TAXATION LAW 2021

TAXATION 1
I. GENERAL PRINCIPLES

A. CONCEPT AND PURPOSE OF TAXATION

1. DEFINITION
Taxes- (1)Enforced proportional contribution from persons and properties (2) levied by the
law-making body of the State by virtue of its sovereignty (3) for the support of the
Government and all public needs (Republic vs. COCOFED, 2001).

As a Power
Taxation is the inherent power by which the sovereign, through its law-making body, raises
income to defray the necessary expenses of government;

As a method0
A method of apportioning the cost of government among those who in some measure are
privileged to enjoy its benefits and must, therefore, bear its burdens.

2. PURPOSE
Revenue-raising
The primary purpose is to generate funds for the State to finance the needs of the citizenry
and to advance the common weal.

Fees may be properly regarded as taxes even though they also serve as an instrument of
regulation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and
substantial purposes, then the exaction is properly called a tax.

Non-revenue/ special or regulatory

Taxation is often employed as a device for regulation by means of which certain effects or
conditions envisioned by governments may be achieved. 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.
Thus, taxation can:

1. Promote general welfare of the people as an implement of police power

The so-called “sin taxes” on alcohol and tobacco manufacturers help dissuade the
consumers from excessive intake of these potentially harmful products.
2. Strengthen anemic enterprises or provide incentives to greater production
through grant of tax exemptions or the creation of conditions conducive to their
growth.

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 3. Protect local industries against foreign competition by imposing additional taxes on
imported goods, or encourage foreign trade by providing tax incentives on imported
goods.
4. Be a bargaining tool by setting tariff rates first at a relatively high level before trade
negotiations are entered into with another country.
5. Halt inflation in periods of prosperity to curb spending power; ward off depression
in periods of slump to expand business.
6. Reduce inequalities in wealth and incomes, as for instance, the estate, donor's and
income taxes, their payers

Nature
1. Inherent in sovereignty – The power to tax is an attribute of sovereignty. It is a
power emanating from necessity because it imposes a necessary burden to preserve
the State's sovereignty.

2. Essentially a legislative function – The power to tax is peculiarly and exclusively

legislative and cannot be exercised by the executive or judicial branch of the
government. Hence, only Congress, our national legislative body, can impose taxes.
The levy of a tax, however, may also be made by a local legislative body subject to
such limitations as may be provided by law. It includes the authority to:
a. Determine the nature, purpose, extent, coverage, apportionment, situs, and
method of collection of the tax;
b. Grant tax exemptions or condonations; and
c. Specify or provide for the administrative as well as judicial remedies that
either the government or the taxpayers may avail themselves in the proper
implementation of the tax measure.

3. Subject to constitutional and inherent limitations – The power to tax is said to be

the strongest of all the powers of government. It is unlimited, plenary,
comprehensive and supreme. In the absence of constitutional restrictions, the
principal checks on its abuse rest on the responsibility of members of Congress to
their constituents. However, the power of taxation is subject to constitutional and
inherent limitations. These limitations are those provided in the fundamental law or
implied therefrom, while the rest spring from the nature of the taxing power itself
although they may or may not be provided in the Constitution.

Elements of Taxation
1. Enforced proportional contribution from persons and properties - Its imposition
is in no way dependent upon the will or assent of the person taxed. It is not
contractual, either express or implied, but positive acts of government;
2. Imposed by the State by virtue of its sovereignty; and
3. It is levied for the support of government.

Characteristics of Taxing Power

1. It is comprehensive- Covers persons, businesses, activities, professions, rights, and
privileges.
2. It is unlimited- A tax does not cease to be valid merely because it regulates,
discourages, or even definitely deters the activities taxed. The power to impose taxes
is one so unlimited in force and so searching in extent, that the courts scarcely venture

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 to declare that it is subject to any restrictions whatever, except such as rest in the
discretion of the authority which exercises it.
3. It is plenary or complete- Under NIRC, the BIR may avail of certain remedies to
ensure the collection of taxes. Taxes, being the lifeblood of the government, should be
collected without unnecessary hindrance, every precaution must be taken not to
unduly suppress it.
4. It is supreme- It is supreme insofar as the selection of the subject of taxation is
concerned, but it does not mean that it is superior to the other inherent powers of the
State.

Characteristics of Tax
1. Enforced contribution
2. Proportionate in character – Laid by some rule of apportionment which is usually
based on ability to pay.

“The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation (Sec. 28 (1), Art. VI, 1987 Constitution)”;
3. Levied for public purpose- Revenues derived from taxes cannot be used for purely
private purposes or for the exclusive benefit of private persons; and
4. Generally payable in the form of money – Although the law may provide payment
in kind (e.g. backpay certificates under Sec. 2, R.A. No. 304, as amended);
5. Personal to the taxpayer;
6. Levied on persons, property, rights, acts, privileges, or transactions;
7. Levied by the State which has jurisdiction or control over the subject to be
taxed;
8. Levied by the law-making body of the State- The power to tax is a legislative power
but is also granted to local governments, subject to such guidelines and limitations as
law may be provided by law.

“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 (Sec. 5, Art. X, 1987 Constitution)”;

3. DISTINGUISH: TAX AND OTHER FORMS OF

EXACTIONS
Tariff
Taxes Tariff
All embracing term to include various kinds A kind of tax imposed on articles which are
of enforced contributions upon persons for traded internationally
the attainment of public purposes

Tariff may be used in one of three (3) senses:

1. A book of rates drawn usually in alphabetical order containing the names of several
kinds of merchandise with the corresponding duties to be paid for the same; or
2. The duties payable on goods imported or exported; or

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 3. The system or principle of imposing duties on the importation (or exportation of
goods)

Toll
Taxes
Paid for the support of the government
Demand of sovereignty
Generally, no limit on the amount collected
as long as it is not excessive, unreasonable
or confiscatory
Imposed only by the government
Toll
Paid for the use of another’s property
Demand of proprietorship
Amount paid depends upon the cost of
construction or maintenance of the public
improvement used
Imposed by the government or by private
individuals or entities

A toll is a sum of money for the use of something, generally applied to the consideration
which is paid for the use of a road, bridge or the like, of a public nature.

License Fee
Taxes License and Regulatory Fee
Imposed under the taxing power of the state Levied under the police power of the state
for purposes of revenue
Forced contributions for the purpose of Exacted primarily to regulate certain
maintaining government functions business or occupations
Generally unlimited as to amount Should not unreasonably exceed the
expenses of issuing the license and of
supervision
Imposed on persons, property, and the right Imposed only on the right to exercise a
to exercise a privilege privilege
Failure to pay does NOT necessarily make Failure to pay makes the act or business
the act or business illegal. illegal.

Penalty for non-payment:

Surcharges; or imprisonment (except poll
tax).

License or permit fee- is a charge imposed under the police power for purposes of
regulation.

License is in the nature of a special privilege, of a permission or authority to do what is

within its terms. It makes lawful an act which would otherwise be unlawful. A license
granted by the State is always revocable.

Importance of the distinctions

1. It is necessary to determine whether a particular imposition is a tax or a license fee
because some limitations apply only to one and not to the other, and for the reason
that exemption from taxes may not include exemption from license fee.
2. The power to regulate as an exercise of police power does not include the power to
impose fees for revenue purposes.
3. An exaction, however, may be considered both a tax and a license fee. This is true in
the case of car registration fees which may be regarded as taxes even as they also
serve as an instrument of regulation. *If the purpose is primarily revenue, or if
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 revenue is, at least, one of the real and substantial purposes, then the exaction is
properly called a tax (Phil. Airlines, Inc. v. Edu, G.R. No. L- 41383 (1988)).
4. But it is possible that a tax may only have a regulatory purpose. The general rule,
however, is that the imposition is a tax if its primary purpose is to generate revenue,
and regulation is merely incidental; *but if regulation is the primary purpose, the
fact that incidentally revenue is also obtained does not make the imposition a tax.

*Primary purpose test:

1. Imposition must relate to an occupation or activity that so engages the public interest
in health, morals, safety, and development as to require regulation for the protection
and promotion of such public interest;
2. Imposition must bear a reasonable relation to the probable expenses of regulation,
taking into account not only the costs of direct regulation but also its incidental
consequences as well.

NOTE: Taxes may also be imposed for regulatory purposes. It is called regulatory tax.

Special Assessment
Taxes Special Assessment
Levied not only on land Levied only on land
Imposed regardless of public improvements Imposed because of an increase in value of
land benefited by public improvement
Contribution of a taxpayer for the support of Contribution of a person for the
the government construction of a public improvement
It has general application both as to time Exceptional both as to time and locality
and place

A special assessment is not a personal liability of the person assessed, i.e., his liability is
limited only to the land involved. It is based wholly on benefits (not necessity).

A charge imposed only on property owners benefited is a special assessment rather than a tax
notwithstanding that the statute calls it a tax. The rule is that an exemption from taxation does
not include exemption from special assessment. But the power to tax carries with it the power
to levy a special assessment.

NOTE: The term "special levy" is the name used in the present Local Government Code
(RA. No. 7160). A province, city, or municipality, or the National Government, may impose a
special levy on lands especially benefited by public works or improvements financed by it.

Debt
Taxes Debt
Based on laws Generally based on contract, express or
implied
Generally cannot be assigned Assignable
Generally paid in money May be paid in kind
Cannot be a subject of set off or Can be a subject of set off or compensation
compensation
Imprisonment is a sanction for non-payment A person cannot be imprisoned for a non-
of tax, except poll tax payment of debt (except when it arises from
a crime)
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 Governed by the special prescriptive periods Draws interest when it is so stipulated or
provided for in the NIRC where there is default
Imposed only by public authority Can be imposed by private individual

A tax is not a debt in the ordinary sense of the word.

Penalty
Taxes Penalty
Violation of tax laws may give rise to Any sanction imposed as a punishment for
imposition of penalty violation of law or acts deemed injurious
Primarily intended to raise revenue Designed to regulate conduct
May be imposed only by the government May be imposed by the government or
private individuals or entities
Cannot be a subject of set off or Can be a subject of set off or compensation.
compensation

B. DISTINGUISH: POWER OF TAXATION, POLICE

POWER, AND EMINENT DOMAIN
When the distinction of exercise of power is relevant- The distinction is important when
the one exercising it is the LGU (mere delegated authority).

Since Congress has the power to exercise the State inherent powers of Police Power, Eminent
Domain, and Taxation, the distinction between police power and the power to tax would not
be of any moment when Congress itself exercises the power.

Taxation Police Power Eminent Domain

Authority (who exercises the power)
May be exercised only by: May be exercised only by: May be exercised only by:
1. The government; or 1. The government; or 1. The government;
2. Its political 2. Its political 2. Its political
subdivisions. subdivisions. subdivisions; or
3. May be granted to
public service
companies or public
utilities.
Purpose
The property (generally in The use of the property is To facilitate the taking of
the form of money) is taken “regulated” for the purpose private property for public
for the support of the of promoting the general use.
government. welfare; it is not
compensable.
Persons Affected
Operates upon: Operates upon: Operates upon:
1. A community; or 1. A community; or 1. An individual as the
2. Class of individuals Class of individuals owner of a particular
property.
Effect

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 The money contributed There is no transfer of title. There is transfer of right to
becomes part of the public At most, there is restraint on property.
funds. the injurious use of property.
Benefits Received
Protection and benefits he Indirect Benefits. Market value of the
receives, The person affected receives property.
The enjoyment of the indirect benefits as may He receives the market value
privileges of living in an arise from the maintenance of the property taken from
organized society, of a healthy economic him.
established and safeguarded standard of society.
by the devotion of taxes to
public purpose.
Amount of Imposition
Generally, there is NO limit Amount imposed should just No amount imposed but
on the amount of tax that be commensurate to cover rather the owner is paid the
may be imposed the cost of regulation, market value of property
issuance of a license or taken.
surveillance.
Relationship to Constitution
Subject to constitutional Relatively free from Inferior to the impairment
limitations, including the constitutional limitations prohibition; government
prohibition against and is superior to the cannot expropriate private
impairment of the obligation impairment of contract property, which under a
of contracts. provisions. contract has previously
bound itself to purchase
from the other contracting
party.

C. THEORY AND BASIS OF TAXATION

1. LIFEBLOOD DOCTRINE
The underlying basis of taxation is governmental necessity, for without taxation, a
government can neither exist nor endure.

Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. It is said that taxes are what we pay for civilized society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and operate it (CIR
v. Algue, G.R. No. L-28896 (1988); See also CIR v. Pineda, G.R. No. L-22734 (1967)).

2. NECESSITY THEORY
The power of taxation proceeds upon the theory that the existence of the government is a
necessity; that it cannot continue without means to pay its expenses; and that for those means
it has the right to compel all citizens and property within its limits 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:
1. an army to resist an aggression;
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 2. a navy to defend its shores from invasion;
3. a corps of civil servants to serve;
4. public improvement designed for the enjoyment of the citizenry and those which
come within the State's territory; and
5. facilities and protection which a government is supposed to provide.

The obligation to pay taxes rests upon the necessity of money for the support of the state. For
this reason, no one is allowed to object to or resist the payment of taxes solely because no
personal benefit to him can be pointed out (Lorenzo v. Posadas, G.R. No. L-43082 (1937)).

3. BENEFITS-RECEIVED THEORY (Symbiotic Relationship)

This principle serves as the basis of taxation and is founded on the reciprocal duties of
protection and support between the State and its inhabitants.

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.

D. JURISDICTION OVER SUBJECT AND OBJECTS

The limited powers of sovereignty are confined to objects within the respective spheres of
governmental control. These objects are the proper subjects or objects of taxation and none
else.

1. Tax laws cannot operate beyond a State’s territorial limits

2. The government cannot tax a particular object of taxation which is not within its
territorial jurisdiction
3. Property outside the State’s jurisdiction does not receive any protection of the State
4. If a law is passed by Congress, it must see to it that the object or subject of taxation
is within the territorial jurisdiction of the taxing authority.

E. PRINCIPLES OF A SOUND TAX SYSTEM

1. FISCAL ADEQUACY
The sources of tax revenue should coincide with, and approximate the needs of, government
expenditures. The revenue should be elastic or capable of expanding or contracting annually
in response to variations in public expenditures.

2. THEORETICAL JUSTICE
The tax burden should be in proportion to the taxpayer’s ability to pay. This is the so-called
ability to pay principle. Taxation should be uniform as well as equitable (Section 28(1),
Art. VI, 1987 Constitution). The State must evolve a progressive system of taxation.
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Taxation is said to be equitable when its burden falls on those better able to pay; taxation is
progressive when its rate goes up depending on the resources of the person affected.

NOTE: The non-observance of the above principles will not necessarily render the tax
imposed invalid except to the extent those specific constitutional limitations are violated.

*A tax law will retain its validity even if it is not in consonance with the principles of fiscal
adequacy and administrative feasibility because the Constitution does not expressly require
so. These principles are only designed to make our tax system sound. However, if a tax law
runs contrary to the principle of theoretical justice, such violation will render the law
unconstitutional considering that under the Constitution, the rule of taxation should be
uniform and equitable.

3. ADMINISTRATIVE FEASIBILITY
Tax laws should be capable of convenient, just, and effective administration. Each tax
should be:
1. capable of uniform enforcement by government officials,
2. convenient as to the time, place, and manner of payment,
3. enforced with the least inconvenience to the taxpayer; and
4. NOT unduly burdensome upon or discouraging to business activity.

F. INHERENT AND CONSTITUTIONAL

LIMITATIONS ON TAXATION
INHERENT LIMITATIONS

1. Public Purpose
The proceeds of the tax must be used:
1. for the support of the State; or
2. for some recognized objects of government or directly to promote the welfare of the
community.

Test: Whether the statute is designed to promote the public interest, as opposed to the
furtherance of the advantage of individuals, although each advantage to individuals might
incidentally serve the public.

The public purpose of a tax may legally exist even if the motive which impelled the
legislature to impose the tax was to favor one industry over another (Tio v. Videogram, G.R.
No. L-75697 (1987))

Public use is no longer confined to the traditional notion of use by the public but held
synonymous with public interest, public benefit, public welfare, and public convenience
(Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647
(2005)).

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It is the purpose which determines the public character of the tax law, not the number of
persons benefited.

2. Inherently Legislative/ Non-delegability of Taxing Power

GR: Delegata potestas non potest delegari (No delegated powers can be further delegated)

The power to tax is exclusively vested in the legislative body and it may not be re-delegated.

Taxation may exceptionally be delegated, subject to such well-settled limitations as:

1. The delegation shall not contravene any constitutional provision or the inherent
limitations of taxation;
2. The delegation is effected either by:
a. The Constitution; or
b. By validly enacted legislative measure or statute; and
3. The delegated levy power, except when the delegation is by an express provision of
the Constitution itself, should only be in favor of the local legislative body of the local
or municipal government concerned (Vitug vs. Acosta).

For a valid delegation of power, it is essential that the law delegating the power must be
1. Complete in itself, that is, it must set forth the policy to be executed by the delegate
and,
2. It must fix a standard — limits of which are sufficiently determinate or determinable
— to which the delegate must conform (Osmena v. Orbos, G.R. No. 99886 (1993)).

Exceptions
1. Delegation to local government units
This exception is in line with the general principle that the power to create municipal
corporations for purposes of local self-government carries with it, by necessary
implication, the power to confer the power to tax on such local governments. This is
logical for after all, municipal corporations are merely instrumentalities of the state
for the better administration of the government in respect to matters of local concern
(Pepsi-Cola Bottling Co. of the Phil. Inc. v. Mun. of Tanauan, G.R. No. L-31156
(1976)).

Under the new Constitution, however, LGUs are now expressly given the 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 which must be consistent with
the basic policy of local autonomy (Sec 5, Art. X 1987 Constitution).

2. Delegation to the President

a. Tariff powers by Congress under the Flexible Tariff Clause
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 imposts within the framework of the national development program of the
Government (Sec. 28(2), Art. VI, 1987 Constitution).
b. Emergency Powers (Sec. 23(2), Art. VI, 1987 Constitution)
c. To enter into Executive agreements; and
d. To ratify treaties which grant tax exemption subject to Senate
concurrence.

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 3. Delegation to administrative agencies
Limited to the administrative implementation that calls for some degree of
discretionary powers under sufficient standards expressed by law or implied from the
policy and purposes of the Act.

There are certain aspects of the taxing process that are not legislative and they may,
therefore, be vested in an administrative body. The powers which are not legislative
include:
a. The power to value property for purposes of taxation pursuant to fixed rules;
b. The power to assess and collect the taxes; and
c. The power to perform any of the innumerable details of computation,
appraisement, and adjustment, and the delegation of such details.

Completeness Test- Regulation must be germane to the objects and purpose of the
law.

Sufficient Standard Test- Regulation shall not contradict but it must be in

conformity with the standards prescribed by the law.

The exercise of the above powers is really not an exception to the rule as no delegation of the
strictly legislative power to tax is involved.

The powers which cannot be delegated include:

1. The determination of the subjects to be taxed;
2. The purpose of the tax, the amount or rate of the tax;
3. The manner, means, and agencies of collection; and
4. The prescribing of the necessary rules with respect thereto.

3. Territorial
Rule: A state may not tax property lying outside its borders or lay an excise or privilege tax
upon the exercise or enjoyment of a right or privilege derived from the laws of another state
and therein exercise and enjoyed.

Reasons:
1. Tax laws do not operate beyond a country’s territorial limits.
2. Property which is wholly and exclusively within the jurisdiction of another state
receives none of the protection for which a tax is supposed to be a compensation.

NOTE: Where privity of relationship exists.

It does not mean, however, that a person outside of state is no longer subject to its taxing
powers. The fundamental basis of the right to tax is the capacity of the government to provide
benefits and protection to the object of the tax. A person may be taxed where there is between
him and the taxing state, a privity of the relationship justifying the levy. Thus, the citizen’s
income may be taxed even if he resides abroad as the personal (as distinguished from
territorial) jurisdiction of his government over him remains. In this case, the basis of the
power to tax is not dependent on the source of the income nor upon the location of the
property nor upon the residence of the taxpayer but upon his relation as a citizen to the state.
As such a citizen, he is entitled, wherever he may be, inside or outside of his country, to
the protection of his government.

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4. International Comity
Comity – respect accorded by nations to each other because they are sovereign equals. Thus,
the property or income of a foreign state or government may not be the subject of taxation by
another state.

Reasons:
1. In par in parem non habet imperium- As between equals there is no sovereign
(Doctrine of Sovereign Equality among states under international law). One state
cannot exercise its sovereign powers over another. All states, including the smallest
and least influential, are also entitled to their dignity and the protection of their honor
and reputation.
2. In international law, a foreign government may not be sued without its consent.
Therefore, it is useless to impose a tax which could not be collected.
3. Usage among states that when a foreign sovereign enters the territorial jurisdiction of
another, there is an implied understanding that the former does not intend to degrade
its dignity by placing itself under the jurisdiction of the other.

5. Exemption of Government Entities, Agencies, and Instrumentalities

If the taxing authority is the National Government:
GR: Agencies and instrumentalities of the government are exempt from tax. Their exemption
rests on the State's sovereign immunity from taxation. The State cannot be taxed without its
consent and such consent, being in derogation of its sovereignty, is to be strictly construed.

NOTE: Unless otherwise provided by law, the exemption applies only to government
entities through which the government immediately and directly exercises its sovereign
powers. With respect to government-owned or controlled corporations (GOCCs)
performing proprietary (not governmental) functions, they are generally subject to tax
unless exempted under Section 27(c) of the Tax Code or, in certain cases, if there is a tax
exemption provisions in their charters or the law creating them in line with the rule that a
specific law overrides a general law.

If the taxing authority is a local government unit: RA 7160 expressly prohibits LGUs from
levying tax on the National Government, its agencies and instrumentalities and other LGUs
(Sec. 133 (o), LGC).

The following GOCCs are considered tax exempt:

1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Philippine Charity Sweepstakes Office (PCSO) (Sec 27(c), NIRC as amended)

NOTE: There is no constitutional prohibition against the government taxing itself.

CONSTITUTIONAL LIMITATIONS

1. Provisions directly affecting taxation:

1. Prohibition against imprisonment for non-payment of poll tax;

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 No person shall be imprisoned for debt or non-payment of a poll tax (Sec. 20, Art. III,
1987 Constitution)

Capitation or poll taxes- are taxes of a fixed amount upon all persons, or upon all the
persons of a certain class, resident within a specified territory, without regard to their
property or the occupations in which they may be engaged. Taxes of a specified
amount upon each person performing a certain act or engaging in a certain business or
profession are not, however, poll taxes.

2. Uniformity and equality of taxation;

The rule of taxation shall be uniform and equitable. Congress shall evolve a
progressive system of taxation (Sec. 28(1), Art. VI, 1987 Constitution).

a. Uniformity – All taxable articles or properties of the same class shall be taxed
at the same rate.
i. Uniformity of operation throughout tax unit – The rule requires the
uniform application and operation, without discrimination, of the tax in
every place where the subject of it is found (geographic uniformity).

Example, that a tax for a national purpose must be uniform and equal
throughout the country and a tax for a province, city, municipality, or
barangay must be uniform and equal throughout the province, city,
municipality or barangay.
ii. Equality in burden – Uniformity implies equality in burden, not
equality in amount or equality in its strict and literal meaning. The
reason is simple enough. If legislation imposes a single tax upon all
persons, properties, or transactions, an inequality would obviously
result considering that not all persons, properties, and transactions are
identical or similarly situated. Neither does uniformity demand that
taxes shall be proportional to the relative value or amount of the
subject thereof. Taxes may be progressive.

b. Equity (Progressivity of taxation)

i. Uniformity in taxation is effected through the apportionment of the tax
burden among the taxpayers which under the Constitution must be
equitable. “Equitable” means fair, just, reasonable, and proportionate
to the taxpayer’s ability to pay. Taxation may be uniform but
inequitable where the amount of the tax imposed is excessive or
unreasonable.
ii. The constitutional requirement of equity in taxation also implies an
approach which employs a reasonable classification of the entities or
individuals who are to be affected by a tax. Where the “tax
differentiation is NOT based on material or substantial differences,”
the guarantee of equal protection of the laws and the uniformity rule
will likewise be infringed.

Taxation does not require identity or equality under all circumstances, or negate
the authority to classify the objects of taxation.

Test of Valid Classification:

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 Classification, to be valid, must be reasonable and this requirement is not deemed
satisfied unless:
a. It is based upon substantial distinctions which make real differences;
b. These are germane to the purpose of the legislation or ordinance;
c. The classification applies not only to present conditions but also to future
conditions substantially identical to those of the present; and
d. The classification applies equally to all those who belong to the same class
(Pepsi-Cola v. Butuan City, G.R. No. L- 22814 (1968)).

The progressive system of taxation would place stress on direct rather than indirect
taxes, on non-essentiality rather than essentiality to the taxpayer of the object of
taxation, or on the taxpayer’s ability to pay.
Example is that individual income tax system that imposes rates progressing upwards
as the tax base (taxpayer’s taxable income) increases. A progressive tax, however,
must not be confused with a progressive system of taxation.

While equal protection refers more to like treatment of persons in like

circumstances, uniformity and equity refer to the proper relative treatment for tax
purposes of persons in unlike circumstances.

3. Grant by Congress of authority to the President to impose tariff rates;

Delegation of Tariff powers to the President under the flexible tariff clause (Sec.
28(2), Art. VI, 1987 Constitution), which authorizes the President to modify import
duties.

4. Prohibition against taxation of religious, charitable entities, and educational

entities;
(Sec. 28(3), Art. VI, 1987 Constitution)
a. Charitable institutions, churches and personages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements,
b. Actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation.
c. The tax exemption under this constitutional provision covers property taxes
only and not other taxes.
d. In general, special assessments are not covered by the exemption because by
nature they are not classified as taxes.

To be entitled to the exemption, the petitioner must prove that:

a. It is a charitable institution
b. Its real properties are actually, directly, and exclusively used for charitable
purposes.

Revenue or income from trade, business or other activity, the conduct of which is not
related to the exercise or performance of religious, educational and charitable
purposes or functions shall be subject to internal revenue taxes when the same is not
actually, directly or exclusively used for the intended purposes (BIR Ruling 046-
2000).

Test of Exemption Use of the property, and not the ownership.

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 Nature of Use Actual, direct, and exclusive use for religious, charitable or
educational purposes.
Scope of Exemption Real property taxes on facilities which are actual, incidental to,
or reasonably necessary for the accomplishment of said
purposes such as in the case of hospitals, a school for training
nurses, a nurses’ home, property to provide housing facilities
for interns, resident doctors and other members of the hospital
staff, and recreational facilities for student nurses, interns and
residents, such as athletic fields.

TEST: Whether an enterprise is charitable or not:

a. Whether it exists to carry out a purpose recognized in law as charitable; or
b. Whether it is maintained for gain, profit, or private advantage

A charitable institution does not lose its character as such and its exemption from
taxes simply because it derives income from paying patients, whether out-patient, or
confined in the hospital, or receives subsidies from the government, so long as the
money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons
managing or operating the institution (including honoraria to members of the board of
trustees; BIR Ruling No. 558-18, among others).

5. Prohibition against taxation of non-stock, non-profit educational institutions;

Sec. 4, Art. XIV, 1987 Constitution
All revenues and assets of non-stock, non- profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from
taxes and duties.

Proprietary educational institutions, including those cooperatively owned, may

likewise be entitled to such exemptions subject to the limitations provided by law,
including restrictions on dividends and provisions for reinvestment.

Subject to conditions prescribed by law, all grants, endowments, donations, or

contributions used actually, directly, and exclusively for educational purposes shall be
exempt from tax.

This provision covers only non-stock, non- profit educational institutions.

The exemption covers income, property, and donor’s taxes, custom duties, and other
taxes imposed by either or both the national government or political subdivisions on
all revenues, assets, property, or donations, used actually, directly, and exclusively
for educational purposes (In the case of religious and charitable entities and non-
profit cemeteries, the exemption is limited to property tax).

The exemption does not cover revenues derived from, or assets used in, unrelated
activities or enterprise.
Revenues derived from assets used in the operation of cafeterias, canteens, and
bookstores are also exempt if they are owned and operated by the educational
institution as ancillary activities and the same are located within the school premises.

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 Lands, buildings, and improvements actually, directly and exclusively used for
educational purposes are exempt from property tax (Sec. 28(3), Art. VI, 1987
Constitution), whether the educational institution is proprietary or non-profit.

CIR vs. DLSU, 2016; La Sallian vs. CIR

When a non-stock, non-profit educational institution proves that it uses its revenues
actually, directly, and exclusively for educational purposes, it shall be exempt from
income tax, VAT, and Local Business Tax (LBT).

On the other hand, when it also shows that it uses its assets in the form of real
property for educational purposes, it shall be exempted from Real Property Tax
(RPT).

The last paragraph of Sec. 30 of the Tax Code is without force and effect with respect
to non-stock, non-profit educational institutions, provided, that the non-stock, non-
profit educational institutions prove that its assets and revenues are used actually,
directly, and exclusively for educational purposes. The tax exemption
constitutionally-granted to non-stock, non-profit educational institutions, is not
subject to limitations imposed by law.

CIR vs. St. Luke’s Medical Center, Inc., 2012 & 2017
Even if the charitable institution must be “organized and operated exclusively” for
charitable purposes, it is nevertheless allowed to engage in “activities conducted for
profit” without losing its tax exempt status for its not-for-profit activities.

The only consequence is that the “income of whatever kind and character” of a
charitable institution “from any of its activities conducted for profit, regardless of the
disposition made of such income, shall be subject to tax”.

Charitable or Religious Entities Non-stock, Non-profit Educational

Real properties that are actually,
directly, and exclusively used for
charitable or religious purposes are
exempt from Real Property Tax.
Income received by them AS SUCH is
exempt from Income Tax.
*INCOME FROM PROPERTIES OR
ACTIVITIES conducted for profit are
taxable regardless of disposition.
Entities
Real properties that are actually,
directly, and exclusively used for
educational purposes are exempt from
Real Property Tax.
Income received by them AS SUCH is
exempt from Income Tax.
*REVENUES FROM PROPERTIES
OR ACTIVITIES conducted for profit
that are actually, directly, and
exclusively used for educational
purposes are tax-exempt.

6. Majority vote of Congress for grant of tax exemption;

Sec. 28, Art. VI, 1987 Constitution
No law granting any tax exemption shall be passed without the concurrence of a
majority of all the Members of the Congress.

Basis: The inherent power of the state to impose taxes carries with it the power to
grant tax exemptions.

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 Exemptions may be created by:
a. The Constitution, or
b. Statutes, subject to constitutional limitations

Vote required for the grant of exemption:

Absolute majority of the members of Congress (at least 1⁄2 + 1 of ALL the members
voting SEPARATELY)
Vote required for withdrawal of such grant of exemption:
Relative majority is sufficient (MAJORITY of the QUORUM).

The provision guaranteeing equal protection of the laws and that mandating the rule
of taxation shall be uniform and equitable likewise limit, although not expressly, the
legislative power to grant tax exemption.

Grants in the nature of tax exemptions:

a. Tax amnesties
b. Tax condonations
c. Tax refunds

NOTE:
a. 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).
b. The President of the Philippines may, when public interest so requires,
condone or reduce the real property tax and interest for any year in any
province or city or a municipality within the Metropolitan Manila Area (Sec.
277, LGC).

7. Prohibition on use of tax levied for special purpose;

All money collected on any tax levied for a special purpose shall be treated as a
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.

8. President’s veto power on appropriation, revenue, tariff bills;

Sec. 27(2), Art. VI, 1987 Constitution
The President shall have the power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall not affect the item or times to
which he does not object.

9. Non-impairment of jurisdiction of the Supreme Court;

Sec. 2, Art. VIII, 1987 Constitution
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.

Sec. 5(2(b)), Art. VIII, 1987 Constitution

The Supreme Court shall have the following powers: xxx

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 1. Review, revise, modify, or affirm on appeal or certiorari, as the laws or the Rules
of Court may provide, final judgments and orders of lower courts in xxx

b. all cases involving the legality of any tax, impost, assessment, or toll or any
penalty imposed in relation thereto.

Even the legislative body cannot deprive the SC of its appellate jurisdiction over all
cases coming from inferior courts where the constitutionality or validity of an
ordinance or the legality of any tax, impost, assessment, or toll is in question.

10. Grant of power to the local government units to create its own sources of
revenue;
LGUs have 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 which
must be consistent with the basic policy of local autonomy (Sec. 5, Art. X, 1987
Constitution).

11. Flexible tariff clause;

Delegation of tariff powers to the President under the flexible tariff clause (Sec.
28(2), Art. VI, 1987 Constitution)

12. Exemption from real property taxes; and

Sec. 28(3), Art. VI, 1987 Constitution
Charitable institutions, churches and personages 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.

13. No appropriation or use of public money for religious purposes.

Sec. 29, Art. VI, 1987 Constitution
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.

2. Provisions indirectly affecting taxation:

1. Due process;
Sec. 1, Art. III, 1987 Constitution
No person shall be deprived of life, liberty, or property without due process of law,
nor shall any person be denied the equal protection of the laws.
Due Process in Taxation requirements:
a. Public purpose
b. Imposed within taxing authority’s territorial jurisdiction
c. Assessment or collection is NOT arbitrary or oppressive

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 The due process clause may be invoked where a taxing statute is so arbitrary that it
finds no support in the Constitution, as where it can be shown to amount to the
confiscation of property (Sison v. Ancheta, G.R. No. L- 59431(1984)).

Due process is usually violated where:

a. The tax imposed is for private, as distinguished from, public purposes
b. A tax is imposed on property outside the State, i.e., extra-territorial taxation;
or
c. Arbitrary or oppressive methods are used in assessing and collecting taxes.

But, a tax does not violate the due process clause, as applied to a particular taxpayer,
although the purpose of the tax will result in an injury rather than a benefit to such
taxpayer.

Instances of violations of the due process clause:

a. If the tax amounts to confiscation of property;
b. If the subject of confiscation is outside the jurisdiction of the taxing authority;
c. If the tax is imposed for a purpose other than a public purpose;
d. If the law which is applied retroactively imposes just and oppressive taxes.
e. If the law violates the inherent limitations on taxation.

2. Equal protection;
Sec. 1, Art. III, 1987 Constitution
No person shall be deprived of life, liberty, or property without due process of law,
nor shall any person be denied the equal protection of the laws.

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 are subject to the same rate and the tax is
administered impartially upon them.”

The equal protection clause is subject to reasonable classification:

Valid Classification:
a. It is based upon substantial distinctions which make real differences;
b. These are germane to the purpose of the legislation or ordinance;
c. The classification applies not only to present conditions but also to future
conditions substantially identical to those of the present; and
d. The classification applies equally to all those who belong to the same class

3. Religious freedom;
Sec. 5, Art. III, 1987 Constitution
No law shall be made respecting an establishment of religion, or prohibiting the free
exercise thereof (Non-establishment clause).

The free exercise and enjoyment of religious profession and worship, without
discrimination or preference, shall forever be allowed (Free exercise clause).

No religious test shall be required for the exercise of civil and political rights.

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 The free exercise clause is the basis of tax exemptions.
The imposition of license fees on the distribution and sale of bibles and other religious
literature by a non-stock, non-profit missionary organization not for purposes of profit
amounts to a condition or permit for the exercise of their right, thus violating the
constitutional guarantee of the free exercise and enjoyment of religious profession and
worship which carries with it the right to disseminate religious beliefs and information
(American Bible Society v. City of Manila, G.R. No. L-9637 (1957)).
a. It is actually in the nature of a condition or permit for the exercise of the
right.
b. This is different from a tax in the income of one who engages in religious
activities or a tax on property used or employed in connection with those
activities.
c. It is one thing to impose a tax on the income or property of a preacher. It is
quite another thing to exact a tax for the privilege of delivering a sermon.

The Constitution, however, does not prohibit imposing a generally applicable tax on
the sale of religious materials by a religious organization (Tolentino v. Secretary of
Finance, G.R. No. 115455 (1994))

4. Non-impairment of obligations of contracts;

Sec. 10, Art. III, 1987 Constitution
No law impairing the obligation of contracts shall be passed.

The Contract Clause has never been thought as a limitation on the exercise of the
State's power of taxation save only where a tax exemption has been granted for a valid
consideration.

There is an impairment if a tax exemption based in a contract is revoked by a latter

statute; but, the non-impairment clause will only be violated if and when the taxing
authority was a party to the contract in question.

5. Freedom of speech and expression;

6. Presidential power to grant reprieves, communications, and pardons, and remit

fines and forfeitures after conviction by final judgement; and

7. No taking of private property for public use without just compensation.

G. STAGES OR ASPECTS OF TAXATION

1. Legislative Act: Levy or Imposition
This process involves the passage of tax laws or ordinances through the legislature. The tax
laws to be passed shall determine:
1. Those to be taxed (person, property, or rights);
2. How much is to be collected (the rate and the base of tax); and
3. How taxes are to be implemented (the manner of imposing and collecting tax).

It also involves the granting of tax exemptions, tax amnesties or tax condonation.

Scope of legislative power to tax:

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 1. Discretion as to purpose for which taxes shall be levied.
The sole arbiter of the purposes for which taxes shall be levied is the legislature,
provided the purposes are public. The courts may review the levy of the tax to
determine whether the purpose is a public one but once that is determined, the courts
can make no other inquiry as to the purpose of tax, as it affects the power to impose it.

2. Discretion as to subjects of taxation.

It is inherent in the power to tax that a state be free to select the subjects of taxation,
and it has been repeatedly held that inequalities which result from a singling out of
one particular class for taxation or exemption infringe no constitutional limitation.

3. Discretion as to amount or rate of tax.

In the absence of constitutional prohibitions, the legislature has the right to finally
determine the amount or rate of tax. Not only is the power to tax unlimited in its reach
as to subjects, but in its very nature, it acknowledges no limits and may be carried
even to the extent of exhaustion and destruction, thus becoming in its exercise a
power to destroy.

The power to tax includes the power to destroy if it is used validly as an implement
of the police power in discouraging and in effect, ultimately prohibiting certain things
or enterprises inimical to the public welfare, xxx But where the power to tax is used
solely for the purpose of raising revenues, the modern view is that it cannot be
allowed to confiscate or destroy. If this is sought to be done, the tax may be
successfully attacked as an inordinate and unconstitutional exercise of the discretion
that is usually vested exclusively in the legislature in ascertaining the amount of the
tax.

2. Executive Act: Assessment and collection

This process involves the act of administration and implementation of tax laws by the
executive through its administrative agencies such as the Bureau of Internal Revenue or
Bureau of Customs.

3. Taxpayer’s Act: Payment

This process involves the act of compliance by the taxpayer in contributing his share to pay
the expenses of the government. Payment of tax also includes the options, schemes or
remedies as may be legally open or available to the taxpayer.

4. Taxpayer’s Act: Refund

A claim for refund must first be filed with the Commissioner of Internal Revenue. A suit or
proceeding may be filed within 2 years from the date of payment of the tax or penalty
regardless of any supervening cause that may arise after payment. The Commissioner may,
even without a written claim therefor, refund, or credit any tax, where on the face of the
return, such payment appears clearly to have been erroneously paid (Sec. 229, NIRC).

H. REQUISITES OF A VALID TAXATION

Elements:
1. It is an enforced proportional contribution from persons and properties;
2. It is Imposed by the State by virtue of its sovereignty; and
3. It is levied for the support of the government.
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Requisites for Validity:
1. It must be for a public purpose;
2. Rule of taxation should be uniform;
3. The person or property taxed is within the jurisdiction of the taxing authority;
4. Assessment and collection is in consonance with the due process clause; AND
5. The tax must not infringe on the inherent and constitutional limitations of the
power of taxation.

I. KINDS OF TAXES
1. As to object
1. Personal, Poll, or Capitation Tax – tax of a fixed amount imposed on persons
residing within a specified territory, whether citizens or not, without regard to their
property or the occupation or business in which they may be engaged (e.g. community
(formerly residence) tax).
2. Property Tax – tax imposed on property, real or personal, in proportion to its value
or in accordance with some other reasonable method of apportionment (e.g., real
estate tax). The obligation to pay the tax is absolute and unavoidable and is not based
upon the voluntary action of the person assessed.
3. Privilege/Excise Tax – it is said that an excise tax is a charge imposed upon:
a. the performance of an act,
b. the enjoyment of a privilege, or
c. the engagement in an occupation, profession, or business

The obligation to pay excise tax is based on the voluntary action of the person
taxed in performing the act or engaging in the activity which is subject to the
excise. The term “excise tax” is synonymous with “privilege tax” and the two are
often used interchangeably (e.g., income tax, value added tax, estate tax, donor’s
tax).

2. As to burden or incidence
1. Direct Taxes – taxes which are demanded from persons who also shoulder them;
taxes for which the taxpayer is directly or primarily liable, or which he cannot shift to
another. The liability for the payment of the tax (incidence) and the burden (impact)
of the tax falls on the same person (e.g., income tax, estate tax, donor’s tax,
community tax)
2. Indirect Taxes – taxes which are demanded from one person in the expectation and
intention that he shall indemnify himself at the expense of another, falling finally
upon the ultimate purchaser or consumer; taxes levied upon transactions or activities
before the articles subject matter thereof, reach the consumers who ultimately pay for
them not as taxes but as part of the purchase price.

Thus, the person who absorbs or bears the burden of the tax is other than the one on
whom it is imposed and required by law to pay the tax. Practically all business taxes
are indirect (e.g., VAT, percentage tax, excise taxes on specified goods, customs
duties).

3. As to tax rates

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 1. Specific Tax – a tax of a fixed amount imposed by the head or number or by some
other standard of weight or measurement. It requires no assessment (valuation) other
than the listing or classification of the objects to be taxed (e.g., taxes on distilled
spirits, wines, and fermented liquors; cigars and cigarettes)
2. Ad Valorem Tax – a tax of a fixed proportion of the value of the property with
respect to which the tax is assessed. It requires the intervention of assessors or
appraisers to estimate the value of such property before the amount due from each
taxpayer can be determined. The phrase “ad valorem” means literally, “according to
value.” (e.g., real estate tax, excise tax on automobiles, non-essential goods such as
jewelry and perfumes, customs duties.
3. Mixed – a tax that has both the characteristics of specific tax and ad valorem tax

4. As to purpose
1. General or Fiscal Tax – levied for the general or ordinary purposes of the
Government, i.e., to raise revenue for governmental needs (e.g., income tax, VAT,
and almost all taxes).
2. Special/Regulatory/Sumptuary Tax – levied for special purposes, i.e., to achieve
some social or economic ends irrespective of whether revenue is actually raised or not
(e.g., protective tariffs or customs duties on imported goods to enable similar products
manufactured locally to compete with such imports in the domestic market).

Tariff duties intended mainly as a source of revenue are relatively low so as not to
discourage imports.

5. As to scope (or authority imposing the tax)

1. National – taxes imposed by the national government, through Congress and
administered by the Bureau of Internal Revenue (BIR) or the Bureau of Customs
(BOC) (e.g., national internal revenue taxes, customs duties, and national taxes
imposed by laws).
2. Municipal or Local – taxes imposed by local governments, through their respective
Sanggunians, and administered by the local executive through the local treasurer (e.g.,
business taxes that may be imposed under the Local Government Code, professional
tax).

6. As to graduation
1. Progressive – The rate of tax increases as the tax base or bracket increases, e.g.,
income tax, estate tax, donor’s tax.
2. Regressive – The rate of tax decreases as the tax base or bracket increases. There is
no regressive tax in the Philippines.
3. Proportionate – The rate of tax is based on a fixed percentage of the amount of the
property, receipts or other basis to be taxed, e.g., real estate tax, VAT, and other
percentage taxes.
4. Digressive – A fixed rate is imposed on a certain amount and diminishes gradually on
sums below it. The tax rate in this case is arbitrary because the increase in tax rate is
not proportionate to the increase of tax base.

G. GENERAL CONCEPTS IN TAXATION

1. *PROSPECTIVITY OF TAX LAWS

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GR: Tax laws are prospective in operation.

XPN: Tax laws may be applied retroactively provided it is expressly declared or it is clearly
the legislative intent (e.g., increase taxes on income already earned) except when retroactive
application would be so harsh and oppressive.

XPN to the XPN: Collection of interest in tax cases is not penal in nature; it is but a just
compensation to the State. Thus, the constitutional prohibition against ex post facto laws is
not applicable to the collection of interest on back taxes.

Non-retroactivity of rulings (Sec. 246, NIRC)

GR: Rulings do not have retroactive application if the revocation, modification, or reversal
will be prejudicial to the taxpayer.

XPN:
1. Taxpayer’s deliberate misstatement or omission of facts
2. BIR’s gathered facts is materially different from the facts from which the ruling was
based on
3. Taxpayer acted in bad faith

NOTE: The rule on non-retroactivity of rulings may be applied only if the parties in the
ruling involve the taxpayer himself/itself. The taxpayer cannot invoke the rulings granted in
favor of the other taxpayers.

2. IMPRESCRIPTIBILITY
Unless otherwise provided by law, taxes are imprescriptible.

The law on prescription, being a remedial measure, should be liberally construed in order to
afford such protection. As a corollary, the exceptions to the law on prescription should
perforce be strictly construed (Commissioner v. Standard Chartered Bank, G.R. No. 192173
(2015))

Prescriptions found in statutes

1. National Internal Revenue Code – statute of limitations in the assessment and
collection of taxes therein imposed.

Summary of prescription on assessment and collection:

3 years Prescription of assessment AND collection from:
1. The prescribed last day of filing of returns (even if the
return was filed earlier than the deadline); OR
2. The day when the return was actually filed if filed later
than the last day of filing (Sec. 203, NIRC), whichever
comes later.
10 years Prescription of assessment in cases of:
1. False or fraudulent return with intent to evade tax; OR
2. Failure or omission to file a return (Sec. 222, NIRC)

Counted from the discovery of the fraud, falsity, or omission.

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 5 years Prescription of collection of tax if:
1. Assessed within the 3-year and 10-year prescriptive
periods;
2. Assessed within the extended period agreed upon by
the Commissioner and taxpayer (waiver of the
prescriptive period); and
3. Collected by distraint, levy, or by a proceeding in court
(Sec. 222, NIRC)

NOTE: The prescriptive period from final liquidation is 3 years, except in cases of:
a. Tentative liquidation;
b. Payment under protest;
c. Fraud; and
d. Compliance audit.

2. Customs Modernization and Tariffs Act (CMTA)

Under Sec. 430, it provides that “in the absence of fraud and when the goods have
been finally assessed and released, the assessment shall be conclusive upon all parties
3 years from the date of final payment or duties, or upon completion of the post-
clearance audit”.

3. Local Government Code

The LGC prescribes the following prescriptive periods for the assessment and
collection of local taxes, fees, or charges (Sec. 194, LGC):
1. Taxes, fees, and charges shall be assessed 5 years from the date they become
due;
2. Taxes, fees, and charges must be collected 5 years from the date of
assessment by administrative or judicial action;
3. The prescriptive period for assessment and collection shall be 3 years if the
tax accrued before the effectivity of the LGC (Sec. 194-270, LGC).
4. In case of fraud or intent to evade the payment of taxes, or charges, the same
may be assessed within 10 years from the discovery of the fraud or intent to
evade payment.
The prescriptive period is tolled when:
1. The treasurer is legally prevented from making the assessment or collection;
2. The taxpayer requests for a reinvestigation and executes a waiver in writing
before expiration of the period within which to assess or collect; and
3. The taxpayer is out of the country or otherwise cannot be located.

3. SITUS OF TAXATION
Meaning: Situs of taxation literally means the place of taxation.
1. The state where the subject to be taxed has a situs may rightfully levy and collect the
tax; and
2. The situs is necessarily in the state which has jurisdiction or which exercises
dominion over the subject in question. Within the territorial jurisdiction, the taxing
authority may determine the situs.

Factors that Determine Situs:

1. Nature of the tax;
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 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.

Situs of Income Tax

Taxpayer Source of Income
Citizenship Residency Within PH Outside PH
Filipino Resident Taxable Taxable
Filipino Non-Resident Taxable Non-Taxable
Alien Resident Taxable Non-Taxable
Alien Non-Resident Taxable Non-Taxable

Situs of Property Tax

Kind of Property
Real Property
Tangible Personal Property
Intangible Personal
Property
Situs
Where it is located (lex rei sitae)
Where property is physically located although the owner
resides in another jurisdiction; or place of sale or
transaction.
GR: Domicile of the owner. Mobilla sequuntur personam
(movables follow the person)

(e.g., credits, bills, XPN:

receivables, bank deposits,
bonds, promissory notes,
mortgage loans, judgments
and corporate stocks)
When property has acquired a business situs in another
jurisdiction; or
When the law provides for the situs of the subject of tax
(e.g., Sec. 104, NIRC)
1. Franchise, patents, copyrights, trademarks-
situs is the place of the country where such
intangibles are exercised.
2. Receivables- Domicile or residence of the debtor.
3. Bank deposits- Location of the depository bank.

Situs of Excise Tax

Kinds of Excise Tax Situs
Income Tax Source of the income, nationality or residence of taxpayer
(Sec. 23, NIRC)
1. Occupation- where the occupation is engaged in
2. Transaction- where the transaction took place
Donor’s Tax Location of property; nationality or residence of donor
Estate Tax Location of property; nationality or residence of deceased

Situs of Business Tax

Kind of Business Tax Situs
VAT Where transaction is made (i.e., where the goods/ service is
sold/ performed and consumed)

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 Sale of Real Property Where the real property is located
Sale of Personal Property Where the personal property was sold

4. DOUBLE TAXATION
a. STRICT SENSE (Direct Duplicate Taxation; objectionable)

The same property must be taxed twice when it should be taxed once. The requisites are:
1. Both taxes must be imposed on the same property or subject matter;
2. For the same purpose;
3. By the same State, Government, or taxing authority;
4. Within the same territory, jurisdiction, or taxing district;
5. During the same taxing period; and
6. Of the same kind or character of tax.

b. BROAD SENSE (Indirect Duplicate Taxation; permissible)

There is double taxation in the broad sense or indirect duplicate taxation if any of the
elements for direct duplicate taxation is absent.

It extends to all cases in which there is a burden of 2 or more pecuniary impositions. For
example, a tax upon the same property imposed by two different states.

Constitutionality of double taxation- There is NO constitutional prohibition against double

taxation in the Philippines. It is something not favored, but is permissible, provided some
other constitutional requirement is not thereby violated.

If the tax law follows the constitutional rule on uniformity, there can be no valid objection to
taxing the same income, business or property twice (China Banking Corp. v. CA, G.R. No.
146749 (2003))

Double taxation in its narrow sense is undoubtedly unconstitutional but in the broader sense
is not necessarily so. Where double taxation (in its narrow sense) occurs, the taxpayer may
seek relief under the uniformity rule or the equal protection guarantee.

c. TAX TREATIES AS RELIEF FROM DOUBLE TAXATION

International Double Taxation- Double taxation usually takes place when a person is
resident of a contracting state and derives income from, or owns capital in, the other
contracting state and both states impose tax on that income or capital. In order to eliminate
double taxation, a tax treaty resorts to several methods.

The purpose of these international agreements is to reconcile the national fiscal legislations of
the contracting parties in order to help the taxpayer avoid simultaneous taxation in two
different jurisdictions. More precisely, the tax conventions are drafted with a view towards
the elimination of international juridical double taxation, which is defined as the imposition
of comparable taxes in two or more states on the same taxpayer in respect of the same subject
matter and for identical periods.

27
Modes of eliminating double taxation
1. Allowing reciprocal exemption either by law or by treaty;
2. Allowance of tax credit for foreign taxes paid;
3. Allowance of deductions such as for foreign taxes paid, and vanishing deductions in
estate tax; or
4. Reduction of Philippine tax rate.

5. ESCAPE FROM TAXATION

a. SHIFTING OF TAX BURDEN

Shifting- The act of transferring the burden of a tax from the original payer or the one on
whom the tax was assessed or imposed to someone else. What is transferred is not the
payment of the tax but the burden of the tax.

All indirect taxes may be shifted; direct taxes cannot be shifted.

