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The distinction is important when the one
exercising it is the LGU (mere delegated
I. GENERAL PRINCIPLES authority).
OF TAXATION
Since Congress has the power to exercise the
State inherent powers of Police Power,
A. POWER OF TAXATION AS Eminent Domain and Taxation, the distinction
DISTINGUISHED FROM POLICE between police power and the power to tax xxx
POWER AND EMINENT DOMAI would not be of any moment when Congress
itself exercises the power. [NTC v. CA, G.R.
No. 127937 (1999)]
When the distinction of exercise of
powers is relevant

Taxation Eminent Domain Police Power

May be exercised by:
the government; May be exercised only by:
Authority (who May be exercised only by:
its political subdivisions; the government; or
exercises the the government; or
or may be granted to public its political subdivisions.
Power) its political subdivisions.
service companies or public
utilities.
The use of the property is
“regulated” for the purpose of
promoting the general
The property (generally in the
welfare; it is not
form of money) is taken for
compensable.
the support of the
government. To facilitate the taking of
If the primary purpose is the
Purpose private property for public
regulation of some particular
If the primary purpose is to use.
occupation, calling, or
raise revenue, it represents
activity, it is an exercise of
an exercise of taxing power.
police power even if it
[71 Am. Jur. 2d 395–396]
incidentally produces
revenue. [71 Am. Jur. 2d
395–396]
Operates upon: Operates on: Operates upon:
Persons
a community; an individual as the owner of a community;
Affected
or class of individuals. a particular property. or a class of individuals.
The money contributed There is no transfer of title. At
There is a transfer of the right
Effect becomes part of the public most, there is restraint on the
to property.
funds. injurious use of property.
Protection and benefits he
Market value of the Indirect benefits
receives.
property
The enjoyment of the
The person affected receives
Benefits privileges of living in an
He receives the market value indirect benefits as may arise
Received organized society,
of the property taken from from the maintenance of a
established and safeguarded
him. healthy economic standard of
by the devotion of taxes to
society.
public purpose.
Amount imposed should just
No amount imposed but
Generally, there is no limit on be commensurate to cover
Amount of rather the owner is paid the
the amount of tax that may be the cost of regulation,
Imposition market value of property
imposed. issuance of a license or
taken.
surveillance
Subject to constitutional Inferior to the impairment Relatively free from
Relationship to limitations, including the prohibition; government constitutional limitations and
the Constitution prohibition against cannot expropriate private is superior to the impairment
impairment of the obligation property, which under a of contract provision.

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Taxation
of contracts.
[MAMALATEO, Reviewer on Taxation 2nd Edition (2008), pp. 11-1
B. INHERENT AND
CONSTITUTIONAL
LIMITATIONS OF TAXATION
1. Inherent Limitations
The following are the inherent limitations of
taxation:
a. Public Purpose
b. Inherently Legislative
c. Territorial
d. International Comity
e. Exemption of Government Entities,
Agencies, and Instrumentalities
a. Public Purpose
The proceeds of the tax must be used:
i. for the support of the State; or
ii. 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. [Pascual v. Sec.
of Public Works, G.R. No. L-10405 (1960)]
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, Stated in another way, taxation may
public welfare, and public convenience.
(Commissioner of Internal Revenue v. Central
Luzon Drug Corporation, G.R. No. 159647
(2005)]
It is the purpose which determines the public
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Eminent Domain Police Power
contract had previously
bound itself to purchase from
the other contracting party.
character of the tax law, not the number of
persons benefited. [Dimaampao, Tax
Principles and Remedies (2015)]
Tests in Determining Public Purpose:
a. Duty Test – Whether the thing to be
furthered by the appropriation of public
revenue is something which is the duty of
the State as a government to provide.
b. Promotion of General Welfare Test –
Whether the proceeds of the tax will directly
promote the welfare of the community in
equal measure.
c. Character of the Direct Object of the
Expenditure – It is the essential character
of the direct object of the expenditure which
must determine its validity as justifying a
tax and not the magnitude of the interests
to be affected nor the degree to which the
general advantage of the community, and
thus the public welfare, may be ultimately
benefited by their promotion. [Pascual v.
Sec. of Public Works, supra]
b. Inherently Legislative
General Rule: 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.
Judge Cooley enunciates the doctrine in the
following oft-quoted language: "One of the
settled maxims in constitutional law is that the
power conferred upon the legislature to make
laws cannot be delegated by that department
to any other body or authority.” [People v. Vera,
G.R. No. L-45685 (1937)]
exceptionally be delegated, subject to such
well-settled limitations as:
a. The delegation shall not contravene any
constitutional provision or the inherent
limitations of taxation;
b. The delegation is effected either by:
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§ the Constitution; or
§ by validly enacted legislative
measures or statute; and
c. 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
and 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.
[Osmeña v. Orbos, G.R. No. 99886 (1993)]
Legislature has the power to determine the:
a. Nature (kind),
b. Object (purpose),
c. Extent (rate),
d. Coverage (subjects) and
e. Situs (place) of taxation.
Exceptions
a. Delegation to local governments
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. (1
Cooley 190). 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]
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b. Delegation to the President
1. 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]
2. Emergency Powers [Sec. 23(2), Art. VI,
1987 Constitution.
3. To enter into Executive agreements;
and
4. To ratify treaties which grant tax
exemption subject to Senate
concurrence.
c. 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:
1. The power to value property for
purposes of taxation pursuant to fixed
rules;
2. The power to assess and collect the
taxes; and
3. The power to perform any of the
innumerable details of computation,
appraisement, and adjustment, and the
delegation of such details.
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:
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● The determination of the subjects to be
taxed;
● The purpose of the tax, the amount or
rate of the tax;
● The manner, means, and agencies of
collection; and
● The prescribing of the necessary rules
with respect thereto.
c. 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. [51 Am.Jur. 87-
88].
Reasons:
a. Tax laws do not operate beyond a
country’s territorial limits.
b. 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. In these cases,
the State can exercise its taxing powers over
the taxpayer even outside its territorial
jurisdiction, such as the taxation of resident
citizens for income from sources worldwide.
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.
d. International Comity
Comity – respect accorded by nations to each
other because they are sovereign equals.
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Thus, the property or income of a foreign state
or government may not be the subject of
taxation by another state.
Reasons:
a. 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. [Dimaampao, Tax
Principles and Remedies (2015)]
b. 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.
c. 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.
e. Exemption of Government Entities,
Agencies, and Instrumentalities
If the taxing authority is the National
Government:
General Rule: 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. [Gomez v. Palomar, GR No.
L-23645, 29 October 1968]
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 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
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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]
Reasons for the exemption:
a. To levy a tax upon public property would
render necessary new taxes on other
public property for the payment of the tax
so laid and thus, the government would be
taxing itself to raise money to pay over for
itself.
b. This immunity also rests upon fundamental
principles of government, being necessary
in order that the functions of government
shall not be unduly impeded. [1 Cooley
263.]
c. The practical effect of an exemption
running to the benefit of the government is
merely to reduce the amount of money that
has to be handled by the government in the
course of its operations: For these
reasons, provisions granting
exemptions to government agencies
may be construed liberally in favor of
non-tax liability of such agencies.
[Maceda v. Macaraig, Jr., G.R. No. 88291
(1991)].
Exception: Government-owned or controlled
corporations (GOCCs) perform proprietary
functions hence, they are subject to taxation.
[Dimaampao, Tax Principles and Remedies
(2015)]
Exception to the Exception: The following
GOCCs are considered tax exempt as
provided under Sec. 27(c) of the NIRC, as
amended:
1. Government Service Insurance System
(GSIS) (Sec. 39, RA 8291)
2. Social Security System (SSS) (Sec. 16, RA
8282)
3. Home Development Mutual Fund
(HDMF) (Sec. 19, RA 9679)
4. Philippine Health Insurance Corporation
(PHIC)
5. Local Water Districts
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There is no constitutional prohibition against
the government taxing itself. [Coll. v. Bisaya
Land Transportation, 105 Phil. 338 (1959)].
2. Constitutional Limitations
The following are the constitutional limitations
of taxation:
1. Provisions directly affecting taxation:
1. Prohibition against imprisonment for
non-payment of poll tax;
2. Uniformity and equality of taxation;
3. Grant by Congress of authority to the
President to impose tariff rates;
4. Prohibition against taxation of religious,
charitable entities, and educational
entities;
5. Prohibition against taxation of non-
stock, non-profit educational
institutions;
6. Majority vote of Congress for grant of
tax exemption;
7. Prohibition on use of tax levied for
special purpose;
8. President’s veto power on appropriation,
revenue, tariff bills;
9. Tax bills should originate exclusively in
the House of the Representatives;
10. Concurrence of at least 2/3 of the
Senate with tax treaties
11. Non-impairment of jurisdiction of the
Supreme Court;
12. Grant of power to the local government
units to create its own sources of
revenue;
13. Flexible tariff clause;
14. Exemption from real property taxes;
and
15. No appropriation or use of public
money for religious purposes;
2. Provisions indirectly affecting taxation:
1. Due process
2. Equal protection;
3. Religious freedom;
4. Non-impairment of obligations of
contracts;
5. Freedom of speech and expression;
6. Presidential power to grant reprieves,
communications, and pardons, and
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remit fines and forfeitures after
conviction by final judgement; and
7. No taking of private property for public
use without just compensation
a. Provisions directly affecting Taxation
1. Prohibition against imprisonment for
non-payment of poll tax
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. [51 Am. Jur. 66-67]
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. [City of Baguio
v. De Leon, G.R. No. L-24756 (1968)]
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. This
means, for 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.
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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
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.
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Equality and Uniformity distinguished:
Equality in taxation is accomplished when the
burden of the tax falls equally and impartially
upon all the persons and property subject to it.
Uniformity has been defined as that principle
by which all taxable articles or kinds of property
of the same class shall be taxed at the same
rate. A tax is uniform when it operates with the
same force and effect in every place where the
subject of it is found. It does not signify an
intrinsic but simply a geographical uniformity
[Churchill v Concepcion, GR No. 11572, 22
September 1916]
Test of Valid Classification: 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.
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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. [Sec. 1608,
Customs Modernization and Tariff Act]
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 [Lladoc v. Commissioner,
G.R. No. L-19201 (1965)].
d. In general, special assessments are not
covered by the exemption because by
nature they are not classified as taxes.
[Apostolic Prefect v. City Treasurer of
Baguio, G.R. No. L-47252 (1941)]
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]
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Test of Use of the property, and not
Exemption the ownership [Abra Valley
College v. Aquino, G.R. No.
L-39086 (1988)]
Nature of Actual, direct and exclusive
Use use for religious, charitable
or educational purposes.
[Lladoc v. CIR, supra]
Scope of Real property taxes on
Exemption 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. [Abra
Valley College v. Aquino,
supra]
TEST: Whether an enterprise is charitable or
not:
• Whether it exists to carry out a purpose
recognized in law as charitable; or
• 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).
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“Exclusive" – possessed and enjoyed to the
exclusion of others; debarred from participation
or enjoyment;
"Exclusively" - “in a manner to exclude; as
enjoying a privilege exclusively.”
If real property is used for one or more
commercial purposes, it is not exclusively used
for the exempted purposes but is subject to
taxation. The words "dominant use" or
"principal use" cannot be substituted for the
words "used exclusively" without doing
violence to the Constitution and the law. Solely
is synonymous with exclusively. [Lung Center
of the Philippines v. Quezon City, G.R. No.
144104 (2004)]
Note: Lung Center did not necessarily overturn
the case of Abra Valley College v. Aquino, G.R.
No. L-39086 (1988). Lung Center just provided
a stricter interpretation. In Abra Valley, the
Court held: The primary use of the school lot
and building is the basic and controlling guide,
norm and standard to determine tax
exemption, and not the mere incidental use
thereof. Under the 1935 Constitution, the trial
court correctly held that the school building as
well as the lot where it is built, should be taxed,
not because the second floor of the same is
being used by the Director and his family for
residential purposes (incidental to its
educational purpose), but because the first
floor thereof is being used for commercial
purposes. However, since only a portion is
used for purposes of commerce, it is only fair
that half of the assessed tax be returned to the
school involved.
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.
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Subject to conditions prescribed by law, all grants,

Sec. 28, par. 3, Sec. 4, par. 3,
endowments, donations, or contributions used Art. VI Art. XIV
actually, directly, and exclusively for educational
purposes shall be exempt from tax. Charitable Non-stock, non-profit
institutions, churches educational
This provision covers only non-stock, non- and parsonages or institutions.
profit educational institutions. convents
appurtenant thereto,
The exemption covers income, property, and mosques, non-profit
donor’s taxes, custom duties, and other taxes cemeteries, and all
imposed by either or both the national lands, buildings, and
government or political subdivisions on all improvements,
revenues, assets, property or donations, used actually, directly, and
actually, directly and exclusively for exclusively used for
educational purposes. (In the case of religious religious, charitable,
and charitable entities and non-profit or educational
cemeteries, the exemption is limited to property purposes.
tax.)
Property taxes Income, property,
The exemption does not cover revenues and donor’s taxes
derived from, or assets used in, unrelated and custom duties.
activities or enterprise.
6. Majority vote of Congress for grant of
Revenues derived from assets used in the tax exemption
operation of cafeterias, canteens, and
bookstores are also exempt if they are owned
and operated by the educational institution as Sec. 28, Art. VI, 1987 Constitution.
No law granting any tax exemption shall be passed
ancillary activities and the same are located
without the concurrence of a majority of all the
within the school premises [RMC No. 76-2003] Members of the Congress.

Similar tax exemptions may be extended to

proprietary (for profit) educational
institutions by law subject to such
limitations as it may provide, including
restrictions on dividends and provisions for
reinvestment. The restrictions are designed to
ensure that the tax-exemption benefits are
used for educational purposes.
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.
Basis: The inherent power of the state to
impose taxes carries with it the power to grant
tax exemptions.
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 ½ + 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,

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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. [Gaston v.
Republic Planters Bank, G.R. No. L-77194
(1988)].
8. President’s veto power
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
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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
(2) 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. [San Miguel Corp v. Avelino,
G.R. No. L-39699 (1979)]
Sec. 30, Art. VI, 1987 Constitution.
No law shall be passed increasing the appellate
jurisdiction of the Supreme Court without its advice
and concurrence.
Scope of Judicial Review in taxation: limited
only to the interpretation and application of tax
laws. Its power does not include inquiry into the
policy of legislation. Neither can it legitimately
on question or refuse to sanction the provisions of
any law consistent with the Constitution. [Coll.
v. Bisaya Land Transportation, 105 Phil. 338
(1959)].
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]
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11. Flexible tariff clause
Delegation of tariff powers to the President
under the flexible tariff clause [Sec. 28(2), Art.
VI, 1987 Constitution]
Flexible tariff clause: the authority given to the
President, upon the recommendation of NEDA,
to adjust the tariff rates under Sec. 1608 of the
CMTA in the interest of national economy,
general welfare and/or national security.
12. Exemption from real property taxes
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.
b. 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.
Substantive Due Process – An act is done
under the authority of a valid law or the
Constitution itself.
Procedural Due Process – An act is done
after compliance with fair and reasonable
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methods or procedure prescribed by law.
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
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:
● The tax imposed is for private, as
distinguished from, public purposes
● A tax is imposed on property outside the
State, i.e., extra-territorial taxation; or
● 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.
Due process does not require that the property
subject to the tax or the amount to be raised
should be determined by judicial inquiry, and a
notice and hearing as to the amount of the tax
and the manner in which it shall be apportioned
are generally not necessary to due process of
law. [Pepsi-Cola Bottling Co. of the Philippines,
Inc. v. Municipality of Tanauan, G.R. No. L-
31156 (1976)]
Instances of violations of the due process
clause:
• If the tax amounts to confiscation of
property;
• If the subject of confiscation is outside the
jurisdiction of the taxing authority;
• If the tax is imposed for a purpose other
than a public purpose;
• If the law which is applied retroactively
imposes just and oppressive taxes.
• If the law violates the inherent limitations
on taxation.
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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.” [1
Cooley 608].
The equal protection clause is subject to
reasonable classification [See requisites for
valid classification, supra].
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.
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)]
• It is actually in the nature of a condition or
permit for the exercise of the right.
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• 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.
• 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. [Tolentino v. Secretary of
Finance, supra]
REQUISITES OF A VALID TAX
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.
TAX AS DISTINGUISED FROM OTHER
FORMS OF EXACTIONS
Tariff
Taxes Tariff
All embracing term A kind of tax
to include various imposed on articles
kinds of enforced which are traded
contributions upon internationally
persons for the
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Taxes Tariff License and
Taxes
attainment of public Regulatory Fee
purposes exceed the
expenses of issuing
Tariff may be used in one of three (3) senses: the license and of
1. A book of rates drawn usually in supervision.
alphabetical order containing the names of Imposed on persons, Imposed only on the
several kinds of merchandise with the property and the right to exercise a
corresponding duties to be paid for the right to exercise a privilege
same; or privilege.
2. The duties payable on goods imported or Failure to pay does Failure to pay makes
exported; or not necessarily the act or business
3. The system or principle of imposing duties make the act or illegal.
on the importation (or exportation of goods) business illegal.

Toll Penalty for non-

Taxes Toll payment:
Paid for the support Paid for the use of Surcharges; or
of the government another’s property. Imprisonment
Demand of Demand of (except poll tax).
sovereignty proprietorship
Generally, no limit on Amount paid License or permit fee is a charge imposed
the amount collected depends upon the under the police power for purposes of
as long as it is not cost of construction regulation.
excessive, or maintenance of
unreasonable or the public License is in the nature of a special privilege,
confiscatory improvement used. of a permission or authority to do what is within
Imposed only by the Imposed by the its terms. It makes lawful an act which would
government government or by otherwise be unlawful. A license granted by the
private individuals or State is always revocable. [Gonzalo Sy Trading
entities. v. Central Bank of the Phil., G.R. No. L-41480
(1976)]
A toll is a sum of money for the use of
something, generally applied to the Importance of the distinctions
consideration which is paid for the use of a 1. It is necessary to determine whether a
road, bridge or the like, of a public nature. [1 particular imposition is a tax or a license fee
Cooley 77] because some limitations apply only to one
and not to the other, and for the reason that
License fee exemption from taxes may not include
License and exemption from license fee.
Taxes 2. The power to regulate as an exercise of
Regulatory Fee
Imposed under the Levied under the police power does not include the power to
taxing power of the police power of the impose fees for revenue purposes.
state for purposes of state. [Progressive Development Corp. v.
revenue. Quezon City, G.R. No. L-36081 (1989)]
Forced contributions Exacted primarily to 3. An exaction, however, may be considered
for the purpose of regulate certain both a tax and a license fee. This is true in
maintaining businesses or the case of car registration fees which may
government occupations. be regarded as taxes even as they also
functions. serve as an instrument of regulation. If the
Generally unlimited Should not purpose is primarily revenue, or if revenue
as to amount unreasonably is, at least, one of the real and substantial

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purposes, then the exaction is properly A charge imposed only on property owners
called a tax. [Phil. Airlines, Inc. v. Edu, G.R. benefited is a special assessment rather than
No. L- 41383 (1988)] a tax notwithstanding that the statute calls it a
4. But it is possible that a tax may only have tax. The rule is that an exemption from taxation
a regulatory purpose. The general rule, does not include exemption from special
however, is that the imposition is a tax if its assessment. But the power to tax carries with
primary purpose is to generate revenue, it the power to levy a special assessment.
and regulation is merely incidental; but if
regulation is the primary purpose, the fact Note: The term "special levy" is the name used
that incidentally revenue is also obtained in the present Local Government Code (RA.
does not make the imposition a tax. No. 7160). A province, city, or municipality, or
[Progressive Development Corp. v. the National Government, may impose a
Quezon City, supra] special levy on lands especially benefited by
public works or improvements financed by it.
Primary purpose test (as seen in Progressive [Sec. 240, RA 7160]
Development Corp v. QC, supra):
1. Imposition must relate to an occupation or Debt
activity that so engages the public interest Taxes Debt
in health, morals, safety and development Based on laws Generally based on
as to require regulation for the protection contract, express or
and promotion of such public interest; implied.
2. Imposition must bear a reasonable relation Generally cannot be Assignable
to the probable expenses of regulation, assigned
taking into account not only the costs of Generally paid in May be paid in kind
direct regulation but also its incidental money
consequences as well. Cannot be a subject Can be a subject of
of set off or set off or
Note: Taxes may also be imposed for compensation compensation (see
regulatory purposes. It is called regulatory tax. Art. 1279, Civil
Code)
Special assessment Imprisonment is a A person cannot be
Taxes Special sanction for non- imprisoned for non-
Assessment payment of tax, payment of debt
Levied not only on Levied only on land except poll tax (except when it
land arises from a crime)
Imposed regardless Imposed because of Governed by the Governed by the
of public an increase in value special prescriptive ordinary periods of
improvements of land benefited by periods provided for prescription
public improvement in the NIRC
Contribution of a Contribution of a Does not draw Draws interest when
taxpayer for the person for the interest except only it is so stipulated or
support of the construction of a when delinquent where there is
government public improvement default
It has general Exceptional both as Imposed only by Can be imposed by
application both as to time and locality public authority private individual
to time and place
A tax is not a debt in the ordinary sense of the
A special assessment is not a personal liability word.
of the person assessed, i.e., his liability is
limited only to the land involved. It is based
wholly on benefits (not necessity).

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Penalty in performing the act or engaging in the
Taxes Penalty activity which is subject to the excise. The
Violation of tax laws Any sanction term “excise tax” is synonymous with
may give rise to imposed as a “privilege tax” and the two are often used
imposition of penalty punishment for interchangeably (e.g., income tax, value
violation of law or added tax, estate tax, donor’s tax).
acts deemed
injurious 2. As to burden or incidence
Primarily intended to Designed to regulate
raise revenue conduct a. Direct Taxes – taxes which are
May be imposed May be imposed by demanded from persons who also
only by the the government or shoulder them; taxes for which the
government private individuals or taxpayer is directly or primarily liable, or
entities which he cannot shift to another. The
Cannot be a subject Can be a subject of liability for the payment of the tax
of set off or set off or (incidence) and the burden (impact) of the
compensation compensation (see tax falls on the same person. (e.g., income
Art. 1279, Civil tax, estate tax, donor’s tax, community tax)
Code)
b. Indirect Taxes – taxes which are
C. KINDS OF TAXES demanded from one person in the
expectation and intention that he shall
indemnify himself at the expense of
1. As to object another, falling finally upon the ultimate
purchaser or consumer; taxes levied upon
a. Personal, Poll or Capitation Tax – tax of
transactions or activities before the articles
a fixed amount imposed on persons
subject matter thereof, reach the
residing within a specified territory, whether
consumers who ultimately pay for them not
citizens or not, without regard to their
as taxes but as part of the purchase price.
property or the occupation or business in
which they may be engaged (e.g.
Thus, the person who absorbs or bears the
community (formerly residence) tax).
burden of the tax is other than the one on whom
it is imposed and required by law to pay the tax.
b. Property Tax – tax imposed on property,
Practically all business taxes are indirect (e.g.,
real or personal, in proportion to its value
VAT, percentage tax, excise taxes on specified
or in accordance with some other
goods, customs duties).
reasonable method of apportionment (e.g.,
real estate tax). The obligation to pay the
3. As to tax rates
tax is absolute and unavoidable and is not
based upon the voluntary action of the
a. Specific Tax – a tax of a fixed amount
person assessed.
imposed by the head or number or by some
other standard of weight or measurement.
c. Privilege/Excise Tax – it is said that an
It requires no assessment (valuation) other
excise tax is a charge imposed upon:
than the listing or classification of the
i. the performance of an act,
objects to be taxed (e.g., taxes on distilled
ii. the enjoyment of a privilege, or
spirits, wines, and fermented liquors; cigars
iii. the engagement in an
and cigarettes)
occupation, profession, or
business.
b. Ad Valorem Tax – a tax of a fixed
proportion of the value of the property with
The obligation to pay excise tax is based
respect to which the tax is assessed. It
on the voluntary action of the person taxed
requires the intervention of assessors or

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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.
c. Mixed – a tax that has both the
characteristics of specific tax and ad
valorem tax
4. As to purpose
a. 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).
b. 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)
a. 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).
b. 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).
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6. As to graduation
a. Progressive – The rate of tax increases as
the tax base or bracket increases, e.g.,
income tax on individuals
b. Regressive – The rate of tax decreases as
the tax base or bracket increases. There is
no regressive tax in the Philippines.
c. 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.
d. 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.
Regressive/Progressive system of taxation
A regressive tax must not be confused with the
regressive system of taxation.
In a society where the majority of the people
have low incomes, a regressive taxation
system exists when there are more indirect
taxes imposed than direct taxes. Since the low-
income sector of the population as a whole
buys more consumption goods on which the
indirect taxes are collected, the burden of
indirect taxes rests more on them than on the
more affluent groups.
A progressive tax is, therefore, also different
from a progressive system of taxation.
Regressivity is not a negative standard for
courts to enforce. What Congress is required
by the Constitution to do is to "evolve a
progressive system of taxation." These
provisions are put in the Constitution as moral
incentives to legislation, not as judicially
enforceable rights. [Tolentino v. Secretary of
Finance, GR No. 115455, 25 August 1994]
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D. DOCTRINES IN TAXATION
1. Construction and Interpretation of
Tax Laws, Rules, and Regulations
General Rules on the Construction of Tax
Laws
a. Public purpose is always presumed
b. If the law is clear, apply the law in
accordance to its plain and simple
tenor
c. A statute will not be construed as
imposing a tax unless it does so clearly,
expressly and unambiguously
· In case of doubt, it is construed
most strongly against the
Government and liberally in favor
of the taxpayer since it is an
imposition of a burden (Lifeblood
Theory).
d. Tax laws may not be extended by
implication beyond the clear import of
their language, nor their operation
enlarged so as to embrace matters not
specifically provided
e. Tax laws operate prospectively unless
the purpose of the legislature to give
retroactive effect is expressly declared
or may be implied from the language
used
f. Tax laws are special laws and prevail
over a general law
a. Tax Laws
General Rule: Tax laws are construed strictly
against the government and liberally in favor of
the taxpayer. [Manila Railroad Co. v. Coll. Of
Customs, G.R. No. L-30264 (1929)].
No person or property is subject to taxation
unless within the terms or plain import of a
taxing statute. [see 72 Am. Jur. 2d 44] Taxes,
being burdens, are not to be presumed beyond
what the statute expressly and clearly
declares. [Coll. V. La Tondena, G.R. No. L-
10431 (1962)].
Thus, a tax payable by “individuals” does not
apply to “corporations.”
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Tax statutes offering rewards are liberally
construed in favor of informers. [Penid v.
Virata, G.R. No. L-44004 (1983)].
Exceptions:
a. 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 [see 51
Am. Jur. 368]. E.g. Word “individual” was
changed by the law to “person”. This clearly
indicates that the tax applies to both natural
and juridical persons, unless otherwise
expressly provided.
b. The rule does not apply where the
taxpayer claims exemption from the tax.
Tax statutes are to receive a reasonable
construction or interpretation with a view to
carrying out their purpose and intent. They
should not be construed as to permit the
taxpayer easily to evade the payment of tax.
[Carbon Steel Co. v. Lewellyn, 251 U.S. 201].
Thus, the good faith of the taxpayer is not a
sufficient justification for exemption from the
payment of surcharges imposed by the law for
failing to pay tax within the period required by
law.
b. Tax Exemption and Exclusion
Tax exemptions must be shown to exist clearly
and categorically, and supported by clear
legal provisions. [NPC v. Albay, G.R. No.
87479 (1990)]
General Rule:
In the construction of tax statutes, exemptions
are not favored and are construed strictissimi
juris against the taxpayer. [Republic Flour Mills
v. Comm. & CTA, G.R. No. L-25602 (1970)]
a. NPC v. Albay [supra]: Tax exemptions
must be shown to exist clearly and
categorically, and supported by clear
legal provisions.
b. Floro Cement v. Gorospe [supra]: Claims
for an exemption must be able to point out
some provision of law creating the right,
and cannot be allowed to exist upon a
mere vague implication or inference.
c. RCPI v Provincial Assessor of South
Cotabato [G.R. No. 144486 (2005)]:
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Exemptions are strictly construed against
the taxpayer and liberally in favor of the
taxing authority—it is the taxpayer’s duty to
justify the exemption by words too plain to
be mistaken and too categorical to be
misinterpreted.
d. CIR v. CA [supra]: Refunds are in the
nature of exemption and must be
construed strictly against the
grantee/taxpayer.
e. Quezon City v. ABS-CBN Broadcasting
Corporation [G.R. No. 166408 (2008)]:
Since taxation is the rule and exemption
the exception, the intention to make an
exemption ought to be expressed in clear
and unambiguous terms
Exceptions:
a. When the law itself expressly provides for
a liberal construction, that is, in case of
doubt, it shall be resolved in favor of
exemption;
b. 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.
c. When the exemption is granted under
special circumstances to special classes of
persons.
d. 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.
[Comm. V. Arnoldus Carpentry Shop, Inc.,
G.R. No. 71122 (1988)].
c. Tax Rules and Regulations
General Rule:
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 an elementary rule in administrative law
that administrative regulations and policies
enacted by administrative bodies to interpret
the law which they are entrusted to enforce
have the force of law and are entitled to great
respect. They have in their favor a presumption
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of legality [Gonzales v. Land Bank, G.R. No.
76759 (1990)]
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
a. Reasonable;
b. Within the authority conferred;
c. Not contrary to law and the Constitution
[Art. 7, NCC]; and
d. Must be published.
Tax regulations whose purpose is to enforce or
implement existing law must comply with the
following requisites to be effective [RP v.
Pilipinas Shell Petroleum Corp., G.R. No.
173918 (2008)]:
a. Be published in a newspaper of general
circulation [Art. 2, NCC]; AND
b. Filed with the UP Law Center Office of the
National Administrative Register (ONAR)
[Ch 2, Book VII, EO 292]
Note: Administrative rules and regulations
must always be in harmony with the provisions
of the law. In case of conflict with the law or
the Constitution, the administrative rules and
regulations are null and void. As a matter of
policy, however, courts will declare a regulation
or provision thereof invalid only when the
conflict with the law is clear and unequivocal.
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.
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General rule: 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.
Exceptions: The Commissioner may not
delegate the following:
a. The power to recommend the promulgation
of rules and regulations by the Secretary of
Finance;
b. The power to issue rulings of first
impression or to reverse, revoke, or modify
any existing ruling of the Bureau; and
c. The power to compromise or abate any tax
liability as provided by Sec. 204 and 205 of
the NIRC
Exception to the exception: 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.”
d. 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. [People
v. Purisima, G.R. No. L-42050-66 (1978)]
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2. Prospectivity of Tax Laws
General rule:
Tax laws are prospective in operation.
Reason: Nature and amount of the tax under
tax laws enacted after the transaction could not
have been foreseen and understood by the
taxpayer at the time of the transaction.
Exception:
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. [Republic v. Fernandez, G.R.
No. L-9141 (1956)]
Statutes are prospective and not retroactive in
their operation, laws being the formulation of
rules for the future, not the past. [Curata v.
Philippine Ports Authority, G.R. Nos. 154211-
12 (2009)]
The language of the statute must clearly
demand or press that it shall have a retroactive
effect. [Lorenzo v. Posadas, supra]
Exception to the exception:
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. [Central
Azucarera v. CTA, G.R. No. L-23236 (1967)]
Non-retroactivity of rulings [Sec. 246, NIRC]
General rule:
Rulings do not have retroactive application if
the revocation, modification, or reversal will be
prejudicial to the taxpayer.
Exceptions:
a. Taxpayer’s deliberate misstatement or
omission of facts
b. BIR’s gathered facts is materially
different from the facts from which the
ruling was based on
c. Taxpayer acted in bad faith
Note: The rule on non-retroactivity of rulings
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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. Imprescriptibility of Taxes
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)]
a. 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:
(a) the prescribed last day of
filing of returns (even if the
return was filed earlier than the
deadline); OR
(b) the day when the return was
actually filed if filed later than the
last day of filing [Sec. 203,
NIRC], whichever comes later.
10 Prescription of assessment in
YEARS cases of:
(a) false or fraudulent return with
intent to evade tax; OR
(b) 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 (i.e., the ascertainment of the duties
that have to be paid on imported goods) is
three (3) years, except in cases of:
1. Tentative liquidation;
2. Payment under protest;
3. Fraud; and
4. Compliance audit.
(2) Customs Modernization and Tariffs Act
(CMTA)
Under Sec. 430, it provides that “[i]n the
absence of fraud and when the goods have
been finally assessed and released, the
assessment shall be conclusive upon all
parties three (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]:
a. Taxes, fees, and charges shall be
assessed five (5) years from the date
they become due;
b. Taxes, fees, and charges must be
collected five (5) years from the date of
assessment by administrative or
judicial action;
c. The prescriptive period for assessment
and collection shall be three (3) years
if the tax accrued before the effectivity
of the Local Government Code [Sec.
194 and 270, LGC].
d. In case of fraud or intent to evade the
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payment of taxes, fees, or charges, the
same may be assessed within ten (10)
years from the discovery of the fraud or
intent to evade payment.
The prescriptive period is tolled when:
a. The treasurer is legally prevented from
making the assessment or collection;
b. The taxpayer requests for a
reinvestigation and executes a waiver
in writing before expiration of the period
within which to assess or collect; and
c. The taxpayer is out of the country or
otherwise cannot be located.
4. Double Taxation
Double taxation means taxing the same
property twice when it should be taxed only
once; that is, “taxing the same person twice by
the same jurisdiction for the same thing.”
[Swedish Match Phils., Inc. v. Treasurer, G.R.
No. 181277 (2013)]
a. Strict sense (Direct Duplicate
Taxation)
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.
[Swedish Match Phils., Inc. v. Treasurer,
supra]
b. Broad sense (Indirect Duplicate
Taxation)
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 two or more pecuniary impositions.
For example, a tax upon the same property
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imposed by two different states.
Double taxation, standing alone and not being
forbidden by our fundamental law, is not a valid
defense against the legality of a tax measure
[Pepsi Cola v. Mun. of Tanauan, G.R. No. L-
31156 (1976)].
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. [Villanueva v. City of
Iloilo, G.R. No. L-26521 (1968)]
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. [DE LEON, citing
26 R.C.L 264-265]. Where double taxation (in
its narrow sense) occurs, the taxpayer may
seek relief under the uniformity rule or the
equal protection guarantee. [DE LEON, citing
84 C.J.S.138].
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.
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The apparent rationale for doing away with
double taxation is to encourage the free flow
of goods and services and the movement of
capital, technology and persons between
countries, conditions deemed vital in creating
robust and dynamic economies. [CIR v. SC
Johnson & Sons, Inc., G.R. No. 127105 (1999)]
Modes of eliminating double taxation
a. Allowing reciprocal exemption either by law
or by treaty;
b. Allowance of tax credit for foreign taxes
paid;
c. Allowance of deductions such as for
foreign taxes paid, and vanishing
deductions in estate tax; or
d. 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.
● 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.
● 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.
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3. Onward shifting - When the tax is shifted
two or more times either forward or
backward.
Factors determining tax shifting
1. Elasticity of demand and supply - The
more the elasticity, the lower the incidence
on the sales and the higher the incidence
on supply.
2. Nature of markets – In an oligopolistic
market (i.e. few sellers and many buyers)
tax shifting to buyers is high since few
sellers can team up to determine the
market price. In a situation where there are
many buyers and sellers, a large portion of
tax will be borne by sellers. For a
monopolistic market, the entire tax burden
falls on the shoulders of the buyer.
3. Government policy on pricing – In the
case of government price control, the
supplier cannot increase prices, hence
cannot shift tax burden to buyers and vice
versa.
4. Geographical location – If taxes are
imposed on certain regions, it is hard to
shift them to consumers because
consumers will move to regions with low
taxes.
5. Nature of tax (Direct or Indirect tax) –
Direct tax e.g. PAYE (pay-as-you-earn)
cannot be shifted whatsoever while indirect
taxes can be shifted through increase in
prices.
6. Rate of tax – If the rate is too high, shifting
can occur backwards or forwards; if the
rate is too low, it may be absorbed by the
manufacturer.
7. Time available for adjustment – The
person who can adjust faster (buyer or
seller) will be able to shift the tax e.g. if the
buyer can shift to substitute goods, the
seller will bear the tax burden.
8. The tax point
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Taxes that can be shifted government. But, the producers may succeed
1. Value-added Tax in collecting it from the consumers by raising
2. Percentage Tax the price of soap by the amount of tax. In that
3. Excise Tax case, consumers eventually pay the tax and so
the incidence falls upon them.
Meaning of Impact and Incidence of
Taxation Relationship between Impact, Shifting, and
Incidence of a Tax
Impact of taxation is the point where the tax Impact Shifting Incidence
is originally imposed or the one on whom the
tax is formally assessed. [Ingles, Tax Made Initial Intermediate Result
Less Taxing (2018)] In so far as the law is phenomenon process
concerned, the taxpayer, the subject of tax, is
the person who must pay the tax to the Imposition of Transfer of Setting or
government. the tax the tax coming to
rest of the
Incidence of taxation is the point on whom the tax
tax burden finally rests. [INGLES] It takes place
when shifting has been effected from the
Example: Impact in VAT is on the producer who
statutory taxpayer to another.
shifts the burden to the customer who finally
bears the incidence of the tax
Impact Distinguished from Incidence
Impact Incidence b. Tax Avoidance (Tax Minimization)
Initial burden of tax Ultimate burden of
the tax The exploitation by the taxpayer of legally
permissible alternative tax rates or methods of
At the point of At the point of assessing taxable property or income in order
imposition settlement to avoid or reduce tax liability. It is politely
called “tax minimization” and is NOT
Falls upon the Rests on the person punishable by law.
person from whom who pays it
the tax is collected eventually Example: A person refrains from engaging in
some activity or enjoying some privilege in
May be shifted Cannot be shifted order to avoid the incidental taxation or to lower
his tax bracket for a taxable year.
Incidence is the end
of the shifting
process. Sometimes,
c. Tax Evasion (Tax Dodging)
however, when no
shifting is possible, Tax Evasion - is the use by the taxpayer of
as in the case of illegal or fraudulent means to defeat or
income tax or such lessen the payment of a tax. It is also known as
other direct taxes, “tax dodging.” It is punishable by law.
the impact coincides
with incidence on the Example: Deliberate failure to report a taxable
same person. income or property; deliberate reduction of
income that has been received; overstatement
of expenses.
Application: Elements of Tax Evasion
Suppose a tax — excise duty — is imposed on a. The end to be achieved. Example: the
soap. Its impact is on the producers, in the first payment of less than that known by the
instance, as they are liable to pay it to the taxpayer to be legally due, or in paying no
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tax when such is due; Tax Avoidance v. Tax Evasion
b. An accompanying state of mind described
Tax Tax
as being “evil,” “in bad faith,” “willful,” or
Avoidance Evasion
“deliberate and not accidental”; and
c. A course of action (or failure of action) Also called Tax Tax
which is unlawful. [CIR v. Estate of Toda, as Minimization Dodging
G.R. No. 147188 (2004)]

