their
implementing regulations.69 Hence, the
determination of the validity of these issuances
clearly falls within the exclusive appellate
jurisdiction of the Court of Tax Appeals under
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 Purple Notes
Taxation Law
Section 7(1) of Republic Act No. 1125, as
amended, subject to prior review by the
Secretary of Finance, as required under Republic
Act No. 8424. (Banco De Oro vs. Rizal Banking
Corporation, G.R.198756,August 16,2016,penned by
J.Leonen; Steel Corporation of the Philippines vs.
Bureau of Customs, G.R.220502, February 12,2018)
2. Exclusive original and appellate
jurisdiction over CRIMINAL CASES
2.1 CTA en banc
2.1.1 Exclusive Appellate Jurisdiction of CTA
en banc
Over cases involving criminal offenses
arising from violations of the National
Internal Revenue Code (NIRC) or the
Tariff and Customs Code and other laws
administered by the Bureau of Internal
Revenue (BIR) or Bureau of Customs
(BOC), CTA en banc have exclusive
appellate jurisdiction on the following:
(a) Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court in
Division in the exercise of its exclusive
original jurisdiction;
(b) Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court in
Division in the exercise of its exclusive
appellate jurisdiction
(c) Decisions, resolutions or orders of the
Regional Trial Courts in the exercise of their
appellate jurisdiction. (Sec. 2 (f)(g)(h), Rule 4,
RRCTA)
2.2CTA Division
2.2.1 Exclusive Original Jurisdiction
(a) over all criminal offenses arising from
violations of the NIRC or Tariff and
Customs Code and other laws
administered by the BIR or the BOC
where the principal amount of taxes and
fees, exclusive of charges and penalties,
claimed is P1 Million or more.
Exception: That offenses or felonies where the
principal amount of taxes and fees, exclusive of
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2018
charges and penalties, claimed is less than One
million pesos (P1,000,000.00) or where there is
no specified amount claimed shall be tried by
the appropriate MTC or RTC depending on their
respective jurisdiction.
2.2.2 Exclusive Appellate Jurisdiction:
(a) Over appeals from the judgments,
resolutions or orders of the Regional
Trial Courts in tax cases originally
decided by them, in their respected
territorial jurisdiction.
(b) Over petitions for review of the
judgments, resolutions or orders of the
Regional Trial Courts in the exercise of
their appellate jurisdiction over tax
cases originally decided by the
Metropolitan Trial Courts, Municipal Trail
Courts and Municipal Circuit Trial Courts
in their respective jurisdiction. (Sec. 7 b.,
R.A. No. 1125)
 The authority of the CTA to take
cognizance of petitions for certiorari
questioning interlocutory orders issued
by the RTC in a local tax case is
included in the powers granted by the
Constitution as well as inherent in the
exercise of its appellate jurisdiction. (City
of Manila v. Grecia-Cuerdo, G.R. No. 175723,
February 4, 2014)
Cases Appealable Straight to CTA En Banc
1. Realty property taxes decided by the CBAA;
2. Decision of the RTC in its appellate
jurisdiction over the following:
a. Local taxes cases
b. Tax collection cases
c. Criminal offenses (Sec. 2, Rule 4, RRCTA])
The power of the Court of Tax Appeals to
exercise its appellate jurisdiction does not
preclude it from considering evidence that
was not presented in the administrative
claim in the Bureau of Internal Revenue.
Republic Act No. 1125 states that the Court of
Tax Appeals is a court of record. (Philippine
Airlines, Inc. (PAL) v. Commissioner of Internal
Revenue, G.R. Nos. 206079-80 and 206309, January
17, 2018)
 Purple Notes
Taxation Law
The Court of Tax Appeals (CTA) was created to Limitations
be of the same level as the Court of Appeals.
(Sec. 1, R.A. No. 1125, as amended by R.A. 9282, General Rule: New issues cannot be raised for
and further amended by R.A. 9503) the first time on appeal.