Ways of shifting the tax burden

1. Forward shifting - When the burden of the tax is transferred from a factor of
production through the factors of distribution until it finally settles on the ultimate
purchaser or consumer.
a. Examples: VAT, percentage tax.
2. Backward shifting - When the burden of the tax is transferred from the consumer or
purchaser through the factors of distribution to the factor of production.
a. Example: Consumer or purchaser may shift tax imposed on him to retailer by
purchasing only after the price is reduced, and from the latter to the
wholesaler, and finally to the manufacturer or producer.
3. Onward shifting - When the tax is shifted 2 or more times either forward or
backward.

Meaning of Impact and Incidence of Taxation

Impact of taxation (Initial burden of tax; May be shifted) is the point where the tax is
originally imposed or the one on whom the tax is formally assessed. In so far as the law is
concerned, the taxpayer, the subject of tax, is the person who must pay the tax to the
government.

Incidence of taxation (Ultimate burden of the tax; Cannot be shifted) is the point on whom
the tax burden finally rests. It takes place when shifting has been effected from the statutory
taxpayer to another.

Incidence is the end of the shifting process. Sometimes, however, when no shifting is
possible, as in the case of income tax or such other direct taxes, the impact coincides with
incidence on the same person.

Application: Suppose a tax — excise duty — is imposed on soap. Its impact is on the
producers, in the first instance, as they are liable to pay it to the government. But, the
producers may succeed in collecting it from the consumers by raising the price of
soap by the amount of tax. In that case, consumers eventually pay the tax and so the
incidence falls upon them.

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b. DISTINGUISH: TAX AVOIDANCE AND TAX EVATION

Tax Avoidance (Tax Minimization)

The exploitation 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. It is politely
called “tax minimization” and is NOT punishable by law.

Example: A person refrains from engaging in some activity or enjoying some

privilege in order to avoid the incidental taxation or to lower his tax bracket for a
taxable year.

Tax Evasion (Tax Dodging)

The use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a
tax. It is also known as “tax dodging.” It is punishable by law.

Example: Deliberate failure to report a taxable income or property; deliberate

reduction of income that has been received; overstatement of expenses.

Elements of Tax Evasion

1. The end to be achieved.
Example: the payment of less than that known by the taxpayer to be legally due, or in
paying no tax when such is due;
2. An accompanying state of mind described as being “evil,” “in bad faith,” “willful,”
or “deliberate and not accidental”; and
3. A course of action or failure of action which is unlawful.

Mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion. The
burden of proof is on the prosecution to prove beyond reasonable doubt that the accused
willfully failed to supply correct and accurate information (People v. Judy Ann Santos, CTA
Crim. Case No. 0-012 (2013)).

The Willful Blindness Doctrine states that a taxpayer can no longer raise the defense that the
errors on their tax returns are not their responsibility or that it is the fault of the accountants
they hired. Intent to defraud need not be shown for a conviction of tax evasion. The only
thing that needs to be proven is that the taxpayer was aware of his obligation to file the tax
return but he nevertheless voluntarily, knowingly, and intentionally failed to file the required
returns. (People v. Kintanar, C.T.A. E.B. No. 006 (2010))

6. EXEMPTION FROM TAXATION

Meaning of exemption from taxation- The grant of immunity to particular persons or
corporations or to persons or corporations of a particular class from a tax which persons and
corporations generally within the same state or taxing district are obliged to pay. It is an
immunity or privilege; it is freedom from a financial charge or burden to which others are
subjected. It is strictly construed against the taxpayer.

It is a waiver of the government's right to collect the amounts that would have been
collectible under our tax laws. Thus, when the law speaks of a tax exemption, it should be
understood as freedom from the imposition and payment of a particular tax (Secretary of
Finance v. Lazatin, G.R. No. 210588 (2016))
29
Taxation is the rule; exemption is the exception. 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.” If not expressly mentioned in the law, it must at least be
within its purview by clear legislative intent (Jaka Investments Corp. v. CIR, G.R. No.
147629 (2010)).

Grounds for Tax Exemption

1. It may be based on a contract.
2. It may be based on some ground of public policy.
3. It may be created in a treaty on grounds of reciprocity or to lessen the rigors of
international or multiple taxation.

NOTE: But equity is NOT a ground for tax exemption. While equity cannot be used as a
basis or justification for tax exemption, a law may validly authorize the condonation of
taxes on equitable considerations.
There is no tax exemption solely on the ground of equity. (Davao Gulf Lumber Corp. v.
CIR, G.R. No. 117359 (1998))

Nature of tax exemption

1. Mere personal privilege – cannot be assigned or transferred without the consent of
the legislature. The legislative consent to the transfer may be given either in the
original act granting the exemption or in a subsequent law.
2. GR: Revocable by the government.
XPN: If founded on a contract which is protected from impairment. But the contract
must contain the essential elements of other contracts. An exemption provided for in a
franchise, however, may be repealed or amended pursuant to the Constitution (Sec.
11, Art. XII, 1987 Constitution). A legislative franchise is a mere privilege.
3. Implies a waiver on the part of the government of its right to collect taxes due to
it, and, in this sense, is prejudicial thereto. Hence, it exists only by virtue of an
express grant and must be strictly construed.
4. Not necessarily discriminatory, provided it has a reasonable foundation or rational
basis. Where, however, no valid distinction exists, the exemption may be challenged
as violative of the equal protection guarantee or the uniformity rule.

Kinds of Tax Exemption

1. Express or Affirmative - either entirely or in part, may be made by provisions of the
Constitution, statutes, treaties, ordinances, franchises, or contracts.
2. Implied or Exemption by Omission- when a tax is levied on certain classes without
mentioning the other classes. Every tax statute, in a very real sense, makes
exemptions since all those not mentioned are deemed exempted. The omission may be
either accidental or intentional.

Exemptions are not presumed, but when public property is involved, exemption is
the rule, and taxation is the exception.
3. Contractual - The legislature of a State may, in the absence of special restrictions in
its constitution, make a valid contract with a corporation in respect to taxation, and
that such contract can be enforced against the State at the instance of the corporation.

Rationale of Tax Exemption

30
Such exemption will benefit the body of the people and not particular individuals or private
interest and that the public benefit is sufficient to offset the monetary loss entailed in the
grant of the exemption.

Principles of Tax Exemption:

1. As the power of taxation is a high prerogative of sovereignty, the relinquishment is
never presumed and any reduction or diminution thereof with respect to its mode or
its rate, must be strictly construed, and the same must be couched in clear and
unmistakable terms in order that it may be applied.
2. When granted, they are strictly construed against the taxpayer.

Revocation of Tax Exemption

GR: Revocable by the government.
XPN: Contractual tax exemptions may not be unilaterally so revoked by the taxing authority
without thereby violating the non- impairment clause of the Constitution.

7. EQUITABLE RECOUPMENT
The doctrine of equitable recoupment allows a taxpayer whose claim for refund has been
barred by prescription to offset such claims against a current assessment.

The doctrine also allows the government to offset taxes that have not been collected from the
taxpayer against a current claim for refund, although the government is time-barred from
collecting the previous taxes.

The doctrine finds NO application in this jurisdiction.

8. PROHIBITION ON COMPENSATION AND SET-OFF

GR: Taxes cannot be subject to compensation.

Reasons:
1. This would adversely affect the government revenue system.
2. The government and the taxpayer are not creditors and debtors of each other. There is
a material distinction between a tax and debt. Debts are due to the Government in its
corporate capacity, while taxes are due to the Government in its sovereign capacity.
We find no cogent reason to deviate from the aforementioned distinction.

XPN: If the claims against the government have been recognized and an amount has already
been appropriated for that purpose. Where both claims have already become:
1. Due,
2. Demandable, and
3. Fully liquidated,
compensation takes place by operation of law under Art. 1200 in relation to Articles 1279 and
1290 of the NCC, and both debts are extinguished to the concurrent amount.

9. COMPROMISE

31
A contract whereby the parties, by making reciprocal concessions, avoid litigation or put an
end to one already commenced (Art. 2028, Civil Code). It involves a reduction of the
taxpayer’s liability.

Requisites of a tax compromise:

1. The taxpayer must have a tax liability.
2. There must be an offer (by the taxpayer or Commissioner) of an amount to be paid by
the taxpayer.
3. There must be acceptance (by the Commissioner or the taxpayer, as the case may be)
of the offer in settlement of the original claim.

10. TAX AMNESTY

Definition- A tax amnesty partakes of an absolute forgiveness or waiver by the
Government of its right to collect what otherwise would be due it, and in this sense,
prejudicial thereto, particularly to give tax evaders, who wish to relent and are willing to
reform a chance to do so and become a part of the new society with a clean slate.

A tax amnesty, much like a tax exemption, is never favored nor presumed in law. If granted,
the terms of the amnesty, like that of a tax exemption, must be construed strictly against the
taxpayer and liberally in favor of the taxing authority.

He who claims an exemption (or an amnesty) from the common burden must justify his claim
by the clearest grant of organic or state law. It cannot be allowed to exist upon a vague
implication. If a doubt arises as to the intent of the legislature, that doubt must be resolved in
favor of the state. (CIR v. Marubeni Corp., G.R. No. 137377 (2001)).

Amnesty distinguished from tax exemption

Tax amnesty is immunity from all criminal and civil and administrative obligations arising
from non-payment of taxes. It is a general pardon given to all taxpayers. It applies to past tax
periods, hence of retroactive application.
Tax exemption is immunity from all civil liability only (relief from paying taxes). It is an
immunity or privilege, a freedom from a charge or burden of which others are subjected. It is
generally prospective in application.

K. CONSTRUCTION AND INTERPRETATION OF

TAX LAWS, RULES, AND REGULATIONS
Tax Laws
GR: Tax laws are construed strictly against the government and liberally in favor of the
taxpayer.

XPNs:
1. The rule of strict construction as against the government is not applicable where the
language of the statute is plain and there is no doubt as to the legislative intent.
2. The rule does not apply where the taxpayer claims exemption from the tax.

Tax Exemption and Exclusion

32
Tax exemptions must be shown to exist clearly and categorically, and supported by clear
legal provisions.

GR: In the construction of tax statutes, exemptions are not favored and are construed
strictissimi juris against the taxpayer.

XPNs:
1. When the law itself expressly provides for a liberal construction, that is, in case of
doubt, it shall be resolved in favor of exemption;
2. When the exemption is in favor of the government itself or its agencies, or of
religious, charitable, and educational institutions because the general rule is that they
are exempt from tax.
3. When the exemption is granted under special circumstances to special classes of
persons.
4. If there is an express mention or if the taxpayer falls within the purview of the
exemption by clear legislative intent, the rule on strict construction does not apply.

Tax Rules and Regulations

GR: The Secretary of Finance, upon recommendation of the CIR, shall promulgate all
needful rules and regulations for the effective enforcement of the provisions of the NIRC
(Sec. 244, NIRC)

It is of course axiomatic that a rule or regulation must bear upon, and be consistent with, the
provisions of the enabling statute if such rule or regulation is to be valid. In case of conflict
between a statute and an administrative order, the former must prevail (Fort Bonifacio
Development Corp v. CIR, GR 175707 (2014))

Requisites for validity and effectivity of regulations

1. Reasonable;
2. Within the authority conferred;
3. Not contrary to law and the Constitution (Art. 7, NCC); and
4. Must be published.

Administrative interpretations and opinions

The power to interpret the provisions of the Tax Code and other tax laws is under the
exclusive and original jurisdiction of the Commissioner of Internal Revenue subject to
review by the Secretary of Finance (Sec. 4, par.1, NIRC).

Revenue regulations are the formal interpretation of the provisions of the NIRC and other
laws by the Secretary of Finance upon the recommendation of the Commissioner of
Internal Revenue.

GR: The Commissioner has the sole authority to issue rulings but he also has the power to
delegate said authority to his subordinates with the rank equivalent to a division chief or
higher.

XPN: The Commissioner may not delegate the following:

1. The power to recommend the promulgation of rules and regulations by the Secretary
of Finance;

33
 2. The power to issue rulings of first impression or to reverse, revoke, or modify any
existing ruling of the Bureau; and
3. The power to compromise or abate any tax liability as provided by Sec. 204 and 205
of the NIRC

XPN to the XPN: BUT assessments issued by RDOs involving (a) Php500,000 or less, and
(b) minor criminal violations as determined by the Secretary of Finance as recommended by
the Commissioner, may be compromised by a Regional Evaluation Board (Sec. 7, NIRC).

Decisions of the Supreme Court applying or interpreting existing tax laws are binding on all
subordinate courts and have the force and effect of law. As provided for in Article 8 of the
Civil Code, they “form part of the law of the land.”

The same is also true with respect to decisions of the Court of Tax Appeals. However, by the
nature of its jurisdiction, the decisions of this court are still appealable to the Supreme Court
by a petition for review on certiorari (Rule 45).

Penal Provisions of Tax Laws

Penal provisions of tax laws must be strictly construed. It is not legitimate to stretch the
language of a rule, however beneficent its intention, beyond the fair and ordinary meaning of
its language.

A penal statute should be construed strictly against the State and in favor of the accused. The
reason for this principle is the tenderness of the law for the rights of individuals and the
object is to establish a certain rule by conformity to which mankind would be safe, and the
discretion of the court limited.

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 II. NATIONAL TAXATION
A. TAXING AUTHORITY
1. JURISDICTION, POWER, AND FUNCTIONS OF THE
COMMISSIONER OF INTERNAL REVENUE
1. Powers and Duties of the Bureau of Internal Revenue (BIR) (Sec. 2, NIRC)
1. To assess and collect all national internal revenue taxes, fees, and charges;
2. To enforce all forfeitures, penalties, and fines connected therewith;
3. To execute judgment in all cases decided in its favor by the CTA and the ordinary
courts; and
4. To give effect to and administer the supervisory and police powers conferred upon it
by the Tax Code or other special laws.

2. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases
Power to Interpret (Quasi-Legislative Power)- The power to interpret provisions of the
NIRC and other tax laws shall be under the exclusive and original jurisdiction of the CIR,
subject to review by the Secretary of Finance (Sec. 4, NIRC).

A ruling by the CIR that interprets provisions of the NIRC and other tax laws shall be
presumed valid unless modified, reversed, or superseded by the Secretary of Finance. A
taxpayer who receives an adverse ruling from the CIR may, within 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. Subject to the exclusive appellate jurisdiction of
the CTA.

Taxpayers acting in good faith should not be made to suffer for adhering to general
interpretative rules of the Commissioner interpreting tax laws, should such interpretation later
turn out to be erroneous and be reversed by the Commissioner or this Court. Indeed, Section

35
246 of the Tax Code expressly provides that a reversal of a BIR regulation or ruling cannot
adversely prejudice a taxpayer who in good faith relied on the BIR regulation or ruling prior
to its reversal (CIR v. San Roque, G.R. No. 187485 (2013))

Power to Decide Tax Cases (Quasi-Judicial Power)- The power to decide (1) disputed
assessments, (2) refunds of internal revenue taxes, fees, charges and penalties, or (3) other
matters arising under the NIRC or other laws administered by the BIR is vested in the CIR,
subject to the exclusive appellate jurisdiction of the CTA (Sec. 4, NIRC).

3. Authority of the Commissioner to Delegate Power

GR: The Commissioner may delegate he powers vested in him, subject to limitations and
restrictions as may be imposed under rules and regulations to be promulgated by the SOF,
upon recommendation of the Commissioner.

XPN: The following powers of the Commissioner shall not be delegated:

1. The power to recommend the promulgation of rules and regulations by the SOF;
2. The power to issue rulings of first impression to reverse, revoke, or modify any
existing ruling of the Bureau;
3. The power to compromise or abate any tax liability;
4. The power to assign or reassign internal revenue officers to establishment where
articles subject to excise tax are produced or kept.

4. Non-retroactivity of rulings (Sec. 246, NIRC)

GR: Any revocation, modification, or reversal of (1) rules and regulations promulgated in
accordance with the NIRC, or (2) any rulings or circulars promulgated by the CIR shall NOT
be given retroactive application if the revocation, modification, or reversal is prejudicial to
the taxpayers.

XPNs:
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.

Under Sec. 246, taxpayers may rely upon a rule or ruling issued by the CIR from the time the
rule or ruling is issued up to its reversal by the CIR or this Court. The reversal is not given
retroactive effect. There must, however, be a rule or ruling issued by the Commissioner that
is relied upon by the taxpayer in good faith. A mere administrative practice, not formalized
into a rule or ruling, will not suffice because such a mere administrative practice may not be
uniformly and consistently applied.

2. RULE-MAKING AUTHORITY OF THE SECRETARY OF

FINANCE
1. Authority of the Secretary of Finance to Promulgate Rules and Regulations (Sec. 244,
NIRC)

36
The Secretary of Finance, upon recommendation of the CIR, shall promulgate all needful
rules and regulations for effective enforcement of the provisions of the Code.

B. INCOME TAX
1. DEFINITION, NATURE, AND GENERAL PRINCIPLES
Definition- Income Tax is defined as a tax on all yearly profits arising from property,
professions, trades, or offices, or as a tax on the person’s income, emoluments, profits,
and the like. It may be succinctly defined as a tax on income, whether gross or net, realized
in one taxable year.

Nature
Income tax is generally classified as an excise tax. It is NOT levied upon persons, property,
funds or profits but upon the right of a person to receive income or profits.

General Principles (Sec. 23, NIRC)

1. A resident citizen of the Philippines is taxable on all income derived from sources
within and without the Philippines;
2. A nonresident citizen is taxable only on income derived from sources within the
Philippines
3. An individual citizen of the Philippines who is working and deriving income
from abroad as an overseas contract worker is taxable only on income derived
from sources within the Philippines: Provided, That a seaman shall be treated as an
overseas contract worker if he (1) is a citizen of the Philippines, and (2) receives
compensation for services rendered abroad as a member of the complement of a
vessel engaged exclusively in international trade;
4. An alien individual, whether a resident or not of the Philippines, is taxable only
on income derived from sources within the Philippines;
5. A domestic corporation is taxable on all income derived from sources within and
without the Philippines; and
6. A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the Philippines.

Taxpayer Within Without

Resident Citizen / /
Non-resident Citizen and OCW / X
Resident Alien / X
Non-resident Alien / X
Domestic Corporation / /
Foreign Corporation / X

a. INCOME TAX SYSTEM

i. GLOBAL

Under a global tax system, it does not matter whether the income received by the taxpayer is
classified as compensation income, business, or professional income, passive investment
income, capital gain, or other income. All items of gross income, deductions, and personal
37
and additional exemptions, if any, are reported in one income tax return, and one set of tax
rates are applied on the tax base.
A global tax system is one where the tax treatment views indifferently the tax base and
generally treats in common all categories of taxable income of the taxpayer (Tan v. Del
Rosario, Jr., G.R. No. 109289 (1994)).

ii. SCHEDULAR

Under a schedular tax system, different types of income are subject to different sets of
graduated or flat income tax rates. The applicable tax rate(s) will depend on the classification
of the taxable income and the basis could be gross income or net income. Separate income
tax returns (or other types of return applicable) are filed by the recipient of income for the
particular types of income received.

A schedular approach in taxation is one where the income tax treatment varies and is made to
depend on the kind or category of taxable income of the taxpayer.

iii. OTHERS

Semi-schedular or Semi-global Tax System

All compensation income, business, or professional income, capital gain and passive income
not subject to final tax, and other income are added together to arrive at the gross income, and
after deducting the sum of allowable deductions, the taxable income is subjected to one set of
graduated tax rates or normal corporate income tax. With respect to such income the
computation is global.

For those other income not mentioned above, they remain subject to different sets of tax rates
and covered by different return.

NOTE: The Philippines, under the NIRC, follows a semi-schedular and semi-global tax
system.

b. FEATURES OF THE PHILIPPINE INCOME TAX LAW

1. Direct Tax – The tax burden is borne by the income recipient upon whom the tax is
imposed.
2. Progressive – The tax rate increases as the tax base increases. It is founded on the
ability to pay principle and is consistent with Sec. 28, Art. VI, 1987 Constitution.
3. Comprehensive – The Philippines has adopted the most comprehensive system of
imposing income tax by adopting the citizenship principle, the residence principle,
and the source principle. Any of the three principles is enough to justify the
imposition of income tax on the income of a resident citizen and a domestic
corporation that are taxed on a worldwide income.
4. Semi-Schedular or Semi-Global Tax System – The Philippines follows the semi-
schedular or semi-global system of income taxation, although certain passive
investment incomes and capital gains from sale of capital assets (namely: (a) shares of
stock of domestic corporations, and (b) real property) are subject to final taxes at
preferential tax rates.

38
c. CRITERIA IN IMPOSING PHILIPPINE INCOME TAX

i. CITIZENSHIP

A citizen of the Philippines is subject to Philippine income tax:

1. On his worldwide income, if he resides in the Philippines; or
2. Only on his income from sources within the Philippines, if he qualifies as a non-
resident citizen.

ii. RESIDENCE

A resident alien is liable to pay Philippine income tax only on his income from sources within
the Philippines but is exempt from tax on his income from sources outside the Philippines.

iii. SOURCE

An alien is subject to Philippine income tax because he derives income from sources within
the Philippines. Thus, a non-resident alien or non-resident foreign corporation is liable to pay
Philippine income tax on income from sources within the Philippines, such as dividend,
interest, rent, or royalty, despite the fact that he has not set foot in the Philippines.

d. GENERAL PRINCIPLES OF INCOME TAXATION

(Refer to B. 1.)

e. TYPES OF PHILIPPINE INCOME TAXES

1. Graduated income tax and fixed tax on gross sales or receipts for individuals;
2. Normal corporate income tax on corporations;
3. Minimum corporate income tax on corporations;
4. Special income tax on certain corporations;
5. Capital gains tax on sale or exchange of unlisted shares of stock of a domestic
corporation classified as capital assets;
6. Capital gains tax on sale or exchange of real property located in the Philippines
classified as a capital asset;
7. Final withholding tax on certain passive investment income paid to residents;
8. Final withholding tax on income payments made to non-residents;
9. Fringe benefits tax on fringe benefits of supervisory or managerial employees;
10. Branch profit remittance tax; and
11. Tax on improperly accumulated earnings of corporations

f. KINDS OF TAXPAYERS

Taxpayer – any person subject to tax imposed by Title II of the Tax Code (Sec. 22(N),
NIRC).

Person – means an individual, a trust, estate, or corporation (Sec. 22(A), NIRC).

For income tax purposes, taxpayers are classified generally as follows:

39
 1. Individuals
2. Corporations
3. Estates and Trusts
4. Partnerships (General Partnership and General Professional Partnerships)

Primary Sub-Classification(s)
Classification
Citizens of the Resident citizens
Philippines Non-resident citizens
Resident
Aliens Engaged in Trade or
Business in the
Individuals Non-residents Philippines
Not Engaged in
Trade or Business in
the Philippines
Special Classes of Minimum Wage Earner
Individuals
Domestic Corporations
Corporations Resident
Foreign Corporations Corporations
Non-resident
Corporations
Estates and Trusts
Partnerships General Partnership
General Professional Partnership

1. Individual Taxpayers

CITIZENS
1. Resident Citizens (RC)
2. Non-resident Citizens (NRC) (Sec. 22 (E), NIRC)
a. PH citizen who establishes to the satisfaction of the CIR the fact of his
physical presence abroad with a definite intention to reside therein.
b. PH citizen who leaves the Philippines during the taxable year to reside abroad,
either as an immigrant or for employment on a permanent basis.
c. PH citizen who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the
time during the taxable year. To be considered physically present abroad
most of the time during the taxable year, a contract worker must have been
outside the PH for not less than 183 days during such taxable year (BIR R.R.
1-79, Sec. 2).
d. PH citizen previously considered as a non-resident citizen and who arrives
during the taxable year to reside permanently in the PH - Treated as NRC with
respect to his income derived from sources abroad until his arrival in the PH

NOTE: The term “residence” is to be understood not in its common acceptation as referring
to “dwelling” or “habitation”, but rather to “domicile” or legal residence, that is, “the place
where a party actually or constructively has his permanent home, where he, no matter where

40
he may be found at any given time, eventually intends to return and remain ( animus
manendi)” (Japzon v. COMELEC, G.R. No. 180088 (2009)).

ALIENS
1. Resident Alien- An alien actually present in the Philippines who is NOT a mere
transient or sojourner is a resident for income tax purposes.
a. No/Indefinite Intention = RESIDENT:
If he lives in the Philippines and has no definite intention as to his stay, he is a
resident. A mere floating intention indefinite as to time, to return to another
country is not sufficient to constitute him a transient.
b. Definite Intention = TRANSIENT:
One who comes to the Philippines for a definite purpose, which in its nature
may be promptly accomplished, is a transient.

XPN: Definite Intention but such cannot be promptly accomplished; If his purpose is
of such nature that an extended stay may be necessary for its accomplishment, and
thus the alien makes his home temporarily in the Philippines, then he becomes a
resident.

2. Non-resident Alien
a. Engaged in trade or business within the Philippines- If the aggregate period
of his stay in the Philippines is more than 180 days during any calendar year
(Sec. 25(A)(1), NIRC)
b. Not engaged in trade or business within the Philippines - If the aggregate
period of his stay in the Philippines does NOT exceed 180 days.

2. Corporations

Includes all types of corporations, partnerships (no matter how created or organized), joint
stock companies, joint accounts (cuentas en participacion), associations, or insurance
companies, whether or not registered with the SEC.

Excludes general professional partnerships (GPP); joint ventures or consortiums formed for
the purpose of (1) undertaking construction projects or (2) engaging in petroleum, coal,
geothermal and other energy operations pursuant to an operating or consortium agreement
under a service contract with the government (Sec. 22 (B), NIRC).

Law of Incorporation Test- To determine the residence of a corporation, the Philippines

adopted the Law of Incorporation test under which a corporation is considered domestic if it
is organized or created in accordance with or under the laws of the Philippines and foreign if
it is organized or created in accordance with or under the laws of a foreign country.

1. Domestic corporations- A corporation created and organized in the Philippines or

under its laws (Sec. 22 (C), NIRC).

2. Foreign corporations- A corporation which is not domestic (Sec. 22 (D), NIRC).

a. Resident foreign corporations – Foreign corporation engaged in trade or
business within the Philippines (Sec. 22 (H), NIRC).
b. Non-resident foreign corporations – Foreign corporation not engaged in
trade or business within the Philippines (Sec. 22 (I), NIRC).

41
Doing Business – implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in progressive prosecution of commercial gain or for the
purpose and object of the business organization (CIR v. BOAC, G.R. No. L-65773 (1987)).

Includes:
1. soliciting orders, service contracts
2. opening offices, whether called "liaison" offices or branches
3. appointing representatives or distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period totaling 180 days or more
4. participating in the management, supervision or control of any domestic business,
firm, entity or corporation in the Philippines.

Excludes:
1. mere investment as a shareholder in domestic corporations, and/or the exercise of
rights as such investor
2. having a nominee director or officer to represent its interests in such corporation
3. appointing a representative or distributor domiciled in the Philippines which transacts
business in its own name and for its own account (RA 7042, Foreign Investments Act).

3. Estate and Trusts

Income tax imposed on individuals shall apply to income of estates or of any kind of property
held in trust (Sec. 60 (A), NIRC).

XPNs: (1) Employee’s trust (Sec. 60, NIRC); (2) Revocable trusts (Sec. 63, NIRC); (3)
Income for Benefit of Grantor (Sec. 64, NIRC)

Taxable income of the estate or trust is computed in the same manner as an individual,
subject to certain special rules (Sec 61, NIRC)

Estate- Refers to all the property, rights, and obligations of a person which are NOT
extinguished by his death and those which have accrued thereto since the opening of the
succession.

Trust- An arrangement created by will or an agreement under which legal title to property is
passed to another for conservation or investment with the income therefrom and ultimately
the corpus (principal) to be distributed in accordance with the directions of the creator as
expressed in the governing instrument.

4. Partnership, Joint Ventures, Co-ownership

General Partnerships- A partnership which is not a general professional partnership.

Treated as a corporation.

General Professional Partnerships (GPP)- A partnership 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 (Sec. 22 (B), NIRC).

42
The partners themselves, NOT THE PARTNERSHIP, shall be liable for income tax in their
separate and individual capacities. Each partner shall report as gross income his distributive
share, actually or constructively received, in the net income of the partnership (Sec. 26,
NIRC).

Joint venture and consortium- Essential factors of a joint venture or consortium:

1. Each party must make a contribution, not necessarily of capital but by way of
services, skill, knowledge, material or money;
2. Profits must be shared among the parties;
3. There must be a joint proprietary interest and right of mutual control over the subject
matter of the enterprise;
4. There is a single business transaction.

A joint venture or consortium is treated as a corporation, except those formed for the purpose
of:
1. Undertaking construction projects, or
2. Engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating consortium agreement under a service contract with the Government.

Co-ownership- There is co-ownership whenever the ownership of an undivided thing or right

belongs to different persons (Art. 484, NCC).

Co-ownerships are NOT subject to tax as a corporation if the activities of the co-owners are
limited to the preservation of the property and the collection of the income therefrom, in
which case each co-owner is taxed individually on his distributive share in the income of the
co- ownership.

g. TAXABLE PERIOD

Taxable year- means the calendar year, or the fiscal year ending during such calendar year,
upon the basis of which the net income is computed. Taxable year includes, in the case of
return made for a fractional part of a year under the provisions of Title II (Tax on Income),
the period for which such return is made (Sec. 22 (P), NIRC).
1. Calendar Year – An accounting period of 12 months ending on the last day of
December.
2. Fiscal Year – An accounting period of 12 months ending on the last day of any
month other than December (Sec. 22(Q), NIRC).
3. Short Period – An accounting period which starts after the first month of the tax year
or ends before the last month of the tax year (less than 12 months). Instances whereby
short accounting period arises:
a. When a corporation is newly organized.
b. When a corporation is dissolved. (Sec. 52(c), NIRC)
c. When a corporation changes its accounting period. (Sec 46, NIRC)
d. When the taxpayer dies.

GR: Taxable income shall be computed based on the taxpayer’s annual accounting period,
which may be fiscal year or calendar year

XPN: Taxable income shall be computed based on the basis of calendar year only:
1. If the taxpayer's annual accounting period is other than a fiscal year;

43
 2. If the taxpayer has no annual accounting period;
3. If the taxpayer does not keep books of accounts; or
4. If the taxpayer is an individual (Sec. 43, NIRC)

2. CONCEPT OF INCOME
a. DEFINITION

Income means all wealth which flows to the taxpayer other than a mere return of capital.
Income is a gain derived from labor or capital, or both labor and capital; and includes the gain
derived from the sale or exchange of capital assets.

Income includes earnings, lawfully or unlawfully acquired, without consensual recognition,

express or implied, of an obligation to repay and without restriction as their disposition.
Income may be received in the form of cash, property, service, or a combination of the three.

Income v. Capital
The essential difference between capital and income is that capital is a fund; income is a
flow. A fund of property existing at an instant of time is called capital. A flow of services
rendered by that capital by the payment of money from it or any other benefit rendered by a
fund of capital in relation to such fund through a period of time is called income.

Classification of Income
1. Compensation Income- Means all remuneration for services performed by an
employee for his employer under an employer-employee relationship, unless
explicitly excluded by the Tax Code or special law.
2. Profession or Business Income- The value derived from an exercise of profession,
business or utilization of capital including profit and gain derived from sale or
conversion of assets. Examples are net income from business and gain from the sale
of assets used in trade or business.
3. Passive Income- An income in which the taxpayer merely waits for the amount to
come in. Examples are royalty, interest, prizes, and winnings.
4. Capital Gain- An income derived from sale of assets NOT used in trade or business.
Examples are sale of family home and other capital assets.

b. WHEN INCOME IS TAXABLE

i. EXISTENCE OF INCOME

Requisites for income to be taxable

1. There is INCOME, gain or profit
2. RECEIVED or REALIZED during the taxable year
3. NOT EXEMPT from income tax

ii. REALIZATION OF INCOME

Income is realized when there is a gain or profit derived from a closed and completed
transaction. The realization of gain may take the form of actual receipt of cash or may occur
as a constructive receipt of income.

44
Mere increase in the value of property without actual realization, either through sale or other
disposition, is not taxable.

Actual v. Constructive receipt

1. Actual receipt – Income is actually reduced to possession. The realization of gain
may take the form of actual receipt of cash.
2. Constructive receipt – An income is considered constructively received when it is
credited to the account of, or segregated in favor of, a person.

iii. RECOGNITION OF INCOME

Income realized pertains to the accrual basis of accounting.

Recognition of income in the books is when it is realized and expenses are recognized when
incurred. It is the right to receive and not the actual receipt that determines the inclusion of
the amount in gross income.

c. TESTS IN DETERMINING WHETHER INCOME IS EARNED FOR

TAX PURPOSES

i. REALIZATION TEST

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. Thus, stock dividends are NOT income subject to income tax on the part of the
stockholder when he merely holds more shares representing the same equity interest in the
corporation that declared stock dividends.

Income is recognized when both of the following conditions are met:

1. the earning is complete or virtually complete; and
2. an exchange has taken place.

ii. CLAIM OF RIGHT DOCTRINE OR DOCTRINE OF OWNERSHIP, COMMAND,

OR CONTROL

Claim of Right Doctrine a.k.a. Doctrine of Ownership, Command, or Control

In the claim-of-right doctrine, if a taxpayer receives money or other property and treats it as
its own under the claim of right that the payments are made absolutely and not contingently,
such amounts are included in the taxpayer's income, even though the right to the income has
not been perfected at that time. It does not matter that the taxpayer's title to the property is in
dispute and that the property may later be recovered from the taxpayer (CIR v. Meralco,
C.T .A. EB No. 773 (2012)).

iii. ECONOMIC BENEFIT TEST OR DOCTRINE OF PROPRIETARY INTEREST

Any economic benefit to the employee that increases his net worth, whatever may have been
the mode by which it is effected, is taxable. Thus, in stock options, the difference between the
fair market value of the shares at the time the option is exercised and the option price
45
constitutes additional compensation income to the employee at the time of exercise (not upon
the grant or vesting of the right).

Anything that benefits a person materially or economically in whatever way is taxable.

However, note that a mere increase in the value of property without actual realization is not
taxable.

iv. SEVERANCE TEST

Under the severance test of income, in order that income may exist, it is necessary that there
be a separation from capital of something of exchangeable value. The income requires a
realization of gain.

Hence, the increase in value of an asset is not income as it has not yet been exchanged or
transferred for something else. Once the asset is exchanged, then a severance of the gain from
its original value takes place, resulting into taxable income.

d. METHODS OF ACCOUNTING

i. DISTINGUISH: CASH AND ACCRUAL METHOD

Principal Methods:
1. Cash method – income, profits, and gains earned are not included in gross income
until received, and expenses are not deducted until paid.

N.B. “received” here includes actual and constructive receipt.

2. Accrual method – income, profits, and gains are included in gross income when
earned, whether received or not, and expenses are allowed as deductions when
incurred, although not yet paid. It is the right to receive and NOT the actual receipt
that determines the inclusion of the amount in gross income.

ii. SPECIAL METHOD: INSTALLMENT, DEFERRED PAYMENT, PERCENTAGE

OF COMPLETION (IN LONG-TERM CONTRACTS)

1. Installment Basis (Sec. 49, NIRC)

Taxpayer reports as income only a part of the gross profit to be realized from the sale on the
instalment plan equivalent to that proportion of the instalments received every year which the
gross profit realized or to be realized when payment is completed bears to the contract price.

Income to be Installment Gross

reported for = Received x Profit
the year Contract
Price

Initial payments mean the payments received in cash or property (other than evidence of
indebtedness of the purchaser) by the seller during the taxable year of the disposition of the
real property (Sec 49(B), NIRC).

2. Deferred Payment Sales

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 1. Applicable when the initial payments exceed 25% of the selling price
2. The income to be reported during the year of sale is the difference between the selling
or contract price and the cost of the property, even though the entire purchase price
has not been actually received in the year of sale.
3. The obligations of the purchaser received by the vendor are considered as equivalent
of cash.

3. Percentage of completion (Sec. 48, NIRC)

Income from long-term contracts is reported for tax purposes on the basis of percentage of
completion. “Long-term contracts” means building, installation, or construction contracts
covering a period in excess of 1 year.

Gross income already earned though not yet received, based on estimates of architects or
engineers duly certified by them, is reported in a taxable year; and all deductions relating to
such gross income for the taxable year, even if not yet paid are taken into account.

e. *SITUS OF INCOME

Income Situs
Interest Residence of the debtor
Dividends Residence of the corporation declaring the dividends.
NOTE: Foreign Corporation
1. RFC- depends on the Predominance Test; if the ratio
of the PH gross income over the world gross income of
the RFC in the 3-year period preceding the year of
dividend declaration is:
a. At least 50%, the portion of the dividend
corresponding to the PH gross income ratio is
earned within;
b. Less than 50%, the entire dividend received is
earned outside.
2. NRFC- earned outside
Services Place of performance
Rentals Location of the property
Royalties Place of use or exercise
Sale of Real Property Location of realty
Sale of Personal Tangible
Property 1. Manufactured w/in and sold w/o- Partly w/in and
partly w/o the PH
2. Manufactured w/o and sold w/in- Partly w/in and
partly w/o the PH
3. Purchased w/in but sold w/o- Place of Sale
4. Purchased w/o but sold w/in- Place of sale

Intangible
GR: Place of Sale
XPN: Shares of stock of domestic corporations: Place of

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 incorporation

3. GROSS INCOME
a. DEFINITION

Gross Income means 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 or business or the exercise of a
profession;
3. Gains derived from dealings in property; interests; rents; royalties; dividends;
annuities; prizes and winnings; pensions; and partner's distributive share from
the net income of the general professional partnership (Sec. 32 (A), NIRC).

The list here is NOT exclusive.

The definition of gross income is broad enough to include all passive income subject to
specific rates or final taxes. However, since these passive incomes are already subject to
different rates and taxed finally at source, they are no longer included in the computation of
gross income which determines taxable income (CIR v. PAL, GR 160628 (2006)).

b. DISTINGUISH: GROSS INCOME, NET INCOME, AND TAXABLE

INCOME

Gross income – The total income of a taxpayer subject to tax. It includes the gains, profits,
and income derived from whatever source, whether legal or illegal (Sec. 32(A), NIRC). It
does not include income excluded by law, or which are exempt from income tax (Sec. 32(B),
NIRC).

Net income – Means gross income less statutory deductions and exemptions (Sec. 31, NIRC).

Taxable income – means the pertinent items of gross income specified in the Tax Code, less
the deductions, if any, authorized for such types of income by the Tax Code or other special
laws (Sec. 31, NIRC). It is synonymous to the term “net income.”

c. SOURCE0pS OF INCOME SUBJECT TO TAX

The following sources of income subject to tax are the following.

1. Compensation income;
2. Fringe benefits;
3. Professional income;
4. Income from business;
5. Income from dealings in property;
6. Passive investment income;
7. Annuities, proceeds from life insurance or other types of insurance;
8. Prizes and awards;
9. Pensions, retirement benefits, or separation pay.

48
 10. Income from any source

i. COMPENSATION INCOME

All remunerations for services performed by an employee for his employer under an
employer- employee (ER-EE) relationship, unless excepted under the provisions of the NIRC
are considered as compensation income.

It includes, but is not limited to, salaries and wages, honoraria and emoluments, allowances
(e.g., transportation, representation, entertainment), commissions, fees (including directors’
fees, if the director is, at the same time, an employee of the payor-corporation), tips, taxable
bonuses, fringe benefits except those subject to Fringe Benefit Tax (FBT) under Section 33 of
the Tax Code, and taxable pensions and retirement pay (e.g., retirement benefits earned
without meeting the conditions for exemption thereof, such as retirement of less than 50 years
of age.)

The term wages does NOT include remuneration paid:

1. For agricultural labor paid entirely in products of the farm where the labor is
performed
2. For domestic service in a private home
3. For casual labor not in the course of the employer's trade or business
4. For services by a citizen or resident of the Philippines for a foreign government or an
international organization (Sec. 78(A), NIRC).

GR: Compensation income including overtime pay, holiday pay, night shift differential pay,
and hazard pay, earned by MINIMUM WAGE EARNERS (MWE) who has no other
returnable income are NOT taxable and not subject to withholding tax on wages (RA 9504);

XPN: If he receives/earns additional compensation such as commissions, honoraria, fringe

benefits, benefits in excess of the allowable statutory amount of P90,000 (RA 10963),
taxable allowance, and other taxable income other than the statutory minimum wage (SMW),
holiday pay, overtime pay, hazard pay and night shift differential pay.

Forms of compensation and how they are assessed

Cash – If compensation is paid in cash, the full amount received is the measure of the income
subject to tax.

Medium other than money – If services are paid for in a medium other than money (e.g.,
shares of stock, bonds, and other forms of property), the fair market value (FMV) of the
thing taken in payment is the amount to be included as compensation subject to tax. If the
services are rendered at a stipulated price, in the absence of evidence to the contrary, such
price will be presumed to be the FMV of the remuneration received.

*If meals, living quarters, and other facilities and privileges are furnished to an employee for
the convenience of the employer, and incidental to the requirement of the employee’s work
or position, the value of that privilege need NOT be included as compensation.

ii. FRINGE BENEFITS

49
Fringe benefit means any goods, services, or other benefit furnished or granted in cash or in
kind, in addition to basic salaries, to an individual employee (managerial/supervisory
employees), except a rank and file employee (RR No. 03-98, Sec 2.23b)

Fringe Benefits shall be subject to FBT (35%) which shall be treated as final income tax on
the employee that shall be withheld and paid by the employer.

Fringe benefit includes but not limited to the following:

1. Housing
2. Expense Account
3. Vehicle of any kind
4. Household personnel, such as maid, driver and others
5. Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted.
6. Membership fees, dues and other expenses borne by the employer for the employee in
social and athletic clubs and similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or his dependents; and
10. Life or health insurance and other non-life insurance premiums or similar amounts on
excess of what the law allows (Sec. 33(B), NIRC)

Tax Rate and Tax Base

1. Tax base is based on the grossed-up monetary value (GMV) of fringe benefits.
2. Rate is generally 35%, since this is the headline or the highest tax rate for individual
income taxpayers.
3. FBT is calculated using the GMV multiply by the 35% (Sec. 33 (A), NIRC)

How GMV is determined

1. GMV is determined by dividing the actual monetary value of the fringe benefit by
65% (100% - tax rate of 35%).
2. For example, the actual monetary value of the fringe benefit is P1,000. The GMV is
equal to P1,538.46 [P1,000 / 0.65]. The fringe benefit tax, therefore, is P538.46
[P1538.46 x 35%].

Special Cases:
For fringe benefits received by non-resident alien not engaged in trade of business in the
Philippines (NRANETB), the tax rate is 25% of the GMV. The GMV is determined by
dividing the actual monetary value of the fringe benefit by 75% [100% - 25%].

What is the tax implication if the employer gives ‘fringe benefits’ to rank-and-file
employees?
Fringe benefits given to a rank-and-file employee are treated as part of his compensation
income subject to normal tax rate and withholding tax on compensation income, except de
minimis benefits and benefits provided for the convenience of the employer.

Payor of Fringe Benefit Tax (FBT): The employer withholds and pays the FBT but the
law allows him to deduct such tax from his gross income.

Fringe benefits NOT subject to Fringe Benefit Tax:

50
 1. Fringe Benefits which are authorized and exempted from income tax under the Code
or under special laws (such as 13 th month pay and other benefits with the ceiling of
P90,000);
2. Contributions of the employer for the benefit of the employee for retirement,
insurance and hospitalization benefit plans;
3. Benefits given to the rank-and-file employees, whether granted under a collective
bargaining agreement or not; and
4. Fringe benefits required or necessary to the business of the employer; if it is granted
for the convenience or advantage of the employer (FB not considered as gross
income);
5. De minimis benefits (exempt from income tax and withholding tax on
compensation) (Sec. 33(C), NIRC).

If the Fringe Benefit is exempted from the FBT, the same may, however, still form of the
employee’s gross compensation income which is subject to income tax; hence, likewise
subject to withholding tax on compensation income payment.

De Minimis Benefits
De Minimis Benefits are facilities and privileges furnished or offered by an employer to his
employees that are relatively small value and are offered or furnished by the employer merely
as means of promoting health, goodwill, contentment, and efficiency of his employees.

The following De Minimis Benefits are exempt from income tax and withholding tax on
compensation income of BOTH managerial and rank and file EEs (exclusive
enumeration):
1. Monetized unused vacation leave credits of PRIVATE employees not exceeding 10
days during the year. Note that the monetization of unused VL credits in excess of 10
days and monetization of SL even if not exceeding 10 days are subject to tax;
2. Monetized value of vacation and sick leave credits paid to GOVERNMENT officials
and employees. Note that there is no limit as to the number of credits;
3. Medical cash allowance to dependents of employees, not exceeding P1,500 per
employee per semester or P250 per month;
4. Rice subsidy of P2,000 or 1 sack of 50 kg. rice per month amounting to not more
than P2,000;
5. Uniform and Clothing allowance not exceeding P6,000 per annum;
6. Actual medical assistance, e.g. medical allowance to cover medical and healthcare
needs, annual medical/executive check- up, maternity assistance, and routine
consultations, not exceeding P10,000.00 per annum;
7. Laundry allowance not exceeding P300 per month;
8. Employees achievement awards, e.g., for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding P10,000 received by the
employee under an established written plan which does not discriminate in favor of
highly paid employees;
9. Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000 per employee per annum;
10. Daily meal allowance for overtime work and night/graveyard shift not exceeding
twenty-five percent (25%) of the basic minimum wage on a per region basis;
11. Benefits received by an employee by virtue of a collective bargaining agreement
(CBA) and productivity incentive schemes provided that the total monetary value

51
 received from both CBA and productivity incentive schemes combined do not exceed
P10,000.00 per employee per taxable year.

All other benefits given by employers which are not included in the above enumeration shall
NOT be considered as "de minimis" benefits and hence, shall be subject to withholding tax
on compensation (rank and file employees) and FBT (managerial/supervisory employees).

iii. PROFESSIONAL INCOME

Refers to fees received by a professional from the practice of his profession, provided that
there is NO employer-employee relationship between him and his clients.

It includes the fees derived from engaging in an endeavor requiring special training as
professional as means of livelihood, which includes, but is not limited to, the fees of CPAs,
doctors, lawyers, engineers, and the like.

The existence of employee-employer relationship is the distinguishing factor between

compensation income versus professional income.

iv. INCOME FROM BUSINESS

Any income derived from doing business.

Doing business: The term implies a continuity of commercial dealings and arrangements,
and contemplates, to that extent, the performance of acts or works or the exercise of some of
the functions normally incident to, and in progressive prosecution of, the purpose and object
of its organization.

v. INCOME FROM DEALINGS IN PROPERTY

Dealings in property such as sales or exchanges may result in gain or loss. The kind of
property involved (i.e., whether the property is a capital asset or an ordinary asset) determines
the tax implication and income tax treatment, as follows:

Taxable Ordinary Net Capital

Net = Net + Gains (other
Income Income than those subject to Final CGT)

(a) DISTINGUISH ORDINARY ASSET AND CAPITAL ASSET

Ordinary Assets Capital Assets

1. Stock in trade of the taxpayer/ other Property held by the taxpayer, whether or
property of a kind which would not connected with his trade or business
properly be included in the inventory which is not an ordinary asset.
of the taxpayer if on hand at the
close of the taxable year.
2. Property held by the taxpayer
primarily for sale to customers in the
ordinary course of his trade or
business.

52
 3. Property used in the trade or
business of a character which is
subject to the allowance for
depreciation, or
4. Real property used in the trade or
business of the taxpayer, including
property held for rent.

NOTE: in ordinary assets, that the list is EXCLUSIVE. The actual use determines whether a
property is an ordinary asset or a capital asset (BIR Ruling No. DA 212-07, April 3, 2007).

Ordinary Asset Capital Asset

Gain from sale, exchange, or other disposition
Ordinary Gain (part of the Gross Income) Capital Gain
Loss from sale, exchange, or other disposition
Ordinary loss (part of Allowable Deductions Capital Loss
from Gross Income)
Excess of Gains over Losses
Part of Gross Income Net Capital Gain
Excess of Losses over Gains
Part of Allowable Deductions from Gross Net Capital Loss
Income

(b) TYPES OF GAINS

Ordinary Income Vis-À-Vis Capital Gain

1. If the asset involved is classified as ordinary, the entire amount of the gain from the
transaction shall be included in the computation of gross income (Sec 32(A)), and the
entire amount of the loss shall be deductible from gross income (Sec 34(D)).
2. If the asset involved is a capital asset, the rules on capital gains and losses apply in
the determination of the amount to be included in gross income.

These rules do not apply to:

1. real property with a capital gains tax (final tax), or
2. shares of stock of a domestic corporation with a capital gains tax (final tax).

NOTE: (Prof. Canero)

Capital Gains Tax (CGT)
1. Shares of Stock in a Domestic Corporation
1. Listed and Traded: Percentage Tax of 6/10 of 1% Gross Selling Price (GSP)
2. NOT Listed and Traded: Final Tax of 15% of the Net Capital Gain (NCG)
2. Real property located in the Philippines
1. 6% Capital Gain Tax on the presumed gain (Selling Price (SP) or Fair Market
Value (FMV), whichever is higher)
2. XPN: sale or disposition of principal residence
3. Other Capital Asset
1. Subject to ordinary income tax but with special rules.

53
Actual Gain Vis-À-Vis Presumed Gain
1. Presumed Gain: In the sale of real property located in the Philippines, classified as
capital asset, the tax base is the gross selling price or fair market value, whichever is
higher. The law presumes that the seller makes a gain from such sale.

Thus, whether or not the seller makes a profit from the sale of real property, he has to
pay 6% capital gains tax.

2. Actual Gain- The tax base in the sale of real property classified as an ordinary asset
is the actual gain.

(c) SPECIAL RULES PERTAINING TO INCOME OR LOSS FROM DEALINGS IN

PROPERTY CLASSIFIED AS CAPITAL ASSET (LOSS LIMITATION RULE, LOSS
CARRY-OVER RULE, HOLDING PERIOD RULE)

Long Term Capital Gain Vis-À-Vis Short Term Capital Gain

1. Long-term capital gain- Capital asset is held for more than 12 months before it is
sold. Only 50% of the gain is recognized.
2. Short-term capital gain- Capital asset is held for 12 months or less, 100% of the
gain is subject to tax.

NOTE: If the taxpayer is a corporation, 100% of the gain is recognized regardless of

the holding period.

Net Capital Gain Vis-À-Vis Net Capital Loss

1. Net Capital Gain- Excess of the gains over the losses on sales or exchange of capital
assets during the taxable year.
2. Net Capital Loss- Excess of the losses over the gains on sales or exchanges of capital
assets during the taxable year.

Income Tax Treatment of Capital Loss

Capital loss limitation rule (applicable to both corporations and individuals)

GR: Losses from sales or exchanges of capital assets shall be allowed only to the extent of
the gains from such sales or exchanges (Sec. 39(C), NIRC).

XPN for Banks and Trust Companies: If a bank or trust company incorporated under the
laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells
any bond, debenture, note, certificate or other evidence of indebtedness issued by any
corporation (including one issued by a government or political subdivision thereof) with
interest coupons or in registered form, any loss resulting from such sale shall not be subject to
the foregoing limitation and shall not be included in determining the applicability of such
limitation to other losses (Sec. 39(C), NIRC).

Net loss carry-over rule (applicable only to individuals)

If an individual sustains in any taxable year a net capital loss, such loss (in an amount not in
excess of the net income for the 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),
NIRC).

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(d) *TAX-FREE EXCHANGES (Sec. 40 (c) (2), NIRC)

Merger or Consolidation
No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation
1. 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
2. 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
3. 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.

Both corporations in the aforementioned cases must be parties to a merger or consolidation.

Merger occurs when one corporation acquires all or substantially all the properties of another
corporation. Consolidation occurs when two or more corporations merge to form one
corporation.