Since fraud is a state of mind, it need not be Means Legal Illegal

proved by direct evidence but may be inferred
from the circumstances of the case. Thus:
● The failure of the taxpayer to declare for Outcome of Outcome of
taxation purposes his true and actual tax planning tax fraud
income derived from his business for
two consecutive years has been held as
an indication of his fraudulent intent to Punishable? No Yes
cheat the government of its due taxes.
[Republic v. Gonzales, G.R. No. L-17962
(1965)] Purpose Merely Entirely
● The substantial underdeclaration of minimize escape
income in the income tax returns of the payment of payment of
taxpayer for four (4) consecutive years taxes (tax taxes
coupled with his intentional savings)
overstatement of deductions justifies the
finding of fraud. [Perez v. CTA and d. Transformation
Collector, G.R. No. L-10507 (1958)].
Method of escape in taxation whereby the
Mere understatement of a tax is not itself proof
manufacturer or producer upon whom the tax
of fraud for the purpose of tax evasion. The
has been imposed pays the tax and endeavors
burden of proof is on the prosecution to prove
to recoup himself by improving his process of
beyond reasonable doubt that the accused
production thereby turning out his units of
willfully failed to supply correct and accurate
products at a lower cost. The taxpayer escapes
information. [People v. Judy Ann Santos, CTA
by a transformation of the tax into a gain
Crim. Case No. 0-012 (2013)]
through the medium of production.
The Willful Blindness doctrine states that a
taxpayer can no longer raise the defense that 1. Exemption from Taxation
the errors on their tax returns are not their
responsibility or that it is the fault of the Meaning of exemption from taxation
accountants they hired. Intent to defraud need The grant of immunity to particular persons or
not be shown for a conviction of tax evasion. corporations or to persons or corporations of a
The only thing that needs to be proven is that particular class from a tax which persons and
the taxpayer was aware of his obligation to file corporations generally within the same state or
the tax return but he nevertheless voluntarily, taxing district are obliged to pay. It is an
knowingly, and intentionally failed to file the immunity or privilege; it is freedom from a
required returns. [INGLES citing People v. financial charge or burden to which others are
Kintanar, C.T.A. E.B. No. 006 (2010)] 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

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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)]
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)]
He who claims an exemption must be able to
point to some positive provision of law creating
the right; it cannot be allowed to exist upon a
mere vague implication or inference. The right
of taxation will not be held to have been
surrendered unless the intention to surrender
is manifested by words too plain to be
mistaken, for the state cannot strip itself of the
most essential power of taxation by doubtful
words; it cannot, by ambiguous language, be
deprived of this highest attribute of sovereignty.
[Manila Electric Corporation v. Vera, G.R. No.
L-29987 (1975)]
If there is nothing in a law that points that the
word “exemption” refers to taxes, the
implication would be that the term would be an
exemption of something else, such as
regulatory or reporting requirements. [Ingles
citing PLDT v. City of Davao, G.R. No. L-29987
(1975)]
Grounds for Tax Exemption
a. It may be based on a contract.
b. It may be based on some ground of public
policy.
c. It may be created in a treaty on grounds of
reciprocity or to lessen the rigors of
international or multiple taxation.
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
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of equity. [Davao Gulf Lumber Corp. v. CIR,
G.R. No. 117359 (1998)]
Nature of tax exemption
a. 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.
b. General rule: Revocable by the
government.
Exception: 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.
c. 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.
d. 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
a. Express or Affirmative - either entirely or
in part, may be made by provisions of the
Constitution, statutes, treaties, ordinances,
franchises, or contracts.
b. 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.
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Exemptions are not presumed, but when
public property is involved, exemption is
the rule, and taxation is the exception.
c. 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. [Casanovas v. Hord, G.R. No.
3473 (1907)]
In the real sense of the term and where the
non-impairment clause of the Constitution
can rightly be invoked, this includes those
agreed to by the taxing authority in
contracts, such as those contained in
government bonds or debentures, lawfully
entered into by them under enabling laws
in which the government, acting in its
private capacity, sheds its cloak of
authority and waives its governmental
immunity.
These contractual tax exemptions,
however, are not to be confused with tax
exemptions granted under franchises. A
franchise partakes the nature of a grant
which is beyond the purview of the non-
impairment clause of the Constitution.
[Manila Electric Company v. Province of
Laguna, G.R. No. 131359 (1999)]
Rationale of Tax Exemption
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:
a. 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. [Floro Cement
v. Gorospe, G.R. No. L-46787 (1991)
b. When granted, they are strictly construed
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against the taxpayer [Luzon Stevedoring
Co. v. CTA, G.R. No. L-30232 (1988)]
c. Tax exemptions are strictly construed
against the taxpayer, they being highly
disfavored and may almost be said “to be
odious to the law.” [Manila Electric
Company v. Vera, supra]
Revocation of Tax Exemption
General Rule: Revocable by the government.
Exception: Contractual tax exemptions may
not be unilaterally so revoked by the taxing
authority without thereby violating the non-
impairment clause of the Constitution.
2. Equitable Recoupment
The doctrine of equitable recoupment means
that when a refund of a tax illegally or
erroneously collected or overpaid by a
taxpayer is barred by the statute of limitations
and a tax is being presently assessed against
said taxpayer, said present tax may be
recouped or set-off against the tax, the refund
of which has been barred. [CIR v. University of
Santo Tomas, G.R. No. 11274, 104 Phil. 1062,
(1958)]
In other words, 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. [CIR v. University of Santo
Tomas, supra]
3. Prohibition on Compensation and
Set-Off
General rule: Taxes cannot be subject to
compensation [South African Airways v. CIR,
G.R. No. 180356 (2010)]
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Reasons:
a. This would adversely affect the
government revenue system [Philex Mining
v. CA, G.R. No. 125704 (1998)].
b. 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. [South African Airways v. CIR,
supra]
Exception: 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:
a. Due,
b. Demandable, and
c. 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.
[Domingo v. Garlitos, G.R. No. L-18994 (1963)]
4. Compromise and Tax Amnesty
Definition of Compromise
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:
a. The taxpayer must have a tax liability.
b. There must be an offer (by the taxpayer or
Commissioner) of an amount to be paid by
the taxpayer.
c. There must be acceptance (by the
Commissioner or the taxpayer, as the case
may be) of the offer in settlement of the
original claim.
Definition of Tax Amnesty
A tax amnesty partakes of an absolute
forgiveness or waiver by the Government of
its right to collect what otherwise would be due
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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. [Republic v. IAC, G.R. No. L-69344
(1991)]
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 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. [People v.
Castañeda, G.R. No. L-46881 (1988)]
Tax exemption is immunity from all civil
liability only. It is an immunity or privilege, a
freedom from a charge or burden of which
others are subjected. [Greenfield v. Meer, C.A.
No. 156 (1946)]. It is generally prospective in
application [Dimaampao, 2005, p. 111].
Tax Amnesty v. Tax Exemption
Tax Tax
Amnesty Exemption
Benefit Immunity Immunity
from civil, from civil
criminal, liability
administrati (relief from
ve liability paying
arising from taxes)
non-
payment of
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of such ruling, seek its review by the Secretary
Tax Tax
of Finance. The Secretary of Finance may also
Amnesty Exemption
review the rulings motu proprio. [DOF Order
taxes No. 007-02, 7 May 2002]

Coverage Past tax Future tax
liability liability
Actual Yes None
Revenue Loss
II. NATIONAL TAXATION
A. TAXING AUTHORITY
1. Jurisdiction, Power and Functions
of the Commissioner of Internal
Revenue
a. Powers and Duties of the Bureau of
Internal Revenue [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.
b. Interpreting Tax Laws and Deciding
Tax Cases
Power to Interpret
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 thirty (30) days from the date of receipt
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 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
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]
c. Non-retroactivity of rulings (Sec. 246,
NIRC)
General Rule: 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.
Exceptions:
1. Where the taxpayer deliberately misstates
or omits material facts from his return or
any document required of him by the BIR;
2. Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the ruling is based; or
3. Where the taxpayer acted in bad faith.
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

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TAXATION 1
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. [CIR v. San
Roque, supra].
2. Rule-Making Authority of the
Secretary of Finance
a. Authority of the Secretary of Finance to
Promulgate Rules and Regulations [Sec.
244, NIRC]
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. Specific Provisions to be Contained in
Rules and Regulations [Sec. 245, NIRC]
1. The manner in which revenue shall be
collected and paid, the instrument, document
or object to which revenue stamps shall be
affixed, the mode of cancellation of the same,
the manner in which the proper books, records,
invoices and other papers shall be kept and
entries therein made by the person subject to
the tax, as well as the manner in which licenses
and stamps shall be gathered up and returned
after serving their purposes;
2. The manner in which tax returns, information
and reports shall be prepared and reported and
the tax collected and paid, as well as the
conditions under which evidence of payment
shall be furnished the taxpayer, and the
preparation and publication of tax statistics;
3. The manner in which internal revenue taxes,
such as income tax, including withholding tax,
estate and donor's taxes, value-added tax,
other percentage taxes, excise taxes and
documentary stamp taxes shall be paid
through the collection officers of the BIR or
through duly authorized agent banks which are
hereby deputized to receive payments of such
taxes and the returns, papers and statements
that may be filed by the taxpayers in connection
with the payment of the tax:
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Provided, however, that notwithstanding the
other provisions of this Code prescribing the
place of filing of returns and payment of taxes,
the CIR may, by rules and regulations require
that the tax returns, papers and statements and
taxes of large taxpayers be filed and paid,
respectively, through collection officers or
through duly authorized agent banks:
Provided, further, That the CIR can exercise
this power within six (6) years from the
approval of R.A. 7646 (An Act Authorizing the
CIR to Prescribe the Place for Payment of
Internal Revenue Taxes by Large Taxpayers)
or the completion of its comprehensive
computerization program, whichever comes
earlier. For the purpose of this Section, 'large
taxpayer' means a taxpayer who satisfies any
of the following criteria:
a. Value-Added Tax (VAT) – Business
establishment with VAT paid or payable of
at least P100,000 for any quarter of the
preceding taxable year;
b. Excise tax – Business establishment with
excise tax paid or payable of at least
P1,000,000 for the preceding taxable year;
c. Corporate Income Tax - Business
establishment with annual income tax paid
or payable of at least P1,000,000 for the
preceding taxable year; and
d. Withholding tax - Business establishment
with withholding tax payment or remittance
of at least P1,000,000 for the preceding
taxable year.
Provided, however, That the Secretary of
Finance, upon recommendation of the CIR,
may modify or add to the above criteria for
determining a large taxpayer after considering
such factors as inflation, volume of business,
wage and employment levels, and similar
economic factors.
The penalties prescribed under Sec. 248 shall
be imposed on any violation of the rules and
regulations issued by the Secretary of Finance,
upon recommendation of the CIR, prescribing
the place of filing of returns and payments of
taxes by large taxpayers.
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TAXATION 1
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. [DE LEON citing CJS and AmJur]
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. [DE LEON]
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
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Philippines.
a. Criteria in Imposing Philippine
Income Tax
Citizenship
A citizen of the Philippines is subject to
Philippine income tax:
a. On his worldwide income, if he resides in
the Philippines; or
b. Only on his income from sources within the
Philippines, if he qualifies as a non-resident
citizen. [MAMALATEO]
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. [MAMALATEO]
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.
[MAMALATEO]
b. Types of Philippine Income Tax
There are several types of income tax under
the NIRC, namely: [MAMALATEO]
i. Graduated income tax and fixed tax on
gross sales or receipts for individuals;
ii. Normal corporate income tax on
corporations;
iii. Minimum corporate income tax on
corporations;
iv. Special income tax on certain
corporations;
v. Capital gains tax on sale or exchange
of unlisted shares of stock of a
domestic corporation classified as
capital assets;
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vi. Capital gains tax on sale or exchange Rosario, Jr., G.R. No. 109289 (1994)]
of real property located in the
Philippines classified as a capital ii. Schedular
asset;
vii. Final withholding tax on certain passive Under a schedular tax system, different types
investment income paid to residents; of income are subject to different sets of
viii. Final withholding tax on income graduated or flat income tax rates. The
payments made to non-residents; applicable tax rate(s) will depend on the
ix. Fringe benefits tax on fringe benefits of classification of the taxable income and the
supervisory or managerial employees; basis could be gross income or net income.
x. Branch profit remittance tax; Separate income tax returns (or other types of
return applicable) are filed by the recipient of
Income Tax can also be simplified into three (3) income for the particular types of income
kinds: received. [MAMALATEO]
A schedular approach in taxation is one where
1. Net Income Tax – certain deductions the income tax treatment varies and is made to
and/or exemptions are deducted from depend on the kind or category of taxable
the gross income and the tax is income of the taxpayer. [Tan v. Del Rosario,
computed based on the resulting net Jr., supra]
income or taxable income,
2. Gross Income Tax – no deductions Global System Schedular System
and/or exemptions are allowed to be A personal tax based
A tax on income-
deducted, hence, the tax is computed on the income of the
producing activities.
based on the gross or the aggregate taxpayer.
amount earned. Emphasizes
3. Final Income Tax – no deductions Emphasizes the
revenue and
and/or exemptions are allowed to be burden allocation
administrative
deducted. Hence the tax is computed aspects.
aspects.
based on the gross or passive income Because of its
but as a distinction, it is subject to the Most equitable
multiple rates, the
withholding or final tax as provided system yet
tax burden of a
under Section 57(A) of the Code developed for
person does not
[CHAVEZ, 2022]. distributing tax
correspond to his
burden. The burden
income but rather
c. Income Tax Systems of an individual is
falls fortuitously on
closely related to his
the type of his
resources and his
i. Global income. It is fixed
ability to pay.
and final.
Under a global tax system, it does not matter It serves as a means This function is alien
whether the income received by the taxpayer is for redistributing to schedular system
classified as compensation income, business income and wealth. where in times of
or professional income, passive investment Big income earners plenty or in times of
income, capital gain, or other income. All items are subject to higher need, people pay the
of gross income, deductions, and personal and taxes than small same fixed tax on
additional exemptions, if any, are reported in income earners. their income.
one income tax return, and one set of tax rates Administration is not
are applied on the tax base. The administration is
quite as easy as
simple, being
schedular because
A global tax system is one where the tax confined to each
one has to consider
treatment views indifferently the tax base and transaction or
all income from
generally treats in common all categories of activity.
whatever source.
taxable income of the taxpayer. [Tan v. Del

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iii. Semi-schedular or Semi-global Tax
System
All compensation income, business or
professional income, capital gain and passive
income that are 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 returns. [Mamalateo]
Note: The Philippines, under the NIRC, follows
a semi-schedular and semi-global tax system.
2. 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 certain capital
assets (namely: (a) shares of stock of
domestic corporations, and (b) real
property) are subject to final taxes at
preferential tax rates [MAMALATEO].
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3. 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].
a. Calendar Year – An accounting period of
12 months ending on the last day of
December.
b. Fiscal Year – An accounting period of 12
months ending on the last day of any month
other than December [Sec. 22(Q), NIRC].
c. 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:
i. When a corporation is newly
organized.
ii. When a corporation is dissolved.
[Sec. 52(c), NIRC]
iii. When a corporation changes its
accounting period. [Sec 46, NIRC]
iv. When the taxpayer dies.
General rule: Taxable income shall be
computed based on the taxpayer’s annual
accounting period, which may be fiscal year or
calendar year
Exception: Taxable income shall be computed
based on the basis of calendar year only:
a. If the taxpayer's annual accounting period
is other than a fiscal year;
b. If the taxpayer has no annual accounting
period;
c. If the taxpayer does not keep books of
accounts; or
d. If the taxpayer is an individual [Sec. 43,
NIRC].
4. 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
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or corporation. [Sec. 22(A), NIRC] satisfaction of the CIR the fact of his
physical presence abroad with a
For income tax purposes, taxpayers are definite intention to reside therein.
classified generally as follows: 2. PH citizen who leaves the Philippines
a. Individuals during the taxable year to reside
b. Corporations abroad, either as an immigrant or for
c. Estates and Trusts employment on a permanent basis.
d. Partnerships (General Partnership and 3. PH citizen who works and derives
General Professional Partnerships) income from abroad and whose
employment thereat requires him to be
Primary physically present abroad most of the
Sub-Classification(s)
Classification time during the taxable year. To be
Citizens Resident citizens considered physically present abroad
of the
Philippi Non-resident citizens
most of the time during the taxable
nes year, a contract worker must have
Residents been outside the PH for not less than
Engaged in 183 days during such taxable year.
Trade or [BIR R.R. 1-79, Sec. 2]
Business in 4. PH citizen previously considered as a
the
non-resident citizen and who arrives
Non- Philippines
Aliens during the taxable year to reside
Individuals residen Not
ts Engaged in permanently in the PH - Treated as
Trade or NRC with respect to his income derived
Business in from sources abroad until his arrival in
the the PH
Philippines
Special
Classes
Note: The term ‘residence’ is to be understood
of Minimum Wage Earner not in its common acceptation as referring to
Individu ‘dwelling’ or ‘habitation,’ but rather to ‘domicile’
als or legal residence, that is, ‘the place where a
Domestic Corporations party actually or constructively has his
Resident permanent home, where he, no matter where
Corporation
he may be found at any given time, eventually
s
Corporations Foreign intends to return and remain (animus
Non-
Corporations manendi). [Japzon v. COMELEC, G.R. No.
resident
Corporation 180088 (2009)]
s
Estates and c. Overseas Contract Worker (OCW) – an
Trusts individual citizen of the PH who is working
General Partnership
Partnerships and deriving income from abroad as an
General Professional Partnership
overseas contract worker is taxable only on
income derived from sources within the PH
i. Individual Taxpayers
Provided, that a seaman who is a citizen of
the PH and who receives compensation for
CITIZENS
services rendered abroad as a member of
the complement of a vessel engaged
a. Resident Citizens (RC)
exclusively in international trade shall be
A citizen of the PH residing therein is
treated as an overseas contract worker [
taxable on all income derived from sourced
Sec 23(C)]
with and without the Philippine [Sec 23 (A)].
b. Non-resident Citizens (NRC) [Sec. 22 (E),
NIRC]
1. PH citizen who establishes to the
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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.
Exception: 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.
ii. Corporations
Includes all types of corporations (even one
person 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. [MAMALATEO]
Excludes general professional partnerships
(GPP); joint ventures or consortiums formed for
the purpose of (1) undertaking construction
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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. [MAMALATEO]
Domestic corporations
A corporation created and organized in the
Philippines or under its laws. [Sec. 22 (C),
NIRC]
Foreign corporations
A corporation which is not domestic. [Sec. 22
(D), NIRC]
1. Resident foreign corporations – Foreign
corporation engaged in trade or business
within the Philippines. [Sec. 22 (H), NIRC]
2. Non-resident foreign corporations –
Foreign corporation not engaged in trade
or business within the Philippines. [Sec. 22
(I), NIRC]
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
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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]
Taxability of income:
Taxpayer Within Without
Resident Citizen √ √
Non-resident Citizen
√ X
and OCW
Resident Alien √ X
Non-resident Alien √ X
Domestic Corporation √ √
Foreign Corporation √ X
iii. Estates 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]
In Sec 60 of the Tax Code, it provides that the
tax imposed upon individuals shall apply to the
income of estates or of any kind of property
held in trust, including:
a. Income accumulated in trust for the
benefit of unborn or unascertained
person or persons with contingent
interests, and income accumulated
or held for future distribution under
the terms of the will or trust.
b. Income which is distributed
currently by a guardian of an infant
which is to be held of distributed as
the court may direct
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c. Income received by estates of
deceased persons during the
period of administration or
settlement of the estate
d. Income, which in the discretion of
the fiduciary, may either be
distributed to the beneficiaries or
accumulated.
Exceptions: (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. [DE
LEON citing Arts. 776 and 781 NCC]
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. [DE LEON]
iv. Partnerships, 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
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business. [Sec. 22 (B), NIRC] Income is a gain derived from labor or capital,
or both labor and capital; and includes the gain
The partners themselves, not the partnership, derived from the sale or exchange of capital
shall be liable for income tax in their separate assets. [DE LEON]
and individual capacities. Each partner shall
report as gross income his distributive share, Income includes earnings, lawfully or
actually or constructively received, in the net unlawfully acquired, without consensual
income of the partnership. [Sec. 26, NIRC] recognition, express or implied, of an obligation
to repay and without restriction as their
Joint venture and consortium disposition. [James v. US, 366 US 213 (1961)]
Income may be received in the form of cash,
Essential factors of a joint venture or property, service, or a combination of the three.
consortium:
1. Each party must make a contribution, not Income v. Capital
necessarily of capital but by way of
services, skill, knowledge, material or "The essential difference between capital and
money; income is that capital is a fund; income is a
2. Profits must be shared among the parties; flow. A fund of property existing at an instant of
3. There must be a joint proprietary interest time is called capital. A flow of services
and right of mutual control over the subject rendered by that capital by the payment of
matter of the enterprise; money from it or any other benefit rendered by
4. There is a single business transaction. a fund of capital in relation to such fund through
a period of time is called income." [Madrigal v.
A joint venture or consortium is treated as a Rafferty, G.R. No. 12287 (1918)]
corporation, except those formed for the
purpose of: Unless otherwise specified, it means cash or its
1. Undertaking construction projects, or equivalent. Income can also be thought of as a
2. engaging in petroleum, coal, geothermal flow of the fruits of one[s] labor.” [Association
and other energy operations pursuant to an of Non-Profit Clubs v BIR, G.R. No. 228539,
operating consortium agreement under a 26 June 2019].
service contract with the Government.
Income Capital
Co-ownership Denotes a flow of
Fund or property
wealth during a
existing at one
There is co-ownership whenever the definite period of
distinct point in time.
ownership of an undivided thing or right time.
belongs to different persons. [Art. 484, NCC] Service of wealth Wealth itself
Return of capital is
Co-ownerships are not subject to tax as a Subject to tax
not subject to tax
corporation if the activities of the co-owners are Fruit Tree
limited to the preservation of the property and
the collection of the income therefrom, in which Classification of Income
case each co-owner is taxed individually on his
distributive share in the income of the co- 1. Compensation Income
ownership. [DE LEON citing Sec. 210 Regs] Means all remuneration for services
performed by an employee for his
5. Income employer under an employer-employee
relationship, unless explicitly excluded by
a. Definition the Tax Code of special law.
[MAMALATEO]
Income means all wealth which flows to the
taxpayer other than a mere return of capital.

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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. [VALENCIA AND ROXAS]
b. When Income is Taxable
In Section 31 of the NIRC, as amended by
TRAIN, taxable income means the pertinent
items of gross income specified in this Code,
less the deductions, if any, authorized for such
types of income by this Code, or other special
laws [CHAVEZ, 2022].
Existence of Income
Requisites for income to be taxable [DE
LEON]
1. There is INCOME, gain or profit
2. RECEIVED or REALIZED during the
taxable year
3. NOT EXEMPT from income tax by law or
treaty
Certainly, an income tax is arbitrary and
confiscatory if it taxes capital because capital
is not income. In other words, it is income, not
capital, which is subject to income tax.
[Chamber of Real Estate and Builders’
Associations, Inc. v The Hon. Executive
Secretary Alberto Romulo, G.R. No. 160756,
09 March 2010.
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
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the form of actual receipt of cash or may occur
as a constructive receipt of income. [Valencia
and Roxas]
Mere increase in the value of property without
actual realization, either through sale or other
disposition, is not taxable. [De Leon]
Stock Dividends are Not Income Until
Realized
Income in tax law is an amount of money
coming to a person within a specified time,
whether as payment for services, interest or
profit from investment.” It means cash or its
equivalent. It is gain derived and severed from
capital, from labor or from both combined, so
that to tax a stock dividend would be to tax a
capital increase rather than the income.
In a loose sense, stock dividends issued by the
corporation are considered unrealized gain,
and cannot be subjected to income tax until
that gain has been realized.
Before the realization, stock dividends are
nothing but a representation of an interest in
the corporate properties.
As capital, it is not yet subject to income tax.
Increase in the Value of Shares Not an
Income
Since a mere advance in the value of the
property of a person or corporation is no sense
constitute the income specified in the revenue
law, it has been held in the early case of Fisher
v Trinidad [43 Phi. 973, 981(1922)] that it
constitutes and can be treated merely as an
increase of capital. Hence, there was no factual
and legal basis in assessing income tax on the
increase in the value until the same is actually
sold at a profit [CIR v Filinvest Development
Corporation, G.R. No. 163653, 19 July 2011]
Campaign Contributions
In the course of an election period, various
contributions are given the candidates, “for the
purpose of influencing the result of the
elections.” The final paragraph of Section 13 of
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RA7166 provides that such campaign
contributions in cash or in kind to any
candidate, duly reported to COMELEC are
exempt from Donor’s Tax.
However in instances when these campaign
are not fully utilized by a candidate for
campaign purposes, there is a need to clarify
the treatment of these excess campaign funds,
for tax purposes.
GR: not taxable since they are not for the
personal expenditure of the candidate
EX: unutilized/excess campaign funds
(contributions net of the campaign
expenditures) are subject to income tax.
Plus: Any candidate, winning or losing, who
fails to file with the COMELEC the appropriate
Statement of expenditures will be precluded
from claiming expenditures as deductions. The
entire amount becomes directly subject to
income tax [Excerpts
from RR 7-2011]
Ordinary Income
In Section 22(Z) of the NIRC, the term ordinary
income includes any gain from the sale or
exchange of property which is not a capital
asset or property described in Section 39(A)
(1). Any gain from the sale or exchange of
property which is treated or considered, under
other provisions of this Title, as ordinary
income, shall be treated as gain from the sale
or exchange of property which is not a capital
asset as defined in Section 39(A)(A).
[CHAVEZ, 2022]
Actual v. Constructive receipt
4 Actual receipt – Income is actually
reduced to possession. The realization of
gain may take the form of actual receipt of
cash.
5 Constructive receipt – An income is
considered constructively received when it
is credited to the account of, or segregated
in favor of, a person.
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Examples of Constructive receipt:
1. Interest credited on savings bank deposit;
2. Matured interest coupons not yet collected
by the taxpayer;
3. Dividends applied by the corporation
against the indebtedness of a stockholder;
4. Share in the profit of a partner in a general
professional partnership, although not yet
distributed, is regarded as constructively
received; or
5. Intended payment deposited in court
(consignation).
The doctrine of constructive receipt is designed
to prevent the taxpayer using the cash basis
from deferring or postponing the actual receipt
of taxable income. Without the rule, the
taxpayer can conveniently select the year in
which he will report the income. [DIMAAMPAO]
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
Examples:
i. Interest or rent income earned but not
yet received
ii. Rent expense accrued but not yet paid
iii. Wages due to workers but remaining
unpaid
c. Tests in Determining Whether Income
is Earned for Tax Purposes
1. 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 [Eisner v. Macomber, 252 U.S. 189,
190 (1920)]. 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
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corporation that declared stock dividends
[Fisher v. Trinidad, supra].
Income is recognized when both of the
following conditions are met: (a) the earning is
complete or virtually complete; and (b) an
exchange has taken place. [INGLES]
2. 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)]
3. Economic Benefit Test, 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 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. [INGLES]
4. 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.
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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. [Ingles]
d. Tax-Free Exchanges
Tax-free exchanges refer to those instances
enumerated in Section 40(C)(2) of the NIRC of
1997, as amended, that are not subject to
Income Tax, Capital Gains Tax, Documentary
Stamp Tax and/or Value-added Tax, as the
case may be.
In general, there are two kinds of tax-free
exchange: (1) reorganization; and (2) transfer
to a controlled corporation.
Reorganization
No gain or loss shall be recognized on a
corporation or on its stock or securities if such
corporation is a party to a reorganization and
exchanges property in pursuance of a plan of
reorganization solely for stock or securities in
another corporation that is a party to the
reorganization.
A reorganization is defined as:
(a) A corporation, which is a party to a merger
or consolidation, exchanges property solely for
stock in a corporation, which is a party to the
merger or consolidation; or
(b) The acquisition by one corporation, in
exchange solely for all or a part of its voting
stock, or in exchange solely for all or part of the
voting stock of a corporation which is in
control of the acquiring corporation, of stock of
another corporation if, immediately after the
acquisition, the acquiring corporation has
control of such other corporation whether or
not such acquiring corporation had control
immediately before the acquisition; or
(c) The acquisition by one corporation, in
exchange solely for all or a part of its voting
stock or in exchange solely for all or part of the
voting stock of a corporation which is in
control of the acquiring corporation, of
substantially all of the properties of another
corporation. In determining whether the
exchange is solely for stock, the assumption by
the acquiring corporation of a liability of the
others shall be disregarded; or
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(d) A recapitalization, which shall mean an
arrangement whereby the stock and bonds of
a corporation are readjusted as to amount,
income, or priority or an agreement of all
stockholders and creditors to change and
increase or decrease the capitalization or
debts of the corporation or both; or
(e) A reincorporation, which shall mean the
formation of the same corporate business with
the same assets and the same stockholders
surviving under a new charter.
Transfer to a controlled corporation
no gain or loss shall be recognized if property
is transferred to a corporation by a person,
alone or together with others, not exceeding
four (4) persons, in exchange for stock or unit
of participation in such a corporation of which
as a result of such exchange the transferor or
transferors, collectively, gains or maintains
control of said corporation.
LEGAL REFERENCE
Section 40(C)(2) to 40(C)(6) of the NIRC of
1997, as amended.
TAX TREATMENT OF EXCHANGES OF
PROPERTIES MADE PURSUANT TO SECTION
40(C)(2) OF THE NIRC, AS AMENDED
The transfers of properties in exchange for
shares of stocks made pursuant to Section
40(C)(2) of the NIRC, as amended, shall be
exempt from the following taxes:
1. Capital Gains Tax (CGT);
2. Creditable Withholding Tax (CWT);
3. Income Tax (IT);
4. Donor’s Tax (DT);
5. Value-Added Tax (VAT); and
6. Documentary Stamp Tax (DST) on
conveyances of real properties and shares
of stocks
7.
However, the original issuance of shares in
exchange for the properties transferred shall
be subject to the DST under Section 174 of the
same Code.
Methods of Accounting
a. Principal Methods:
• Cash method – income, profits and
gains earned are not included in gross
income until received, and expenses
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are not deducted until paid. [DE LEON]
N.B. “received” here includes actual
and constructive receipt.
• 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. [DE LEON]
• Hybrid method – income and
expenses are reported by employing
the combination of cash and accrual
method. Example: where a taxpayer is
engaged in more than one trade or
business, he may use a different
method of accounting for each trade or
business. [DE LEON]
b. SPECIAL METHODS:
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.
Gross
Income to be
Instalment Profit
reported for = ×
Received Contract
the year
Price
Installment basis is available to:
Dealers in personal property [Sec 49
(A), NIRC]; Casual Sellers of personal
property [Sec 49 (B), NIRC]; and
Sellers of real property [Sec 49 (B) &
(C), NIRC]
Personal Property Real Property
Dealer
● Installment ● Installment
method method if initial
● Person who payments do
regularly not exceed
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Personal Property Real Property year of sale is the difference between
sells/disposes of 25% of the the selling or contract price and the
personal gross selling cost of the property, even though the
property on price entire purchase price has not been
instalment plan ● Deferred actually received in the year of sale.
● Held as ordinary payment c. The obligations of the purchaser
asset method if initial received by the vendor are considered
● Regardless of payments as equivalent of cash.
amount of exceed 25% of
percentage of the gross 3. Percentage of completion [Sec. 48,
initial payments selling price NIRC]
● Held as Income from long-term contracts is
inventory reported for tax purposes on the basis of
Casual Sale percentage of completion. “Long-term
● Installment contracts” means building, installation or
method if :(1) construction contracts covering a period in
Selling price excess of 1 year.
exceeds P1k
and (2) Initial Gross income already earned though not
payments do not yet received, based on estimates of
exceed 25% of architects or engineers duly certified by
selling price them, is reported in a taxable year; and all
● Deferred deductions relating to such gross income
payment for the taxable year, even if not yet paid are
method if taken into account. [DE LEON]
neither of the 2
conditions are Completed contract method – No longer
met allowed since January 1, 1998 as per RA
● Personal 8424. Cost of the contract is accumulated
property not during the years of construction and
considered deducted from the income of the contract in
inventory the year it is completed.
Sale by Individuals
● Installment e. Situs of Income
method
provided; initial Income Situs
payments do not Interest Residence of the debtor
exceed 25% of Dividends • From DC
selling price Income within
● Held as capital • From Foreign
asset Corporation
1) Income within if 50%
Initial payments mean the payments received or more of the gross
in cash or property (other than evidence of income of the FC for
indebtedness of the purchaser) by the seller the preceding 3
during the taxable year of the disposition of the years prior to the
real property. [Sec 49(B), NIRC] declaration of
dividend was derived
2. Deferred Payment Sales from sources within
a. Applicable when the initial payments the Philippines [ but
exceed 25% of the selling price only to the amount
b. The income to be reported during the
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Income Situs
that bears with the
percentage.]
2) Income without if less
than 50% subject to
the same condition.
[Use also in other
unallocated
income/expenses]
Services Place of performance
Rentals Location of the property
Royalties Place of use or exercise
Sale of Real Location of realty in the
Property Philippines
Sale of ● Tangible
Personal ▪ Manufactured w/in
Property and sold w/o: Partly
w/in and partly w/o
the PH
▪ Manufactured w/o
and sold w/in: Partly
w/in and partly w/o
the PH
▪ Purchased w/in but
sold w/o: Place of
Sale
▪ Purchased w/o but
sold w/in: Place of
sale
● Intangible
▪ General rule: Place
of Sale
Exception: Shares of stock of
domestic corporations: Place
of incorporation-Philippines
6. Gross Income
a. Definition
Gross Income [Sec. 32(A)]
Gross Income means all income derived from
whatever source, including (but not limited to)
the following items:
• Compensation for services in whatever
form paid, including, but not limited to fees,
salaries, wages, commissions, and similar
items;
• Gross income derived from the conduct of
trade or business or the exercise of a
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profession;
• 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.
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)]
Two Kinds of Gross Income Mentioned in
the Tax code
1) Gross income for MCIT purposes under
Sec 27(E)(4) of the NIRC.
“Gross Income” shall mean gross sales less
sales returns, discounts, and allowances and
cost of goods sold.
“Cost of Goods Sold” shall include all business
expenses directly incurred to produce the
merchandise to bring them to their present
location and use.
2) Gross receipts for VAT purposes under
Sec 108(A) of the NIRC.
“Gross receipts” means the total amount of
money or its equivalent representing the
contract price, compensation, service fee,
rental or royalty, including the amount charged
for materials supplied with the services and
deposits and advance payment actually or
constructively received during the taxable
quarter for the services performed or to be
performed for another person, excluding VAT.
b. Concept of Income from Whatever
Source Derived
While it has been held that the phrase “from
whatever source derived” indicated a
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legislative policy to include all income not
expressly exempted within the class of taxable
income under our laws, the term income has
been variously interpreted to mean “cash
received or its equivalent,” the amount of
money coming to a person within a specific
time,” or “something distinct from principal or
capital.”
Otherwise stated, there must be a proof of the
actual, or, at the very least, probable receipt or
realization by the controlled taxpayer of the
item of gross income sought to be distributed.
[ICR Filinvest Development Corporation, GR.
163653, 19 July 2011]
c. Gross Income vs. Net Income vs.
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 and/or personal and additional
exemptions, 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.” [VALENCIA and ROXAS]
d. Sources 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;
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9. Pensions, retirement benefits, or
separation pay.
10. Income from any source
1. 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. [RR No.
02-98, Sec 2.78.1]
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:
a. For agricultural labor paid entirely in
products of the farm where the labor is
performed
b. For domestic service in a private home
c. For casual labor not in the course of the
employer's trade or business
d. For services by a citizen or resident of the
Philippines for a foreign government or an
int’l organization. [Sec. 78(A), NIRC]
The term “remuneration for domestic
services” refers to remuneration paid for
services of a household nature performed by
an employee in or about the private home of
the person whom he is employed. The services
of household personnel furnished to an
employee (except rank and file employees) by
an employer shall be subject to the fringe
benefits tax pursuant to Sec. 33 of the Tax
Code.
The term “casual labor” includes labor which
is occasional, incidental or regular. “Not in the
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course of the employer’s trade or business”
includes labor that does not promote or
advance the trade or business of the employer.
General Rule: 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];
Exception: 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 [Henderson v.
Collector, G.R. No. L-12954 (1961)]
2. Fringe Benefits
Definition
Fringe benefit means any goods, services, or
other benefit furnished or granted in cash or in
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kind, in addition to basic salaries, to an
individual employee, except a rank and file
employee [RR No. 03-98, Sec 2.23b]
Fringe benefit means includes but not limited to
the following:
• Housing
• Expense Account
• Vehicle of any kind
• Household personnel, such as maid, driver
and others
• Interest on loan at less than market rate to
the extent of the difference between the
market rate and actual rate granted.
• Membership fees, dues and other
expenses borne by the employer for the
employee in social and athletic clubs and
similar organizations
• Expenses for foreign travel
• Holiday and vacation expenses
• Educational assistance to the employee or
his dependents; and
• Life or health insurance and other non-life
insurance premiums or similar amounts on
excess of what the law allows. [Sec. 33(B)]
Tax Rate and Tax Base
Tax base is based on the grossed-up
monetary value (GMV) of fringe benefits.
Rate is generally 35%, since this is the
headline or the highest tax rate for individual
income taxpayers.
FBT is calculated using the GMV multiply by
the 35%. [Sec. 33 (A), NIRC]
GMV represents
i. the whole amount of income realized by
the employee which includes the net
amount of money or net monetary value of
property that has been received; and
ii. the amount of fringe benefit tax due from
the employee which has been withheld
and paid by the employer for and in behalf
of his employee.
How GMV is determined
GMV is determined by dividing the actual
monetary value of the fringe benefit by 65%
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[100% - tax rate of 35%].
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.
Taxable and non-taxable fringe benefits
Fringe Benefits NOT subject to Tax
Fringe benefits not considered as gross
income – if it is required or necessary to the
business of employer; if it is for the
convenience or advantage of employer
Fringe Benefit that is not taxable under Sec. 32
(B) – Exclusions from Gross Income
Fringe benefits not subject to Fringe Benefit
Tax:
a. Fringe Benefits which are authorized and
exempted from income tax under the Code
or under special laws;
b. Contributions of the employer for the
benefit of the employee for retirement,
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insurance and hospitalization benefit
plans;
c. Benefits given to the rank-and-file
employees, whether granted under a
collective bargaining agreement or not;
and
d. Fringe benefits granted for the
convenience of the employer;
e. De minimis benefits
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
[RR No. 3-98, Sec 2.23c]
The following De Minimis Benefits are exempt
from income tax and withholding tax on
compensation income of BOTH managerial
and rank and file EEs [as provided by R.R. No.
11-2018/ R.R. No. 5-2011 / R.R. No. 8-2012/
R.R. No. 1-2015 and RR No. 11-2018]
1. Monetized unused vacation leave credits of
PRIVATE employees not exceeding ten
(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; [RR No. 5-2011]
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; [RR No. 5-
2011]
3. Medical cash allowance to dependents of
employees, not exceeding P1,500 per
employee per semester or P250 per
month; [RR No. 11-2018]
4. Rice subsidy of P2,000 or one (1) sack of
50 kg. rice per month amounting to not
more than P2,000; [RR No. 11-2018]
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5. Uniform and Clothing allowance not Fringe Benefit
exceeding P6,000 per annum; [RR No. 11- Tax Base
Housing Privilege
2018] (Monetary
6. Actual medical assistance, e.g. medical Value)
allowance to cover medical and healthcare residential use of where MV =
needs, annual medical/executive check- employees monetary value
up, maternity assistance, and routine of the FB
consultations, not exceeding P10,000.00 Assignment of MV= [5% (FMV
per annum; [RR No. 5-2011] residential property or ZV, whichever
7. Laundry allowance not exceeding P300 per owned by employer for is higher) x 50%]
month; [RR No. 5-2011] use of employees
8. Employees achievement awards, e.g., for Purchase of residential MV= 5% x
length of service or safety achievement, property in installment acquisition cost
which must be in the form of a tangible basis for the use of the exclusive of
personal property other than cash or gift employee interest x 50%
certificate, with an annual monetary value Purchase of residential MV= FMV or ZV,
not exceeding P10,000 received by the property and ownership whichever is
employee under an established written is transferred in the higher
plan which does not discriminate in favor of name of the employee
highly paid employees; [RR No. 5-2011] ZV = Zonal Value = value of the land or
9. Gifts given during Christmas and major improvement, as declared in the Real Property
anniversary celebrations not exceeding Declaration Form
P5,000 per employee per annum; [RR No.
5-2011] FMV = Fair Market Value = FMV as determined
10. Daily meal allowance for overtime work by the Commissioner of Internal Revenue
and night/graveyard shift not exceeding
twenty-five percent (25%) of the basic Non-taxable housing fringe benefit:
minimum wage on a per region basis; [RR a. Housing privilege of the Armed Forces of
No. 3-98] the Philippines (AFP) officials – i.e. those of
11. Benefits received by an employee by virtue the Philippine Army, Philippine Navy, or
of a collective bargaining agreement (CBA) Philippine Air Force
and productivity incentive schemes b. A housing unit, which is situated inside or
provided that the total monetary value adjacent to the premises of a business or
received from both CBA and productivity factory – maximum of 50 meters from
incentive schemes combined do not perimeter of the business premises
exceed P10,000.00 per employee per c. Temporary housing for an employee who
taxable year. [RR No 1-2015] stays in housing unit for three months or
less
All other benefits given by employers which are
not included in the above enumeration shall Motor Vehicle
NOT be considered as "de minimis" benefits
and hence, shall be subject to withholding tax Fringe Benefit
on compensation (rank and file employees) Tax Base
and FBT (managerial/supervisory employees). Motor Vehicle
(Monetary
Value)
Housing Purchased in the name MV = acquisition
Fringe Benefit of the employee cost
Tax Base Cash given to employee MV = cash
Housing Privilege
(Monetary to purchase in his own received by
Value) name employee
LEASE of residential MV= 50% of
property for the lease payments,