Structure of CTA Exceptions:

It consists of Nine (9) justices:  The BIR should not be allowed to defeat an
otherwise valid claim for refund by raising
1. A presiding Justice and question of alleged incapacity for the first
2. Eight (8) Associate Justices (Sec. 1, R.A. time on appeal before SC. The question was
1125, as amended by R.A. 9282, and further neither raised on administrative level nor on
amended by R.A. 9503)
CTA level. (CIR vs. Procter & Gamble Phil Mfg.
Corp, G.R. No. L-66838, December 2, 1991)
Quorum; Promulgation of resolution;  Right to opportunity to present taxpayer‘s
Reversal of decision case should not be curtailed. But this right
should not be abused. In this case, the
As to: En banc Division
different petitions for reconsideration have
Quorum At least Five At least Two
(5) Justices (2) Justices
been on the same ground. CTA gave ample
Promulgation Majority of the Two (2) opportunities for reconsideration. (Marquez
of Resolution Justices members Lim vs. Collector of Internal Revenue and CTA,
present G.R. No. 12157, May 30, 1959)
Reversal of Affirmative N/a
decision of votes of Five  Jurisdiction over subject matter is
Division (5) members fundamental for a court to act on given
controversy. It‘s conferred by law, not by
The attendance of five (5) justices of the Court consent of parties. It can be challenged at
shall constitute a quorum for its sessions en any stage of proceedings and for lack of it,
banc. The affirmative vote of five (5) justices of court can dismiss a case ex meromotu. To
the Court en banc shall be necessary to reverse inquire into existence of jurisdiction over
a decision of a Division but a simple majority of subject matter is the primary concern of a
the Justices present is necessary to promulgate court, for thereon would depend the ability
a resolution or decision in all other cases. (Sec. of its proceedings. (CIR vs. Leonardo S. Villa,
2, R.A. 1125, as amended by R.A. 9503) G.R. No. L-23988, January 2, 1968)

Interlocutory orders or resolutions shall be acted
upon by majority vote of the justices present
constituting a quorum. Where the necessary
majority vote cannot be had, the petition shall
be dismissed; in appealed cases, the judgment
or order appealed from shall stand affirmed; and
on all incidental matters, the petition or motion
shall be denied (Sec. 3, Rule 2, RRCTA)
The attendance of at least two (2) justices of
the Division Court shall be necessary to
constitute a quorum for its sessions in Divisions.
The presence at the deliberation and the
affirmative vote of at least two justices shall be
required for the pronouncement of a judgment
or final resolution of the Court in Divisions. (Sec.
2, R.A. 1125, as amended by R.A. 9503)
 The 30-day period fixed by law within which
taxpayer may question any ruling of CIR
before Tax Appeal Court is jurisdictional.
(CIR vs. Lazarus Joseph, G.R. No. L-14034,
August 30, 1962)
B. JUDICIAL PROCEDURES
1. Judicial Action for Collection of Taxes
a. Internal revenue taxes
Civil Action
a. By filing a CIVIL CASE for collection of
sums of money with proper regular
court; and