*Initial Acquisition of Control

No gain or loss shall also be recognized if property is transferred to a corporation by a person
in exchange for stock or unit of participation in such a corporation of which as a result of
such exchange said person, alone or together with others, not exceeding 4 persons, gains
control of said corporation (Lucio Co, et sl. Vs. CIR, 2020): Provided, That stocks issued for
services shall not be considered as issued in return for property.

vi. PASSIVE INVESTMENT INCOME

Under Sec 24(B) of the Tax Code, a final tax is imposed upon gross passive income of
citizen and resident aliens. An income is considered passive if the taxpayer merely waits for
it to be realized.

Sources
The following are the sources of passive income subject to final tax
1. Interest income;
2. Dividend Income;
3. Royalty Income; and
4. Rental Income.

NOTE: these sources of income are NOT added to other income in the determination of
ordinary income tax liability.

Passive income is only subject to final tax if the source is within the Philippines.

(a) INTEREST (final tax)

An earning derived from depositing or lending of money, goods, or credits.

NOTE: (Prof. Canero)

Interest Income

55
 1. Interest from any currency bank deposit- 20% final tax
2. Interest income received by an individual taxpayer (except non-resident individual)
from depositary bank under the Expanded Foreign Currency Deposit System
(EFCDS)- 15% final tax
3. Interest income from long term deposit or investment- EXEMPT from tax, except in
cases of pre-termination

(b) DIVIDEND
A form of earnings derived from the distribution made by a corporation out of its earnings or
profits and payable to its stockholders, whether in money or in property.

The following are the classification of dividends:

1. Cash dividends
2. Stock dividends
3. Property dividends; and
4. Liquidating dividends.

NOTE: (Prof. Canero)

Cash and Property Dividend From Domestic Corporation
1. 10% Final Tax (Citizen or RA)
2. 20% Final Tax (NRAETB)
3. 25% Gross Income Tax (NRANETB)
4. EXEMPT (Inter-Corporate Dividend by DC and RFC)
5. Tax Sparing Rule (NRFC)
1. Dividends from DC received by NRFC is subject 15% Final Tax, subject to the
condition that the country in which the NRFC is domiciled allows a credit on taxes
deemed to have been paid in the Philippines
2. Otherwise, 30%
Cash and Property Dividend from Foreign Corporation
1. Part of the Gross Income and thus subject to the graduated tax rates if received by
RESIDENT CITIZEN, (Sec. 24, 25A1)
2. Part of the GI and thus subject to 30%income tax if received by a DOMESTIC
CORPORATION (Sec. 32A)
3. Not taxable if received by NRC, RA, NRA, RFC and NRFC
Stock Dividend
GR: stock dividend is not subject to tax because it does not constitute income (Sec. 73B,
1997 NIRC).
XPN: if a corporation cancels or redeems stock dividend at such time and in such manner
as to make the distribution and cancellation or redemption essentially equivalent to the
distribution of a taxable dividend.
Liquidating Dividends
1. Gain realized or loss sustained is taxable income or deductible loss (Sec. 73(A), NIRC)

2. Any gain or loss on the part of the stockholder is subject to tax, while on the part of the
liquidating corporation, no tax is imposed on its receipt of the shares surrendered or
transfer of assets to the stockholder because said transaction is not treated as a sale.

Cash dividends- Dividends are subject to final tax under the NIRC. However, dividends
received by a domestic corporation from another domestic corporation, and a non-resident
foreign corporation from a domestic corporation is EXEMPT from income tax.
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Stock dividends- Stock dividend is generally EXEMPT from income tax, except:
1. If a corporation cancels or redeems stock issues as dividend xxx the amount so
distributed in redemption or cancellation of the stock shall be considered as taxable
income to the extent that it represents a distribution of earnings or profits (Sec. 73(B),
NIRC); or
2. Where there is an option that some stockholders could take cash or property dividends
instead of stock dividends; some stockholders exercised the option to take cash of
property dividends; and the exercise of option resulted in a change of the
stockholders’ proportionate share in the outstanding share of the corporation.

Property dividends- Property dividends are subject to tax at the preferential rate under the
NIRC.

Liquidating dividends- Represents distribution of all the property or assets of a corporation

in complete liquidation or dissolution. It is strictly NOT dividend income, but rather is treated
in effect, a return of capital to the extent of the shareholder’s investment.

The difference between the cost or other basis of the stock and the amount received in
liquidation of the stock is a capital gain or a capital loss. Where property is distributed in
liquidation, the amount received is the FMV of such property. The income is subject to
ordinary income tax rates. It is subject neither to the FWT on dividends nor to the CGT on
sale of shares.

(c) ROYALTY INCOME

Where a person pays royalty to another for the use of its intellectual property, such royalty is
generally a passive income of the owner thereof subject to withholding tax.

NOTE: (Prof. Canero)

1. Subject to the Ordinary Income Tax at the rate prescribed for individuals and
corporation if it is an active income.
2. Subject to Final Withholding Tax if it is a passive income.

(d) RENTAL INCOME

Refers to earnings derived from leasing real estate as well as personal property. Aside from
the regular amount of payment for using the property, it also includes all other obligations
assumed to be paid by the lessee to the third party in behalf of the lessor (e.g., interest, taxes,
loans, insurance premiums, etc.)

vii. ANNUITIES AND PROCEEDS FROM LIFE INSURANCE OR OTHER TYPES

OF INSURANCE

It refers to periodic installment payments of income or pension by insurance companies

during the life 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 for life.

57
The annuity payments represent a part that is taxable and not taxable. If part of annuity
payment represents interest, then it is a taxable income. If the annuity is a return of
premium, it is not taxable.

viii. PRIZES AND AWARDS

NOTE: (Prof. Canero)

Prizes
1. 10,000 or less–part of GI subject to the graduated rates for individuals
2. more than 10,000
1. 20% FWT - RC, NRC,RA and NRA-ETB
2. 25% FWT – NRA-NETB
3.Part of the GI of the Corporation, regardless of the amount
Winnings
20% final tax (except winnings amounting to P10,000.00 or less from PCSO and Lotto
which shall be exempt)
Tax-Exempt Prizes and Awards
Prizes and Awards in religious, charitable, etc. achievements
1. recipient was selected without any action on his part to enter the contest or
proceeding; and
2. recipient is not required to render substantial future services as a condition to
receiving the prize or award (Sec. 32(B)(7)(c), NIRC).

Prizes and awards granted to athletes in local and international sports competitions and
tournaments held in the Philippines and abroad and sanctioned by their national
associations shall be EXEMPT from income tax.

A prize is a reward for a contest or a competition. Such payment constitutes gain derived
from labor.

XPNs:
1. Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievements are EXCLUSIONS from gross
income if:
a. The recipient was selected without any action on his part to enter a contest or
proceedings; and
b. The recipient is not required to render substantial future services as a condition
to receiving the prize or award.

2. Prizes and awards granted to athletes in local and international sports competitions
and tournaments held in the Philippines and abroad and sanctioned by their national
associations shall be EXEMPT from income tax.

ix. PENSION, RETIREMENT BENEFIT, OR SEPARATION PAY

A stated allowance paid regularly to a person on his retirement or to his dependents on his
death, in consideration of past services, meritorious work, age, loss or injury.

x. INCOME FROM ANY SOURCE

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Inclusion of all income not expressly exempted within the class of taxable income under the
laws irrespective of the voluntary or involuntary action of the taxpayer in producing the
gains, and whether derived from legal or illegal sources.

(a) CONDONATION OF INDEBTEDNESS

The cancellation of indebtedness may have any of 3 possible consequences:

1. It may amount to payment of income. If, for example, an individual performs
services to or for a creditor, who, in consideration thereof, cancels the debt, income in
that amount is realized by the debtor as compensation for personal services.
2. It may amount to a gift. If a creditor wishes merely to benefit the debtor, and without
any consideration therefore, cancels the debt, the amount of the debt is a gift to the
debtor and need not be included in the latter’s report of income.
3. It may amount to a capital transaction. If a corporation to which a stockholder is
indebted forgives the debt, the transaction has the effect of a payment of dividend.

(b) RECOVERY OF ACCOUNTS PREVIOUSLY WRITTEN OFF

Bad debts claimed as a deduction in the preceding year(s) but subsequently recovered 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. There is an income tax benefit when the
deduction of the bad debt in the prior year resulted in lesser income and hence tax savings for
the company (Sec. 4, RR 5-99).

(c) RECEIPT OF TAX REFUNDS OR CREDIT

GR: A refund of a tax related to the business or the practice of profession, is taxable income
(e.g., refund of fringe benefit tax) in the year of receipt to the extent of the income tax benefit
of said deduction.

XPNs: However, the following tax refunds are NOT to be included in the computation of
gross income:
1. Philippine income tax, except the fringe benefit tax
2. Income tax imposed by authority of any foreign country, if the taxpayer claimed a
credit for such tax in the year it was paid or incurred.
3. Estate and donor’s taxes
4. Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed (Special assessments)
5. Value Added Tax
6. Fines and penalties due to late payment of tax
7. Final taxes
8. Capital Gains Tax

NOTE: The enumeration of tax refunds that are not taxable (income) is derived from an
enumeration of tax payments that are not deductible from gross income.

If a tax is not an allowable deduction from gross income when paid (no reduction of taxable
income, hence no tax benefit), the refund is not taxable.

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d. EXCLUSION

Exclusions from gross income refer to income received or earned but is NOT taxable as
income because it is exempted by law or by treaty. Such tax-free income is not to be included
in the income tax return unless information regarding it is specifically called for. Receipts
which are not in fact income are, of course, excluded from gross income.

The exclusion of income should not be confused with the reduction of gross income by the
application of allowable deductions. While exclusions are simply not taken into account in
determining gross income, deductions are subtracted from gross income to arrive at net
income.

Items of Exclusions representing return of capital

Amount of capital is generally recovered through deduction of the cost or adjusted basis of
the property sold from the gross selling price or consideration, or through the deduction from
gross income of depreciation relating to the property used in trade or business before it is
sold.

It may also relate to indemnities, such as proceeds of life insurance paid to the insured’s
beneficiaries and return of premiums paid by the insurance company to the insured under a
life insurance, endowment or annuity contract.

Damages, in certain instances, may also be exempt because they represent return of capital.

Items of Exclusion because it is subject to another internal revenue tax

The value of property acquired by gift, bequest, devise, or descent is exempt from income tax
on the part of the recipient because the receipt of such property is already subject to transfer
taxes (estate tax or donor’s tax).

Items of Exclusions because they are expressly exempt from income tax
1. Under the Constitution
2. Under a tax treaty
3. Under special laws

i. RATIONALE

The term “exclusions” refers to items that are not included in the determination of gross
income because:
1. They represent return of capital or are not income, gain, or profit;
2. They are subject to another kind of internal revenue tax;
3. They are income, gain, or profit expressly exempt from income tax under the
Constitution, tax treaty, Tax Code, or a general or special law.

ii. TAXPAYERS WHO MAY AVAIL

Exclusion Taxpayer
Return of Capital All taxpayers since there is no income
Already subject to internal revenue tax All taxpayers unless provided that income is
to be included
Express exclusion As expressly provided

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iii. *DISTINGUISH: EXCLUSIONS, DEDUCTIONS, AND TAX CREDITS

Exclusions from gross income refer to flow of wealth to the taxpayer which are not treated
as part of gross income for purposes of computing the taxpayer’s taxable income, due to the
following reasons:
1. it is exempted by the Constitution or a statute; or
2. it does not come within the definition of income.

Deductions, on the other hand, are the amounts which the law allows to be subtracted from
gross income in order to arrive at net income.

Exclusions pertain to the computation of gross income, while deductions pertain to the
computation of net income.

Exclusions are something received or earned by the taxpayer which do not form part of gross
income while deductions are something spent or paid in earning gross income.

Tax Credit refers to amounts subtracted from the computed tax in order to arrive at taxes
payable.

iv. EXCLUSIONS UNDER THE CONSTITUTION

Income derived by the government or its political subdivisions from the exercise of any
essential governmental function.

Also, all assets and revenues of a non-stock, non-profit private educational institution
used directly, actually ,and exclusively for private educational purposes shall be exempt
from taxation.

EXCLUSIONS UNDER THE TAX CODE (Sec. 32(B), NIRC)

1. Proceeds of life insurance policies

The proceeds of life insurance policies paid to his estate or to any beneficiary (but not
a transferee for a valuable consideration), directly or in trust, upon the death of the
insured, are excluded from the gross income of the beneficiary.

However, if such amounts are held by the insurer under an agreement to pay interest
thereon, the interest payments received by the insured shall be included in gross
income. The interest income shall be taxed at the graduated income tax rates.

2. Return of premium paid

GR: The amount received by the insured as a return of premiums paid by him under
life insurance, endowment, or annuity contracts, either during the term or at the
maturity of the term mentioned in the contract or upon surrender of the contract is a
return of capital and not income.

This refers to the cash surrender value of the contract.

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 XPN: If the amounts received by the insured (when added to the amounts already
received before the taxable year under such contract) exceed the aggregate premiums
or considerations paid (whether or not paid during the taxable year), then the excess
shall be included in gross income.

3. Amounts received under life insurance, endowment, or annuity contracts

Amounts received (other than amounts paid by reason of the death of the insured and
interest payments on such amounts) under a life insurance, endowment, or annuity
contracts are excluded from gross income, but if such amounts (when added to
amounts already received before the taxable year under such contract) exceed the
aggregate premiums of considerations paid (whether or not paid during the taxable
year), then the excess shall be included in gross income. However, in the case of a
transfer for valuable consideration, by assignment or otherwise, of a life insurance,
endowment, or annuity contract, or any interest therein, only the actual value of such
consideration and the amount of the premiums and other sums subsequently paid by
the transferee are exempt from taxation.

4. Value of property acquired by gift, bequest, devise or descent

Gifts, bequests, and devises (which are subject to estate or gift taxes) are excluded
from gross income, BUT not the income from such property. If the amount received
is on account of services rendered, whether constituting a demandable debt or not, or
the use or opportunity to use of capital, the receipt is income.

5. Amount received through accident or health insurance (Compensation for

damages)
As a rule, amounts received through accident or health insurance or under workmen’s
compensation acts, as compensation for personal injuries or sickness, plus the amount
of any damages received, whether by suit or agreement, on account of such injuries or
sickness are excluded from gross income.

6. Income exempt under tax treaty

Income of any kind, to the extent required by any treaty obligation binding upon the
Government of the Philippines.

7. Retirement benefits, pensions, gratuities, etc.

These are:
a. Retirement benefits under RA 7641, RA 4917, and Section 60(B) of the NIRC
b. Terminal pay
c. Retirement Benefits from foreign government agencies
d. Veterans benefits
e. Benefits under the Social Security Act
f. GSIS benefits

Retirement benefits received under RA 7641(The Retirement Pay Law) and those
received by officials and employees of private firms under a reasonable private
benefit plan (RPBP) maintained by the employer under RA 4917 (now Section 32(B)
(6)(a) of NIRC) are excluded from gross income subject to income tax.

The Retirement Pay Law (RA 7641) Reasonable Private Benefit Plan

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 (RPBP) (RA 4917)
Retiring employee must be in the Retiring official or employee must have
service of same employer been in the service of the same employer
CONTINUOUSLY for at least five (5) for at least ten (10) years.
years.
Retiring employee must be at least 60 Retiring official or employee must be at
years old but not more than 65 years of least 50 years old at the time of
age at the time of retirement. retirement.
Availed of only once, and only when Retiring employee shall not have
there is no RPBP previously availed of the privilege under
a retirement benefit plan of the same or
another employer
Plan must be reasonable. Its
implementation must be fair and
equitable for the benefit of all employees
(e.g. from president to laborer)
Plan must be approved by BIR

Involuntary Separation- separation of the employee must not be asked for, initiated
by him or of his own making or choice (Section 32(B)(6)(b), NIRC).

8. Winnings, prizes, and awards, including those in sports

All prizes and awards granted to athletes in local and international sports competitions
and tournaments whether held in the Philippines or abroad, AND sanctioned by their
national sports associations shall not be included in gross income and shall be tax
exempt (Sec. 32 B7d, NIRC)

Prizes and awards made primarily in recognition of charitable, literary, educational,

artistic, religious, scientific, or civic achievement are NOT taxable, provided (1)
recipient was selected without any action on his part to enter the contest or
proceeding; and (2) recipient is not required to render substantial future services as a
condition to receiving the prize or award.

4. DEDUCTIONS
Deductions are items or amounts authorized by law to be subtracted from the pertinent items
of gross income to arrive at taxable income.

Deductions from income tax purposes partake of the nature of tax exemptions; hence, if tax
exemptions are to be strictly construed, then it follows that deductions must also strictly
construed (CIR v. Isabela Cultural Co., G.R. No. 172231 (2007)).

However, if there is an express mention in the law or if the taxpayer falls within the purview
of the exemption by clear legislative intent, the rule on strict construction will not apply.

Types of Deductions
There are four (4) types of deductions from gross income:
1. Itemized deductions in Section 34(A) to (J) and (M) available to all kinds of
taxpayers engaged in trade or business or practice of profession in the Philippines;

63
 2. Optional standard deduction in Section 34(L) available only to individual taxpayers
deriving business, professional, capital gains and passive income not subject to final
tax, or other income; and
3. Optional standard deduction available to corporations under Section 34(L) of the
Tax Code (introduced by RA No. 9504)
4. The special deductions in Sections 37 and 38 of the NIRC, and in special laws like
the BOI law (E.O. 226).

a. GENERAL DEDUCTIONS

1. Deductions must be paid or incurred in connection with the taxpayer’s trade, business,
or profession
2. Deductions must be supported by adequate receipts or invoices (except standard
deduction)

b. CONCEPT OF RETURN OF CAPITAL

Income tax is levied by law only on income; hence, the amount representing return of capital
should be deducted from proceeds from sales of assets and should not be subject to income
tax.

Costs of goods purchased for resale, with proper adjustment for opening and closing
inventories, are deducted from gross sales in computing gross income (Sec. 65, Rev. Reg. 2).

Sale of inventory of goods by manufacturers and dealers of properties- In sales of goods

representing inventory, the amount received by the seller consists of return of capital and gain
from sale of goods or properties. That portion of the receipt representing return of capital is
not subject to income tax. Accordingly, cost of goods manufactured and sold (in the case of
manufacturers) and cost of sales (in the case of dealers) is deducted from gross sales and is
reflected above the gross income line in a profit and loss statement.

Sale of stock in trade by a real estate dealer and dealer in securities- Real estate dealers and
dealers in securities are ordinarily not allowed to compute the amount representing return of
capital through cost of sales. Rather they are required to deduct the total cost specifically
identifiable to the real property or shares of stock sold or exchanged.

Sale of services- Their entire gross receipts are treated as part of gross income.

c. DISTINGUISH: ITEMIZED DEDUCTIONS AND OPTIONAL

STANDARD DEDUCTION

d. REQUIREMENTS FOR DEDUCTIBLE ITEMS

Timing of Claiming Deductions

A taxpayer has the right to deduct all authorized allowances for the taxable year. As a rule, if
he does not within any year deduct certain of his expenses, losses, interest, taxes or other
charges, he cannot deduct them from the income of the next of any succeeding year (Sec. 76,
Income Tax Regulations)

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ITEMIZED DEDUCTIONS

1. Expenses

Business expenses deductible from gross income include the ordinary and necessary
expenditures directly connected with or pertaining to the taxpayer’s trade or business.
The cost of goods purchased for resale, with proper adjustment for opening and
closing inventories, is deducted from gross sales in computing gross income.

Requisites for deductibility

1. Ordinary AND necessary

ORDINARY - normal and usual in relation to the taxpayer's business and

surrounding circumstances; need not be recurring
NECESSARY - appropriate and helpful in the development of taxpayer's
business or are proper for the purpose of realizing a profit or minimizing a loss

1. Paid or incurred during the taxable year;

2. Paid or incurred in carrying on or which are directly attributable to the
development, management, operation and/or conduct of the trade, business or
exercise of profession;
3. Substantiated by adequate proof – documented by official receipts or adequate
records, which reflect the amount of expense deducted and the connection or
relation of the expense to the business/ trade of the taxpayer);
4. Legitimately paid (not a BRIBE, kickback, or otherwise contrary to law,
morals, public policy);
5. If subject to withholding tax, the tax required to be withheld on the expense
paid or payable is shown to have been properly withheld and remitted to the
BIR on time;
6. Amount must be reasonable.

NOTE: The expenses allowable to a non- resident alien or a foreign corporation

consist of only such expenses as are incurred in carrying on any business or trade
conducted within the Philippines exclusively (Sec. 77 RR 2).

Substantiation requirement – Sec. 34(A)(1)(b), NIRC: No deduction from gross

income shall be allowed unless the taxpayer shall substantiate with sufficient
evidence, such as official receipts or other adequate records: (1) the AMOUNT of the
expense being deducted, and (2) the DIRECT CONNECTION or relation of the
expense being deducted to the development, management, operation and/or conduct
of the trade, business or profession of the taxpayer.

Kinds of business expenses

1. Salaries, wages and other forms of compensation for personal services actually
rendered, including the grossed- up monetary value of the fringe benefit
subjected to fringe benefit tax which tax should have been paid
2. Travelling expenses
3. Cost of materials
4. Rentals and/or other payments for use or possession of property
5. Repairs and maintenance

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 NOTE: Extraordinary repairs are not deductible – they are capital
expenditures
6. Expenses under lease agreements
7. Expenses for professionals
8. Entertainment expenses
9. Political campaign expenses
10. Training expenses
11. Others

2. Interest

Requisites for deductibility

1. There is a valid and existing indebtedness.
2. The indebtedness is that of the taxpayer
3. The indebtedness is connected with the taxpayer‘s trade, profession, or
business.
4. The interest must be legally due.
5. The interest must be stipulated in writing.
6. The taxpayer is LIABLE to pay interest on the indebtedness.
7. The indebtedness must have been paid or accrued during the taxable year.
8. The interest payment arrangement must NOT be between related taxpayers.
9. The interest must NOT be incurred to finance petroleum operations.
10. In case of interest incurred to acquire property used in trade, business or
exercise of profession, the same was not treated as a capital expenditure
(which the taxpayer may claim only as a deduction the periodic amortization
of such expenditure).

Non-deductible interest expense

Interest paid in advance by the taxpayer who reports income on cash basis shall
only be allowed as deduction in the year the indebtedness is paid.

If the indebtedness is payable in periodic amortizations, only the amount of interest

which corresponds to the amount of the principal amortized or paid during the year
shall be allowed as deduction in such taxable year.

Interest payments made between related taxpayers.

Interest on indebtedness incurred to finance petroleum exploration.

3. Taxes

Taxes Proper: Refers to national and local taxes

Requisites for deductibility

1. Paid or incurred within the taxable year;
2. Paid or incurred in connection with the taxpayer‘s trade, profession, or
business;
3. Imposed directly on the taxpayer;
4. Not specifically excluded by law from being deducted from the taxpayer‘s
gross income.

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The following taxes are deductible:
1. Import duties;
2. Business tax;
3. Professional/ occupation tax;
4. Privilege and excise tax;
5. Documentary Stamp Tax;
6. Motor vehicle registration fees;
7. Real property tax;
8. Electric energy consumption tax; and
9. Interest on delinquent taxes.

Non-deductible taxes
1. Philippine income tax, except Fringe Benefit Taxes;
2. Income tax imposed by authority of any foreign country, if taxpayer avails of
the Foreign Tax Credit (FTC)

However, when the taxpayer does NOT signify his desire to avail of the tax credit for
taxes of foreign countries, the amount may be allowed as a deduction from gross
income of citizens and domestic corporations subject to the limitations set forth by
law.

Treatments of surcharges/ interests/ fines for delinquency

The amount of deductible taxes is limited to the basic tax and shall not include the
amount for any surcharge or penalty on delinquent taxes. However, interest on
delinquent taxes, although not deductible as tax, can be deducted as interest expense
at its full amount.

Treatment of special assessment

Special assessments and other taxes assessed against local benefits of a kind tending
to increase the value of the property assessed are non-deductible from gross income.

Tax credit vis-à-vis deduction

Tax credit – amount allowed by law to reduce the Philippine income tax due, subject
to limitations, on account of taxes paid or accrued to a foreign country.

Tax Deduction Tax Credit

Taxes are deductible from gross income in
computing the taxable income
Effect: Reduces taxable income upon
which the tax liability is calculated
Sources: Deductible taxes (e.g. business
tax, excise tax)
Taxes are deductible from the
Philippines income tax itself
Effect: Reduces Philippine income tax
liability
Sources: Only foreign income taxes
may be claimed as credits against
Philippine income tax.

The following may claim tax credits:

1. Resident citizens
2. Domestic corporations, which include all partnerships except general
professional partnerships
3. Members of general professional partnerships

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 4. Beneficiaries of estates or trusts

The following may NOT claim tax credits:

1. Non-resident citizens
2. Aliens, whether resident or non-resident
3. Foreign corporations, whether resident on non-resident

NOTE: Tax credits for foreign taxes are allowed only for income derived from
sources outside the Philippines. The above taxpayers are not entitled to tax credit;
they are taxable only on income derived from Philippine sources.

4. Losses

Requisites for deductibility

1. Loss must be that of the taxpayer (e.g., losses of the parent corp. cannot be
deducted by its subsidiary);
2. Actually sustained and charged off within the taxable year;
3. Incurred in trade, business or profession;
4. Of property connected with the trade, business, or profession, if the loss arises
from fires, storms, shipwreck or other casualties, or from robbery, theft, or
embezzlement;
5. Sustained in a closed and completed transaction;
6. Not compensated for by insurance or other form of indemnity;
7. Not claimed as a deduction for estate tax purposes;
8. In case of casualty loss, filing of notice of loss with the BIR within 45 days
from the date of the event that gave rise to the casualty; and
9. The taxpayer must prove the elements of the loss claimed, such as the actual
nature and occurrence of the event and amount of the loss.

In case a non-depreciable vehicle is sold at a loss, the loss incurred from the sale of
non- depreciable vehicle is not allowed as a deduction (RR No. 2-2013)

NO loss is recognized in the following:

1. Merger, consolidation, or control securities (where no gains are recognized
either);
2. Exchanges not solely in kind;
3. Related taxpayers- Interest expense incurred to acquire property for use in
trade/business/profession;
4. Wash sales;
5. Illegal transactions.

Other types of losses

1. Capital losses
2. Incurred in the sale or exchange of capital assets (allowable only to the extent
of capital gains, except for banks and trust companies under conditions in Sec.
39 of NIRC where loss from such sale is not subject to the foregoing
limitation)
3. Resulting from securities becoming worthless and which are capital assets
(considered loss from sale or exchange) on last day of the taxable year
4. Losses from short sales of property;

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 5. Losses due to failure to exercise privileges or options to buy or sell property.

Net Operating Loss Carry Over (NOLCO)

Net operating loss (NOL) is the excess of allowable deductions over gross income
for any taxable year immediately preceding the current taxable year.

NOLCO- The NOL of the business or enterprise which had not been previously
offset as deduction from gross income shall be carried over as a deduction from
gross income for the next 3 consecutive taxable years immediately following the
year of such loss, provided however, that any net loss incurred in a taxable year
during which the taxpayer was exempt from income tax shall not be allowed as a
deduction (Sec. 34(3)(D), NIRC)

Requisites for NOLCO

1. The taxpayer was not exempt from income tax the year the loss was incurred;
2. There has been no substantial change in the ownership of the business or
enterprise wherein:
3. AT LEAST 75% of nominal value of outstanding issued shares is held by or
on behalf of the same persons; or
4. AT LEAST 75% of the paid up capital of the corporation is held by or on
behalf of the same persons.

Taxpayers Entitled to NOLCO

Individuals engaged in trade or business or in the exercise of his profession (including
estates and trusts);

NOTE: An individual who avails of 40% Optional Standard Deduction (OSD) shall
NOT simultaneously claim deduction of NOLCO. However, the 3-year reglementary
period shall continue to run during such period notwithstanding the fact that the
aforesaid taxpayer availed of OSD during the said period.

Domestic and resident foreign corporations subject to the normal income tax or
preferential tax rates under the Code (e.g., private educational institutions, hospitals,
and regional operating headquarters) or under special laws (e.g., PEZA-registered
companies)

NOTE: Domestic and resident foreign corporations taxed during the taxable year with
Minimum Corporate Income Tax (MCIT) cannot enjoy the benefit of NOLCO.
However, the 3-year period for the expiry of the NOLCO is not interrupted by the fact
that the corporation is subject to MCIT during such three-year period.

5. Bad debts

Debts resulting from the worthlessness or uncollectibility, in whole or in part, of

amounts due the taxpayer actually ascertained to be worthless and the corresponding
receivable should have been written off or charged off within the taxable year.

A debt is worthless when after taking reasonable steps to collect it, there is no
likelihood of recovery at any time in the future.

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 Requisites for deductibility
1. Valid and legally demandable debt due to the taxpayer
2. Debt is connected with the taxpayer's trade, business or practice of profession;
3. Debt was not sustained in a transaction entered into between related parties;
4. Actually ascertained to be worthless and uncollectible as of the end of the
taxable year (taxpayer had determined with reasonably degree of certainty that
the claim could not be collected despite the fact that the creditor took
reasonable steps to collect); and
5. Actually charged off the books of accounts of the taxpayer as of the end of the
taxable year

GR: Taxpayer must ascertain and demonstrate with reasonable certainty the
uncollectibility of debt

XPNs:
1. Banks as creditors – BSP Monetary Board shall ascertain the worthlessness
and uncollectibility of the debt and shall approve the writing off
2. Receivables from an insurance or surety company (as debtor) may be
written off as bad debts only when such company is declared closed due to
insolvency or similar reason

Effect Of Recovery Of Bad Debts

Tax Benefit Rule on Bad Debts
Bad debts claimed as deduction in the preceding year(s) but subsequently recovered
shall be included as part of the taxpayer‘s gross income in the year of such recovery
the extent of the income tax benefit of said deduction. Also called the equitable
doctrine of tax benefit.

6. Depreciation

An annual reasonable allowance to reduce the wasteful value of the tangible fixed
assets resulting from wear and tear and normal obsolescence.

For intangible assets, the annual allowance to reduce their useful value is called
amortization.

Requisites for Deductibility

1. It must be reasonable.
2. It must be charged off during the year.
3. The asset must be used in profession, trade, or business.
4. The asset must have a limited useful life.

The depreciable asset must be located in the Philippines if the taxpayer is a

nonresident alien or a foreign corporation.

No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircrafts,

and land vehicles which exceed the threshold amount of P2,400,000, unless the
taxpayer’s main line of business is transport operations or lease of transportation
equipment and the vehicles purchased are used in the operations.

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7. Depletion of oil and gas wells and mines

8. Charitable and other contributions

Requisites for deductibility

1. Actually PAID or made to the ENTITIES or institutions specified by law;
2. Made within the TAXABLE year.
3. It must be EVIDENCED by adequate receipts or records.
4. For Contributions Other than Money: The amount shall be BASED on the
acquisition cost of the property (i.e., NOT the fair market value at the time of
the contribution).
5. For Contributions subject to the statutory limitation: It must NOT EXCEED
10% (individual) or 5% (corporation) of the taxpayer‘s taxable income before
charitable contributions

Amount that May Be Deducted

Kinds of Contributions:
1. Contributions deductible in full;
2. Contributions subject to the statutory limit.

Contributions Deductible in Full:

1. Donations to the Government of the Philippines, or to any of its agencies, or
political subdivisions, including fully owned government corporations
2. Exclusively to finance, provide for, or to be used in undertaking priority
activities in
a. Education
b. Health
c. Youth and sports development
d. Human settlements
e. Science and culture, and
f. Economic development
in accordance with a National Priority Plan determined by NEDA (otherwise,
subject to statutory limit)

3. Donations to Certain Foreign Institutions or International Organizations which

are fully deductible in compliance with agreements, treaties or commitments
entered into by the Government of the Philippines and the foreign institutions
or international organizations or in pursuance of special laws
4. Donations to Accredited Non-government Organizations subject to conditions
set forth in RR No. 13-98 – NGO means a non-stock non-profit domestic
corporation or organization:
Organized and operated exclusively for:
a. scientific,
b. research,
c. educational,
d. character-building and youth and sports development,
e. health,
f. social welfare,
g. cultural or

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 h. charitable purposes, or
i. a combination thereof,

No part of the net income of which inures to the benefit of any private individual.

Administrative expense, on an annual basis, must not exceed 30% of total expenses
for the taxable year

9. Research and development

10. Pension trusts

Contributions to pension trusts

Contribution to a pension trust may be claimed as deduction as follows:
1. Amount contributed for the present/normal service cost – 100% deductible
2. Amount contributed for the past service cost – 1/10 of the amount contributed
is deductible in year the contribution is made, the remaining balance will be
amortized equally over 9 consecutive years

GR: An employer establishing or maintaining a pension trust to provide for the

payment of reasonable pensions to his employees shall be allowed as a deduction, a
reasonable amount transferred or paid into such trust in excess of the contributions to
such trust made during the taxable year.

Requisites for deductibility of payments to pension trusts

1. There must be a pension or retirement plan established to provide for the
payment of reasonable pensions to employees;
2. The pension plan is reasonable and actuarially sound;
3. It must be funded by the employer;
4. The amount contributed must no longer be subject to the employer’s control or
disposition; and
5. The payment has not theretofore been allowed before as a deduction.

OPTIONAL STANDARD DEDUCTION (OSD)

1. Individuals, except non-resident aliens

May be taken by an individual in lieu of itemized deductions except those earning
purely compensation income.

If an individual opted to use OSD, he is no longer allowed to deduct cost of sales or

cost of services.

Amount: 40% of gross sales or gross receipts (under RA 9504, effective July 6,
2008)

Requisites:
1. Taxpayer is a citizen or resident alien;
2. Taxpayer’s income is not entirely from compensation;
3. Taxpayer signifies in his return his intention to elect this deduction; otherwise
he is considered as having availed of the itemized deductions;

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 4. Election is irrevocable for the year in which made; however, he can change to
itemized deductions in succeeding years.

2. Corporations, except non-resident foreign corporations

The option to elect Optional Standard Deduction granted is now granted to
corporations by virtue of RA 9504. The OSD is 40% of its gross income.

Corporations availing of OSD are still required to submit their financial statements
when they file their annual ITR and to keep such records pertaining to its gross
income.

3. Partnerships
For purposes of taxation, the Code considers general co-partnerships as corporations.
Hence, rules on OSD for corporations are applicable to general co-partnerships.

e. ITEMS NOT DEDUCTIBLE

GR: In determining deductions, one of the general rules is that deductions must be paid or
incurred in connection with the taxpayer’s trade, business, or profession. Capital
expenditures (e.g. acquisition cost of a building) are also NOT deductible, because these are
not expenses, but form part of assets.

XPNs: In computing taxable net income, NO deduction shall be allowed with respect to:
1. Personal, living, or family expenses
2. Any amount paid out for new buildings or for permanent improvements (capital
expenditures), or betterments made to increase the value of any property or estate
3. Any amount expended in restoring property (major repairs) or in making good the
exhaustion thereof for which an allowance (for depreciation or depletion) is or has
been made
4. Premiums paid on any life insurance policy covering the life of any officer, employee,
or any person financially interested in the trade or business carried on by the taxpayer,
individual or corporate, when the taxpayer is directly or indirectly a beneficiary under
such policy
5. Interest expense and bad debts between related parties (Sec. 36(B), NIRC))
6. Losses from sales or exchanges of property between related taxpayers.
7. Non-deductible interest – should the taxpayer elect to deduct interest payments
against its gross income, he cannot at the same time capitalize such interest and claim
depreciation on the undepreciated cost which includes the interest.
8. Non–deductible taxes
9. Non-deductible losses
10. Losses on Wash Sales (except if by dealer in securities in ordinary course of exempt
corporations) These are:
a. Proprietary Educational Institutions and hospitals
b. Government owned and controlled corporations
11. Others- Bribes kickbacks and other payments.

Relevant points regarding related taxpayers

1. Payment of interest is not deductible.
2. Bad debts are not deductible.
3. Losses from sales or exchanges of property are not deductible.

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Related Parties (Sec. 34(B), NIRC)
1. Between members of a family (which shall include only his brothers and sisters,
spouse, ancestors and lineal descendants)
2. Between an individual and a corporation more than 50% in value of the outstanding
stock of which is owned, directly or indirectly, by or for such individual – except in
the case of distributions in liquidation
3. Between two corporations more than 50% in value of the outstanding stock of each of
which is owned, directly or indirectly by or for the same individual
4. Between the grantor and the fiduciary of a trust
5. Between the fiduciary of a trust and the fiduciary of another trust if the same person is
a grantor with respect to each trust
6. Between the fiduciary of a trust and a beneficiary of such trust.

5. INCOME TAX ON INDIVIDUALS

Summary Table for Taxation of Individuals (all individual taxpayers, including non-
resident aliens)
Classification Taxable Income Tax Rates
Resident Citizen Income from sources within AND outside 0%-35%
the Philippines
Non-Resident Citizen Income from sources within the 0%-35%
Philippines
Resident Alien Income from sources within the 0%-35%
Philippines
Non-Resident Alien Engaged Income from sources within the 0%-35%
in Trade or Business Philippines
Non-Resident Alien NOT Income from sources within the 25%
Engaged in Trade or Business Philippines

a. RESIDENT CITIZENS, NON-RESIDENT CITIZENS, AND

RESIDENT ALIENS (Sec. 24(A) (1), NIRC)

i. COVERAGE

1. Resident Citizens
A Filipino resident citizen is taxable on income from all sources (both within and outside
Philippines).

2. Non-resident Citizens
A non-resident citizen is taxable only on income derived from sources within the Philippines.

Other considerations:
1. A Filipino citizen working and deriving abroad as an Overseas Contract Worker
(OCW) is taxable only on income from sources within the Philippines (i.e. sideline
income in the Philippines).
2. OCW – Filipino citizens who are physically present in a foreign country as a
consequence of their employment. Their salaries and wages are paid by an employer
abroad and is not borne by an entity or person in the Philippines (Sec. 2, RR 1-11)

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 3. An OCW’s income arising from sources outside the Philippines is exempt from
income tax.

3. Resident Aliens
A resident alien is taxable only on income from sources within the Philippines.

ii. TAXATION ON COMPENSATION INCOME

Income arising from an employer-employee relationship.

NOTE: (Prof. Canero)

Purely Compensation Income
1. Taxed based on the new graduated income tax rates (5%- 35%);
2. Taxable income is the gross compensation income less non- taxable
income/benefits.

(a) INCLUSIONS

1. Monetary compensation – If compensation is paid in cash, the full amount received is the
measure of the income subject to tax.

2. Regular salary/wage
Salary – earnings received periodically for a regular work other than manual labor, such as
monthly salary of an employee.

Wages – all remuneration for services performed by an employee for his employer, including
the cash value of all non-cash remuneration (Sec. 78(A), NIRC)

Separation pay/retirement benefit NOT exempt

Retirement pay – a lump sum payment received by an employee who has served a company
for a considerable period of time and has decided to withdraw from work into privacy (Sec.
2(b), RR No. 6-82).

GR: Retirement pay is taxable

XPNs:
1. SSS or GSIS retirement pays (Sec.32(B)(6), NIRC)
2. Retirement benefit under R.A. 7641 provided the following requirements are met:
a. Retirement program is approved by the Commissioner;
b. Retirement benefit is pursuant to a reasonable private benefit plan;
c. Retiree employed for 10 years by the employer;
d. Retiree should have been 50 years old or above at the time of retirement; and
e. Retirement benefit availed only once (Sec. 32 (B)(6)(a), NIRC).

Separation pay
GR: Separation pay TAXABLE if voluntarily availed of.

XPN: (NOT TAXABLE) if due to causes such as death, sickness, disability, reorganization
or bankruptcy of the company or for any other cause beyond the control of the said employee.

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3. Bonuses, 13th month pay, and other benefits not exempt

Tips and Gratuities – those paid directly to the employee (usually by employer’s customer)
which are not accounted for by the employee to the employer. (taxable income but not subject
to withholding tax) (Sec. 2.78.1, RR No. 2-98)

13th month pay – taxable ONLY for the part which exceeds P90,000 (Sec. 32(7)(e), NIRC).

Overtime Pay – premium payment received for working beyond regular hours of work
which is included in the computation of gross salary of employee.

4. Directors’ fees, allowances, and bonuses

GR: taxable as compensation income when the recipient director has an employee-employer
relationship with the corporation which pays the same

XPN: NOT TAXABLE as compensation income when recipient director’s duties is confined
to attendance and participation only in the meetings of the Board of Directors, but taxable as
income arising from exercise of profession.

5. Non-monetary compensation – measure of income subject to tax is the equivalent value

in money.

(b) EXCLUSIONS

1. Fringe benefit subject to tax

If the recipient of the fringe benefits is a rank and file employee, and the said fringe benefit
is NOT TAX-EXEMPT, then the value of such fringe benefit shall be considered as part of
taxable compensation income.

Where the recipient of the fringe benefit is NOT a rank and file employee, and the said
benefit is NOT TAX-EXEMPT, then the value of such fringe benefit shall NOT be included
in the taxable compensation income. It is instead levied upon the employer.

Convenience of the employer Rule

If meals, living quarters, and other facilities and privileges are furnished to an employee for
the convenience of the employer, and incidental to the requirement of the employee’s work or
position, the value of that privilege need not be included as compensation.

2. De minimis benefits
Facilities or privileges of relatively small value furnished by an employer to his employees
and are as a means of promoting the health, goodwill, contentment, or efficiency of his
employees (RR No. 11-18).

These are exempt from both fringe benefit tax and compensation income tax (Sec. 33 (C)(4),
NIRC).

3. 13th month pay and other benefits and payments specifically excluded from taxable
compensation income

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Gross benefits received by employees up to P90,000 (amounts in excess are considered
compensation income)

Benefits include:
1. Benefits received by government employees under RA 6686;
2. Benefits received by employees pursuant to PD 851 (13th Month Pay Decree);
3. Benefits received by employees not covered by PD 851 as amended by Memorandum
Order No. 28; and,
4. Other benefits such as productivity incentives and Christmas bonus.

iii. TAXATION OF BUSINESS INCOME/ INCOME FROM PRACTICE OF

PROFESSION

(a) SCHEDULAR

(b) 8% OPTION

All income obtained from doing business or exercising of profession shall be included in the
computation of gross income.

Individuals earning purely business or professional income

Individuals earning income purely from self-employment and/or practice of profession,
whose gross sales/receipts and other non- operating income does not exceed the VAT
threshold (P3,000,000) as provided under Sec. 109 (BB) of the Tax Code, as amended, shall
have the option to avail of:
1. The graduated rates under Sec. 24 (A)(2)(a) of the Tax Code, as amended; OR
2. An 8% tax on gross sales or receipts and other non-operating income in excess of
P250,000.00 in lieu of the graduated income tax rates under Sec. 24 (A) and the
percentage tax under Sec. 116 of the NIRC.

*Individuals earning mixed income

For mixed income earners, the income tax rates applicable are:
1. The compensation income shall be subject to the tax rates prescribed under
Section 24 (A)(2)(a); AND
2. The income from business or practice of profession shall be subject to the
following:
a. If the gross sales/receipts and other non- operating income do NOT exceed
the VAT threshold (P3,000,000.00), the individual has the OPTION to be
taxed at:
i. The aforementioned graduated taxable income rates; OR
ii. The aforementioned optional 8% gross income tax.
b. If the gross sales/receipts and other non-operating income EXCEEDS the
VAT threshold (P3,000,000), the individual shall be subject to the graduated
income tax rates.

iv. TAXATION OF PARTNERS IN A GENERAL PROFESSIONAL PARTNERSHIP

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.

77
Each partner shall report as gross income his distributive share in the net income of the GPP,
actually or constructively received.

In computing the distributive share of the partners, the net income of the GPP shall be
computed in the same manner as a corporation. (Sec. 26, NIRC)

If the partnership sustains a net operating loss, the partners shall be entitled to deduct their
respective shares in the net operating loss from their individual gross income

v. TAXATION OF PASSIVE INCOME

Passive Income Subject to Final Tax

“Final tax” means tax withheld from source, and the amount received by the income earner
is net of the tax already. The income having been tax-paid already, it need not be included in
the gross income in the yearly submission of ITR.

Interest income
1. on any currency bank deposit, yield or any other monetary benefit from deposit
substitutes, trust funds and similar arrangements - 20% final tax
2. under the expanded foreign currency deposit system (EFCDS) - 15% final tax for
residents, exempt if non-residents

Treatment of income from long-term deposits

On long-term deposit or investment certificates (LTDIC) in banks (e.g., savings, common or
individual trust funds, deposit substitutes, investment management accounts and other
investments, which have maturity of 5 years or more) – EXEMPT

Should LTDIC holder pre-terminate LTDIC before the 5th year, a final tax shall be imposed
on the entire income based on the remaining maturity:
4 years to less than 5 years- 5%
3 years to less than 4 years- 12%
Less than 3 years- 20%

Any income of nonresidents, whether individuals or corporations, from transactions with

depository banks under the expanded system shall be exempt from income tax.

For interest from foreign currency loans granted by FCDUs to residents other than Offshore
Banking Units (OBUs) or other depository banks under the expanded system – tax rate is
10% if payors are RESIDENTS, whether individuals or corporations.

Royalties
(See summary table)

Dividends from domestic corporation

Cash and/or property dividends actually or constructively received by an individual from
1. a domestic corporation
2. a joint stock company
3. insurance or mutual fund companies
4. regional operating headquarters of multinational companies

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 5. share of an individual in the distributable net income after tax of a partnership (except
a general professional partnership) of which he is a partner
6. share of an individual member or co-venturer in the net income after tax of an
association, a joint account, or a joint venture or consortium taxable as a corporation

Rate:
1. 10% for residents (RC, RA) and non- resident citizens (NRC);
2. 20% for non-resident aliens engaged in trade or business (NRAETB)

However, if a corporation cancels or redeems stock issued as a dividend at such time and in
such manner as to make the distribution and cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be considered as taxable income to the extent
that it represents a distribution of earnings or profits. (Sec. 73 (B), NIRC)

In other words, stock dividends are generally not subject to tax as long as there are no options
in lieu of the shares of stock.

On the other hand, a stock dividend constitutes income if it gives the shareholder an interest
different from that which his former stockholdings represented.

Prizes and other winnings

Prizes and other winnings - 20%, except
1. Prizes amounting to P10,000 or less, which shall be subjected to the graduated rates
under Subsection A of Section 24; and
2. Philippine Charity sweepstakes / lotto winnings which does NOT exceed P10,000 –
EXEMPT;
3. Prizes excluded from gross income.

Prize, differentiated from winnings:

A prize is the result of an effort made (e.g., prize in a beauty contest), while winnings are the
result of a transaction where the outcome depends upon chance (e.g., betting).

vi. *TAXATION OF CAPITAL GAINS

NOTE: (Prof. Canero)

Capital Gains Tax (CGT)
1. Shares of Stock in a Domestic Corporation
3. Listed and Traded: Percentage Tax of 6/10 of 1% Gross Selling Price (GSP)
4. NOT Listed and Traded: Final Tax of 15% of the Net Capital Gain (NCG)
2. Real property located in the Philippines
3. 6% Capital Gain Tax on the presumed gain (Selling Price (SP) or Fair Market
Value (FMV), whichever is higher)
4. XPN: sale or disposition of principal residence
3. Other Capital Asset
3. Subject to ordinary income tax but with special rules.

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(a) INCOME FROM SALE OF SHARES OF STOCK OF A PHILIPPINE
CORPORATION

Shares traded and listed in the stock exchange – Capital Gains Tax (CGT)-exempt, but
subject to business tax.

The transaction is exempt from income tax regardless of the nature of business of the seller
or transferor. However, it is subject to a business tax of six-tenths of one percent (0.6%) of
the gross selling price (Sec. 127 (A), NIRC).

Shares NOT listed and traded in the stock exchange – subject to final tax

On sale, barter, exchange or other disposition of shares of stock of a domestic

corporation NOT listed and traded through a local stock exchange, held as a capital
asset.

On the net capital gain- Final Tax of 15%

Net capital gain- selling price less cost
Selling price- consideration on the sale OR fair market value (FMV) of the shares of stock at
the time of the sale, whichever is higher
Cost- original purchase price

(b) INCOME FROM SALE OF REAL PROPERTY SITUATED IN THE

PHILIPPINES

What property covered

Property located in the PH classified as capital assets

What transactions covered

Sales, exchanges, or other disposition of real property (classified as capital assets), including
pacto de retro sales and other forms of conditional sales of the following: citizens, resident
aliens, NRAETB, NRANETB, domestic corporations.

Tax rate
GR: 6% of —whichever is higher of: GSP, or FMV in accordance with Sec. 6 (E).

Exception:
1. In case of sales made to the government, any of its political subdivisions or agencies,
or to GOCCs, it can be taxed either:
2. Under Sec. 24 (D)(1) – 6% CGT, or
3. Under Sec. 24 (A), at the option of the taxpayer.
4. In case of the sale of or disposition of their principal residence by natural persons

Requirements for exception on principal residence:

1. Sale or disposition by a natural person of his principal residence,
2. The proceeds of which is fully utilized in acquiring/ constructing a new principal
residence,
3. Such acquisition/construction taking place within 18 calendar months from the
date of sale or disposition,

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 4. The taxpayer notifies the Commissioner within 30 days from the sale/disposition
through a prescribed return of his intention to avail of the exemption,
5. The tax exemption can only be availed of once every 10 years.

Tax treatment of sale of principal residence: Exempt from capital gains tax (CGT).
If there is no full utilization of the proceeds of sale or disposition, the portion of the
gain presumed to have been realized from the sale or disposition shall be subject to
CGT.

How taxable portion and tax determined: (HIGHER of Gross selling price or
FMV @ sale)
The historical cost or adjusted basis of the real property sold or disposed shall be
carried over to the new principal residence built or acquired

(c) INCOME FROM SALE, EXCHANGE, AND OTHER DISPOSITION OF OTHER

CAPITAL ASSETS

Other properties shall be subject to income tax

1. At the graduated income tax rates, if the seller is an individual
2. Long-term capital gains: only 50% is recognized.
3. Short-term capital asset transactions: 100% subject to tax (Sec. 39(B), NIRC).

Determination of whether short- or long- term- Short-term if held for 12 months or less;
otherwise, it is a long-term capital gain.

At 30% corporate income tax, if the seller is a corporation.

Rule: Capital gain/loss is recognized in full.

Capital assets shall refer to all real properties held by a taxpayer, whether or not connected
with his trade or business, and which are not included among the real properties considered as
ordinary assets under Section 39(A)(1).
Ordinary assets shall refer to all real properties specifically excluded from the definition of
capital assets under Section 39(A)(1), NIRC, namely:
1. Stock in trade of a taxpayer or other real property of a kind which would properly
be included in the inventory of the taxpayer if on hand at the close of the taxable year;
or
2. Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business; or
3. Real property used in trade or business (i.e., buildings and/or improvements) of a
character which is subject to the allowance for depreciation provided for under Sec.
34(F) of the Code; or
4. Real property used in trade or business of the taxpayer.

b. NON-RESIDENT ALIENS ENGAGED IN TRADE OR BUSINESS

GR: Subject to income tax in the same manner as an individual citizen and a resident alien
individual on taxable income from all sources within the Philippines.

The following shall be subject to an income tax of 20% on the total amount thereof:
1. Cash and/or property dividends from:

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 a. A domestic corporation;
b. A joint stock company;
c. An insurance or mutual fund company;
d. A regional operating headquarters of multinational company;
e. The share of a nonresident alien individual in the distributable net income after
tax of a partnership (except a general professional partnership) of which he is
a partner;
f. The share of a nonresident alien individual in the net income after tax of an
association, a joint account, or a joint venture taxable as a corporation of
which he is a member or a co-venturer;
2. Interests
3. Royalties (in any form); and
4. Prizes (except prizes amounting to P10,000 or less which shall be subject to graduated
tax) and other winnings (except PCSO /lotto winnings which shall NOT exceed
P10,000)

XPN:
The following Royalties shall be subject to a final tax of 10% on the total amount
thereof:
a. On books as well as other literary works; and
b. On musical compositions
c. Cinematographic films and similar works shall be subject to 25% of the gross
income.
d. Interest income 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) shall be EXEMPT from the tax.