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Fringe Benefit the practice of his profession, provided that
Tax Base there is NO employer-employee relationship
Motor Vehicle
(Monetary between him and his clients.
Value)
Purchase on MV = acquisition It includes the fees derived from engaging in an
installment, in the name cost exclusive of endeavor requiring special training as
of employee interest professional as means of livelihood, which
Employee shoulders includes, but is not limited to, the fees of CPAs,
MV = amount doctors, lawyers, engineers, and the like [RR
part of the purchase
shouldered by No. 2-98].
price, ownership in the
employer
name of employee
Employer owns and The existence of employee-employer
maintains a fleet of relationship is the distinguishing factor
MV = (AC/5) x between compensation income versus
motor vehicles for use
50% professional income.
of the business and of
employees
Employer leases and 4. Income from Business
maintains a fleet for the MV = 50% of
use of the business and rental payment Any income derived from doing business.
of employees
Doing business: The term implies a continuity
Pure Compensation Earner of commercial dealings and arrangements, and
(Minimum Wage Earner, Rank & File, contemplates, to that extent, the performance
Executive) of acts or works or the exercise of some of the
Minimum functions normally incident to, and in
Managerial or progressive prosecution of, the purpose and
Wage Rank and File
Supervisory
Earner object of its organization.
Basic Compensation
Taxable Taxable 5. Income from Dealings in Property
Exempt
Compensation Compensation
Holiday Pay, OT, Nightshift Pay, Hazard Dealings in property such as sales or
Pay exchanges may result in gain or loss. The kind
Taxable Taxable of property involved (i.e., whether the property
Exempt
Compensation Compensation is a capital asset or an ordinary asset)
13th Month Pay up to P90,000 determines the tax implication and income tax
Exempt Exempt Exempt treatment, as follows:
Other Benefit in Excess of P90,000
N/A (with Taxable Taxable Net Capital
caveat) Compensation Compensation Taxable Ordinary Gains (other
Fringe Benefit Net Net than those
Subject to = +
Taxable Income Income subject to
Fringe Benefit final CGT)
Compensation
Tax
N/A Tax
Tax
shouldered by
shouldered by
employee Ordinary Asset Capital Asset
employer
De Minimis Benefit
Gain from sale, exchange or other
Exempt Exempt Exempt disposition
Ordinary Gain (part
Capital Gain
3. Professional Income of Gross Income)
Loss from sale, exchange, or other
Refers to fees received by a professional from disposition

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Ordinary Asset Capital Asset whether a property is an ordinary asset or a
Ordinary Loss (part capital asset. [BIR Ruling No. DA 212-07, April
of Allowable 3, 2007]
Capital Loss
Deductions from
Gross Income) b. Types of Gains
Excess of Gains over Losses
Part of Gross Income Net Capital Gain ORDINARY INCOME VIS-À-VIS CAPITAL
Excess of Losses over Gains GAIN.
Part of Allowable
Deductions from Net Capital Loss a. If the asset involved is classified as
Gross Income ordinary, the entire amount of the gain
from the transaction shall be included in
a. Capital v. Ordinary Asset the computation of gross income [Sec
32(A)], and the entire amount of the loss
shall be deductible from gross income.
Ordinary Assets Capital Assets
[Sec 34(D)]. (See Allowable Deductions
1. Stock in trade of Property held by the
from Gross Income – Losses
the taxpayer/ taxpayer, whether
other property of or not connected
b. If the asset involved is a capital asset, the
a kind which with his trade or
rules on capital gains and losses apply in
would properly business which is
the determination of the amount to be
be included in not an ordinary
included in gross income. (See Capital
the inventory of asset.
Gains and Losses).
the taxpayer if on
hand at the close
These rules do not apply to:
of the taxable
a. real property with a capital gains tax (final
year.
tax), or
2. Property held by
b. shares of stock of a domestic corporation
the taxpayer
with a capital gains tax (final tax).
primarily for sale
to customers in
ACTUAL GAIN VIS-À-VIS PRESUMED GAIN
the ordinary
course of his
Presumed Gain: In the sale of real property
trade or
located in the Philippines, classified as capital
business.
asset, the tax base is the gross selling price or
3. Property used in
fair market value, whichever is higher. The law
the trade or
presumes that the seller makes a gain from
business of a
such sale.
character which
is subject to the
Thus, whether or not the seller makes a profit
allowance for
from the sale of real property, he has to pay 6%
depreciation, or
capital gains tax.
4. Real property
used in the trade
Actual Gain: The tax base in the sale of real
or business of
property classified as an ordinary asset is the
the taxpayer,
actual gain.
including
property held for
rent.

Note in ordinary assets, that the list is

EXCLUSIVE. The actual use determines
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Computation of the amount of gain or loss
Amount realized from sale or other
disposition of property
Less: Basis or Adjusted Basis
______________________________
NET GAIN (LOSS)
c. Special rules pertaining to income or
loss from dealings in property classified
as capital asset
Long Term Capital Gain Vis-À-Vis Short
Term Capital Gain
Long-term capital gain: Capital asset is held
for more than twelve months before it is sold.
Only 50% of the gain is recognized.
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
Net Capital Gain: Excess of the gains over the
losses on sales or exchange of capital assets
during the taxable year.
Net Capital Loss: Excess of the losses over
the gains on sales or exchanges of capital
assets during the taxable year. [Sec. 39 (A),
NIRC]
Income Tax Treatment of Capital Loss
Capital loss limitation rule (applicable to both
corporations and individuals)
General Rule: 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].
Exception 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
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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].
d. Tax free exchanges [Sec. 40 (c)(2)]
Merger or Consolidation
No gain or loss shall be recognized if in
pursuance of a plan of merger or consolidation
a. A corporation, which is a party to a merger
or consolidation, exchanges property
solely for stock in a corporation, which is a
party to the merger or consolidation; or
b. A shareholder exchanges stock in a
corporation, which is a party to the merger
or consolidation, solely for the stock of
another corporation also a party to the
merger or consolidation; or
c. A security holder of a corporation, which is
a party to the merger or consolidation,
exchanges his securities in such
corporation, solely for stock or securities in
such corporation, a party to the merger or
consolidation.
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.
Substantially all the properties of another
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corporation means the acquisition of at least
80% of the assets, including cash, of another
corporation which has the element of
permanence and not merely momentary
holding [Banggawan citing BIR Gen.Circ. V-
253 (1957)]
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 four (4)
persons, gains control of said corporation:
Provided, That stocks issued for services shall
not be considered as issued in return for
property.
6. 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
a. Interest income;
b. Dividend Income;
c. Royalty Income; and
d. Rental Income.
Note that 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.
It is not the signing of the contract, the
construction on the vessels, the payment of the
stipulated price and their delivery to the obligor
even if done abroad that determines the source
of income.
Interest Income
An earning derived from depositing or lending
of money, goods or credits [Valencia and
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Roxas]
If one is a domestic and resident corporation
with principal offices in Manila, the residence of
the obligor who pays the interest rather than
the physical location of the securities, bonds,
or notes or the place of payment, is the
determining factor of the source of interest
income. Nothing in the law speaks of the act or
activity of non-resident corporations in the
Philippines, or place where the contract is
signed [National Development Cooperation v
CIR, G.R. No. 53961, 30 June 1987).
Dividend Income
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.
Cash dividends
Dividends are subject to final tax under the
NIRC. However, dividends received by a
domestic corporation from another domestic
corporation, and dividends received by a
resident foreign corporation from a domestic
corporation are exempt from income tax.
Stock dividends
Stock dividend is generally exempt from
income tax, EXCEPT:
a. If a corporation cancels or redeems stock
issued as a 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
b. 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
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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.
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.
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.) [RR
19-86]
Lease of personal property
Rental income on the lease of personal
property located in the Philippines and paid to
a non-resident taxpayer shall be taxed as
follows:
NRA-
NRFC
NETB
Vessel 4.5% 25%
Aircraft, 7.5% 25%
machineries and
other Equipment
Other assets 30% 25%
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Leasehold improvements by lessee
Rent Income from leasehold improvements:
1. Outright method- lessor shall report as
income FMV of the buildings or
improvements subject to the lease in the
year of completion.
2. Spread-out method- lessor shall spread
over the remaining term of the lease the
estimated depreciated (book) value of
such buildings or improvements at the
termination of the lease, and reports as
income for each remaining term of the
lease an aliquot part thereof.
Estimated BV at the end of the lease contract/
remaining lease term = Income per year
7. Annuities, 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. [Peralta v. Auditor General, G.R. No. L-
8480 (1957)]
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.
8. Prizes and Awards
A prize is a reward for a contest or a
competition. Such payment constitutes gain
derived from labor.
The EXCEPTIONS are as follows:
1. Prizes and awards made primarily in
recognition of religious, charitable,
scientific, educational, artistic, literary or
civic achievements are EXCLUSIONS
from gross income if:
2. The recipient was selected without any
action on his part to enter a contest or
proceedings; and
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3. The recipient is not required to render
substantial future services as a condition
to receiving the prize or award.
4. 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.
9. Pensions, Retirement Benefit, or
Separation Pay
a. 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]

A stated allowance paid regularly to a person Illustration:

on his retirement or to his dependents on his Case A Case B Case C
death, in consideration of past services, Year 1
meritorious work, age, loss or injury. Gross
[VALENCIA] 500,000 400,000 500,000
Income
Less:
10. Income from Any Source Allowable
Deduction
Inclusion of all income not expressly exempted s (before
(200,00 (480,00 (495,00
within the class of taxable income under the write-off of
0) 0) 0)
laws irrespective of the voluntary or involuntary Uncollecti
action of the taxpayer in producing the gains, ble
and whether derived from legal or illegal Accounts/
sources Debts)
Taxable
Condonation of Indebtedness Income
(Net Loss)
The cancellation of indebtedness may have 300,000 (60,000) 5,000
before
any of three possible consequences: write-off
1. It may amount to payment of income. If, for Deduction
example, an individual performs services for
to or for a creditor, who, in consideration Accounts
thereof, cancels the debt, income in that Receivabl (2,000) (2,000) (6,000)
amount is realized by the debtor as e written
compensation for personal services. off
2. It may amount to a gift. If a creditor wishes Taxable
merely to benefit the debtor, and without Income
any consideration therefore, cancels the (Net Loss) 298,000 (62,000) (1,000)
debt, the amount of the debt is a gift to the after write-
debtor and need not be included in the off
latter’s report of income. Year 2
3. It may amount to a capital transaction. If a Recovery
corporation to which a stockholder is of
indebted forgives the debt, the transaction 2,000 2,000 6,000
Amounts
has the effect of a payment of dividend. Written Off
Taxable
Income on
2,000 - 5,000
the
Recovery
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In Case A, the entire amount recovered
(P2,000) is included in the computation of
gross income in Year 2 because the taxpayer
benefited by the same extent. Prior to the write-
off, the taxable income was P300,000; after the
write-off, the taxable income was reduced to
P298,000.
In Case B, none of the P2,000 recovered would
be recognized as gross income in Year 2. Note
that even without the write-off, the taxpayer
would not have paid any income tax anyway.
The “taxable income” before the write-off was
actually a net loss.
In Case C, only P5,000 of the P6,000
recovered would be recognized as gross
income in Year 2. It was only to this extent that
the taxpayer benefited from the write-off. The
taxpayer did not benefit from the extra P1,000
because at this point, the P1,000 was already
a net loss.
b. Receipt of tax refunds or credit
General rule: 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.
Exceptions: 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
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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.
e. Exclusions
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. [DE LEON]
Exclusions v Exemptions
Both in their nature and in their effect, there is
no difference between tax exemption and tax
exclusion. Exemption is immunity or privilege;
it is freedom from a charge of burden to which
others are subjected.
Exclusion is the removal of otherwise taxable
items from the reach of taxation, e.g.
exclusions from gross income and allowable
deductions. It is also therefore an immunity or
privilege which frees a taxpayer from a charge
to which others are subjected.
Consequently the rule that tax exemption
should be applied strictly against the taxpayer
and liberally in favor of the government, equally
applies to tax exclusions [PLDT v Province of
Laguna, 467 SCRA 93(2005)].
Items of Exclusions representing return of
capital
Amount of capital is generally recovered
 FOR UP CANDIDATES ONLY
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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
a. Under the Constitution
b. Under a tax treaty
c. Under special laws
Rationale
The term “exclusions” refers to items that are
not included in the determination of gross
income because:
a. They represent return of capital or are not
income, gain or profit;
b. They are subject to another kind of internal
revenue tax;
c. They are income, gain or profit expressly
exempt from income tax under the
Constitution, tax treaty, Tax Code, or a
general or special law. [MAMALATEO]
1. Taxpayers Who May Avail
Exclusion Taxpayer
All taxpayers since
Return of capital
there is no income.
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Exclusion Taxpayer
All taxpayers unless
Already subject to
provided that income
internal revenue tax
is to be included.
As expressly
Express exclusion
provided.
2. Exclusions Distinguished from
Deductions and Tax Credit
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.
3. 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.
4. Exclusions Under the Tax Code [Sec.
32(b), NIRC]
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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.
Return of premium paid
General rule: 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.
Exception: 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.
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
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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.
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 [Pirovano v. Commissioner, G.R. No.
L-19865, July 31, 1965]
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.
Examples of non-taxable and taxable
damages recoveries are:
Non-taxable – Taxable –
compensation for compensation for
damages on damages on
account of account of
Actual damages for
Personal (physical)
loss of anticipated
injuries or sickness
profits
Any other damages Moral and exemplary
recovered on damages awarded
account of personal as a result of break
injuries or sickness of contract
Exemplary and
moral damages for Interest for non-
out-of-court taxable damages
settlement, including above
attorney’s fees
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Non-taxable – Taxable – RA 7641 RPBP
compensation for compensation for more than 65 years old at the time of
damages on damages on of age at the time of retirement
account of account of retirement
Alienation of Any damages as Retiring employee
affection, or breach compensation for shall not have
Availed of only once,
of promise to marry unrealized income previously availed of
and only when there
Any amount the privilege under a
is no RPBP
received as a return retirement benefit
of capital or plan of the same or
reimbursement of another employer
expenses Plan must be
reasonable. Its
Income exempt under tax treaty implementation must
be fair and equitable
Income of any kind, to the extent required by for the benefit of all
any treaty obligation binding upon the employees (e.g.
Government of the Philippines. from president to
laborer)
Retirement benefits, pensions, gratuities, Plan must be
etc. approved by BIR

These are: A 'reasonable private benefit plan' means a

• Retirement benefits under RA 7641, RA
4917, and Section 60(B) of the NIRC
• Terminal pay
• Retirement Benefits from foreign
government agencies
• Veterans benefits
• Benefits under the Social Security Act
• 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.
pension, gratuity, stock bonus or profit-sharing
plan maintained by an employer for the benefit
of some or all of his employees wherein
contributions are made by such employer, or
employees, or both for the purpose of
distributing to such employees the earnings
and principal of the fund thus accumulated by
the trust in accordance with such plan (trust
fund)
Further, it should be provided in the plan that at
no time prior to the satisfaction of all liabilities
with respect to employees under any trust,
shall any part of the corpus or income of the
fund be used for, or be diverted to, any purpose
other than for the exclusive benefit of his
employees.

RA 7641 RPBP Terminal pay/Separation pay

Retiring employee Any amount received by an employee or by his
Retiring official or heirs from the employer as a consequence of
must be in the
employee must have separation of such official or employee from the
service of same
been in the service of service of the employer because of death,
employer
the same employer sickness, other physical disability or for any
CONTINUOUSLY
for at least ten (10) cause beyond the control of the employee. The
for at least five (5)
years. phrase “for any cause beyond the control of the
years
Retiring employee Retiring official or said official or employee” means that the
must be at least sixty employee must be at separation of the employee must be
(60) years old but not least fifty (50) years involuntary and not initiated by him.
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The separation must not be of his own making.
Notes:
a. Sickness must be life-threatening or one
which renders the employee incapable of
working
b. Retrenchment of the employee due to
unfavorable business conditions or
financial reverses is considered as
involuntary.
c. BIR Ruling 143-98: The “terminal leave
pay” (amount paid for the commutation of
leave credits) of retiring government
employees is considered not part of the
gross salary, and is exempt from taxes.
[Commissioner v. CA and Castaneda,
G.R. 96016 (1991)].
Retirement BENEFITS from foreign
government agencies – The social security
benefits, retirement gratuities, pensions and
other similar benefits received by resident or
non-resident citizens or aliens who come to
reside permanently in the Philippines from
foreign government agencies and other
institutions, private or public;
Payments of VETERANS benefits under
U.S. Veterans Administration – Payments of
benefits due or to become due to any person
residing in the Philippines under the laws of the
United States administered by the United
States Veterans Administration
Social Security Act benefits – Payments of
benefits received under the Social Security Act
of 1954 [RA 8282], as amended, e.g., Maternity
Benefits
GSIS benefits – Benefits received from GSIS
under the GSIS Act of 1937, as amended, and
the retirement gratuity received by government
officials and employees are not taxable. [Sec.
32B6., NIRC; Sec. B1, RR 2-98]
h. Winnings, prizes and award, including
those in sports competitions
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
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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
recipient was selected without any action on
his part to enter the contest or proceeding; and
recipient is not required to render substantial
future services as a condition to receiving the
prize or award
7. Deductions from Gross Income
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.
[Commissioner v. Anoldus Carpentry Shop,
G.R. No. 71122 (1988)]
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;
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
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BOI law (E.O. 226).
General Rules
1. Deductions must be paid or incurred in
connection with the taxpayer’s trade,
business or profession
2. They must be paid or incurred during the
taxable year
3. The tax required to be withheld has been
deducted and paid
4. Deductions must be supported by
adequate receipts or invoices (except
standard deduction)
5. Has direct connection or relation to the
development, management, operation,
and/or conduct of the trade, business, or
profession of the taxpayer or in the pursuit
of trade or business.
6. The expense incurred must not be contrary
to law, morals, public policy, or public order
7. The amount must be reasonable
8. The taxpayer must be duly registered
before the BIR.
The requisite that it must have been paid or
incurred during the taxable year is further
qualified by Section 45 of the NIRC, which
provides, “the deductions provided for in this
Title shall be taken for the taxable year in which
paid or accrued or paid or incurred dependent
upon the method of accounting upon the basis
of which the net income is computed.
Revenue Audit Memorandum Order No. 1-
2000, provides that under the accrual method
of accounting, expenses not being claimed as
deductions by a taxpayer in the current year
when they are incurred cannot be claimed as
deduction from income for the succeeding
year. Thus, a taxpayer who is authorized to
deduct certain expenses and other allowable
deductions for the current year, but failed to do
so cannot deduct the same for the next year.
a. 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.
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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.
b. Distinguish: Itemized Deductions
and Optional Standard Deductions
Itemized Deductions
• Expenses
• Interest
• Taxes
• Losses
• Bad debts
• Depreciation
• Depletion of oil and gas wells and mines
• Charitable and other contributions
• Research and development
• Pension trusts
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
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[Sec. 76, Income Tax Regulations]
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
a. 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
b. Paid or incurred during the taxable year;
c. 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;
d. 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);
e. Legitimately paid (not a BRIBE, kickback, or
otherwise contrary to law, morals, public
policy);
f. 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;
g. 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]
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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.
Possible Kinds of Business Expenses
(deductible and not deductible)
a. 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
b. Travelling expenses
c. Cost of materials
d. Rentals and/or other payments for use or
possession of property
e. Repairs and maintenance
f. Expenses under lease agreements
g. Expenses for professionals
h. Entertainment expenses
i. Training expenses
j. Others
Salaries, Wages, and Other Compensation
Forms
a. To be deductible, 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
Given for personal services must be actually
rendered and reasonable.
For income payment to be allowed as
deduction, the withholding tax must have been
paid [RR No. 12-2013].
Bonuses are deductible when:
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TAXATION 1
1. made in good faith
2. given as additional compensation for
personal services actually rendered
3. such payments, when added to the
stipulated salaries, do not exceed a
reasonable compensation for the
services rendered
Traveling expenses
This include transportation expenses and
meals and lodging [Secs. 65 and 66, Rev. Reg.
No. 2]
Expenses must be reasonable and necessary.
Must be incurred or paid “while away from
home;” tax home is the principal place of
business, when referring to “away from home”
Incurred or paid in the conduct of trade or
business.
Note: However, necessary transportation
expenses of the taxpayer in its “tax home” are
deductible. Thus, a taxpayer operating its
business in Manila is allowed transportation
expenses from its office to its customers’ place
of business and back. But the transportation
expenses of an employee from his residence to
its office and back are not deductible as they
are considered personal expenses.
Cost of materials
Deductible only to the amount that they are
actually consumed and used in operation
during the year for which the return is made,
provided that their cost has not been deducted
in determining the net income for any previous
year.
Rentals and/or other payments for use or
possession of property
a. Required as a condition for continued use
or possession of property.
b. For purposes of trade business or
profession.
c. Taxpayer has not taken or is not taking title
to the property or has no equity other than
that of lessee, user, or possessor.
d. On the accrual basis, rent is deductible as
expense when liability is incurred during
the period of use. On cash basis, rent is
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deductible when it is incurred and paid.
[VALENCIA and ROXAS]
Repairs and maintenance
Incidental or ordinary repairs are deductible.
Repairs which neither materially add to the
value of the property nor appreciably prolong
its life, but keep it in an ordinarily efficient
working condition, may be deducted as
expenses, provided the plant or property
account is not increased by the amount of such
expenditure. [Visayan Transportation Co. v.
CTA, CTA Case No. 1119, (1964)]
Extraordinary repairs are not deductible – they
are capital expenditures
Repairs which add material value to the
property or appreciably prolong its life
Repairs in the nature of replacement, to the
extent that they arrest deterioration and
appreciably prolong the life of the property,
should be charged against the depreciation
reserves if such account is kept. [Sec. 68, Rev.
Regs. 2]
All maintenance expenses on account of non-
depreciable vehicles for taxation purposes are
disallowed in its entirely. [RR No. 12-2012]
Expenses under lease agreements
Since the rentals are considered as income of
the lessor (owner of the property), such lessor
may deduct all ordinary and necessary
expenses paid or incurred during the taxable
year to the earning of the income (Sec. 2.01,
RR No. 19-86). Among such deductions may
be cost of repairs and maintenance, salaries
and wages of employees attendant to such
lease, interest payment, property taxes, and
more others.
Expenses for professionals
Deductible in the year the professional services
are rendered, not in the year they are billed,
provided that the “all events” is present.
“All events test” requires:
1. Fixing a right to income or liability to pay;
and
2. The availability of reasonably accurate
determination of such income or liability.
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The “all-events test” does not demand that the
amount of income or liability be known
absolutely; it only requires that a taxpayer has
at its disposal the information necessary to
compute the amount with reasonable
accuracy, which implies something less than
an exact or completely accurate amount.
[Commissioner v. Isabela Cultural Corporation,
G.R. No. 172231 (2007)]
A professional may claim as deductions the
cost of supplies used by him in the practice of
his profession, expenses paid in the operation
and repair of transportation equipment used in
making professional calls, dues to professional
societies and subscriptions to professional
journals. [MAMALATEO]
Entertainment/Representation expenses
These are entertainment, amusement and
recreation (EAR) expenses incurred or paid
during the year that are directly connected to
the development, management and operation
of the trade, business or profession of the
taxpayer.
Requisites for deductibility:
1. Reasonable in amount.
2. Paid or incurred during the taxable
period.
3. Directly connected to the development,
management, and operation of the trade,
business or profession of the taxpayer,
or that are directly related to or in
furtherance of the conduct thereof.
4. Not to exceed 0.50% of net sales for
sellers of goods or properties or 1% of
net revenues for sellers of services,
including taxpayers engaged in the
exercise of profession and use or lease
of properties)
5. Not incurred for purposes contrary to
law, morals, public policy or public order.
6. Must be substantiated with sufficient
evidence such as receipts and/or
adequate records.
7. Not exceed such ceiling as the Secretary
of Finance may, by rules and regulations
prescribe, upon recommendation of the
Commissioner, taking into account the
needs as well as the special
circumstances, nature and character of
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the industry, trade, business, or
profession of the taxpayer.
Exclusions from EAR expenses:
1. Expenses which are treated as
compensation or fringe benefits for
services rendered under an employer-
employee relationship
2. Expenses for charitable or fund raising
events
3. Expenses for bona fide business
meeting of stockholders, partners or
directors
4. Expenses for attending or sponsoring an
employee to a business league or
professional organization meeting
5. Expenses for events organized for
promotion marketing and advertising,
including concerts, conferences,
seminars, workshops, conventions and
other similar events; and
6. Other expenses of a similar nature.
Political campaign expenses
Amount expended for political campaign
purposes or payments to campaign funds are
NOT deductible either as business expenses
or as contribution [CTA Case No. 695, April 30,
1969, citing Mertens]
Training expenses
Organization and pre-operating expenses of a
corporation (including training expenses) are
considered as capital expenditures and are
therefore, not deductible in the year they are
paid or incurred.
But taxpayers who incur these expenses and
subsequently enter the trade or business to
which the expenditures relate can elect to
amortize these expenditures over a period not
less than sixty (60) months. [BIR Ruling 102-
97, Sept. 29, 1997]
This rule, however, does not apply to a
situation where an existing corporation incurs
these same expenditures for the purpose of
expanding its business in a new line of trade,
venture or activity.
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OTHERS
Expenses Allowable to Private Educational
Institutions
In addition to the expenses allowable as
deductions under the NIRC, a private
proprietary educational institution may at its
OPTION, elect either:
a. To deduct expenditures otherwise
considered as capital outlays or
depreciable assets incurred during the
taxable year for the expansion of school
facilities, OR
b. To deduct allowances for depreciation
thereof.
Thus, where the expansion expense has been
claimed as a deduction, no further claims for
yearly depreciation of the school facilities are
allowed.
Advertising Expenses
The media advertising expenses which were
found to be inordinately large and thus, not
ordinary, and which were incurred in order to
protect the taxpayer’s brand franchise which is
analogous to the maintenance of goodwill or
title to one’s property, are not ordinary and
necessary expenses but are capital
expenditures, which should be spread out over
a reasonable period of time. [CIR v. General
Foods Phils. Inc, G.R. No. 143672 (2003)]
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
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exercise of profession, the same was not
treated as a capital 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.
Related Taxpayers
a. Between members of the family, i.e.
brothers and sisters (whether by the whole
or half-blood), spouse, ancestor, and lineal
descendants; or
• Except in case of distributions in
liquidation, between an individual and a
corporation, where the individual owns
directly or indirectly more than 50% of
the outstanding stock of the
corporation
• Except in the case of distributions in
liquidation, between two corporations
where:
i. Either one is a personal holding
company of a foreign personal
holding company with respect to the
taxable year preceding the date of
the sale of exchange; and
ii. More than 50% of the outstanding
stock of each is owned, directly or
indirectly, by or for the same
individual; or
b. Between parties to a trust – Grantor and
Fiduciary; or
c. Fiduciary of a trust and fiduciary of another
trust if the same person is a grantor with
respect to each trust; or
d. Fiduciary and Beneficiary
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INTEREST SUBJECT TO SPECIAL RULES
Interest paid in advance
No deduction shall be allowed if within the
taxable year an individual taxpayer reporting
income on cash basis incurs an indebtedness
on which an interest is paid in advance through
discount or otherwise.
But the deduction shall be allowed in the year
the indebtedness is paid.
Interest periodically amortized
If the indebtedness is payable in periodic
amortizations, 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 expense incurred to acquire
property for use in
trade/business/profession
At the option of the taxpayer, interest expense
on a capital expenditure may be allowed as
a. A deduction in full in the year when
incurred;
b. A capital expenditure for which the
taxpayer may claim only as a deduction
the periodic amortization of such
expenditure.
Should the taxpayer elect to deduct the interest
payments against its gross income, the
taxpayer cannot at the same time capitalize the
interest payments. In other words, the taxpayer
is not entitled to both the deduction from gross
income and the adjusted (increased) basis for
determining gain or loss and the allowable
depreciation charge. [Paper Industries Corp. v.
Commissioner, G.R. Nos. 106949-50 (1995)]
Reduction of interest expense/interest
arbitrage
The taxpayer's allowable deduction for interest
expense shall be reduced by an amount equal
to the percentages of the interest income
subjected to final tax, twenty percent (20%) of
interest income subjected to final tax effective
1 July 2020. This is known as the Tax Arbitrage
Rule.
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Optional Treatment of Interest Expense
At the option of the taxpayer, interest incurred
to acquire property used in trade, business or
exercise of profession may be allowed as a
deduction or treated as capital expenditure.
Taxes
Taxes Proper: Refers to national and local
taxes
Requisites for deductibility
a. Paid or incurred within the taxable year;
b. Paid or incurred in connection with the
taxpayer‘s trade, profession or business;
c. Imposed directly on the taxpayer;
d. Not specifically excluded by law from
being deducted from the taxpayer‘s gross
income.
The following taxes are deductible:
a. Import duties;
b. Business tax;
c. Professional/occupation tax;
d. Privilege and excise tax;
e. DST;
f. Motor vehicle registration fees;
g. Real property tax;
h. Electric energy consumption tax; and
i. Interest on delinquent taxes.
Non-deductible taxes
a. Philippine income tax, except Fringe
Benefit Taxes;
b. 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.
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[CIR v. Palanca, G.R. No. L-16626 (1966)] Foreign Tax Credit Tax Deduction
against Philippine
Treatment of special assessment income tax.
Special assessments and other taxes
assessed against local benefits of a kind The following may claim foreign tax credits:
tending to increase the value of the property a. Resident citizens
assessed are non-deductible from gross b. Domestic corporations, which include all
income. partnerships except general professional
partnerships
Tax credit vis-à-vis deduction c. Members of general professional
partnerships
A tax credit reduces the tax due, including d. Beneficiaries of estates or trusts
whenever applicable, the income tax that is
determined after applying the corresponding The following may NOT claim foreign tax
tax rates to taxable income. credits:
a. Non-resident citizens
A tax deduction, on the other, reduces the b. Aliens, whether resident or non-resident
income that is subject to tax in order to arrive c. Foreign corporations, whether resident on
at taxable income. A tax credit is used only non-resident
after the tax has been computed; a tax Note: Tax credits for foreign taxes are allowed
deduction, before. only for income derived from sources outside
the Philippines. The above taxpayers are not
Since a tax credit is used to reduce directly the entitled to tax credit; they are taxable only on
tax that is due, there ought to be a tax liability income derived from Philippine sources.
before the tax credit can be applied.
Otherwise, the application is useless If a net loss is reported by, and no other taxes
[CHAVEZ, 2020]. are currently due from a business
establishment, there will obviously be no tax
Foreign Tax credit – amount allowed by law liability against which any tax credit can be
to reduce the Philippine income tax due, applied. [CIR v Central Luzon Drug Corp., GR.
subject to limitations, on account of taxes paid No. 159647, 15 April 2005]
or accrued to a foreign country
Limitations on Tax Credit.
Foreign tax credits are confined to resident and
domestic corporations. Meanwhile, the Per Country Limit
withholding creditable tax at source under The amount of tax credit shall not exceed the
Section 57(B) may be availed of by resident same proportion of the tax against which such
taxpayers. credit is taken, which the taxpayer's taxable
income from sources within such country bears
Foreign Tax Credit Tax Deduction to his entire taxable income for the same
Taxes are Taxes are deductible taxable year; and
deductible from the from gross income in
Phil. Income tax computing the Worldwide Limit
itself taxable income The total amount of the credit shall not exceed
Effect: Reduces the same proportion of the tax against which
Effect: Reduces
taxable income upon such credit is taken, which the taxpayer's
Philippine income
which the tax liability taxable income from sources without the
tax liability
is calculated Philippines taxable bears to his entire taxable
Sources: Only income for the same taxable year.
Sources: Deductible
foreign income
taxes (e.g. business
taxes may be
tax, excise tax)
claimed as credits

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Formula: transaction;
Limit #1 Per Country Limit f. Not compensated for by insurance or other
Taxable form of indemnity;
Income Per g. Not claimed as a deduction for estate tax
Foreign purposes;
Country Phil. Limit on h. In case of casualty loss, filing of notice of
x Income = amount of loss with the BIR within 45 days from the
Worldwide Tax tax credit date of the event that gave rise to the
Taxable casualty; and
Income i. The taxpayer must prove the elements of
the loss claimed, such as the actual nature
and occurrence of the event and amount
Limit #2 World Limit of the loss.
Limit #2 World Limit
Taxable In case a non-depreciable vehicle is sold at a
Income Per loss, the loss incurred from the sale of non-
Foreign Limit on
depreciable vehicle is not allowed as a
Country Phil. deduction. [RR No. 2-2013]
amount
x Income =
of tax
Worldwide Tax No loss is recognized in the following:
credit
Taxable a. Merger, consolidation, or control securities
Income (where no gains are recognized either);
b. Exchanges not solely in kind;
c. Related taxpayers (see above – (c)
Note: Computation of FTC: Limit #2 applies Interest expense incurred to acquire
where taxes are paid to two or more foreign property for use in
countries. Allowable tax credit is the lower trade/business/profession)
between the tax credit computed under Limit d. Wash sales;
#1 and that computed under Limit#2. e. Illegal transactions

FTC Limitations – the lowest FTC among OTHER TYPES OF LOSSES

the three shall be applied:
1. Actual FTC
2. For taxes paid to one foreign country
3. For taxes paid to 2 or more foreign
countries
Losses
Requisites for deductibility
a. Loss must be that of the taxpayer (e.g.,
losses of the parent corp. cannot be
deducted by its subsidiary);
b. Actually sustained and charged off within
the taxable year;
c. Incurred in trade, business or profession;
d. 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;
e. Sustained in a closed and completed
a. Capital losses
b. 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)
c. Resulting from securities becoming
worthless and which are capital assets
(considered loss from sale or exchange)
on last day of the taxable year
d. Losses from short sales of property;
e. Losses due to failure to exercise privileges
or options to buy or sell property.
Securities becoming worthless
Loss in shrinkage in value of stock through
fluctuation in the market is not deductible from
gross income. (To be deductible, the loss must
be actually suffered when the stock is disposed
of.)