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 Purple Notes
Taxation Law
b. By filing an ANSWER to the petition for
review filed by the Taxpayer to the CTA.
Criminal Action
a. Attempt to Evade or Defeat Tax
b. Failure to file return, supply correct and
accurate information, pay tax, withhold
and remit tax and refund excess taxes
withheld on compensation.
b.Local taxes
Same rules as in internal revenue taxes
b.1 Prescriptive period
Within 5 years from the date taxes, fees, or
charges become due. (Sec. 194, LGC)
2. Civil Cases
a.1 Who may appeal
 Any party adversely affected by a
decision or ruling or inaction of:
i. The Commissioner of Internal
Revenue;
ii. The Commissioner of Customs;
iii. The Secretary of Finance;
iv. The Secretary of Trade and
Industry;
v. The Secretary of Agriculture;
vi. The Central Board of Assessment
Appeal; or
vii. The Regional Trial Courts (Sec. 3
Rule 8, RRCTA);
 Stockholders of a dissolved corporation;
and
 Government.
a.2 Modes of Appeal
1. By filing a petition for review under Rule 42
of the 1997 Rules of Court, with respect to a
decision, ruling, or inaction of the:
i. Commissioner of Internal Revenue;
ii. Commissioner of Customs;
iii. The Secretary of Finance;
302 Center for Legal Education and Research
iv. The Secretary of 2018 Trade and
Industry;
v. The Secretary of Agriculture; or
vi. The Regional Trial Courts
 This appeal shall be heard by a Division
of the CTA
2. By filing a petition for review as provided
under Rule 43 of the 1997 Rules of Court
with respect to a decision or resolution of
the Court in Division on a motion for
reconsideration or new trial shall the Court
en banc shall act on the appeal.
3. By filing a petition for review under a Rule
43 of 1997 ROC with respect to the
decisions of rulings of:
i. The Central Board of Assessment Appeals;
and
ii. Regional Trial Courts in the exercise of its
appellate jurisdiction
 This appeal shall be heard by the CTA
en banc (Sec. 4 Rule 8, RRCTA)
b. Suspension of collection of tax
General Rule: An appeal to the CTA from the
decision of the CIR will not 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.
 Exception When, in the view of the CTA
the collection may jeopardize the interest of
the Government and/or the taxpayer, it may
suspend the said collection and require the
taxpayer either to (i) deposit the amount
claimed or (ii) to file a surety bond. (Spouses
Emmanuel Pacquiao and Jinkee Pacquiao v. CTA,
G.R. No. 213394, April 6, 2016)
Requisites:
1) That the collection of tax may jeopardize
the interest of the government and/or the
taxpayer.
2) That the taxpayer is willing to deposit the
amount equal to the taxes assessed or
willing to file a bond amounting to not
more than twice the value of the tax being
assessed.
 Purple Notes
3) That the CTA may issue injunction order
only in the exercise of its appellate
jurisdiction
4) That the appeal is not frivolous/dilatory
(ibid.)
c. Injunction not available to restrain
collection
The NO INJUNCTION RULE does not apply to
the Court of Tax Appeals. Sec. 11 or RA 1125
gives the Tax Court authority to order the
suspension of tax collection when in its view,
such collection would work to the serious
prejudice of either the government or the
taxpayer.
 The ancillary remedy is available only when
there is pending appeal over which the
Court of Tax Appeals has jurisdiction.
(Commissioner of Customs vs. Alikapata, G.R.
No. L-32542, November 26, 1970).
 In case the CTA finds that the petitioners
should provide the necessary security under
Section 11 of R.A. 1125, a recomputation of
the amount thereof is in order. If there
would be a need for a bond or to reduce the
same, the CTA should take note that the
Court, in A.M. No. 15-92-01-CTA, resolved
to approve the CTA En Banc Resolution No.
02-2015, where the phrase ―amount
claimed‖ stated in Section 11 of R.A. No.
1125 was construed to refer to the
principal amount of the deficiency taxes,
excluding penalties, interests and
surcharges. (Spouses Emmanuel Pacquiao and
Jinkee Pacquiao v. CTA, G.R. No. 213394, April 6,
2016)
Taking of evidence
The Court may receive evidence in the following
cases:
a. In all cases failing within the original
jurisdiction of the Court in Division pursuant
to Section 3, Rule 4 of the RCTA; and
b. In appeals in both civil and criminal cases
where the Court grants a new trial shall
suspend the running of the period within
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Taxation Law
which an appeal may be perfected (RCTA,
Rule 13, Sec. 4a).
Taking of evidence by:
 Justice
 Court Official
 Motion for reconsideration or New trial
Any aggrieved party may seek a reconsideration
or new trial of any decision, resolution or order
of the Court. He shall file a motion for
reconsideration or new trial within fifteen days
form the date he received notice of the decision,
resolution or order of the Court in question (Sec.
1, Rule 15, RRCTA)).
The motion shall be in writing stating its
grounds, in a written notice of which shall be