But should the holder of the certificate pre-terminate the deposit or investment before
the fifth (5th) year, a final tax shall be imposed on the entire income and shall be
deducted and withheld by the depository bank from the proceeds of the long-term
deposit or investment certificate based on the remaining maturity thereof:
a. Four (4) years to less than five (5) years - 5%;
b. Three (3) years to less than four (4) years - 12%; and
c. Less than three (3) years - 20%.

Capital gains
Capital gains realized from sale, barter or exchange of shares of stock in domestic
corporations NOT traded through the local stock exchange, and real properties shall be
subject to the similar tax prescribed on citizens and resident aliens.

Sale, barter, or exchange of Shares of stock in domestic corporation NOT traded – 15%
of net capital gains
Sale, barter, or exchange of real properties – 6% of gross selling price or current FMV
whichever is higher

c. NON-RESIDENT ALIENS NOT ENGAGED IN TRADE OR

BUSINESS (Sec. 25(B), NIRC)

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There shall be levied, collected, and paid for each taxable year upon the entire income
received from all sources within the Philippines by every NRANETB within the Philippines
as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments, or other fixed or determinable annual or periodic
or casual gains, profit, and income, and capital gains, a tax equivalent to 25% of such
income.

d. ALIENS EMPLOYED BY REGIONAL HEADQUARTERS,

REGIONAL OPERATING HEADQUARTERS, OFFSHORE BANKING
UNITS, AND PETROLEUM SERVICE CONTRACTORS

The preferential tax treatment of 15% shall NO LONGER be applicable to employees of

regional headquarters (RHQs), regional operating headquarters (ROHQs), offshore banking
units (OBUs) or petroleum service contractors and subcontractors. They are now subject to
regular income tax rates (Sec. 25 (F), NIRC).

e. INDIVIDUAL TAXPAYERS EXEMPT FROM INCOME TAX

a. Senior Citizens (with qualifications)

b. Minimum wage earners
c. Exemptions granted under international agreements

All individuals and entities claiming exemption from imposition of taxes on income and,
consequently, from withholding taxes are required to provide a copy of a valid, current, and
subsisting tax exemption certificate or ruling, as per existing administrative issuances and any
issuance that may be issued from time to time, before payment of the related income.

The tax exemption certificate or ruling must explicitly recognize the grant of tax exemption,
as well as the corresponding exemption from imposition of withholding tax. Failure on the
part of the taxpayer to present the said tax exemption certificate or ruling as herein required
shall subject him to the payment of appropriate withholding taxes due on the transaction.

i. MINIMUM WAGE EARNER (MWE)

Rule: they shall be exempt from payment of income tax on their taxable income.

Limit: However, if he receives “other benefits” in excess of the allowable statutory amount
of P90,000, then he shall be taxable on the exceeds benefits as well as his salaries, wages,
and allowances, just like an employee receiving compensation income beyond the statutory
minimum wage.

The minimum wage shall be exempt from the payment of income tax on their taxable
income: Provided, further, That the holiday pay, overtime pay, night shift differential pay and
hazard pay received by such minimum wage earners shall likewise be exempt from income
tax.

Compensation income including overtime pay, holiday pay and hazard pay, earned by
minimum wage earners who have no other returnable income are NOT taxable and not
subject to withholding tax on wages (RA 9504).

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ii. EXEMPTIONS GRANTED UNDER INTERNATIONAL AGREEMENTS

See RMC No, 31-2013, April 12, 2013 – taxation of compensation income of Philippine
nationals and alien individuals employed by foreign governments/ embassies/ diplomatic
missions and international organizations situated in the Philippines.

The Government of the Philippines is a signatory of certain international agreements and a

party to different tax treaties which specifically provide for the exemption of certain persons
or entities from taxes imposed by the Philippines.

Examples of these tax exemptions are those accorded to diplomats or ambassadors of other
countries here in the Philippines. The World Health Organization is also tax exempt upon an
international agreement (CIR v. Gotamco, G.R. No. L-31092 (1987)).

*Summary Table of Rates

Interest, Royalties, Resident Citizens Non-Resident Aliens Non-Resident
Prizes, and Other (RC); Engaged in Trade or Aliens NOT
Non-Resident Citizens Business Engaged in Trade
Winnings (NRC); (NRAETB) or Business
Resident Aliens (RA) (NRANETB)
Interest from any currency 20% 20% 25%
bank deposit
Yield or any other 20% 20% 25%
monetary benefit from
deposit substitute
Royalties, in general 20% 20% 25%
Royalties on books as well 10% 10% 25%
as other literary works and
musical compositions
Prizes exceeding P10,000 20% 20% 25%
(prizes P10,000 or less-
part of GI subject to the
graduated rates for
individuals)
Other winnings (except 20% 20% 25%
Philippine Charity
Sweepstakes and Lotto
winnings NOT exceeding
P10,000- EXEMPT)
Interest income from long- EXEMPT EXEMPT 25%
term deposit or investment
evidenced by certificates
prescribed by BSP. If pre-
terminated before 5th year,
a final tax shall be imposed
based on remaining
maturity
5% 5% 25%
4 years to less than 5 years
12% 12% 25%
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3 years to less than 4 years
20% 20% 25%
Less than 3 years
Cash and/ or Property Resident Citizens Non-Resident Aliens Non-Resident
Dividends (RC); Engaged in Trade or Aliens NOT
Non-Resident Citizens Business Engaged in Trade
(NRC); (NRAETB) or Business
Resident Aliens (RA) (NRANETB)
Cash and/or property 10% 20% 25%
dividends actually or
constructively received
from a DOMESTIC
CORP. or from a joint
stock corp., insurance or
mutual fund companies
and regional operation
headquarters of
multinational companies
(beginning Jan. 1, 2000)
Share of an individual in 10% 20% 25%
the distributable net
income after tax of a
PARTNERSHIP (other
than a general
professional partnership)
(beginning Jan. 1, 2000)
Share of an individual in 10% 20% 25%
the net income after tax of
an ASSOCIATION, a
JOINT ACCOUNT, or a
JOINT VENTURE or
CONSORTIUM taxable
as a corporation, of which
he is a member or a co-
venturer (beginning Jan. 1,
2000)

Sec. 24 (C). Capital Resident Citizens Non-Resident Aliens Non-Resident

Gains Tax (CGT) from (RC); Engaged in Trade or Aliens NOT
Non-Resident Citizens Business Engaged in Trade
Sale of Shares of Stock of (NRC); (NRAETB) or Business
a domestic corporation Resident Aliens (RA) (NRANETB)
NOT TRADED in the
Stock Exchange
Tax base: Net Capital Gain 15% 15% 15%
(NCG)

Sec. 24 (D). Capital Resident Citizens Non-Resident Aliens Non-Resident

Gains Tax (CGT) from (RC); Engaged in Trade or Aliens NOT
Non-Resident Citizens Business Engaged in Trade
Sale of Real Property (NRC); (NRAETB) or Business
Classified as Capital Resident Aliens (RA) (NRANETB)

85
 Asset
Tax base: Gross Selling
Price (GSP) or current Fair
Market Value, whichever
is higher
Tax Rate 6% 6% 6%

Resident Non-Resident
Category of Citizen Alien Citizen NRAETB NRCNET
Income B
All Within the Within the Within the Within the
sources Philippines Philippines Philippines Philippines
Compensation/ Based on Taxable (i.e. Net) Income
Business/
Profession Schedular Income Tax Rates (i.e. 0% to 35% (Sec.
24))
Prizes of P10,000 or
less For those earning purely business or professional
income or mixed income NOT exceeding the
threshold gross sales/receipts for the year of
P3,000,000, the taxpayer can opt to avail of the 8%
tax on gross sales/ receipts in lieu of graduated
income tax rates and percentage tax – for the
business/ professional income portion – upon the
option of the taxpayer
Interest from any
currency bank
deposit, etc. Gross
Gross Income Within the Philippines (GIW) – 20% Income
Royalties, in general Final Withholding Tax Within the
Philippines
Winnings/ Prizes (GIW) –
(except prizes 25%
P10,000 and below-
EXEMPT)
Royalties from
books, literary GIW – 10% Final Withholding Tax
works, musical
compositions
Interest from long- EXEMPT; However:
term deposit or In case of pre-termination, with remaining maturity
certificates, which of:
have a maturity of 5 4 years to less than 5 years -5% on entire income
years or more 3 years to less than 4 years – 12% on entire income
less than 3 years – 20% on entire income
Cash/ Property
Dividends from a
domestic
corporation, etc.,
OR share in the GIW – 10% Final Withholding Tax GIW – 20%
86
 distributed net
income after tax of a
partnership (except
a general
professional
partnership), etc.
Interest (Expanding
Foreign Currency GIW – 15% Final Withholding Tax EXEMPT
Deposit System)
Prizes Subject to schedular rates if not exceeding P10,000
Winnings on
Philippines EXEMPT if P10,000 and below
Sweepstakes/ Lotto
Capital Gains on
Sale of Shares of
Domestic Net Capital Gains – 15% Final Tax
Corporation (NOT
traded in a domestic
stock exchange)
Capital Gains on Gross Selling Price or Fair Market Value, whichever is higher – 6%
Sale of Real Final Withholding Tax
Property in the
Philippines
Sale of Shares of 0.6 of 1% (0.6%) of the Selling Price (Stock Transaction Tax)
Domestic
Corporation (traded NOTE: Stock Transaction Tax is NOT an income tax, but a
in a domestic stock business (percentage) tax
exchange)
Sale of Real Schedular/Graduated Income Tax Rates (i.e. 0% to 35%) (Sec. 24)
Property Located
Abroad For those earning purely business or professional income or mixed
Sale of Shares of income, the taxpayer can opt to avail of the 8% tax on gross sales/
Foreign Corp receipts in lieu of graduated rates – for the business/professional
Passive Income income portion – upon the option of the taxpayer
from Abroad

NOTE:
1. The option of 8% income tax rate applicable only to taxpayer's income from
business, and the same is in lieu of the income tax under the graduated income tax
rates and the percentage tax under Section 116 of the Tax Code, as amended.
2. *The amount of P250,000.00 allowed as deduction under the law for taxpayers
earning solely from self- employment/ practice of profession, is not applicable for
mixed income earner under the 8% income tax rate option.
3. The P250,000.00 mentioned above is already incorporated in the first tier of the
graduated income tax rates applicable to compensation income.
4. For mixed income, (i.e. compensation income and business income/income from the
practice of profession), the taxable income from both compensation and business shall
be combined for purposes of computing the income tax due if the taxpayer chose to be
subject under the graduated income tax rates.

87
Schedule of Income Tax Rates for Individual Citizens, Residents and NRAETB

Range of Taxable Income Tax Due (a+b)

Basic Amount (a) Additional Rate (b)
0 to 250,000 - -
Over 250,000 but not more - 20% of excess over 250,000
than 400,000
Over 400,000 but not more 30,000 25% of excess over 400,000
than 800,000
Over 800,000 but not over 130,000 30% of excess over
2,000,000 2,000,000
Over 2,000,000 but not over 490,000 32% of excess over
8,000,000 2,000,000
Over 8,000,000 2,410,000 35% of excess over
8,000,000

6. INCOME TAX ON CORPORATIONS

a. DOMESTIC CORPORATION
A corporation created and organized in the Philippines or under its laws (the law of
incorporation test) (Sec. 22 (C), NIRC).

Taxable on all income derived from sources within and without the Philippines.

i. TAXATION IN GENERAL

(a) REGULAR CORPORATE INCOME TAX (RCIT)

Default income tax. Except as otherwise provided, income tax of 30% is imposed on taxable
income.

Applies equally to both: (a) Domestic corporations (on income from within and without the
Philippines) and (b) Resident Foreign Corporations (on income from within the
Philippines)

Normal/ Regular Corporate Income Tax Rate: 30% of Taxable Income

Gross Income xxx

Less: Allowable Deductions xxx
Taxable Income xxx

Optional Gross Income Tax (GIT)- Section 27 (A) provides for an optional gross income
tax of 15% based on gross income.

(b) MINIMUM CORPORATE INCOME TAX (MCIT)

1. Applies to domestic corporations and resident foreign corporations whenever such
corporations
a. have zero or negative taxable income, or whenever the
b. MCIT is greater than the normal income tax due.

88
 2. Imposed beginning the 4th taxable year from the taxable year the corporation
commenced its business operations. For purposes of MCIT, the taxable year in
which business operations commenced shall be the year when the corporation
registers with the BIR (not in which the corporation started commercial operations).
3. Tax rate: 2% of Gross Income

What amount of income tax is paid by the corporation to the BIR?

Whichever is higher between the normal tax and the minimum corporate income tax.

It addresses the previously rampant practice of some corporations not declaring their actual
income or bloating their expenses.

There is no MCIT on the first three taxable years as incentive to do business.

Coverage
The MCIT covers domestic and resident foreign corporations which are subject to the regular
income tax. Corporations subject to a special corporate tax system do not fall within the
coverage of the MCIT .

These special corporations include Proprietary educational institutions, nonprofit hospitals,

OBUs, FCDUs, ROHQs, firms registered in PEZA/BCDA/other ecozones, International
Carriers.

For corporations whose operations or activities are partly covered by regular income tax and
special income tax system, MCIT shall apply on operations covered by the regular corporate
income tax system.

Carry forward of excess minimum tax

Any excess of the minimum corporate income tax over the normal income tax shall be carried
forward on an annual basis. The excess can be credited against the normal income tax in the
next 3 succeeding taxable years only (Sec. 27(E)(2), NIRC). In the year to which it was
carried forward, the normal tax should be higher than the MCIT.

Relief from MCIT (Sec. 27 (E)(3), NIRC)

The Secretary of Finance may suspend imposition of MCIT on any corporation which
sustained substantial losses on account of:
1. Prolonged labor dispute (losses from a strike staged by employees that lasts for
more than 6 months and caused the temporary shutdown of operations), or
2. Force majeure (acts of God and other calamity; includes armed conflicts like war or
insurgency), or
3. Legitimate business reverses (substantial losses due to fire, robbery, theft or other
economic reasons).

Quarterly MCIT Computation

The computation and the payment of MCIT shall likewise apply at the time of filing the
quarterly corporate income tax. In the computation of the tax due for the taxable quarter, if
the quarterly MCIT is higher than the quarterly normal income tax, the tax due to be paid for
such taxable quarter at the time of filing the quarterly corporate income tax return shall be the
MCIT.

89
Items allowed to be credited against quarterly MCIT due: (a) Creditable Withholding Tax
(CWT), (b) Quarterly income tax payments under the normal income tax; and (c) MCIT paid
in the previous taxable quarter(s).

Excess MCIT from the previous taxable year/s shall not be allowed to be credited against the
quarterly MCIT tax due.

Annual Income Tax Computation.

The final comparison between the normal income tax payable and the MCIT shall be made at
the end of the taxable year. The payable or excess payment in the Annual Income Tax Return
shall be computed taking into consideration corporate income tax payment made at the time
of filing of quarterly corporate income tax returns whether this be MCIT or normal income
tax.

In the computation of annual income tax due, if the normal income tax due is higher than the
computed annual MCIT, the following shall be allowed to be credited against the annual
income tax: (a) quarterly MCIT payments, (b) quarterly normal income tax payments, (c)
excess MCIT in the prior year/s (subject to the prescriptive period allowed for its
creditability), (d) CWTs in the current year, (d) excess CWTs in the prior year.

If in the computation of annual income tax due, the computed annual MCIT due is higher
than the annual normal income tax due, the following may be credited against the annual
income tax: (a) quarterly MCIT payments of current taxable quarter, (b) quarterly normal
income tax payments in current year, (c) CWTs in the current year, (d) excess CWTs in the
prior year.

Excess MCIT from the previous taxable year/s shall not be allowed to be credited against the
annual MCIT due as the same can only be applied against normal income tax.

Manner of Filing and Payment.

The MCIT shall be paid in the same manner prescribed for the payment of the normal
corporate income tax which is on a quarterly and on a yearly basis.

(c) TAXATION OF PASSIVE INCOME

Interest from deposits and yield or any other monetary benefit from deposit substitutes and
from trust funds and similar arrangements and royalties

1. 20% final tax on:

1. interest on any currency bank deposit,
2. yield or any other monetary benefit from deposit substitutes, trust funds, and
similar arrangements, and
3. Royalties
2. same for Domestic Corporations and Resident Foreign Corporations
3. Collected as Final Withholding Tax (Sec. 57, NIRC)

Interest Income derived by a domestic corporation from depository bank under the
expanded foreign currency deposit system (Section 27 (D)(1), NIRC)
1. 15% final income tax

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 2. same for Domestic Corporations and Resident Foreign Corporations
3. Collected as Final Withholding Tax (Sec. 57, NIRC)

Inter-corporate dividends
1. Dividends received from a domestic corporation by another domestic corporation or
resident foreign corporation – EXEMPT
2. Dividends received from a domestic corporation by a non-resident foreign corporation
(NRFC): 30% of the amount of cash and/or property dividend; provided that it
may be reduced to 15% of the amount of cash and/or property dividend, if the country
in which the NRFC is domiciled shall allow a credit against the tax due from the
NRFC deemed to have been paid in the Philippines equivalent to 15%, which
represents the difference between the regular income tax of 30% and the 15% tax
sparing rate.

Stock dividends are EXEMPT if there is no change in proportionate interest.

(d) TAXATION OF CAPITAL GAINS

Capital gain from sale of shares of stock NOT traded in the stock exchange.

Final tax on net capital gains realized by a DOMESTIC CORPORATION during the
taxable year from the sale, barter, exchange or other disposition of shares of stock in a
domestic corporation NOT listed and traded through a local stock exchange: 15% of net
capital gains (Sec. 27 (D)(2), NIRC).

Final tax on net capital gains realized by RESIDENT FOREIGN CORPORATIONS

and NON-RESIDENT FOREIGN CORPORATIONS during the taxable year from the
sale, barter, exchange or other disposition of shares of stock in a domestic corporation
not listed and traded through a local stock exchange:

Capital gains realized from the sale, exchange, or disposition of lands and/or buildings
1. On the sale, exchange, or disposition of lands and/or buildings which are not actually
used in the business of a corporation and are treated as capital assets
2. On the gross selling price, or the current fair market value at the time of the sale,
whichever is higher, a final tax of 6%;
3. If it is a RESIDENT FOREIGN CORPORATION, it is subject to the regular
corporate income tax rate of 30%
4. The capital gains tax is applied on the gross selling price, or the current fair market
value at the time of the sale, whichever is higher. Any gain or loss on the sale is
immaterial because there is a conclusive presumption by law that the sale resulted in a
gain.
5. Applicable to DOMESTIC CORPORATIONS ONLY.
6. Tax treatment is similar to that of individuals.

(e) IMPROPERLY ACCUMULATED EARNINGS TAX

(Sec. 29, NIRC, as implemented by RR 2-2001)

91
Rule: In addition to other income taxes, there is imposed for each taxable year a tax equal to
10% of the improperly accumulated taxable income.

Applies to every corporation formed or availed for the purpose of avoiding the income tax
with respect to its shareholders or the shareholders of any other corporation, by permitting
earnings and profits to accumulate instead of being divided or distributed.

Rationale: It is a tax in the nature of a penalty to the corporation for the improper
accumulation of its earnings, and a deterrent to the avoidance of tax upon shareholders who
are supposed to pay dividends tax on the earnings distributed to them.

Effect of imposition of IAET

Once the profit has been subjected to IAET, the same shall no longer be subjected to IAET in
later years even if not declared as dividend.

Profits which have been subjected to IAET, when finally declared as dividends, shall
nevertheless be subject to tax on dividends.

In applying the above rules, dividends shall be deemed to have been paid out of the most
recently accumulated profits (LIFO: last in, first out).

The use of undistributed earnings and profits for the reasonable needs of the business would
generally NOT make the accumulated or undistributed earnings subject to IAET.

Immediacy Test: The term "reasonable needs of the business" means (1) the immediate
needs of the business, including (2) reasonably anticipated needs.

The corporation should be able to prove (1) an immediate need for the accumulation of the
earnings and profits, or (2) the direct correlation of anticipated needs to such accumulation of
profits.

Accumulation for Reasonable needs under RR 2-2001

Accumulation of earnings up to 100% of paid- up capital;

Definite corporate expansion projects requiring considerable capital expenditure (approved

by Board of Directors or equivalent body);

Building, Plant, or Equipment Acquisition (approved by Board of Directors or equivalent

body)
1. compliance with any Loan Covenant or pre-existing obligation (established under a
legitimate business agreement);
2. required by Law or applicable regulations to be retained;
3. in case of subsidiaries of foreign corporations in the Philippines, undistributed
earnings reserved for Investments within the Philippines

Coverage:
1. IAET applies to- domestic corporations classified as closely- held corporations.
2. IAET does NOT apply to:
a. Banks and other non-bank financial intermediaries;
b. Insurance companies;

92
 c. Publicly-held corporations;
d. Taxable partnerships;
e. General professional partnerships;
f. Non- taxable joint ventures; and
g. Enterprises registered with Philippine Economic Zone Authority (PEZA)
(RA7916), Bases Conversion and Development Authority (BCDA) (RA 7227),
and other special economic zones declared by law which enjoy a special tax
rate in lieu of other taxes.

Closely-held corporations are those:

1. at least 50% in value of the outstanding capital stock; or
2. at least 50% of the total combined voting power of all classes of stock entitled to vote
3. is owned directly or indirectly by or for not more than 20 individuals. Domestic
corporations not falling under the aforesaid definition are, therefore, publicly- held
corporations.

BIR Ruling 025-02

The ownership of a domestic corporation for purposes of determining whether it is a closely
held corporation or a publicly held corporation is ultimately traced to the individual
shareholders of the parent company.

Where at least 50% of the outstanding capital stock or at least 50% of the total combined
voting power of all classes of stock entitled to vote in a corporation is owned directly or
indirectly by at least 21 or more individuals, the corporation is considered as a publicly-held
corporation, thus, EXEMPT from IAET.

Determination of Purpose to Avoid Income Tax

Being a holding or investment company is prima facie evidence of purpose to avoid dividend
tax. Holding or investment company – corporation having practically no activities except
holding property, and collecting the income therefrom or investing the same;

Accumulation in excess of reasonable needs is determinative of the purpose to avoid dividend

tax. Prima facie instances of this include: (i) investment of substantial earnings and profits in
unrelated business or in stock or securities of unrelated business; (ii) investment in bonds and
other long-term securities; (iii) accumulation of earnings in excess of 100% of paid-up capital

The controlling intention of the taxpayer is that which is manifested at the time of
accumulation, not subsequently declared intentions which are merely the product of
afterthought.

A speculative and indefinite purpose will not suffice. Definiteness of plan/s coupled with
action/s taken towards its consummation are essential.

INCOME TAX ON SPECIAL DOMESTIC CORPORATIONS

93
ii. PROPRIETARY EDUCATIONAL INSTITUTIONS AND NON-PROFIT
HOSPITALS (Sec. 27(B), NIRC)

Tax Rate and Base –10% tax on taxable income (except on income subject to capital gains
tax and passive income subject to final tax) within and without the Philippines

Caveat: If gross income from unrelated trade or business or other activity exceeds 50% of
total gross income derived from all sources, the tax rate of 30% shall be imposed on the
entire taxable income.

Unrelated trade, business or other activity – any trade, business or other activity, the
conduct of which is not substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or function.

Proprietary educational institution – any private school maintained and administered by

private individuals or groups with an issued permit to operate from DepEd, CHED or TESDA
(Sec. 27 (B), NIRC).

iii. GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS, AGENCIES,

INSTRUMENTALITIES (Sec. 27(C), NIRC)

GOCCs
GR: GOCCs are taxable as any other corporation engaged in similar business, industry, or
activity

XPNS:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Local water districts (LWDs) (Sec. 27 (C), NIRC)

Government agencies or instrumentalities

GR: The government is exempt from tax.

XPN: When it chooses to tax itself. Nothing can prevent Congress from decreeing that even
instrumentalities or agencies of the government performing governmental functions may be
subject to tax. Where it is done precisely to fulfill a constitutional mandate and national
policy, no one can doubt its wisdom (Mactan Cebu Airport v Marcos (1996)).

iv. FOREIGN CURRENCY DEPOSIT UNITS (FCDU) (Sec. 27(D)(3), NIRC)

Income derived by a depository bank under the expanded foreign currency deposit system
from:

Foreign currency transactions with nonresidents, offshore banking units in the Philippines,
local commercial banks, including branches of foreign banks authorized by the BSP to
transact business with foreign currency depository system units and other depository banks
under the EFCDS – EXEMPT from income tax.

94
XPN: net income from transactions specified by the Secretary of Finance upon
recommendation by the Monetary Board – subject to regular income tax payable by banks

Foreign currency loans granted to residents (other than offshore banking units in the
Philippines) – interest income subject to a final tax of 10%

Income of nonresidents, individuals or corporations, from transactions with depository banks

under the EFCDS – EXEMP from income tax

Same for Domestic and Resident Foreign Corporations.

Similar treatment to OBUs.

b. RESIDENT FOREIGN CORPORATIONS

A corporation organized under the laws of a foreign country, which is engaged in trade or
business in the Philippines.

Taxable only on income derived from sources within the Philippines.

A Philippine branch of a foreign corporation duly licensed by the SEC is considered a

resident foreign corporation. Thus, only the income of the Philippine branch from sources
within the Philippines is subject to Philippine income tax.

As general rule, the head office of a foreign corporation is the same juridical entity as its
branch in the Philippines following the single entity concept. Thus, the income from sources
within the Philippines of the foreign head office shall thus be taxable to the Philippine
branch.

But, when the head office of a foreign corporation independently and directly invested in a
domestic corporation without the funds passing through its Philippine branch, the taxpayer,
with respect to the tax on dividend income, would be the non-resident foreign corporation
itself and the dividend income shall be subject to the tax similarly imposed on non- resident
foreign corporations (Marubeni v. Commissioner, G.R. No. 76573 (1989)).

i. TAXATION- IN GENERAL

(a) REGULAR CORPORATE INCOME TAX (RCIT)

Default income tax. Except as otherwise provided, income tax of 30% is imposed on taxable
income.

Applies equally to both: (a) Domestic corporations (on income from within and without the
Philippines) and (b) Resident Foreign Corporations (on income from within the
Philippines)

Normal/ Regular Corporate Income Tax Rate: 30% of Taxable Income

Gross Income xxx

Less: Allowable Deductions xxx

95
Taxable Income xxx

Optional Gross Income Tac (GIT)- Section 27 (A) provides for an optional gross income
tax of 15% based on gross income.

(b) MINIMUM CORPORATE INCOME TAX (MCIT)

1. Applies to domestic corporations and resident foreign corporations whenever such

corporations
a. have zero or negative taxable income, or whenever the
b. MCIT is greater than the normal income tax due.
2. Imposed beginning the 4th taxable year from the taxable year the corporation
commenced its business operations. For purposes of MCIT, the taxable year in
which business operations commenced shall be the year when the corporation
registers with the BIR (not in which the corporation started commercial operations).
3. Tax rate: 2% of Gross Income

(c) BRANCH PROFITS REMITTANCE TAX (BPRT)

1. *Applies to NON-RESIDENT FOREIGN CORPORATIONS. Imposed on profits

remitted by the Philippine branch to the head office.
2. Collected as Final Withholding Tax (Sec. 57, NIRC)

Taxable transaction – any profit remitted by a branch to its head office

Tax Rate and Base – 15% final tax based on the total profits applied or earmarked for
remittance without any deduction for the tax component (except those activities registered
with PEZA).

The following are not treated as branch profits unless effectively connected with the conduct
of trade or business in the Philippines:
1. Interests, dividends, rents, royalties (including remuneration for technical services),
2. salaries, wages,
3. premiums, annuities, emoluments, or
4. other fixed or determinable annual, periodic or casual gains, profits, income and
capital gains received during each taxable year from all sources within the Philippines

(d) TAXATION OF PASSIVE INCOME

Interest from deposits and yield or any other monetary benefit from deposit substitutes and
from trust funds and similar arrangements and royalties

4. 20% final tax on:

4. interest on any currency bank deposit,
5. yield or any other monetary benefit from deposit substitutes, trust funds, and
similar arrangements, and
6. Royalties
5. same for Domestic Corporations and Resident Foreign Corporations
6. Collected as Final Withholding Tax (Sec. 57, NIRC)

96
Interest Income derived by a domestic corporation from depository bank under the
expanded foreign currency deposit system (Section 27 (D)(1), NIRC)
4. 15% final income tax
5. same for Domestic Corporations and Resident Foreign Corporations
6. Collected as Final Withholding Tax (Sec. 57, NIRC)

Inter-corporate dividends
3. Dividends received from a domestic corporation by another domestic corporation or
resident foreign corporation – EXEMPT
4. Dividends received from a domestic corporation by a non-resident foreign corporation
(NRFC): 30% of the amount of cash and/or property dividend; provided that it
may be reduced to 15% of the amount of cash and/or property dividend, if the country
in which the NRFC is domiciled shall allow a credit against the tax due from the
NRFC deemed to have been paid in the Philippines equivalent to 15%, which
represents the difference between the regular income tax of 30% and the 15% tax
sparing rate.

Stock dividends are EXEMPT if there is no change in proportionate interest.

(e) TAXATION OF CAPITAL GAINS

Capital gain from sale of shares of stock NOT traded in the stock exchange.

Final tax on net capital gains realized by a DOMESTIC CORPORATION during the
taxable year from the sale, barter, exchange or other disposition of shares of stock in a
domestic corporation NOT listed and traded through a local stock exchange: 15% of net
capital gains (Sec. 27 (D)(2), NIRC).

Final tax on net capital gains realized by RESIDENT FOREIGN CORPORATIONS

and NON-RESIDENT FOREIGN CORPORATIONS during the taxable year from the
sale, barter, exchange or other disposition of shares of stock in a domestic corporation
not listed and traded through a local stock exchange:

Not over P100,000- 5%

On any amount in excess of P100,000- 10%

Capital gains realized from the sale, exchange, or disposition of lands and/or buildings
1. On the sale, exchange, or disposition of lands and/or buildings which are not actually
used in the business of a corporation and are treated as capital assets
2. On the gross selling price, or the current fair market value at the time of the sale,
whichever is higher, a final tax of 6%;
3. If it is a RESIDENT FOREIGN CORPORATION, it is subject to the regular
corporate income tax rate of 30%
4. The capital gains tax is applied on the gross selling price, or the current fair market
value at the time of the sale, whichever is higher. Any gain or loss on the sale is
immaterial because there is a conclusive presumption by law that the sale resulted in a
gain.
5. Applicable to DOMESTIC CORPORATIONS ONLY.
6. Tax treatment is similar to that of individuals.

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ii. RESIDENT FOREIGN CORPORATIONS SUBJECT TO PREFERENTIAL TAX
RATES

(a) INTERNATIONAL CARRIERS

Tax Rate and Base – 2.5% on Gross Philippine Billings (GPB)

International Air Carriers, GPB means:

1. Gross revenue derived from
a. carriage of persons, excess baggage, cargo, and mail
b. originating from the Philippines in a continuous and uninterrupted flight,
c. irrespective of the place of sale or issue and the place of payment of the ticket
or passage document
2. Tickets revalidated, exchanged and/or indorsed to another international airline – part
of GPB if passenger boards a plane in a port or point in the PH
3. Flights which originate from the PH, but transshipment of passenger takes place at a
port outside PH on another airline – part of GPB only the aliquot portion of the cost of
the ticket corresponding to the leg flown from the PH to transshipment point (RR 15-
02)

Air Canada vs. CIR (CTA Case No. 6572):

A foreign airline company selling tickets in the Philippines through their local agents shall be
considered as a resident foreign corporation engaged in trade or business in the country.

The absence of flight operations within the Philippine territory cannot alter the fact that the
income received was derived from activities within the Philippines.

The test of taxability is the source, and the source is that activity which produced the
income.

International Shipping, GPB means

Gross revenue for (a) passenger, cargo or mail (b) originating from the Philippines up to final
destination, (c) regardless the place of sale or payments of the passage or freight documents.

(b) FOREIGN CURRENCY DEPOSIT UNITS AND OFFSHORE BANKING UNITS

Foreign Currency Deposit Units (Sec. 28(A)(7))

Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes,
Trust Funds and Similar Arrangements and Royalties (Sec. 28(B)(7)(a), NIRC)

Derived from sources within the Philippines - Final income tax at tax rate of 20% of
interest income

Interest income derived by RFC from a depository bank under the expanded foreign currency
deposit system - 7.5% of interest income

Income derived by a depository bank under the expanded foreign currency deposit
system (Sec. 28(B)(7)(b), NIRC)

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NOTE: The provision discussing income derived by a resident foreign corporation under the
expanded foreign currency deposit system cites the same rule as that derived by a domestic
corporation (Sec. 27(D)(3), NIRC).

Offshore Banking Units (Sec. 28(A)(4), NIRC)

Income derived by OBUs authorized by the BSP from:
1. foreign currency transactions with nonresidents, other OBUs, local commercial banks,
including branches of foreign banks authorized by the BSP to transact business with
OBUs – EXEMPT from income tax
2. except net income from transactions specified by the Secretary of Finance upon
recommendation by the Monetary Board – subject to regular income tax payable
by banks
3. foreign currency loans granted to residents (other than offshore banking units in the
Philippines)– interest income subject to a final tax of 10%
4. income of nonresidents, individuals or corporations, from transactions with
OBUs – EXEMPT from income tax
5. Similar treatment to FCDUs

(c) REGIONAL OR AREA HEADQUARTERS AND REGIONAL OPERATING

HEADQUARTERS (Sec. 28(A)(6), NIRC)

Regional or area headquarters

1. Branch established in the Philippines by multinational companies and which
headquarters do not earn or derive income from the Philippines and which act as
supervisory, communications and coordinating center for their affiliates, subsidiaries,
or branches in the Asia- Pacific Region and other foreign markets (Sec. 22 (DD))
2. NOT subject to income tax

Regional operating headquarters

1. Branch established in the Philippines by multinational companies which are engaged
in any of the following services: (i) general administration and planning; (ii) business
planning and coordination; (iii) sourcing and procurement of raw materials and
components; (iv) corporate finance advisory services; (v) marketing control and sales
promotion; (vi) training and personnel management; (vii) logistic services; (viii)
research and development services and product development; (ix) technical support
and maintenance; (x) data processing and communications; and (xi) business
development. (Sec. 22 (EE), NIRC)

2. tax of 10% of their taxable income.

Summary of Tax Base and Rates of Special Corporations

Domestic Corporation Tax Base Tax Rate
Proprietary Educational Institutions Taxable income from all 10%
and Non-profit Hospitals sources
Depository Banks (Foreign Currency EXEMPT (except that net EXEMPT
Deposit Units (FDCU)) income from such
With respect to income derived under the transactions is subject to the
expanded foreign currency deposit regular income tax payable
system from certain foreign currency by banks)
transactions.

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 With respect to interest income from Amount of interest income 10%
foreign currency loans to residents
other than offshore banking units in the
Philippines or other depository banks
under the expanded system
Resident Foreign Corporation Tax Base Tax Rate
International Carriers Gross Philippine Billings 2.5%
Offshore Banking Units EXEMPT (except that net EXEMPT
With respect to income derived by income from such
offshore banking units from certain transactions is subject to the
foreign currency transactions regular income tax payable
by banks)
With respect to interest income derived Amount of interest income 10%
from foreign currency loans granted to
residents other than offshore banking
units or local commercial banks
Resident Depository Banks (Foreign EXEMPT (except that net EXEMPT
Currency Deposit Units (FCDU) income from such
With respect to income derived under the transactions is subject to the
expanded foreign currency deposit regular income tax payable
system from certain foreign currency by banks)
transactions
With respect to interest income from Amount of interest income 10%
foreign currency loans to residents
other than offshore banking units in the
Philippines or other depository banks
under the expanded system
Regional Operation Headquarters of Taxable income from within 10%
Multinational Companies the Philippines
Non-Resident Foreign Corporation Tax Base Tax Rate
Non-resident cinematographic film Gross income from the 25%
owners, lessors or distributors Philippines
Non-resident owner or lessor of vessels Gross rentals, lease, and 4.5%
chartered by Philippine nationals charter fees from the
Philippines
Non-resident owner or lessor of aircraft, Gross rentals, lease, and 7.5%
machineries or other equipment charter fess from the
Philippines

c. NON-RESIDENT FOREIGN CORPORATIONS (NRFC) (Sec. 28(B),

NIRC)

i. TAXATION OF NRFC IN GENERAL

A corporation organized under the laws of a foreign country, which is not engaged in trade or
business in the Philippines.

Taxable only on income derived from sources within the Philippines.

Income taxes on nonresident foreign corporations are collected as Final Withholding Tax
under Sec. 57, NIRC.

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GR: The tax is 30% of gross income received during each taxable year from all sources
within the Philippines

This includes: interests, dividends, rents, royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual
gains, profits and income, and capital gains (except capital gains on the sale of shares not
traded in the stock exchange)

ii. NRFCs SUBJECT TO PREFERENTIAL TAX RATES

Non-resident cinematographic film owner, lessor or distributor – 25% of gross income

from all sources within the Philippines

Non-resident owner or lessor of vessels chartered by Philippine nationals – 4.5% of

gross rentals, lease or charter fees from leases or charters to Filipino citizens or
corporations, as approved by the Maritime Authority

Non-resident owner or lessor of aircraft, machineries and other equipment – 7.5% of

gross rentals, charters or other fees

Tax On Certain Income Received By NRFC

Tax on Interest on foreign loans: contracted on or after August 1, 1986 – 20% (Sec. 28 (B)
(5)(a), NIRC)

Tax on Inter-corporate dividends

Inter-corporate Dividend – 15% on dividends received from domestic corporations, if the
country in which the nonresident foreign corporation is domiciled allows a tax credit of at
least 15% for taxes “deemed paid” in the Philippines

15% foreign tax credit represents the difference between the regular income tax of 30% on
corporations and the 15% tax on dividends (“tax sparing credit”)

If the country within which the NRFC is domiciled does NOT allow a tax credit, the tax is
30% on dividends received from a domestic corporation.

Tax on Capital gain from sale of shares of stock NOT traded in the stock exchange
Final tax on net capital gains realized by the NRFC during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in a domestic corporation not listed
and traded through a local stock exchange:

First P100k – 5%
Amount in excess of P100k – 10%

d. CORPORATIONS EXEMPT FROM INCOME TAX

Tax exempt corporations (Sec. 30, NIRC)

1. Labor, agricultural, or horticultural organization – non-profit
2. Mutual savings bank or cooperative bank – non-stock, non-profit, operated for mutual
purposes

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 3. Beneficiary society, order, or association - operating for the exclusive benefits of their
members; includes: fraternal organization operating under the lodge system; or mutual
aid association or a nonstock corporation organized by employees providing life,
sickness, accident, or other benefits exclusively to the members
4. Cemetery company – owned and operated exclusively for the benefit of its members
5. Non-stock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes or for the rehabilitation of veterans,
provided that no part of its income or asset belong to or inure to the benefit of any
individual
6. Business league, chamber of commerce, or board of trade – Non-profit; no part of net
income inures to the benefit of an individual
7. Civic league or organization – Non-profit; operating exclusively for the promotion of
social welfare
8. Non-stock and non-profit educational institutions
9. Government educational institutions
10. Organizations of a purely local character whose income consists solely of assessment,
duties and fees collected from their members to meet expenses; includes: farmers’ or
other mutual typhoon or fire insurance company, mutual ditch or irrigation company
and mutual or cooperative telephone company
11. Farmers’, fruit growers’, and like association – whose primary function is to market
the product of their members

Notwithstanding the provisions in the preceding paragraphs, the income of the foregoing
organizations from (1) their properties, real or personal, or from (2) their activities conducted
for profit regardless of the disposition made of such income, shall be subject to tax imposed
under the NIRC.

N.B. This means capital gains tax, tax on passive income, etc. applies to these otherwise
exempt organizations.

e. TAX ON OTHER BUSINESS ENTITIES: GENERAL

PARTNERSHIPS, GENERAL PROFESSIONAL PARTNERSHIPS, CO-
OWNERSHIPS, JOINT VENTURES, ANS CONSORTIA

1. General Partnerships
Partnerships where all or part of their income is derived from the conduct of trade or
business; it is treated as a corporation (Sec. 22 (B), NIRC).

GR: The partnership is subject to the same rules and rates as corporations.
XPN: A partner’s share in the partnership’s distributable net income is deemed actually
or constructively received by the partners in the same taxable year (Sec. 73 (D), NIRC).
Consequently:
1. such share will be subjected to dividend tax (10%) whether actually distributed or
not.
2. there can never be an instance of improperly accumulated taxable income; note that
RR 2-01 provides that IAET does NOT apply to taxable partnerships.

Distributable net income of the partnership is its taxable income less the normal corporate
income tax (30%).

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A partner’s contribution to the general partnership fund is a capital investment and is not
taxable income of the partnership.

2. General Professional Partnerships

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 (Sec 22 (B),
NIRC).

A GPP as such shall NOT be subject to the income tax. It is not a taxable entity for income
tax purposes.

GPP is NOT a taxable entity

The GPP is deemed to be no more than a mere mechanism or a flow-through entity in the
generation of income by, and the ultimate mechanism distribution of such income to the
individual partners (Tan v. Commissioner, G.R. No. 109289 (1994)).

But the partnership itself is required to file income tax returns for the purpose of furnishing
information as to the share in the gains or profits which each partner shall include in his
individual return (RR 2-98).

The share of an individual partner in the net profit of a general professional partnership is
deemed to have been actually or constructively received by the partner in the same taxable
year in which such partnership net income was earned, and shall be taxed to them in their
individual capacities, whether actually distributed or not, at the graduated income tax ranging
from 5% to 32%.

Because the principle of constructive receipt is applied to undistributed profits of GPPs, the
actual distribution to the partners of such tax- paid profits in another year should no longer be
liable to income tax.

A GPP may claim either the itemized deductions allowed under Section 34 of the Code or in
lieu thereof, it can opt to avail of the OSD allowed to corporations in claiming the deductions
in an amount not exceeding forty percent (40%) of its gross income.

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 (RR No. 08-2018).

3. Co-ownerships
There is co-ownership whenever the ownership of an undivided thing or right belongs to
different persons (Art. 484, NCC). It may be created by succession or donation.

When Co-ownership is not subject to tax

When the co-ownership’s activities are limited merely to the preservation of the co-owned
property and to the collection of the income from the property. Each co-owner is taxed
individually on his distributive share in the income of the co-ownership.

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When Co-ownership is subject to tax
The following circumstances would render a co-ownership subject to a corporate income tax:
1. When a co-ownership is formed or established voluntarily, or upon agreement of the
parties;
2. When the individual co-owner reinvested his share, and
3. When the inherited property remained undivided for more than 10 years, and no
attempt was ever made to divide to same among the co-heirs, nor was the property
under administration proceedings nor held in trust, the property should be considered
as owned by an unregistered partnership.

Automatically converted into an unregistered partnership the moment the said common
properties and/or the incomes derived from them 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 (1972))

4. Joint Ventures and Consortiums

To constitute a” joint venture,” certain factors are essential. Each party to the venture must
make a contribution, not necessarily of capital, but by way of services, skill, knowledge,
material or money; profits must be shared among the parties; there must be a joint proprietary
interest and right of mutual control over the subject matter of the enterprise; and usually,
there is single business transaction.

GR: An unincorporated joint venture is taxed like a corporation. The share of the joint
venture partners will no longer be taxable to them because they partake in the nature of inter-
corporate dividends.

XPN: an unincorporated joint venture formed for the purpose of undertaking a construction
project or engaging in petroleum operations pursuant to the consortium agreement with the
Philippine Government is NOT subject to the corporate income tax. Only the joint venture
partners will be taxed on their respective shares in the income of the joint ventures (Sec. 22
(B), NIRC).

Two elements necessary to exempt a joint venture or consortium from tax

1. The joint venture must be an unincorporated entity formed by two or more persons
2. The joint venture was formed for the purpose of undertaking a construction project, or
engaging in the petroleum and other energy operations with operating contract with
the government.

SUMMARY ON INCOME TAX ON CORPORATIONS

CORPORATE INCOME TAX (CIT)

Tax Rate
Income Domestic Resident Foreign Non-Resident
Corporation Corporation Foreign
Corporation
Regular Corporate Income Tax Rate 30% 30% 30%
(RCIT)

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Optional Gross Income Tax (GIT) 15% - -
Minimum corporate income tax (MCIT) on 2% 2% -
gross income, beginning in the 4th taxable
year following the year of commencement
of business
operations. MCIT is greater than the
normal income tax due.
With respect to interest income from 10% 10% -
foreign currency loans to residents other
than offshore banking units in the
Philippines or other depository banks
under the expanded system
Passive Income 20% 20% -
Capital Gains
1. Sale of shares of stock NOT traded 15% Not over Not over
P100,000- 5% P100,000- 5%
in the stock exchange
On any amount On any amount
in excess of in excess of
P100,000- 10% P100,000- 10%

2. Sale, exchange, or disposition of 6%

30%
lands and/or buildings
Improperly Accumulated Earnings Tax 10% - -
(IAET)
Proprietary Educational Institutions and 10% - -
Non-Profit Hospitals
Government-owned or Controlled GOCCs- taxable - -
Corporations, Agencies, Instrumentalities as any other
corporation

Agencies,
instrumentalities-
EXEMPT
Foreign Currency Deposit Units (FCDU) EXEMPT EXEMPT -
Offshore Banking Units (OBU)
Branch Profit Remittance Tax (BPRT) - - 15%
International Carriers - 2.5% -
Interest income derived from foreign
currency loans granted to residents other 10% 10% -
than offshore banking units or local
commercial banks
Regional or area headquarters - EXEMPT -
Regional operating headquarters - 10% -
Tax on Inter-corporate dividends
1. Inter-corporate Dividend –on - - 15%
dividends received from domestic
corporations, if the country in
which the nonresident foreign
corporation is domiciled allows a
tax credit of at least 15% for taxes
“deemed paid” in the Philippines
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 2. If the country within which the - - 30%
NRFC is domiciled does NOT
allow a tax credit.

CORPORATE INCOME TAX DETERMINATION (PWC)

Inventory valuation- Inventories are generally stated at the lower of cost or net realizable
value. Last in first out (LIFO) is not allowed for tax purposes. Generally, the inventory
valuation method for tax purposes must conform to that used for financial reporting
purposes.
Capital Gains- Capital gains are not generally subject to Corporate Income Tax (CIT) but
may be subject to Capital Gains Tax (CGT).

Capital gains arises from the sale or exchange of “capital assets”. Capital assets are
property held by the taxpayer (whether or not connected with its trade or business, other
than the following:
1. Inventories or property held primarily for sale to customers in the ordinary course
of business.
2. Real property or depreciable property used in trade or business.
3. Property of a kind that would be included in the inventory of the taxpayer if on
hand at the close of the taxable year.

Capital losses are deductible only to the extent of capital gains.

There are no holding period requirements for capital assets of corporations

*A 6% Final Tax is imposed on the higher of the Gross Selling Price (GSP) or the Fair
Market Value (FMV) upon the sale, exchange, or disposition of land or buildings not
actually used in the business of a corporation. The tax is withheld by the buyer at the time
of sale.

*Net Capital Gains derived by DOMESTIC CORPORATIONS from the sale, exchange,
transfer, or similar transactions of shares of stock NOT traded through a local stock
exchange are now taxed at a flat 15% rate.

*FOREIGN CORPORATIONS are now also taxed at the flat rate of 15% under the
CREATE law (April, 2021).

Sales of shares of stock listed and traded on a local stock exchange, other than the sale
by a dealer in securities, are subject to a stock transaction tax of 0.6% based on the Gross
Selling Price (GSP), provided the listed corporation observes a minimum public
ownership of at least 10% based on the company’s issued and outstanding shares,
exclusively of any treasury shares or such percentage as may be prescribed by the SEC or
Philippine Stock Exchange (PSE), whichever is higher. Otherwise, the 15% capital gains
tax shall apply.

Capital gains from the sale of bonds debentures, or other certificates of indebtedness with a
maturity of more than 5 years are EXEMPT from tax.
Dividend income- Dividends received by a DOMESTIC or RESIDENT FOREIGN
CORPORATION from another domestic foreign corporation are NOT subject to tax.

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 These dividends are excluded from the taxable income of the recipient.

*Dividends received by a NON-RESIDENT FOREIGN CORPORATION from a domestic

corporation are subject to a general final withholding tax at the rate of 30%. A lower
rate of 15% applies if the country in which the corporation is domiciled either does not
impose income tax on such dividends or allows a tax deemed paid credit of 15% (10%
beginning July 1, 2020) or the difference between the CIT and 15% tax on dividends).
Treaty rates ranging from 10% to 25% may also apply if the recipient is a resident of a
country with which the Philippines has a tax treaty.

Stock dividends- A Philippine corporation can distribute stock dividends TAX-FREE,

proportionately to all shareholders. The subsequent cancellation or redemption of such
stocks, however, shall be taxable to the extent that it represents a distribution of earnings.
Royalty income- Royalties received by DOMESTIC or RESIDENT FOREIGN
CORPORATIONS from a domestic corporation are subject to a final tax of 20%.
However, if the royalties are derived from the active conduct of business, they shall be
subject to 25% CIT.
Other significant items
Other items EXEMPT from CIT include the following:

1. Proceeds of life insurance policies.

2. Return of policy premium.
3. Gifts, bequests, and devises.
4. Interest on certain government securities.
5. Income exempt under a treaty.
6. Gains from sale, exchange, or retirement of bonds, with a maturity of 5 years.
7. Gains from redemption of shares of stock in mutual fund companies.
Foreign income- A PHILIPPINE (DOMESTIC) CORPORATION is taxed on its
worldwide income. A domestic corporation is taxed on income from foreign sources when
earned or received, depending on the accounting method used by the taxpayer.

Meanwhile, income earned through a foreign branch is taxed as it accrues. The losses
incurred by the foreign branch are deductible against other income earned by the Philippine
corporation.

For Filipino citizens and domestic corporations, foreign taxes may either be credited
against income tax due or claimed as a deduction against gross income for income tax
purposes.

7. FILING OF RETURNS AND PAYMENT

Tax Return
Tax return refers to a formal report prepared by the taxpayer or his agent in a prescribed form
showing an enumeration of taxable amounts and description of taxable transactions,
allowable deductions, amount of tax and tax payable to the government.

Examples of tax returns are:

1. BIR Form Nos. 1700 and 1701 – Annual Income Tax Returns for Individual
2. BIR Form No. 1702 – Annual Income Tax Return for Corporations and Partnerships
3. BIR Form No. 1800 – Donor’s Tax Return
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 4. BIR Form No. 1801 – Estate Tax Return

Information Return
Any individual not required to file an income tax return may nevertheless be required to file
an information return pursuant to rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner (Sec. 51(A)(3), NIRC).

Every withholding agent required to deduct and withhold taxes under Section 57 shall
submit to the Commissioner an annual information return containing the list of payees and
income payments, amount of taxes withheld from each payee and such other pertinent
information as may be required by the Commissioner (Sec. 58 (C), NIRC).

Every employer required to deduct and withhold the taxes in respect of the wages of his
employees shall, on or before January 31st of the succeeding year, submit to the
Commissioner an annual information return containing a list of employees, the total amount
of compensation income of each employee, the total amount of taxes withheld therefrom
during the year, accompanied by copies of the statement referred to in the preceding
paragraph, and such other information as may be deemed necessary (Sec. 83 (B), NIRC).

a. INDIVIDUAL RETURN

i. WHO ARE REQUIRED TO FILE; EXCEPTIONS

GR: The following are required to file income tax return:

1. Resident citizen
2. Non-resident citizen, on income from sources within the Philippines
3. Resident alien, on income from sources within the Philippines
4. Non-resident alien engaged in trade or business or in the exercise of profession in the
Philippines, on income from sources within the Philippines
XPNs: The following shall not be required to file income tax return:
1. Individuals whose gross income does NOT exceed P250,000 except citizen and alien
individuals engaged in business or practice of profession within the Philippines who
shall file income tax returns regardless of the amount of gross income.
2. Individuals with respect to pure compensation income from sources within the
Philippines, the income tax on which has been withheld; except when such
compensation has been derived from more than one employer.
3. Individuals whose sole income has been subjected to final withholding tax (pursuant
to Sec. 57 (A)).
4. Minimum wage earner (as defined in Sec. 22 (HH))
5. Individuals who are exempt from income tax pursuant to the provisions of the Tax
Code and other laws.