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Exception: If the stock of the corporation
becomes worthless, the cost or other basis
may be deducted by its owner in the taxable
year in which the stock became worthless,
provided a satisfactory showing of its
worthlessness be made, as in the case of bad
debts.
Losses on wash sales of stocks or securities
Wash Sale - a sale or other disposition of stock
or securities where substantially identical
securities (substantially the same as those
disposed of) are acquired or purchased (or
there was an option to acquire, and the
acquisition or option should be by purchase or
exchange upon which gain or loss is
recognized under the income tax law) within a
61-day period, beginning 30 days before the
sale and ending 30 days after the sale
General rule: Not deductible from gross
income
Exception: If by a dealer in securities in the
course of ordinary business, it is deductible.
Wagering losses
Losses from wagering (gambling) are
deductible only to the extent of gains from such
transactions. A wager is made when the
outcome depends upon CHANCE.
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 three (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]
Exception: Mines other than oil and gas wells,
where a net operating loss without the benefit
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of incentives provided for under EO No. 226
(Omnibus Investments Code) incurred in any of
the first ten (10) years of operation may be
carried over as a deduction from taxable
income for the next five (5) years immediately
following the year of such loss.
Requisites for NOLCO
a) The taxpayer was not exempt from income
tax the year the loss was incurred;
b) There has been no substantial change in
the ownership of the business or enterprise
wherein:
a. AT LEAST 75% of nominal value of
outstanding issued shares is held
by or on behalf of the same
persons; or
b. 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% OSD
shall not simultaneously claim deduction of
NOLCO. However, the three-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 cannot enjoy
the benefit of NOLCO. However, the three-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.
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NOLCO Incurred During COVID-19
Under RMC 138-2020, issued on 22 December
2020, RR 25-2020 issued on 30 September
2020 implementing Sec. 4 (bbbb) of RA No.
11494 or the Bayanihan Act to Recover as One
Act relative to the NOLCO, incurred by
businesses for taxable years 2020 and 2021,
provided that unless otherwise disqualified
from claiming the deduction, the business or
enterprise which incurred net operating loss for
the two years shall be allowed to carry over the
same as deduction from its gross income for
the next five (5) consecutive taxable years
immediately following the year of such loss.
The regulation also provides that net operating
loss for said taxable years may be carried over
as a deduction even after the expiration of RA
11494, provided the same are claimed within
the next five (5) consecutive taxable years
immediately following the year of such loss.
Losses sustained by NRA and Foreign
Corporation
In the case of a non-resident alien individual or
foreign corporation, the losses deductible shall
be those:
• Actually sustained during the year
incurred in business, trade, exercise of
profession conducted within the
Philippines
• Such losses are not compensated for
by insurance or other forms of
indemnity
• Submit a declaration of loss sustained
from casualty or from robbery, theft or
embezzlement furing the taxable year
not be less than 30 days nor more than
90 days from the discovery.
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
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likelihood of recovery at any time in the future.
Requisites for deductibility
a. Valid and legally demandable debt due to
the taxpayer
b. Debt is connected with the taxpayer's
trade, business or practice of profession;
c. Debt was not sustained in a transaction
entered into between related parties;
d. 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
e. Actually charged off the books of accounts
of the taxpayer as of the end of the taxable
year
General rule: Taxpayer must ascertain and
demonstrate with reasonable certainty the
uncollectibility of debt
Exceptions:
a. Banks as creditors – BSP Monetary Board
shall ascertain the worthlessness and
uncollectibility of the debt and shall
approve the writing off
b. 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
The taxpayer must show that the debt is indeed
uncollectible even in the future. He must prove
that he exerted diligent efforts to collect:
a. Sending of statement of accounts
b. Collection letters
c. Giving the account to a lawyer for
collection
d. Filing the case in court [Phil. Refining
Corp. v. CA, G.R. No. 118794 (1996)]
Rev. Reg. No. 5-1999
“Actually ascertained to be worthless” –
Determination of worthlessness must depend
upon the particular facts and circumstances of
the case. A taxpayer may not postpone a bad
debt deduction on the basis of a mere hope of
ultimate collection or because of a continuance
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of attempts to collect, where there is no helicopters, airplanes and/or aircrafts, and land
showing that the surrounding circumstances vehicles which exceed the threshold amount of
differ from those relating to other notes which P2,400,000, unless the taxpayer’s main line of
were charged off in a prior year. business is transport operations or lease of
transportation equipment and the vehicles
Accounts receivable may be written off as bad purchased are used in the operations. [RR No.
debts even without conclusive evidence that 12-2012]
they had definitely become worthless when:
a. the amount is insignificant; and Methods of computing depreciation
b. collection through court action may be allowance
more costly to the taxpayer. (cost- salvage
Straight-line value) ÷
“Actually charged off from the taxpayer’s book estimated life
of accounts” – Receivable which has actually Cost x Rate of
become worthless at the end of the taxable Depreciation*
year has been cancelled and written off. Mere
recording in the books of account of estimated *rate = (1÷
uncollectible accounts does not constitute a estimated life) x
write-off. multiplier
applicable
EFFECT OF RECOVERY OF BAD DEBTS ex. Double
Declining balance
declining balance
Tax Benefit Rule on Bad Debts multiplier is 200%
Bad debts claimed as deduction in the
preceding year(s) but subsequently recovered Note: depreciation
shall be included as part of the taxpayer‘s gross allowance should
income in the year of such recovery the extent not cause the asset
of the income tax benefit of said deduction. to be valued below
Also called the equitable doctrine of tax benefit. its salvage value
(remaining life ÷
Depreciation Sum-of-the-year- SYD) x (cost-
An annual reasonable allowance to reduce the digit (SYD) salvage value)
wasteful value of the tangible fixed assets
resulting from wear and tear and normal
obsolescence Charitable and other contributions

For intangible assets, the annual allowance to Requisites for deductibility

reduce their useful value is called amortization.
Requisites for Deductibility
a. It must be reasonable.
b. It must be charged off during the year.
c. The asset must be used in profession,
trade or business.
d. 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. [VALENCIA and
ROXAS]
No depreciation shall be allowed for yachts,
a) Actually PAID or made to the ENTITIES or
institutions specified by law;
b) Made within the TAXABLE year.
c) It must be EVIDENCED by adequate
receipts or records.
d) 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).
e) 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

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Amount that May Be Deducted
Kinds of Contributions:
a. Contributions deductible in full;
b. 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
3. Education
4. Health
5. Youth and sports development
6. Human settlements
7. Science and culture, and
8. Economic development
9. in accordance with a National Priority Plan
determined by NEDA (otherwise, subject
to statutory limit)
10. 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
11. 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:
a. Organized and operated exclusively
for:
i. scientific,
ii. research,
iii. educational,
iv. character-building and youth and
sports development,
v. health,
vi. social welfare,
vii. cultural or
viii. charitable purposes, or
ix. 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,
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must not exceed 30% of total expenses for the
taxable year
Contributions subject to the Statutory
Limit:
These contributions are not deductible in full as
specified by the law or such deduction has not
met the requirements to be deducted in full.
Those made to:
a. Government or any of its agencies or
political subdivisions exclusively for public
purposes (contributions for non-priority
activities)
b. Accredited domestic corporation or
associations organized exclusively for
c. Religious
d. Charitable
e. Scientific
f. youth and sports development
g. cultural
h. educational purposes or
i. rehabilitation of veterans
j. Social welfare institutions
k. Non-government organizations: No part of
the net income of which inures to the
benefit of any private stockholder or
individual
Statutory Limit:
a. 10% in the case of an individual (individual
donor), and
b. 5% in the case of a corporation (corporate
donor), of the taxpayer's/donor’s income
derived from trade, business or profession
computed before the deduction for
contributions and donations
The amount deductible is the actual
contribution or the statutory limit computed,
whichever is lower.
Contributions to pension trusts
Based on the Code, 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 (in
addition to the contributions to such trust during
the taxable year to cover the pension liability
accruing during the year, allowed as a
deduction under Subsection (A) (1) of this
Section ) a reasonable amount transferred or
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paid into such trust during the taxable year in
excess of such contributions, but only if such
amount (1)has not theretofore been allowed as
a deduction, and (2) is apportioned in equal
parts over a period of ten (10) consecutive
years beginning with the year in which the
transfer or payment is made
Contribution to a pension trust may be claimed
as deduction as follows:
a. Amount contributed for the present/normal
service cost – 100% deductible
i. Deductible under “ordinary and
necessary” expenses
b. 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 nine consecutive
years
General Rule: 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
a. There must be a pension or retirement
plan established to provide for the
payment of reasonable pensions to
employees;
b. The pension plan is reasonable and
actuarially sound;
c. It must be funded by the employer;
d. The amount contributed must no longer be
subject to the employer’s control or
disposition; and
e. The payment has not theretofore been
allowed before as a deduction.
Research and Development Expenses
The Philippines grants a tax deduction for
qualifying R&D expenditure. Such expenditure
may be treated as ordinary and necessary
expenses that are fully deductible from gross
income in the year paid or incurred, or deferred
and allowed as a deduction ratably distributed
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over a period of no less than 60 months (RA
8424, Section 34, I)
Requisites:
a. The expenditure is paid or incurred by
the taxpayer in connection with the
taxpayer’s trade, business, or
profession;
b. The expenditure is not treated as a
current expense; and
c. The expenditure is chargeable to a
capital account but not chargeable to
property that is subject to depreciation
or depletion
Optional Standard Deduction
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:
a. Taxpayer is a citizen or resident alien;
b. Taxpayer’s income is not entirely from
compensation;
c. Taxpayer signifies in his return his
intention to elect this deduction; otherwise
he is considered as having availed of the
itemized deductions;
d. Election is irrevocable for the year in which
made; however, he can change to
itemized deductions in succeeding years.
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. [RR 2-2010].
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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.
General professional partnerships
For purposes of computing the distributive
shares of the partners, the net income of the
GPP shall be computed in the same manner as
a corporation. [Sec. 26, NIRC]
As such, a GPP may likewise claim either
itemized deductions or it can opt to avail of the
OSD allowed to corporations in claiming the
deductions in an amount not exceeding 40% of
its gross income.
The net income determined by either claiming
the itemized deduction or OSD from the GPP’s
gross income is the distributable net income
from which the share of each partner is to be
determined. Each partner shall report as gross
income his distributive share, actually or
constructively received, in the net income of
the partnership. [RR No. 2-2010]
c. Items Not Deductible
General rule: 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.
Exceptions: In computing taxable net income,
no deduction shall be allowed with respect to:
a. Personal, living or family expenses
b. 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
c. 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
d. Premiums paid on any life insurance policy
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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
e. Interest expense and bad debts between
related parties [Sec. 36(B), NIRC)]
f. Losses from sales or exchanges of
property between related taxpayers.
g. 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. [PICOP v.
Commissioner, G.R. No. 106949-50
(1995)]
h. Non–deductible taxes
i. Non-deductible losses
j. Losses on Wash Sales (except if by dealer
in securities in ordinary course of exempt
corporations) These are:
k. Proprietary Educational Institutions and
hospitals
l. Government owned and controlled
corporations
m. Others
Relevant points regarding related taxpayers
a. Payment of interest is not deductible.
b. Bad debts are not deductible.
c. Losses from sales or exchanges of
property are not deductible.
Related Parties [Sec. 34(B), NIRC]
a. Between members of a family (which shall
include only his brothers and sisters,
spouse, ancestors and lineal
descendants)
b. 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
c. 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
d. Between the grantor and the fiduciary of a
trust
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e. Between the fiduciary of a trust and the performed by an employee for his
fiduciary of another trust if the same employer, including the cash value of all
person is a grantor with respect to each non-cash remuneration. [Sec. 78(A), NIRC]
trust
f. Between the fiduciary of a trust and a Separation pay/retirement benefit not
beneficiary of such trust [Section 36(B), exempt
NIRC]
Retirement pay – a lump sum payment
8. Income Tax on Individuals received by an employee who has served
a company for a considerable period of
Summary Table for Taxation of Individuals time and has decided to withdraw from
(all individual taxpayers, including non- work into privacy. [Sec. 2(b), RR No. 6-82]
resident aliens)
Tax General rule: Retirement pay is taxable
Classification Taxable Income
Rates
Income from Exceptions:
Resident sources within and i. SSS or GSIS retirement pays [Sec.
0%-35%
Citizen outside the
32(B)(6), NIRC]
Philippines
Income from ii. Retirement benefit under R.A.
Non-Resident 7641 provided the following
sources within the 0%-35%
Citizen
Philippines requirements are met:
Income from a. Retirement program is
Resident Alien sources within the 0%-35% approved by the
Philippines Commissioner;
Non-resident b. Retirement benefit is pursuant
Income from
Alien Engaged
in Trade or
sources within the 0%-35% to a reasonable private benefit
Philippines plan
Business
Non-resident c. Retiree employed for 10 years
Alien Not Income from by the employer;
Engaged in sources within the 25% d. Retiree should have been 50
Trade or Philippines years old or above at the time
Business
of retirement; and
e. Retirement benefit availed only
a. Resident Citizens, Non-Resident once [Sec. 32 (B)(6)(a), NIRC].
Citizens and Resident Aliens [Sec.
24(A)(1)] Separation pay
General Rule: Separation pay taxable
1. Inclusions and Exclusions for if voluntarily availed of.
Taxation on Compensation Income
Exception: if due to causes such as
a. Inclusions death, sickness, disability,
reorganization or bankruptcy of the
1. Monetary compensation – If company or for any other cause
compensation is paid in cash, the full beyond the control of the said
amount received is the measure of the employee.
income subject to tax.
3. Bonuses, 13th month pay, and other
2. Regular salary/wage benefits not exempt
Salary – earnings received periodically for
a regular work other than manual labor, Tips and Gratuities – those paid directly
such as monthly salary of an employee. to the employee (usually by employer’s
Wages – all remuneration for services customer) which are not accounted for by

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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
General Rule: taxable as compensation
income when the recipient director has an
employee-employer relationship with the
corporation which pays the same
Exception: 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 [R.M.C 34-08].
5. Non-monetary compensation – measure
of income subject to tax is the equivalent
value in money.
b. Exclusions
1. Fringe benefit subject to tax
(See Gross Income, supra for the
discussion of Taxable and Non-taxable
fringe benefits)
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.
[DOMONDON]
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.
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[DOMONDON]
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 [Henderson
v. Collector (1961)]
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].
(See Gross Income, supra for the
discussion of de minimis benefits)
3. 13th month pay and other benefits and
payments specifically excluded from
taxable compensation income
Gross benefits received by employees up
to P90,000 (amounts in excess are
considered compensation income)
Benefits include:
a) Benefits received by government
employees under RA 6686;
b) Benefits received by employees
pursuant to PD 851 (13th Month Pay
Decree);
c) Benefits received by employees not
covered by PD 851 as amended by
Memorandum Order No. 28; and,
d) Other benefits such as productivity
incentives and Christmas bonus.
2. Taxation of Business Income/Income
from Practice of Profession
All income obtained from doing business or
exercising of profession shall be included in the
computation of gross income.
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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 as provided under Sec. 109 (BB) of
the Tax Code, as amended, shall have the
option to avail of:
a. The graduated rates under Sec. 24
(A)(2)(a) of the Tax Code, as amended;
OR
b. An eight percent (8%) tax on gross sales
or receipts and other non-operating
income in excess of two hundred fifty
thousand pesos (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 if income does not exceed
the VAT threshold.
Individuals earning mixed income
For mixed income earners, the income tax
rates applicable are:
a. The compensation income shall be subject
to the tax rates prescribed under Section
24 (A)(2)(a); AND
b. The income from business or practice of
profession shall be subject to the following:
c. If the gross sales/receipts and other non-
operating income do not exceed the VAT
threshold, the individual has the option to
be taxed at:
d. The aforementioned graduated taxable
income rates; OR
e. The aforementioned optional 8% gross
income tax.
If the gross sales/receipts and other non-
operating income exceeds the VAT threshold,
the individual shall be subject to the graduated
income tax rates.
3. 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.
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Interest income
• on any currency bank deposit, yield or any
other monetary benefit from deposit
substitutes, trust funds and similar
arrangements - 20% final tax
• 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 5%
years
3 years to less than 4 12%
years
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, infra)
Dividends from domestic corporation
a. cash and/or property dividends actually or
constructively received by an individual
from
b. a domestic corporation
c. a joint stock company
d. insurance or mutual fund companies
e. regional operating headquarters of
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multinational companies
f. 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
g. 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:
a. 10% for residents (RC, RA) and non-
resident citizens (NRC);
b. 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
a. Prizes amounting to P10,000 or less, which
shall be subjected to the graduated rates
under Subsection A of Section 24; and
b. Philippine Charity sweepstakes / lotto
winnings which does not exceed P10,000 -
exempt ;
c. 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).
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4. Taxation of Capital Gains
Income from sale of shares of stock of a
Philippine corporation
Shares traded and listed in the stock exchange
– 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 of the shares of stock at the time
of the sale, whichever is higher
Cost: original purchase price
Income from the sale of real property situated
in the Philippines
Note: The FMV is taken into consideration in
determining if there is donor's tax due. If FMV
is higher than selling price, the excess is
considered a donation. However, with the
advent of Republic Act (RA) No. 10963, or the
Tax Reform for Acceleration and Inclusion
(TRAIN) Law, Section 100 of the National
Internal Revenue Code (NIRC) was amended.
Section 100 imposes donor’s tax on the
transfer of property for less than adequate or
full consideration in money or money’s worth.
The amendment leads to an exception to this.
In this case, a transaction that is bona fide, at
arm’s length, and free from any donative intent
shall be deemed made for an adequate and full
consideration, even if the selling price is lower
than the FMV.
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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
General rule: 6% of —whichever is higher of:
GSP, or FMV in accordance with Sec. 6 (E).
Exception:
a. In case of sales made to the government,
any of its political subdivisions or
agencies, or to GOCCs, it can be taxed
either:
b. Under Sec. 24 (D)(1) – 6% CGT, or
c. Under Sec. 24 (A), at the option of the
taxpayer.
d. In case of the sale of or disposition of their
principal residence by natural persons
Requirements:
a. Sale or disposition by a natural person of
his principal residence,
b. The proceeds of which is fully utilized in
acquiring/constructing a new principal
residence,
c. Such acquisition/construction taking place
within 18 calendar months from the date of
sale or disposition,
d. The taxpayer notifies the Commissioner
within 30 days from the sale/disposition
through a prescribed return of his intention
to avail of the exemption,
e. 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 @
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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.
Computation for the basis of new principal
residence:
Historical cost of old principal
residence XXX
Add: Additional cost to acquire
new principal residence* XXX
Adjusted cost basis of the new
principal residence XXX
*Additional cost to acquire new
principal residence:
Cost to acquire new principal
residence XXX
Less: Gross selling price of old
principal residence (XXX)
Additional cost to acquire new
principal residence XXX
a. Income from the sale, exchange, or other
disposition of other capital assets
Other personal properties shall be subject
to income tax
a. At the graduated income tax rates, if the
seller is an individual
b. Long-term capital gains: only 50% is
recognized.
c. Short-term capital asset transactions:
100% subject to tax [Sec. 39(B), NIRC].
Note: if real property is an ordinary asset then
gain is computed and graduated rates apply.
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
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as ordinary assets under Section 39(A)(1).
5. Capital Asset vs. Ordinary Asset
Capital Asset
The term ‘capital assets’ means property held
by the taxpayer (whether or not connected with
his trade or business), but does not include
stock in trade of the taxpayer or other 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 property held by the
taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or
property used in the trade or business, of a
character which is subject to the allowance for
depreciation provided in Subsection (F) of
Section 34; or real property used in trade or
business of the taxpayer. (Sec. 39(A), NIRC)
Ordinary assets
It shall refer to all real properties specifically
excluded from the definition of capital assets
under Section 39(A)(1), NIRC, namely:
a. 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
b. Real property held by the taxpayer
primarily for sale to customers in the
ordinary course of his trade or business; or
c. 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
Real property used in trade or business of the
taxpayer
b. Income Tax on Non-Resident Aliens
Engaged in Trade or Business
General Rule: 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:
a. Cash and/or property dividends from:
b. A domestic corporation;
c. A joint stock company;
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d. An insurance or mutual fund company;
e. A regional operating headquarters of
multinational company;
f. 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;
g. 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;
h. Interests
i. Royalties (in any form); and
j. Prizes (except prizes amounting to Ten
thousand pesos (P10,000) or less which
shall be subject to graduated tax) and
other winnings (except PCSO/lotto
winnings which shall not exceed P10,000)
Except:
The following Royalties shall be subject to
a final tax of ten percent (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 twenty-five percent
(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
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- 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 through the
stock exchange – 15% of net capital gains
Sale, barter or exchange of real properties –
6% of gross selling price or current FMV
whichever is higher
c. Income Tax on Non-Resident Aliens
Not Engaged in Trade or Business
There shall be levied, collected, and paid for
each taxable year upon the entire income
received from all sources within the PH by
every NRANETB within the PH 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, profits, 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)]. [Note
item A of veto message of the President on
TRAIN Law]
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e. Individual Taxpayers Exempt from
Income Tax
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. [RMC No. 8-14]
Senior Citizens
Under RA 9994, otherwise known as the
“Senior Citizens Act of 2010,” which took effect
on February 15, 2010, senior citizens who are
considered to be minimum wage earners in
accordance with RA 9504 shall also be treated
as exempt from the payment of individual
income tax.
Minimum Wage Earners
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 treatment of bonuses and other benefits
that [a minimum wage earner] receives from
the employer in excess of the [₱90,000] ceiling
cannot but be the same as the prevailing
treatment prior to R.A. 9504 - anything in
excess of ₱30,000 is taxable; no more, no less.
The treatment of this excess cannot operate to
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disenfranchise the MWE from enjoying the
exemption explicitly granted by R.A. 9504.
[Soriano v. Secretary of Finance, G.R. No.
184450 (2017)]
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].
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 TABLES OF RATES

Citizens,
Interest, Royalties, Prizes and Other Winnings NRAETB NRANETB
Residents
Interest from any currency bank deposit 20% 20% 25%
Yield or any other monetary benefit from deposit substitute 20% 20% 25%
Yield or any other monetary benefit from trust funds and
20% 20% 25%
similar arrangements
Royalties, in general 20% 20% 25%
Royalties on books as well as other literary works and musical
10% 10% 25%
compositions
Prizes exceeding P10,000 20% 20% 25%
Other winnings (except Philippine Charity Sweepstakes and
20% 20% 25%
Lotto winnings not exceeding P10,000)
15%
Interest incomes received from a depositary bank under Note: NRC –
Exempt Exempt
expanded foreign currency deposit system exempt (RR 1-
11)
Interest income from long-term deposit or investment
evidenced by certificates prescribed by BSP. If preterminated
Exempt Exempt 25%
before fifth year, a final tax shall be imposed based on
remaining maturity

4 years to less than 5 years 5% 5% 25%

3 years to less than 4 years 12% 12% 25%
Less than 3 years 20% 20% 25%
Citizens,
Cash and/or Property Dividends NRAETB NRANETB
Residents
Cash and/or property dividends actually or constructively
received from a domestic corp. or from a joint stock corp., 10% 20% 25%
insurance or mutual fund companies and regional operation

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headquarters of multinational companies (beginning Jan. 1,
2000)
Share of an individual in the distributable net income after tax
of a PARTNERSHIP (other than a general professional 10% 20% 25%
partnership) (beginning Jan. 1, 2000)
Share of an individual in the net income after tax of an
ASSOCIATION, a JOINT ACCOUNT, or a JOINT VENTURE
10% 20% 25%
or CONSORTIUM taxable as a corporation, of which he is a
member or a co-venturer (beginning Jan. 1, 2000)

Sec. 24 (C). Capital Gains Tax from Sale of Shares

Citizens,
of Stock of a domestic corporation NOT TRADED NRAETB NRANETB
Residents
in the Stock Exchange
Tax base: Net Capital Gain 15% 15% 15%

Sec. 24 (D). Capital Gains Tax from Sale of Real Citizens,

NRAETB NRANETB
Property Classified as Capital Asset Residents
Tax base: Gross selling price or current fair market
value, whichever is higher
Tax Rate 6% 6% 6%

Resident Non-Resident
Citizen Alien Citizen NRAETB NRANETB
Category of income
Within the Within the Within the Within the
All sources
Philippines Philippines Philippines Philippines
Based on Taxable (i.e. Net) Income

Schedular Income Tax Rates (i.e. 0% to 35% (Sec. 24) (See table
below)
Compensation/ Business/
Profession
For those earning purely business or professional income or mixed
income not exceeding the threshold gross sales/receipts for the year
Prizes of P10,000 or less
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 Income Within the Philippines (GIW) – 20% Final Withholding
Royalties, in general GIW – 25%
Tax
Winnings/ Prizes (except prizes
P10,000 and below)
Royalties from books, literary
GIW – 10% Final Withholding Tax
works, musical compositions
EXEMPT; However:
Interest from long-term deposit or In case of pre-termination, with remaining maturity of:
investment certificates, which have 4 years to less than 5 years -5% on entire income
a maturity of 5 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 distributed net income after tax GIW – 10% Final Withholding Tax GIW – 20%
of a partnership (except a general
professional partnership), etc.
Interest (Expanding Foreign
GIW – 15% Final Withholding Tax Exempt
Currency Deposit System)
Prizes Subject to schedular rates if not exceeding P10,000
Winnings on Philippine
Exempt if P10,000 and below
Sweepstakes/ Lotto
Capital Gains on Sale of Shares
Net capital gains: 15% Final Tax
of Domestic Corp (not traded in a
domestic stock exchange
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Capital Gains on Sale of Real
Property in the Philippines
Sale of Shares of Domestic Corp.
(traded in a domestic stock
exchange)
Sale of Real Property located
Abroad
Sale of Shares of Foreign Corp.
Passive Income from Abroad
Gross Selling Price or FMV, whichever is higher – 6% Final Withholding Tax
0.6 of 1% of the Selling Price (Stock Transaction Tax)
Note: Stock Transaction Tax is not an income tax, but a business (percentage)
tax
Schedular/Graduated Income Tax Rates (i.e. 0% to 35%) (Sec. 24)
For those earning purely business or professional income or mixed income, the
taxpayer can opt to avail of the 8% tax on gross sales/receipts in lieu of
graduated rates – for the business/professional income portion – upon the option
of the taxpayer

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 than 400,000 - 20% of excess over 250,000
Over 400,000 but not more than 800,000 30,000 25% of excess over 400,000
Over 800,000 but not over 2,000,000 130,000 30% of excess over 800,000
32% of excess over
Over 2,000,000 but not over 8,000,000 490,000
2,000,000
35% of excess over
Over 8,000,000 2,410,000
8,000,000

Computations [RR 08-2018] Pure Compensation Income

Illustration: Mr. CSO earned, aside from his basic wage, additional pay of P140,000.00 which consists
of the overtime pay — P80,000.00, night shift differential — P30,000.00, hazard pay — P15,000.00,
and holiday pay — P15,000.00. He has P5,000 mandatory contributions (SSS, Pag-Ibig, Phil-health,
etc.) and P11,000 non-taxable benefits.

Total Compensation Income P135,000.00

Add: Overtime, night shift differential, hazard, and holiday pay 140,000.00
–––––––––––
Total Income P275,000.00
Less: Mandatory contributions P5,000.00
Non-taxable benefits 11,000.00 16,000.00
––––––––––– –––––––––––
Net taxable income P259,000.00

Tax due (20% in excess of P250,000) 1,800

Mixed-income (i.e. compensation income and business income/income from the practice of
profession – opted to avail of 8% tax on business/professional income)

Illustration: Mr. MAG, a Financial Comptroller of JAB Company, earned annual compensation in 2018
of P1,500,000.00, inclusive of 13th month and other benefits in the amount of P120,000.00 but net of
mandatory contributions to SSS and Philhealth. Aside from employment income, he owns a
convenience store, with gross sales of P2,400,000. His cost of sales and operating expenses are
P1,000,000.00 and P600,000.00, respectively, and with non-operating income of P100,000.00.

a. His tax due for 2018 shall be computed as follows if he opted to be taxed at eight percent
(8%) income tax rate on his gross sales for his income from business:

Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other benefits (max) 90,000.00

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––––––––––––
Taxable Compensation Income P1,410,000.00

Tax due:
1. On Compensation:
On P800,000.00 P130,000.00
On excess (P1,410,000 - P800,000) x 30% 183,000.00
––––––––––––
Tax due on Compensation Income P313,000.00
––––––––––––
2. On Business Income:
Gross Sales P2,400,000.00
Add: Non-operating Income 100,000.00
––––––––––––
Taxable Business Income P2,500,000.00
Multiplied by income tax rate 8%
––––––––––––
Tax Due on Business Income P200,000.00
––––––––––––
Total Income Tax Due (Compensation and Business) P513,000.00

* The option of 8% income tax rate is

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.
* 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.
* The P250,000.00 mentioned above is
already incorporated in the first tier of the
graduated income tax rates applicable to
compensation income.
|||
Mixed-income (i.e. compensation income and business income/income from the practice of
profession)

Illustration: Same facts for Mr. MAG. His tax due for 2018 shall be computed as follows if he did not
opt for the eight percent (8%) income tax based on gross sales/receipts and other non-operating
income:

Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other benefits-max 90,000.00
––––––––––––
Taxable Compensation Income P1,410,000.00
Add: Taxable Income from Business —
Gross Sales P2,400,000.00
Less: Cost of Sales 1,000,000.00
–––––––––––
Gross Income P1,400,000.00
Less: Operating Expenses 600,000.00
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–––––––––––
Net Income from Operation P800,000.00
Add: Non-operating Income 100,000.00 900,000.00
––––––––––– ––––––––––––
Total Taxable Income P2,310,000.00

Tax Due:
On P2,000,000.00 P490,000.00
On excess (P2,310,000 - 2,000,000) x 32% 99,200.00
––––––––––––
Total Income Tax P589,200.00

* 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.

Pure Business/Professional Income (Opted income tax rates under subsection (A) hereof
to be taxed at 8% of gross sales or receipts) and percentage tax due, by express provision
Illustration: Ms. EBQ operates a convenience of law.
store while she offers bookkeeping services to
her clients. In 2018, her gross sales amounted Pure Business/Professional Income (Opted
to P800,000.00, in addition to her receipts from to be taxed at schedular rates)
bookkeeping services of P300,000.00. She Illustration: Ms. EBQ above, failed to signify
already signified her intention to be taxed at 8% her intention to be taxed at 8% income tax rate
income tax rate in her 1st quarter return. on gross sales in her initial Quarterly Income
Her income tax liability for the year will be Tax Return, and she incurred cost of sales and
computed as follows: operating expenses amounting to P600,000.00
and P200,000.00, respectively, or a total of
Gross Sales — Convenience P800,000.00, the income tax shall be
Store P800,000.00 computed as follows:
Gross Receipts — Bookkeeping 300,000.00
–––––––––––
Gross Sales/Receipts P1,100,000.00
–
Less: Cost of Sales 600,000.00
Total Sales/Receipts P1,100,000.00
–––––––––––
Less: Amount allowed as
–
deduction under Sec. 24 (A) (2)
Gross Income P500,000.00
(b) 250,000.00
Less: Operating Expenses 200,000.00
–––––––––––
–––––––––––
–
–
Taxable Income P850,000.00
Taxable Income P300,000.00
Tax Due:
Tax Due:
8% of P850,000.00 P68,000.00
On excess (P300,000 - P250,000)
x 20% P10,000.00
* The total of gross sales and gross receipts is
below the VAT threshold of P3,000,000.00.
* Taxpayer's source of income is purely from
self-employment, thus she is entitled to the
amount allowed as deduction of P250,000.00
under Sec. 24 (A) (2) (b) of the Tax Code, as
amended.

* Income tax imposed herein is based on the

total of gross sales and gross receipts.
* Income tax payment is in lieu of the graduated

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9 . Income Tax on Corporations RA 11534, also known as the Corporate
Recovery and Tax Incentives for Enterprises
a. Income Tax on Domestic (CREATE Act) revised the rate of corporate
Corporations and Resident Foreign income tax. The law took effect on April 11,
Corporations 2021.

The effectivity of the revised RCIT rates under

Domestic Corporations
the CREATE Act shall be as follows:
A corporation created and organized in the
Philippines or under its laws (the law of § Domestic Corporations and Resident
Foreign Corporations – July 1, 2020
incorporation test) [Sec. 22 (C), NIRC].
§ Non-Resident Foreign Corporations –
January 1, 2021
Taxable on all income derived from sources
within and without the Philippines; and
Prior to July 1, 2020, the income tax rate of
Resident Foreign Corporations corporations was at 30% of taxable income.
A corporation organized under the laws of a
foreign country, which is engaged in trade or General rule: RCIT rate for domestic
corporations and resident foreign corporations
business in the Philippines. [See “Doing
Business” definition under the FIA above] under the CREATE act shall be 25% of taxable
income.
Taxable only on income derived from
Exception: if the domestic corporation is
sources within the Philippines.
classified as Micro Small and Medium
Enterprises (MSME), the RCIT shall be 20%
A Philippine branch of a foreign corporation
of taxable income.
duly licensed by the SEC is considered a
resident foreign corporation. Thus, only the
MSME are domestic corporation with:
income of the Philippine branch from sources
within the Philippines is subject to Philippine a. Net taxable income of NOT more than
P5,000,000; AND
income tax.
b. Assets of NOT more than P100,000,000,
excluding the land on which the particular
As general rule, the head office of a foreign
corporation is the same juridical entity as its business entity’s office, plant, and
equipment are situated during the taxable
branch in the Philippines following the single
entity concept. Thus, the income from sources year for which the tax is imposed.
within the Philippines of the foreign head office
shall thus be taxable to the Philippine branch. Note: the 20% income tax rate for MSME is
NOT applicable to foreign corporations
But, when the head office of a foreign (resident or non-resident)
corporation independently and directly
invested in a domestic corporation without the Normal/Regular Corporate Income Tax Rate:
funds passing through its Philippine branch, 25% of Taxable Income, except MSMEs
subject to 20% of Taxable Income.
the taxpayer, with respect to the tax on
dividend income, would be the non-resident
Gross Income xxx
foreign corporation itself and the dividend
Less: Allowable Deductions xxx
income shall be subject to the tax similarly
imposed on non- resident foreign corporations. Taxable Income xxx
[Marubeni v. Commissioner, G.R. No. 76573
(1989)] Minimum Corporate Income Tax (MCIT)

1. Taxation in General a. Applies to domestic corporations and

RFCs:
(a) Regular Corporate Income Tax (RCIT) i. whenever such corporations have

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zero or negative taxable income, or where the goods are actually sold including
ii. whenever the MCIT is greater than insurance while the goods are in transit.
the normal income tax due.
b. Imposed beginning the fourth taxable year Manufacturing – include all costs of
from the taxable year the corporation production of finished goods, such as raw
commenced its business operations. For materials used, direct labor and manufacturing
purposes of MCIT, the taxable year in overhead, freight cost, insurance premiums
which business operations commenced and other costs incurred to bring the raw
shall be the year when the corporation materials to the factory or warehouse.
registers with the BIR (not in which the
corporation started commercial Gross Receipts xxx
operations). Less: Sales Returns xxx
c. Tax rates: Sales Discounts xxx
i. TRAIN Law (beginning Jan. 1, 2018):
Allowances xxx
2% of gross income
ii. CREATE Law Cost of Services xxx xxx
§ From July 1, 2020 to June 30, 2023: Gross Income xxx
1% of gross income Direct cost of services all direct costs and
§ Beginning July 1, 2023: 2% of gross expenses necessarily incurred to provide the
income services required by the customers and clients
including (i) salaries and employee benefits of
Gross Income personnel, consultants and specialists directly
Gross Sales xxx rendering the service and (ii) cost of facilities
Less: Sales Returns xxx directly utilized in providing the service such as
Sales Discounts xxx depreciation or rental of equipment used and
Allowances xxx cost of supplies. In the case of banks, it
includes interest expense.
Cost of Goods Sold xxx xxx
Gross Income xxx MCIT is in the nature of a tax credit, not an
allowable deduction.
If apart from deriving income from core
business activities there are other items of It addresses the previously rampant practice of
gross income realized or earned by the some corporations not declaring their actual
taxpayer which are subject to the normal income or bloating their expenses.
corporate income tax, they must be included as
part of gross income for computing MCIT. [Sec. There is no MCIT on the first three taxable
27 (E), NIRC; RR 12-07] years as incentive to do business.

This means that the term “gross income” will
also include all items of gross income
enumerated under Section 32(A), except: (a)
income exempt from income tax, and (b)
income subjected to FWT.
Cost of goods sold
In general – includes all business expenses
directly incurred to produce the merchandise to
bring them to their present location and use.
Trading or merchandising – includes invoice
cost of the goods sold, plus import duties,
freight in transporting the goods to the place
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.
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,

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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.

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Illustration:
E Co., a domestic trading corporation, in its fourth year of operations had a gross income from sales
of P300,000 and net taxable income of P100,000. How much was the income tax paid by the
corporation for the year?

MCIT (P300,000 x 2%) P6,000

Normal Income Tax (P100,000 x 25%) P25,000
Income Tax to be paid for the year (whichever is higher) P25,000

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 three (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.

Sample Computation of MCIT Carry Forward:

A domestic corporation had the following data on computations of the normal tax (NT) and the
minimum corporate income tax (MCIT) for five years.

Yr 4 Yr 5 Yr 6 Yr 7 Yr 8
MCIT 80K 50K 30K 40K 35K
NT 20K 30K 40K 20K 70K

The excess MCIT over NT carried-forward as follows:

Year 4 Year 5 Year 6 Year 7 Year 8

MCIT 80,000 50,000 30,000 40,000 35,000
NT 20,000 30,000 40,000 20,000 70,000

Excess MCIT over 60,000(a) 20,000(b) n/a 20,000(c) n/a

NT
(MCIT – NT)

Income Tax to be 80,000 50,000 40,000 40,000 70,000

paid
(Higher of MCIT or
NT)
Less: MCIT carry n/a n/a (40,000) (a) n/a (20,000) (a)
forward
(20,000) (b)
Tax Due 80,000 50,000 0 40,000 30,000

(a) 60k excess MCIT from year 4 is credited against the normal tax to be paid in year 6 and 8.
(b) 20k excess MCIT from year 5 is credited against the normal tax to be paid in year 8.
(c) 20k excess MCIT from year 7 will be credited against future normal tax to be paid.

