
Taxation Law
Bar 2011 Notes
Roland Glenn T. Tuazon
Ateneo de Manila University

TABLE OF CONTENTS:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
GENERAL PRINCIPLES OF TAXATION
INCOME TAX
ESTATE TAX
DONOR’S TAX
VALUE ADDED TAX
COMPLIANCE REQUIREMENTS
REMEDIES
LOCAL GOVERNMENT TAXATION
REAL PROPERTY TAX
TARIFF AND CUSTOMS CODE
JUDICIAL REMEDIES AND THE COURT OF TAX APPEALS


GENERAL PRINCIPLES OF TAX


What is the definition and concept of taxes?
o Power by which the sovereign raises revenue for the expenses
of government
o “Power to destroy” – interferes with personal and property
rights of people to support the government
What is the nature of taxation?
o 1. Attribute of sovereignty

It is an inherent power of government. No need for
constitutional provision to grant the sovereign such
power.
o 2. Legislative in character

Congress provides for nature, object, and extent of
tax, tax exemptions and condonation, and remedies
o 3. Generally not delegated to executive or judiciary.

1
Except:

1. Local government taxes

2. Presidential power to set tariffs

3. Administrative implementation, given
completeness and sufficient standards
o 4. Subject to constitutional and inherent limitations
What are the stages/aspects of taxation and who exercises these?
o 1. Levy  Congress

All revenue and tariff bills must originate from HOR
o 2. Assessment and collection BIR (executive)
o 3. Payment
o 4. Refund
Requisites of a valid tax?
o 1. Within jurisdiction of taxing authority
o 2. For public purpose
o 3. Uniform
o 4. Guarantees against injustice such as notice and opportunity
for hearing
o 5. Not against constitutional or inherent limitations
What are the theories and bases of Tax?
o 1. Lifeblood theory

Without taxes, government cannot operate

Reason why injunctions against tax are disallowed

Can government use the lifeblood theory to justify
collection of tax through warrant of distraint and
levy even when there is protest pending?

No. There is no finality of assessment yet as
long as a protest is still pending. While taxes
should be collected without unnecessary
hindrance, it must be according to law.
o 2. Benefits-protection theory

Symbiotic relationship – we pay taxes to help
government operate and in turn, government provides
benefits to improve lives of people
o 3. Power to tax is the power to destroy

As long as not abused – SC can nullify exercise of
taxation power if there’s GADALEJ
What are the characteristics of tax?
o 1. It is a forced charge, imposition, or contribution



It is not contractual
Implication of non-contractual nature: it cannot be
used to offset obligations with/by government
o 2. Congress attempts to implement a progressive system
o 3. It is pecuniary in nature; meaning it generally involves
payment of money
o 4. Follows principle of territoriality – imposed on persons,
property, excises within its jurisdiction
o 5. Imposes obligations

Civil liability and criminal liability

Although it is the civil liability that gives rise to the
criminal liability, unlike the usual rule
o 6. Levied for public purpose
o 7. Personal to taxpayers – important for separate juridical
personality rule

When can SHs be held liable for a dissolved
corporation’s taxes?

1. When corporate assets were passed into
their hands

2. When they have unpaid subscriptions –
can be made liable to extent of unpaid
subscriptions
What are the purposes and objectives of taxation?
o 1. Raise revenue to operate government
o 2. Regulatory purpose

Ex. to provide means for rehabilitation and
stabilization of threatened industries affected with
public purpose
o 3. Promotion of general welfare

Can be used as an implement of police power

What is the relationship of PP and tax?

In itself, PP involving license fees and such
can only be used to raise necessary costs in
relation to the activity (ex. issuing license,
surveillance, regulation, etc.)

But for non-useful occupations, PP and tax
can be exercised together to impose
sufficiently higher fees. So in itself, PP

cannot be used to raise taxes. Both powers
must be jointly exercised.
o 4. Reduction of social inequality

In progressivity
o 5. Encourage economic growth by granting incentives and
exemptions
o 6. Protectionism

To protect local industries
What are the principles of a sound tax system?
o 1. Fiscal adequacy
o 2. Administrative feasibility
o 3. Theoretical justice
Comparison of taxation with ED and PP:
Tax
Exercised by
government
Operates on
community or class
Money becomes part of
public funds
Can be delegated to
public service
companies or utilities
Property taken for
public use;
compensated
Operates on individual
owners
Transfer of right to
property to government
Indirect benefits
received in government
services
Generally, no limit on
tax imposed
Directly receives
market value for
property taken
Market value of
property
Subject to
constitutional
limitations;
Including prohibition
Inferior to impairment
prohibition because
government cannot
enter contract to
Property taken to
support government
2
ED
Exercised by
government
PP
Exercised by
government
Property is regulated
for general welfare; not
compensated
Operates on
community or class
No transfer of title; just
restraint on injurious
use of property
Indirect benefits in form
of healthy/safe
community
Amount imposed must
be just sufficient to
cover costs for
regulation and
necessary expenses
Relatively free from
constitutional
limitations;
Superior to impairment
against impairment of
obligation of contracts

purchase private
property and then
expropriate it after
Tax
Enforced contribution from persons
or property
of contract
Based on necessity
Levied on person, property, or acts
Generally applicable
Personal liability of taxpayer
Generally, how do you distinguish PP from taxation?
o Look at the purpose, whether regulation or raising of revenues
Tax as distinguished from other exactions
Tax
Based on law
May be imprisoned for failure to pay
tax
Payable in money
Not assignable
No interest unless delinquent
Imposed by public authority
Prescriptive periods in NIRC
Debt
Based on contract or judgment
May not be imprisoned for
nonpayment of debt
Money, property, services
Can be assigned
Draws interest if: a) stipulated; b)
mora
Imposed by individuals
Prescriptive period governed by
NCC
Tax
Enforced contribution from persons
or property
To raise revenue
Imposed by government
Imposed by government
Tax
For revenue purposes
Under power of taxation
No limit as to amount
Paid after start of business
Failure to pay does not make
business illegal
Cannot be surrendered except for
lawful consideration
Penalty
Sanction as punishment for violation
of law (including tax laws) or acts
deemed injurious
To regulate conduct
Imposed by government or private
individuals/entities
Doctrines