Special Provisions
Married individuals (whether citizens, resident, or nonresident aliens) who do not derive
income purely from compensation, shall file only one consolidated return to cover the income
of both spouses for the taxable year, but where it is impracticable for the spouses to file one
return, each spouse may file a separate return of income but the returns so filed shall be
consolidated by the BIR for verification (Sec. 51 (D), NIRC).

108
The income of unmarried minors is a tax liability of the minor but where such income is
derived from property received from a living parent, the income shall be included in the
return of the parent except (a) when the donor’s tax has been paid on such property, or (b)
when the transfer of such property is exempt from the donor’s tax (Sec. 51 (E), NIRC).

If the taxpayer is unable to make his return, such as when he suffers from disability, the
return may be made by his duly authorized agent or representative or by the guardian or other
person charged with the care of the taxpayer or his property; the principal and his
representative or guardian assuming responsibility for penalties for erroneous, false or
fraudulent returns (Sec. 51 (F), NIRC).

ii. SUBSTITUTED FILING

Applicable to individual taxpayers:

1. receiving purely compensation income, regardless of amount
2. from only one employer in the Philippines for the calendar year, and
3. the income tax of which has been withheld correctly by the employer

The certificate of withholding filed by their respective employers, duly stamped ‘received’ by
the BIR, shall be tantamount to the substituted filing of income tax returns by the employee
(Sec. 51-A, NIRC).

iii. WHEN ARE WHERE TO FILE

Income tax return of an individual who is not on a substituted basis shall be filed on or
before April 15 of each year covering income of the preceding taxable year (Sec. 51 (C)(1),
NIRC)

Individuals subject to capital gains tax (Sec. 51 (C)(2), NIRC):

1. Sale of shares not traded through a local stock exchange – file a return within 30
days from the transaction, and a final consolidated return on or before April 15 of
each year covering all stock transactions of the preceding taxable year
2. Sale of real property – file a return within 30 days from each sale

Individuals deriving self-employment income (as sole source of income or mixed) – must
file quarterly return of summary declaration of gross income and deductions, and a final or
adjustment (Sec. 74 (A), NIRC).

Period Due Date for Filing

Q1 Return May 15 of the same year
Q2 Return August 15 of the same year
Q3 Return November 15 of the same year
Annual Return April 15 of the following year

Self-employment income consists of earnings derived by the individual from the practice of
profession or conduct of trade or business, as a sole proprietor or as a member in a general
professional partnership (Sec. 74 (A), NIRC)

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Filing of these returns shall be in lieu of filing of a declaration of estimated income under
Sec. 74, primarily for the reason that the procedure prescribed in Sec. 74 may not reasonably
approximate the correct amount of tax to be paid (DE LEON citing RR No. 2-93)

Where to File
Except in cases where the CIR otherwise permits, the return shall be filed with an authorized
agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of
the city or municipality in which such person has his legal residence or principal place of
business in the Philippines, or if there be no legal residence or place of business in the
Philippines, with the Office of the Commissioner (Sec. 51 (B), NIRC).

b. CORPORATE RETURNS

i. QUARTERLY INCOME TAX

ii. FINAL ADJUSTMENT RETURN

All corporations subject to income tax shall render quarterly income tax returns and a final
or adjustment return, except foreign corporations not engaged in trade or business in the
Philippines.

The return shall be filed by the President, Vice- President or other principal officer, and shall
be sworn to by such officer and by the treasurer or assistant treasurer.

iii. WHEN ARE WHERE TO FILE

DOMESTIC CORPORATIONS and RESIDENT FOREIGN CORPORATIONS shall file

quarterly corporate income tax returns within 60 days after the end of the calendar or
fiscal quarter used, and annual corporate income tax return on or before the 15th day of
the fourth month following the close of the calendar year or fiscal year, as the case may be
(Sec. 74).

The filing of the tax returns by a corporation using the calendar year:
Period Due Date for Filing Return
Q1 Return May 31 of the same year
Q2 Return August 31 of the same year
Q3 Return November 30 of the same year
Annual Return April 15 of the following year

Where to File
Except in cases where the CIR otherwise permits, the return shall be filed with an authorized
agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of
the city or municipality having jurisdiction over the place where the corporation’s principal
office is located and where its books of accounts and other data are kept; otherwise, the
returns shall be filed and the tax paid thereon with the Office of the Commissioner of Internal
Revenue (Sec. 77 (A), NIRC).

Payment of Income Tax

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GR: The total amount of tax imposed by this Title (Tax on Income) shall be paid by the
person subject thereto at the time the return is filed.

XPN: When the tax due is in excess of P2,000, the taxpayer other than a corporation may
elect to pay the tax in 2 equal installments: the first installment paid at the time the return is
filed and the second installment, on or before October 15 following the close of the calendar
year. (Sec. 56 (A)(2), NIRC)

iv. RETURN OF CORPORTIONS CONTEMPLATING DISSOLUTION OR

REORGANIZATION

Within 30 days after the adoption of the plan for dissolution or reorganization (including
corporations notified of possible involuntary dissolution by the SEC), render a correct return
to the CIR, verified under oath, setting forth the terms of such plan and such other
information required by rules and regulations. Prior to the issuance by the SEC of the
Certificate of Dissolution or Reorganization, the corporation shall secure a certificate of tax
clearance from the BIR which shall be submitted to the SEC (Sec. 52 (C), NIRC).

c. RETURN ON CAPITAL GAINS REALIZED FROM SALE OF

SHARES OF STOCK AND REAL ESTATE

Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock
Exchange – file a return within 30 days from the transaction, and a final consolidated return
on or before the 15th day of the fourth month following the close of the taxable year (Sec.
52 (D), NIRC).

8. WITHHOLDING TAX
a. CONCEPT

Withholding tax is a method of collecting income tax in advance from the taxable income of
the recipient of income.

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.

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.

In addition, the withholding tax that should have been withheld and remitted to the BIR as
well as the penalties for non-, late or erroneous payment of the withholding tax such as
surcharges and deficiency interest are assessed by the BIR.

b. FINAL WITHHOLDING TAX

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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 withholding agent. Thus,
in case of his failure to withhold the tax or in case of under withholding, the deficiency tax
shall be collected from the payor/withholding agent. The payee is NOT required to file an
income tax return for the particular income.

c. CREDITABLE WITHHOLDING TAX

Under the creditable withholding tax system, taxes withheld on certain income payments are
intended to equal or at least approximate the tax due of the payee on said income.

The income recipient is still required to file an income tax return, to report the income and/
or pay the difference between the tax withheld and the tax due on the income. Taxes withheld
on income payments covered by the expanded withholding tax and compensation income
are creditable in nature.

i. EXPANDED WITHHOLDING TAX

Withholding Tax at Source (Sec 57, NIRC)

Withholding of final tax of certain income – Subject to rules and regulations the Secretary
of Finance may promulgate, upon the recommendation of the CIR, the tax imposed or
prescribed by the NIRC on certain specified items of income shall be withheld by payor-
corporation and/or person.

N.B. Sec. 57 contains an extensive list of taxes. These items of income include taxes on
certain passive incomes (interest, dividends), capital gains tax (shares not traded, real
property), branch profit remittance tax, and certain payments to nonresident aliens /foreign
corporations.

Withholding of creditable tax at source – The Secretary of Finance may, upon the
recommendation of the CIR, require the withholding of a tax on the items of income payable
to natural or juridical persons, residing in the Philippines, by payor- corporation/persons as
provided for by law, at the rate of not less than 1% but not more than 32%, which shall be
credited against the income tax liability of the taxpayer for the taxable year. Provided, That,
beginning January 1, 2019, the rate of withholding shall not be less than one percent (1%) but
not more than fifteen percent (15%) of the income payment. (Sec. 57 (B), NIRC)

Withholding of VAT (Sec 114 (C), NIRC)

The government (political subdivisions, instrumentalities, agencies, GOCCs) shall deduct and
withhold final VAT of 5% of gross payment on purchase of goods and services subject to
VAT. If the payment is for lease or use of properties to a nonresident owner, withholding tax
shall be 12%.

NOTE: Beginning January 1, 2021, the VAT withholding system shall shift from final to a
creditable system.

ii. WITHHOLDING TAX ON COMPENSATION

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Except in the case of minimum wage earner, every employer making payment of wages shall
deduct and withhold upon such wages a tax determined in accordance with the rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of the CIR.

d. FRINGE BENEFITS TAX

(See Fringe benefits tax discussion)

e. DUTIES OF A WITHHOLDING AGENT

The withholding tax that should have been withheld and remitted to the BIR as well as the
penalties for non-, late or erroneous payment of the withholding tax such as surcharges and
deficiency interest are assessed by the BIR

TAXATION 2

TRANSFER TAXES
C. ESTATE TAX
1. BASIC PRINCIPLES, CONCEPT, AND DEFINITION
Estate tax is 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.

Estate tax is levied upon the transfer of the net estate (Sec. 84, NIRC).
1. Estate tax accrues at the time of the decedent’s death, distinct from the obligation to
pay the same as fixed by law.
2. The tax is measured by the value of the property AT THE TIME OF DEATH.
Subsequent appreciation or depreciation is immaterial;
3. Estate taxation is governed by the statute in force at the time of the death of the
decedent. Tax laws cannot be given retroactive effect unless they explicitly provide
for it (Sec. 3, RR 12-2018)

Nature, Purpose, and Object

It is a transfer tax (i.e. an excise tax on the right of transmitting property), not a property
tax.

Unlike the old inheritance tax, estate tax is a tax on the right to transfer and not the right to
inherit property.

Purpose: To tax the shift of economic benefits and enjoyment of property from the dead to
the living.

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Taxable objects/subjects:
1. Right/privilege of the deceased person to transmit his/her estate to his/her lawful heirs
and beneficiaries at the time of death;
2. Certain transfers, during his lifetime, which are made by law as equivalent to
testamentary disposition.

Justification Theories for its Imposition:

1. Benefits-received theory – The State collects the tax because of the services it
renders in the distribution of the estate of the decedent, either by law or in accordance
with his will.
2. Privilege theory or state partnership theory – Succession to the property of a
deceased person is not a right but a privilege granted by the State and consequently,
the legislature can constitutionally burden such succession with a tax
3. Ability-to-pay theory – Receipt of inheritance is in the nature of unearned wealth
which creates an ability to pay the tax and thus contributes to government income.
4. Redistribution of wealth theory – The imposition of estate tax reduces the property
received by the successor, which helps promote a more equitable distribution of
wealth in society.

Time and Transfer of Properties

The rights to the succession are transmitted from the moment of the death of the decedent
(Art. 777, Civil Code). The decedent’s estate includes property to the extent of the interest
therein of the decedent at the time of his death (Sec. 85(A), NIRC)

The executor or administrator shall not deliver a distributive share to any party interested in
the estate despite the transfer of properties and rights at the time of death, unless there is a
certification from CIR that estate tax has been paid (Sec. 94, NIRC)

Time of death governs:

1. The determination of the extent of the decedent’s interest for computing his gross
estate.
2. The statute that governs estate taxation.
3. The accrual of the estate tax.

Taxable Transfers
1. Transfers Mortis Causa- These are gratuitous transfers that take effect after death,
either testate or intestate. These are subject to estate tax.

A donation which purports to be one inter vivos but withholds from the donee the
right to dispose of the donated property during the donor's lifetime is in truth one
mortis causa. (Maglasang v Heirs of Cabatingan, G.R. No. 131953 (2002))

2. Transfers Inter Vivos. Gratuitous transfers that take effect during the lifetime of the
donor.

GR: Donation Inter Vivos is subject to donor’s tax.

XPN: Donation Inter Vivos is subject to estate tax when it is treated by law as
substitutes for testamentary dispositions:
a. Transfers in contemplation of death (Sec. 85(B), NIRC)

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 b. Revocable transfers (Sec. 85(C), NIRC)
c. Transfers of property arising under general power of appointment (Sec. 85(D),
NIRC)
d. Transfers for insufficient consideration (Sec. 85(G), NIRC)

NOTE: These transfers would be included in the computation of the gross value of
estate.

2. CLASSIFICATION OF DECEDENT
Estate Tax applies only to individuals. The decedent may be classified into:
1. Citizens and residents (RC/NRC/RA) or
2. Non-resident alien (NRA).

Concept of residence
For purposes of estate taxation, “residence” refers to domicile, the permanent home or the
place to which whenever absent, one intends to return (animus revertendi), and depends on
facts and circumstances, in the sense that they disclose intent. It is, therefore, not necessarily
the actual place of residence.

Situs of Intangible Personal Properties

GR: Mobilia Sequuntur Personam (movables follow the person)

Principle: Taxation of intangible personal properties (such as credits, bills, bank deposits
promissory notes, and corporate stocks) follows the residence/domicile of the owner.

XPN: When it is inconsistent with express provisions of law.

XPN to the XPN: Rule of Reciprocity with respect to an NRA.

Intangible Properties which are considered situated in the Philippines (Sec 104, NIRC)
1. Franchise which must be exercised in the Philippines
2. Shares, obligations or bonds issued by any corporation or sociedad anonima organized
or constituted in the Philippines in accordance with its laws
3. Shares, obligations or bonds issued by any foreign corporation 85% of the business of
which is located in the Philippines
4. Shares, obligations or bonds issued by any foreign corporation if such shares,
obligations or bonds have acquired a business situs in the Philippines
5. Shares or rights in any partnership, business or industry established in the Philippines

Rule of Reciprocity
There is reciprocity if the foreign country of which the decedent was a citizen and resident at
the time of his death:
1. Did not impose a transfer tax of any character, in respect of intangible personal
property of citizens of the Philippines not residing in that foreign country; OR
2. Allowed a similar exemption from transfer tax in respect of intangible personal
property owned by citizens of the Philippines not residing in that country

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If there is reciprocity, the intangible personal property of an NRA shall not be included in his
gross estate. If there is no reciprocity, such intangible personal property will be included
(Sec. 104, NIRC)

Valuation of Gross Estate (Sec. 88, NIRC)

GR: Gross Estate = FMV at the time of the decedent’s death (Sec. 5, RR 12-2018)

Real Property
1. Appraised value, whichever is higher between:
a. FMV, as determined by the Commissioner of Internal Revenue (zonal value)
or
b. FMV, as shown in the schedule of values fixed by the Provincial or City
Assessor.
2. If there is an improvement, the value of improvement is the construction cost per
building permit or the FMV per latest tax declaration (Sec. 5, RR 12-2018)
Personal Property
1. FMV at the time of death.
2. Shares of stocks
a. If listed = FMV is the mean between the highest and lowest quotation at a date
nearest the date of death, if none is available on the date of death
b. If unlisted = book value at the time of death (common shares) or par value
(preferred shares) (Sec. 5, RR 12-2018)

NOTE: In determining the book value, appraisal surplus and the value assigned to preferred
shares, if any, shall not be considered. The valuation of unlisted shares shall be exempt from
the provisions of RR 6-2013, which prescribes the use of the Adjusted Net Asset Method.
(Sec. 5, RR 12-2018)

Units of Participation in Any Association, Recreation or Amusement Club (golf, polo,

etc.)
FMV shall be the bid price nearest the date of death published in any newspaper or
publication of general circulation (Sec. 5, RR 12-2018).

Right to Usufruct, Use or Habitation, and Annuity

The probable life of the beneficiary in accordance with the latest basic standard mortality
table shall be taken into account (Sec. 5, RR 12-2018).

3. COMPOSITION OF GROSS ESTATE

a. ITEMS TO BE INCLUDED IN DETERMINING GROSS ESTATE (Sec.
85, NIRC)

1. Decedent’s interest (Sec. 85(A), NIRC) –This includes property owned by the
decedent actually and physically present in his estate at the time of his death;
2. Properties not physically in the estate, such as:
a. Transfers in contemplation of death (Sec. 85(B), NIRC);
b. Revocable transfers (Sec. 85(C), NIRC);
c. Property passing under general power of appointment (Sec. 85(D), NIRC);
d. Proceeds of life insurance (Sec. 85(E), NIRC);
e. Prior interest (Sec. 85(F), NIRC);
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 f. Transfers for insufficient consideration (Sec. 85(G), NIRC);

i. DECEDENT’S INTEREST

All property owned by the decedent to the extent of his interest therein at the time of his
death. This includes any interest, having value or capable of being valued or transferred, in
property owned or possessed by the decedent at the time of his death., This also includes
those transferred by the decedent at the time of his death.
Examples:
1. dividend declared on or before death, but is received by the estate after death
2. partnership profits which have accrued before his death, but received after death

ii. TRANSFERS IN CONTEMPLATION OF DEATH

It is a transfer in contemplation of death if the decedent either has retained for his life or for
any period which does not in fact end before his death:
1. the possession or enjoyment of, or the right to the income from the property, or
2. the right, either alone or in conjunction with any person, to designate the person who
shall possess or enjoy the property or the income therefrom

XPN: In case of a bona fide sale for an adequate and full consideration in money or money's
worth

NOTE: The term “in contemplation of death” does not refer to the general expectation of
death. The words mean that it is the thought of death, as a controlling motive, which induces
the disposition of the property for the purpose of avoiding the tax. The decedent’s motive is a
question of fact. Thus, the imminence of death may afford convincing evidence of the
impelling cause of transfer.

iii. REVOCABLE TRANSFERS

GR A transfer is revocable where:

1. There is a transfer by trust or otherwise,

XPN: In case of a bona fide sale for an adequate and full consideration in money or
money’s worth
2. The enjoyment thereof was subject at the date of his death to any change through the
exercise of a power (in whatever capacity exercisable) by:
a. The decedent alone;
b. The decedent in conjunction with any other person (without regard to when or
from what source the decedent acquired such power), to alter, amend, revoke,
or terminate; or
c. Where any such power is relinquished in contemplation of the decedent death.

NOTE: The power to alter, amend, or revoke shall be considered to exist on the date of the
decedent’s death even though:
1. The exercise of the power is subject to a precedent giving of notice, or
2. The alteration, amendment, or revocation takes effect only on the expiration of a
stated period after the exercise of the power, whether or not on or before the date of
the decedent’s death notice has been given or the power has been exercised.

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 3. If notice has not been given or the power has not been exercised before the date of his
death, such notice shall be considered to have been given, or the power exercised, on
the date of his death.

iv. PROPERTY PASSING UNDER A GENERAL POWER OF APPOINTMENT

Power of Appointment – the right to designate the person or property who shall enjoy and
possess certain property from a donor or a prior decedent.
1. General Power of Appointment (GPA): when it gives to the decedent the power to
appoint any person he pleases including himself, thus having as full dominion over
the property as though he owned it
2. Special Power of Appointment (SPA): when the decedent can appoint only among a
designated class of persons other than himself, his estate, the creditors of his estate

GR: Property passing under a GPA is excluded from gross estate

XPN: Included in the gross estate if the property arises under a GPA exercised by the
decedent:
1. By will; or
2. By deed executed in contemplation of, or intended to take effect in possession or
enjoyment at or after his death; or
3. By deed under which he has retained for his life or any period not ascertainable
without reference to his death or for any period which does not in fact end before his
death –
a. The possession or enjoyment of, or the right to the income from the property;
or
b. The right, either alone or in conjunction with any person, to designate the
persons who shall enjoy or possess the property or the income therefrom.

v. PROCEEDS OF LIFE INSURANCE

Inclusion of proceeds of life insurance to the gross estate depends on (i) the designated
beneficiary; (ii) the revocability of the insurance; and (iii) the period and source of funds used
in premiums.

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 when the beneficiary is:
1. The estate of the deceased, his executor or administrator, irrespective of whether or
not the insured retained the power of revocation; or
2. Any beneficiary designated in the policy, except when designation is irrevocable.

When NOT taxable

1. Irrevocably designated; how done
a. By expressly stating it in the policy (if not stated, the designation is
PRESUMED to be REVOCABLE);
b. By not changing the beneficiary during the lifetime of the insured, it is deemed
irrevocable. (Sec. 11, RA 10607 (2013))
2. Accident insurance proceeds as the Tax Code specifically mentions only life
insurance policies.

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 3. Proceeds of a group insurance policy taken out by a company for its employees.
4. Amount receivable by any beneficiary irrevocably designated in the policy of
insurance by the insured. The transfer is absolute and the insured did not retain any
legal interest in the insurance.
5. Proceeds of insurance policies issued by the GSIS are exempt from all taxes.
6. Benefits accruing under the SSS Law.
7. Proceeds of life insurance payable to heirs of deceased members of military
personnel.

To determine the conjugal or separate character of proceeds, the following factors are
considered:
1. Policy was taken before marriage – source of funds determines ownership of the
proceeds of life insurance
2. Policy was taken during marriage:
a. Beneficiary is estate of the insured – proceeds are presumed conjugal; hence,
one-half share of the surviving spouse is NOT taxable
b. Beneficiary is third person – proceeds are payable to beneficiary even if
premiums were paid out of the conjugal interest

v. PRIOR INTERESTS

The subsections pertaining to (1) transfers in contemplation of death, (2) revocable transfers
and (3) proceeds of life insurance shall apply to the transfers, trusts, estates, interests, rights,
powers and relinquishment of powers whether made, created, arising, existing, exercised or
relinquished before or after the effectivity of the NIRC.

vi. TRANSFERS FOR INSUFFICIENT CONSIDERATION

This refers to any (1) transfer in contemplation of death, (2) revocable transfer or (3) property
passing under GPA that is made, created, exercised or relinquished for a consideration in
money or money’s worth, but is NOT a bona fide sale for an adequate and full consideration
in money or money’s worth.

The value to be included in the gross estate is the excess of the FMV of the property at the
time of the decedent’s death over the consideration received.

NOTE: The transfer is subject to estate tax if the 3 instances mentioned are present.
Otherwise, it is subject to donor’s tax.

Capital of the Surviving Spouse (Sec.85(H), NIRC)

It is NOT part of the gross estate of the deceased spouse.

The capital of the surviving spouse is considered an exclusion from the deceased’s gross
estate.

b. ALLOWABLE DEDUCTIONS FROM GROSS ESTATE

Deductions and/or losses already deducted from gross income can no longer be deducted
from gross estate. Deductions should not be compensated for by any insurance or
extrajudicial settlement. Otherwise, they are not valid deductions.

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ORDINARY DEDUCTIONS

1. Losses, Indebtedness, and Taxes, Etc. (LIT)

a. Claims Against the Estate (Sec. 86 (A)(2))

“Claims” generally mean debts or demands of a pecuniary nature which could
have been enforced against the deceased in his lifetime and could have been
reduced to simple money judgments. Claims against the estate or indebtedness
in respect of property may arise out of contract, tort, or operation of law (Sec.
6(2), RR 12-2018).

Requisites for Deductibility (Sec. 6 (2.1) and (2.2), RR 12-2018)

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; and
5. They must be reasonably certain in amount, and substantiated.

Substantiation Requirements (Sec. 6 (2.2), RR 12-2018)

In case of simple loan (including advances):
1. The debt instrument must be duly notarized at the time the
indebtedness was incurred, except for loans granted by financial
institutions where notarization is not part of the business
practice/policy.
2. Duly notarized Certification from the creditor as to the unpaid
balance of the debt, including interest as of the time of death.
3. Proof of financial capacity of the creditor to lend the amount at the
time the loan was granted, as well as its latest audited balance sheet
showing the unpaid balance of the decedent-debtor.
4. A statement under oath executed by the administrator or executor of
the estate reflecting the disposition of the proceeds of the loan if it was
contracted within 3 years prior to the death of the decedent.

If the unpaid obligation arose from purchase of goods or services:

1. Documents evidencing the purchase of goods or service (e.g., sales
invoice/delivery receipt or contract for services), and statement of
account given by the creditor
2. Duly notarized certification from the creditor as to the unpaid
balance of the debt, including interest as of the time of death.
3. Certified true copy of the latest audited balance sheet of the
creditor with a detailed schedule of its receivable showing the unpaid
balance of the decedent-debtor. A certified true copy of the updated
latest subsidiary ledger/records of the debtor- decedent, should
likewise be submitted.

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 NOTE: Where the settlement is made through the Court in a testate or
intestate proceeding, pertinent documents filed with the Court evidencing
the claims against the estate, and the Court Order approving the said
claims, if already issued, in addition to the documents mentioned in the
preceding paragraphs. (Sec. 6(2.2.3), RR 12-2018)
b. Claims against Insolvent Persons (Sec. 86 (A)(3), NIRC)
These are claims of the deceased against insolvent persons as defined under
RA 10142 (The Financial Rehabilitation and Insolvency Act of 2010) and
other existing laws, where the value of the decedent’s interest therein is
included in the value of the gross estate (Sec. 6(3), RR 12-2018).

Requirements for deductibility:

1. The full amount owed by the insolvent must first be included in the
decedent’s gross estate; and
2. The incapacity of the debtor to pay his obligation should be proven,
although a judicial declaration of insolvency is not required.

NOTE: If the insolvent could only pay a partial amount, the full amount owed
shall be included in the gross estate, and the amount uncollectible shall be
allowed as a deduction.

c. Unpaid Mortgages, Losses, and Taxes (Sec. 86(A)(4), NIRC)

Unpaid Mortgages
Requisites for Deductibility (Sec. 6(4.1), RR 12- 2018)
1. The value of the decedent’s interest therein, undiminished by such
mortgage or indebtedness, is included in the value of the gross estates.
2. The mortgages were contracted bona fide and for an adequate and full
consideration in money or money’s worth.

NOTE: In case the loan of the decedent is only an accommodation loan where
the loan proceeds went to another person, the value of the unpaid loan must be
included as a receivable of the estate. If there is a legal impediment to
recognize the same as a receivable of the estate, said unpaid obligation shall
not be allowed as a deduction. 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), RR 12-2018).

d. Unpaid Taxes (Sec. 6(4.2), RR 12-2018)

Requisites for Deductibility:
1. Taxes which have accrued as of or before the death of the decedent,
and
2. Unpaid as of the time of his death, regardless of whether or not it was
incurred in connection with trade or business.

Casualty Losses
Requisites for Deductibility:
1. Incurred during the settlement of the estate
2. Arising from fires, storms, shipwreck, or other casualties, or from
robbery, theft, or embezzlement

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 3. Not compensated for by insurance or otherwise
4. At the filing of the estate tax return, such losses have NOT been
claimed as a deduction for income tax purposes in an income tax return
5. Incurred not later than the last day for the payment of the estate tax
(i.e., 1 YEAR from decedent’s death). Therefore, all casualty losses
after the prescribed period from the payment of tax are not deductible.

Value to deduct: The difference of the FMV before and after incurring the
loss.

Casualty loss can be allowed as deduction in one instance only, either for
income tax or estate tax purposes (Sec. 6(A)(5)), Rev. Reg 2-2003)

2. Property Previously Taxed (Vanishing Deduction) (Sec. 86(A)(5))

This is an amount allowed to reduce the gross estate where the property was
previously subjected to transfer taxes, either donor’s tax or estate tax.

Requisites for deductibility:

1. Death – The present decedent died within 5 YEARS from the date of death of the
prior decedent OR the date of gift.
2. Identity of the property – The property can be identified as the one received
from prior decedent or donor.
3. Inclusion of the property – The property must have formed part of the gross
estate situated in the Philippines of the prior decedent, or have been included in
the total amount of the gifts of the donor.
4. Previous taxation of property – The estate tax on the prior succession, or the
donor’s tax on the gift must have been finally determined and paid by the prior
decedent or by the donor.
5. No previous vanishing deduction on the property – No such deduction on the
property was allowed in determining the value of the net estate of the prior
decedent. This is intended to preclude the application of vanishing deduction on
the same property more than once.

Steps (L.I.A.R):
1. Lower value – Identify the property and its proper value (i.e., the value at the time
previously taxed or the value of the property in the present estate, whichever is
lower)
2. Initial Basis - Deduct any mortgage or lien paid by the present decedent to arrive
at the initial basis.
3. Actual or Final Basis - From the initial basis, deduct the proportionate amount for
(a) claims against the estate, (b) claims against insolvent persons, (c) unpaid
mortgages, taxes and casualty losses, and (d) transfers for public use (pars. 2, 3, 4
and 6 of Sec. 86(A) of the NIRC) based on the ratio of the initial basis over the
gross estate. Thus, deductions are only Losses Indebtedness and Taxes (LIT) and
Transfer for Public Use (TPU).
4. Rate - Multiply the actual basis by the applicable rate based on the length of time
the property has been acquired.

3. Transfers for Public Use (Sec. 86 (A) (6))

Requisites for deductibility:

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 1. The disposition is in a last will and testament
2. To take effect after death
3. In favor of the Government of the Republic of the Philippines, or any political
subdivision thereof
4. Exclusively for public purposes
5. The value of the property given is included in the gross estate.

SPECIAL DEDUCTIONS

1. Family Home (Sec. 86(A)(7), NIRC; Sec. 6(7), RR 12-2018)

Family home – The dwelling house, including the land on which it is situated, where
the husband and wife, or a head of the family, and members of their family reside, as
certified to by the Barangay Captain of the locality. It is deemed constituted on the
house and lot from the time it is actually occupied as the family residence and
considered as such for as long as any of its beneficiaries actually resides therein.

Temporary absence from the constituted family home due to travel or studies or work
abroad, etc. does not interrupt actual occupancy. The family home is generally
characterized by permanency, that is, the place to which one still intends to return.

It must be part of the ACP/CPG/exclusive property of the decedent. It may also be

constituted by an unmarried head of a family on his or her own property.

For purposes of availing this deduction, a person may constitute only one family
home. (Sec. 6(7.1), RR 12-2018 citing Arts. 152, 153, 156 and 161, Family Code)

Requisites for Deductibility (Sec. 6(7.2), RR 12-2018)

1. The decedent was married (or if single, was the head of the family).
2. Along with the decedent, any of the beneficiaries must be dwelling in the family
home.
3. The family home as well as the land on which it stands must be owned by the
decedent.
4. The family home must be the actual residential home of the decedent and his
family at the time of his death, as certified by the Barangay Captain of the locality
where the same is situated.
5. The total value of the family home must be included as part of the gross estate.
6. Allowable deduction must be in an amount equivalent to whichever is lowest of:
a. the current FMV of the family home as declared or included in the gross
estate, or
b. the extent of the decedent’s interest (whether conjugal/community or
exclusive property), or
c. P10,000,000.

Beneficiaries of a Family Home (Sec. 6(7), RR 12-2018)

2. The husband and wife, or an unmarried person who is the head of a family; and
2. Their parents, ascendants, descendants, brothers and sisters, whether the
relationship be legitimate or illegitimate, who are living in the family home and
who depend upon the head of the family for legal support.

2. Standard Deduction (Sec. 86(A)(1), NIRC)

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 An amount equivalent to P5,000,000 shall be deducted from the gross estate without
need of substantiation.

For NRAs, the Standard Deduction is P500,000 (Sec. 86 (B)(1)].Amounts Received

by Heirs Under RA 49171 [Sec. 86(A)(8), NIRC)

Any amount received by the heirs from the decedent’s employer as a consequence of
the death of the decedent-employee in accordance with RA 4917, provided that such
amount is included in the gross estate of the decedent.

This includes retirement benefits given by private firms with a reasonable private
benefit plan, if the employee is not less than 50 years old and has been with the same
employer for at least 10 years. Such benefit may be availed of only once.

NET SHARE OF SURVIVING SPOUSE IN CPG/ACP (Sec. 86(C), NIRC; Sec. 6(9), RR
12-2018)
(Compare with Capital of Surviving Spouse which is excluded from the gross estate)

The amount deductible from the net estate of the decedent is the net share of the surviving
spouse in the conjugal property. The net share is equivalent to 1⁄2 of the conjugal property
after deducting the obligations chargeable to such property. The net share of the surviving
spouse is neither an ordinary nor a special deduction.

c. EXCLUSIONS FROM GROSS ESTATE AND EXEMPTIONS OF

CERTAIN ACQUISITIONS AND TRANSMISSIONS

Summary of the Composition of the Gross Estate and Exclusions, Deductions therefrom

Resident Citizen/ Non-Resident Citizen/ Non-Resident Alien

Resident Alien
Composition and Determination of Gross Estate (Sec. 85, NIRC)
All properties, real or personal, tangible or Only properties situated in the Philippines,
intangible, wherever situated (Sec. 4, RR provided that the inclusion of intangible
12- 2018) personal property is subject to the rule of
reciprocity provided for under Section 104
of the NIRC (Sec. 4, RR 12-2018)

NOTE: If there is reciprocity, intangible

assets are EXCLUDED from gross estate
Exclusion from Gross Estate (Sec. 85 (H), NIRC, & Special Laws)

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Exclusion
1. Separate property of the surviving spouse (Sec. 85 (H), NIRC)

Exemptions under the NIRC

1. Merger of usufruct in the owner of the naked title (Sec. 87 (A), NIRC)
2. Transmission of inheritance or legacy by fiduciary heir or legatee to the
fideicommissary (Sec. 87 (B), NIRC)
3. Transmission from the first heir, legatee, or donee in favor of another beneficiary,
in accordance with the desire of the predecessor (Sec. 87 (C), NIRC)
4. Bequests, devises, legacies or transfers to social welfare, cultural and charitable
institutions, no part of the net income of which inures to the benefit of any
individual: provided that not more than 30% of said transfer shall be used for
administration purposes (Sec. 87 (D), NIRC)

Exemptions under special laws

1. GSIS proceeds/benefits (P.D. 1146)
2. Accruals from SSS (R.A. 1161)
3. Proceeds of life insurance where the beneficiary is irrevocably appointed
4. Proceeds of life insurance under a group insurance taken by employer
5. War damage payments and Benefits received from US Veterans Administration
(R.A. 227)
6. Transfer of property to the National Government or to any of its political
subdivisions
7. Benefits received by beneficiaries residing in the Philippines under laws
administered by the US Veteran Administration (R.A. 360)
8. Grants and donations to the Intramuros Administration (P.D 1616)
9. Properties held in trust by the decedent
10. Acquisition and/or transfer expressly declared as not taxable
11. Personal equity and Retirement Account (PERA) assets of the decedent-contributor
(Sec.14, RA 9505)
Deductions from Gross Estate to arrive at the Net Estate (Sec. 86 (A) and (B), NIRC)
Ordinary deductions Ordinary deductions
1. Losses, indebtedness, taxes (LIT) 1. Proportionate deductions for (LIT)
a. Claims against the estate a. Claims against the estate
b. Claims against insolvent b. Claims against insolvent
persons persons
c. Unpaid mortgages c. Unpaid mortgages
d. Taxes d. Taxes
e. Casualty losses e. Casualty losses

2. Vanishing deductions (property 2. Vanishing deductions (property

previously taxed) previously taxed)
3. Transfers for public use 3. Transfers for public use

Special deductions Special deduction

1. Family home (max of P10Million) 1. Standard Deduction of P500,000
2. Standard deduction (fixed at
P5Million) Net share of the surviving spouse
3. Amounts received under R.A. 4917-
amount received by the heirs from NOTE: NO DEDUCTION for Family home

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 the decedent’s employer as a and Amounts received under R.A. 4917
consequence of the death of the
decedent-employee NOTE: NO DEDUCTION shall be allowed
for NRA, if the executor, administrator, or
Net share of the surviving spouse (Sec. 6, anyone of the heirs DID NOT include in the
RR 12-2018) return required to be filed under Section 90
of the Code the value at the time of the
decedent’s death of that part of his gross
estate NOT situated in the Philippines (Sec.
86 (D), NIR).

NOTE: Formula for Proportionate

Deductions of NRA (Sec. 7, RR 12-2018):
Allowable Deduction = Phil Gross Estate
World Gross Estate x LIT

NOTE: *Funeral expenses, judicial expenses, and medical expenses are NO LONGER
allowed as deductions under the TRAIN LAW.

Gross Estate vis-à-vis Net Estate

Gross Estate Net Estate
Value at the time of death of all the The value of the gross estate less
decedent’s property wherever situated allowable deductions; also called net
taxable estate, after deducting the net share
HOWEVER, in the case of an NRA at the of surviving spouse, if any.
time of his death, only that part of the entire
gross estate which is situated in the Tax Rate: FLAT RATE OF 6% (Sec. 84,
Philippines shall be included in his taxable NIRC)
estate (Sec 85, NIRC). Tax Base: Net Estate

Formula for Estate Tax

Gross Estate (Sec. 85)
Less: Deductions (Sec. 86(A), (B))
-------------------------------------------------------
Net estate before share of surviving spouse, if married
Less: 1⁄2 share of the surviving spouse in the conjugal property (Sec. 86(C))
-------------------------------------------------------
= Net taxable estate
Multiply by: tax rate of 6% (Sec. 84)
-------------------------------------------------------
= Estate Tax Due
Less: Tax Credit, if any (Sec. 86(E)
-------------------------------------------------------
= Estate Tax Payable

d. TAX CREDIT FOR ESTATE TAXES PAID TO A FOREIGN

COUNTRY

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Estate Tax Credit is a remedy against international double taxation to minimize the onerous
effect of taxing the same property twice.

GR: The estate tax imposed by the NIRC shall be credited with the amounts of any estate tax
imposed by the authority of a foreign country (Sec. 86(E), NIRC)

Who may claim: RC/NRC/RA. 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.

Limitations on Credit
1. Specific Country Limitation; Limit A
The amount of the credit in respect to the tax paid to any country shall not exceed the
same proportion of the tax against which such credit is taken, which the decedent's net
estate situated within such country taxable under the tax code bears to his entire net
estate (Sec. 86(E)(2)(a), NIRC)
2. Global Limitation; Limit B
The total amount of the credit shall not exceed the same proportion of the tax against
which such credit is taken, which the decedent's net estate situated outside the
Philippines taxable under the tax code bears to his entire net estate (Sec. 86(E)(2)(b),
NIRC)

Compare the tax credit allowed under Limitation A and Limitation B. The lower of the two
amounts is the final allowable tax credit.

The resulting amount will be compared to the actual tax paid to the foreign country. The
lower amount will be the final allowable tax credit.

e. FILING OF ESTATE TAX RETURNS AND PAYMENT OF ESTATE

TAX (Sec. 90, NIRC)

Filing of Notice of Death (Sec. 89, NIRC)– Repealed by the TRAIN Law (R.A. 10963).
Hence, no such requirement.

FILING OF ESTATE TAX RETURN (Sec. 90, NIRC)

When Required (Copies in duplicate) (Sec. 90 (A), NIRC)

1. In all cases of transfers subject to estate tax, or
2. Regardless of the gross value of the estate, when the said estate consists of registered
or registrable property such as real property, motor vehicle, shares of stock or other
similar property for which a clearance from the BIR is required as a condition
precedent for the transfer of ownership thereof in the name of the transferee.

Contents (Sec. 90 (A), NIRC)

The return shall be filed in duplicate, setting forth:
1. The value of the gross estate of the decedent at the time of his death, or in case of a
NRA, of that part of his gross estate situated in the Philippines;
2. The deductions allowed from gross estate in determining the net taxable estate; and
3. Such part of such information as may at the time be ascertainable and such
supplemental data as may be necessary to establish the correct taxes.

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 4. For estate tax returns showing a gross value exceeding P5,000,000, there must be a
statement duly certified to by a CPA containing the following:
a. Itemized assets of the decedent with their corresponding gross value at the
time of his death, or in the case of a
**Apply the Limit A computation (per foreign country)
***Apply the Limit B computation (total of all foreign countries)

NRA, of that part of his gross estate situated in the Philippines;

b. Itemized deductions from gross estate allowed in Sec. 86; and
c. The amount of tax due whether paid or still due and outstanding.

Period for Filing (Sec. 90 (B), NIRC)

GR: Must be filed within 1 year from the decedent's death.

XPN: (Sec. 90 (C), NIRC)

The CIR shall have authority to grant, in meritorious cases, a reasonable extension not
exceeding 30 days for filing the return.

Who will file: 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 the estate tax return and pay the tax due (Sec. 90(D), NIRC)
1. Resident Citizen (RC and 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:
a. An authorized agent bank (AAB), or
b. Revenue District Officer (RDO), or
c. Collection Officer, or
d. Duly authorized Treasurer of the city or municipality in which the decedent
was domiciled at the time of his death

2. Non-resident decedent (NRA/NRC)

a. With executor or administrator in the Philippines
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, it 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 (Section 9(8), RR 12-2018).

b. Without an executor or administrator in the Philippines

The estate tax return shall be filed with and the TIN for the estate shall be
secured from the Office of the Commissioner through RDO 39 QC (Section
9(8), RR 12-2018)

PAYMENT OF ESTATE TAX (Sec. 91, NIRC)

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Time of Payment (Sec. 91(A), NIRC)
“Pay as you file”: At the time the return is filed by the executor, administrator or the heirs.

Who are liable for the payment of estate taxes

Primarily, the estate, through the executor or administrator.
1. Payment shall be made before the delivery of the distributive share in the inheritance.
2. If there are two or more executors or administrators, all of them are severally liable
for the payment of the tax. The tax clearance issued by the CIR or the RDO having
jurisdiction over the estate will serve as the authority to distribute the remaining
properties.

Subsidiarily, the heirs or beneficiaries, for the payment of that portion of the estate tax
which his distributive share bears to the value of the total net estate (Sec. 9(9), RR 12-2018).

The heirs shall be liable in proportion to their share in the inheritance.

Extension of Payment (Sec. 91(B), NIRC)

The CIR may allow an extension of payment, if payment on the due date would impose
undue hardship upon the estate or any of the heirs:
1. Extension not to exceed 5 years, in case the estate is settled judicially, or
2. 2 years in case the estate is settled extrajudicially.

Where the taxes are assessed by reason of negligence, intentional disregard of rules and
regulations, or fraud on the part of the taxpayer, NO EXTENSION will be granted by the
CIR.

If extension is granted, the CIR may require the executor, or administrator, or beneficiary, as
the case may be, to furnish a bond in such amount, not exceeding double the amount of the
tax and with such sureties as the CIR deems necessary, conditioned upon the payment of the
said tax in accordance with the terms of the extension.

Effects of granting an extension

1. Payment of the amount in respect of which the extension is granted on or before the
date of the expiration of the period of the extension
2. Suspension of the running of the statute of limitations for deficiency assessment for
the period of any extension
3. Any amount paid after the statutory due date of the tax, but within the extension
period, shall be subject to interest but not to surcharge (Sec. 9(5), RR 12-2018)

Payment by installment (Sec. 91(C), NIRC)

In case the available cash of the estate is insufficient to pay the total estate tax due, payment
by installment shall be made within 2 years from the statutory date of filing, without civil
penalty and interest.

Restitution of tax paid (Sec. 96, NIRC)

If, after the payment of the estate tax, new obligations of the decedent appear, and the persons
interested satisfied them by order of the court, they shall have a right to the restitution of the
proportional part of the tax paid.

Withdrawal from bank account of decedent

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GR: If a bank has knowledge of the death of a person, who maintained a bank deposit
account alone, or jointly with another, it shall allow withdrawal from the said deposit
account, subject to a final withholding tax of 6%. (Sec. 97, NIRC)

XPN: No withholding tax shall be imposed where the bank deposit accounts have been duly
included in the gross estate of the decedent and the estate tax due thereon has been paid
provided that an eCAR is presented prior to withdrawing. (Sec. 10, RR 12-2018)

Tax deficiency after distribution of properties

1. The BIR may recover the deficiency from all the heirs and collect from each of them
the amount proportionate to the inheritance received.
2. By virtue of a lien created under Sec. 219, it may go after one heir and subject the
property he received from the estate to the payment of estate tax. Such heir may seek
reimbursement from the other heirs.

D. DONOR’S TAX
1. BASIC PRINCIPLES, CONCEPT, AND DEFINITION
A donor’s tax is levied, assessed, collected and paid upon the transfer by any person, resident
or nonresident, of the property by gift (Sec. 98(A), NIRC). It shall apply whether the transfer
is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real
or personal, tangible or intangible (Sec. 98(B), NIRC).

It is a tax on donations. Thus, it is a tax on–

1. An act of the donor disposing gratuitously of a thing/right in favor of a donee; and
2. Sales, exchanges, or other transfers of properties, other than real property (defined in
Sec. 24(D)) classified as capital asset within the Philippines, for less than an
adequate and full consideration in money or money’s worth (Sec. 100, NIRC).

Nature of donor’s tax

1. Donor’s tax is not a property tax, but a tax imposed on the transfer of property by way
of gift inter vivos (i.e., an excise tax).
2. It is a direct tax imposed on the donor.
3. It applies to both natural and juridical persons.

Object: To prevent avoidance of income tax through the device of splitting income among
numerous donees, who are usually members of a family, or into many trusts, with the donor
thereby escaping the effect of the progressive rates of income tax.

Time and Transfer of Properties

Donor’s tax shall not apply unless and until there is a completed gift. The transfer of property
by gift is perfected from the moment the donor knows of the acceptance by the donee; it is
completed by 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. (Sec. 12, RR 12-2018)

2. REQUISITES OF A VALID DONATION

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 Art. 725, NCC. Donation is an act of liberality whereby a person disposes gratuitously
of a thing or right in favor of another, who accepts it.

Requisites of a VALID and COMPLETE donation

1. Donative intent of the donor
Donative intent must be present in a direct gift. It is not, however, required in
transfers of property for less than adequate and full consideration. (Sec. 100, NIRC)

2. Capacity of the donor

3. Delivery of the donated property
4. Acceptance of the done
5. Donation must be in the proper form
a. Movable: orally or in writing if value is equal to or less than P5,000.
Otherwise, it shall be in writing.
b. Immovable: must be made in a public document.

Acceptance (Sec. 12, RR 12-2018)

1. For movables exceeding P5,000 – Acceptance shall be in writing (Art. 748, Civil
Code)
2. For immovable (Art. 749, Civil Code) –
a. Must be in the same deed of donation; OR
b. In a separate public document – the donor shall be notified thereof in an
authentic form, and this step shall be noted in both instruments

NOTE: Acceptance shall not take effect unless it is done during the lifetime of the donor and
of the donee (Art. 746, Civil Code).

3. TRANSFERS WHICH MAY BE CONSIDERED AS

DONATION
a. SALE, EXCHANGE, OR TRANSFER OF PROPERTY FOR LESS
THAN ADEQUAE AND FULL CONSIDERATION; EXCEPTION

GR: Where property, other than real property referred to in Sec. 24(D), is transferred for less
than an adequate and full consideration, then the amount by which the FMV of the property
exceeded the value of the consideration shall be deemed a gift.

XPN: A transfer of property made in the ordinary course of business (a transaction which is
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)

Requisites:
The excess of FMV over the value of the consideration will be considered a donation and
subject to donor’s tax when:
1. The transfer was for less than adequate and full consideration;
2. Such transfer was effective during his lifetime (inter vivos); and
3. It involves property other than real property classified as capital asset within the
Philippines as defined in Sec. 24(D) (Sec. 100, NIRC)

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 NOTE: Real property considered as capital assets under the Tax Code are
EXEMPTED from this rule because the taxable value taken into account in the
computation of tax is the higher of either the gross selling price or the FMV; not gain.
(Sec. 100 in relation to Sec. 24(D), NIRC)

NOTE: The absence of donative intent does not exempt the sales of stock transaction from
donor's tax since Sec. 100 of the NIRC categorically states that the amount by which the fair
market value of the property exceeded the value of the consideration shall be deemed a gift
(Philam Life v. Secretary of Finance, G.R. No. 210997 (2014))

b. CONDONATION OR REMISSION OF DEBT

Condonation or remission of debt is defined as an act of liberality, by virtue of which,

without receiving any equivalent, the creditor renounces the enforcement of the obligation,
which is extinguished in its entirety or in that part or aspect of the same to which the
remission refers. It is an essential characteristic of remission that it be gratuitous.

c. RENUNCIATION OF INHERITANCE; EXCEPTION

Renunciation in favor of other heirs is subject to donor’s tax (Sec 12, RR 12-2018)
1. Renunciation by the surviving spouse of his/her share in the ACP/CPG after the
dissolution of the marriage in favor of heirs of the deceased spouse or any other
person/s
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

However, general renunciation by an heir, including the surviving spouse, of his/her share
in the hereditary estate left by the decedent is NOT subject to donor’s tax. (Sec 12, RR 12-
2018)

4. CLASSIFICATION OF DONOR
Donor’s tax applies to INDIVIDUALS and CORPORATIONS

Classifications:
1. Residents (RC/RA/DC/RFC)
2. Non-Residents (NRC/NRA/NRFC)

Such classification is important in determining the deductions from the gross gift of the
donor, and in filing the return.
If donor is:
1. RC/NRC/RA/DC/RFC = liable for donor’s tax REGARDLESS of where the gift was
made or where property is located
2. NRA/NRFC = liable for donor’s tax ONLY if the property donated is within the
Philippines

Situs of Intangible Personal Properties

GR: Mobilia Sequuntur Personam

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Principle: Taxation of intangible personal properties (such as credits, bills, bank deposits
promissory notes, and corporate stocks) follows the residence/domicile of owner thereof.
Situs is the domicile or residence of the owner.

XPN: When it is inconsistent with express provisions of law

Rule of Reciprocity: Same as in Estate Tax.

5. DETERMINATION OF GROSS GIFT

a. COMPOSITION OF GROSS GIFT

b. VALUATION OF GIFTS MADE IN PROPERTY

c. EXEMPTION OF CERTAIN GIFTS

RC/ NRC/ RA/ DC/ RFC NRA/ NRFC

Composition and Determination of Gross Gift
All properties, real or personal, tangible or Only properties situated in the Philippines,
intangible, wherever situated provided that the inclusion of intangible
personal property is subject to the rule of
reciprocity

NOTE: If there is reciprocity, intangible

assets are EXCLUDED from gross gifts
(Sec. 104, NIRC)
Exemptions from Gross Gift to arrive at Net Gifts
Gifts made to or for the use of the National Government or any entity created by any of its
agencies which is not conducted for profit, or to any political subdivision of the said
Government. (Sec. 101 (A)(1), NIRC)
Gifts in favor of an educational and/or charitable, religious, cultural or social welfare
corporation, institution, accredited nongovernment organization, trust or philanthropic
organization or research institution or organization: Provided not more than 30% of said
gifts will be used by such donee for administration purposes.

For the purpose of this exemption, a “non-profit educational and/or charitable corporation,
institution, accredited nongovernment organization, trust or philanthropic organization
and/or research institution or organization” is a:
1. school, college or university and/or charitable corporation, accredited non-
government organization, or;
2. trust or philanthropic organization and/or research institution or organization, that
is:
a. incorporated as a non-stock entity,
b. paying no dividends,
c. governed by trustees who receive no compensation, and
d. devoting all its income, whether students' fees or gifts, donation, subsidies
or other forms of philanthropy, to the accomplishment and promotion of the
purposes enumerated in its Articles of Incorporation. (Sec. 101 (A)(2),
NIRC)

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 Common Exemptions
1. Encumbrances on the property donated if assumed by the donee in the deed of
donation.
2. Donations made to entities exempted under special laws

NOT Subject to Donor’s Tax

1. Contributions to a candidate or political party for campaign purposes duly reported to
COMELEC (Sec. 99 (B), NIRC)

Under R.A. 7166, contributions duly reported to the BIR are not subject to donor’s
tax, as long as it is utilized in his campaign. Unutilized/excess campaign funds, that is,
campaign contributions net of the candidate’s campaign expenditures, shall be
considered as subject to income tax and must be included in the candidate’s taxable
income as stated in his/her ITR.