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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
(LMB):
a. 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
b. Force majeure (acts of God and other
calamity; includes armed conflicts like war
or insurgency), or
c. 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.
Items allowed to be credited against quarterly
MCIT due: (a) 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)
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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.
a. 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
a. 20% final tax on:
i. interest on any currency bank deposit,
ii. yield or any other monetary benefit
from deposit substitutes,
iii. yield or any monetary benefir from trust
funds and similar arrangements, and
iv. Royalties
b. same for Domestic Corporations and
Resident Foreign Corporations
c. Collected as Final Withholding Tax [Sec.
57, NIRC]
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Interest Income derived by a domestic
corporation from depository bank under the
expanded foreign currency deposit system
[Section 27 (D)(1), NIRC]
a. 15% final income tax
b. same for Domestic Corporations and
Resident Foreign Corporations
c. Collected as Final Withholding Tax [Sec.
57, NIRC]
Inter-corporate dividends
a. Dividends received from a domestic
corporation by another domestic
corporation or resident foreign corporation
- Exempt
b. Dividends received from a domestic
corporation by a non-resident foreign
corporation (NRFC): 25% 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.
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
Nonresident 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: 15% of net
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capital gains [Sec. 28 (A)(6)(c), NIRC].
Capital gains realized from the sale,
exchange, or disposition of lands and/or
buildings [Sec. 27 (D)(5)]
a. Imposed 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
b. A final tax of 6% on the gross selling price,
or the current fair market value at the time
of the sale, whichever is higher;
c. 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.
d. Applicable to domestic corporations only.
e. Tax treatment is similar to that of
individuals.
2. Branch Profit Remittance Tax
a. Applies only to a resident foreign
corporation which is a branch of a non-
resident foreign corporation. Imposed on
profits remitted by the Philippine branch to
the head office.
b. 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:
a. Interests, dividends, rents, royalties
(including remuneration for technical
services),
b. salaries, wages,
c. premiums, annuities, emoluments, or
d. other fixed or determinable annual,
periodic or casual gains, profits, income
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and capital gains received during each
taxable year from all sources within the
Philippines
3. Itemized Deductions vs. Optional
Standard Deductions
A taxpayer engaged in business or in the
practice of profession shall choose either the
optional or itemized deduction (described
below) deduction.
Itemized Deductions
There shall be allowed as deduction from
gross income all the ordinary and
necessary expenses paid or incurred
during the taxable year in carrying on or
which are directly attributable to, the
development, management, operation
and/or conduct of the trade, business or
exercise of a profession including a
reasonable allowance for salaries, travel,
rental and entertainment expenses.
Itemized deduction includes also interest,
taxes, losses, bad debts, depreciation,
depletion, charitable and other
contributions, research and development,
pension trust, premium payments on health
and/or hospitalization insurance.
Optional Standard Deductions
In the case of a corporation subject to tax
under Sections 27(A) and 28 (A)(1), it may
elect a standard deduction in an amount
not exceeding forty percent (40%) of its
gross income as defined in Section 32 of
the NIRC. [Sec. 34 (L), NIRC]
“Gross income” shall mean the gross sales
less sales returns, discounts and
allowances, and cost of goods sold. “Cost
of goods sold” shall include the purchase
price or cost to produce the merchandise
and all expenses directly incurred in
bringing them to their present location and
use.
Unless the taxpayer signifies in his return
his intention to elect the optional standard
deduction, he shall be considered as
having availed himself of the itemized
deductions allowed in Sec. 34(A) to (J) of
the NIRC.
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Once the election to avail of OSD or
itemized deduction is signified in the
taxpayer’s return, it shall be irrevocable for
the taxable year for which the return is
made.
General partnerships and general
professional partnerships may likewise
claim either itemized deductions or it can
opt to avail of the OSD allowed to
corporations in claiming the deductions in
an amount not exceeding 40% of its gross
income.
The net income determined by either
claiming the itemized deduction or OSD
from the GPP’s gross income is the
distributable net income from which the
share of each partner is to be determined.
Each partner shall report as gross income
his distributive share, actually or
constructively received, in the net income
of the partnership. [RR No. 2-2010]
b. Income Tax on Non-Resident Foreign
Corporations
1. 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. [See “Doing
Business” definition under the FIA in B.7.2.
Corporations]
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.
General rule
The tax is 25% of gross income received
during each taxable year beginning January 1,
2021 from all sources within the Philippines
This includes: interests, dividends, rents,
royalties, salaries, premiums (except
reinsurance premiums), annuities,
emoluments or other fixed or determinable
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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)
2. 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
3. Tax on Certain Income Received
by the NRFC
Tax on Interest on Foreign Loans
Tax on Interest on foreign loans: contracted on
or after August 1, 1986 – 20% final withholding
tax [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
The 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 25% 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 during
the taxable year from the sale, barter,
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exchange or other disposition of shares of
stock in a domestic corporation not listed and
traded through a local stock exchange: 15% on
the net capital gains
c. Income Tax on Special Corporations
1. Proprietary Educational
Institutions and Non-profit
Hospitals [Sec. 27(B), NIRC]
Tax Rates and Base:
§ Under TRAIN Law – 10% on taxable
income
§ Under CREATE Law
a. From July 1, 2020 to June 30,
2023 – 1% on taxable income
b. Beginning July 1, 2023 – 10% on
taxable income
The above rates shall be imposed 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].
2. Government-owned or Controlled
Corporations, Agencies,
Instrumentalities [Sec. 27(C),
NIRC]
GOCCs
General rule: GOCCs are taxable as any other
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corporation engaged in similar business,
industry or activity
Exceptions:
a. Government Service Insurance System
(GSIS)
b. Social Security System (SSS)
c. Philippine Health Insurance Corporation
(PHIC)
d. Local water districts (LWDs) [Sec. 27 (C),
NIRC]
Government agencies or instrumentalities
General rule: The government is exempt from
tax.
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
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

Exception: 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)]
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 – exempt from income
tax

3. Foreign Currency Deposit Units Same for Domestic and Resident Foreign
[Sec. 27(D)(3), NIRC] Corporations.

Income derived by a depository bank under the Similar treatment to OBUs.

expanded foreign currency deposit system

Summary of Tax Bases and Rates of Corporations

Type of Corporation The higher between RCIT or MCIT rates

Regular MCIT (Gross Income)

Rate Effectivity Rate Effectivity

Domestic Corporation:

Domestic Corporations, in general 25% of taxable July 1, 2020 1% July 1, 2020 –

income June 30, 2023
(within and without)
July 1, 2023
2%

For corporations with net taxable 20% of taxable July 1, 2020 1% July 1, 2020 –
income not exceeding Five Million income June 30, 2023

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Type of Corporation The higher between RCIT or MCIT rates

Regular MCIT (Gross Income)

Rate Effectivity Rate Effectivity

Pesos (P5,000,000) AND total

assets not exceeding One Hundred July 1, 2023
Million (P100,000,000), excluding
the land on which the particular 2%
business entity's office, plant and
equipment are situated

Proprietary Educational Institutions 1% of taxable July 1, 2020 – Not Applicable

and Hospitals income June 30, 2023

July 1, 2023

10% of taxable
income

Government Owned or Controlled 20% / 25% of July 1, 2020 Not Applicable

Corporations taxable income

Exempt if SSS,
GSIS, HDMF,
PHIC, local water
districts, [Sec.
27(C), NIRC]

Foreign Corporation [on taxable income (e.g., net or gross income, as applicable) derived from all sources
within the Philippines]:

Resident Foreign Corporation 25% of taxable July 1, 2021 1% July 1, 2020 –

income June 30, 2023
(within)
July 1, 2023
2%

International Carriers 2.5% of Gross

Philippine Billings

Offshore Banking Unit (OBUs) 25% taxable Upon the 1% Upon the
(Note: OBUs shall now be taxed as income effectivity of effectivity of
resident foreign corporation upon the CREATE the CREATE
effectivity of the CREATE) (Apr. 11, 2022) until June 30,
2023

2% July 1, 2023

Regional Operating Headquarters 25% taxable Jan. 1, 1% Jan. 1, 2022

(ROHQ) income 2022

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Type of Corporation The higher between RCIT or MCIT rates

Regular MCIT (Gross Income)

Rate Effectivity Rate Effectivity

– June 30,
2023

2% July 1, 2023

Offshore Gaming Licensees 25% taxable Oct. 9, 2021 1% Oct. 9, 2021

income – June 30,
2023

2% July 1, 2023

Non-Resident Foreign 25% of gross Jan. 1, 2021 Not applicable

Corporation income
(within)

Non-Resident Cinematographic 25% of Jan. 1, 2021 Not applicable

Film Owners, Lessor or Distributor gross income from
all sources within
the Philippines

Non-Resident Owner or Lessors of 4.5% Jan. 1, 2021 Not applicable

Vessels Chartered by Philippine of gross rentals,
Nationals lease or charter
fees from leases or
charters to Filipino
citizens or
corporations

Non-Resident Owner or Lessors of 7.5% of gross Jan. 1, 2021 Not applicable

Aircraft, Machineries and Other rentals, charters or
Equipment other fees

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d. Exemptions from Tax on
Corporations
Tax exempt corporations [Sec. 30, NIRC]
a. Labor, agricultural or horticultural
organization – non-profit
b. mutual savings bank or cooperative bank
– non-stock, non-profit, operated for
mutual purposes
c. 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
d. Cemetery company – owned and
operated exclusively for the benefit of its
members
e. 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
f. Business league, chamber of commerce,
or board of trade – Non-profit; no part of
net income inures to the benefit of an
individual
g. Civic league or organization – Non-profit;
operating exclusively for the promotion of
social welfare
h. Non-stock and non-profit educational
institutions
i. Government educational institutions
j. 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
k. 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
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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.
Tax on Other Entities: General Partnerships,
General Professional Partnerships, Co-
ownerships, Joint Ventures, and Consortia
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].
General rule: The partnership is subject to the
same rules and rates as corporations.
Exceptions: 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:
a. such share will be subjected to dividend
tax (10%) whether actually distributed or
not.
b. 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 (25%).
A partner’s contribution to the general
partnership fund is a capital investment and is
not taxable income of the partnership.
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.
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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 35%.
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. [MAMALATEO]
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]
Co-ownerships
There is co-ownership whenever the
ownership of an undivided thing or right
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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. [De Leon]
When Co-ownership is subject to tax
The following circumstances would render a
co-ownership subject to a corporate income
tax:
a. When a co-ownership is formed or
established voluntarily, or upon
agreement of the parties;
b. When the individual co-owner reinvested
his share, and
c. When the inherited property remained
undivided for more than ten 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.
[Valencia and Roxas]
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)]
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.
General rule: An unincorporated joint venture
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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.
Exception: 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
a. The joint venture must be an unincorporated
entity formed by two or more persons
b. 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.
e. Period Within Which to File Income
Tax Return of Individuals and
Corporations
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:
a. BIR Form Nos. 1700 and 1701 – Annual
Income Tax Returns for Individual
b. BIR Form No. 1702 – Annual Income Tax
Return for Corporations and Partnerships
c. BIR Form No. 1800 – Donor’s Tax Return
d. 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]
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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
1. Who are required to file; Exceptions
[Sec. 51(A), NIRC]
General Rule: The following are required to file
income tax return:
a. Resident citizen
b. Non-resident citizen, on income from
sources within the Philippines
c. Resident alien, on income from sources
within the Philippines
d. Non-resident alien engaged in trade or
business or in the exercise of profession in
the Philippines, on income from sources
within the Philippines
Exceptions: The following shall not be
required to file income tax return:
a. 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.
b. 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
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more than one employer.
c. Individuals whose sole income has been
subjected to final withholding tax
(pursuant to Sec. 57 (A)).
d. Minimum wage earner (as defined in Sec.
22 (HH))
e. 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].
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].
2. Substituted Filing
Applicable to individual taxpayers:
a. receiving purely compensation income,
regardless of amount
b. from only one employer in the Philippines
for the calendar year, and
c. the income tax of which has been withheld
correctly by the employer
The certificate of withholding filed by their
respective employers, duly stamped ‘received’
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by the BIR, shall be tantamount to the
substituted filing of income tax returns by the
employee [Sec. 51-A, NIRC].
3. When and 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]:
a. Sale of shares not traded thru 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
b. 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].
Due Date for Filing
Period
Return
Q1 Return May 15 of the same year
August 15 of the same
Q2 Return
year
November 15 of the same
Q3 Return
year
April 15 of the following
Annual Return
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]
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
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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
1. Quarterly Income Tax
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.
2. When and 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. 77].
The filing of the tax returns by a corporation
using the calendar year:
Period Due Date for Filing Return
Period Due Date for Filing
Return
Q1 Return May 30 of the same year
Q2 Return August 29 of the same
year
Q3 Return November 29 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
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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
General rule: 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.
Exception: 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]
Return of Corporations 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]
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d. Failure to File Returns
There shall be imposed and collected as part
of the tax:
1. A surcharge of twenty five percent (25%) for
each of the following violations:
(a) Failure to file any return and pay the
amount of tax or installment due on or
before the due dates;
(b) Filing a return with a person or office
other than those with whom it is
required to be filed;
(c) Failure to pay the full or part of the
amount of tax shown on the return, or
the full amount of tax due for which no
return is required to be filed, on or
before the due date;
(d) Failure to pay the deficiency tax
within the time prescribed for its
payment in the notice of Assessment
(Delinquency Surcharge)
2. A surcharge of fifty percent (50%) of the tax
or of the deficiency tax, in case any payment
has been made on the basis of such return
before the discovery of the falsity or fraud, for
each of the following violations:
(a) Willful neglect to file the return within the
period prescribed by the Code or by rules
and regulations; or
(b) In case a false or fraudulent return is
willfully made.
3. Interest at the rate of double the legal
interest rate for loans or forbearance of any
money in the absence of an express stipulation
as set by the Bangko Sentral ng Pilipinas from
the date prescribed for payment until the
amount is fully paid. [Sec. 249(A), NIRC]
Note: the current interest rate imposed by the
BIR is 12% or double the legal interest rate of
6% as prescribed by the BSP.
4. Compromise penalty.
10. Withholding Taxes
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,
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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. [MAMALATEO]
b. Creditable vs. Withholding Taxes
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.
Final Withholding Tax
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.
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Expanded Withholding Tax

1. 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.]

2. 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

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I. NATIONAL
TAXATION
A. Value – Added Tax (VAT)
1. Concept and Elements of VATable
Transactions
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. [MAMALATEO]
b. Sales Tax
The taxpayer (seller) determines his tax liability
by computing the tax on the gross selling price
on sale of goods or properties or gross receipts
on sale of services (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. Elements of a Vat-Taxable
Transaction in General
1. There must be a sale, barter, exchange, or
lease of goods or properties, performance
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TAXATION LAW
of service in the Philippines, or importation
of good
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.
Meaning of “in the course of trade or
business” (Rule of Regularity)
The regular conduct or pursuit of a commercial
or economic activity, including transactions
incidental thereto, by any person regardless of
whether or not the person engaged therein is a
nonstock, nonprofit private organization
(irrespective of the disposition of its net income
and whether or not it sells exclusively to
members or their guests), or government
entity. [Sec. 105, NIRC; Section 4.105-3, RR
16-2005]
Exceptions:
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. [Section 4.105-3,
RR 16-2005]
2. Importation are subject to VAT whether or
not made in the course of trade or business
[Sec. 4.105-1, RR 16-2005]
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. [RMC 7-2014 in relation to
RR 7-2012]
2. Impact and Incidence of Tax
Impact Incidence
Refers to the statutory Refers to the buyer /
taxpayer (i.e., the final consumer, the
seller/importer), the one who ultimately
one who collects tax
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Impact Incidence
and pays to the bears the burden of
government taxation
3. Destination Principle and Cross-
Border Doctrine
General rule: The VAT system uses the
destination principle as a basis for the
jurisdictional reach of the tax. Goods and
services are taxed only in the country where
they are consumed. Thus, exports are zero-
rated, while imports are taxed. [CIR v.
American Express International, G.R. No.
152609 (2005)]
Exception: 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
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. [CIR v. American
Express International, G.R. No. 152609
(2005)]
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. [ibid.]
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4. Imposition of VAT on Transfer of
Goods by Tax Exempt Persons
Transfer of Goods by Tax-Exempt Persons
(Technical Importation):
a. 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.
b. 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]
5. Transactions deemed sale
Rate: 12% VAT
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. [Sec. 4.106-7, RR 16-2005]
The following are transactions deemed sale:
[Sec. 106(B), NIRC]
a. Transfer, use or consumption not in the
course of business of goods or properties
originally intended for sale or for use in the
course of business [Sec. 4.106-7(a)(1), RR
16-2005]
Example: when a VAT-registered person
withdraws goods from his business for his
personal use
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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. [Sec. 4.106-3, RR 16-2005]
b. Distribution or transfer to:
(i) shareholders or investors as share in
the profits of the VAT-registered
person; or
(ii) creditors in payment of debt. [Sec.
4.106-7(a)(2), RR 16-2005]
c. 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. [Sec. 4.106-7(a)(3), RR 16-
2005]
d. 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. [Sec. 4.106-7(a)(3), RR 16-
2005]
Examples:
(i) change of ownership of the business
(e.g., when a sole proprietorship
incorporates, or the sole proprietor
sells his entire business)
(ii) dissolution of a partnership and
creation of a new partnership which
takes over the business
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6. Zero-rated and Effectively Zero-
rated sales of goods or properties,
and services
Rate: 0% VAT
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%
7) Export sales
8) Sales of goods or property to persons or
entities who are tax-exempt (Effectively
Zero-Rated Sales)
9) Zero-rated sale of services
10) Sales to offshore gaming licensees subject
to gaming tax under Section 125-A of NIRC
[RA No. 11590]
Provided that the 0% VAT shall only apply
if the OGLs are paying the 5% gaming tax
[RR 20-2021]
Provided further, that in cases wherein the
goods supplied are used in non-gaming
operations, the 0% shall NOT apply.
[RR 20-2021]
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
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
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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
Export-oriented enterprise – any
enterprise whose export sales exceed 70%
of the total annual production of the
preceding taxable year [Sec. 4.106-5(a)(3),
RR 16-2005]
4. Those considered export sales under the
Omnibus Investment Code of 1987, and
other special laws (e.g. Bases Conversion
& Development Act of 1992)
Considered Export Sales under the
Omnibus Investment Code (EO 226):
a. Philippine port F.O.B. value
determined from invoices, bills of
lading, inward letters of credit, landing
certificates, and other commercial
documents, of export products
exported directly by a registered export
producer; OR
b. Net selling price of export products sold
by a registered export producer to
another export producer, or to an
export trader that subsequently exports
the same (only when actually exported
by the latter) as evidenced by landing
certificates.
Constructive Exports (without actual
exportation):
a. Sales to bonded manufacturing
warehouses of export-oriented
manufacturers
b. Sales to export processing zones [R.A.
7916, R.A. 7922, R.A. 7903 and other
similar export zones];
c. Sales to registered export traders
operating bonded trading warehouses
supplying raw materials in the
manufacture of export products;
d. Sales to diplomatic missions and other
agencies and/or instrumentalities
granted tax immunities, of locally
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manufactured, assembled or repacked
products, whether paid for in foreign
currency or not [Sec. 4.106-5(a)(4), RR
16-2005]
Notes:
a. Export sales of registered export
traders shall include commission
income.
b. The exportation of goods on
consignment shall not be deemed
export sales until the export products
consigned are in fact sold by the
consignee.
c. Sales by a VAT-registered supplier to a
manufacturer/producer whose
products are 100% exported are
considered export sales. A certification
to this effect must be issued by the
Board of Investment (BOI) which shall
be good for 1 year unless subsequently
re-issued [Sec. 4.106-5(a)(4), RR 16-
2005]
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 [as
amended by Train Law; Sec. 2, RR 13-
2018]
a. Limited to goods, supplies,
equipment and fuel to be used in
the transport of goods and
passengers from a port in the
Philippines directly to a foreign
port, or vice versa without docking
or stopping at any other port in the
Philippines unless it is for
unloading passengers and/or
cargoes originating abroad, or to
load passengers and/or cargoes
bound for abroad
b. If any portion of such fuel, goods,
supplies or equipment is used for
purposes other than that
mentioned, such portion shall be
subject to 12% VAT [Sec. 4.106-5,
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RR 16-2005 as amended by RR
13-2018]
Note: items (2), (3), and (4) 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.
The Department of Finance shall establish a
VAT refund center in the BIR and in the BOC
that will handle the processing and granting of
cash refunds of creditable input tax. [Sec.
106(A), NIRC]
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). [MAMALATEO; RR 4-
2007]
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”].
Tax Treatment of Sales to and by PEZA-
registered Enterprises [RMC 21-21; RMC
24-22]:
i) Incentives to Registered Enterprises under
the provisions of CREATE (Rationalization
of Incentives) include Value-added tax
exemption on importation and VAT zero-
rating on local purchases of goods and
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services directly and exclusively used
in the registered project or activity.
“Customs Territory” shall mean the national
territory of the Philippines outside of the
proclaimed boundaries of the ECOZONES
except those areas specifically declared by
other laws and/or presidential
proclamations to have the status of special
economic zones and/or free ports. [Sec.
2(g), Rule 1, Part I, RA 7916-IRR]
ii) Revenue Regulations (RR) No. 21-2021:
"direct and exclusive use in the registered
project or activity" refers to such "raw
materials, supplies, equipment, goods.
packaging materials, services,
including provision of basic
infrastructure, utilities, and
maintenance, repair and overhaul of
equipment, and other expenditures"
that must be "directly attributable to the
registered project or activity without
which the registered project or activity
cannot be carried out"
iii) RMC No. 24-2022: expenses for
administrative purposes are excluded from
the definition and that registered export
enterprises should adopt a method for
allocating local purchases between those
used in the registered export enterprise's
registered project or activity and for
administrative purposes.
If the local purchases are used in both the
registered export enterprise's registered
project or activity and for administrative
purposes and the proper allocation cannot
be made, the local purchase will be subject
to the 12% VAT.
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:
i) Processing, manufacturing or repacking
goods for other persons doing business
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outside the Philippines which goods are
subsequently exported, where the services
are paid for in acceptable foreign currency
and accounted for in accordance with the
rules and regulations of the BSP;
ii) 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% VAT 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. [CIR v.
American Express International, G.R. No.
152609 (2005)]
iii) 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;
iv) 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];
v) 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;
vi) Transport of passengers and cargo by
domestic air or sea vessels from the
Philippines to a foreign country [as
amended by TRAIN Law]; and
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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]
vii) 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.
viii) Services rendered to offshore gaming
licensees subject to gaming tax under
Section 125-A of this Code by service
providers, including accredited service
providers as defined in Section 27 (G) of
this Code [RA 11590]
Provided that the 0% VAT shall only apply
if the OGLs are paying the 5% gaming tax
[RR 20-2021]
Provided further, that in cases wherein the
goods supplied are used in non-gaming
operations, the 0% shall NOT apply.
[RR 20-2021]
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]
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TAXATION 2 TAXATION LAW

Difference between Zero-rated and VAT- Note: The VAT-registered person may elect
exempt 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
Zero-rated VAT-exempt
of three (3) years from the quarter the election
It is a taxable Not subject to output was made [Sec. 4.109-2, RR 16-2005 as
transaction and result tax amended by RR 13-2018].
in an output tax at
zero-percent Exempt Transactions

The following transactions are exempt from

The input VAT The seller is not VAT: [Sec. 109, NIRC]
attributable to zero- entitled to any input 1. Sale or importation of agricultural and
rated sales may be tax on his purchases marine food products in their original
allowed as tax credits despite the issuance state, livestock and poultry of a kind
or refund. of a VAT invoice or generally used as, or yielding or producing
receipt. foods for human consumption, and
breeding stock and genetic materials
therefor;
Persons engaged in VAT-exempt persons • Products in their original state remain
zero-rated shall register as non- as such even if they have undergone
transactions are VAT taxpayers. Some the simple processes of preparation or
required to register as VAT exempt persons preservation for the market, such as
VAT taxpayers may opt to register as freezing, drying, salting, broiling,
a VAT taxpayer, and roasting, smoking or stripping,
then be subject to including those using advanced
VAT. Eg. Gross technological means of packaging,
annual sale of goods, such as shrink wrapping in plastics,
properties, or services vacuum packing, tetra-pack, and other
that do not exceed similar packaging methods.
PhP3Million (Sec. 109 • Polished and/or husked rice, corn grits,
CC). raw cane sugar and molasses, ordinary
salt, AND COPRA shall be considered
in their original state
7. Value-added Tax-exempt • Livestock or poultry do not include
Transactions fighting cocks, race horses, zoo
animals and other animals generally
VAT-exempt transactions refer to the sale of considered as pets. [Sec. 4.109-
goods or properties and/or services and the 1(B)(1)(a), RR 16-2005]
use or lease of properties that is NOT subject 2. Sale or importation of fertilizers, seeds,
to VAT (output tax) and the seller is not allowed seedlings and fingerlings, fish, prawn,
any tax credit of VAT (input tax) on purchases. livestock and poultry feeds including
[Sec. 4.109-1(A), RR 16-2005] ingredients, whether locally produced or
imported, used in the manufacture of
The person making the exempt sale of goods, finished feeds (except specialty feeds for
properties or services shall not bill any output race horses, fighting cocks, aquarium fish,
tax to his customers. [Sec. 4.109-1(A), RR 16- zoo animals, and other animals generally
2005] considered as pets);
3. Importation of personal and household
effects belonging to (i) Philippine residents
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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
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];
Exception: Vehicles, vessels, aircrafts,
machineries, and other goods for use in
manufacturing shall be subject to duties,
taxes and other charges.
5. Services subject to percentage tax; (see
Percentage Tax, infra)
6. Services by agricultural contract growers
and milling for others of palay into rice, corn
into grits, and sugar cane into raw sugar;
1) Agricultural contract growers refer to
those producing for others poultry,
livestock or other agricultural and
marine food products in their original
state. [Sec. 4.109-1(B)(1)(f), RR 16-
2005]
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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.
[Sec. 4.109-1(B)(1)(g), RR 16-2005]
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;
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);
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. [RR 4-2007]
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13. Gross receipts from lending activities by
credit or multi-purpose cooperatives duly
registered with the CDA;
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. [Sec. 4.109-
1(B)(1)(n), RR 16-2005]
15. Export sales by persons who are not VAT-
registered;
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 (e.g., R.A. 7835, R.A.
8763;
• Low-cost housing refers to
housing projects intended for
homeless low-income family
beneficiaries, undertaken by
the Government or private
developers, which may either
be a subdivision or a
condominium registered and
licensed by the Housing and
Land Use Regulatory Board /
Housing (HLURB) under BP
220, PD 957 or any other
similar law, wherein the unit
selling price is within the selling
price ceiling per unit as set by
the Housing and Urban
Development Coordinating
Council (HUDCC). [RR 13-
2018]
c. Sale of real properties utilized for
socialized housing as defined
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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. [HUDCC Resolution
Nos. 1 and 2, series of 2018]
• Socialized housing refers to
housing programs and projects
covering houses and lots or
home lots only undertaken by
the Government or the private
sector for the underprivileged
and homeless citizens which
shall include sites and services
development, long-term
financing, liberated terms on
interest payments, and such
other benefits. [RR 13-2018]
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.
a. If two or more adjacent
residential lots are sold or
disposed of in favor of one
buyer (even if covered by
separate titles or tax
declarations or separate
deeds of conveyance), for
the purpose of utilizing the
lots as one residential lot,
the sale shall be exempt
from VAT only if the
aggregate value of the lots
does not exceed P1.5M.
[RR 13-2018]
b. Sale of parking lots shall
not be considered a sale of
residential lot. Hence, it
shall be subject to VAT
regardless of its selling
price. [RR 13-2012]
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Note: Beginning January 1, 2021,
the VAT 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, as adjusted to
P3,199,200 in 2011 using the 2010
Consumer Price Index values.
[Sec. 109(1)(P), NIRC, as
amended by TRAIN Law; RR 8-
2021]
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 P3M. Otherwise,
the gross receipts will be subject to
the 3% tax imposed under Sec. 116
of the NIRC.
c. Residential units refers to apartments
and houses & lots used for residential
purposes, and buildings or parts or
units thereof used solely as dwelling
places (e.g., dormitories, rooms and
bed spaces) except motels, motel
rooms, hotels and hotel rooms, lodging
houses, inns and pension houses.
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d. Unit means an apartment unit in the
case of apartments, house in the case
of residential houses; per person in the
case of dormitories, boarding houses
and bed spaces; and per room in case
of rooms for rent. [RR 13-2018]
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;
19. Transport of passengers by international
carriers; [added by TRAIN Law]
1. 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.
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;
A. The exemption from VAT on the
importation and local purchase of
passenger and/or cargo vessels shall
be subject to the requirements on
restriction on vessel importation and
mandatory vessel retirement program
of the Maritime Industry Authority
(MARINA). [RR 13-2018]
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];
1. The said fuel, goods and supplies shall
be used exclusively or shall pertain to
the transport of goods and/or
passengers from a port in the
Philippines directly to a foreign port
without stopping at any other port in the
Philippines, except to unload
passengers and/or cargoes from
abroad or load the same bound for
abroad.
 FOR UP CANDIDATES ONLY
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2. If any portion of such fuel, goods or
supplies is used for any other purpose,
such portion of fuel, goods and
supplies shall be subject to VAT. [RR
13-2018]
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;
[RR 13-2018]
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];
24. Transfer of property pursuant to Section
40 (2) of the NIRC, as amended [added by
TRAIN Law];
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:
a. Diabetes, high cholesterol, and
hypertension beginning January 1,
2020 [TRAIN Law, as amended by RA
11467]
b. Cancer, mental illness, tuberculosis,
and kidney diseases beginning January
1, 2021. [RA 11467]
Provided, That the DOH shall issue a list of
approved drugs and medicines for this purpose
within sixty (60) days from the effectivity of this
Act.
[RA 11467]
28. Sale or importation of the following
beginning January 1, 2021 to December
31, 2023:
a. Capital equipment, its spare parts and
raw materials, necessary for the
production of personal protective
equipment components such as
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coveralls, gown, surgical cap, surgical
mask, N-95 mask, scrub suits, goggles
and face shield, double or surgical
gloves, dedicated shoes, and shoe
covers, for COVID-19 prevention; and
b. All drugs, vaccines and medical
devices specifically prescribed and
directly used for the treatment of
COVID-19; and
c. Drugs for the treatment of COVID-19
approved by the Food and Drug
Administration (FDA) for use in clinical
trials, including raw materials directly
necessary for the production of such
drugs: Provided, That the Department
of Trade and Industry (DTI) shall certify
that such equipment, spare parts or
raw materials for importation are not
locally available or insufficient in
quantity, or not in accordance with the
quality or specification required:
Provided, further, That for item (ii),
within sixty (60) days from the
effectivity of this Act, and every three
(3) months thereafter, the Department
of Health (DOH) shall issue a list of
prescription drugs and medical devices
covered by this provision: Provided,
finally, That the exemption claimed
under this subsection shall be subject
to post audit by the Bureau of Internal
Revenue or the Bureau of Customs as
may be applicable.
29. 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.
[Sec. 4.109-1(B), RR 16-2005]
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30. 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 [RR 13-2018].
31. Importation of critical or needed healthcare
equipment or supplies intended to combat
the COVID-19 public health emergency
including PPE (i.e., gloves, gowns, masks,
goggles, face shields, surgical equipment
and supplies; laboratory equipment and its
reagents; medical supplies, tools, and
consumable (i.e., alcohol, sanitizers,
tissue, thermometers, hand soap,
detergent, sodium hydrochloride, cleaning
materials, povidone iodine, common
medicines (e.g., paracetamol tablet and
suspension, mefenamic acid, vitamins
tablet and suspension, hyoscine tablet and
suspension, oral rehydration solution, and
cetirizine tablet and suspension; testing
kits, and such other supplies or equipment
as may be determined by the DOH and
other government agencies
[RA 11469; RR 6-2020]
32. Importation of material needed to make
health equipment and supplies deemed as
critical or needed to address COVID-19
public health emergency
[RA 11469; RR 6-2020]
33. In case of foreign donation, the importation
of personal computers, laptops, tablets, or
similar equipment by the DepEd, CHED,
TESDA
Provided, that if the importer/consignee is
other than the abovementioned agencies,
in order for the imported articles to be
exempt from VAT, the importer should
present a Deed of Donation duly accepted
by the abovementioned agencies.
[RA 11494; RR 26-2020]
34. In the case of local donation where the
personal computers, laptops, tablets, or
similar equipment are originally intended
for sale or for use in the course of business
by the donor
[RA 11494; RR 26-2020]
Note: Any input tax VAT attributable to the
purchase of donated personal computers,
laptops, tablets, or similar equipment not
previously claimed as input tax shall be
creditable against any output tax. The above
rules shall also apply to donations by
ECOZONE locators to the abovementioned
agencies. [RA 11494; RR 26-2020]

SUMMARY OF VAT-EXEMPTIONS [SEC. 109, NIRC]

1 Of agricultural and marine products in their original state

Of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock
Sale or importation
and poultry feeds.
2
Exception: specialty feeds for race horses, fighting cocks, aquarium
fish, zoo animals, and other animals generally considered pets.
Of personal and household effects belonging to (i) residents of the
3 Philippines returning from abroad and (ii) nonresident citizens coming
to resettle in the Philippines
Importation Of professional instruments and implements, tools of trade, occupation
or employment, wearing apparel, domestic animals and personal
4
household effects, belong to persons coming to settle in the Philippines
or overseas Filipinos for their own use and not for barter or sale.

5 Services Subject to percentage tax

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By agricultural contract growers and milling for others of palay into rice,
6
corn into grits and sugarcane into raw sugar

Medical, dental, hospital and veterinary services

7
Exception: those rendered by professionals

Educational services rendered by private educational institutions duly

8 accredited by DepEd, CHED, and TESDA, and those rendered by
governmental educational institutions

9 Rendered pursuant to an employer-employee relationship

10 Rendered by a RAHQ established in the Philippines

Transactions exempt under international agreements or special laws,

11 Others
except those under PD 529 (Petroleum concessionaires)

Sales By agricultural cooperatives duly registered with the CDA

12
By agricultural cooperatives of direct farm inputs, machineries and
Importation
equipment

Gross receipts from lending activities by credit or multi-purpose

13 Services
cooperatives duly registered with the CDA

By non-agricultural, non-electric, and non-credit cooperatives duly

14 Sales registered with the CDA. Provided, the share capital contribution of
each member does not exceed P15,000

15 Export sales By persons who are not VAT-registered

Of real property not primarily held for sale to customers or held for lease
in the ordinary course of business, or real property for low-cost and
16 Sales socialized housing, residential lot valued at P1.5M and below and
house and lot and other residential dwellings valued at P2.5M and
below
17 Lease Of a residential unit with a monthly rental not exceeding P15,000

Sale, importation, Of books and any newspaper, magazine, review or bulletin which
18 printing, or appears at regular intervals with fixed prices for subscription and sale
publication and is not devoted principally to publication of paid advertisements

19 Services Transport of passengers by international carriers

Of passenger or cargo vessels and aircraft, including engine,
Sale, importation,
20 equipment and spare parts thereof for domestic or international
or lease
transport operations

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Of fuel, goods, and supplies by persons engaged in international

21 Importation
shipping or air transport operations

Of banks, non-bank financial intermediaries performing quasi-banking

22 Services
functions and other non-bank financial intermediaries

23 Sale or lease Of goods and services to senior citizens and persons with disability

Of property pursuant to Section 40(C)(2) of the NIRC (tax free

24 Transfer
exchanges)

Association dues, membership fees, and other assessments and

25 Others charges collected by homeowners associations and condominium
corporations

26 Sale Of gold to BSP

Sale of drugs and medicines prescribed for:
i) Diabetes, high cholesterol, and hypertension beginning
January 1, 2020
ii) Cancer, mental illness, tuberculosis, and kidney diseases
27 Sale beginning January 1, 2021

Provided, That the DOH shall issue a list of approved drugs and
medicines for this purpose within sixty (60) days from the effectivity of
this Act.
Beginning January 1, 2021 to December 31, 2023:
(i) Capital equipment, its spare parts and raw materials, necessary for
the production of personal protective equipment components for
COVID-19 prevention
28 Sale or Importation
(ii) All drugs, vaccines and medical devices specifically prescribed and
directly used for the treatment of COVID-19; and
(iii) Drugs for the treatment of COVID-19 approved by the FDA for use
in clinical trials
Sale or lease or
Other than the transactions mentioned in the preceding paragraphs, the
29 performance of
gross annual sales and/or receipts do not exceed the amount of P3M
services

Self-employed individuals and professionals availing of the 8% tax on

Individuals
30 gross sales and/or receipts and other non-operating income, under
Availing 8% tax
Sections 24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the NIRC.