served by movant on the adverse party.
The filing of a motion for reconsideration or new
trial shall suspend the running of the period
within which an appeal may be perfected (Sec. 4,
Rule 15, RRCTA).
 A motion for new trial may be based on
one or more of the following grounds:
1. Fraud, accident, mistake or excusable
negligence which ordinary prudence could
not have guarded against and by reason of
which such aggrieved party has probably
been impaired in his rights; or
2. Newly discovered evidence, which he could
not, with reasonable diligence have
discovered and produced at the trial and,
which, if presented would probably alter the
result.
3. Criminal Cases
a. Institution of criminal actions
 All criminal actions before the Court in
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. In criminal
actions involving violations of the NIRC
and other laws enforced by the BIR, the
CIR must approve their filing.
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 Purple Notes
Taxation Law
 In criminal actions involving violations of
tariff and Customs Code and other laws
enforced by BOC, the Commissioner of
Customs must approve their filing
 The institution of the criminal action
shall interrupt the running of the period
of prescription. (Sec. 2 Rule 9, RRCTA)
Prosecution of criminal actions
 All criminal actions shall be conducted
and prosecuted under the direction and
control of the public prosecutor.
 In criminal actions involving violation of
the National Internal Revenue Code or
other laws enforced by the Bureau of
Internal Revenue, and violations of the
Tariff and Customs Code or other laws
enforced by the Bureau of Customs, the
prosecution may be conducted by their
respective duly deputized legal officers.
(Sec. 3 Rule 9, RRCTA)
b. Institution of civil action in criminal
action
 In cases within the jurisdiction of the
Court, the criminal action and to the
corresponding civil action for the
recovery of civil liability for taxes and
penalties shall be deemed jointly
instituted in the same proceeding.
 The filing of the criminal action shall
necessarily carry with it the filing of the
civil action. No right to reserve the filing
of such civil action separately from the
criminal action shall be allowed or
recognized (Sec. 1 (a), Rule 111, Rules of
Court)
c. Period to appeal
1. Notice of appeal within 15 days – appeal
from criminal cases decided by a RTC in the
exercise of its original jurisdiction. The Court
in Division shall act on the appeal.
2. Petition for review under Rule 43 of the
1997 ROC within 15 days
304 Center for Legal Education and Research
 Appeal from criminal cases2018decided by
the Court in Division.
 Appeal from criminal cases decided by
the RTC in the exercise of their
appellate jurisdiction. The Court en banc
shall act on the appeal.
 Role of Solicitor General
The Solicitor General shall represent the
People of the Philippines and
government officials sued in their official
capacity in all cases brought to the
Court in the exercise of its appellate
jurisdiction.
4. Appeal to the CTA, en banc
If the taxpayer is not satisfied with the CTA
Division‘s ruling:
 FIRST, he may file a motion for
reconsideration before the same Division of
the CTA within fifteen (15) days from notice
thereof (Sec. 11, R.A. No. 1125 as amended by
R.A. No. 9282).
 THEN, a party adversely affected by a
resolution of a Division of the CTA on a
motion for reconsideration may file a petition
for review with the CTA en banc (Sec. 18, R.A.
No. 1125 as amended by R.A. No. 9282).
 A Motion for Reconsideration or Motion for
New Trial from the decision of the CTA
division is mandatory, because Rule 8, Sec.
1(Review of cases in Court en banc) of CTA
rules uses the word, ―must‖. Meanwhile, the
same is optional with CTA En Banc as Rule
16, Sec. 1 (Appeal to the Supreme Court by
petition for review on Certiorari) of CTA
rules uses the word ―may‖.
5. Petition for review on certiorari to the
Supreme Court
 By filing a petition for review on certiorari
under Rule 45 of the Rules of Court with
respect to a decision or ruling of the CTA en
banc. The Supreme Court shall act on the
appeal.
Effect of appeal
 Purple Notes
Taxation Law
 The motion for reconsideration or for new
trial filed before the Court shall be deemed
abandoned if, during its pendency, the
movant shall appeal to the Supreme Court
pursuant to Section 1 of this Rule. [2002
Internal Rules of the Court of Appeals, Rule VI,
sec. 15a] (Sec. 2, Rule 16, RRCTA)

 A party adversely affected by a decision or

ruling of the Court en banc may appeal
therefrom by filing with the SC a verified
petition for review on certiorari within 15
days from receipt of a copy of the decision or
resolution, as provided in Rule 45 of the
ROC. If such party filed a motion for
reconsideration or for new trial, the period
herein fixed shall run from the party‘s receipt
of a copy of the resolution denying the
motion for reconsideration or for new trial.

HAIL TO THE CHIEFS

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