Subject to Donor’s Tax

Gratuitous Donations to Homeowners’ Association

Valuation of Gifts Made in Property

Taxable Base: Net gifts - the net economic benefit from the transfer that accrues to the donee
AT THE TIME OF DONATION

1. If gift is personal property = FMV at the time of donation (Sec. 102, NIRC)
2. If gift is real property = whichever is HIGHER
a. FMV as determined by the CIR (Zonal Value) or
b. FMV in the latest schedule of values fixed by the provincial and city assessor
(MV per Tax Declaration) (Sec. 102 in relation to Sec. 88(B), NIRC)
3. If there is an improvement = construction cost per building permit or the FMV
based on the latest tax declaration.
4. If unlisted stocks = Adjusted Net Asset Method shall be used whereby all assets and
liabilities are adjusted to fair market values. The net of adjusted asset minus the
adjusted liability value is the indicated value of the equity.

NOTE: Where the consideration is fictitious, the entire value of the property shall be subject
to donor’s tax.

6. TAX CREDIT FOR DONOR’S TAXES PAID TO A

FOREIGN COUNTRY
Donor’s tax credit
The donor’s tax imposed upon a citizen or resident at the time of the donation shall be
credited with the amount of any donor’s tax, of any character and description, imposed by the
authority of a foreign country. (Sec. 101(C), NIRC)

Who may claim the tax credit:

Resident or Citizen: RC, NRC, RA, DC, RFC (not NRA or NRFC)

7. FILING OF RETURN AND PAYMENT

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Persons liable
Every person, whether natural or juridical, resident or non-resident, who transfers or causes to
transfer property by gift, whether in trust or otherwise, whether the gift is direct or indirect
and whether the property is real or personal, tangible or intangible (Sec. 98, NIRC)

Donor’s tax return

Separate return is filed for each gift made on different dates during the year reflecting therein
any previous net gifts made in the same calendar year. If the gift involves
conjugal/community property, each spouse shall file separate return with respect to his/her
respective share in the said property.

Contents
1. Each gift made during the calendar year which is to be included in computing net
gifts;
2. The deductions claimed and allowable;
3. Any previous net gifts made during the same calendar year;
4. The name of the donee; and
5. Such further information as the CIR may require (Sec. 103(A), NIRC)

Period for Filing

The return must be filed within 30 days after the date when the gift was made or completed.
The tax due thereon shall be paid at the same time that the return is filed (pay-as-you-file).
(Sec. 103(B), NIRC)

Who will file: Any person who made a gift (whether direct or indirect), is required to file
under oath a donor’s tax return in duplicate (Sec. 103(A), NIRC)

Where to File the Donor’s Tax Return and Pay the Tax Due
1. Residents
Unless the CIR permits otherwise, the return shall be filed and the tax paid to:
a. AAB
b. Revenue District Officer
c. Revenue Collection Officer
d. duly Authorized City or Municipal Treasurer where the donor was domiciled
at the time of the transfer (Sec. 103(B), NIRC)
2. Non-residents
The Philippine Embassy or Consulate in the country where he is domiciled at the time
of the transfer, or Directly with the Office of the Commissioner (i.e., Revenue District
Office No. 39 – South QC) (Sec. 103(B), NIRC)

Payment of Donor’s Tax

Payment: “Pay as you file”
The donor’s tax is paid upon filing of the return (Sec. 103(B), NIRC)

Notice of donation to donee institutions duly accredited by the Philippine Council for
NGO Certification, Inc. (PCNC) Requisites to be EXEMPT from donor’s tax and to
claim full deduction:
1. Donor must give notice on every donation worth at least P50,000
2. Notice is given to the RDO which has jurisdiction over donor’s place of business

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 3. Notice must be given within 30 days after receipt of the qualified done institution’s
Certificate of Donation
4. Certificate of Donation must be attached to the Notice
5. Notice must state that not more than 30% of the donation for the taxable year shall be
used by the qualified donee institution for administration purposes (Sec. 15 (C), RR
12-2018 in relation to Sec. 101(A)(2) and (B)(2))

Tax Basis: The tax for each calendar year shall be computed on the basis of the total gifts in
excess of P250,000 made during the calendar year.

Tax Rate: FLAT RATE OF 6% (Sec. 99, NIRC)

General Formula If There Are Several Gifts During The

Year
Gross Gifts
Less: Allowable deductions Gifts made on a certain date
----------------------------------------------------- Less: Deductions from gross gifts
Net Gifts ----------------------------------------------------
Less: Exempt gift of P250,000 -
----------------------------------------------------- Net gifts made on a certain date
Taxable Net Gift Add: Prior gifts during the year
Multiply by: Tax rate of 6% -----------------------------------------------------
----------------------------------------------------- = Aggregate Net Gifts
= Donor’s Tax Due -----------------------------------------------------
Less: Tax Credit, if any Less: Exempt gift of P250,000
----------------------------------------------------- -----------------------------------------------------
= Donor’s Tax Payable Taxable Net Gift
Multiply by: Tax rate of 6%
-----------------------------------------------------
= Donor’s Tax on Aggregate Gifts
Less: Tax credits:
-Payments for Prior Net Gifts During the
Year
-Foreign Donor’s Tax Credit
-----------------------------------------------------
= Donor’s Tax Payable, if any

E. VALUE-ADDED TAX (VAT)

1. NATURE AND CHARACTERISTICS OF VALUE-ADDED
TAX
a. TAX ON VALUE-ADDED

It is imposed only on the value added of a taxpayer. “Value added” is the difference between
total sales of the taxpayer and his total purchases for the same period subject also to VAT.

b. SALES TAX
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The taxpayer (seller) determines his tax liability by computing the tax on the gross selling
price or gross receipts (output tax), and subtracting or crediting the VAT on the purchase (or
importation) of goods or services (input tax) against the tax due on his own sale.

VAT rate: 12% standard rate; 0% on certain sales or transactions

VAT base: gross selling price or gross receipts

c. TAX ON CONSUMPTION

VAT is a consumption tax imposed at every stage of the distribution process on (i) the sale,
barter, exchange, or lease of goods or properties, (ii) rendition of services in the course of
trade or business, and (iii) the importation of goods, whether or not such imported goods are
for use in business (Sec. 4.105-2, RR 16-2005).

d. INDIRECT TAX: IMPACT AND INCIDENCE OF TAX

Impact Incidence
Refers to the statutory taxpayer (i.e., the Refers to the buyer/ final consumer, the
seller/ importer), the one who collects tax one who ultimately bears the burden of
and pays to the government. taxation.

e. TAX CREDIT METHOD

Under the VAT method of taxation, which is invoice-based, an entity can credit against or
subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs
and imports. (CIR v. Seagate, G.R. No. 153866 (2005)).

The VAT payable is the excess of output tax over input tax:

OUTPUT VAT – INPUT VAT = VAT PAYABLE or EXCESS INPUT TAX

NOTE: If input VAT is higher than output VAT, the excess input tax is carried over to the
succeeding taxable quarter/s as tax credit. However, any input tax attributable to zero- rated
sales may instead be refunded or credited against other internal revenue taxes.

f. DESTINATION PRINCIPLE AND CROSS-BORDER DOCTRINE

GR: 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.

XPN: Zero-rated services under Sec. 108(b)(1)[1] and (2)

Requisites for the exception to apply:

1. The service is performed in the Philippines;
2. The service falls under any of the categories provided in Section 108(b) of the Tax
Code; and

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 NOTE: The recipient of such services must be doing business outside the Philippines.
(CIR v. Burmeister, G.R. No. 153205 (2007))
3. It is paid for in acceptable foreign currency that is accounted for in accordance with
the regulations of the BSP.

In a zero-rated service, the place where the service is rendered determines the
jurisdiction to impose the VAT. The place of payment is immaterial; much less is the place
where the output of the service will be further or ultimately used.

Constitutionality of Vat (ABAKADA Guro Party List, et. al. v. Ermita, G.R. No. 168056
(2005):
4. The VAT law is uniform: it provides a standard rate of 10% (now 12%) on all goods
or services and 0% rate on certain sales and transactions.
5. It is equitable: The law is equipped with a threshold margin where VAT does NOT
apply to sales of goods or services with gross annual sales or receipts not exceeding
P1.5 million (now P3 million).
6. VAT , by its very nature, is regressive, BUT the Constitution does not prohibit the
imposition of indirect taxes. What it simply provides is that Congress shall “evolve a
progressive system of taxation”.

Characteristics of a Vat-Taxable Transaction

General Characteristics/Nature:
1. Percentage Tax – imposed by law not on the thing or service but on the act (sale,
barter, exchange, lease, importation, or performance of service)
2. Ad Valorem Tax – the amount or rate is based on the gross selling price or gross
value in money, or the gross receipts derived from the transaction
3. Indirect Tax – The seller is the one statutorily liable for the payment of the tax, but
the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of
the goods, properties or services. (Sec. 105, NIRC)

NOTE: In the case of importation, the importer is the one liable for VAT . (Sec.
4.105.2, RR 16-2005)
4. Excise Tax - a tax on the privilege of engaging in the business of selling goods or
services, or in the importation of goods
5. Broad-based Tax on Consumption – VAT is levied on every sale of goods,
properties or services at all stages of manufacture, production, and distribution of
goods and services.
6. Regressive Tax – By its very nature, VAT is regressive. The principle of progressive
taxation has no relation with the VAT system inasmuch as the VAT paid by the
consumer or business for every goods bought or services enjoyed is the same
regardless of income.

Elements of a Vat-Taxable Transaction in General

1. There must be a sale, barter, exchange, or lease of goods or properties, performance of
service in the Philippines, or importation of goods
2. The subject matter must be taxable goods or properties or services
3. The sale must be made by a taxable person in the course of trade or business or in the
furtherance of one’s profession.

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XPNs:
1. Services rendered by non-resident foreign persons shall be considered as being
rendered in the course of trade or business, even if the performance of services is not
regular.
2. Importation are subject to VAT whether or not made in the course of trade or business
3. Any business where the gross sales or receipts do NOT exceed P100,000 during the
12-month period shall be considered principally for subsistence or livelihood and not
in the course of trade or business.

Thus, they are exempt from VAT and percentage tax.

2. PERSONS LIABLE TO VALUE-ADDED TAX

1. Any person who sells, barters, exchanges, or leases goods or properties, or who
renders services, in the course of trade or business

XPNs:
a. A non-VAT-registered person whose annual gross sales or receipts do not
exceed P3M.
b. Franchise grantees under Sec. 119 of this Code whose annual gross receipts
do not exceed P10M and who are not VAT-registered.

2. Any person who imports goods, whether or not in the course of business
3. Any person who voluntarily registers its business under the VAT system, regardless
of level of sales.

The term “person” refers to any individual, trust, estate, partnership, corporation, joint
venture, cooperative or association (Sec. 4.105-1, RR 16-2005).

VAT and Percentage Tax

GR: VAT and Percentage Tax cannot be charged together. The transaction is subject to either
VAT or Other Percentage Tax, but not both.

XPN: When a non-VAT registered person erroneously issues a VAT invoice.

3. IMPOSITION OF VALU-ADDED TAX

a. ON SALE OF GOODS OR PROPERTIES

Transactions:
1. Every sale, barter or exchange (actual sale and in the course of trade or business)
2. Transactions “deemed sale” of taxable goods or properties

Rate: 12% VAT (Sec. 106, NIRC)

Who Pays: Seller/Transferor (Sec. 106(A), NIRC)

Meaning of goods or properties

Goods or properties – all tangible and intangible objects which are capable of pecuniary
estimation, including:

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 1. Real properties held primarily for sale to customers or held for lease in the ordinary
course of trade or business;
2. 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;
3. The right or the privilege to use in the Philippines of any industrial, commercial or
scientific equipment;
4. The right or the privilege to use motion picture films, films, tapes and discs;
5. Radio, television, satellite transmission and cable television time. (Sec. 106(A)(1),
NIRC)

Requisites for Taxability of Sale of Goods or Personal Properties

1. There is an actual or deemed sale of goods or properties for a valuable consideration
2. Undertaken in the course of trade or business
3. For use or consumption in the Philippines (regardless of the payment arrangements)
4. Not exempt from VAT under Sec. 109 of the NIRC, special law, or international
government.

Summary of Rules on Transactions Involving Real Properties

Casual sale (Capital Assets) Subject to 6% CGT
Regular sales (Ordinary Subject to 12% VAT
Assets)

Commercial Property (Sale/

Lease)
Residential Units (Lease)
If monthly rental P15,000 = VAT and Other Percentage Taxes (OPT) - EX

If monthly rental > P15,000 but aggregate annual rentals P3M = subject to

If monthly rental > P15,000 and aggregate annual rentals

Sale of Residential Lot
Sale of Residential House
and Lot
> P3M = subject to VAT
If Selling Price > P1.5M = subject to VAT
If Selling Price P1.5M = VAT- EXEMPT
If Selling Price > P2.5M = subject to VAT
If Selling Price P2.5M = VAT- EXEMPT

Sales of real properties subject to VAT

Sale of real properties held primarily for sale to customers or held for lease in the ordinary
course of trade or business of the seller shall be subject to VAT.

Requisites for Taxability of Sale or Exchange of Real Property

1. The seller executes a deed of sale, barter or exchange, assignment or conveyance, or
contract to sell of real property.
2. The real property is located within the Philippines.
3. The seller or transferor is engaged in real estate business either as a real estate dealer,
developer, or lessor.
4. The real property is held primarily for sale or for lease in the ordinary course of his
trade or business, or at least an ordinary asset used in the trade or business of the VAT
taxpayer as an incident to his VAT-taxable activity.

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 5. The sale is not exempt from VAT under Sec. 109 of the NIRC, special law, or
international agreement.

Modes of Sales of Real Estate; Effects

1. Cash sale – the entire selling price is taxable in the month of sale
2. Installment sales
a. Meaning of installment sale: a sale in which the initial payments in the year
of sale do not exceed 25% Gross Selling Price (GSP)
b. Effect: VAT is recognized based on collection, including interest and
penalties, actually and/or constructively received by the seller.
3. Sale on a deferred-payment basis
a. Meaning: initial payments in the year of sale exceed 25% of the GSP
b. Effect: The transaction shall be treated as cash sale which makes the entire
selling price taxable in the month of sale. Subsequent payments are no longer
subject to VAT.

Sale of Real Property NOT subject to VAT

1. Sale of real properties not primarily held for sale or lease in the course of trade or
business
2. Real property utilized for low cost or socialized housing
3. Residential lot valued at P1.5M and below
4. House and lot, and other residential dwellings valued at P2.5M and below (Sec.
109(1)(P), NIRC)
5. Transfer of property to a corporation in exchange for shares of stocks in a tax- free
exchange under Sec. 40(C)(2) of the NIRC (Sec. 109(1)(X), NIRC)
6. Transmission of property to a trustee if the property is to be merely held in trust for
the trustor and/or beneficiary

XPN: If the property transferred is originally intended for sale, lease or use in the
ordinary course of trade or business AND the transfer constitutes a completed gift, the
transfer is subject to VAT as a deemed sale transaction. The transfer is a completed
gift if the transferor divests himself absolutely of control over the property, i.e.,
irrevocable transfer of corpus and/or irrevocable designation of beneficiary.

i. TAX BASE: GROSS SELLING PRICE

Basis: Gross selling price or gross value in money of the goods or properties sold, bartered
or exchanged.

Meaning of Gross Selling Price (GSP): 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 VAT. The excise tax, if any, on such goods or
properties shall form part of the gross selling price (Sec. 106(A), NIRC)
a. Excludes: VAT , sales allowances, and returns discounts and,
b. Includes: Excise tax paid, initial payments, interests and penalties (if
installment), commission income (if exported), purchase price, charges for
packing, delivery and insurance

GSP in case of sale or exchange of real property

1. The consideration stated in the sales document or

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 2. The fair market value (FMV), whichever is higher.

Meaning of FMV – Whichever is higher of the following:

1. The FMV as determined by the CIR (zonal value) or
2. The FMV as shown in the schedule of values of the Provincial and City Assessors
(real property tax declaration).

Allowable Deductions from GSP

1. Sales returns and allowances – those for which a proper credit or refund was made
during the month or quarter to the buyer for sales previously recorded as taxable sales

These refer to the value of goods or properties sold and subsequently returned or for
which allowances were granted by a VAT-registered person.

2. Sales Discounts – bona fide or regular discounts given to purchasers, which are
ascertainable and definitely agreed upon between the vendor and the vendee at the
time of sale
a. Must be determined and granted at the time of sale
b. Must be expressly indicated in the sales invoice and the amount forming part
of the gross sales duly recorded in the books of accounts
c. The grant is not dependent upon the happening of a future event

ii. TRANSACTIONS DEEMED SALE

Rate: 12%

Basis: Market value of the goods deemed sold as of the time of the occurrence of the
transactions.

However, in case of retirement or cessation of business, the tax base shall be the
acquisition cost or the current market price of the goods or properties, whichever is lower.

In the case of a sale where the gross selling price is unreasonably lower than the FMV, the
actual market value shall be the tax base. The gross selling price is unreasonably lower than
the actual market value if it is lower by more than 30% of the actual market value of the
same goods of the same quantity and quality sold in the immediate locality on or nearest the
date of sale.

The following are transactions deemed sale: (Sec. 106(B), NIRC)

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.

Example: when a VAT-registered person withdraws goods from his business for his
personal use

NOTE: Transmission of property to a trustee, if such property is one for sale, lease or
use in the ordinary course of trade or business and the transfer constitutes a completed
gift, is subject to VAT as a deemed sale transaction.

2. Distribution or transfer to:

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 a. shareholders or investors as share in the profits of the VAT-registered person; or
b. creditors in payment of debt.

3. Consignment of goods if actual sale is not made within 60 days following the date
such goods were consigned
NOTE: 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 goods on hand

This covers 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.

iii. CHANGE OR CESSATION OF STATUS AS VALUE-ADDED TAX-

REGISTERED PERSON

Rate: 12%

Basis: the acquisition cost or the current market price of the goods or properties,
whichever is LOWER

VAT shall apply to goods disposed of or existing as of a certain date if, under certain
circumstances, the status of a person as a VAT-registered person changes or is terminated.
(Sec. 106(C), NIRC)

1. Subject to VAT- The 12% VAT is applicable to goods or properties originally

intended for sale or use in business and capital goods which are existing as of the
occurrence of the following:
a. Change of business activity from VAT taxable status to VAT-exempt status
b. Approval of request for cancellation of a registration due to reversion to
exempt status
c. Approval of request for cancellation of registration due to:
i. Reversion to exempt status
ii. A desire to revert to exempt status after 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 NIRC
iii. Failure to exceed the threshold of P3,000,000 by one who commenced
business with the expectation of gross sales or receipts exceeding said
threshold.

2. NOT Subject to VAT- VAT shall not apply to goods or properties originally
intended for sale or use in the course of business which existing as of the occurrence
of the following:
a. Change of control of a corporation by the acquisition of the controlling interest
of such corporation by another stockholder (individual or corporate) or group
of stockholders.
b. Change in the trade or corporate name of the business
c. Merger or consolidation of corporations: 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.

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b. ON IMPORT OF GOODS

Rate: 12% VAT

Basis: 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)

Where the customs duties are determined on the basis of the quantity or volume of the goods,
VAT shall be based on the landed cost, plus excise taxes, if any.

Who Pays: IMPORTER prior to the release of such goods from customs custody (Sec. 107
(A), NIRC)

Transfer of Goods by Tax-Exempt Persons (Technical Importation):

1. If the importer is tax-exempt, the subsequent purchasers, transferees or recipients who
are non-exempt persons shall be considered as importers who shall be liable for VAT
due on such importation.
2. 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. (Sec. 107(B),
NIRC)

c. ON SALE OF SERVICES AND USE OR LEASE OF PROPERTIES

Rate: 12% VAT

Basis: Gross receipts derived from the sale or exchange of services, including the use or
lease of properties

Gross Receipts – 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 VAT (Sec. 108 (A), NIRC)

Requisites for Taxability

1. There is a sale or exchange of service or lease or use of property enumerated in the
law or other similar services;
2. The service is performed or to be performed in the Philippines;
3. For a valuable consideration actually or constructively received; and
4. The service is not exempt under the NIRC, special law or international agreement

Sale or exchange of services Means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration (Sec 108 (A), NIRC)

“Sale or exchange of services” includes services performed by the following:

1. Construction and service contractors
2. Stock, real estate, commercial, customs and immigration brokers
3. Lessors of property, whether personal or real

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 Lease of property shall be subject to VAT regardless of the place where the contract
of lease or licensing agreement was executed if the property is leased or used in the
Philippines.

NOTE: Lease of a residential unit with a monthly rental not exceeding P15,000 shall
be exempt from VAT. (Sec. 109(1)(Q), NIRC)

4. Persons engaged in warehousing service

5. Lessors or distributors of cinematographic films
6. Persons engaged in milling, processing, manufacturing or repacking goods for others
(except palay into rice, corn into corn grits, and sugarcane into raw sugar)
7. Proprietors, operators, or keepers of hotels, motels, rest houses, 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 – merchants of stock or securities who buy and sell securities to
customers with a view to the gains and profits that may be derived therefrom

“Gross receipts” means gross selling price less cost of the securities sold.

10. Lending investors – 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
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

NOTE: Common carriers which transport passengers by land are subject to the 3%
percentage tax under Sec. 117 of the NIRC. [Sec. 4.108-3(d), RR 16-2005]

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 by any entity including the
National Grid Corporation of the Philippines (NGCP), and distribution companies,
including electric cooperatives

NOTE: Sale of power or fuel generated through renewable sources of energy

shall be subject to 0% VAT (zero-rated) (Sec. 108(B)(7), NIRC)

14. Franchise telephone television franchise grantees grantees of electric utilities, and
telegraph, radio and/or broadcasting and all other franchise grantees

XPNs:
a. Franchise grantees of radio and/or television broadcasting whose annual
gross receipts of the preceding year do not exceed P10,000,000 shall be
subject to 3% franchise tax, subject to optional registration; while franchise
grantees of gas and water utilities shall be subject to 2% franchise tax. (Sec.
119, NIRC)

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 b. With respect to franchise grantees of telephone and telegraph services,
amounts received for overseas dispatch, message, or conversation originating
from the Philippines are subject to the 10% percentage tax and hence exempt
from VAT . (Sec. 120, NIRC)

15. Non-life insurance companies (except crop insurances) including surety, fidelity,
indemnity and bonding companies

NOTE: Life and disability insurance, and health and accident insurance are subject to
the 2% percentage tax under Sec. 123 of the NIRC.

Non-life reinsurance premiums are NOT subject to VAT. However, insurance and
reinsurance commissions, whether life or non-life, are subject to VAT.

16. Similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties

Health Maintenance Organizations (HMOs) – entities which arrange for coverage or

designated managed care services needed by plan holders/members for fixed prepaid
membership fees and for a specified period of time.

HMO’s gross receipts shall be the total amount of money or its equivalent representing the
service fee actually or constructively received during the taxable period for the services
performed or to be performed for another person, excluding VAT.

The amounts earmarked and eventually paid by the HMO to the medical service providers do
NOT form part of its gross receipts for VAT purposes (Medicard Philippines, Inc. v. CIR,
G.R. No. 222743 (2017)).

Additional services subject to VAT:

1. Services performed in the exercise of profession or calling by individuals subject to
professional tax under the LGC, and professional services rendered by general
professional partnerships (GPPs)
Requisites:
a. The performance of services should not be in pursuit of an employer-
employee relationship between the service-provider and the service-recipient
b. His/her gross receipts exceed P3,000,000

2. Services performed by actors/actresses, talents, singers, emcees, radio/television

broadcasters, choreographers, musical, radio, movie, television, stage directors, and
professional athletes
3. Lease or use of sports facilities and equipment by amateur players

4. ZERO-RATED AND EFFECTIVELY ZERO-RATED SALES

OF GOODS OR PROPERTIES, AND SERVICES
Rate: 0% VAT

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Concept: A zero-rated sale of goods, properties, or services by a VAT-registered person is a
taxable transaction for VAT purposes but shall not result in any output tax. However, the
input tax on purchases of goods, properties or services, related to such zero-rated sale,
shall be available as tax credit or refund.

The following transactions are subject to VAT at 0%

1. Export sales
2. Sales of goods or property to persons or entities who are tax-exempt (Effectively
Zero-Rated Sales)
3. Zero-rated sale of services

1. Export Sales (Sec. 106(A)(2)(a), NIRC)

1. The (i) sale and actual shipment of goods from the Philippines to a foreign
country AND (ii) paid for in acceptable foreign currency or its equivalent in goods or
a. services, AND (iii) accounted for in accordance with the rules and regulations of
the BSP
2. The (i) sale of raw materials or packaging materials to a nonresident buyer (ii)
for delivery to a resident local export-oriented enterprise (iii) to be used in
manufacturing, processing, packing or repacking in the Philippines of the said buyer's
goods AND (iv) paid for in acceptable foreign currency AND (v) accounted for in
accordance with the rules and regulations of the BSP
3. Sale of raw materials or packaging materials to export-oriented enterprise whose
export sales exceed 70% of total annual production
4. Those considered export sales under the Omnibus Investment Code of 1987, and
other special laws.
5. 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 exclusively for international
shipping or air transport operations.

2. Sales of goods or property to persons or entities who are tax-exempt (Effectively

Zero-Rated Sales) (Sec. 106(A)(2)(b), NIRC)
This refers to (i) the local sale of goods and properties (ii) by a VAT-registered person (iii) to
a person or entity who was granted direct and indirect tax exemption under special laws or
international agreement (e.g., PEZA, Asian Development Bank, International Rice Research
Institute (Ecozones)).

NOTE: ECOZONES
Ecozones shall be managed and operated by PEZA as a separate customs territory (Sec. 8, RA
7916 or the “Special Economic Zone Act of 1995”).

3. Zero Rated Sale of Services (Sec. 108 (B), NIRC)

The following services performed in the Philippines by a VAT-registered person shall be
subject to 0% VAT:

1. Processing, manufacturing or repacking goods for other persons doing business

outside the Philippines which goods are subsequently exported, where the services

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 are paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the BSP;
2. Services other than those mentioned in the preceding paragraph, rendered to a
person engaged in business conducted outside the Philippines or to a nonresident
person not engaged in business who is outside the Philippines when the services are
performed, the consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP; Note: The 0%
V A T on services performed in the Philippines is an exception to the destination
principle, which states that goods and services are taxed only in the country where
they are consumed.
3. 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 0% rate;
4. Services rendered to persons engaged in international shipping or international air
transport operations, including leases of property for use thereof: Provided, That these
services shall be exclusively for international shipping or air transport operations [as
amended by TRAIN Law];
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;
6. Transport of passengers and cargo by domestic air or sea vessels from the Philippines
to a foreign country [as amended by TRAIN Law]; and

NOTE: 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 subject to the 3% percentage tax. (Sec. 118, NIRC)

7. Sale of power or fuel generated through renewable sources of energy such as, but not
limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other
emerging energy sources using technologies such as fuel cells and hydrogen fuels.

NOTE: Items (1) and (5) above shall be subject to the 12% VAT and NO LONGER be
considered export sales subject to 0% VAT rate upon satisfaction of the following
conditions:
1. 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; and
2. All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash
by December 31, 2019. (Sec. 108(B), NIRC)

Difference between Zero-rated and VAT-exempt

Zero-rated VAT-exempt
It is a taxable transaction but does not result NOT subject to output tax.
in an output tax.
The input VAT attributable to zero- rated The seller is NOT entitled to any input tax
sales may be allowed as tax credits or on his purchases despite the issuance of a
refund. VAT invoice or receipt.
Persons engaged in zero-rated transactions Registration is optional for VAT- exempt
are required to register. persons.

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5. VALUE-ADDED TAX-EXEMPT TRANSACTIONS
VAT-exempt transactions refer to the sale of goods or properties and/or services and the use
or lease of properties that is NOT subject to VAT (output tax) and the seller is not allowed
any tax credit of VAT (input tax) on purchases.

The person making the exempt sale of goods, properties or services shall not bill any output
tax to his customers.

NOTE: The VAT-registered person may elect that the exemption not apply to its sale of
goods or properties or services; provided that the election made shall be irrevocable for a
period of 3 years from the quarter the election was made.

Exempt Transactions
The following transactions are exempt from VAT: (Sec. 109, NIRC)

Sale or Importation
1. 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;
a. Products in their original state remain as such even if they have undergone the
simple processes of preparation or preservation for the market, such as
freezing, drying, salting, broiling, roasting, smoking or stripping, including
those using advanced technological means of packaging, such as shrink
wrapping in plastics, vacuum packing, tetra-pack, and other similar packaging
methods.
b. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary
salt, AND COPRA shall be considered in their original state
c. Livestock or poultry do NOT include fighting cocks, race horses, zoo animals
and other animals generally considered as pets. (Sec. 4.109-1(B)(1)(a), RR
16-2005)
2. Sale or importation of fertilizers, seeds, seedlings and fingerlings, fish, prawn,
livestock and poultry feeds including ingredients, whether locally produced or
imported, used in the manufacture of finished feeds (except specialty feeds for
race horses, fighting cocks, aquarium fish, zoo animals, and other animals generally
considered as pets);

Imporation
3. Importation of personal and household effects belonging to (i) Philippine residents
returning from abroad and (ii) non-resident citizens coming to resettle in the
Philippines; provided, that such goods are also exempt from customs duties under the
Tariff and Customs Code of the Philippines;
4. Importation of professional instruments and implements, tools of trade,
occupation or employment, wearing apparel, domestic animals, and personal
household effects:
a. 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
(i.e., overseas Filipinos
b. in quantities and of the class suitable to the profession, rank, or position of the
persons importing said items

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 c. for their own use and not for barter or sale,
d. accompanying such persons, or arriving within a reasonable time (as amended
by TRAIN Law)

NOTE: The Bureau of Customs may, upon 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, exempt such
goods from payment of duties and taxes (as amended by TRAIN Law);

XPN: Vehicles, vessels, aircrafts, machineries, and other goods for use in
manufacturing shall be subject to duties, taxes, and other charges.

Services
5. Services subject to percentage tax;
6. Services by agricultural contract growers and milling for others of palay into rice,
corn into grits, and sugar cane into raw sugar;
NOTE: Agricultural contract growers refer to those producing for others
poultry, livestock or other agricultural and marine food products in their
original state.
7. Medical, dental, hospital and veterinary services, except those rendered by
professionals;
a. Laboratory services are EXEMPTED. If the hospital or clinic operates a
pharmacy or drugstore, the sale of drugs and medicine is subject to VAT .
b. NOTE: R.A. 9337 removed the VAT- exemption previously granted to
doctors and lawyers.
8. Educational services (i) rendered by private educational institutions, duly accredited
by DepEd, CHED, TESDA, and (ii) those rendered by government educational
institutions;
9. Services rendered by individuals pursuant to an employer-employee
relationship;
10. Services rendered by regional or area headquarters established in the
Philippines by multinational corporations which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries or branches
in the Asia-Pacific Region and do not earn or derive income from the Philippines;

Others
11. Transactions which are exempt under international agreements to which the
Philippines is a signatory or under special laws, except those under PD No. 529
(Petroleum Exploration Concessionaires under the Petroleum Act of 1949);

Sales and Importation

12. Sales by agricultural cooperatives duly registered with the Cooperative

Development Authority (CDA) to their members, as well as sale of their produce,
whether it is original state or processed form, to non-members; their importation of
direct farm inputs, machineries and equipment, including spare parts thereof, to be
used directly and exclusively in the production and/or processing of their produce;
a. Sale by agricultural cooperatives to non-members are exempted from VAT if
the producer is the cooperative itself. If not (e.g., trader), then only those sales
to its members shall be exempted from VAT.

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Services
13. Gross receipts from lending activities by credit or multi-purpose cooperatives duly
registered with the CDA;

Sales
14. Sales by non-agricultural, non-electric and non-credit cooperatives duly
registered and in good standing with the CDA; Provided, that the share capital
contribution of each member does not exceed P15,000 and regardless of the aggregate
capital and net surplus ratably distributed among the members;
a. However, their importation of machineries and equipment, including spare
parts thereof, to be used by them are subject to VAT.

Export Sales
15. Export sales by persons who are not VAT- registered;

Sales
16. Sale of real properties as follows:
a. Sale of real properties NOT primarily held for sale to customers or held for
lease in the ordinary course of trade or business.
b. Sale of real properties utilized for low-cost housing as defined by R.A. 7279
(Urban Development and Housing Act of 1992) and other related laws;
c. Sale of real properties utilized for socialized housing as defined under RA
7279, and other related laws, such as RA 7835 and RA 8763, wherein the
price ceiling per unit is P480,000 for a horizontal socialized housing with a
minimum floor area of 24sq.m, and P700,000 (if within NCR and nearby
areas) or P600,000 (in other areas) for socialized vertical/condominium
projects with a minimum floor area of 22sq.m.
d. Sale of residential lot valued at P1.5M and below , or house & lot and other
residential dwellings valued at P2.5M and below, as adjusted in 2011 using the
2010 Consumer Price Index values.

NOTE: Beginning January 1, 2021, the V A T exemption shall only apply to

(i) sale of real properties not primarily held for sale to customers or held for
lease in the ordinary course of trade or business, (ii) sale of real property
utilized for socialized housing as defined by RA No. 7279, (iii) sale of house
and lot, and other residential dwellings with selling price of not more than
P2,000,000 (Sec. 109(1)(P), NIRC, as amended by TRAIN Law)

Lease
17. Lease of residential units with a monthly rental per unit not exceeding P15,000;
a. If more than P15,000 but the aggregate rentals of the lessor during the year do
not exceed P3M, the lease shall be exempt from VAT , but subject to 3%
percentage tax.
b. Where a lessor has several residential units for lease, his tax liability will be as
follows:
i. Gross receipts from rentals not exceeding P15,000 shall be exempt
from VAT and percentage tax regardless of the aggregate annual gross
receipts.
ii. Gross receipts from rentals exceeding P15,000 shall be subject to VAT
IF the aggregate annual gross receipts from said units only exceed

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 P3M. Otherwise, the gross receipts will be subject to the 3% tax
imposed under Sec. 116 of the NIRC.

Sales, Importation, Printing, or Publication

18. Sale, importation, printing or publication of books and any newspaper,
magazine, review or bulletin which appears at regular intervals with fixed prices for
subscription and sale and which is not devoted principally to the publication of paid
advertisements;

Services
19. Transport of passengers by international carriers; (added by TRAIN Law)
NOTE: Transport of cargoes by international carriers doing business in the
Philippines is likewise exempt from VAT , but subject to 3% percentage tax under
Sec. 118 of the NIRC.

Sales, Importation, or Lease

20. Sale, importation or lease of passenger or cargo vessels and aircraft, including
engine, equipment and spare parts thereof for domestic or international transport
operations;

Importation
21. 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 (as amended by
TRAIN Law);

Services
22. Services of banks, non-bank financial intermediaries performing quasi-banking
functions and other non-bank financial intermediaries (such as money changers and
pawnshops) subject to percentage tax;

Sale or Lease
23. Sale or lease of goods and services to senior citizens and persons with disability,
as provided under RA Nos. 9994 (Expanded Senior Citizens Act of 2010) and 10754
(An Act Expanding the Benefits and Privileges of Persons with Disability),
respectively (added by TRAIN Law);

Transfer
24. Transfer of property pursuant to Section 40(C)(2) of the NIRC (Plan of Merger
or Consolidation), as amended (added by TRAIN Law);

Others
25. Association dues, membership fees, and other assessment and charges collected by
homeowners association and condominium corporations (added by TRAIN Law);
26. Sale of gold to BSP (added by TRAIN Law);
27. Sale of drugs and medicines prescribed for diabetes, high cholesterol, and
hypertension beginning January 1, 2019 (added by TRAIN Law);

Sale or Lease or Performance of Services

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 28. 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 P3M;
a. For purposes of the threshold of P3M, the husband and the wife shall be
considered separate taxpayers. However, the aggregation rule (e.g.,
combining income from business and profession) for each taxpayer shall
apply.
b. The VAT-exempt sales shall NOT be included in determining the threshold.
29. Self-employed individuals and professionals availing of the 8% tax on gross sales
and/or receipts and other non- operating income, under Sections 24(A)(2)(b) and
24(A)(2)(c)(2)(a) of the NIRC.

6. INPUT AND OUTPUT TAX

Definitions
Input tax – the VAT due from or paid by a VAT- registered person on importation of goods
or local purchase of goods, properties, or services, including lease or use of properties, in the
course of his trade or business (Sec. 110(A)(3), NIRC)

Output tax – the VAT due on the sale or lease of taxable goods or properties or services by
any person registered or required to register under Section 236 of the NIRC (Sec. 110(A)(3),
NIRC)

Sources of Input Tax

1. Purchase or Importation of Goods (evidenced by VAT invoice/receipt)
a. For sale; or
b. For conversion into or intended to form part of a finished product for sale
including packaging materials; or
c. For use as supplies in the course of business; or
d. For use as materials supplied in the sale of service; or
e. For use in trade or business for which deduction for depreciation or
amortization is allowed under the NIRC.
2. Purchase of real properties for which VAT has actually been paid
3. Purchase of services in which VAT has actually been paid
4. Transactions deemed sale
5. Transitional Input Tax (Sec 111(A), NIRC)
Who may avail of transitional input tax:
a. A person who becomes VAT-liable for the first time upon exceeding P3M in any
12-month period, or
b. any person who voluntarily registers even if their turnover does not exceed P3M
(except franchise grantees of radio and television broadcasting whose threshold is
P10M)
6. Presumptive Input Tax (Sec. 111(B), NIRC)
Who may avail: Persons or firms engaged in the:
a. processing of (i) sardines, (ii) mackerel and (iii) milk, and
b. manufacturing (i) refined sugar, (ii) cooking oil and (iii) packed noodle based
instant meals
Rate and basis: 4% of the gross value in money of their purchases of primary
agricultural products which are used as inputs to their production (Sec. 111(B), NIRC)

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Persons Who Can Avail of Input Tax Credit
Input tax on domestic purchase or importation of goods or properties shall be
creditable:
1. To the importer upon payment of the VAT prior to the release of the goods from
customs custody;
2. To the purchaser of domestic goods or properties upon consummation of sale; or
3. To the purchaser of services or the lessee or licensee upon payment of the
compensation, rental, royalty or fee.

Input Tax on Depreciable Goods

Capital goods or properties
1. Goods or properties with estimated useful life greater than one (1) year;
2. Treated as depreciable assets under Sec. 34(F) of the NIRC; and
3. Used directly or indirectly in the production or sale of taxable goods or services.

Claims for input tax on depreciable goods

Where a VAT-registered person purchases or imports capital goods, which are depreciable
assets for income tax purposes, the aggregate acquisition cost of which (excluding VAT) in a
calendar month exceeds P1,000,000, regardless of the acquisition cost of each capital good:
1. If the estimated useful life is 5 years or more – the input tax shall be spread evenly
over the month of acquisition and the 59 succeeding months (i.e., 60 months) and the
claim for input tax credit will start in the month of acquisition
2. If the estimated useful life is less than 5 years – the input tax shall be spread over such
a shorter period by dividing the input tax by the actual number of months comprising
the estimated useful life

7. REFUND OR TAX CREDIT OF EXCESS INPUTS TAX;

PROCEDURE
Output VAT- Input VAT = VAT Payable or Excess Input VAT

Determination of output tax

1. Output VAT in a sale of goods/ properties shall be computed by multiplying the total
amount indicated in the invoice or receipt by 12%.

𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝑨𝑻 = 𝑮𝒓𝒐𝒔𝒔 𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆 × 𝑽𝑨𝑻 𝑹𝒂𝒕𝒆

2. Output VAT in a sale of services shall be computed by multiplying the total amount
indicated in the invoice or receipt by 12%.

𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝑨𝑻 = 𝑮𝒓𝒐𝒔𝒔 𝑹𝒆𝒄𝒆𝒊𝒑𝒕𝒔 × 𝑽𝑨𝑻 𝑹𝒂𝒕𝒆

3. Where VAT is erroneously billed in the invoice, the total invoice amount shall be
presumed to be comprised of the gross selling price or gross receipts plus the correct
amount of VAT. Hence, the output tax is computed as follows:

𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝑨𝑻 = 𝑻𝒐𝒕𝒂𝒍 𝒊𝒏𝒗𝒐𝒊𝒄𝒆 𝒂𝒎𝒐𝒖𝒏𝒕 × 𝟏𝟐%

𝟏𝟏𝟐%

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Determination of input tax creditable
1. Add all input tax creditable to a VAT- registered person during the taxable month or
quarter and any excess input tax carried over from the preceding month or quarter.
2. The sum shall be reduced by the amount of claim for VAT refund or credit (whether
filed with the BIR, the Department of Finance, the BOI or the BOC) and other
adjustments, such as purchase returns or allowances and input tax attributable to
exempt sale.

Determination of the VAT payable or excess tax credits

If at the end of any taxable month or quarter:
1. The output tax exceeds the input tax, the excess shall be paid by the VAT- registered
person
2. The input tax exceeds the output tax, the excess shall be carried over to the
succeeding quarter or quarters. However, any input tax attributable to zero-rated sales
may be refunded or credited. (Sec. 110(B), NIRC)

Illustration:
For a given taxable quarter ABC Corp. has output VAT of 100 and input VAT of 80.
Since output tax exceeds the input tax for such taxable quarter, all of the input tax may be
utilized to offset against the output tax. Thus, the VAT payable is 20.

Who May Claim for Refund/Apply for Issuance of Tax Credit Certificate
1. Zero-Rated Sales (Sec. 112(A), NIRC)

Requirements: A claim for refund or tax credit for unutilized input VAT may be
allowed only if the following requisites concur, namely:
1. the taxpayer is VAT-registered;
2. the taxpayer is engaged in zero-rated or effectively zero-rated sales;
3. the input taxes are due or paid;
4. the input taxes are not transitional input taxes;
5. the input taxes have not been applied against output taxes during and in the
succeeding quarters;
6. the input taxes claimed are attributable to zero-rated or effectively zero-rated
sales;
7. for zero-rated sales under Section 106(A)(2)(a)(1) and (3) and 108(B)(1) and
(2), the acceptable foreign currency exchange proceeds have been duly
accounted for in accordance with the rules and regulations of the BSP;
8. where there are both zero-rated or effectively zero-rated sales and taxable or
exempt sales, and the input taxes cannot be directly and entirely attributable to
any of these sales, the input taxes shall be proportionately allocated on the
basis of sales volume; and
9. the claim is filed within 2)years after the close of the taxable quarter when
such sales were made.

2. Cancelled VAT Registration (Sec. 112(B), NIRC)

1. A VAT-registered person whose registration has been cancelled due to (i)
retirement from or cessation of business, or due to changes in or (ii) cessation
of status under Section 106(C) of the NIRC may, within 2 years from the date
of cancellation, apply for the issuance of a tax credit certificate for any unused
input tax which may be used in payment of his other internal revenue taxes.

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 2. The taxpayer shall be entitled to a refund if he has no internal revenue tax
liabilities against which the tax credit certificate may be utilized.
3. The date of cancellation shall be the date of issuance of tax clearance by the
BIR, after full settlement of all tax liabilities.
4. The filing of the claim shall be made only after completion of the mandatory
audit of all internal revenue tax liabilities covering the immediately preceding
year and the short period return and the issuance of the applicable tax
clearance/s.

Period to File Claim/Apply for Issuance of Tax Credit Certificate

Administrative Claim (Sec 112(C), par. 1, NIRC)
1. The claim must be filed within 2 years after the close of the taxable quarter when the
sales were made (or 2 years from the date of cancellation of registration). (Sec.
112(A) and (B), NIRC)
2. The CIR shall grant the refund within 90 days from the date of submission of the
official receipts or invoices and other documents in support of the application.
3. Should the CIR find that the grant of refund is not proper, the CIR must state in
writing the legal and factual basis for the denial.

Judicial Claim (Sec 112 (C), par. 2, NIRC)

1. In case of full or partial denial of the claim for tax refund, the taxpayer may appeal to
the CTA within 30 days from the receipt of decision.
2. The 30-day period to appeal is both mandatory and jurisdictional.

8. COMPLIANCE REQUIREMENTS
a. REGISTRATION

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b. INVOICING REQUIREMENTS

In General
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 (OR) for every lease of goods or properties, and for every
sale, barter or exchange of services (Sec. 113(A), NIRC)

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 3. Only VAT-registered persons are required to print their TIN followed by the
word “VAT” in their invoice or ORs, which shall be considered as a “VAT
Invoice” or “VAT OR”. All purchases covered by invoices/receipts other than VAT
Invoice/VAT OR shall not give rise to any input tax.

Issuance of a VAT Invoice or VAT Receipt by a non-VAT person

If a person who is not a VAT-registered person issues an invoice or receipt showing his TIN,
followed by the word "VAT", the erroneous issuance shall result to the following:
1. The issuer shall be liable to:
a. percentage taxes applicable to his transactions;
b. VAT due on transactions under Section 106 or 108 of the NIRC, without the
benefit of any input tax credit; and
c. a 50% surcharge under Section 248(B) of the NIRC.
2. The VAT shall be recognized as an input tax credit to the purchaser, if the other
requisite information is shown on the invoice/receipt. (Sec. 113(D), NIRC)

Issuance of a VAT Invoice or VAT Receipt on an Exempt Transaction by a VAT-

registered Person
If a VAT-registered person issues a VAT invoice or VAT OR for a VAT-exempt transaction,
but fails to display prominently on the invoice or receipt the term "VAT-exempt Sale”:
1. the transaction shall become taxable;
2. the issuer shall be liable to pay VAT thereon; and
3. the purchaser shall be entitled to claim an input tax credit on his purchase.

c. FILING OF RETURNS AND PAYMENTS

Procedure
1. Every person liable to pay VAT shall file a quarterly return of the amount of his gross
sales or receipts within 25 days after the close of each taxable quarter prescribed for
each taxpayer.
2. The monthly VAT Declarations of taxpayers whether large or non-large shall be filed
and the taxes paid not later than the 20th day following the end of each month.
3. Beginning January 1, 2023, the filing of return and payment of VAT shall be done
within 25 days following the close of each taxable quarter. (Sec. 114(A), NIRC as
amended by TRAIN Law; Sec. 4.114-1(A), RR 16-2005)

NOTE: VAT is paid on a monthly basis. Payments in the monthly VAT declarations
shall be credited in the quarterly VAT return to arrive at the net VAT payable or
excess input tax/overpayment as of the end of a quarter.

d. WITHHOLDING OF FINAL VALUE-ADDED TAX ON SALES TO

GOVERNMENT

GR: VAT cannot be collected by way of withholding.

XPN:
1. Gross payments by the government shall be subject to the 5% final withholding VAT;
2. Gross payments by resident VAT-taxpayers to non-residents shall be subject to 12%
withholding VAT.

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 NOTE: The payor or person in control of the payment is considered as the
withholding agent.

e. ADMINISTRATIVE AND PENAL SANCTIONS

Surcharge, interest and other penalties – The interest on unpaid amount of tax, civil
penalties and criminal penalties imposed in Title XI of the NIRC shall also apply to
violations of the VAT provisions of the NIRC.

Suspension of business operations – In addition to other administrative and penal sanctions

provided for in the NIRC and implementing regulations, the CIR or his duly authorized
representative may order the suspension or closure of a business establishment for a period of
not less than 5 days for any of the following violations:
1. Failure to issue receipts and invoices
2. Failure to file VAT return as required under Sec. 114 of the NIRC
3. Understatement of taxable sales or receipts by 30% or more of his correct taxable
sales or receipt for the taxable quarter
4. Failure of any person to register as required under Sec. 236 of the NIRC

F. PERCENTAGE TAXES: CONCEPT AND NATURE

Concept
A percentage tax is a national tax measured by a certain percentage of the gross selling
price or gross value in money of goods sold, bartered or imported; or of the gross receipts or
earnings derived by any person engaged in the sale of services (CIR v. Solidbank Corp., G.R.
No. 148191 (2003)).

Percentage tax is a business tax imposed on persons, entities, or transactions specified under
Sections 116 to 127 of the NIRC.

Nature
It is a privilege tax. Like VAT, it is imposed on the privilege to sell commodities or services.

Tax Base: Gross Receipts

By its nature, a gross receipts tax applies to the entire receipts without any deduction,
exemption or exclusion, unless the law clearly provides otherwise.

Tax Rate
Any person whose sales or receipts are exempt from the payment of VAT AND who is not a
VAT-registered person shall pay a tax equivalent to 3% of his gross quarterly sales or
receipts.

NOTE: Cooperatives shall be EXEMPT from the 3% gross receipts tax (Sec. 116, NIRC).

G. EXCISE TAX: CONCEPT AND NATURE

Concept

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Excise taxes are taxes imposed on certain specified goods manufactured or produced in the
Philippines for domestic sale or consumption or for any other disposition and to things
imported as well as services performed in the Philippines (Sec. 129, par. 1, NIRC)

Kinds of Excise Taxes (Sec. 129, par. 2, NIRC)

1. Specific tax – tax due is computed based on:
a. Weight
b. volume capacity
c. any other physical unit of measurement.
2. Ad valorem tax – tax due is computed based on:
a. selling price
b. other specified value of the good or service performed

Nature
Excise taxes, whether under the specific or the ad valorem tax system, is basically an indirect
tax imposed on certain types or classes of goods, whether locally manufactured or imported.
While the tax is directly levied upon the manufacturer/ importer upon removal of the taxable
goods from its place of production or from the customs custody, the tax, in reality, is actually
passed on to the end consumer as part of the transfer value or selling price of the goods, sold,
bartered or exchanged.

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.

Purpose
1. To curtail consumption of certain commodities, the excessive or incriminate use of
which is considered harmful to the individual or community (e.g., alcoholic beverages
and tobacco products);
2. To protect a domestic industry, the products of which face competition from similar
imported articles;
3. To distribute the tax burden in proportion to the benefit derived from a particular
government service (e.g., excise taxes on gasoline, lubricating oils and denatured
alcohol for motive power); and
4. To raise revenue

H. DOCUMENTARY STAMP TAX: CONCEPT AND

NATURE
Concept
Documentary stamp tax (DST) is a tax on documents, instruments, loan agreements and
papers evidencing the acceptance, assignment, sale, or transfer of an obligation, right, or
property incident thereto (Sec. 173, NIRC)

Nature
A DST is actually an excise tax because it is imposed on the transaction rather than on the
document. It is levied on the exercise by persons of certain privileges conferred by law for

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the creation, revision, or termination of specific legal relationships through the execution of
specific instruments. Hence, in imposing the DST, the Court considers not only the document
but also the nature and character of the transaction is considered.

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.

The tax base is the document itself, not the transaction or the property described in the
document. 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 .

I. TAX REMEDIES UNDER THE NATIONAL

INTERNAL REVENUE CODE
General Concepts

Taxpayer Remedies
1. Administrative Remedies (BIR)
a. Before payment
i. Filing a protest with request for reconsideration or reinvestigation; and
ii. Entering into a compromise
b. After payment
i. Filing a claim for refund; and
ii. Filing a claim for tax credit

2. Judicial Remedies (CTA/ RTC)

a. Civil Action
i. Appeal to the CTA
ii. Action to contest forfeiture of chattel; and
iii. Action for damages
b. Criminal Action
i. Filing a criminal complaint against erring BIR officials and employees

Government Remedies
1. Administrative Remedies
a. Enforcement of tax lien
b. Distraint of personal property, and garnishment of bank deposits
c. Levy of real property
d. Forfeiture of property
e. Compromise and abatement
f. Penalties and fines
g. Suspension of business operations
2. Judicial Remedies
a. Ordinary civil action
b. Criminal action

1. ASSESSMENT OF INTERNAL REVENUE TAXES

Definition

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To assess means to impose a tax; to fix or settle a sum to be paid by way of tax; to settle,
determine, or fix the amount of tax to be paid.

An assessment is the notice to the effect that the amount therein stated is due from a taxpayer
as a tax with a demand for payment of the same within a stated period of time.

Presumption of correctness
An assessment is presumed correct and made in good faith in the performance of official
duties and failure to present proof of error will prosper such assessment.

a. PROCEDURRAL DUE PROCESS IN TAX ASSESSMENTS (Sec. 228,

NIRC)

i. LETTER OF AUTHORITY AND TAX AUDIT

Letter of Authority (LOA)- An official document that empowers a Revenue Officer to

examine and scrutinize a taxpayer’s books of accounts and other accounting records, in order
to determine the taxpayer’s correct internal revenue tax liabilities.