Importation of critical or needed healthcare equipment or supplies

31 Importation intended to combat the COVID-19 public health emergency
[RA 11469; RR 6-2020]

Importation of material needed to make health equipment and supplies

32 Importation deemed as critical or needed to address COVID-19 public health
emergency [RA 11469; RR 6-2020]
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In case of foreign donation, personal computers, laptops, tablets, or
similar equipment by the DepEd, CHED, TESDA

If the importer/consignee is other than the abovementioned agencies,

33 Importation
in order for the imported articles to be exempt from VAT, the importer
should present a Deed of Donation duly accepted by the
abovementioned agencies.
[RA 11494; RR 26-2020]
In case of local donation where the personal computers, laptops,
tablets, or similar equipment are originally intended for sale or for use
34 Importation
in the course of business by the donor
[RA 11494; RR 26-2020]

8. Input and Output Tax 3. Purchase of services in which VAT has

a. 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]
b. 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
actually been paid
4. Transactions deemed sale
5. Transitional Input Tax [Sec 111(A),
NIRC]
Who may avail of transitional input tax:
1. A person who becomes VAT-liable for the
first time upon exceeding P3M in any 12-
month period, or
2. 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) [Sec. 4.111-1(a), RR 16-2005]
Transitional Input VAT credit:
Whichever is higher of:
1. two percent (2%) of the value of the
beginning inventory on hand, OR
2. actual VAT paid on such goods,
materials and supplies.
Note: A real estate dealer is entitled to
claim transitional input VAT on its
beginning inventory based on the value of
the entire real property, including the
improvements thereon, regardless of
whether there was prior payment of VAT on
the purchase of such real property. [Fort
Bonifacio Development Corp. v. CIR, G.R.
Nos. 158885 and 170680 (2009)]
6. Presumptive Input Tax [Sec. 111(B),
NIRC]

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Who may avail: Persons or firms engaged
in the:
1. processing of (i) sardines, (ii) mackerel
and (iii) milk, and
2. 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]
“Processing” means pasteurization,
canning and activities which through
physical or chemical process alter the
exterior texture or form or inner substance
of a product in such manner as to prepare
it for special use to which it could not have
been put in its original form or condition.
[Sec. 111(B), NIRC]
c. Persons Who Can Avail of Input Tax
Credit
Input tax on domestic purchase or
importation of goods or properties shall be
creditable:
a. To the importer upon payment of the VAT
prior to the release of the goods from
customs custody;
b. To the purchaser of domestic goods or
properties upon consummation of sale; or
c. To the purchaser of services or the lessee
or licensee upon payment of the
compensation, rental, royalty or fee. [Sec.
4.110-2, RR 16-2005]
d. 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. [Sec.
16, RR 4-2007]
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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 [Sec.
4.110-3, RR 16-2005]
Notes:
1. If the aggregate acquisition cost does not
exceed P1,000,000, the total input taxes
will be allowable as credit against output
tax in the month of acquisition.
2. If the depreciable capital good is
sold/transferred within 5 years or prior to
the exhaustion of the amortizable input tax,
the entire unamortized input tax can be
claimed as input tax credit during the
month/quarter when the sale or transfer
was made. [Sec. 4.110-3, RR 16-2005]
3. The amortization of the input VAT shall only
be allowed until December 31, 2021 after
which taxpayers with unutilized input VAT
on capital goods purchased or imported
shall be allowed to apply the same as
scheduled until fully utilized
Claiming of input tax on motor vehicles
subject to the following conditions:
a. Purchase of vehicle must be substantiated
with official receipts or other adequate
records;
b. Taxpayer has to prove the direct
connection of the motor vehicle to the
business;
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c. Only one vehicle for land transport is d. No depreciation shall be allowed for
allowed for the use of an official/employee yachts, helicopters, airplanes [Sec. 3, RR
with value not exceeding P2.4 million; 12-2012]

ILLUSTRATION: CLAIMS FOR INPUT TAX ON DEPRECIABLE GOODS

[RR 13-2018]

(1) ABC Corporation sold capital goods on installment on October 1, 2018. It is agreed that the selling
price, including the VAT, shall be payable in 5 equal monthly installments with the first installment to
be paid on October 1, 2018. The data pertinent to the sold assets are as follows:

Selling Price 5,000,000 (exclusive of VAT)

Passed on VAT 600,000

Original Cost of Asset 3,000,000

Accumulated Depreciation 1,000,000

Unutilized Input Tax (Sold Asset) 100,000

Accounting:
SELLER BUYER

October 1, 2017 October 1, 2017

Cash [(P5M + 600k)/5] P1,120,000 Asset P5,000,000

Installment Receivable 4,480,000 Input Tax* 600,000

[(P5M+600k)-1.12M]

Accumulated Depreciation 1,000,000 Cash 1,120,000

Output Tax (12% x 600,000 Installment Payable 4,480,000

P5M)

Asset 3,000,000

Gain on sale of set 3,000,000

To record VAT liability:

Output Tax 600,000

Input Tax 100,000

VAT Payable 500,000

Periodic receipt of installment Periodic receipt of installment

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Cash 1,120,000 Installment 1,120,000

Payable

Installment Receivable 1,120,000 Cash 1,120,000

* The input tax of P600,000.00 shall be spread evenly over a period of 60 months starting on October
2018 or the month of purchase.
If the depreciable capital good is sold/transferred within a period of 5 years or prior to the exhaustion
of the amortizable input tax thereon, the entire unamortized input tax on the capital goods
sold/transferred can be claimed as input tax credit during the month/quarter when the sale or transfer
was made.

(2) A manufacturer purchased capital goods on different occasions as follow :

Month of Amount 12% Input Useful Life No. of Last Month of

Purchase Tax Monthly Amortization
Amortization

January 2018 P8,500,000 P1,020,000 6 Years 60 December

2022

February 2018 P8,500,000 P1,020,000 4 Years 48 January 2022

December P10,000,000 P1,020,000 5 Years 60 November

2018 2022

January 2018 P10,000,000 P1,020,000 5 Years - *Outright claim

on January
2022

a. For purchase made in January 2018, the amortization shall be for the shorter period of 5 years
only or up to December 2022 although the useful life is 6 years.
b. For purchase made in February 2018, the amortization shall be for a period of 4 years only or
up to January 2022 since the useful life of the asset is shorter than 5 years.
c. For purchase made in December 2021, the amortization shall be for the period of 5 years or
up to November 2026.
d. For purchase made in January 2022, no amortization shall be made and the input VAT shall
be claimed on the month of purchase or January 2022

9. Tax Refund or Tax Credit amount indicated in the invoice or receipt

by 12%.
Output VAT – Input VAT = VAT Payable !"#$"# &'( = *+,-- ./00123 4+15/
or Excess input VAT × &'( 78#/

Determination of output tax 2. Output VAT in a sale of services shall be

[Sec. 4.110-6, RR 16-2005] computed by multiplying the total amount
1. Output VAT in a sale of goods/properties indicated in the invoice or receipt by 12%.
shall be computed by multiplying the total
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!"#$"# &'( = *+,-- 7/5/1$#- Allocation of input tax on mixed
× &'( 78#/ transactions

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:
!"#$"# &'(
;<%
= (,#80 129,15/ 8:,"2# ×
;;<%
Determination of input tax creditable
a. 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.
b. 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. [Sec. 4.110-5, RR 16-2005]
A VAT-registered person who is also engaged
in transactions not subject to VAT shall be
allowed tax credit as follows:
a. All input taxes directly attributable to
transactions subject to VAT may be
recognized for input tax credit. Input taxes
directly attributable to VAT taxable sales to
the Government, including GOCCs, shall
not be credited against output taxes arising
from sales to non-government entities.
b. If any input tax cannot be directly attributed
to either a VAT taxable or VAT-exempt
transaction, the input tax shall be pro-rated
to the VAT taxable and VAT-exempt
transactions and ONLY the ratable portion
pertaining to transactions subject to VAT
may be recognized for input tax credit.
[Sec. 4.110-4, RR 16-2005]

ILLUSTRATION: ALLOCATION OF INPUT TAX ON MIXED TRANSACTIONS

[Sec. 4.110-4, RR 16-2005, as amended by RR 4-2007]
ERA Corporation has the following sales during the month:

Sale to private entities subject to 12% 100,000

Sale to private entities subject to 0% 100,000

Sale of exempt goods 100,000

Sale to government subjected to 5% final withholding VAT 100,000

Total sales for the month 400,000

The following input taxes were passed on by its VAT suppliers:

Input tax on taxable goods (12%) 5,000

Input tax on zero-rated sales 3,000

Input tax on sale of exempt goods 2,000

Input tax on sale to government 4,000

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Not attributable to any specific activity (monthly amortization for 60 months) 20,000

The creditable input tax for the month shall be computed as follows:
Input tax on sale subject to 12% 5,000
Ratable portion of the input tax not directly attributable to any activity:

!"#"$%& ("%&( (*+%)

!./"% 0"%&(
× >?@ABC @D EBFAC CGH B@C IEJKLCMN GCCJEOACGOMK C@ GBN GLCEPECN

100,000
× 20,000 = 5,000
400,000

Total input tax attributable to sales to private entities for the month: 10,000.00

The input tax attributable to zero-rated sales for the month shall be computed as follows:
Input directly attributable to zero-rated sale P 3,000
Ratable portion of the input tax not directly attributable to any activity:

1&2. 2"/&3 ("%&(

× >?@ABC @D EBFAC CGH B@C IEJKLCMN GCCJEOACGOMK C@ GBN GLCEPECN
!./"% 0"%&(

100,000
× 20,000 = 5,000
400,000

Total input tax attributable to zero-rated sales for the month: 8,000

The input tax attributable to VAT-exempt sales for the month shall be computed as follows:
Input tax on VAT-exempt sales - 2,000
Ratable portion of the input tax not directly attributable to any activity:

45! &#&67/ ("%&(

!./"% 0"%&(
× >?@ABC @D EBFAC CGH B@C IEJKLCMN GCCJEOACGOMK C@ GBN GLCEPECN

100,000
× 20,000 = 5,000
400,000

Total input tax attributable to VAT-exempt sales: 7,000

The input tax attributable to sales to government for the month shall be computed as follows:
Input tax on sale to gov’t. P 4,000
Ratable portion of the input tax not directly attributable to any activity:

!"#"$%& ("%&( /. /8& 9.:&2;6&;/

!./"% 0"%&(
× >?@ABC @D EBFAC CGH B@C IEJKLCMN GCCJEOACGOMK C@ GBN GLCEPECN

100,000
× 20,000 = 5,000
400,000

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Total input tax attributable to sales to government: 9,000
Determination of the VAT payable or excess
tax credits
If at the end of any taxable month or quarter:
a. The output tax exceeds the input tax, the
excess shall be paid by the VAT-registered
person
b. 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.
Substantiation of Input Tax Credits
Input taxes must be substantiated and
supported by the following documents, and
must be reported in the information returns
required to be submitted to the BIR:
a. Importation of goods – import entry or
other equivalent document showing actual
payment of VAT on the imported goods
b. Domestic purchase of goods and
properties – invoice showing the
information required under Secs. 113
(Invoicing Requirements) and 237
(Issuance of Receipts or Invoices) of the
NIRC
c. Purchase of real property – public
instrument, i.e., deed of absolute sale,
deed of conditional sale,
contract/agreement to sell, etc., together
with VAT invoice issued by the seller
d. Purchase of services – official receipt
showing the information required under
Secs. 113 and 237 of the NIRC
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e. Transitional input tax – inventory of
goods as shown in a detailed list to be
submitted to the BIR
f. Input tax on "deemed sale" transactions
– required invoice
g. Input tax from payments made to non-
residents (such as for services, rentals
and royalties) – copy of the Monthly
Remittance Return of VAT Withheld (BIR
Form 1600) filed by the resident payor in
behalf of the non-resident evidencing
remittance of VAT due which was withheld
by the payor
h. Advance VAT on sugar – Payment Order
showing payment of the advance VAT
Who May Claim for Refund/Apply for
Issuance of Tax Credit Certificate
a. 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
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proportionately allocated on the basis of
sales volume; and
9. the claim is filed within two (2) years after
the close of the taxable quarter when such
sales were made. [Luzon Hydro
Corporation v. CIR, G.R. No. 188260
(2013); Sec. 4.112-1, RR 16-2005]
b. 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 two (2) years from the date of
cancellation, apply for the issuance of a tax
credit certificate for any unused input tax
which may be used in payment of his other
internal revenue taxes.
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. [RR 13-2018]
Period to File Claim/Apply for Issuance of
Tax Credit Certificate
Administrative Claim [Sec 112(C), par. 1,
NIRC]
a. 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]
Note: It is only the administrative claim that
must be filed within the two-year period,
which must be reckoned from the close of
the taxable quarter when the relevant sales
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were made. The judicial claim may be
made beyond the two-year period [CIR v.
San Roque Power Corporation, G.R.
187485 (2013)]
Note: Distinguish this process for
claiming refund of unutilized input tax
credits from the claim for refunds of
erroneous tax payments under
Sec. 229 of the NIRC, where the
administrative and judicial claims must
be made within the 2-year period from
the date of payment.
b. The CIR shall act on the claim for
refund within 90 days from the date of
submission of complete documents in
support of the application.
Note: Prior to January 1, 2018, all
claims for refund or tax credit will be
governed by the 120-day processing
period.
c. 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]
a. 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.
b. The 30-day period to appeal is both
mandatory and jurisdictional.
Exception: Premature filing is allowed only if
filed between 10 December 2003 and 5
October 2010, when BIR Ruling No. DA-489-
03 was still in force. [CIR v. San Roque Power
Corporation, G.R. 187485 (2013)]
Effect of inaction by the CIR
Failure on the part of any official, agent, or
employee of the BIR to act on the application
within the 90-day period shall be punishable
under Section 269 of the NIRC (Violations
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Committed by Government Enforcement
Officers). [Sec. 112(C), NIRC]
Note: The provision on the appeal of the CIR’s
failure to act on the application for refund or tax
credit was removed by the TRAIN Law.
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.
[Sec. 4.114-1(A), RR 16-2005]

Exclusive appellate jurisdiction of CTA

The CTA has exclusive appellate jurisdiction to

review by appeal the inaction by the CIR in
cases involving disputed assessments, refunds
of internal revenue taxes, fees or other
charges, penalties in relations thereto, or other
matters arising under the NIRC or other laws
administered by the BIR, where the NIRC
provides a specific period of action, in which
case the inaction shall be deemed a denial.
[Sec. 7(a)(2), R.A. 1125 as amended by R.A.
9282]

Manner of Refund

Refunds shall be made upon warrants drawn

by the CIR or by his duly authorized
representative without the necessity of being
countersigned by the Chairman of the
Commission on Audit (COA), provided that
refunds shall be subject to post audit by COA.
[Sec. 112(D), NIRC]

10. Filing of Returns and Payment

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]
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VAT FORMULA (IN GENERAL)

Actual Sales/Receipts xxx
Add: Excise Tax xxx
Remaining Merchandise (Cessation of VAT-registered Status) xxx
Transactions Deemed Sale xxx xxx

Less: Sales Returns and Allowances xxx

Sales Discounts xxx xxx

Total Sales (Taxable Base) xxx

Multiplied by 12% 12%
Output VAT on sales or gross receipts xxx
Less: Allowable Input Tax:
Input VAT on current purchases/importations/services xxx
Input VAT on sales to nonresidents xxx
Input VAT on capital goods exceeding P1M
(deferred from prior period) xxx
(from current period) xxx
Transitional Input VAT, if applicable xxx
Presumptive Input VAT, if applicable xxx
Input VAT Carry-over from previous period xxx
Total available input tax xxx
Less: Input tax on capital goods exceeding P1M xxx
deferred to next period
Input tax on exempt sales xxx
Input tax subject to VAT refund/TCC xxx xxx
Net VAT payable xxx
Less: Tax Credits/Payments:
Creditable VAT withheld xxx
Advance payments xxx
VAT paid in return previously filed xxx xxx
VAT Still Payable (Overpayment) xxx

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Illustration of the VAT System

VAT System (All VAT)

Raw Material (VAT) Manufacturer (VAT) Trader (VAT) End-User

SP (100+12) 100 112 SP (300 + 36). 300 336 SP (450 +54) 450 504
Cost 50 Cost (100 + 12) 100 112 Cost (300+36) 300 336
Profit 50 Profit 200 Profit 150

Purchase 112 Purchases 336 Purchases 504

Input VAT 12 12% VAT 36 12% VAT 54

OT 12% 12 OT 12% 36 OT 12% 54

IT 0 IT 12 IT 36
VAT Payable 12 Vat Payable 24 VAT Payable 18

VAT to BIR 12 VAT to BIR 24 VAT to BIR 18 Total VAT 54

VAT System (VAT Exempt 1st chain)

Raw Material Manufacturer Trader End-User
(VAT Exempt)

SP (100+ 0) 100 SP (300 + 36) 300 336 SP (450 +54) 450 504
Cost 50 Cost (100) 100 Cost (300+36) 300 336
Profit 50 Profit 200 Profit 150

Purchase 100 Purchases 336 Purchases 504

Input VAT 0 12% VAT 36 12% VAT 54

OT 0 OT 12% 36 OT 12% 54
IT 0 IT 0 IT 36
VAT Payable 0 Vat Payable 36 VAT Payable 18

VAT to BIR 0 VAT to BIR 36 VAT to BIR 18 Total VAT 54

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VAT System (VAT Exempt mid-chain)
Raw Material Manufacturer Trader End-User
(VAT Exempt)

SP (100+12) 100 112 SP (300) 300 SP (450 +54) 450 504

Cost 50 Cost (100+12) 100 112 Cost (300) 300
Profit 50 Profit 188 Profit 150

Purchase 112 Purchases 300 Purchases 504

No Input VAT 0 No VAT 0 12% VAT 54

OT 12% 12 OT 0 OT 12% 54
IT 0 IT 0 IT 0
VAT Payable 12 Vat Payable 0 VAT Payable 54

VAT to BIR 12 VAT to BIR 0 VAT to BIR 54 Total VAT 66

VAT System (VAT zero-rate mid-chain)

Raw Material Manufacturer Trader End-User
(VAT Zero-rated)

SP (100+12) 100 112 SP (300+ 0) 300 SP (450 +54) 450 504

Cost 50 Cost (100 + 12) 100 112 Cost (300) 300
Profit 50 Profit 188 Profit 150

Purchase 112 Purchases 300 Purchases 504

No Input VAT 12 No VAT 0 12% VAT 54

OT 12% 12 OT 12% 0 OT 12% 54

IT 0 IT 12 IT 0
VAT Payable 12 Vat Payable (12) VAT Payable 54

VAT to BIR 12 VAT to BIR (12) VAT to BIR 54 Total VAT 54

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B. Tax Remedies Under The
NIRC
1. Assessment of Internal Revenue
Taxes
Definition
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
(84 C.J.S 749-750)
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. [CIR
v. CTA, G.R. No. L-21483 (1969)]
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. [Atlas Consolidated
Mining and Development Corp. v. CA, G.R. No.
104151 and 105563 (1995)].
a. Procedural Due Process in Tax
Assessments
[Sec. 228, NIRC; RR 12-99, as amended by
RR 18-13, RR 7-18, and RR 22-2020)
Letter of Authority and Tax Audit
Letter of Authority (LOA): A Letter of
Authority (LOA) is the authority given to the
appropriate revenue officer to conduct the
assessment function. It empowers the revenue
officer to examine the books of accounts and
other accounting records of the taxpayer for the
purpose of collecting the correct amount of tax.
[Republic v Robiegie Corporation, G.R. No.
260261(2022)]
The LOA is premised on the power of the CIR
himself to investigate. Pursuant to Sec 6(A) of
the NIRC, unless authorized by the CIR or his
representative, the investigation of a taxpayer
cannot ordinarily be undertaken. (ibid)
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General Rule: 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)]
Exception: 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. [RMO 36-
99]
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
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required report of investigation. If the Revenue
Officer is unable to submit his final report of
investigation within the 120-day period, he
must then submit a progress report to his Head
of Office, and surrender the LOA for
revalidation.
Re-assignment/Transfer of Revenue
Officers
Reassigning or transferring revenue officers
originally named in the LOA and substituting
them with new revenue officers to continue the
audit or investigation without a separate or
amended LOA (i) violates the taxpayer's right
to due process in tax audit or investigation; (ii)
usurps the statutory power of the CIR or his
duly authorized representative to grant the
power to examine the books of account of a
taxpayer; and (iii) does not comply with existing
BIR rules and regulations, particularly RMO
No. 43-90 dated September 20, 1990. [CIR v.
McDonald’s Philippine Realty Corporation,
G.R. No. 242670 (2021)]
Any reassignment/transfer of cases requires
the issuance of a new LOA. Assessment made
by new RO without a valid LOA is invalid.
(Republic v Robiegie, supra)
Notice of Discrepancy (NOD)
[RR 22-2020]
If a taxpayer is found to be liable for deficiency
tax or taxes in the course of an investigation
conducted by a Revenue Officer, the taxpayer
shalt be informed through a Notice of
Discrepancy. The Notice of Discrepancy aims
to fully afford the taxpayer with an opportunity
to present and explain his side on the
discrepancies found.
The Revenue Officer who audited the
taxpayer’s records shall state in his report,
among others, his findings of discrepancies.
The taxpayer shall be informed in writing of the
discrepancies in his/her payment of internal
revenue taxes, for the purposes of “Discussion
of Discrepancy”.
Discussion of Discrepancy (DOD)
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If the taxpayer disagrees with the
discrepancies during the audit/investigation, it
is during the Discussion of Discrepancy that
the taxpayer is given the opportunity to present
his/her side of the case and explain the
discrepancy found during the investigation of
the Revenue Officer assigned and submit
documents to support his/her explanation or
arguments.
The “Discussion of Discrepancy” shall in no
case extend beyond 30 days from receipt of the
notice of discrepancy. The taxpayer must
submit all necessary documents that supports
his explanation within 30 days after receipt of
the Notice of Discrepancy.
Should the taxpayer need more time to present
the documents, he may submit such
documents after the discussion.
If after being afforded the opportunity to
present his side through the Discussion of
Discrepancy, it is still found that the taxpayer is
still liable for deficiency tax or taxes and the
taxpayer does not address the discrepancy
through payment of the deficiency taxes or the
taxpayer does not agree with the findings, the
investigating office, shall endorse the case to
the reviewing office and approving official in the
National Office or the Revenue Regional
Office, for issuance of a deficiency tax
assessment in the form of a Preliminary
Assessment Notice within ten (10) days from
the conclusion of the Discussion.
Issuance of Preliminary Assessment
Notice (PAN)
General rule: 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.
Exceptions to the issuance of a PAN
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:
● The finding for any deficiency tax is the
result of mathematical error in the
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TAXATION 2
computation of the tax as appearing on
the face of the return; or
● A discrepancy has been determined
between the tax withheld and the
amount actually remitted by the
withholding agent; or
● 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
● The excise tax due on excisable
articles has not been paid; or
● 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.
[RR 18-2013]
Note: Prior to the issuance of a PAN, the
taxpayer may be allowed to make voluntary
payments of probable deficiency taxes and
penalties. [RMC 11-2014]
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 response, calling for
payment of the taxpayer’s deficiency
tax liability, inclusive of the applicable
penalties. [RR 18-2013]
Issuance of a Formal Letter of Demand
and Final Assessment Notice (FLD/FAN)
An FLD/FAN is a declaration of deficiency
taxes issued to a taxpayer who:
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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.
Tax collection must be preceded by a valid
assessment to allow the taxpayer to protest the
assessment, present their case and adduce
supporting evidence. Without complying with
the unequivocal mandate of first informing the
taxpayer of the government's claim, there can
be no deprivation of property, because no
effective protest can be made. The
assessment is void [if it does not state] the
factual and legal bases therefor. Ultimately,
void assessment bears no valid fruit. [CIR v.
Unioil Corporation, G.R. No. 204405 (2021)]
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. [RMC 11-2014]
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
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(2018), citing CIR v. Metro Star Superama,
Inc., G.R. No. 185371 (2010)]
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.
Administrative Decision on a Disputed
Assessment
The FDAA issued by the CIR’s duly authorized
representative cannot be considered as the
decision appealable to the CTA under Section
7(a)(1) of RA 1125, as amended, if the
taxpayer availed of its remedy of appeal to the
Office of the Commissioner of Internal
Revenue the denial of protest issued by the
CIR’s duly authorized representative, under
Subsection 3.1.5 of RR 12-99:
xxx “provided, however, that if the taxpayer
elevates his protest to the CIR within 30-days
from date of receipt of the final decision of the
CIR’s duly authorized representative, the
latter’s decision shall not be considered final,
executory and demandable, in which case, the
protest shall be decided by the Commissioner.”
[LRTA v CIR, G.R. No. 231238 (2022)]
Appeal from an Administrative Decision
on Disputed Assessment
Appeal to the CTA must be filed 30 days from
receipt of the (final) adverse decision. In case
of inaction by the CIR, a taxpayer may either:
1. File a petition for review with the CTA within
30-days after the expiration of the 180-day
period; or
2. Await the final decision of the CIR on the
disputed assessment and appeal that final
decision to the CTA within 30-days.
These options are mutually exclusive and
resort to one bars the application of the other.
[LRTA v CIR, G.R. No. 231238 (2022)]
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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]
2. Assessment contains not only a
computation of tax liabilities, but also a
demand for payment within a
prescribed period. [CIR v. Fitness by
Design, Inc. G.R. No. 215957 (2016)]
3. Assessment must be served on and
received by the taxpayer. [CIR v.
Fitness by Design, Inc. G.R. No.
215957 (2016)]
Modes of service of assessment notice
1. Personal Service – Notice is delivered
personally to the taxpayer at his known
address. If not practicable, notice shall be
served by substituted service or by mail.
2. Substituted Service – The notice is left with
a clerk or a person in charge at the
taxpayer’s known address.
3. Service by mail [RR 18-2013]
Service to the tax agent shall be deemed
service to the taxpayer. [RR 18-2013]
The notice shall first be served to the
taxpayer’s registered address before the same
may be served to the taxpayer’s known
address, or in the alternative, may be served to
the taxpayer’s registered address and known
address simultaneously. [RMC 11-2014]
c. Tax Delinquency v. 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)]
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Tax Delinquency v. Tax Deficiency d. Prescriptive Period for Assessment

Tax Delinquency Tax Deficiency General Rule: Within 3 years after the last day
The self-assessed The amount by prescribed by law for the filing of the return or
tax per return was which the tax from the date of actual filing, whichever comes
not paid or only imposed by law later; provided, that a return filed before the last
partially paid; or exceeds the amount day prescribed by law for filing shall be
shown in the tax considered as filed on such last day [Sec. 203,
The deficiency tax return; or NIRC]
assessed by the BIR
became final and If no amount is Exception: Within 10 years after the discovery
executory. shown in the return, of the falsity, fraud or omission in case of: (FFF)
or if there is no 1. False return
return, then the 2. Fraudulent return with intent to evade tax;
amount by which the or
tax as determined by 3. Failure to file a return. [Sec. 222, NIRC]
the CIR exceeds the
amount previously 1. False Returns vs. Fraudulent Returns
assessed as a vs. Non-Filing of Returns
deficiency [Sec.
56(B), NIRC] False return Fraudulent Failure to
Delinquency tax can Deficiency tax must return file a return
be collected be assessed and Contains Made with Omission to
administratively by must go through the wrong intent to file a return
distraint or levy or by process of filing the information evade taxes within the
judicial action protest by the due to due time
taxpayer and denial mistake, prescribed
of such protest by carelessnes by law
the BIR. s or
The filing of a civil The filing of a civil ignorance
action for the action at the ordinary Deviation Intentional or
Omission
collection of the court for collection may or may deceitfulmay or may
delinquent tax in the during the pendency not be entry with
not be
ordinary court is a of protest may be the intentional intent intentional
proper remedy. subject of a motion Not subject Subject to
Not subject
to dismiss. In to 50% 50% to 50%
addition, the surcharge, surchargesurcharge,
taxpayer must file a except if except if
petition for review done willfully omission is
with the CTA to toll willful
the running of the Assessment may be made within 10 years
prescriptive period. after discovery of the falsity, fraud or
Subject to Subject to omission
administrative administrative
penalties, such as penalties of interest 2. Suspension of the Running of Statute of
25% surcharge, and compromise Limitations
interest, and penalty, but NOT to a. When the CIR is prohibited from
compromise penalty the 25% surcharge making the assessment or beginning
[MAMALATEO] distraint or levy or a proceeding in
court, and for 60 days thereafter;

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b. When the taxpayer requests for a
reinvestigation which is granted by the
CIR;
c. 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;
d. 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
e. When the taxpayer is out of the
Philippines.
2. Taxpayer Remedies
a. Protesting the assessment
1. 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.
2. 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.
● “Relevant supporting documents”
– documents necessary to support the
legal and factual bases in disputing a
tax assessment as determined by the
taxpayer
● “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 FDDA
shall consequently be denied.
● The 60-day period to submit supporting
documents shall NOT apply to
requests for reconsideration. [RR 18-
2013
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3. Effect of Failure to File Protest
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.
4. Action of the Commissioner on the
Protest Filed
Period to act upon or decide the 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. Compromise and Abatement of Taxes
Authority to compromise and abate taxes
General rule: The CIR has the authority to
compromise or abate any tax liability. [Sec.
7(C), NIRC]
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Exception: The power to compromise may be
delegated to:
a. the Regional Evaluation Board (REB), in
case of:
i. assessments issued by
regional offices involving basic
taxes of P500,000 or less; and
ii. minor criminal violations
discovered by regional and
district officials [Sec. 7(C),
NIRC]
b. the National Evaluation Board (NEB),
when:
i. the basic tax exceeds
P1,000,000, or
ii. the settlement offered is less
than the prescribed minimum
rates [Sec. 204(A), NIRC]
COMPROMISE
Grounds for a compromise
The CIR may compromise the payment of any
internal revenue tax in the following cases:
1. 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
2. Financial incapacity – when the financial
position of the taxpayer demonstrates a
clear inability to pay the assessed tax.
[Sec. 204(A), NIRC; Sec. 3, RR 30-2002]
Limits of the CIR’s power to compromise
Ground Minimum compromise
rate
Financial 10% of the basic assessed
incapacity tax
Other cases 40% of the basic assessed
tax
[Sec. 204(A), NIRC]
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
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TAXATION LAW
without the full settlement of the offered
amount. In case of disapproval of the
application for compromise settlement, the
amount paid upon filing of the aforesaid
application shall be deducted from the total
outstanding tax liabilities. [RR 9-2013]
Requisites of a tax compromise
a. The taxpayer must have a tax liability;
b. There must be an offer by the taxpayer or
the Commissioner of an amount to be paid
by the taxpayer
c. 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.
Cases which may be compromised:
a. Delinquent accounts
b. Cases under administrative protest
after issuance of the FAN to the
taxpayer which are still pending in the
Regional Offices, Revenue District
Offices, Legal Service, Large Taxpayer
Service (LTS), Collection Service,
Enforcement Service and other offices
in the National Office
c. Civil tax cases being disputed before
the courts
d. Collection cases filed in courts
e. Criminal violations, except (i) those
already filed in court or (ii) those
involving criminal tax fraud [Sec. 2, RR
30-2002]
Cases which cannot be compromised:
a. Withholding tax cases, unless the
applicant-taxpayer invokes provisions
of law that cast doubt on the taxpayer's
obligation to withhold
b. Criminal tax fraud cases confirmed as
such by the CIR or his duly authorized
representative
c. Criminal violations already filed in court
 FOR UP CANDIDATES ONLY
TAXATION 2 TAXATION LAW
d. Delinquent accounts with duly Compromise Abatement
approved schedule of installment litigation or to put an
appears to be
payments end to one already unjustly or
e. Cases where final reports of commenced. It
excessively
reinvestigation or reconsideration have reduces the amount assessed or the
been issued resulting in reduction in of taxpayer’s liability.
costs do not the
the original assessment and the collection of the
taxpayer is agreeable to such decision amount due.
by signing the required agreement form As to authorized officer
for the purpose. CIR and, in certain CIR
f. Cases which become final and cases, the NEB and
executory after final judgment of a REB
court, where compromise is requested As to grounds
on the ground of doubtful validity of the 1. Doubtful validity 1. Unjustly or
assessment of assessment excessively
g. Estate tax cases where compromise is 2. Financial assessed tax
requested on the ground of financial incapacity 2. Administration
incapacity of the taxpayer [Sec. 2, RR and collection
30-2002] costs do not
justify the
ABATEMENT collection of the
amount due
It refers to the cancellation of the entire amount
of tax payable. c. Recovery of Tax Erroneously or
Illegally Collected
Grounds for abatement
a. The tax or any portion thereof appears
Tax Refund as Distinguished from Tax
to be unjustly or excessively assessed;
Credit
or
1. Tax refund takes place when there is
b. The administration and collection costs
actual reimbursement.
do not justify the collection of the
2. Tax credit takes place upon the
amount due. [Sec. 204(B), NIRC]
issuance of a tax certificate or tax credit
memo, which can be applied against
Coverage of abatement
any sum that may be due and collected
from the taxpayer.
General rule: The CIR’s authority to abate is
applicable to surcharge and compromise
1. Grounds, Requisites, and Period for
penalties only.
Filing a Claim for Refund or Issuance of a
Exception: In meritorious instances, the CIR
Tax Credit Certificate (TCC)
may abate the interest as well as basic tax
assessed, provided that cases for abatement Grounds for filing a claim for tax refund or
or cancellation of tax, penalties and/or interest credit
by the CIR shall be coursed through certain a. Tax is erroneously or illegally assessed
officials. [Sec. 4, NIRC] or collected
i. Taxes are erroneously paid
when a taxpayer pays under a
Compromise Abatement
mistake of fact, as when he is
As to nature/definition
not aware of an existing
It is a contract It is the cancellation
exemption in his favor at the
whereby the parties, of the entire amount
time that payment is made.
by reciprocal of tax payable
concessions, avoid a because the tax