GR: The issuance of an LOA is a mandatory statutory requirement. (Sec. 13, NIRC)

Any tax assessment issued without an LOA is a violation of the taxpayers’ right to due
process and is therefore “inescapably void.” (RMC 75-2018; Medicard Philippines, Inc. v.
CIR, G.R. No. 222743 (2017))

XPN: The following cases 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.

Letter of Authority vs. Letter Notice

A Letter Notice (LN) is not found in the NIRC and is not an authority to conduct an audit.
The LN is merely a notice to the taxpayer that a discrepancy is found based on the BIR’s
third party information data matching programs. Thus, an LOA must still be secured before
proceeding with the further examination and assessment of the taxpayer. (Medicard
Philippines, Inc. v. CIR, G.R. No. 222743 (2017))

Tax audit
It is the process of examining, going over or scrutinizing the books and records of the
taxpayer to ascertain the correctness of the tax declared and paid by the taxpayer.

There must be a grant of authority before any revenue officer can conduct an examination or
assessment. Equally important is that the revenue officer so authorized must not go beyond
the authority given. In the absence of such an authority, the assessment or examination is a
nullity. (CIR v. Sony Philippines, Inc., G.R. No. 178697 (2010))

NOTE: A Revenue Officer is allowed only 120 days from the date of receipt of an LOA by
the taxpayer to conduct the audit and submit the required report of investigation. If the
Revenue Officer is unable to submit his final report of investigation within the 120-day

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period, he must then submit a progress report to his Head of Office, and surrender the LOA
for revalidation.

ii. INFORMAL CONFERENCE (NIC)

The Revenue Officer who audited the taxpayer’s records shall state in his report whether or
not the taxpayer agrees with his findings that the taxpayer is liable for deficiency taxes. If the
taxpayer is not amenable, based on the said Officer’s submitted report of investigation, the
taxpayer shall be informed, in writing, of the discrepancies in the taxpayer’s payment of his
internal revenue taxes for the purpose of “Informal Conference,” in order to afford the
taxpayer with an opportunity to present his side of the case.

The Informal Conference shall in no case extend beyond 30 days from receipt of the notice
for informal conference. If it is found that the taxpayer is still liable for deficiency tax or
taxes after presenting his side, and the taxpayer is not amenable, the case shall be endorsed
within 7 days from the conclusion of the Informal Conference for the issuance of a
deficiency tax assessment.

iii. PRELIMINARY ASSESSMENT NOTICE (PAN)

GR: A PAN shall be issued if it is determined that there exists sufficient basis to assess the
taxpayer for any deficiency tax. It shall show in detail the facts and the law on which the
proposed assessment is based.

XPNs: The NIC and the PAN shall NOT be required in any of the following cases, in which
case, a Formal Letter of Demand and Assessment Notice (FLD/FAN) shall be issued
outright:
1. 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
2. A discrepancy has been determined between the tax withheld and the amount actually
remitted by the withholding agent; or
3. 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
4. The excise tax due on excisable articles has not been paid; or
5. 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.

NOTE: Prior to the issuance of a PAN, the taxpayer may be allowed to make voluntary
payments of probable deficiency taxes and penalties.

Reply to the PAN

The taxpayer is given 15 days from the date of receipt of the PAN to respond.
1. If the taxpayer fails to respond, he is considered in default and a formal letter of
demand and assessment notice (FLD/ FAN) shall be issued to the taxpayer.
2. If he responds that he disagrees with the findings of deficiency taxes, an FLD/
FAN shall be issued within 15 days from filing/ submission of the taxpayer’s

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 response, calling for payment of the taxpayer’s deficiency tax liability, inclusive of
the applicable penalties.

iv. FORMAL LETTER OF DEMAND AND FINAL ASSESSMENT NOTICE (FLD/

FAN)

An FLD/FAN is a declaration of deficiency taxes issued to a taxpayer who:

1. fails to respond to a PAN within the prescribed period of time, or
2. whose reply to the PAN was found to be without merit.

Contents of the FLD/FAN

The taxpayer shall be informed in writing of the law and the facts on which the assessment is
made; otherwise the assessment shall be void. (Sec. 228, NIRC)

An assessment contains not only a computation of tax liabilities, but also a demand for
payment within a certain period.

Period for Issuance of the FLD/ FAN

It must be issued within 15 days from the filing/ submission of the taxpayer’s response to
the PAN.
1. If the FLD/ FAN is issued beyond the 15-day period, it shall still be valid, provided
that it is issued within the period of limitation to assess internal revenue taxes.

NOTE: The revenue officers who caused the delay shall be subject to administrative
sanction.

2. If the FLD/ FAN is issued before the lapse of the 15-day period, it shall be void.

NOTE: Prematurely issuing an FLD/ FAN before the lapse of the 15-day period is a
wanton disregard of the mandatory due process requirement. (CIR v. Pacific Bayview
Properties, Inc., CTA EB No. 1677 (2018), citing CIR v. Metro Star Superama, Inc.,
G.R. No. 185371 (2010))

v. DISPUTED ASSESSMENT

The taxpayer or his duly authorized representative may protest administratively against the
FLD/ FAN within 30 days from date of receipt thereof. The taxpayer protesting an
assessment may file a written request for reconsideration or reinvestigation.

vi. ADMINISTRATIVE DECISION ON A DISPUTED ASSESSMENT

vii. APPEAL FROM AN ADMINISTRATIVE DECISION ON DISPUTED

ASSESSMENT

b. REQUISITES OF A VALID ASSESSMENT

1. The taxpayer shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment notice shall be rendered null and
void. (Sec. 228, NIRC)

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 2. assessment contains not only a computation of tax liabilities, but also a demand for
payment within a prescribed period.
3. assessment must be served on and received by the taxpayer.

c. TAX DELINQUENCY AND TAX DEFICIENCY

Deficiency is defined as the amount still due and collectible from a taxpayer upon audit or
investigation; whereas delinquency is defined as the failure of the taxpayer to pay the tax due
on the date fixed by law or indicated in the assessment notice or letter of demand. (Takenaka
Corporation Philippine Branch v. CIR, CTA EB No. 745 (2012))

Tax Delinquency Tax Deficiency

1. The self-assessed tax per return was
not paid or only partially paid; or
2. The deficiency tax assessed by the
BIR became final and executory.
Delinquency tax can be collected
administratively by distraint or levy or by
judicial action.
The filing of a civil action for the collection
of the delinquent tax in the ordinary court is
a proper remedy.
Subject to administrative penalties, such as
25% surcharge, interest, and compromise
penalty
1. The amount by which the tax
imposed by law exceeds the amount
shown in the tax return; or
2. If no amount is shown in the return,
or if there is no return, then the
amount by which the tax as
determined by the CIR exceeds the
amount previously assessed as a
deficiency (Sec. 56(B), NIRC)
Deficiency tax must be assessed and must
go through the process of filing the protest
by the taxpayer and denial of such protest
by the BIR.
The filing of a civil action at the ordinary
court for collection during the pendency of
protest may be the subject of a motion to
dismiss. In addition, the taxpayer must file a
petition for review with the CTA to toll the
running of the prescriptive period.
Subject to administrative penalties of
interest and compromise penalty, but NOT
to the 25% surcharge.

d. PRESCRIPTIVE PERIOD FOR ASSESSMENT

i. GENERAL RULE

Within 3 years after the last day prescribed by law for the filing of the return or from the date
of actual filing, whichever comes later; provided, that a return filed before the last day
prescribed by law for filing shall be considered as filed on such last day (Sec. 203, NIRC)

XPN: Within 10 years after the discovery of the falsity, fraud, or omission in case of: (FFF)
1. False return
2. Fraudulent return with intent to evade tax; or
3. Failure to file a return (Sec. 222, NIRC)

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ii. DISTINGUISH: FALS RETURNS, FRAUDULENT RETURNS, AND NON-FILING
OF RETURNS

False Return Fraudulent Return Failure to file a Return

Contains wrong information Made with intent to evade Omission to file a return
due to mistake, carelessness, taxes due. within the time prescribed
or ignorance. by law.
Deviation may or may not Intentional or deceitful entry Omission may or may not be
be intentional with intent. intentional.
Not subject to 50% Subject to 50% surcharge. Not subject to 50%
surcharge, except if done surcharge, except if
willfully. omission is willful.
Assessment may be made within 10 years after discovery of the falsity, fraud or omission

Waiver of the Statute of Limitations

The taxpayer and the CIR may agree in writing, before the expiration of the time prescribed
in Sec. 203, to extend the period of assessment. (Sec. 222(b), NIRC)

NOTE: A waiver of the statute of limitations is a derogation of the taxpayers’ right to

security against prolonged and unscrupulous investigations and must therefore be carefully
and strictly construed. However, the waiver does not mean that the taxpayer relinquishes the
right to invoke the defense of prescription unequivocally particularly where the language of
the document is equivocal. (Philippine Journalists Inc. v. CIR, G.R. No. 162852 (2004))

iii. SUSPENSION OF STATUTE OF LIMITATIONS

1. When the CIR is prohibited from making the assessment or beginning distraint or levy
or a proceeding in court, and for 60 days thereafter;
2. When the taxpayer requests for a reinvestigation which is granted by the CIR;
3. When the taxpayer cannot be located in the address given by him in the return filed,
BUT if the taxpayer informs the CIR of any change in address, the running of the
statute of limitations shall not be suspended;
4. When the warrant of distraint or levy is duly served upon the taxpayer, his authorized
representative, or a member of his household with sufficient discretion, and no
property is located; and
5. When the taxpayer is out of the Philippines.

2. TAXPAYER’S REMEDIES
a. PROTESTING AN ASSESSMENT

i. PERIOD TO FILE PROTEST

After issuance of the FLD/ FAN, the taxpayer may protest the assessment within 30 days
from receipt thereof by filing a request for reconsideration or reinvestigation.

ii. KINDS OF PROTEST- REQUEST FOR RECONSIDERATION OR

REINVESTIGATION

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 Request for Reconsideration Request for Reinvestigation
As to Nature/ Definition
It refers to a plea of re-evaluation of an It refers to a plea of re-evaluation of an
assessment on the basis of existing records assessment on the basis of newly discovered
without need of additional evidence. It may evidence that a taxpayer intends to present
involve both a question of fact or of law or in the reinvestigation. It may also involve a
both. question of fact or law or both.
As to Effect on the Status of Limitations
It shall NOT suspend the prescriptive period A request for reconsideration does NOT toll
to collect the running of the prescriptive period for the
collection of an assessed tax.
NOTE: It will only toll the prescriptive
period to collect if the request for
reinvestigation is granted by the BIR.
As to Evidence
It is limited to the evidence already at hand. It entails the reception and evaluation of
additional evidence.

Supporting documents must be submitted

within 60 days from the filing of protest
Counting of 180-day Period for CIR to Decide
From the filing of the protest. From the submission of the complete
supporting documents.

Contents of the Protest

The protest shall state the following in his protest; otherwise, the protest shall be considered
void and without force and effect.
1. Nature of protest, whether reconsideration or reinvestigation, specifying newly
discovered or additional evidence he intends to present if it is a request for
reinvestigation,
2. Date of the assessment notice, and
3. law, rules and regulations, or jurisprudence on which his protest is based.

iii. SUBMISSION OF SUPPORTING DOCUMENTS

For requests for reinvestigation, the taxpayer shall submit all relevant supporting documents
in support of his protest within 60 days from filing of the protest; otherwise, the assessment
shall become final.

1. “Relevant supporting documents” – documents necessary to support the legal and

factual bases in disputing a tax assessment as determined by the taxpayer
2. “Assessment shall become final” – taxpayer is barred from disputing the correctness
of the issued assessment by introduction of newly discovered or additional evidence,
and the Final Decision on Disputed Assessment (FDDA) shall consequently be
denied.
3. The 60-day period to submit supporting documents shall NOT apply to requests for
reconsideration.

iv. EFFECT OF FAILURE TO FILE PROTEST

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Failure of the taxpayer to file a protest against the FLD/FAN within 30 days will make the
assessment final, executory, and demandable. No request for reconsideration or
reinvestigation shall be granted on tax assessments that have already become final, executory
and demandable.

v. ACTION OF THE COMMISSIONER ON THE PROTEST FILED

(a) PERIOD TO ACT UPON OR DECIDE ON PROTEST FILED

1. By the CIR’s duly authorized representative

a. In a request for reinvestigation, within 180 days from submission of
documents; or
b. In a request for reconsideration, within 180 days from the date of filing of
the protest
2. By the CIR
a. In case of protest, within 180 days from the filing of the protest
b. In case of an administrative appeal, within 180 days from the filing of the
administrative appeal

NOTE: An administrative appeal to the CIR may only be availed of upon the
denial of the protest to the FLD/ FAN by the CIR’s duly authorized representative.
Under RR 18-2013, there is no administrative appeal to the CIR for inaction by the
CIR’s representative. The remedy is to await the decision or file a petition for review
to the CTA within 30 days after the lapse of the 180-day waiting period.

(b) REMEDIES OF THE TAXPAYER IN CASE OF DENIAL OR INACTION OF

THE COMMISSIONER

1. Denial of the protest through the issuance of a Final Decision on Disputed Assessment
(FDDA)
The decision of the CIR or his duly authorized representatives shall state (a) the facts, the
applicable law, rules and regulations or jurisprudence on which such decision is based, and
(b) that the same is his final decision.

Effect of a void FDDA

A void FDDA does not ipso facto render the assessment void. A “decision” differs from an
“assessment” and failure of the FDDA to state the facts and law on which it is based renders
the decision void, but not the assessment. (CIR v. Liquigaz Philippines Corp., GR No.
215534, (2016))

Indirect denial of the protest

The following actions are equivalent to a denial of the protest:
a. Filing of collection suit against taxpayer
b. Issuing a warrant of distraint and levy
c. A final demand letter from BIR

NOTE: A final demand letter from the BIR, reiterating to the taxpayer the immediate
payment of a tax deficiency assessment previously made, is tantamount to a denial of
the taxpayer’s request for reconsideration. Such letter amounts to an FDDA and is
thus appealable to the CTA.

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 d. Filing of criminal action against the taxpayer

2. Inaction by the CIR or his duly authorized representative

If the protest is not acted upon within the 180- day period, the inaction by the CIR is
considered as a denial of protest.

(c) EFFECT OF FAILURE TO APPEAL

1. The decision or assessment becomes final, executory, and demandable.

2. The taxpayer is barred, in an action for collection, from invoking any defense that will
re-open the question of his liability on the merits;
3. The assessment is considered correct and may be enforced by summary remedies or
by judicial action;
4. The taxpayer may raise only questions of jurisdiction, collusion between the parties,
or fraud in the party offering the record with respect to the proceedings.
5. The assessment which has become final and executory cannot be superseded by a new
assessment.

b. RECOVERY OF TAX ERRONEOUSLY OR ILLEGALLY

COLLECTED

Tax Refund as Distinguished from Tax Credit

Tax refund takes place when there is actual reimbursement.
Tax credit takes place upon the issuance of a tax certificate or tax credit memo, which can be
applied against any sum that may be due and collected from the taxpayer.

i. GROUNDS, REQUISITES, AND PERIODS FOR FILING OF A CLAIM FOR

REFUND OR ISSUANCE OF A TAX CREDIT CERTIFICATE

1. Grounds for filing a claim for tax refund or credit

1. Tax is erroneously or illegally assessed or collected
a. Taxes are erroneously paid when a taxpayer pays under a mistake of fact, as
when he is not aware of an existing exemption in his favor at the time that
payment is made.
b. Taxes are illegally collected when payments are made under duress.
c. Penalty is collected without authority
2. Penalty is collected without authority
3. Sum collected is excessive or in any manner wrongfully collected (Sec. 229, NIRC)

2. Requisites for tax refund or tax credit

1. There is a tax collected erroneously or illegally, or a penalty collected without
authority, or a sum excessively or wrongfully collected.
2. There must be a written claim for refund filed by the taxpayer to the CIR.

XPNs:
1. When on the face of the return upon which payment was made, such payment appears
clearly to have been erroneously paid, the CIR may refund or credit the tax even
without a written claim (Sec. 229, NIRC)

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 2. A return filed showing an overpayment shall be considered as a written claim for
credit or refund (Sec. 204(C), NIRC)
3. The claim must be a categorical claim for reimbursement
4. The claim for refund must be filed within 2 years from the date of the payment of the
tax regardless of any supervening cause (Sec. 229, NIRC)

NOTE: Both the claim for refund with the BIR and the subsequent appeal to the
CTA must be filed within the 2-year period.

5. Taxpayer must show proof of the payment of tax (Sec. 229, NIRC)

NOTE: The 2-year period is not jurisdictional. Even if it had already lapsed, the same may
be suspended for reasons of equity and other special circumstances.

It is subject to waiver in the absence of objection to a claim filed after 2 years.

3. Two-year period when counted

GR: From the date the tax was paid

XPNs:
1. If the tax is withheld at source – from the date it falls due at the end of the taxable
year
2. If the income is paid on a quarterly basis – from the time of filing the final
adjustment return
3. When the tax is paid in installments – from the date of final payment or the last
installment

ii. PROPER PARTY TO FILE CLAIM FOR REFUND OR TAX CREDIT

GR: The “taxpayer” is the person entitled to claim a tax refund; hence, the proper party to
file a claim for refund or credit.

XPNs:
1. In case of indirect taxes, the proper party 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.”
2. Withholding agent
a. In case the taxpayer does not file a claim for refund, the withholding agent
may file the claim.
b. The withholding agent of a non- resident foreign corporation may file the
claim.

Remedy upon Denial or Inaction by the CIR

Taxpayer’s remedies
1. If the CIR denies claim – appeal to the CTA within 30 days from receipt of the
CIR’s decision and within 2 years from the date of payment.
2. If the CIR does not act on the claim and the 2-year period is about to lapse – file
a claim before the CTA prior to the lapse of the 2- year period; otherwise, the claim
shall be barred

Simultaneous filing allowed

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If the CIR takes time in deciding the claim and the period of 2 years is about to end, the suit
or proceeding must be started in the CTA before the end of the 2 year period without
awaiting the decision of the CIR.

iii. DISTINGUISH FROM INPUT VALUE-ADDED TAX REFUND

Sec. 229 Sec. 112

Refers to a refund or credit of Refers to a refund or tax credit of excess or
1. tax erroneously or illegally assessed unutilized input VAT attributable to zero-
or collected, or rated sales.
2. penalty collected without authority,
or
3. any sum excessively or wrongfully
collected
The 2-year period shall be reckoned from The 2-year period shall be reckoned from
the date of payment of the tax or penalty. the close of the taxable quarter when the
sales were made.
Both the administrative claim with the CIR Only the administrative claim is required to
and the appeal to the CTA must be made be filed within the 2-year period.
within the 2-year period.
If the 2-year period is about to lapse and the Sec. 112(C) of the NIRC provides a 90-day
CIR has not acted on the claim, the taxpayer waiting period for the CIR to decide on
may already appeal to the CTA without the application for tax refund or credit.
waiting for the decision of the CIR. Compliance with the 90-day waiting period
is mandatory and jurisdictional.

Thus, the taxpayer may elevate his claim to

the CTA
1. within 30 days from the full or
partial denial of the claim, or
2. within 30 days after the lapse of the
90-day waiting period, in case of
inaction by the CIR.

c. POWER OF COMMISSIONER OF INTERNAL REVENUE TO

COMPROMISE

Compromise
It is a contract whereby the parties, by reciprocal concessions, avoid a litigation or to put an
end to one already commenced. It reduces the amount of taxpayer’s liability.

Authority to compromise and abate taxes

GR: The CIR has the authority to compromise or abate any tax liability. (Sec. 7(C), NIRC)

XPN: The power to compromise may be delegated to:

1. the Regional Evaluation Board (REB), in case of:
a. assessments issued by regional offices involving basic taxes of P500,000 or
less; and
b. minor criminal violations discovered by regional and district officials
2. the National Evaluation Board (NEB), when:
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 a. the basic tax exceeds P1,000,000, or
b. the settlement offered is less than the prescribed minimum rates (Sec. 204(A),
NIRC)

Grounds for a compromise

The CIR may compromise the payment of any internal revenue tax in the following cases:
7. Doubtful validity of the assessment – when there exists reasonable doubt as to the
validity of the claim against the taxpayer (e.g., one arising from a jeopardy
assessment, arbitrary assessment); or
7. Financial incapacity (10% of the basic assessed tax) – when the financial position
of the taxpayer demonstrates a clear inability to pay the assed tax.

Payment of compromise upon filing of 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.

Requisites of a tax compromise

6. The taxpayer must have a tax liability;
6. There must be an offer by the taxpayer or the Commissioner of an amount to be paid
by the taxpayer
6. There must be an acceptance by the Commissioner or taxpayer as the case may be, of
the offer in settlement of the original claim.

NOTE: A compromise is consensual in nature. Hence, it may not be imposed on the taxpayer
without his consent. The BIR may only suggest settlement of the taxpayer’s liability through
a compromise.

Abatement
It refers to the cancellation of the entire amount of tax payable.

Grounds for abatement

4. The tax or any portion thereof appears to be unjustly or excessively assessed; or
4. The administration and collection costs do not justify the collection of the amount
due. (Sec. 204(B), NIRC)

Coverage of abatement
GR: The CIR’s authority to abate is applicable to surcharge and compromise penalties only.

XPN: In meritorious instances, the CIR may abate the interest as well as basic tax assessed,
provided that cases for abatement or cancellation of tax, penalties and/or interest by the CIR
shall be coursed through certain officials. (Sec. 4, NIRC)

d. NON-RETROACTIVITY OF RULINGS (Sec. 246, NIRC)

GR: Rulings do not have retroactive application if the revocation, modification, or reversal
will be prejudicial to the taxpayer.

XPN:

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 1. Taxpayer’s deliberate misstatement or omission of facts
2. BIR’s gathered facts is materially different from the facts from which the ruling was
based on
3. Taxpayer acted in bad faith

NOTE: The rule on non-retroactivity of rulings may be applied only if the parties in the
ruling involve the taxpayer himself/itself. The taxpayer cannot invoke the rulings granted in
favor of the other taxpayers.

3. GOVERNMENT REMEDIES FOR COLLECTION OF

DELINQUENT TAXES
a. REQUISITES

1. The government can initiate collection administratively or judicially once the

assessment becomes final and executory.
2. Collection must be made within 5 years following the assessment of the tax (Sec.
222(c), NIRC).

The government has two ways to collect:

1. Summary or administrative remedies
a. Distraint on personal property
b. Levy on real property
2. Judicial remedies (civil or criminal)

NOTE: The remedies of distraint and levy shall NOT be availed of where the amount of tax
involved is not more than P100.

b. PRESCRIPTIVE PERIODS; SUSPENSION OF RUNING OF

STATUTE OF LIMITATIONS

Prescriptive period
GR: The taxes due must be collected within 5 years following the assessment of the tax (Sec.
222(c), NIRC)

XPN:
1. In case of (i) false or fraudulent return with intent to evade tax or of (ii) failure to file
a return, a proceeding in court for the collection of such tax without assessment may
be made within 10 years from discovery of falsity, fraud or omission. (Sec. 222(a),
NIRC)
2. When a waiver of the statute of limitation is executed within the 5-year period,
collection may be made within the period agreed upon (Sec. 222(d), NIRC)

Court proceeding for collection of tax

GR: No proceeding in court without assessment for the collection of taxes may be made
after the 3-year period for making an assessment (Sec. 203, NIRC).

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XPN: A proceeding in court for the collection of such tax may be filed without assessment in
the case of (i) false or fraudulent return with intent to evade tax or of (ii) failure to file a
return (Sec. 222(a), NIRC).

Waiver of prescriptive period

If tax was assessed within the period agreed upon by the CIR and the taxpayer, such tax may
be collected by distraint or levy or by a proceeding in court within the period agreed upon in
writing before the expiration of the 5-yr period (Sec. 222(d), NIRC)

c. ADMINISTRATIVE REMEDIES

i. TAX LIEN

A tax lien is a legal claim or charge on property, whether real or personal, established by law
as a source of security for the payment of tax obligations.

Nature and extent of tax lien

1. When a taxpayer neglects or refuses to pay his internal revenue tax liability after
demand, the amount so demanded shall be a lien in favor of the government from the
time the assessment was made by the CIR until paid with interests, penalties, and
costs that may accrue in addition thereto upon all property and rights to property
belonging to the taxpayer.
2. The lien shall NOT be valid against any mortgagee, purchaser, or judgment creditor
until notice of such lien shall be filed by the CIR in the office of the Register of Deeds
of the province or city where the property of the taxpayer is situated or located (Sec.
219, NIRC)

Seizure under forfeiture vs. seizure to enforce a tax lien

In the former, all the proceeds derived from the sale of the thing forfeited are turned over to
the CIR; in the latter, the residue after payment of taxes and expenses is returned to the owner
of the property.

ii. DESTRAINT AND LEVY

1. Distraint- is a remedy in which the collection of tax is enforced on the 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 (Sec.
205(a), NIRC).

Kinds of Distraint:
1. Constructive Distraint
2. Actual Distraint

Constructive Distraint Actual Distraint

As to Procedure
The BIR does not take physical possession The personal property is actually taken
of the property
As to Basis
Delinquency of the taxpayer is not The taxpayer is already delinquent in the
necessary payment of his taxes

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 As to the Disposition of the Personal Property
The personal property is merely held as The personal property is taken to be sold in
security to answer for any future tax order to satisfy the tax delinquencies.
delinquencies
As to Purpose
The purpose is to protect the government The purpose is to satisfy the tax, expenses
revenues and ensure that there are properties of distraint and the cost of the subsequent
that the government could proceed against sale.
after a determination of the amount of
deficiency taxes.

Grounds for Constructive Distraint: When the taxpayer is:

1. delinquent; or
2. retiring from any business subject to tax; or
3. intending to leave the Philippines; or
4. intending to remove his property from the Philippines or to hide or conceal his
property; or
5. planning to perform any act tending to obstruct the proceedings for collecting the tax
due or which may be due from him (Sec. 206, NIRC)

2. Garnishment- This refers to the taking of personal properties, usually cash or sums of
money, owned by a delinquent taxpayer which is in the possession of a third party (e.g., bank
accounts).

Procedure for actual distraint

1. Commencement of distraint proceedings
The warrant of distraint is issued by:
a. CIR or his duly authorized representative – where the amount involved is
more than P1M
b. Revenue District Officer – where the amount involved is P1M or less (Sec.
207(A), NIRC)
2. Service of warrant of distraint
3. Report on the distraint- A report shall be submitted by the distraining officer to the
Revenue District Officer, and to the Revenue Regional Director within 10 days from
receipt of the warrant.

NOTE: The CIR or his duly authorized representative may, in his discretion, allow
the lifting of the order of distraint (Sec. 207(A), NIRC)

4. Notice of sale of distrained properties

a. A notice of the public sale shall be posted in not less than 2 public places in
the municipality or city (one of which is the Office of the Mayor) where the
distraint was made.
b. The notice shall specify the time and place of the sale.
c. The time of sale shall not be less than 20 days after notice to the owner and the
publication or posting of such notice (Sec. 209, NIRC)

5. Sale at public auction

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 6. Release of the properties from distraint- 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)
7. Purchase by the government at sale upon distraint- If the highest bid 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 CIR or his deputy may purchase the same on behalf of the
National Government for the amount of taxes, penalties and costs due. The property
so purchased may be resold by the CIR or his deputy (Sec. 212, NIRC)
8. Report of sale to CIR- Within 2 days after the sale, the officer making the same shall
make a report of his proceedings in writing to the CIR (Sec. 211, NIRC).

3. Levy on real property- Levy refers to the seizure of real properties and interest in or
rights to such properties for the satisfaction of taxes due from the delinquent taxpayer.

When levy may be made

It can be made before, simultaneously, or after the distraint of personal property (Sec. 207(B),
NIRC)

NOTE: If the warrant of levy is not issued before or simultaneously with the warrant of
distraint, and the proceeds from the sale of the distrained properties are not sufficient to
satisfy the tax delinquency, the CIR or his duly authorized representative shall within 30 days
after execution of the distraint, proceed with the levy on the taxpayer’s real property (Sec.
207(B), NIRC)

Procedure for levy on real property

1. Issuance of warrant of levy
2. Service of written notice
3. Advertisement of the sale
4. Sale of real property
5. Redemption of property sold
6. Final deed of sale to the purchaser
7. Forfeiture in favor of the government

Further distraint or levy

The remedy by distraint of personal property and levy on realty may be repeated if necessary
until the full amount due, including all expenses, is collected. (Sec. 217, NIRC)

Summary
1. Distraint- It is the seizure of personal property, tangible or intangible, by the
government to effect collection of taxes including penalties.
2. Garnishment- It is the taking of personal property, usually cash or sums of money,
owned by the delinquent taxpayer which is in the possession of a third party.
3. Levy of real property- It is the seizure of real property of the taxpayer by the
government in order to enforcement payment of taxes.

iii. FORFEITURE OF REAL PROPERTY

Forfeiture implies a divestiture of property without compensation in consequence of a default

or offense. The effect of forfeiture is to transfer the title of the specific thing from the owner
to the government.

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Instances when forfeiture is appropriate
1. All chattels, machinery, and removable fixtures of any sort used in the unlicensed
production of articles (Sec. 268(B), NIRC)
2. Dies and other equipment used for the printing or making of any internal revenue
stamp, label or tag which is in imitation of or purports to be a lawful stamp, label or
tag (Sec. 268(B), NIRC)
3. Goods subject to excise tax which are illegally stored or removed (Sec. 268(C))
4. Liquor or tobacco shipped or removed under a false name or brand (Sec. 262, NIRC)

Enforcement of forfeitures
1. Forfeiture of chattels and removable fixtures: enforced by the seizure, sale or
destruction of the specific forfeited property
2. Forfeiture of real property: enforced by a judgment of condemnation and sale in a
legal action or proceeding civil or criminal as the case may require [Sec. 224, NIRC]

Resale of real estate taken for taxes

In case of any real estate taken by the government in payment of taxes, penalties or costs or
in compromise or adjustment of any claim, the CIR may:
1. sell the same at a public auction after giving not less than 20 days notice; or
2. dispose of the same at a private sale upon approval of the Secretary of Finance (Sec.
216, NIRC)

iv. SUSPENSION OF BUSINESS OPERATION

In addition to other administrative and penal sanctions, the CIR or his duly authorized
representative may order the suspension or closure of a business establishment for any of the
following violations:
1. Failure to issue receipts and invoices;
2. Failure to file VAT returns as required under Sec. 114 of the NIRC;
3. Understatement of taxable sales or receipts by 30% or more of his correct taxable
sales or receipt for the taxable quarter; (Sec. 115(a), NIRC)
4. Failure of any person to register as required under Sec. 236 of the NIRC, in which
case, the closure shall be for a duration of not less than 5 days and shall be lifted only
upon compliance (Sec. 115(b), NIRC)

v. JUDICIAL REMEDIES

Form and Mode of Proceeding:

Civil and criminal action and proceedings instituted in behalf of the Government under the
authority of this Code or other law enforced by the BIR:
1. shall be brought in the name of the Government of the Philippines;
2. shall be conducted by legal officers of the BIR; and
3. shall be filed in court only with the approval of the CIR.(Sec. 220, NIRC)

Civil Action
Two ways by which civil liability is enforced:
1. By filing a civil case for the collection of sum of money with the proper regular court;
and
2. By filing an answer to the petition for review filed by the taxpayer with the CTA

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Criminal Action
Any person convicted of a crime under the NIRC shall:
1. be liable for the payment of the tax, and
2. be subject to the penalties imposed under the NIRC (Sec. 253(a), NIRC).

Prescriptive period for criminal action

All violations of any provision of the NIRC shall prescribe after 5 years:
1. from the day of the commission of the violation, or
2. if not known at the time, from the discovery thereof and the institution of judicial
proceedings for its investigation and punishment (Sec. 281, NIRC).

When prescription is interrupted

1. when proceedings are instituted against the guilty persons and the period shall run
again if the proceedings are dismissed for reasons not constituting jeopardy; or
2. when the offender is absent from the Philippines.

Assessment not necessary before filing a criminal charge for tax evasion
An assessment is not necessary before a criminal charge can be filed. The criminal charge
need only be proved by a prima facie showing of a willful attempt to file taxes, such as
failure to file a required tax return.

Payment of tax not a defense

Payment of the tax due after a criminal case has been filed shall not constitute a valid defense
in any prosecution for violation of the provisions under the NIRC (Sec. 253(a), NIRC).

Liability of person who aids or abets

Any person who willfully aids or abets in the commission of a crime penalized under the
NIRC or who causes the commission of any such offense by another shall be liable in the
same manner as the principal (Sec. 253(b), NIRC).

d. NO INJUNCTION RULE; EXCEPTIONS

GR: 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)
XPN: When in the opinion of the CTA, the collection of tax may jeopardize the interest of
the government and/or the taxpayer, the CTA may suspend said collection and require the
taxpayer to deposit the amount claimed or file a surety bond.

4. CIVIL PENALTIES
a. DELINQUENCY INTEREST AND DEFICIENCY INTEREST

Interest- In general, interest is assessed and collected on any unpaid amount of tax at the rate
of 12% or double the legal interest rate for loans or forbearance of any money as set by the
BSP from the date prescribed for payment until the amount is fully paid (Sec. 249(A), NIRC).

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NOTE: The rate of interest per BSP Circular No. 799 series of 2013 for loans or forbearance
of any money in the absence of an express stipulation is 6%. Thus, the interest rate imposable
shall be 12%.

1. Deficiency Interest – Interest at the rate of 12% per annum on any deficiency tax due,
which interest shall be assessed and collected from the date prescribed for its payment until:
(a) full payment thereof; or (b) upon issuance of a notice and demand by the CIR or his
authorized representative, whichever comes first (Sec 249(B), NIRC)

2. Delinquency interest – Interest at the rate of 12% per annum on the unpaid amount in
case of failure to pay:
1. the amount of the tax due on any return required to be filed; or
2. the amount of the tax due for which no return is required; or
3. a deficiency tax, or any surcharge or interest thereon on the due date appearing in the
notice and demand of the CIR or his authorized representative until the amount is
fully paid, which interest shall form part of the tax (Sec. 249(C), NIRC).

b. SURCHARGE

This is a civil penalty imposed in addition to the tax required to be paid (Sec. 248, NIRC)

Rates of Surcharges (25% or 50%)

1. 25% of the amount due in the following:
a. Failure to file any return and pay the tax due on the prescribed date; or
b. Filing a return with an internal revenue officer other than those with whom the
return is required to be filed, unless the CIR authorizes otherwise; or
c. Failure to pay the deficiency tax within the time prescribed for its payment in
the notice of assessment; or
d. Failure to pay the full or part of the amount of tax due on or before the date
prescribed for its payment (Sec. 248(A), NIRC)

2. 50% of the tax or of the deficiency tax in case any payment has been made, in the
following cases:
a. Willful neglect to file the return within the prescribed period; or
b. A false or fraudulent return is willfully made (Sec. 248(B), NIRC)

Prima facie evidence of a false or fraudulent return

1. Substantial under declaration of sales, receipts or income – failure to report sales,
receipts or income in an amount exceeding 30% of that declared per return
2. Substantial overstatement of deductions – a claim of deductions in an amount
exceeding 30% of actual deductions (Sec. 248(B), NIRC)

c. COMPROMISE PENALTY

A compromise penalty is an amount of money paid by a taxpayer to compromise a tax

violation that he has committed, instead of the BIR instituting a criminal action against the
taxpayer. A compromise is consensual in character, hence, may not be imposed on the
taxpayer without his consent.

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NOTE: All criminal violations may be compromised except: (a) those already filed in court,
or (b) those involving fraud.

d. FRAUD PENALTY

Fifty percent (50%) of the tax or of the deficiency tax xxx

Failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that
declared per return, and a claim of deductions in an amount exceeding (30%) of actual
deductions, shall render the taxpayer liable for substantial under-declaration of sales, receipts
or income or for overstatement of deductions, as mentioned herein (Sec. 248 (B), NIRC)

III. LOCAL TAXATION

A. LOCAL GOVERNMENT TAXATION

1. FUNDAMENTAL PRINCIPLES
1. Taxation shall be uniform in each local government unit (LGU);
2. Taxes, fees, charges and other impositions shall:
a. be equitable and based as far as practicable on the taxpayer's ability to pay;
b. be levied and collected only for public purposes;
c. NOT be unjust, excessive, oppressive, or confiscatory;
d. NOT be Contrary to law, public policy, national economic policy, or in
restraint of trade;
3. The collection of local taxes, fees, charges and other impositions shall NOT be left to
any private person;

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 4. The revenue collected shall inure solely to the benefit of, and be subject to the
disposition by, the LGU levying the tax, fee, charge or other imposition, unless
otherwise specifically provided herein; and,
5. Each LGU shall, as far as practicable, evolve a progressive system of taxation (Sec.
130, LGC)

2. NATURE AND SOURCE OF TAXING POWER

Nature of the taxing power of LGUs
1. Not inherent – Municipal corporations, being mere creatures of law, may exercise the
power to tax only if delegated to them by the national legislature or conferred to them
by the Constitution. The 1987 Constitution directly grants LGUs the power to tax.
2. Limited – The taxing power of LGUs is not absolute because it is subject to such
guidelines and limitations that Congress may provide (Sec. 5, Art. X, Constitution)
3. Legislative in nature – The power to impose taxes is vested solely in the legislative
body (i.e., the Sanggunian) of each LGU.
4. Territorial – It can only be exercised within the territorial jurisdiction of each LGU.

a. GRANT OF LOCAL TAXING POWER UNDER THE LOCAL

GOVERNMENT CODE

1. Each LGU 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 (Sec. 5, Art. X, 1987
Constitution)
2. Each LGU shall exercise its power to create its own sources of revenue and to levy
taxes, fees, and charges subject to the provisions herein, consistent with the basic
policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the
LGUs. (Sec. 129, LGC)

Local Taxing Authority

The power to impose a tax, fee, or charge, or to generate revenue under the LGC shall be
exercised by the Sanggunian of the LGU concerned through an appropriate ordinance
(Sec. 132, LGC).
1. Sangguniang Panlalawigan for the province;
2. Sangguniang Panlungsod for the city;
3. Sangguniang Bayan for the municipality;
4. Sangguniang Barangay for the barangay (Sec. 48, LGC)

NOTE: The exercise of the power to tax by the local legislative assembly is subject to the
veto power of the local chief executive (Sec. 55, LGC).

b. AUTHORITY TO PRESCRIBE PENALTIES FOR TAX VIOLATIONS

1. The sanggunian of an LGU is authorized to prescribe fines or other penalties for

violation of tax ordinances
a. in no case shall such fines be less than P1,000 nor more than P5,000,
b. nor shall imprisonment be less than 1 month nor more than 6 months.

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 2. Such fine or other penalty, or both, shall be imposed at the discretion of the court.
3. The Sangguniang Barangay may prescribe a fine of not less than P100 nor more than
P1,000 (Sec. 516, LGC).

c. AUTHORITY TO GRANT LOCAL TAX EXEMPTIONS

LGUs may, through ordinances, grant tax exemptions, incentives, or reliefs under such terms
and conditions as they may deem necessary (Sec. 192, LGC)

d. WITHDRAWAL OF EXEMPTIONS

Local tax exemptions, in general

GR: Unless otherwise provided, tax exemptions or incentives granted to, or presently enjoyed
by all persons, whether natural or judicial, including government- owned or controlled
corporations are withdrawn upon the effectivity of the LGC (Sec. 193, LGC).

XPNs: Tax exemptions not withdrawn

1. Local water districts
2. Cooperatives duly registered under RA 6938 (Cooperative Code of the Philippines),
3. Non-stock and non-profit hospitals and educational institutions (Sec. 193, LGC)

NOTE: The LGC took effect on January 1, 1992.

Sec. 193 is an express and general repeal of all statutes granting exemptions from local taxes.
It withdrew the sweeping tax privileges previously enjoyed by private and public
corporations.

e. AUTHORITY TO ADJUST LOCAL TAX RATES

LGUs shall have the authority to adjust the tax rates NOT oftener than once every 5 years,
but in no case shall the adjustment exceed 10% of the rates fixed by the LGC (Sec. 191,
LGC).

f. RESIDUAL TAXING POWER OF LOCAL GOVERNMENTS

LGUs may exercise the power to levy taxes, fees, or charges on ANY base or subject not
otherwise specifically enumerated in the LGC or taxed under the NIRC or other applicable
laws.

Limitations on the taxing power of LGUs

1. NOT unjust, excessive, oppressive, confiscatory, or contrary to declared national
policy (Sec. 186, LGC);
2. Pursuant to an ordinance enacted after a public hearing conducted for the purpose
(Sec. 186, LGC);
3. Subject to the constitutional limitations on the power to tax and the common
limitations on the taxing power of LGUs as provided under Section 133 of the LGC;
and
4. The principle of preemption.

Principle of preemption or exclusionary doctrine

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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.

3. SCOPE OF TAXING POWER

LGU Scope of Taxing Power
Province Except as otherwise provided in the LGC, a province may levy only
the following taxes, fees, and charges (Sec. 134, LGC):
1. Transfer of real property ownership (Sec. 135, LGC)
2. Business of printing and publication (Sec. 136, LGC)
3. Franchise tax (Sec. 137, LGC)
4. Tax on sand, gravel and other quarry resources (Sec. 138,
LGC)
5. Professional tax (Sec. 139, LGC)
6. Amusement tax (Sec. 140, LGC)
7. Annual fixed tax for every delivery truck or van (Sec. 141,
LGC)
Municipality May levy taxes, fees and charges not otherwise levied by provinces
(Sec. 142, LGC)
City May levy taxes, fees and charges which the province or municipality
may impose (Sec. 151, LGC)
Barangay May levy only:
1. Taxes on stores or retailers
2. Service fees or charges
3. Barangay clearance
4. Other fees and charges (Sec. 152, LGC)

4. SPECIFIC TAXING POWER OF LOCAL GOVERNMENT

UNITS
Specific Taxes
Tax on Transfer of Real Property
Tax on Business of Printing and Publication
Franchise Tax
Tax on Sand, Gravel and other Quarry
Resources
Professional Tax (Sec. 139, LGC)
Amusement Tax (Sec. 140, LGC)
Annual Fixed Tax for Every Delivery Truck
or Van of Manufacturers or Producers,
Wholesalers of, Dealers, or Retailers in,
Certain Products (Sec. 141, LGC)
Tax on Business (Sec. 143, LGC)
Province Municipality City Barangay
/ /
/ /
/ /
/ /
/ /
/ /
/ /
/ /

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Fees and Charges on Regulation/Licensing / /
of Business or Occupation, or Practice of
Profession (Sec. 147, LGC)
Fees for Sealing and Licensing of Weights / /
and Measures (Sec. 148, LGC)
Fishery Rentals, Fees and Charges (Sec. / /
149, LGC)
Community Tax (Sec. 156, LGC) / /
Tax on Small-scale Stores/Retailers (Sec. /
152(a), LGC)
Service Fees or Charges on the Regulation /
or Use of Barangay-owned Properties (Sec.
152(b), LGC)
Barangay Clearance (Sec. 152(c), LGC) /
Other Fees and Charges (on commercial /
breeding of fighting cocks, cockfights,
cockpits; places of recreation which charge
admission fees; outside advertisements)
(Sec. 152(d), LGC)
Reasonable Fees and Charges for Services /
Rendered (Sec. 153, LGC)
Public Utility Charges (Sec. 154, LGC) / / / /
Toll Fees or Charges (Sec. 155, LGC) / / / /
Real Property Tax (see separate discussion / / /
on Real Property Taxation) (w/in Metro
Manila)

TAXING POWERS OF PROVINCES

Transaction Taxed Tax Rate and Tax Exemptions Other

Base
Tax on Transfer of Real Property
Imposed on the sale, Tax Rate: Not more Sale, transfer, or other Person Liable: seller,
donation, barter, or than 50% of 1% disposition of real donor, transferor,
any other mode of property pursuant to executor or
transfer of ownership Tax Base: Total RA 6657 administrator
or title to real property acquisition price or (Comprehensive
(Sec 135, LGC) fair market value if Agrarian Reform Law) Time of Payment:
monetary Within 60 days from
consideration is not the date of execution
substantial, whichever of deed or from the
is higher. date of decedent's
death

NOTE: Evidence of
payment of tax must
be presented to the
Register of Deeds
before registration,

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 and to the provincial
assessor before
cancellation of an old
tax declaration.
Tax on Business of Printing and Publication
Imposed on the Tax Rate: Not Receipts from printing
business of persons exceeding 50% of and/or publishing of
engaged in the 1% books and other
printing, and/or reading materials
publication of books, Tax Base: Gross prescribed by the
cards, posters, leaflets, annual receipts for Department of
handbills, certificates, the preceding calendar Education as school
receipts, pamphlets, year texts or references
and others of similar
nature In the case of a newly
started business:
1. Tax Rate: Not
exceeding 1/20 of 1%
2. Tax Base: Capital
investment
Franchise Tax
Imposed on businesses Tax Rate: Not No exception Franchise tax is a tax
enjoying a franchise exceeding 50% of 1 on the privilege of
(Sec 137, LGC) Notwithstanding any transacting business in
Tax Base: Gross exemption granted by the state and
annual receipts for any law or other exercising corporate
the preceding calendar special law, the franchises granted by
year based on the province may impose a the state. It is not
incoming receipt, or tax on businesses levied on the
realized, within its enjoying a franchise corporation simply for
territorial jurisdiction (Sec. 137, LGC). existing as a
corporation.
In the case of a newly
started business: Requisites to be
1. Tax Rate: Not covered by franchise
more tax:
than 1/20 of 1% 1. that one has a
2. Tax Base: Capital franchise in the sense
investment of a secondary or
special franchise; and
2. that it is exercising
its rights or privileges
under this franchise
within the territory of
the concerned LGU.
Tax on Sand, Gravel, and Other Quarry Resources
Levied on ordinary Tax Rate: Not more Who issues permit to
stones, gravel, earth than 10% extract: issued
and other quarry exclusively by the
resources, as defined Tax Base: Fair market provincial governor
in the NIRC, extracted value in the locality pursuant to an
from public lands or per cubic meter of the ordinance by the
from the beds of seas, extracted resources. Sangguniang
lakes, rivers, streams, Panlalawigan

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creeks, and other
public waters within Distribution of
its territorial proceeds:
jurisdiction (Sec. 138, 1. Province - 30%
LGC) 2. Component
municipality resources
extracted - 30%
3. Barangay where
resources were
extracted - 40%
Professional Tax
Exercise or practice of Tax Rate: Not to Professionals Place of payment: To
profession requiring exceed P300 exclusively employed the province where the
government by the government profession is practiced,
examination (Sec 139, Tax Base: At such or where the principal
LGC) amount and office is maintained
reasonable
NOTE: A person who classification Time of payment:
has paid the determined by the Payable annually, on
professional tax is Sangguniang or before January 31
entitled to practice his Panlalawigan or before beginning
profession anywhere the practice of
in the country without profession
being subjected to
similar taxes for the Employers shall
practice of such require payment of
profession. professional tax before
employment and
annually thereafter.
Amusement Tax
Collected from Tax Rate: Not more Holding of operas, NOTE: In case of
proprietors, lessees, or than 10% concerts, dramas, theaters or cinemas,
operators of theaters, recitals, paintings, and tax shall first be
cinemas, concert Tax Base: Gross art exhibitions, flower deducted and withheld
halls, circuses, receipts from shows, musical by their proprietors,
boxing stadia, and admission fees programs, literary and lessees and operators
other places of oratorical before the gross
amusement (Sec 140, presentations receipts are divided
LGC) among them.
XPN to the XPN
Not subject to (taxable): Pop, rock, or Distribution of
amusement tax similar concerts proceeds: Shared
under the LGC: equally by the
1. Resorts, swimming province and the
pools, bath houses, hot municipality where
springs, and tourist amusement places are
spots located.
2. Professional
basketball games
3. Golf courses
4. Those subject to
amusement tax under
Sec. 125 of the NIRC
Tax on Delivery Truck/ Van

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 Imposed on vehicles Tax Rate: Not Such manufacturers,
used by exceeding P500 producers,
manufacturers, wholesalers, dealers
producers, Tax Base: Every and retailers shall be
wholesalers, dealers or truck, van, or vehicle EXEMPT from the tax
retailers in the on peddlers.
delivery or distribution
of distilled spirits,
fermented liquors, soft
drinks, cigars and
cigarettes, and other
products, as may be
determined by the
Sangguniang
Panlalawigan, to sales
outlets, or consumers
in the province,
whether directly or
indirectly (Sec 141,
LGC)

TAXING POWERS OF MUNICIPALITIES

Scope of taxing power: Municipalities may levy taxes, fees, and charges NOT otherwise
levied by provinces (Sec. 142, LGC).

Tax on Various Types of Businesses (Sec. 143, LGC)

Businesses Taxed Rate/Amount and Base Other Information
Manufacturers, assemblers, Tax Rate: From P165 to
repackers, processors, P24,375 per annum or at a rate
brewers, distillers, rectifiers, not exceeding 37.5 % of 1%
and compounders of liquors,
distilled spirits, and wines or Tax Base: Gross sales or
manufacturers of any article of receipts for the preceding
commerce of whatever kind or calendar year
nature (Sec. 143(a), LGC)
Wholesalers, distributors, or Tax Rate: From P18 to “Wholesale” means a sale
dealers in any article of P10,000 or at a rate not where the purchaser buys or
commerce of whatever kind or exceeding 50% of 1% imports the commodities for
nature (Sec. 143(b), LGC) resale to persons other than the
Tax Base: Gross sales or end user regardless of the
receipts for the preceding quantity of the transaction.
calendar year
“Dealer” means one whose
business is to buy and sell
merchandise, goods, and
chattels as a merchant. He
stands immediately between
the producer or manufacturer
and the consumer.
Exporters and manufacturers, Not exceeding 1⁄2 of rates Essential Commodities:
millers, producers, wholesalers, prescribed under Sec. 143 (a), 1. Rice and corn
distributor, dealers or retailers (b) and (d) of the LGC (on 2. Wheat or cassava flour,
of essential commodities manufacturers; wholesalers, meat,

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enumerated below: (Sec.distributors and dealers; and dairy products, locally
143(c), LGC) retailers, respectively) manufactured, processed or
preserved food, sugar, salt, and
other agricultural, marine, and
freshwater products, whether
in
their original state or not
3. Cooking oil and cooking gas
4. Cement
5. Laundry soap, detergents,
and
medicine
6. Agricultural implements,
Equipment and post-harvest
facilities, fertilizers, pesticides,
insecticides, herbicides and
other farm inputs
7. Poultry feeds and other
animal feeds
8. School supplies (Sec.
143(c), LGC)
Retailers (Sec. 143(d), LGC) Tax Rate: From P27.50 to “Contractor” includes
P11,500 or at a rate not persons, natural or juridical,
exceeding 50% of 1% not subject to professional tax
under Sec. 139 of the LGC,
Tax Base: Gross sales or whose activity consists
receipts for the preceding essentially of the sale of all
calendar year kinds of services for a fee,
regardless of whether or not
the performance of the service
calls for the exercise or use of
the physical or mental faculties
of such contractor or his
employees. (Sec. 131(h), LGC)
Banks and other financial Tax Rate: Not exceeding 50% NOTE: All other income and
institutions (Sec. 143(f), LGC) of 1% receipts of banks and other
financial institutions not
Tax Base: Gross receipts of otherwise enumerated herein
the preceding calendar year shall be excluded from the
derived from interest, taxing authority of the LGU
commissions and discounts concerned. (Art. 232(f), LGC
from lending activities, income IRR)
from financial leasing,
dividends, rentals on property
and profit from exchange or
sale of property, insurance
premium
Peddlers engaged in the sale of Tax Rate and Base: Not “Peddler” means any person
any merchandise or article of exceeding P50 per peddler who, either for himself or on
commerce (Sec. 143(g), LGC) annually commission, travels from place
to place and sells his goods or
offers to sell and deliver the
same (Sec. 131(t), LGC)
Any other business which the Tax Base: Gross sales or NOTE: This is a catch-all

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 Sanggunian concerned may receipts provision.
deem proper to tax (Sec.
143(h), LGC) Tax Rate: The Sanggunian XPN: Any business engaged in
may prescribe a schedule of the production, manufacture,
graduated rates but in no case refining, distribution or sale
to exceed the rates prescribed of oil, gasoline, and other
herein. petroleum products shall not
be subject to any local tax
NOTE: For any business imposed under Sec. 143 of
subject to excise, value-added the LGC.
or percentage tax under the
NIRC, the rate of tax shall not
exceed 2% of gross sales or
receipts of the preceding
calendar year.