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 FOR UP CANDIDATES ONLY
TAXATION 2
ii.Taxes are illegally collected
when payments are made
under duress.
iii. Penalty is collected without
authority
b. Penalty is collected without authority
c. Sum collected is excessive or in any
manner wrongfully collected [Sec. 229,
NIRC]
Requisites for tax refund or tax credit
a. There is a tax collected erroneously or
illegally, or a penalty collected without
authority, or a sum excessively or
wrongfully collected.
b. There must be a written claim for refund
filed by the taxpayer to the CIR [Vda. De
Aguinaldo v. CIR, G.R. No. L-19927
(1965)]
Exceptions:
● 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]
● A return filed showing an overpayment
shall be considered as a written claim
for credit or refund. [Sec. 204(C),
NIRC]
● The claim must be a categorical claim
for reimbursement [Bermejo v. CIR,
G.R. No. L-3029 (1950)]
● 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.
● Taxpayer must show proof of the
payment of tax [Sec. 229, NIRC]
Note: The two-year period is not jurisdictional.
Even if it had already lapsed, the same may be
suspended for reasons of equity and other
special circumstances. [CIR v. Philippine
American Life Ins. Co., G.R. 105208 (1995)]
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TAXATION LAW
It is subject to waiver in the absence of
objection to a claim filed after 2 years.
Two-year period when counted
General Rule: From the date the tax was paid
Exceptions:
● If the tax is withheld at source – from
the date it falls due at the end of the
taxable year [Gibbs v. CIR, G.R. No. L-
17406 (1965)]
● If the income is paid on a quarterly
basis – from the time of filing the final
adjustment return [CIR v. CA, G.R. No.
117254 (1999)]
● When the tax is paid in installments
– from the date of final payment or the
last installment
Legal basis of tax refunds
Tax refunds are based on the principle of
quasi-contract or solutio indebiti. The
Government is not exempted from the
application of the time-honored doctrine that no
person shall unjustly enrich himself at the
expense of another. [CIR v. Acesite
(Philippines) Hotel Corporation, G.R. No.
147295 (2007); Secs. 2142 and 2154, NCC]
Necessity of proof in claim for refund
A claim for refund partakes of the nature of an
exemption and is strictly construed against the
claimant. The burden of proof is on the
taxpayer claiming the refund that he is entitled
to the same. [CIR v. Tokyo Shipping, G.R. No.
L-68252 (1995)]
2. Proper Party to File Claim for Refund or
Tax Credit
General Rule: The “taxpayer” is the person
entitled to claim a tax refund; hence, the proper
party to file a claim for refund or credit.
Exceptions:
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.” [Silkair (Singapore)
Pte. Ltd. v. CIR, G.R. No. 173594 (2008)]
2. Withholding agent
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TAXATION 2
a. In case the taxpayer does not file a
claim for refund, the withholding agent
may file the claim. [CIR v. Smart
Communications, Inc., G.R. Nos.
179045-46 (2010)]
b. The withholding agent of a non-resident
foreign corporation may file the claim.
[CIR v. Procter & Gamble Phil. Mfg.
Corp., G.R. No. L-66838 (1991)]
Reason: The withholding agent, who is made
personally liable for the withholding tax, is a
“taxpayer” under the NIRC. The withholding
agent is directly and independently liable for
the correct amount of tax that should be
withheld and for deficiency assessments,
surcharges and penalties. [CIR v. Procter &
Gamble Phil. Mfg. Corp., G.R. No. L-66838
(1991)]
Option of a corporate taxpayer in case of
excess income tax payments
If the sum of the quarterly tax payments made
during the taxable year exceeds the total tax
due on the entire taxable income of that year,
the corporation shall either:
1. carry-over the excess credit; or
2. be credited or refunded with the excess
amount paid
Note: These two options under Section 76 are
alternative in nature. The choice of one
precludes the other. [Republic v. Team (Phils.)
Energy Corporation, G.R. No. 188016 (2015)]
Irrevocability rule
Once the option to carry over and apply the
excess income tax payments to succeeding
quarters of the succeeding years is taken, that
option is irrevocable for that taxable period.
Consequently, a taxpayer is barred from
securing a refund of, or tax credit certificate for,
the excess amount that it has initially opted to
carry-over. [Sec. 76, NIRC]
Payment under protest not required
A suit or proceeding for tax refund may be
maintained whether or not such tax, penalty or
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TAXATION LAW
sum has been paid under protest or duress.
[Sec. 229, NIRC].
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 [R.A. 1125, as amended]
Simultaneous filing allowed
If the CIR takes time in deciding the claim and
the period of two 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. [Gibbs v. CIR,
G.R. No. L-17406 (1965)]
Period for claiming refund once granted
The refund check or warrant must be claimed
or cashed within 5 years from the date such
warrant or check was mailed or delivered;
otherwise it shall be forfeited in favor of the
government and the amount thereof shall
revert to the general fund. [Sec. 230(A), NIRC]
Period for using the TCC
TCCs may be applied against all internal
revenue taxes, excluding withholding tax.
TCCs which remain unutilized after 5 years
from the date of issue shall, unless revalidated,
be considered as invalid, and shall revert to the
general fund. [Sec. 230, NIRC]
All TCCs issued by the BIR shall not be allowed
to be transferred or assigned to any person.
[RR 14-2011]
Any TCC which remains unutilized for more
than one (1) year at any given interval of time
during its validity shall be converted into cash
with prior written notice by the BIR, subject to
the availability of funds in accordance with the
 FOR UP CANDIDATES ONLY
TAXATION 2 TAXATION LAW
procedural requirements that will be issued by Sec. 229 Sec. 112
the BIR for this purpose [RR 14-2020] without
authority, or
3. Distinction Between Refund of 3. any sum
Unutilized Input VAT (Sec. 112, NIRC) and excessively
Refund of Erroneously or Illegally or wrongfully
Collected Tax (Sec. 229, NIRC) collected
The 2-year period The 2-year period
Rules on refund of excess or unutilized shall be reckoned shall be reckoned
input VAT from the date of from the close of the
● When to file an administrative claim with payment of the tax taxable quarter
the CIR: or penalty. when the sales were
o General rule: Within 2 years from made.
the close of the taxable quarter Both the Only the
when the sales were made [Sec. administrative claim administrative claim
112(A), NIRC; CIR v. Mirant with the CIR and the is required to be filed
Pagbilao, G.R. No. 172129 (2008)] appeal to the CTA within the 2-year
o Exception: Within 2 years from the must be made within period.
date of payment of the output VAT, the 2-year period.
if the administrative claim was filed If the 2-year period is Sec. 112(C) of the
from June 8, 2007 (promulgation of about to lapse and NIRC provides a 90-
Atlas v. CIR) to September 12, the CIR has not day waiting period
2008 (promulgation of Mirant) acted on the claim, for the CIR to decide
● When to file a judicial claim with the CTA: the taxpayer may on the application for
o General rule: Section 112(D) already appeal to the tax refund or credit.
applies; not Section 229 CTA without waiting Compliance with the
§ Within 30 days from the full or for the decision of 90-day waiting
partial denial of the the CIR. period is mandatory
administrative claim by the CIR; and jurisdictional.
or
§ Within 30 days from the Thus, the taxpayer
expiration of the 90-day period may elevate his
provided to the CIR to decide claim to the CTA (a)
on the claim. This is mandatory within 30 days from
and jurisdictional. the full or partial
denial of the claim, or
Exception: The judicial claim need not await (b) within 30 days
the expiration of the 90-day period, if such was after the lapse of the
filed from December 10, 2003 (issuance of BIR 90-day waiting
Ruling No. DA-489-03) to October 6, 2010 period, in case of
(promulgation of Aichi). inaction by the CIR.
[CIR v. San Roque Power Corporation, G.R.
Sec. 229 Sec. 112 No. 187485 (2013); Visayas Geothermal
Refers to a refund or Refers to a refund or Power Company v. CIR, G.R. No. 197525
credit of tax credit of excess (2014); Sec. 112, NIRC, as amended by
1. tax or unutilized input TRAIN Law]
erroneously VAT attributable to
or illegally zero-rated sales
assessed or
collected, or
2. penalty
collected
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TAXATION 2
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 3 or 5 years
following the assessment of the tax. [Sec.
203 vis-à-vis 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.
A Final Decision on Disputed Assessment
(FDDA) is not a collection letter. The CIR’s
collection efforts are initiated by distraint, levy,
or court proceedings. [CIR v CTA 2nd Division
and QL Development Inc., G.R. No. 258947
(2022)]
The distraint and levy proceedings are validly
begun or commenced by the issuance of a
warrant of distraint and levy, and service
thereof on the taxpayer. (ibid)
A judicial action for collection is initiated by (a)
filing of a complaint with the court of competent
jurisdiction; or (b) where the assessment is
appealed to the CTA by filing an answer to the
taxpayer’s petition for review wherein payment
of the tax is prayed for. (ibid)
b. Prescriptive Periods
Prescriptive period
General Rule: In case of assessments issued
within the three-year ordinary period, the CIR
has another three years within which to collect
the taxes [CIR v. United Salvage and Towage
(Phils.) Inc., G.R. No. 197515 (2014)]
The five-year period for collection of taxes
(under Sec. 222) only applies to assessments
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TAXATION LAW
issued within the extraordinary period of 10
years in cases of false or fraudulent return or
failure to file a return. For assessments issued
within the 3-year ordinary prescriptive period to
assess, the CIR had another 3-years to initiate
the collection of taxes by distraint or levy or
court proceedings. [CIR v CTA 2nd Division
and QL Development Inc., G.R. No. 258947
(2022)]
The period to collect begins to run from the
date the assessment notice is released, mailed
or sent to the taxpayer. (ibid)
For collection to be valid, the assessment must
be within the period of limitation. Essentially,
when the assessment is issued beyond the
prescriptive period, the government's right to
collect deficiency taxes also prescribes.
Hence, there is no more basis for its collection
save for certain exceptions. Both the
assessment and collection should be made in
accordance with law as any arbitrariness will
negate the very reason for government itself.
[La Flor Dela Isabela, Inc. v. CIR, G.R. No.
202105, (2021)]
While the government cannot be estopped by
the negligence or omission of its agents, the
mandatory provisions on Sections 203 and 228
of the NIRC cannot be rendered nugatory by
the mere act of the CIR. Article 5 of the Civil
Code is explicit: "[a]cts executed against the
provisions of mandatory or prohibitory laws
shall be void, except when the law itself
authorizes their validity." [CIR v. Unioil
Corporation, G.R. No. 204405 (2021)]
Exception:
a. In case of assessments issued within the
extra-ordinary period of 10 years in cases
of (i) false or fraudulent return with intent to
evade tax or of (ii) failure to file a return, the
CIR has another five (5) years within which
to collect the taxes [CIR v. CTA Second
Division and QL Development, Inc., G.R.
No. 258947, (March 29, 2022)]
b. 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]
 FOR UP CANDIDATES ONLY
TAXATION 2
Court proceeding for collection of tax
General rule: 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]
Exception: 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]
A waiver of the statute of limitations is a
derogation of a taxpayer's right to security
against prolonged and unscrupulous
investigations. Thus, it must be carefully and
strictly construed. [La Flor Dela Isabela, Inc. v.
CIR, G.R.No.202105 (2021)]
Waiver must be (i) in the proper form; (ii) must
be signed by the taxpayer himself or his duly
authorized representative. In case of a
corporation, the waiver must be signed by any
of its responsible official. If delegated, such
delegation should be in writing and duly
notarized; (iii) waiver should be duly notarized;
(iv) CIR or RO authorized by him must sign the
waiver indicating that the BIR has accepted
and agreed to the waiver. The date of such
acceptance by the BIR should be indicated; (v)
both the date of execution by the taxpayer and
the date of acceptance by the BIR should be
before the expiration of the period of
prescription or the lapse of the period agreed
upon in case a subsequent waiver is executed;
(vi) Executed in 3 copies; 1 copy attached to
the docket, 2nd to the taxpayer, and 3rd to the
office accepting the waiver; (vii) he fact of
receipt by the taxpayer must be indicated in the
original copy, showing that taxpayer was
notified of acceptance by the BIR. [Republic v
First Gas Power Corp. G.R. No. 214933
(2022)]
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CIR’s contention that the date of notarization of
waiver should be presumed as the date of
acceptance of waiver is untenable. The notary
public is distinct from the CIR who is authorized
by law to accept waivers. (ibid)
The doctrine of estoppel cannot be applied as
an exception to the statute of limitations on
assessment of taxes considering that the BIR
provides a detailed procedure for the proper
execution of waiver which must be strictly
followed. The BIR cannot invoke the doctrine of
estoppel to conceal its failure to comply with its
own issuances, namely, RMO No. 20-90 and
RDAO No. 05-01. It cannot collect taxes based
on an already prescribed assessment, even
when taxes are considered the lifeblood of
government. [La Flor Dela Isabela, Inc. v. CIR,
supra]
The taxpayer’s contributory fault or negligence
coupled with estoppel will, however, render
effective an otherwise flawed waiver,
regardless of the physical number of mistakes
attributable to a party. The doctrine of estoppel,
as a bar to the statute of limitations protecting
a taxpayer from prolonged investigations, must
be applied sparingly; but no taxpayer may be
allowed to execute haphazard waivers
deliberately, and lead the tax authorities to
believe that the assessment period has been
extended, only to deny the validity thereof
when it becomes unfavorable to him. [Asian
Transmission Corp v CIR, G.R. No. 230861
(2022)]
Suspension of running of statute of
limitations
[see discussion under Assessments]
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
 FOR UP CANDIDATES ONLY
TAXATION 2
amount is fully paid. [Sec. 249(A), NIRC; Sec.
2, RR 21-2018]
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%. [Sec. 2, RR 21-2018]
a. 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; Sec. 3, RR 21-2018]
TAXATION LAW
delinquency interest SHALL NOT be imposed
simultaneously. [Sec. 249(A), NIRC; Sec. 5,
RR 21-2018]
c. Interest on extended payment – Interest
at the rate of 12% per annum on the tax or
deficiency tax or any part thereof unpaid
from the date of notice and demand until it
is paid in the following cases:
1. When a person elects to pay the tax on
installment, but fails to pay the tax or any
installment, or any part of such amount or
installment on or before the date
prescribed for its payment; or
2. Where the CIR has authorized an
extension of time within which to pay a tax
or a deficiency tax or any part thereof [Sec.
249(D), NIRC]

b. Delinquency interest – Interest at the rate Effectivity of the 12% interest rate
of 12% per annum on the unpaid amount in The interest rate of 12% is effective starting
case of failure to pay: January 1, 2018. Prior to such date, the
1. the amount of the tax due on any return applicable interest rate shall be 20%.
required to be filed; or
2. the amount of the tax due for which no b. Surcharge
return is required; or
3. a deficiency tax, or any surcharge or This is a civil penalty imposed in addition to the
interest thereon on the due date tax required to be paid [Sec. 248, NIRC]
appearing in the notice and demand of
the CIR or his authorized Rates of Surcharge (25% or 50%)
representative until the amount is fully a. 25% of the amount due in the following
paid, which interest shall form part of cases:
the tax [Sec. 249(C), NIRC; Sec. 4, RR ● Failure to file any return and pay the tax
21-2018] due on the prescribed date; or
● Filing a return with an internal revenue
Deficiency Delinquency officer other than those with whom the
interest interest return is required to be filed, unless the
Basic tax + CIR authorizes otherwise; or
deficiency ● Failure to pay the deficiency tax within
Base Basic tax
interest + the time prescribed for its payment in
surcharge the notice of assessment; or
From the due ● Failure to pay the full or part of the
From the date
date appearing amount of tax due on or before the date
prescribed for
Recko- in the notice and prescribed for its payment [Sec.
its payment
ning demand of the 248(A), NIRC]
until the full
date CIR until the
payment
amount is fully b. 50% of the tax or of the deficiency tax in
thereof
paid case any payment has been made, in the
Rate 12% per annum following cases:
• Willful neglect to file the return within
Note: Upon effectivity of the TRAIN Law on the prescribed period; or
January 1, 2018, the deficiency and the

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TAXATION 2
• A false or fraudulent return is willfully
made [Sec. 248(B), NIRC]
Prima facie evidence of a false or fraudulent
return
1. Substantial underdeclaration 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]
TAXATION LAW
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.[Sec. 6, RR 12-
99]
Note: All criminal violations may be
compromised except: (a) those already filed in
court, or (b) those involving fraud

ILLUSTRATION
Mr. A has been assessed deficiency income tax of P1,000,000, exclusive of interest and surcharge,
for taxable year 2015. The tax liability remained unpaid despite the lapse of June 30, 2017, the
deadline for payment stated in the notice and demand issued by the Commissioner. Payment was
made by Mr. A on February 10, 2018. The civil penalties are computed as follows:

Basic Tax Due P 1,000,000.00

Add: 25% surcharge for late payment P 250,000.00
20% Deficiency Interest
from April 16, 2016 to June 30, 2017
(441 days) 241,643.84 491,643.84
Total Amount Due, June 30,2017 P 1, 491,643.84
Add: 20% Deficiency Interest
from July 1, 2017 to December 31, 2017
(184 days based on P1M) 100,821.92
Add: 20% Delinquency Interest
from July 1, 2017 to December 31, 2017
(184 days; based on total amount as of
June 30, 2017) 150,390.39
Add: 12% Delinquency Interest
from January 1, 2018 to February 10, 2018
(41 days; based on total amount due as of
June 30, 2017) 20,106.54 271,318.85
Total Amount Due, February 10, 2018 P 1,762,962.90

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TAXATION 2
II. LOCAL TAXATION
A. Local Government Taxation
1. General Principles
i. Taxation shall be uniform in each local
government unit (LGU)
ii. Taxes, fees, charges and other
impositions shall be:
a. equitable and based as far as
practicable on the taxpayer’s liability 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 restraint of
trade
iii. The collection of local taxes, fees,
charges and other impositions shall not
be left to any private person;
iv. 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
v. 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
a. 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. Sec. 5, Art. X of The 1987
Constitution directly grants LGUs the
power to tax.
b. Limited – The taxing power of LGUs is
not absolute because it is subject to
such guidelines and limitations that
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TAXATION LAW
Congress may provide. [Sec. 5, Art. X,
1987 Constitution]
c. Legislative in nature – The power to
impose taxes is vested solely in the
legislative body (i.e., the Sanggunian)
of each LGU.
d. Territorial – It can only be exercised
within the territorial jurisdiction of each
LGU.
Grant of Local Taxing Power Under the
Local Government Code
a. “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
of The 1987 Constitution]
b. “Each local government unit shall
exercise its power to create its own
sources of revenue and to levy taxes,
fees, and charges subject to the
provisions herein, consistent with the
basic policy of local autonomy. Such
taxes, fees, and charges shall accrue
exclusively to the local government
units.” [Sec. 129, LGC]
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]
Local legislative power shall be exercised by
the ff:
a. Sangguniang Panlalawigan for the
province;
b. Sangguniang Panlungsod for the city;
c. Sangguniang Bayan for the
municipality;
d. 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
 FOR UP CANDIDATES ONLY
TAXATION 2
power of the local chief executive. [Sec. 55,
LGC]
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
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]
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]
Withdrawal of Exemptions
Local tax exemptions, in general
TAXATION LAW
General rule: Unless otherwise provided, tax
exemptions or incentives granted to, or
presently enjoyed by all persons, whether
natural or juridical, including GOCCs, are
withdrawn upon the effectivity of the LGC.
[Sec. 193, LGC]
Exemptions: Tax exemptions granted to the ff
are not withdrawn:
a. Local water districts
b. Cooperatives duly registered under RA
6938 (Cooperative Code of the Philippines)
c. Non-stock and non-profit hospitals and
educational institutions. [Sec. 193, LGC]
Note: The LGC took effect on January 1, 1992.
By virtue of Sec. 193 of the LGC, all tax
exemption privileges then enjoyed by all
persons, save those expressly mentioned,
have been withdrawn effective January 1, 1992
– the date of effectivity of the LGC. However,
the withdrawal of exemptions pertains only to
those already existing when the LGC was
enacted. The intention of the legislature was to
remove all tax exemptions or incentives
granted prior to the LGC. [City of Iloilo vs.
Smart Communications, G.R. No. 167260,
Feb. 27, 2009]

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 of Manufacturers or Producers,
Wholesalers of, Dealers, or Retailers in, Certain Products. [Sec. 141, LGC]

Municipality May levy taxes, fees and charges not otherwise levied by provinces, such as:
1. Tax on business
2. Fees and charges on business and occupation
3. Fees for sealing and licensing of weights and measures
4. Fishery rentals, fees and charges [Sec. 142, LGC]

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LGU Scope of Taxing Power
City May levy taxes, fees and charges which the province or municipality may
impose; those levied and collected by highly urbanized and independent
component cities shall accrue to them and distributed in accordance with the
LGC; rate may exceed maximum rates allowed for the province or municipality
by not more than 50% except the rates of professional and amusement taxes.
[Sec. 151, LGC]

Barangay May levy taxes, fees, and charges, as provided in this Article, which shall
exclusively accrue to them:
1. Taxes on stores or retailers with fixed business establishments with gross
sales of receipts of the preceding calendar year of P50,000 or less, in the case
of cities and P30,000 or less, in the case of municipalities, at a rate not
exceeding 1% on such gross sales or receipts.
2. Service fees or charges rendered in connection with the regulations or the use
of barangay-owned properties or service facilities (e.g., palay, copra, tobacco
dryers)
3. Barangay clearance
4. Other fees and charges on commercial breeding of fighting cocks, cockfights
and cockpits, on places of recreation which charge admission fees, and
billboards, signboards, neon signs, and outdoor advertisements. [Sec. 152,
LGC]

4. Specific Taxing Power of Local Government Units

Specific Taxes Province Municipality City Barangay

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] ✓ ✓
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]

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Specific Taxes Province Municipality City Barangay
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 ✓ ✓ [within ✓
on Real Property Taxation] Metro Manila]

B. Taxing Powers of Provinces

Transaction Taxed Tax Rate and Tax Base Exemptions Others
TAX ON TRANSFER OF REAL PROPERTY
Imposed on the sale, Tax Rate: Not more than Sale, transfer, or other Person Liable:
donation, barter, or 50% of 1% disposition of real seller, donor,
any other mode of Tax Base: Total property pursuant to RA transferor,
transfer of ownership acquisition price or fair 6657 (Comprehensive executor or
or title to real property market value if monetary Agrarian Reform Law) administrator
[Sec 135, LGC] consideration is not Time of Payment:
substantial, whichever is Within 60 days
higher. from the date of
execution of deed
or from the date of
decedent's death

Note: Evidence of
payment of tax
must be presented
to the Register of
Deeds before
registration, 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 exceeding Receipts from printing
business of persons 50% of 1% and/or publishing of
engaged in the Tax Base: Gross annual books and other
printing, and/or receipts for the preceding reading materials
publication of books, calendar year prescribed by the
cards, posters, Department of
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Transaction Taxed Tax Rate and Tax Base Exemptions Others
leaflets, handbills, In the case of a newly Education as school
certificates, receipts, started business: texts or references
pamphlets, and others ● Tax Rate: Not
of similar nature [Sec exceeding 1/20 of 1% ●
136, LGC] Tax Base: Capital
investment

FRANCHISE TAX
Imposed on Tax Rate: Not exceeding No exception Franchise tax is a
businesses enjoying a 50% of 1 Notwithstanding any tax on the privilege
franchise [Sec 137, Tax Base: Gross annual exemption granted by of transacting
LGC] receipts for the preceding any law or other special business in the
calendar year based on law, the province may state and
the incoming receipt, or impose a tax on exercising
realized, within its businesses enjoying a corporate
territorial jurisdiction franchise. [Sec. 137, franchises granted
In the case of a newly LGC] by the state. It is
started business: not levied on the
● Tax Rate: Not more corporation simply
than 1/20 of 1% for existing as a
● Tax Base: Capital corporation.
investment Requisites to be
covered by
franchise tax:
a. that one has a
franchise
in the sense of a
secondary or
special franchise;
and
b. that it is
exercising its rights
or privileges under
this franchise
within the territory
of the concerned
LGU [NPC v.
Province of
Isabela, G.R. No.
165827 (2006)]

TAX ON SAND, GRAVEL AND OTHER QUARRY RESOURCES

Levied on ordinary Tax Rate: Not more than Who issues
stones, gravel, earth 10% permit to extract:
and other quarry Tax Base: Fair market issued exclusively
resources, as defined value in the locality per by the provincial
in the NIRC, extracted cubic meter of the governor pursuant
from public lands or extracted resources to an ordinance by
from the beds of seas, the Sangguniang
lakes, rivers, streams, Panlalawigan
creeks, and other
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Transaction Taxed Tax Rate and Tax Base Exemptions Others
public waters within Distribution of
its territorial jurisdiction proceeds:
[Sec 138, LGC] a. Province - 30%
b. Component
municipality
resources
extracted - 30%
c. Barangay where
resources were
extracted - 40%
PROFESSIONAL TAX
Exercise or practice of Tax Rate: Not to exceed Professionals Place of
profession requiring P300 exclusively employed payment: To the
government Tax Base: At such by the government province where the
examination [Sec 139, amount and reasonable profession is
LGC] classification determined practiced, or where
Note: A person who by the Sangguniang the principal office
has paid the Panlalawigan is maintained
professional tax is Time of payment:
entitled to practice his Payable annually,
profession anywhere on or before
in the country without January 31 or
being subjected to before beginning
similar taxes for the the practice of
practice of such profession
profession. Employers shall
require payment of
professional tax
before
employment and
annually
thereafter.

AMUSEMENT TAX
Collected from Tax Rate: Not more than Holding of operas, Note: In case of
proprietors, lessees, or 10% [RA 9640] concerts, dramas, theaters or
operators of theaters, Tax Base: Gross receipts recitals, paintings, and cinemas, tax shall
cinemas, concert halls, from admission fees art exhibitions, flower first be deducted
circuses, boxing shows, musical and withheld by
stadia, and other programs, literary and their proprietors,
places of amusement oratorical presentations lessees and
[Sec 140, LGC] operators before
Not subject to Exception to the gross receipts
amusement tax exemption (taxable): are divided among
under the LGC: Pop, rock, or similar them.
a. Resorts, swimming concerts Distribution of
pools, bath houses, proceeds: Shared
hot springs, and tourist equally by the
spots [Pelizloy Realty province and the
Corp. v. Province of municipality where
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Transaction Taxed Tax Rate and Tax Base Exemptions Others
Benguet, G.R. No. amusement places
183137 (2013)] are located
b. Professional
basketball games
[PBA v. CA, G.R. No.
119122 (2000)]
c. Golf courses [Alta
Vista Golf and Country
Club v. City of Cebu,
G.R. No. 180235
(2016)]
d. Those subject to
amusement tax under
Sec. 125 of the NIRC

TAX ON DELIVERY TRUCK/VAN

Imposed on vehicles Tax Rate: Not exceeding Such
used by P500 manufacturers,
manufacturers, producers,
producers, Tax Base: Every truck, wholesalers,
wholesalers, dealers van, or vehicle dealers and
or retailers in the retailers shall be
delivery or distribution exempt from the
of distilled spirits, tax on peddlers.
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]

C. 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
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TAXATION 2
Businesses Taxed
manufacturers of any article of
commerce of whatever kind or
nature [Sec. 143(a), LGC]
Wholesalers, distributors, or
dealers in any article of
commerce of whatever kind or
nature [Sec. 143(b), LGC]
Exporters and manufacturers,
millers, producers,
wholesalers, distributor,
dealers or retailers of essential
commodities enumerated
below: [Sec. 143(c), LGC]
Retailers [Sec. 143(d), LGC]
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Rate/Amount and Base
Tax Base: Gross sales or
receipts for the preceding
calendar year
Tax Rate: From P18 to
P10,000 or at a rate not
exceeding 50% of 1%
Tax Base: Gross sales or
receipts for the preceding
calendar year
Not exceeding 1⁄2 of rates
prescribed under Sec. 143 (a),
(b) and (d) of the LGC (on
manufacturers; wholesalers,
distributors and dealers; and
retailers, respectively)
Tax Rate:
1. 2% per annum on sales
not exceeding
P400,000
2. 1% per annum on sales
in excess of the first
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TAXATION LAW
Other Information
“Wholesale” means a sale
where the purchaser buys or
imports the commodities for
resale to persons other than the
end user regardless of the
quantity of the transaction.
[Sec. 131(z), LGC]
“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. [Sec.
131(k), LGC]
Essential Commodities:
[RWC- CLAPS]
a. Rice and corn
b. Wheat or cassava flour,
meat,
dairy products, locally
manufactured, processed or
preserved food, sugar, salt, and
other agricultural, marine, and
freshwater products, whether in
their original state or not
c. Cooking oil and cooking gas
d. Cement
e. Laundry soap, detergents,
and
medicine
f. Agricultural implements,
Equipment and post-harvest
facilities, fertilizers, pesticides,
insecticides, herbicides and
other farm inputs
g. Poultry feeds and other
animal feeds
h. School supplies [Sec. 143(c),
LGC]
Note: Barangays have the
exclusive power to tax gross
sales or receipts amounting to:
a. 50,000 or less in case of
cities b. 30,000 or less in case
of

TAXATION 2
Businesses Taxed
Contractors and other
independent contractors [Sec.
143(e), LGC]
Banks and other financial
institutions[Sec. 143(f), LGC]
Peddlers engaged in the sale of
any merchandise or article of
commerce [Sec. 143(g), LGC]
Any other business which the
Sanggunian concerned may
deem proper to tax [Sec.
143(h), LGC]
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Rate/Amount and Base
P400,000 [Art. 232(d),
LGC IRR]
Tax Base: Gross sales or
receipts for the preceding
calendar year
Tax Rate: From P27.50 to
P11,500 or at a rate not
exceeding 50% of 1%
Tax Base: Gross sales or
receipts for the preceding
calendar year
Tax Rate: Not exceeding 50%
of 1%
Tax Base: Gross receipts of
the preceding calendar year
derived from interest,
commissions and discounts
from lending activities, income
from financial leasing,
dividends, rentals on property
and profit from exchange or
sale of property, insurance
premium
Tax Rate and Base: Not
exceeding P50 per peddler
annually
Tax Base: Gross sales or
receipts
Tax Rate: The Sanggunian
may prescribe a schedule of
graduated rates but in no case
to exceed the rates prescribed
herein.
Note: For any business subject
to excise, value-added or
percentage tax under the
NIRC, the rate of tax shall not
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TAXATION LAW
Other Information
municipalities [Sec. 143(d),
Sec. 152, LGC]
“Retail” means a sale where
the purchaser buys the
commodity for his own
consumption, irrespective of
the quantity of the commodity
sold. [Sec. 131(w), LGC]
“Contractor” includes
persons, natural or juridical, not
subject to professional tax
under Sec. 139 of the LGC,
whose activity consists
essentially of the sale of all
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]
Note: All other income and
receipts of banks and other
financial institutions not
otherwise enumerated herein
shall be excluded from the
taxing authority of the LGU
concerned. [Art. 232(f), LGC
IRR]
“Peddler” means any person
who, either for himself or on
commission, travels from place
to place and sells his goods or
offers to sell and deliver the
same. [Sec. 131(t), LGC]
Note: This is a catch-all
provision.
Exception: Any business
engaged in the production,
manufacture, refining,
distribution or sale of oil,
gasoline, and other petroleum
products shall not be subject to
any local tax imposed under
Sec. 143 of the LGC. [Art.
232(h), LGC IRR]
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TAXATION 2 TAXATION LAW
Businesses Taxed Rate/Amount and Base Other Information
exceed 2% of gross sales or
receipts of the preceding
calendar year.

Tax base of local business tax
Business tax must be based on gross sales or
receipts, it being different from gross revenue.
[Ericsson Telecommunications Inc. v. City of
Pasig, G.R. No. 176667 (2007)]
“Gross Sales or Receipts” include the total
amount of money or its equivalent representing
the contract price, compensation or service
fee, including the amount charged or materials
supplied with the services and deposits or
advance payments actually or constructively
received during the taxable quarter for the
services performed or to be performed for
another person excluding discounts if
determinable at the time of sales, sales return,
excise tax, and VAT. [Sec. 131(n), LGC]
“Gross revenue” covers money or its
equivalent actually or constructively received,
including the value of services rendered or
articles sold, exchanged or leased, the
payment of which is yet to be received.
[Ericsson Telecommunications Inc. v. City of
Pasig, G.R. No. 176667 (2007)]
establishment or place where business subject
to tax is conducted.
b. One line of business is not exempted
by being conducted with some other
businesses for which such tax has been paid.
c. The tax on a business must be paid by
the person conducting it.
d. If a person operates 2 or more
businesses mentioned in Sec. 143, the tax
shall be computed:
e. on the combined total gross sales or
receipts, if they are subject to the same tax rate
f. 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)]

Ceiling on business tax within Metro Manila Situs of business tax

Municipalities within Metro Manila may levy
taxes at rates which shall not exceed by 50%
the maximum rates prescribed in Sec. 143 of
the LGC. [Sec. 144, LGC]
Tax on retirement of business
Upon termination of a business subject to tax
under Sec. 143 and 144, it shall submit a sworn
statement of its gross sales or receipts for the
current year. If the tax paid is less than the tax
due, the difference shall be paid before the
business is considered officially retired. [Sec.
145, LGC]
Rules on payment of business taxes
a. Taxes imposed under Sec. 143 of the
LGC shall be paid for every separate or distinct
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]
“Branch or Sales Office” – a fixed place in a
locality which conducts operations of the
business as an extension of the principal office.
Offices used only as display areas of the
products where no stocks or items are stored
for sale, although orders for the products may
be received thereat, are not branch or sales
offices as herein contemplated. A warehouse
which accepts orders and/or issues sales

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invoices independent of a branch with sales
office shall be considered as a sales office. [Art.
243(a)(2), LGC IRR]
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]
“Principal Office” – the head or main office of
the business appearing in the pertinent
documents (e.g., articles of incorporation)
submitted to the SEC, or the DTI, or other
appropriate agencies, as the case may be [Art.
243(a)(1), LGC IRR]
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]
Illustration of Rules 1 to 3A company has a
principal office in Mnadaluyong, and a sales
office and a factory in Sta. Rosa:
1. Sales made in Mandaluyong will be
recorded in Mandaluyong.
2. Sales made in Sta. Rosa by the Sta. Rosa
sales office will be recorded in Sta. Rosa.
3. Sales made in Los Baños, Calamba or
Cabuyao [i.e., delivered to customers
located in these places and not made by the
Sta. Rosa sales office] will be recorded in
Mandaluyong where the principal office is
located. The allocation shall be as follows:
a. 30% of all sales recorded in the
principal office shall be taxable in
Mandaluyong;
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TAXATION LAW
b. 70% of all sales recorded in the
principal office shall be taxable in Sta.
Rosa where the factory is located.
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]
Illustration: A company has a principal office
in Valenzuela and 2 factories located in
Malolos City, Bulacan and Mandaue City,
Cebu, which produced 60% and 40%,
respectively, of the total production for the
year. It also has branches selling merchandise
in Muntinlupa, Bacolod and Cebu City.
1. Sales made in Valenzuela will be
recorded in Valenzuela;
2. Sales made in Muntinlupa, Bacolod and
Cebu City shall be taxable in the said cities;
3. Sales in all other places which do not
have a sales branch shall be distributed as
follows: 30% to Valenzuela and 70% to be
allocated between Malolos City, and
Mandaue City based on the factories’
volume of production. Hence, 42% shall be
taxed in Malolos City; while 28% shall be
taxed in Mandaue City.
Note: The sales allocation shall be applied
irrespective of whether or not sales are made
in the locality where the factory, project office,
plant, or plantation is located. [Sec. 150(e),
LGC]
Excise Tax: The business tax is imposed on
the performance of an act, enjoyment of a
 FOR UP CANDIDATES ONLY
TAXATION 2
privilege, or engagement in an occupation. The
power to levy such tax depends on the place in
which the act is performed or the occupation is
engaged in, not upon the location of the office
or the domicile of the person. [Allied Thread
Co., Inc. v. City Mayor of Manila, G.R. No. L-
40296 (1984)]
Sales Tax: It is the place of the consummation
of the sale, associated with the delivery of the
things which are the subject matter of the
contract, that determines the situs of the
contract for purposes of taxation, and not
merely the place of the perfection of the
contract. [Shell Co., Inc. v. Municipality of
Sipocot, Camarines Sur, G.R. No. L-12680
(1959)]
Municipal Fees and Charges For Regulation
& Licensing
General rule: The municipality may impose
reasonable fees and charges on the conduct of
business or practice of profession
commensurate with the cost of regulation,
inspection and licensing. [Sec. 147, LGC]
Exception: Professional tax reserved to the
province in Sec. 139 of the LGC [Sec. 147,
LGC]
Specific rules:
1. The municipality may impose reasonable
fees for sealing and licensing of weights and
measures. [Sec. 148, LGC]
2. The municipality has exclusive authority to
grant fishery privileges in municipal waters and
impose rentals, fees or charges therefor. [Sec.
149, LGC]
D. 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]
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Exception: Rates of professional and
amusement taxes [Sec. 151, LGC]
E. 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(b), 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
a. Service fees and charges
LGUs may impose and collect such reasonable
fees and charges for services rendered. [Sec.
153, LGC]
b. 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]
 FOR UP CANDIDATES ONLY
TAXATION 2 TAXATION LAW
c. Toll fees or charges 3. No toll fees or charges shall be collected
1. The Sanggunian may prescribe the terms from:
and conditions and fix the rates for the i. Officers and enlisted men of the AFP and
imposition of toll fees or charges for the use members of the PNP on mission.
of any public road, pier, or wharf, waterway, ii. Post office personnel delivering mail
bridge, ferry or telecommunication system iii. Persons who are physically
funded and constructed by the LGU handicapped
concerned. iv. Disabled citizens who are 65 years or
2. The Sanggunian may discontinue the older. [Sec. 155, LGC]
collection of the tolls when public safety and
welfare so requires.

6. Community Tax

Who may levy Cities or Municipalities

[Sec. 156, LGC]
Who are liable Natural Persons Juridical Persons
[Sec. 157 & 158, a. Inhabitants of the Philippines 1. Every corporation no matter
LGC] b. 18 years of age or over how created or organized
c. Either: 2. Whether domestic or resident
• Regularly employed on a wage or foreign
salary basis for at least 30 3. Engaged in or doing business
consecutive working days during in the Philippines
any calendar year, or
• Engaged in business or
occupation, or
• Owns real property with an
aggregate assessed value of
P1,000 or more, or
• Is required by law to file an income
tax return

Rates [Sec. 157 Natural Persons Juridical Persons

& 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]
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a. Annual community tax of P500
PLUS annual additional tax,
which shall not exceed P10,000
according to the following
schedule:
b. 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
c. P2.00 for every P5,000 of gross
receipts or earnings derived
from business in the Philippines
during the preceding year.
d. Dividends received by a
corporation from another
corporation shall be deemed
part of the gross receipts or
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TAXATION 2 TAXATION LAW
Who may levy Cities or Municipalities
[Sec. 156, LGC]
earnings for purposes of
computing additional tax.

Persons a. Diplomatic and consular representatives

Exempt [Sec. b. Transient visitors who stay in the Philippines for not more than 3 months
159, LGC]

Place of Where individual resides, or where the principal office of the juridical entity is
Payment [Sec. located.
160, LGC] 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 for Accrues on January 1 of each year to be paid not later than the last day of
Payment [Sec. February of each year.
161, LGC]
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.