Rules on payment of business tax

1. Taxes imposed under Sec. 143 of the LGC shall be paid for every separate or distinct
establishment or place where business subject to tax is conducted.
2. One line of business is not exempted by being conducted with some other businesses
for which such tax has been paid.
3. The tax on a business must be paid by the person conducting it.
4. If a person operates 2 or more businesses mentioned in Sec. 143, the tax shall be
computed:
a. on the combined total gross sales or receipts, if they are subject to the same tax
rate
b. separately based on the gross sales or receipts of each business, if they are
subject to different tax rates (Sec. 146, LGC)

NOTE: Condominium corporations are not business entities, and are thus not subject to
local business tax. Even though the corporation is empowered to levy assessments or dues
from the unit owners, these amounts are not intended for the incurrence of profit by the
corporation, but to shoulder the multitude of necessary expenses for maintenance of the
condominium (Yamane v. BA Lepanto Condominium Corp., G.R. No. 154993 (2005)).

Situs of business tax

Rule 1: In case of persons maintaining/operating a branch or sales outlet making the sale or
transaction, the sale shall be recorded in said branch or sales outlet and the tax paid to the
municipality/city where the branch or sales outlet is located (Sec. 150(a), LGC)

Rule 2: Where there is NO branch or sales outlet in the city/municipality where the sale is
made, the sale shall be recorded in the principal office and the tax shall be paid to such
city/municipality. (Sec. 150(a), LGC)

Rule 3: In the case of manufacturers, assemblers, contractors, producers, and exporters

having factories, project offices, plants, and plantations, proceeds shall be allocated as
follows:
1. 30% of sales recorded in the principal office shall be taxable by the city/municipality
where the principal office is located; and
2. 70% shall be taxable by the city/municipality where the factory, project office, plant,
or plantation is located (Sec. 150(b), LGC)

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Rule 4: In case the plantation is located in a place other than the place where the factory is
located, the 70% in Rule 3 will be divided as follows:
1. 60% to the city/municipality where the factory is located; and
2. 40% to the city/municipality where the plantation is located (Sec. 150(c), LGC)

Rule 5: In case of 2 or more factories, project offices, plants or plantations in different

localities, the 70% shall be prorated among the localities where they are located in proportion
to their respective volumes of production (Sec. 150(d), LGC)

TAXING POWERS OF CITIES

Scope of taxing power: The city may levy taxes, fees, charges which the province or
municipality may impose.
1. Those levied and collected by highly urbanized and independent component cities
shall accrue to them and distributed according to the provisions of the LGC.
2. Rates of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than 50%. (Sec. 151, LGC)

XPN: Rates of professional and amusement taxes (Sec. 151, LGC)

TAXING POWERS OF BARANGAYS

The following shall accrue exclusively to the barangays:

1. Taxes on stores or retailers with fixed business establishments with gross sales or
receipts for the preceding calendar year of P50,000 or less in case of cities, and
P30,000 or less in case of municipalities (Sec. 152(a), LGC).
a. Tax Rate: not greater than 1%
b. Tax Base: gross sales or receipts

2. Service fees or charges- Barangays may collect reasonable fees or charges for
services rendered in connection with the regulation or the use of barangay-owned
properties or facilities (Sec. 152(a), LGC).
3. Barangay clearance – A city or municipality cannot issue a permit for business
without a clearance from the barangay concerned. The sangguniang barangay may
impose a reasonable fee on the clearance (Sec. 152(c), LGC)
4. Reasonable fees and charges:
a. on commercial breeding of fighting cocks, cockfights and cockpits;
b. on places of recreation which charge admission fees; and
c. on billboards, signboards, neon signs, and outdoor advertisements (Sec.
152(d), LGC)

5. COMMON REVENUE RAISING POWERS

2. Service fees and charges
LGUs may impose and collect such reasonable fees and charges for services rendered
(Sec. 153, LGC)
2. Public utility charges
LGUs may fix the rates for the operation of public utilities owned, operated and
maintained by them within their jurisdiction (Sec. 154, LGC)

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 2. Toll fees or charges
a. The Sanggunian 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 LGU concerned.
b. The Sanggunian may discontinue the collection of the tolls when public safety
and welfare so requires.
c. No toll fees or charges shall be collected from:
i. Officers and enlisted men of the AFP and members of the PNP on
mission
ii. Post office personnel delivering mail
iii. Persons who are physically handicapped
iv. Disabled citizens who are 65 years or older (Sec. 155, LGC)

6. COMMUNITY TAX
Who may levy Cities or municipalities
(Sec. 156, LGC)
Persons Liable 1. Individuals who are:
(Sec. 157 &158, LGC) a. Inhabitants of the Philippines
b. 18 years of age or over
c. Either:
i. Regularly employed on a wage or salary basis for
at least 30 consecutive working days during any
calendar year, or
ii. Engaged in business or occupation, or
iii. Owns real property with an aggregate assessed
value of P1,000 or more, or
iv. Is required by law to file an income tax return
2. Juridical Persons
a. Every corporation no matter how created or organized
b. Whether domestic or resident foreign
c. Engaged in or doing business in the Philippines
Rates 1. Individuals
(Sec. 157 & 158, LGC) a. Annual community tax of P5.00 PLUS annual additional
tax of P1.00 per P1,000 of income regardless of whether
from business, exercise of profession or property, but
which shall not exceed P5,000
b. Husband and wife shall pay a basic tax of P5.00 each
PLUS an additional tax of P1.00 for every P1,000 of
income based on the total property owned by them and/or
the total gross receipts or earnings derived by them (Art.
246(b)(2), LGC IRR)

2. Juridical Persons
a. Annual community tax of P500 PLUS annual additional
tax, which shall not exceed P10,000 according to the
following schedule:
i. P2.00 for every P5,000 worth of real property in
the Philippines owned during the preceding year,
based on the assessed value used for the payment
of the real property tax; and
ii. P2.00 for every P5,000 of gross receipts or

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 earnings derived from business in the Philippines
during the preceding year.
b. Dividends received by a corporation from another
corporation shall be deemed part of the gross receipts or
earnings for purposes of computing additional tax.
Persons Exempt 1. Diplomatic and consular representatives
(Sec. 159, LGC) 2. Transient visitors who stay in the Philippines for not more
than 3 months
Place of Payment Where individual resides, or where the principal office of the juridical
(Sec. 160, LGC) entity is located

NOTE: In case of branch, sales office or warehouse where sales are

made and recorded, corresponding community tax shall be paid to the
LGU where such branch, sales office, or warehouse is located (Art.
246(e)(3), LGC IRR)
Time of Payment Accrues on January 1 of each year to be paid not later than the last
(Sec. 161, LGC) day of February of each year

1. If a person reaches 18 years of age or otherwise loses the

benefit of exemption:
a. on or before June 30 – he shall be liable on the day he
reaches such age or upon the day the exemption ends;
b. on or before March 31 – he shall have 20 days to pay
without being delinquent.
2. If a person comes to reside in the Philippines, or reaches 18
years old, or ceases to belong to an exempt class on or after
July 1, he shall not be subject to community tax for that year.
3. If a corporation is established and organized:
a. on or before June 30 – it shall be liable to community tax
for that year
b. on or before March 31 – it shall have 20 days to pay
without becoming delinquent
c. on or after July 1 – it shall not be subject to community
tax for that year
Penalty If unpaid within the prescribed period, an interest of 24% per annum
(Sec. 161, LGC) shall be added from the due date until payment.

Community Tax Certificate (CTC)

It is issued to every person or corporation upon payment of the community tax. It may also be
issued to any person or corporation not subject to the community tax upon payment of P1.00.
(Sec. 162, LGC)

Presentation of CTC is necessary when an individual subject to community tax:

1. acknowledges any document before a notary public;
2. takes the oath of office upon election or appointment to any position in the
government service;
3. receives any license, certificate, or permit from any public authority;
4. pays any tax or fee;
5. receives any money from any public fund
6. transacts other official business; or
7. receives any salary or wage from any person or corporation (Sec. 163(a), LGC)

NOTE: Presentation of CTC is not needed in the registration of a voter (Sec. 163(a), LGC)

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7. COMMON LIMITATIONS ON THE TAXING POWERS OF
LOCAL GOVERNMENT UNITS
Unless otherwise provided, the following CANNOT be levied by the local governments:
1. Income tax, except when levied on banks and other financial institutions under Sec.
143(f) of the LGC;
2. Documentary stamp tax;
3. Taxes on Estate, inheritance, gifts, legacies and other acquisitions mortis causa;
XPN: Tax on transfer of real property
4. Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues,
and all other kinds of customs fees, charges and dues;
XPN: wharfage on wharves constructed and maintained by the LGU concerned
5. Taxes, fees or charges on goods carried into or out of, or passing through, the
territorial jurisdictions of LGUs in the guise of charges for wharfage, tolls for bridges
or otherwise, or other taxes, fees, or charges in any form;
6. Taxes, fees or charges on Agricultural and aquatic products when sold by marginal
farmers or fishermen;
7. Taxes on business enterprises certified to by the Board of Investments as Pioneer or
non-pioneer for a period of 6 and 4 years, respectively from the date of registration;
8. Excise taxes on articles enumerated under the NIRC, as amended, and taxes, fees or
charges on petroleum products;
9. Percentage or VAT on sales, barters or exchanges or similar transactions on goods or
services except as otherwise provided herein;
10. Taxes on the gross receipts of:
a. Transportation contractors and
b. persons engaged in the transportation of passengers or freight by hire and
c. common carriers by air, land or water
11. Taxes on premiums paid by way of reinsurance or retrocession;
12. 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;
13. Taxes, fees, or other charges on Philippine products actually exported;
14. Taxes, fees, or charges on Countryside and Barangay Business Enterprises and
cooperatives duly registered under RA 6810 (Magna Carta for Countryside and
Barangay Business Enterprises) and RA 6938 (Cooperative Code of the Philippines),
respectively; and
15. Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and LGUs (Sec. 133, LGC).

8. REQUIREMENTS FOR A VALID TAX ORDINANCE

Local tax ordinance
The power to impose a tax, fee, or charge or to generate revenue under the LGC shall be
exercised by the Sanggunian concerned through an appropriate ordinance (Sec. 132, LGC)

Tests of a valid ordinance:

1. It must not contravene the Constitution or any statute
2. It must not be unfair or oppressive;
3. It must not be partial or discriminatory;

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 4. It must not prohibit but may regulate trade;
5. It must be general and consistent with public policy; and
6. It must not be unreasonable

NOTE: An ordinance is presumed valid unless declared otherwise by a court in an

appropriate proceeding.

9. TAXPAYER’S REMEDIES
a. PROTEST

Protest- The taxpayer may file a written protest with the local treasurer within 60 days from
receipt of the notice of assessment; otherwise it shall become final and executory.

Decision- The local treasurer shall decide the protest within 60 days from the time of its
filing.
1. If found to be wholly or partly meritorious, a notice cancelling wholly or partially
the assessment will be issued.
1. If denied or when the 60-day period already lapsed, the taxpayer shall have 30
days thereafter to appeal with the court of competent jurisdiction; otherwise, the
assessment becomes conclusive and unappealable (Sec. 195, LGC)

Court of competent jurisdiction

1. Depending on the amount involved, the taxpayer may appeal the decision of the local
treasurer to the MTC, MeTC, MCTC or the RTC in the exercise of its original
jurisdiction.
2. Local tax cases decided by the MTC, MeTC and MCTC may be appealed to the RTC
in the exercise of its appellate jurisdiction.
3. Said cases decided by the RTC in its original or appellate jurisdiction may be elevated
to the CTA.

b. REFUND

Requisites:
1. A written claim for refund or credit must be filed with the local treasurer; and
2. The case or proceeding must be filed in court within 2 years from the payment of
tax or from the date the taxpayer became entitled to refund or credit (Sec. 196, LGC)

c. ACTION BEFORE THE SECRETARY OF JUSTICE

Any question on the constitutionality or legality of tax ordinances or revenue measures

may be raised on appeal to the Secretary of Justice (Sec. 187, LGC)

Procedure:
1. Appeal must be made to the Secretary of Justice within 30 days from effectivity of
the ordinance.
2. The Secretary must render a decision within 60 days from receipt of the appeal.

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 NOTE: The appeal shall not suspend the effectivity of the ordinance and the accrual
and payment of the tax, fee or charge levied therein.
3. Within 30 days after receipt of the decision or the lapse of the 60-day period without
any action from the Secretary of Justice, the aggrieved party may file appropriate
proceedings with a court of competent jurisdiction (Sec. 187, LGC).

NOTE: The 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. There is no need
for a written protest when disputing an ordinance.
10. ASSESSMENT AND COLLECTION OF LOCAL TAXES
a. REMEDIES OF LOCAL GOVERNMENT UNITS

1. Local Government’s Lien

Local taxes, fees, charges and other revenues constitute a lien, superior to all liens or
encumbrances in favor of any person, enforceable by administrative or judicial action (Sec.
173, LGC)

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).

2. Civil Remedies, in General

1. Administrative action

Distraint Of Personal Property

Subject of distraint: 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 (Sec. 174(a), LGC)

Procedure:
1. Seizure of personal property
2. Accounting of distrained goods
3. Publication of time and place of sale and the articles distrained
4. Release of distrained property upon payment prior to sale
5. Sale of the goods or effects distrained at public auction.
NOTE: If the property distrained is not disposed of within 120 days from the date
of distraint, the same shall be considered as sold to the LGU for the amount of the
assessment made (Sec. 175(e), LGC)
6. Disposition of proceeds (Sec. 175, LGC)

Levy On Real Property

Subject of Levy: real property and interest in or rights to real property

Procedure
2. After expiration of the time for payment of delinquent tax, fee or charge, real
property may be levied on before, simultaneously, or after the distraint of personal
property.
2. Preparation of a duly authenticated certificate by the local treasurer effecting the
levy and showing:
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 a. the name of the taxpayer,
b. the amount of the tax, fee or charge, and penalty due, and o the description
of the property.
c. Service of written notice of levy to the assessor, Register of Deeds, and the
delinquent taxpayer (or his agent if he be absent from the Philippines, or if
none, to the occupant of the property in question)
d. Annotation of the levy on the tax declaration and the certificate of title
e. Report on any levy to be submitted to the Sanggunian within 10 days after
receipt of warrant (Sec. 176, LGC)
f. Advertisement of the sale or auction shall be held within 30 days after the
levy.
g. Before the date of sale, the taxpayer may stay the proceedings by paying
the taxes, fees, charges, penalties and interests.
h. Sale of the subject property (Sec. 178, LGC)
i. Redemption of property sold within 1 year from date of sale (Sec. 179,
LGC)
j. If not redeemed, the local treasurer shall execute a deed conveying the
property to the purchaser (Sec. 180, LGC)

Further distraint or levy

The remedies of distraint or levy may be repeated if necessary until the full amount
due, including all expenses, is collected (Sec. 184, LGC)

NOTE: In case the levy is not issued before or simultaneously with the warrant of
distraint, and the personal property of the taxpayer is not sufficient to satisfy his
delinquency, the local treasurer shall within 30 days after execution of the distraint,
proceed with the levy on the taxpayer's real property (Sec. 176, LGC).

Property exempt from distraint or levy

1. Tools and implements necessarily used by the taxpayer in his trade or employment
2. One horse, cow, carabao, or other Beast of burden, such as the delinquent
taxpayer may select and necessarily used by him in his ordinary occupation
3. His necessary clothing, and that of all his family
4. Household furniture and Utensils necessary for housekeeping and used for that
purpose by the delinquent taxpayer, such as he may select, of a value not
exceeding P10,000
5. Provisions, including crops, actually provided for individual or family use
sufficient for 4 months
6. The professional Libraries of doctors, engineers, lawyers and judges
7. One Fishing boat and net, not exceeding the total value of P10,000 by the lawful
use of which a fisherman earns his livelihood
8. Any material or Article forming part of a house or improvement of any real
property (Sec. 185, LGC)

Penalty on local treasurer for failure to issue and execute warrant of distraint or levy
Automatic dismissal from service after due notice and hearing (Sec. 177, LGC)

2. Judicial Action

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 The LGU may enforce the collection of delinquent taxes, fees, charges or other
revenues by civil action in any court of competent jurisdiction within 5 years from
the date they became due (Secs. 183 and 194, LGC).

NOTE: Either of these remedies (administrative or judicial action) or all may be

pursued concurrently or simultaneously at the discretion of the LGU concerned
(Sec. 174, LGC).

Injunction against collection of local taxes

The LGC does not contain a provision prohibiting courts from enjoining the collection
of local taxes. Such lapse may have allowed preliminary injunction under Rule 58
of the Rules of Court where local taxes are involved (Angeles City v. Angeles City
Electric Corporation, G.R. No. 166134 (2010))

b. PRESCRIPTIVE PERIOD

Prescriptive period for assessment

GR: Within 5 years from the date they become due

XPN: In case of fraud or intent to evade tax, within 10 years from discovery of fraud or
intent to evade payment (Sec. 194(a),(b), LGC)

Prescriptive period for collection

Within 5 years from the date of assessment by administrative or judicial action. No such
action shall be instituted after the expiration of said period (Sec. 194(c), LGC).

B. REAL PROPERTY TAXATION

1. FUNDAMENTAL PRINCIPLES
1. Real property shall be appraised at its current and fair market value.
2. Real property shall be classified for assessment purposes on the basis of its actual use.
3. Real property shall be assessed based on a uniform classification within each LGU.
4. The appraisal, assessment, levy and collection of real property tax shall not be left to
any private person.
5. The appraisal and assessment of real property shall be equitable (Sec. 198, LGC)

2. NATURE
1. It is a direct tax on the use of real property.
NOTE: 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)
2. It is an ad valorem tax where the tax base is a fixed proportion of the value of the
property (Sec. 199(c), LGC)
3. It is proportionate because the tax is calculated on the basis of a certain percentage
of the value assessed.
4. It creates a single, indivisible obligation.

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 5. It attaches on the property (i.e., a lien) and is enforceable against it.

3. IMPOSITION
a. POWER TO LEVY

Extent of taxing power

A province or city or a municipality within Metro Manila may:
1. levy an annual ad valorem tax on real property such as land, building, machinery, and
other improvement not hereinafter specifically exempted; and (Sec. 232, LGC)
2. fix a uniform rate of basic real property tax applicable to their respective localities.
(Sec. 233, LGC)

The following may levy real property tax:

1. Province
2. City
3. Municipality within Metro Manila (Sec. 232, LGC)

NOTE: A special levy on lands benefited by public works may be imposed by municipalities
outside Metro Manila.

Properties Subject To Rpt

1. Land
2. Building
3. Machinery
4. Other improvements not specifically exempted (Sec. 232, LGC)

NOTE: The LGC contains no definition of the term “real property”. Therefore, reference
should be made to the enumeration of immovable property under Art. 415 of the Civil Code.

Summary of rules on machinery

1. Machinery that is permanently attached to land and buildings is subject to RPT.
2. Machinery that is NOT permanently attached:
a. Subject to the RPT if it is an essential and principal element of an industry,
work or activity without which such industry, work or activity cannot
function; and
b. NOT SUBJECT TO RPT if it is not an essential and principal element of an
industry, work or activity.

Improvement
It is a valuable addition made to a property or an amelioration in its condition, amounting to
more than a mere repair or replacement of parts involving capital expenditures and labor,
which is intended to enhance its value, beauty or utility or to adapt it for new or further
purposes (Sec. 199(m), LGC)

Types Of Real Property Tax

1. Basic RPT
a. Province: not exceeding 1% of the assessed value of real property; and
b. City or municipality within Metro Manila: not exceeding 2% of the assessed
value of real property (Sec. 233, LGC)
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 2. Special levies on real property
a. Special Education Fund (SEF) – annual tax of 1% on the assessed value of
real property which shall be in addition to the basic RPT (Sec. 235, LGC)
b. Special Levy on Idle Lands – annual tax on idle lands at the rate not
exceeding 5% of the assessed value of the property in addition to the basic
RPT (Sec. 236, LGC)

Idle lands covered

1. Agricultural lands more than 1 hectare in area, suitable for cultivation,
dairying, inland fishery, and other agricultural uses, 1/2 of which remain
uncultivated or unimproved
2. Non-agricultural lands more than 1,000 square meters in area 1/2 of which
remain unutilized or unimproved
3. Residential lots in subdivisions regardless of land area (Sec. 237, LGC)

Lands not considered idle

1. Agricultural lands planted to permanent or perennial crops with at least 50
trees to a hectare
2. Lands actually used for grazing purposes (Sec. 237(a), LGC)

Idle lands may be exempted by reason of:

1. Force majeure,
2. Civil disturbance,
3. Natural calamity, or
4. Any cause or circumstance which physically or legally prevents the owner
from improving, utilizing or cultivating the same (Sec. 238, LGC)

c. Special Levy for Public Works – a special levy on lands specially benefited
by public works projects or improvements funded by the LGU concerned, but
which shall not exceed 60% of the actual cost of such projects and
improvements, including the costs of acquiring land and such other real
property in connection therewith (Sec. 240, LGC)

XPN: The special levy shall not apply to:

1. lands exempt from basic RPT; and
2. the remainder of the land, portions of which were donated to the LGU
for the construction of such projects or improvements (Sec. 240, LGC)

NOTE: Municipalities outside Metro Manila may impose a special levy on

lands benefited by public works.

b. EXEMPTION FROM REAL PROPERTY TAX

1. Real property owned by the Republic of the Philippines or any of its political
subdivisions (Sec. 234,(a) LGC)
NOTE: when beneficial use is granted for a consideration or to a taxable person.
2. Charitable institutions, churches, parsonages, or convents appurtenant thereto,
mosques, non-profit or religious cemeteries, and all lands, buildings, and

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 improvements actually, directly and exclusively used for religious, charitable, or
educational purposes (Sec. 234,(b) LGC)
3. Machinery and equipment actually, directly and exclusively used by local water
districts and GOCCs engaged in the supply and distribution of water and/or
generation and transmission of electric power (Sec. 234,(c) LGC)
4. Real property owned by duly registered cooperatives as provided for under RA 6938
(Cooperative Code of the Philippines) (Sec. 234,(d) LGC)
5. Machinery and equipment used for pollution control and environmental protection
(Sec. 234,(e) LGC)

Withdrawal of exemption
Except as provided herein, any exemption from payment of RPT previously granted to, or
presently enjoyed by, all persons, whether natural or juridical, including all government-
owned or controlled corporations (GOCCs) are hereby withdrawn upon the effectivity of the
LGC (Sec. 234, LGC)

NOTE: Section 234 of the LGC applies specifically to RPT exemptions, while Section 193
of the LGC applies to exemptions from all other local taxes.

Proof of exemption
Every person who shall claim tax exemption shall file with the local assessor within 30 days
from the date of declaration of real property sufficient documentary evidence in support of
such claim (e.g., corporate charters, title of ownership, affidavits, by-laws, contract, articles
of incorporation). Otherwise, the property will be listed as taxable in the assessment roll.
(Sec. 206, LGC)

4. APPRAISAL AND ASSESSMENT

Appraisal is the act or process of determining the value of property as of a specified date for
a specific purpose. (Sec. 199(e), LGC)

Assessment is the act or process of determining the value of a property, or proportion thereof
subject to tax, including the discovery, listing, classification, and appraisal of properties.
(Sec. 199(f), LGC)

a. CLASSES OF REAL PROPERTY

For purposes of assessment, real property shall be classified as residential, agricultural,

commercial, industrial, mineral, timberland or special (Sec. 215, LGC)
1. Residential land – land principally devoted to habitation (Sec. 199(u), LGC)
2. Agricultural land – land devoted principally to the planting of trees, raising of crops,
livestock and poultry, dairying, salt making, inland fishing and similar aquaculture
activities and other agricultural activities and is not classified as mineral, timber,
residential, commercial or industrial land (Sec. 199(d), LGC)
3. Commercial land – land devoted principally for the object of profit and is not
classified as agricultural, industrial, mineral, timber or residential land (Sec. 199(i),
LGC)
4. Industrial land – land devoted principally to industrial activity as capital investment
and is not classified as agricultural, commercial, timber, mineral or residential land
(Sec. 199(n), LGC)
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 5. Mineral land – land in which minerals exist in sufficient quantity or grade to justify
the necessary expenditures to extract and utilize such minerals (Sec. 199(p), LGC)
6. Timberland – land identified as forest or reserved area by the government, which
may or may not be granted to a concessionaire, licensee, lessee or permitee
7. Special
a. all lands, buildings and other improvements actually, directly and exclusively
used for hospitals, cultural, or scientific purposes, and
b. those owned and used by local water districts, and GOCCs rendering essential
public services in the supply and distribution of water and/or generation and
transmission of electric power (Sec. 216, LGC)

Declaration of real property by owner or administrator

All persons owning or administering real property, including improvements therein, shall
prepare a sworn statement:
1. declaring the true value of the property which shall be the current and FMV of the
property; and
2. containing a sufficient description of the property for assessment purposes.

The declaration must be filed with the assessor once every 3 years during the period from
January 1 to June 30 (Sec. 202, LGC)

Declaration by person acquiring real property or making improvements

A sworn statement declaring the true value of the property must be filed with the provincial,
city or municipal assessor within 60 days after the acquisition of a real property or upon
completion or occupancy of the improvement, whichever comes earlier (Sec. 203, LGC)

Declaration by the local assessor

When the person required to file the sworn declaration under Sec. 202 of the LGC refuses or
fails to make such declaration, the provincial, city or municipal assessor shall declare the
property in the name of the defaulting owner, and shall assess the property for taxation (Sec.
204, LGC)

b. ASSESSMENT BASED ON ACTUAL USE

Basis of assessment
Real property shall be classified, valued, and assessed on the basis of actual use regardless
of where located, whoever owns it, and whoever uses it. (Sec. 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)

Assessment levels
It is the percentage applied to the FMV to determine the taxable value of the property. (Sec.
199(g), LGC)
NOTE: Assessment levels shall be fixed by ordinances of the Sanggunian at rates not
exceeding those prescribed under Sec. 218 of the LGC.

Assessed or Taxable Value

It is the FMV of the real property multiplied by the assessment level. (Sec. 199(h), LGC)
1. Assessed Value = FMV × Assessment Level

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 2. RPT = Assessed Value × Tax Rate

General revisions of assessments and property classification

The local assessor shall undertake a general revision of real property assessments every 3
years. (Sec. 219, LGC)

Valuation of real property by assessor

The local assessor shall make a classification, appraisal, and assessment of the real
property irrespective of any previous assessment or taxpayer’s valuation thereon in the
following cases:
1. real property is declared and listed for taxation purposes for the first time;
2. there is an ongoing general revision of property classification and assessment; or
3. a request is made by the person in whose name the property is declared. (Sec. 220,
LGC)

NOTE: The assessment shall not be increased more often than once every 3 years except in
case of new improvements substantially increasing the value of said property or of any
change in its actual use. (Sec. 220, LGC)

Date of effectivity of assessment or reassessment

GR: All assessments or reassessments made after January 1 of any year shall take effect on
January 1 of the succeeding year (Sec. 221, LGC)

XPNs: Reassessments due to the following causes shall be made within 90 days from the date
of any cause and shall take effect at the beginning of the quarter subsequent to the
reassessment:
1. partial or total destruction
2. major change in actual use;
3. any great and sudden inflation or deflation of real property values;
4. gross illegality of the assessment when made; or
5. any other abnormal cause. (Sec. 221, LGC)

Assessment of property subject to back taxes

Property declared for the first time shall be assessed for taxes for the period during which it
would have been liable but in no case for more than 10 years prior to the date of initial
assessment (Sec. 222, LGC)

Notification of new or revised assessment

When real property is assessed for the first time or when an existing assessment is increased
or decreased, the local assessor shall within 30 days give written notice of the new or revised
assessment to the person in whose name the property is being declared.

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)

5. COLLECTION
Collecting authority

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The collection of RPT shall be the responsibility of the city or municipal treasurer
concerned. He may deputize the barangay treasurer to collect all taxes on real property
located in the barangay provided the latter is bonded (Sec. 247, LGC).

Duty of assessor to furnish local treasurer with assessment rolls

The provincial, city or municipal assessor shall prepare and submit to the local treasurer, on
or before December 31 of each year, an assessment roll containing a list of all persons whose
real properties have been newly assessed or reassessed and the values of such properties.
(Sec. 248, LGC)

Notice of time for collection of tax

The local treasurer shall post the notice of the dates when the tax may be paid without interest
at a conspicuous and publicly accessible place at the city or municipal hall:
1. on or before January 31 of each year in the case of basic RPT and additional tax for
SEF; or
2. on any other date in the case of any other tax.

The notice shall also be published in a newspaper of general circulation in the locality once a
week for 2 consecutive weeks (Sec. 249, LGC)

a. DATE OF ACRRUAL

Real property tax for any year shall accrue on the 1st day of January. (Sec. 246, LGC)

b. PERIODS TO COLLECT

GR: Within 5 years from the date the taxes become due

XPN: In case there is fraud or intent to evade payment of tax, within 10 years from
discovery of fraud or intent to evade payment (Sec. 270, LGC)

Grounds for suspension of prescriptive period

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 to
collect; and
3. The owner of the property or the person having legal interest therein is out of the
country or cannot be located. (Sec. 270, LGC)

Rules On Payment
Payment of RPT
1. Payment of RPT and the additional tax for SEF, without interest, may be made in 4
equal installments:
a. 1st: March 31
b. 2nd: June 30
c. 3rd: September 30
d. 4th: December 31
2. Any special levies shall be governed by ordinance of the Sanggunian concerned. (Sec.
250, LGC)

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NOTE: Payments of RPT shall first be applied to prior years’ delinquencies, interests and
penalties, if any, and only after the delinquencies are settled may tax payments be credited for
the current period. (Sec. 250, LGC)

Interests on unpaid RPT

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, but the total interest shall not exceed 36 months
(Sec. 255, LGC)

Discount for advance or prompt payment

a. Advance payment – not exceeding 20% of annual tax due (Sec. 251, LGC)
b. Prompt payment – not exceeding 10% of annual tax due (Art. 342, LGC IRR)

c. REMEDIES OF LOCAL GOVERNMENT UNITS

Issuance of notice of delinquency

When the real property tax becomes delinquent, the local treasurer shall post a notice of
delinquency at the main hall and in a publicly accessible and conspicuous place in each
barangay of the LGU concerned. (Sec. 254, LGC)

1. Local Government’s Lien

The RPT shall 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)

It constitutes a lien on the property from the date of accrual (i.e., January 1) (Sec. 246, LGC).

2. Administrative Action

1. Levy on real property

a. After expiration of the time required to pay the tax when due, the local
treasurer shall issue a warrant of levy on or before, or simultaneously with, the
institution of the civil action for the collection of the delinquent tax.
b. The warrant shall include a duly authenticated certificate showing:
i. the name of the owner or person having legal interest therein,
ii. description of the property, and
iii. amount of the tax due and interest thereon.
c. Warrant must be mailed to or served upon the delinquent owner or person
having legal interest in the property.
d. Written notice of levy with the attached warrant must be mailed to or served
upon the assessor and the Register of Deeds where the property is located.
e. The Register of Deeds must annotate the levy on the tax declaration and
certificate of title.
f. The levying officer shall submit a report on the levy to the Sanggunian within
10 days after receipt of warrant by the owner. (Sec. 258, LGC)
g. Advertisement of the sale or auction shall be made within 30 days after service
of warrant.
h. Before the date of sale, the proceedings may be stayed by paying the
delinquent tax.

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 i. Sale of the real property (Sec. 260, LGC)
j. Redemption of property sold within 1 year from date of sale upon payment of
the delinquent tax (Sec. 261, LGC)
k. If not redeemed, the local treasurer shall execute a deed conveying the
property to the purchaser. (Sec. 262, LGC)
l. Purchase of property by local treasurer in case there is no bidder for the real
property or if the highest bid is insufficient to pay the RPT and other costs;
resale of such property may be made at a public auction (Sec. 263 and 264,
LGC)

Further levy until full payment

Levy may be repeated if necessary until the full due, including all expenses, is
collected. (Sec. 265, LGC)

2. Distraint of personal property

The notice of delinquency shall state that personal property may be distrained to
effect payment. It shall likewise state that any time before the distraint of personal
property, payment of the tax with surcharges, interests and penalties may be made.
(Sec. 254, LGC)

3. Judicial Action
The LGU concerned may enforce the collection of the basic RPT or any other related tax by
civil action in any court of competent jurisdiction. The civil action shall be filed by the local
treasurer within the period prescribed for collection (i.e., 5 years or 10 years) under Sec. 270
of the LGC. (Sec. 266, LGC)

6. TAXPAYER’S REMEDIES
a. CONTESTING AN ASSESSMENT

i. PAYMENT UNDER PROTEST; EXCEPTION

GR: No protest shall be entertained unless the taxpayer first pays the tax. There shall be
annotated on the tax receipts the words "paid under protest". (Sec. 252, LGC)

When the taxpayer questions the excessiveness or reasonableness of the assessment, the
taxpayer is required to first pay the tax due before his protest can be entertained (NPC v.
Provincial Treasurer of Benguet, G.R. No. 209303 (2016))

XPN: “Payment under protest” is not a prerequisite when the issue is the legality or validity
of the assessment. Certainly, it would be unjust to require the realty owner to first pay the
tax, the validity of which he precisely questions, before he can lodge a complaint to the court.
(NPC v. Municipal Government of Navotas, G.R. 192300 (2014))

ii. FILE PROTEST WITH TREASURER

Period to file protest

The protest in writing must be filed within 30 days from payment of the tax to the provincial,
city or municipal treasurer. (Sec. 252(a), LGC)

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NOTE: The tax or a portion thereof paid under protest, shall be held in trust by the treasurer.
(Sec. 252(b), LGC)

Period to decide
The local treasurer shall decide the protest within 60 days from receipt. (Sec. 252(a), LGC)

Decision on the protest

1. If the protest is decided in favor of the taxpayer, the amount or portion of the tax
protested shall be refunded to the protestant, or applied as tax credit against his
existing or future tax liability. (Sec. 252(c), LGC)
2. If the protest is denied or the 60-day period expired, the taxpayer may appeal to
the LBAA and subsequently to the CBAA pursuant to Secs. 226 and 229 as in the
case of assessment appeals. (Sec. 252(d), LGC)

Erroneous assessment vs. Illegal assessment

Erroneous assessment- An erroneous assessment presupposes that the taxpayer is subject to

the tax but is disputing the correctness of the amount assessed. The taxpayer claims that the
local assessor erred in determining any of the items for computing the RPT.

Taxpayer must exhaust the administrative remedies provided under the LGC.

Illegal assessment- An assessment is illegal if it was made without the authority under the
law.

The taxpayer may directly resort to judicial action without paying under protest the assessed
tax and filing an appeal with the LBAA and CBAA (City of Lapu-Lapu v. PEZA, G.R. Nos.
184203 and 187583 (2014))

NOTE: A claim for exemption from the payment of RPT pertains to the reasonableness
or correctness of the assessment by the local assessor, a question of fact which should be
resolved, at the very first instance, by the LBAA. (NPC v. Provincial Treasurer of Benguet,
G.R. No. 209303 (2016))

iii. REFUNDS OR CREDITS OF REAL PROPERTY TAXES

Repayment of excessive collections

When an assessment of RPT is found to be illegal or erroneous and the tax is accordingly
reduced or adjusted, the taxpayer may file a written claim for refund or credit for taxes and
interests with the provincial or city treasurer within 2 years from the date the taxpayer is
entitled to such reduction or adjustment.

The provincial or city treasurer shall decide the claim for tax refund or credit within 60 days
from receipt thereof. (Sec. 253, LGC)

Remedy in case of denial by the local treasurer

In case the claim for tax refund or credit is denied, the taxpayer may follow the procedure in
questioning an assessment (i.e., appeal to the LBAA, then to the CBAA, and subsequently to
the CTA En Banc). (Sec. 253, LGC)

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b. CONTESTING A VALUATION OF REAL PROPERTY

i. APPEAL TO THE LOCAL BOARD OF ASSESSMENT APPEALS (LBAA)

Who may appeal

Any owner or person having legal interest in the property who is not satisfied with the
action of the local assessor in the assessment of his property may appeal to the LBAA by
filing a petition under oath, together with copies of the tax declarations and such affidavits or
documents submitted in support of the appeal. (Sec. 226, LGC)

When to appeal
The appeal must be filed within 60 days from the date of receipt of the written notice of
assessment. (Sec. 226, LGC)

Period to decide on the appeal

The LBAA shall decide the appeal within 120 days from the date of receipt of such appeal.
(Sec. 229(a), LGC)

NOTE: The LBAA shall have the power to summon witnesses, administer oaths, conduct
ocular inspection, take depositions, and issue subpoena and subpoena duces tecum. (Sec.
229(b), LGC)

Motion for reconsideration with local assessor NOT allowed

The procedure likewise does not permit the property owner the remedy of filing a motion for
reconsideration before the local assessor.

When appeal to LBAA not required

An exception to the rule on exhaustion of administrative remedies is where the controversy
does not involve questions of fact but only of law. Under Sec. 229(b) of the LGC "the
proceedings of the Board shall be conducted solely for the purpose of ascertaining the facts."
It follows that appeals to the LBAA may be fruitful only where questions of fact are
involved.

ii. APPEAL TO THE CENTRAL BOARD OF ASSESSMENT APPEALS (CBAA)

Who may and when to appeal

The owner of the property or the person having legal interest therein or the assessor who is
not satisfied with the decision of the LBAA, may, within 30 days after receipt of the decision
of said LBAA, appeal to the CBAA. (Sec. 229, LGC)

Period to decide and finality of decision

The CBAA shall decide cases on appeal within 12 months from the date of receipt thereof,
which shall become final and executory 15 days after receipt thereof by the appellant or
appellee, as the case may be.

iii. EFFECT OF PAYMENT OF TAXES

Appeal on assessments of real property shall not suspend the collection of the corresponding
realty taxes on the property involved as assessed by the provincial or city assessor without

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prejudice to subsequent readjustment depending upon the final outcome of the appeal. (Sec.
231, LGC)

c. COMPROMISING REAL PROPERTY TAX ASSESSMENT

Condonation or reduction of RPT

1. The Sanggunian:, in case of general failure of crops or substantial decrease in the
price of agricultural or agri-based products or calamity, may, by ordinance, condone
or reduce taxes and interest for the succeeding year/s in the city or municipality
affected by the calamity. (Sec. 276, LGC)
2. The President of the Philippines may, when public interest so requires, condone or
reduce the real property tax and interest for any year in any province or city or
municipality within Metro Manila. (Sec. 277, LGC)

IV. JUDICIAL REMEDIES

(R.A. 1125, as amended by R.A. No. 3457 and further amended by R.A. 9282 and R.A. 9503,
and A.M. No. 05-11-07-CTA or the Revised Rules of the Court of Tax Appeals (RRCTA))

A. JURISDICTION OF THE COURT OF TAX

APPEALS
1. EXCLUSIVE ORIGINAL AND APPELLATE
JURISDICTION OVER CIVIL CASES
1. Exclusive Original Jurisdiction of the Court in Divisions
The Court in Divisions shall exercise exclusive original jurisdiction in tax collection 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 P1,000,000
or more (Sec. 3(c)(1), Rule 4, RRCTA)

2. Exclusive Appellate Jurisdiction in Civil Cases

The Court in Divisions shall exercise exclusive appellate jurisdiction over appeals from the
judgments, resolutions or orders of the RTCs in tax collection cases originally decided by
them within their respective territorial jurisdiction (Sec. 3(c)(2), Rule 4, RRCTA)

The Court in Divisions shall exercise exclusive original or appellate jurisdiction to

review by appeal the following:

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 1. Decisions of the CIR 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;
2. Inaction by the CIR 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:
a. Provided, that in case of disputed assessments, the inaction of the CIR within
the 180-period under Section 228 of the NIRC shall be deemed a denial for
purposes of allowing the taxpayer to appeal his case to the Court and does not
necessarily constitute a formal decision of the CIR on the tax case;
b. Provided, further, that should the taxpayer opt to await the final decision of the
CIR on the disputed assessments beyond the 180-period above mentioned, the
taxpayer may appeal such final decision to the Court under Section 3(a), Rule
8 of these Rules; and
c. Provided, still further, that in the case of claims for refund of taxes
erroneously or illegally collected, the taxpayer must file a petition for review
with the Court prior to the expiration of the 2-year period under Section 229
of the NIRC;

3. Decisions, resolutions or orders of the RTC in local tax cases decided or resolved
by them in the exercise of their original jurisdiction;
4. Decisions of the Commissioner of Customs in cases involving liability for customs
duties, fees or other money charges, seizure, detention or release of property affected,
fines, forfeitures of other penalties in relation thereto, or other matters arising under
the Customs Law or other laws administered by the Bureau of Customs;
5. 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
6. 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. 3(a), Rule 4, RRCTA).

3. Civil cases within the jurisdiction of the Court En Banc (Sec. 2(a-e), Rule 4, RRCTA)

The Court en banc shall exercise exclusive appellate jurisdiction to review by appeal the
following:
1. Decisions or resolutions on motions for reconsideration (MR) or new trial (MNT)
of the Court in Divisions in the exercise of its exclusive appellate jurisdiction over:
a. Cases arising from administrative agencies – Bureau of Internal Revenue,
Bureau of Customs, Department of Finance, Department of Trade and
Industry, Department of Agriculture;
b. Local tax cases decided by the Regional Trial Courts in the exercise of
their original jurisdiction; and
c. Tax collection cases decided by the Regional Trial Courts in the exercise of
their original jurisdiction involving final and executory assessments for taxes,

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 fees, charges and penalties, where the principal amount of taxes and
penalties claimed is less than P1,000,000.

2. Decisions, resolutions or orders of the RTC in local tax cases and in tax collection
cases decided or resolved by them in the exercise of their appellate jurisdiction;
3. 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; and
4. Decisions of the Central Board of Assessment Appeals (CBAA) 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.

2. EXCLUSIVE ORIGINAL AND APPELLATE

JURISDICTION OVER CRIMINAL CASES
1. Exclusive Original Jurisdiction of the Court in Divisions
The Court in Divisions shall exercise exclusive original jurisdiction over all criminal offenses
arising from violations of the NIRC or Tariff and Customs Code and other laws administered
by the BIR or the Bureau of Customs, where the principal amount of taxes and fees,
exclusive of charges and penalties, claimed is P1,000,000 or more (Sec. 3(b)(1), Rule 4,
RRCTA).

2. Exclusive Appellate Jurisdiction in Criminal Cases

The Court in Divisions shall exercise exclusive appellate jurisdiction over appeals from the
judgments, resolutions, or orders of the RTC in their original jurisdiction in criminal
offenses arising from violations of the NIRC or Tariff and Customs Code and other laws
administered by the BIR or Bureau of Customs, where the principal amount of taxes and fees,
exclusive of charges and penalties, claimed is less than P1,000,000 or where there is no
specified amount claimed (Sec. 3(b)(2), Rule 4, RRCTA).

3. Criminal cases within the jurisdiction of the Court En Banc (Sec. 2(f-h), Rule 4,
RRCTA)

The Court en banc shall exercise exclusive appellate jurisdiction to review by appeal the
following:
1. Decisions, resolutions, or orders on motions for reconsideration (MR) or new
trial (MNT) of the Court in Division in the exercise of its exclusive original
jurisdiction over cases involving criminal offenses arising from violations of the
NIRC or the Tariff and Customs Code and other laws administered by the BIR or
Bureau of Customs;
2. Decisions, resolutions or orders on motions for reconsideration or new trial of
the Court in Division in the exercise of its exclusive appellate jurisdiction over
criminal offenses mentioned in the preceding subparagraph; and
3. Decisions, resolutions or orders of the RTC in the exercise of their appellate
jurisdiction over criminal offenses arising from violations of the NIRC or the Tariff
and Customs Code and other laws administered by the BIR or Bureau of Customs.

Does the CTA have jurisdiction over a special civil action for certiorari assailing an
interlocutory order issued by the RTC in a local tax case?

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YES. While there is no express grant of such power, with respect to the CTA, Section 1,
Article VIII of the 1987 Constitution provides, nonetheless, that judicial power shall be
vested in one Supreme Court and in such lower courts as may be established by law and that
judicial power includes the duty of the courts of justice to settle actual controversies
involving rights which are legally demandable and enforceable, and to determine whether or
not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on
the part of any branch or instrumentality of the Government.

On the strength of the above constitutional provisions, it can be fairly interpreted that the
power of the CTA includes that of determining whether or not there has been grave abuse of
discretion amounting to lack or excess of jurisdiction on the part of the RTC in issuing an
interlocutory order in cases falling within the exclusive appellate jurisdiction of the tax court
(City of Manila v. Grecia-Cuerdo, G.R. No. 175723 (2014)).

B. PROCEDURE
1. FILING OF AN ACTION FOR COLLECTION OF TAXES
a. INTERNAL REVENUE TAXES

The remedies for the collection of internal revenue taxes, fees or charges, and any increment
thereto resulting from delinquency can be through the institution of a civil or criminal
action. (Sec. 205, NIRC).

When this remedy is resorted to:

The tax assessment becomes final and executory because of the failure to appeal.

Even pending decision of the administrative protest.

b. LOCAL TAXES

The LGU concerned may enforce the collection of delinquent taxes, fees, charges or other
revenues by civil action in any court of competent jurisdiction. The civil action shall be
filed by the local treasurer (Sec. 183, LGC)

MTC/ RTC depending on jurisdictional threshold amount.

Prescriptive period
Local taxes, fees, or charges shall be assessed within 5 years from the date they became
due.

No action for the collection of such taxes, fees, or charges, whether administrative or judicial,
shall be instituted after the expiration of such period.

In case of fraud or intent to evade the payment of taxes, fees, or charges, the same may be
assessed within 10 years from discovery of the fraud or intent to evade payment.

Local taxes, fees, or charges may be collected within 5 years from the date of assessment by
administrative or judicial action.

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No judicial or administrative action for collection can be instituted after lapse of the period
for assessment except when there is fraud or intent to evade tax (Sec. 194 LGC)

The running of the periods of prescription shall be suspended for the time during
which:
1. The treasurer is legally prevented from making the assessment of collection;
2. The taxpayer requests for a reinvestigation and executes a waiver in writing before
expiration of the period within which to assess or collect; and
3. The taxpayer is out of the country or otherwise cannot be located (Sec. 194, LGC)

2. CIVIL CASES
a. WHO MAY APPEAL, MODE OF APPEAL, AND EFFECT OF
APPEAL

Appeal to CTA Division

1. A party aggrieved or adversely affected by the decision or ruling or inaction of
a. CIR;
b. Commissioner of Customs;
c. Secretary of Finance;
d. Secretary of Trade and Industry;
e. Secretary of Agriculture; or
f. RTC exercising original jurisdiction
2. May appeal within 30 days from the receipt of the copy of the decision or ruling, or
the expiration of the period fixed by law for the Commissioner to decide, to the Court
of Tax Appeals Division.

Mode of Appeal: Rule 42

Aggrieved party may file a motion for reconsideration (MR) or new trial (MNT) within 15
days from receipt of the copy of the decision.

Effect: The filing of a motion for reconsideration or new trial shall suspend the running of
the period within which an appeal may be perfected.

Appeal to CTA en Banc

A party adversely affected by a decision or resolution of a Division of the Court on a
motion for reconsideration or new trial may appeal within 15 days from receipt of the
copy of the decision.

Mode of Appeal: Rule 43

A party adversely affected by a decision or ruling of the Central Board of Assessment
Appeals and the Regional Trial Court in the exercise of their appellate jurisdiction may
appeal within 30 days from the receipt of the copy of the decision.

b. SUSPENSION OF COLLECTION OF TAXES

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GR: No appeal taken to the Court shall suspend the payment, levy, distraint, or sale of any
property of the taxpayer for the satisfaction of his tax liability as provided under existing
laws.

XPN: Where the collection of the amount of the taxpayer’s liability, sought by means of a
demand for payment, by levy, distraint or sale of any property of the taxpayer, or by whatever
means, as provided under existing laws, may jeopardize the interest of the Government or the
taxpayer, an interested party may file a motion for the suspension of the collection of the tax
liability (Sec. 11, RA 1125, as amended)

c. INJUNCTION NOT AVAILABLE TO RETRAIN COLLECTION

No court shall have authority to grant an injunction to restrain the collection of any
national internal revenue tax, fee or charge imposed by the Code (Sec. 217, NIRC)

XPN: Sec. 11, R.A. 1125, supra.

The CTA has ample authority to dispense with the deposit of the amount claimed or the filing
of the required bond, whenever the method employed by the BIR in the collection of tax
jeopardizes the interest of the taxpayer for being patently in violation of law (Sps. Pacquiao
v. CTA First Division, G.R. No. 213394 (2016))

3. CRIMINAL CASES
a. INSTITUTION AND PROSECUTION OF CRIMINAL ACTION

Institution of criminal action

Instituted by the filing an information in the name of the People of the Philippines

Those involving violations of the NIRC and other laws enforced by the BIR: Must be
approved by the CIR

Those involving violations of the tariff and Customs Code and other laws enforced by
the Bureau of Customs: Must be approved by the Commissioner of Customs

Institution shall interrupt the running of the period of prescription.

Prosecution of criminal action

Conducted and prosecuted under the direction and control of the public prosecutor

Those involving violations of the NIRC and other laws enforced by the BIR or violations
of the tariff and Customs Code and other laws enforced by the Bureau of Customs –
The prosecution may be conducted by their respective duly deputized legal officers.

b. INSTITUTION OF CIVIL ACTION IN CRIMINAL ACTION

In cases within the jurisdiction of the Court, the criminal action and 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

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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.

c. PERIOD TO APPEAL

Deciding Body Period to Appeal Mode of Appeal

RTC in the exercise of its 15 days from receipt of Appeal pursuant to Sec. 3(a)
original jurisdiction (to CTA decision and 6, Rule 122 of the RRC
Division)
CTA Division (to CTA En 15 days from receipt of Petition for review as
Banc) decision provided in Rule 43 of the
Rules of Court
May be extended for good
cause for not more than 15 The Court En Banc shall act
days. on the appeal.
RTC in the exercise of its 15 days from receipt of Petition for review as
appellate jurisdiction (to decision provided in Rule 43 of the
CTA division) Rules of Court.

4. APPEAL TO THE COURT OF TAX APPEALS EN BANC

No civil proceeding involving matters arising under the National Internal Revenue Code, the
Tariff and Customs Code or the Local Government Code shall be maintained, except as
herein provided, until and unless an appeal has been previously filed with the CTA and
disposed of in accordance with the provisions of this Act.

A party adversely affected by a resolution of a Division of the CTA on a motion for

reconsideration or new trial, may file a petition for review with the CTA en banc (Sec. 18,
RA No. 1125 as amended).

The CTA En Banc CANNOT annul a final and executory judgment of a division of the court.
The laws creating the CTA and expanding its jurisdiction, and the CTA’s own rules of
procedure do not provide for a scenario where the CTA sitting en banc is asked to annul a
decision of one of its divisions. Annulment by a collegial court, sitting En Banc is tantamount
to allowing a court to annul its own judgment and acknowledging that a hierarchy exists
within such court. A proper remedy would have been an original action for Certiorari under
Rule 65 (CIR v. Kepco Ilijan Corp., G.R. No. 199422 (2016))

5. PETITION FOR REVIEW ON CERTIORARI TO THE

SUPREME COURT (Rule 16, A.M. No. 05-11-07)
A party adversely affected by a decision or ruling of the Court en banc may appeal by filing
with the Supreme Court 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 Rules of Court.

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.

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