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.
If a corporation is established and organized:
• on or before June 30 – it shall be liable to community tax for that year
• on or before March 31 – it shall have 20 days to pay without becoming
delinquent
• on or after July 1 – it shall not be subject to community tax for that year
Penalty for If unpaid within the prescribed period, an interest of 24% per annum shall be
Delinquency added from the due date until payment.
[Sec. 161, LGC]

Community Tax Certificate (CTC) v. receives any money from any public
It shall be issued to every person or corporation fund
upon payment of the community tax. It may vi. transacts other official business; or
also be issued to any person or corporation not vii. receives any salary or wage from any
subject to the community tax upon payment of person or corporation [Sec. 163(a),
P1.00. [Sec. 162, LGC] LGC]

Presentation of CTC is necessary when an Note: Presentation of CTC is not needed in the
individual subject to community tax: registration of a voter. [Sec. 163(a), LGC]
i. acknowledges any document before
a notary public;
ii. takes the oath of office upon election
or appointment to any position in the Collection of community tax
government service; The city or municipal treasurer shall deputize
iii. receives any license, certificate, or the barangay treasurers to collect, provided the
permit from any public authority; latter be bonded. [Sec. 164(b), LGC]
iv. pays any tax or fee;
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TAXATION 2
Distribution of proceeds of community tax
1. If the community tax is actually and directly
collected by the city or municipal treasurer, the
proceeds shall accrue entirely to the general
fund of the city or municipality.
2. If the community tax is collected through the
barangay treasurers, the proceeds shall be
apportioned equally between the
city/municipality and the barangay. [Sec.
164(c), LGC]
7. Common Limitations on the Taxing
Powers of Local Government Units
Unless otherwise provided, the following
cannot be levied by the local governments:
(IDEC-GAPEP-TRR-ECN):
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;
• Exception: Tax on transfer of
real property [Sec. 135, LGC; Art.
221(c), LGC IRR]
4. Customs duties, registration fees of
vessel and wharfage on wharves,
tonnage dues, and all other kinds of
customs fees, charges and dues;
• Exception: wharfage on wharves
constructed and maintained by
the LGU concerned
• “Wharfage” means a fee
assessed against the cargo of a
vessel engaged in foreign or
domestic trade based on quantity,
weight, or measure received
and/or discharged by vessel.
[Sec. 131(y), LGC]
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;
• Note: Sec.133(e) prohibits the
imposition, in the guise of
wharfage, of fees, as well as all
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other taxes or charges in any form
whatsoever, on goods or
merchandise. It is therefore
irrelevant if the fees imposed are
actually for police surveillance on
the goods, because any other
form of imposition on goods
passing through the territorial
jurisdiction of the municipality is
clearly prohibited. [Palma
Development Corp. v.
Municipality of Malangas, G.R.
No. 152492 (2003)]
6. Taxes, fees or charges on Agricultural
and aquatic products when sold by
marginal farmers or fishermen;
• "Marginal Farmer or
Fisherman" refers to an
individual engaged in subsistence
farming or fishing which shall be
limited to the sale, barter or
exchange of agricultural or
marine products produced by
himself and his immediate family.
[Sec. 131(p), LGC]
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.
• Exceptions (Percentage taxes):
a. Tax on business of printing and
publication imposed by
provinces/cities [Sec. 136, LGC]
b. Amusement tax imposed by
provinces/cities [Sec. 140, LGC]
c. Tax on business imposed by
municipalities/cities on
manufacturers, wholesalers,
distributors, dealers, and
contractors enumerated in Sec.
143 of the LGC in accordance
 FOR UP CANDIDATES ONLY
TAXATION 2
with the schedules provided
therein
10. Taxes on the gross receipts of:
a. Transportation contractors and
persons engaged in the
transportation of passengers or
freight by hire and
b. common carriers by air, land or
water
Exception: Tax on the operation
and franchising of tricycles [Art.
221(j), LGC IRR]
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;
a. Exception: Tax on exporters of
essential commodities
b. [Sc. 143(c), LGC, Art. 221(m),
LGC IRR]
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
Validity of Local (Tax) Ordinance. The two-
pronged test:
a. Formal Test: whether the ordinance
was enacted within the corporate
powers of the LGU, and whether the
same was passed pursuant to the
procedure laid down by law.
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b. Substantive Test: reasonableness and
fairness of the ordinance and
significantly its compliance with the
Constitution and existing statutes.
[Manila Electric Company v. Barlis, G.R. No.
198529. February 9, 2021]
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:
a. Not contrary to the Constitution or any
statute
b. Not unfair or oppressive;
c. Not partial or discriminatory;
d. Not prohibit but may regulate trade;
e. General and consistent with public
policy; and
f. Not unreasonable [Ferrer vs. Bautista,
G.R. No. 210551, (2015)]
Note: An ordinance is presumed valid unless
declared otherwise by a court in an appropriate
proceeding. [Rural Bank of Makati v.
Municipality of Makati, G.R. No. 150763
(2004)]
Public hearing
It should be conducted prior to the enactment
of local tax ordinance and revenue measures.
[Sec. 187, LGC] When no valid public hearing
has been duly conducted prior to the
enactment of the tax ordinance, such is void
and cannot be given any effect. [Suco vs.
Malones, G.R. No. 182065, (2009)]
Procedure for approval of tax ordinances
1. Within 10 days from the filing of the proposed
tax ordinance, the same shall be published
for 3 consecutive days in a newspaper of
local circulation or posted simultaneously in
at least 4 conspicuous public places within
the territorial jurisdiction of the LGU. [Art.
276(b)(1), LGC IRR]
2. The Sanggunian shall send written notices,
specifying the date and venue of public
hearing, to the interested or affected parties
 FOR UP CANDIDATES ONLY
TAXATION 2
operating or doing business within the
concerned LGU. [Art. 276(b)(2), (3), LGC
IRR]
3. The public hearing must be held not earlier
than 10 days from sending the notices, or
the last day of publication, or date of posting,
whichever is later. [Art. 276(b)(3), LGC IRR]
4. An ordinance must be approved on third
reading by a majority of the sanggunian
members present, there being a quorum.
[Art. 107(g), LGC IRR]
5. The enacted ordinance shall be presented
to the local chief executive (LCE), who
may:
a. Approve the same by affixing his
signature; or
b. Veto and return the same with his
objections to the Sanggunian within 15
days in case of a province, and 10 days
in case of a city or municipality; otherwise,
the ordinance shall be deemed approved.
[Art. 108, LGC IRR]
Note: The LCE, except the Punong Barangay,
may veto any ordinance on the ground that it is
ultra vires or prejudicial to public welfare. His
reasons shall be stated in writing. The LCE
may veto an ordinance only once. [Art. 109,
LGC IRR]
The sanggunian may override the veto of the
LCE by 2/3 vote of all its members, thereby
making the ordinance effective. [Art.
109(c), LGC IRR]
Once approved, the ordinance shall be
transmitted to the higher level sanggunian
for review. If no action is taken by the latter
within 30 days after submission, the same
shall be deemed approved. [Arts. 110 and
111, LGC IRR]
Within 10 days after the approval of the
ordinance, certified true copies of all tax
ordinances or revenue measures shall
be published in full for 3 consecutive days
in a newspaper of local circulation. Where
there are no newspapers of local
circulation, it must be posted in at least 2
conspicuous and publicly accessible
places. [Art. 276, LGC, IRR]
Effectivity of ordinance
a. Unless otherwise stated in the
ordinance, the same shall take effect after 10
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days from the date a copy is posted at the
entrance of the provincial capitol or city,
municipal, or barangay hall, as the case may
be, and in at least 2 other conspicuous places
in the LGU concerned. [Sec. 59, LGC]
In case the effectivity falls on any date other
than the beginning of the quarter, the same
shall be considered as falling at the beginning
of the next quarter and the taxes, fees, or
charges due shall begin to accrue therefrom.
[Art. 276(a), LGC IRR]
9. Taxpayer's Remedies
a. Protest
Protest: Upon the issuance of a notice of
assessment by the local treasurer, the
taxpayer may file a written protest with said
local treasurer within 60 days from receipt of
the notice of assessment; otherwise, the
assessment shall become final an executory.
Decision: The local treasurer shall decide the
protest within 60 days from the time of its filing.
3. Within 30 days from the receipt of the
denial of the protest or from the lapse of the 60-
day period, the taxpayer may appeal with the
court of competent jurisdiction, otherwise the
assessment becomes conclusive and
unappealable. [Sec. 195, LGC]
Court of competent jurisdiction
5. Depending on the amount of assessed tax
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.
6. Local tax cases decided by the MTC,
MeTC and MCTC may be appealed to the
RTC in the exercise of its appellate
jurisdiction.
7. Said cases decided by the RTC in its
original or appellate jurisdiction may be
elevated to the CTA.
With the passage of R.A. No. 9282, the
authority to exercise either original or appellate
jurisdiction over local tax cases depended on
the amount of the claim. In cases where the
RTC exercises appellate jurisdiction, it
necessarily follows that there must be a court
 FOR UP CANDIDATES ONLY
TAXATION 2
capable of exercising original jurisdiction –
otherwise there would be no appeal over which
the RTC would exercise appellate jurisdiction.
The RTC exercises appellate jurisdiction only
from cases decided by the MeTC, MTC, and
MCTC in the proper cases, and not those
decided by non-judicial entities such as the City
Treasurer. [China Banking Corp. vs. City
Treasurer of Manila, G.R. No. 204117, (2015)]
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]
3. If the refund is brought about by an
assessment made by the local treasurer,
the written claim for refund will be treated as
the written protest, and upon the denial of
the protest/refund or lapse of the 60-day
period for the local treasurer to decide, the
taxpayer must appeal within 30 days
therefrom, even though the whole 2-year
period has not been maximized. [City of
Manila vs. Cosmos Bottling Corp. G.R. No.
196681 (2018)]
c. Action before the Secretary of Justice
1. 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]
2. 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.
When he alters or modifies or sets aside a tax
ordinance, he is not also permitted to substitute
his own judgment for the judgment of the local
government that enacted the measure. [Drilon
vs. Lim, G.R. No. 112497, (1994)]
Procedure:
1. Appeal must be made to the Secretary of
Justice within 30 days from effectivity of
the ordinance.
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2. The Secretary must render a decision
within 60 days from receipt of the
appeal.
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: Failure to interpose the requisite appeal
to the Secretary of Justice is fatal to a
complaint for a refund. [Reyes vs. CA G.R. No.
118233, (1999)]
10. Assessment and Collection of
Local Taxes
a. Remedies of Local Government Units
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]
Civil Remedies, in General
(a) 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]
 FOR UP CANDIDATES ONLY
TAXATION 2
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.
6. Disposition of proceeds [Sec. 175, LGC]
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]
LEVY ON REAL PROPERTY
Subject of Levy: real property and interest in or
rights to real property
Procedure
a. 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.
b. Preparation of a duly authenticated
certificate by the local treasurer effecting the
levy and showing:
c. the name of the taxpayer,
d. the amount of the tax, fee or charge,
and penalty due, and
the description of the property.
e. 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)
f. Annotation of the levy on the tax
declaration and the certificate of title
g. Report on any levy to be submitted to
the Sanggunian within 10 days after receipt
of warrant [Sec. 176, LGC]
h. Advertisement of the sale or auction
shall be held within 30 days after the levy.
i. Before the date of sale, the taxpayer
may stay the proceedings by paying the
taxes, fees, charges, penalties and
interests.
j. Sale of the subject property [Sec. 178,
LGC]
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k. Redemption of property sold within 1
year from date of sale [Sec. 179, LGC]
l. If not redeemed, the local treasurer
shall execute a deed conveying the property
to the purchaser [Sec. 180, LGC]
m. Purchase of the real property by the
local treasurer in case there is no bidder for
said property or if the highest bid is
insufficient to pay the taxes, fees, or
charges, related surcharges, interests,
penalties and costs; resale of said property
may be made at a public auction [Sec. 181
and 182, 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
(ToB-CUPLAF)
a. Tools and implements necessarily
used by the taxpayer in his trade or
employment
b. 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
c. His necessary clothing, and that of all
his family
d. 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
e. Provisions, including crops, actually
provided for individual or family use
sufficient for 4 months
f. The professional Libraries of doctors,
engineers, lawyers and judges
g. One Fishing boat and net, not
exceeding the total value of P10,000 by the
 FOR UP CANDIDATES ONLY
TAXATION 2
lawful use of which a fisherman earns his
livelihood
h. 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]
Judicial Action
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
General Rule: Within 5 years from the date they
become due
Exception: 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]
Grounds for suspension of prescriptive
period
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1. The treasurer is legally prevented
from making the assessment or
collection
2. The taxpayer requests for
reinvestigation and executes a
waiver in writing before the lapse of
the period for assessment or
collection
3. The taxpayer is out of the country
or otherwise cannot be located
[Sec. 194(d), LGC]
III. REAL PROPERTY
TAXATION
1. Fundamental Principles
The appraisal, assessment, levy and
collection of real property tax shall be guided
by the following 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 local government unit.
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 of Real Property Tax (RPT)
a. 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]
b. It is an ad valorem tax where the tax
base is a fixed proportion of the value of the
property. [Sec. 199(c), LGC]
c. It is proportionate because the tax is
calculated on the basis of a certain
percentage of the value assessed.
d. It creates a single, indivisible
obligation.
 FOR UP CANDIDATES ONLY
TAXATION 2
e. 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 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]
Note: A province or city or a municipality
within Metro Manila shall 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.
Machinery
It embraces machines, equipment, mechanical
contrivances, instruments, appliances or
apparatus which may or may not be attached,
permanently or temporarily, to the real
property. It includes the physical facilities for
production, the installations and appurtenant
service facilities, those which are mobile, self-
powered or self-propelled, and those not
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permanently attached to the real property
which are actually, directly, and exclusively
used to meet the needs of the particular
industry, business or activity and which by their
very nature and purpose are designed for, or
necessary to its manufacturing, mining,
logging, commercial, industrial or agricultural
purposes [Sec. 199(o), LGC]
Summary of rules on machinery
a. Machinery that is permanently
attached to land and buildings is subject to
RPT.
b. Machinery that is not permanently
attached:
1. 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
2. Not subject to RPT if it is not an
essential and principal element of an
industry, work or activity. [DOF Local
Finance Circular No. 001- 2002]
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 Real Property Tax
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]
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]
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TAXATION 2
Note: The LGU can impose SEF at a rate of
less than 1%. The text in Sec. 235 of the LGC
is cast in a permissive language. Sec. 235’s
specified rate of 1% is a maximum rate rather
than an immutable edict. [Demaala vs. COA,
G.R. No. 199752, (2015)]
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 sqm
in area, 1/2 of which remain unutilized or
unimproved [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]
Exception: The special levy shall not apply to:
a. lands exempt from basic RPT; and
b. the remainder of the land, portions of
which were donated to the LGU for the
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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. Exemptions from RPT
a. Real property owned by the Republic of the
Philippines or any of its political subdivisions
Exception: when beneficial use is granted
for a consideration or to a taxable person.
Beneficial use – means that the person or
entity has the use and possession of the
property. In contrast, actual use refers to the
purpose for which the property is principally
or predominantly utilized by the person in
possession thereof. [Herarc Realty
Corporation vs. Provincial Treasurer of
Batangas, G.R. No. 210736, (2018)]
The assessment of real property shall be
based on its actual use. The liability to pay
real property taxes on government-owned
properties, the beneficial or actual use of
which was granted to a taxable entity,
devolves on the taxable beneficial user.
While the liability for taxes generally rests on
the owner of the real property, liability for real
property taxes may also expressly rest on
the entity with the beneficial use of the real
property at the time the tax accrues. [MWSS
v CBAA, G.R. No. 215955. January 13,
2021]
b. Charitable institutions, churches
parsonages, or convents appurtenant
thereto, mosques, non-profit or religious
cemeteries, and all lands, buildings, and
improvements actually, directly and
exclusively used for religious, charitable, or
educational purposes
c. 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
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TAXATION 2
d. Real property owned by duly registered
cooperatives as provided for under RA 6938
[Cooperative Code of the Philippines]
e. Machinery and equipment used for pollution
control and environmental protection [Sec.
234, LGC]
A claim for exemption under Sec. 234(e) of the
LGC should be supported by evidence that
the property sought to be exempted is actually,
directly and exclusively used for pollution
control and environmental protection.
[Provincial Assessor of Marinduque v. CA,
G.R. No. 170532 (2009)]
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 Sec. 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]
The burden of proving exemption from local
taxation is upon whom the subject real property
is declared; thus, said person shall be
considered by law as the taxpayer thereof.
Failure to do so, said property shall be listed as
taxable in the assessment roll. [Camp John
Hay Development Corporation vs. Central
Board of Assessment Appeals, G.R. No.
169234, (2013)]
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GOCCs not exempt from RPT
The last paragraph of Sec. 234 of the LGC
expressly withdrew the exemption of GOCCs
from RPT upon the effectivity of the LGC.
Exemption of Charitable Institutions
To be entitled to the exemption, claimant must
prove, that (a) it is a charitable institution; and
(b) its real properties are actually, directly and
exclusively used for charitable purposes.
What is meant by actual, direct and exclusive
use of the property for charitable purposes is
the direct and immediate and actual application
of the property itself to the purposes for which
the charitable institution is organized. [Lung
Center of the Philippines v. Quezon City, G.R.
No. 144104 (2004)]
4. Appraisal and Assessment of Real
Property
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 follows: [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]
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TAXATION 2
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]
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 [BLGF Manual on Real Property
Appraisal and Assessment Operations]
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:
4. declaring the true value of the property
which shall be the current and FMV of the
property; and
5. 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 improvement thereon
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]
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Declaration of real property 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]
Notice of transfer of real property
Any person who shall transfer real property
ownership to another shall notify the provincial,
city or municipal assessor within 60 days from
the date of such transfer.
The notification shall include the ff:
1. Mode of transfer,
2. Description of the property alienated,
3. Name and address of the transferee
[Sec. 208, LGC]
Appraisal of Real Property at Fair Market
Value
All real property shall be appraised at the
current and fair market value (FMV) prevailing
at the locality where the property is situated.
[Sec. 201, LGC]
FMV is the price at which property may be sold
by a seller who is not compelled to sell and
bought by a buyer who is not compelled to buy.
[Sec. 199(l), LGC]
Note: Sec. 201 of the LGC implies that an LGU
may only collect real estate tax on properties
falling within its territorial jurisdiction. Thus, the
settlement of a boundary dispute between 2
LGUs presents a prejudicial question that must
be resolved before determining the real
property tax liability of a property that straddles
the border. [Sta. Lucia Realty vs. City of Pasig,
G.R. No. 166838, (2011)]
Determination of FMV
a. The assessor of the province, city or
municipality or his deputy may summon
the owners or persons having legal
interest therein and witnesses, and may
 FOR UP CANDIDATES ONLY
TAXATION 2
administer oaths, and take deposition
concerning the property, its ownership,
amount, nature, and value. [Sec. 213,
LGC]
b. The assessors shall prepare a schedule
of FMV for the different classes of real
property situated in their respective local
government units for enactment by
ordinance of the Sanggunian concerned.
[Sec. 212, LGC]
c. The schedule of FMV shall be published
in a newspaper of general circulation in
the LGU concerned or in the absence
thereof, shall be posted in the provincial
capitol, city or municipal hall and in 2
other conspicuous public places therein.
[Sec. 212, LGC]
d. The assessor may recommend to the
Sanggunian amendments to correct
errors in valuation in the schedule of
FMV. The Sanggunian shall, by
ordinance, act upon the
recommendation within 90 days from its
receipt. [Sec. 214, LGC]
FMV of Machinery
Brand New The FMV is the acquisition
cost. [Sec. 224(a), LGC]
If the machinery is
imported, the acquisition
cost includes freight,
insurance, bank and other
charges, brokerage,
arrastre and handling,
duties and taxes, plus cost
of inland transportation,
handling, and installation
charges at the present site.
[Sec. 224(b), LGC]
All other FMV is determined by
cases dividing the remaining
economic life of the
machinery by its estimated
economic life and multiplied
by the replacement or
reproduction cost. [Sec.
224(a), LGC]
Depreciation Depreciation rate: not
Allowance exceeding 5% of its original
cost or its replacement or
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reproduction cost, for each
year of use
The remaining value shall
be fixed at not less than
20% of such original,
replacement or
reproduction cost for so
long as the machinery is
useful and in operation.
[Sec. 225, LGC]
b. Assessment of Real Property 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]
Note: Unpaid realty taxes attach to the property
and are chargeable against the person who
had actual or beneficial use and possession of
it regardless of whether or not he is the owner.
[Estate of Lim v. City of Manila, G.R. No. 90639
(1990)]
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]
Assessed FMV × Assessment Level
Value
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TAXATION 2
Real Property Assessed Value × Tax
Tax Rate
Computing the RPT
1. Compute for the assessed value
2. Multiply the assessed value by the real
property tax rate (ref Sec. 233)
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
General rule: All assessments or
reassessments made after January 1 of any
year shall take effect on January 1 of the
succeeding year [Sec. 221, LGC]
Exceptions: 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;
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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 of Real Property Tax
Collecting authority
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
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TAXATION 2
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:
• on or before January 31 of each year in
the case of basic RPT and additional
tax for SEF; or
• 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 Accrual
Real property tax for any year shall accrue on
the 1st day of January and from that date it
shall constitute a lien on the property which
shall be superior to any other lien, mortgage, or
encumbrance of any kind whatsoever, and
shall be extinguished only upon the payment of
the delinquent tax. [Sec. 246, LGC]
b. Periods to Collect
Ordinary Period to Collect: Within 5 years
from the date the taxes become due.
Extraordinary Period to Collect: In case of
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
The period of prescription within which to
collect shall be suspended for the time during
which:
1. The local treasurer is legally prevented from
collecting the tax;
2. The owner of the property or the person
having legal interest therein requests for
reinvestigation and executes a waiver in writing
before the expiration of the period 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]
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RULES ON PAYMENT
Payment of RPT
a. Payment of RPT and the additional tax
for SEF, without interest, may be made in 4
equal installments:
1. 1st: March 31
2. 2nd: June 30
3. 3rd: September 30
4. 4th: December 31
b. Any special levies shall be governed by
ordinance of the Sanggunian concerned.
[Sec. 250, LGC]
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
1. Advance payment – not exceeding 20% of
annual tax due [Sec. 251, LGC]
2. Prompt payment – not exceeding 10% of
annual tax due [Art. 342, LGC IRR]
c. Remedies of LGUs
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,
 FOR UP CANDIDATES ONLY
TAXATION 2
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
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:
c. the name of the owner or person
having legal interest therein,
d. description of the property, and
e. amount of the tax due and interest
thereon.
f. Warrant must be mailed to or served
upon the delinquent owner or
person having legal interest in the
property.
g. 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.
h. The Register of Deeds must
annotate the levy on the tax
declaration and certificate of title.
i. 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]
j. Advertisement of the sale or auction
shall be made within 30 days after
service of warrant.
k. Before the date of sale, the
proceedings may be stayed by
paying the delinquent tax.
l. Sale of the real property [Sec. 260,
LGC]
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m. Redemption of property sold within
1 year from date of sale upon
payment of the delinquent tax [Sec.
261, LGC]
n. If not redeemed, the local treasurer
shall execute a deed conveying the
property to the purchaser. [Sec.
262, LGC]
o. 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]
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]
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
Payment Under Protest; Exceptions
General Rule: 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
 FOR UP CANDIDATES ONLY
TAXATION 2 TAXATION LAW
entertained. [NPC v. Provincial Treasurer of or applied as tax credit against his existing or
Benguet, G.R. No. 209303 (2016)] future tax liability. [Sec. 252(c), LGC]
2. If the protest is denied or the 60-day period
Exceptions to Payment Under Protest: expired, the taxpayer may appeal to the Local
a. “Payment under protest” is not a Board of Assessment Appeals (LBAA) and
prerequisite when the issue is the legality subsequently to the CBAA pursuant to Secs.
or validity of the assessment. Certainly, it 226 and 229 as in the case of assessment
would be unjust to require the realty owner appeals. [Sec. 252(d), LGC]
to first pay the tax, the validity of which he
precisely questions, before he can lodge a Erroneous assessment vs. illegal
complaint to the court. [NPC v. Municipal assessment
Government of Navotas, G.R. 192300
(2014)] Erroneous Illegal Assessment
b. When questioning the very authority Assessment
and power of the assessor, acting solely Definition
and independently, to impose the An erroneous An assessment is
assessment and of the treasurer to assessment illegal if it was made
collect the tax, such are not questions presupposes that the without the authority
merely of amounts of the increase in the tax taxpayer is subject to under the law.
but attacks on the very validity of any the tax but is
increase for which no payment under disputing the
protest is mandated. [NPC vs. Province of correctness of the
Quezon, G.R. No. 171568, (2010)] amount assessed.
c. When the taxpayer posts a surety The taxpayer claims
bond which guarantees the payment to the that the local
local treasurer of the total amount of real assessor erred in
property taxes and penalties due, such is determining any of
substantial compliance with the “payment the items for
under protest” requirement. [Manila Electric computing the RPT.
Co. vs. City Assessor, G.R. No. 166102,
(2015)]

File Protest with Local Treasurer Exhaustion of administrative remedies

Taxpayer must The taxpayer may
Period to file protest exhaust the directly resort to
The protest in writing must be filed within 30 administrative judicial action
days from payment of the tax to the provincial, remedies provided without paying under
city or municipal treasurer. [Sec. 252(a), LGC] under the LGC. protest the assessed
tax and filing an
Note: The tax or a portion thereof paid under appeal with the
protest shall be held in trust by the treasurer. LBAA and CBAA.
[Sec. 252(b), LGC]
[City of Lapu-Lapu v. PEZA, G.R. Nos. 184203
Period to decide
and 187583 (2014)]
The local treasurer shall decide the protest
Note: A claim for exemption from the payment
within 60 days from receipt. [Sec. 252(a), LGC]
of RPT pertains to the reasonableness or
correctness of the assessment by the local
Decision on the protest
assessor, a question of fact which should be
1. If the protest is decided in favor of the
resolved, at the very first instance, by the
taxpayer, the amount or portion of the tax
LBAA. [NPC v. Provincial Treasurer of
protested shall be refunded to the protestant,
Benguet, G.R. No. 209303 (2016)]
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TAXATION 2
Refunds or Credits of RPT
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]
b. Contesting the Valuation of Real
Property
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
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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.
If the taxpayer fails to appeal with the LBAA in
due course, the right of the LGU to collect the
taxes due with respect to the taxpayer’s
property becomes absolute upon the
expiration of the period to appeal. [Fels
Energy Inc. v. Province of Batangas, G.R. No.
168557 (2007)]
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. [Ty v. Trampe,
G.R. No. 117577 (1995)]
The protest contemplated under Section 252 of
the LGC is required when there is question as
to the reasonableness or correctness of the
amount assessed, while an appeal to the LBAA
under Section 226 is fruitful only where
questions of fact are involved. When the very
authority and power of the assessor to impose
the assessment, and of the treasurer to collect
real property taxes are in question, the proper
recourse is a judicial action. [MWSS v CBAA,
supra]
Appeal to the Central Board of Assessment
Appeals (CBAA)
Who may appeal 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]
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TAXATION 2
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. [Sec. 9, Rule 3,
Chapter VII, Manual of Real Property Appraisal
and Assessment Operations]
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 prejudice to subsequent readjustment
depending upon the final outcome of the
appeal. [Sec. 231, LGC]
c. Compromising an RPT 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,
TAXATION LAW
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]
Compromise by authority of the President
The CTA allowed the compromise agreement
between Batangas City, represented by its
Mayor, and the taxpayer since it was entered
into in line with an executive order issued by
the President to address the real property tax
issues of independent power producers
through the reduction of their tax liabilities and
the condonation of fines, penalties and interest
on deficiency taxes. [Kepco Ilijan Corporation
v. CBAA, CTA EB No. 909 (2013)]

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Flowchart V: Procedure for Assessment of Land Value for Real Property Tax Purposes – Local
Government Code

For purposes of this flowchart, owner means owner or administrator of real property or any person having legal interest
thereto:
Owner declares real Assessor declares Assessor prepares
property once every 3 real property if assessment rolls wherein
START owner/administrator real property shall be
years (Sec. 202) listed, valued and
within Jan 1 to Jun 30 fails to do so (Sec.
204) assessed. (Sec. 205)

Submit documents
supporting exemption Owner may claim
Is real property
within 30 day from for tax exemption yes
exempt?
declaration (Sec. 206) (Sec. 206)

Required
documents Property Property shall be
submitted yes proven as yes dropped from
within 30 days? tax assessment roll
exempt? (Sec. 206)
No

END
Property shall be
listed as taxable in
the assessment No
roll (Sec. 206)

Within 30 days
from assessment,
assessor sends No
notice to owner
(Sec. 223)

Owner may If LBAA rejects

LBAA must
protest protest, owner may
decide within
assessment appeal to the CBAA
120 days from
within 60 days within 30 days from
receipt of appeal
from receipt of receipt of notice (Sec.
(Sec. 229)
notice to the 229)
LBAA (Sec. 226)

If CBAA rejects
protest, owner may
Appeal to the
END SC within 15 appeal to the CTA en
banc within 30 days
days from receipt of
decision

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Flowchart VI: Taxpayer’s Remedies Involving Collection of Real Property Tax – Loc Gov’t Code

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Flowchart VII: Procedure for Levy for purposes of Satisfying Real Property Taxes – Loc Gov’t
Code

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IV. JUDICIAL
REMEDIES
A. Jurisdiction of The Court Of
Tax Appeals
[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)]
1. Exclusive Original and Appellate
Jurisdiction Over Civil Cases
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 one million
pesos or more. [Sec. 3(c)(1), Rule 4, RRCTA]
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:
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: Provided, that in
case of disputed assessments, the inaction
of the CIR within the one hundred eighty
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day-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; Provided, further, that should
the taxpayer opt to await the final decision
of the CIR on the disputed assessments
beyond the one hundred eighty day-period
above mentioned, the taxpayer may appeal
such final decision to the Court under
Section 3(a), Rule 8 of these Rules; and
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 two-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]
Note, however, that applying PD No. 242,
except in the case of Constitutional offices, it is
the Secretary of Justice or the Solicitor General
 FOR UP CANDIDATES ONLY
or the Government Corporate Counsel
depending on the issues and the government
agencies involved who has the jurisdiction to
settle all intra-governmental disputes, including
disputed tax assessments, prior to resort to
judicial action. (CIR v COMELEC, G.R. No.
244155, May 11, 2021) The reason for vesting
jurisdiction to them is the President's
constitutional power of control over all
departments, bureaus, and offices under the
executive branch that cannot be curtailed or
diminished by law. It is also in line with the
doctrine of exhaustion of administrative
remedies that every opportunity must be given
to the administrative body to resolve the
matter, and exhaust all options for a resolution
under the remedy provided by statute before
bringing an action in or resorting to the courts
of justice. (ibid)
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:
a. Decisions or resolutions on motions for
reconsideration or new trial of the Court in
Divisions in the exercise of its exclusive
appellate jurisdiction over:
1. Cases arising from administrative
agencies – Bureau of Internal Revenue,
Bureau of Customs, Department of
Finance, Department of Trade and
Industry, Department of Agriculture;
2. Local tax cases decided by the Regional
Trial Courts in the exercise of their
original jurisdiction; and
3. Tax collection cases decided by the
Regional Trial Courts in the exercise of
their original jurisdiction involving final
and executory assessments for taxes,
fees, charges and penalties, where the
principal amount of taxes and penalties
claimed is less than one million pesos.
b. Decisions, resolutions or orders of the RTC
in local tax cases and in tax collection
cases decided or resolved by them in the
exercise of their appellate jurisdiction;
c. Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court
in Division in the exercise of its exclusive
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original jurisdiction over tax collection
cases; and
d. 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
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 one million
pesos or more. [Sec. 3(b)(1), Rule 4, RRCTA]
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
one million pesos or where there is no specified
amount claimed. [Sec. 3(b)(2), Rule 4, RRCTA]
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 or new trial 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
 FOR UP CANDIDATES ONLY
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? 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)]
The CTA may take cognizance of a petition for
certiorari to determine whether there is grave
abuse of discretion amounting to lack or
excess of jurisdiction committed by the BIR in
issuing the 2017 LOA against petitioner as well
as the subpoena duces tecum considering that
a previous investigation of the same taxable
year 2007 was already conducted pursuant to
the 2008 LOA and petitioner has already
settled its tax liabilities arising out of said
investigation. [Golden Donuts, Inc. v.
Commissioner of Internal Revenue, G.R. No.
252816 (Notice), February 3, 2021]
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Presentation of Evidence in the CTA. Cases
before the CTA are litigated de novo where
party litigants should prove every minute
aspect of their cases. The CTA’s decision
should be solely based on the evidence
formally presented before it, notwithstanding
any pieces of evidence that may have been
submitted (or not submitted) to the CIR. The
court is not limited by the evidence presented
in the administrative claim. (CIR v. PBCom,
G.R. No. 211348. February 23, 2022)
Appeal. Section 1, Rule 8 of the RRCTA
requires that an appeal to the CTA En Banc
must be preceded by a motion for
reconsideration or new trial with the CTA
Division that issued the decision or resolution.
that the rule applies in an amended decision
since an amended decision is a different
decision. (CIR v COMELEC, G.R. No. 244155,
May 11, 2021)
However, if the amended decision of the CTA
Division is not a "new" decision, but a mere
clarification, a correction at best, appeal would
be proper without aa motion for
reconsideration. (ibid)
B. Procedures
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]
Note: See Taxpayer’s Remedies – Collection
above.
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 [CIR v. Union Shipping, G.R. No. L-
66160 (1990)]
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TAXATION LAW
b. Local Taxes Appeal to CTA Division

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 five (5) years from the date they became
due.
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.

No action for the collection of such taxes, fees, Mode of Appeal: Rule 42
or charges, whether administrative or judicial,
shall be instituted after the expiration of such Aggrieved party may file a motion for
period. reconsideration or new trial within 15 days from
receipt of the copy of the decision.
In case of fraud or intent to evade the payment
of taxes, fees, or charges, the same may be In view of respondent’s availment of a wrong
assessed within ten (10) years from discovery mode of appeal via notice of appeal stating that
of the fraud or intent to evade payment. it was elevating the case to the Court of
Local taxes, fees, or charges may be collected Appeals — instead of appealing by way of a
within 5 years from the date of assessment by petition for review to the CTA within thirty (30)
administrative or judicial action. days from receipt of a copy of the RTC’s
August 3, 2012 Order, as required by Section
No judicial or administrative action for 11 of RA 1125, as amended by Section 9 of RA
collection can be instituted after lapse of the 9282 — the Court is constrained to deem the
period for assessment except when there is RTC’s dismissal of respondent’s collection
fraud or intent to evade tax. [Sec. 194 LGC] case against petitioner final and executory.
[Mitsubishi Motors Phils. Corp. v. Bureau of
The running of the periods of prescription shall Customs, G.R. No. 209830 (2015)]
be suspended for the time during which:
a. The treasurer is legally prevented from b. Suspension of Collection of Taxes
making the assessment of collection;
b. The taxpayer requests for a reinvestigation General rule: No appeal taken to the Court
and executes a waiver in writing before shall suspend the payment, levy, distraint, or
expiration of the period within which to sale of any property of the taxpayer for the
assess or collect; and satisfaction of his tax liability as provided under
c. The taxpayer is out of the country or existing laws.
otherwise cannot be located. [Sec. 194,
LGC] Exception: Where the collection of the amount
of the taxpayer’s liability, sought by means of a
2. Civil Cases demand for payment, by levy, distraint or sale
of any property of the taxpayer, or by whatever
a. Who May Appeal, Mode of Appeal, means, as provided under existing laws, may
Effect of Appeal 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]
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c. Injunction not available to restrain
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]
Exception: Sec. 11, R.A. 1125, supra.
Injunctive relief is not available as a remedy to
assail the collection of a tax. The more
substantial reason that should have impelled
the RTC to desist from taking cognizance of the
respondent’s petition for declaratory relief
except to dismiss the petition was its lack of
jurisdiction. Section 218 of the NIRC expressly
provides that “[n]o 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].” Also,
pursuant to Section 11 of RA 1125, as
amended, the decisions or rulings of the
Commissioner of Internal Revenue, among
others, assessing any tax, or levying, or
distraining, or selling any property of taxpayers
for the satisfaction of their tax liabilities are
immediately executory, and their enforcement
is not to be suspended by any appeals thereof
to the CTA unless “in the opinion of the Court
[of Tax Appeals] the collection by the Bureau of
Internal Revenue or the Commissioner of
Customs may jeopardize the interest of the
Government and/or the taxpayer,” in which
case the CTA “at any stage of the proceeding
may suspend the said collection and require
the taxpayer either to deposit the amount
claimed or to file a surety bond for not more
than double the amount.” [Commissioner of
Internal Revenue v. Standard Insurance Co.,
Inc., G.R. No. 219340 (2018)]
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)]
The requirement of the bond as a condition
precedent to the issuance of the writ of
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injunction applies only in cases where the
processes by which the collection sought to be
made by means thereof are carried out in
consonance with the law for such cases
provided and not when said processes are
obviously in violation of the law to the extreme
that they have to be suspended for
jeopardizing the interests of taxpayer.
[Privatization and Management Office v. Court
of Tax Appeals, G.R. No. 211839 (2019)]
The wording of Section 11 of the CTA Law is
clear in requiring the existence of a “tax liability”
before a Suspension Order may be availed of.
However, more than just proof of an issued
assessment, the said assessment must be
properly assailed and elevated to the CTA for it
to acquire jurisdiction to issue any and all kinds
of ancillary remedies in favor of the taxpayer,
e.g., a Suspension Order. [Commissioner of
Internal Revenue v. Court of Tax Appeals (First
Division), G.R. Nos. 210501, 211294 &
212490, March 15, 2021]
A taxpayer may seek the following provisional
remedies before the CTA: (a) a motion to
suspend the direct enforcement of the tax
assessment pursuant to the special provision
of the CTA law; and/or (b) the ordinary
injunctive writs (TRO/WPI) based on the
suppletory application of the Rules of Court
against the implementation of the tax statute or
issuance assailed. To note, since the latter
remedy (TRO/WPI) is meant to enjoin the
implementation of a tax statute or issuance, a
successful application thereof will indirectly
result in the suspended implementation of a tax
assessment or demand for payment of taxes, if
any, springing from the tax statute or issuance.
The issuance of one of two remedies does not
necessarily result into or preclude the other.
However, when a TRO/WPI is issued enjoining
the implementation of a tax statute or issuance,
the practical effect is to suspend the
assessment or collection of all taxes stemming
from the same. In this regard, the TRO/WPI
may thus be considered as a broader relief
which renders unnecessary further Suspension
Orders covering future assessments/collection
of taxes stemming from such tax statute or
issuance. [Commissioner of Internal Revenue
v. Court of Tax Appeals (First Division), G.R.
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TAXATION LAW
Nos. 210501, 211294 & 212490, March 15, Revenue, represented by the Commissioner of
2021] Internal Revenue, G.R. No. 210238 (2020)]

3. Criminal Cases b. Institution of Civil Action in Criminal

a. Institution and Prosecution
Criminal Actions
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
Action
of
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 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.

Those involving violations of the tariff and Rule 111, Section 1(a) of the Rules of Court
Customs Code and other laws enforced by the provides that what is deemed instituted with the
Bureau of Customs: Must be approved by the criminal action is only the action to recover civil
Commissioner of Customs liability arising from the crime. Civil liability
arising from a different source of obligation,
Institution shall interrupt the running of the such as when the obligation is created by law,
period of prescription. such civil liability is not deemed instituted with
the criminal action. It is well-settled that the
Prosecution of criminal action taxpayer’s obligation to pay the tax is an
Conducted and prosecuted under the direction obligation that is created by law and does not
and control of the public prosecutor arise from the offense of tax evasion, as such,
the same is not deemed instituted in the
Those involving violations of the NIRC and criminal case. [Gaw, Jr. v. Commissioner of
other laws enforced by the BIR or violations of Internal Revenue, G.R. No. 222837 (2018)]
the tariff and Customs Code and other laws
enforced by the Bureau of Customs - The c. Period to Appeal
prosecution may be conducted by their
respective duly deputized legal officers. Deciding Period to Mode of
Body Appeal Appeal
All violations of any provision of this Code shall Regional Appeal
prescribe after five (5) years. Prescription shall Trial Court in pursuant to
begin to run from the day of the commission of the exercise 15 days from Sec. 3[a] and
the violation of the law, and if the same be not of its original receipt of 6, Rule 122
known at the time, from the discovery thereof jurisdiction decision of the Rules
and the institution of judicial proceedings for its [to CTA of Court
investigation and punishment. [Sec. 281, Division]
NIRC] 15 days from Petition for
receipt of review as
An offense under the Tax Code is considered decision provided in
discovered only after the manner of CTA Division Rule 43 of
commission and the nature and extent of fraud [to CTA En May be the Rules of
has been definitely ascertained. This occurs Banc] extended for Court
when the BIR renders its final decision and good cause
requires the taxpayer to pay the deficiency tax. for not more The Court En
[Imelda Sze, et al. v. Bureau of Internal than 15 days Banc shall

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TAXATION LAW
Deciding Period to Mode of within fifteen days from receipt of a copy of the
Body Appeal Appeal questioned decision or resolution. Upon proper
act on the motion and the payment of the full amount of
appeal. the docket and other lawful fees and deposit for
Regional costs before the expiration of the reglementary
Trial Courts Petition for period herein fixed, the Court may grant an
in the review as additional period not exceeding fifteen days
15 days from from the expiration of the original period within
exercise of provided in
receipt of which to file the petition for review. [Section
their Rule 43 of
decision 3(b) and (c), Rule 8 of the RRCTA]
appellate the Rules of
jurisdiction Court
[To CTA The CTA En Banc cannot annul a final and
division] executory judgment of a division of the court
The laws creating the CTA and expanding its
Solicitor General as counsel for the People jurisdiction, and the CTA’s own rules of
and government officials sued in their procedure do not provide for a scenario where
official capacity the CTA sitting En Banc is asked to annul a
decision of one of its divisions. Annulment by a
The Solicitor General shall represent the collegial court, sitting En Banc is tantamount to
People of the Philippines and government allowing a court to annul its own judgment and
officials sued in their official capacity in all acknowledging that a hierarchy exists within
cases brought to the Court in the exercise of its such court. A proper remedy would have been
appellate jurisdiction. He may deputize the an original action for Certiorari under Rule 65.
legal officers of the Bureau of Internal Revenue [CIR v. Kepco Ilijan Corp., G.R. No. 199422
in cases brought under the National Internal (2016)]
Revenue Code or other laws enforced by the
Bureau of Internal Revenue, or the legal The filing of a motion for reconsideration or new
officers of the Bureau of Customs in cases trial before the CTA Division is an
brought under the Tariff and Customs Code of indispensable requirement for filing an appeal
the Philippines or other laws enforced by the before the CTA En Banc. Failure to file such
Bureau of Customs, to appear in behalf of the motion for reconsideration or new trial is cause
officials of said agencies sued in their official for dismissal of the appeal before the CTA En
capacity: Provided, however, such duly Banc. [City of Manila v. Cosmos Bottling Corp.,
deputized legal officers shall remain at all times G.R. No. 196681 (2018)]
under the direct control and supervision of the
Solicitor General. 5. Petition for Review on Certiorari to
the Supreme Court
4. Appeal to the CTA En Banc
[Rule 16, A.M. No. 05-11-07]
No civil proceeding involving matters arising
under the National Internal Revenue Code, the A party adversely affected by a decision or
Tariff and Customs Code or the Local ruling of the Court En Banc may appeal by filing
Government Code shall be maintained, except with the Supreme Court a verified petition for
as herein provided, until and unless an appeal review on certiorari within fifteen days from
has been previously filed with the CTA and receipt of a copy of the decision or resolution,
disposed of in accordance with the provisions as provided in Rule 45 of the Rules of Court.
of this Act.
The motion for reconsideration or for new trial
A party adversely affected by a decision or filed before the Court shall be deemed
resolution of a Division of the Court on a motion abandoned if, during its pendency, the movant
for reconsideration or new trial may appeal to shall appeal to the Supreme Court.
the Court by filing before it a petition for review

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