Tax
Enforced contribution from persons
or property
Demand of sovereignty
No limit as to amount of tax
Special Assessment
Enforced contribution from owners of
lands specially benefited by public
improvements
Based on benefits
Levied only on lands
Exceptionally applicable
Liability limited to land involved
Toll
Money for use of something (such as
road, bridge, etc.)
Demand of proprietorship
Amount depends on cost of
construction and maintenance
Imposed by government or private
entities/individuals
License fee
For regulatory purposes
Under police power
Limited to amount for issuance of
license, surveillance, regulation
Paid before start of business
Failure to pay makes business illegal
License fee may be or without
consideration
3
What are the requisites of double taxation?
o 1. Same subject matter
o 2. Same purpose
o 3. Same taxing authority
o 4. Same taxing period
o N.B. Regulation and taxation are different

License fee and sales tax = not double taxation 
usual question

Prohibition on taxation of lumber products in RA 2264
is different from taxation on sale of lumber, which is
allowed
o XYZ corp. is engaged in both warehousing business and
sale of sugar. Can the government tax both businesses?

Yes. There is no double taxation in taxation of every
separate or distinct business of a party
o X is a lessor of property. X pays real estate tax on the
property, real estate dealer’s tax based on rentals, and
income tax on rentals. Is there DT?

No. Real estate tax is on property, dealer’s tax is on
profession, income tax is on earnings.

o

Is double taxation prohibited per se?

No.

What is prohibited is direct duplicate taxation (the
requisites above), because it is oppressive and
inequitable. (“STRICT SENSE”)

But indirect duplicate taxation is valid (ex. different
authorities, different purposes, etc.) (“BROAD
SENSE”)

What are the usual methods to avoid double
taxation?

1. Reciprocal exemptions by law/treaty

2. Tax credit for foreign taxes paid

3. Deduction for foreign taxes paid

4. Reduction of Philippine tax rate
What is a tax exemption?
o A grant of immunity, express or implied, to particular persons
or entities from tax that it would have otherwise paid and
others are expected to pay.
o Why are tax exemptions strictly construed against the
taxpayer?

They are highly disfavored, because it is contrary to
the lifeblood theory
o Normally “in lieu of all taxes” just pertains to the specific taxes
touched upon in the section wherein it is contained.

And normally it doesn’t cover indirect taxes unless
provided explicitly (Silk Air v CIR)

It also does not cover local taxes (Smart v. Davao)
o ABC Corp. is granted exemption from all taxes for a 3 year
period. ABC purchased a machine from XYZ, which is
subject to sales tax. Can XYZ refuse to pay the sales tax
because ABC is tax exempt?

No. Exemptions are personal and only cover taxes
for which ABC is directly liable for. XYZ cannot claim
this exemption indirectly.

XYZ just increased the sale price of the machine
to ABC to buffer the tax. Can ABC claim a refund
of the extra amount it paid to XYZ because ABC is
exempt from taxes?




4
No. One who can claim a refund is only a
taxpayer statutorily liable to pay the tax.
ABC is not, so it cannot claim refund.

The statutory taxpayer must pay and claim
refund, if any, even if it passed on the tax
through purchase price to another.
What is the rule on construction of tax statutes?
o In case of doubt, the statutes are construed strongly against
government and in favor of taxpayers.
o Is the construction of a predecessor entity on a tax statute
binding on his successors to the position?

No.
Can taxes have retroactive application?
o Yes, but only if expressly provided so.
o As a general rule, taxes are prospective.
o Usual situation: a law or issuance repeals an old law or
issuance and the taxpayer already paid. The taxpayer cannot
claim a refund.

This includes reversed rulings.
Distinguish tax evasion from tax avoidance:
o Tax avoidance is a tax-saving device within means sanctioned
by law. It is used in good faith and at arm’s length.

Ex. X leases property and his income tax is at the
highest bracket. He donates half of the property to a
NSNP educational institution whose income and
assets are A, D, E used for educational purposes, to
reduce his income tax. There is tax avoidance only.
o Tax evasion is usage of unlawful means.

1) payment of less than what is due or non-payment

2) bad faith, willful, deliberate

3) course of action or omission is unlawful
May taxes be subject to set-off or compensation?
o No.

1. They are not ordinary obligations.

2. The applicable laws governing each are peculiar to
each.

3. Public policy is better served if integrity and
independence of taxes are maintained.
o
o

Taxes and debts are of different nature and character, so no
set-off or compensation is allowed.
What is the exception?

Where the government and taxpayer are in their own
right reciprocal debtors and creditors of each other,
and the debts are both liquidated, due, and
demandable.
Inherent limitations





1. Public purpose
o It must be for a public purpose, even if the collection of fees is
entrusted to a private entity
o The essential character of the direct object of expenditure
controls, not magnitude of interest
o Mere incidental benefit to public or the State cannot justify
taxation to benefit private individuals
o Not just public use but also public interest, public benefit,
public welfare, or public convenience
o Can the government impose taxes on sugar
manufacturing in order to raise money for a special fund
for the rehabilitation and stabilization of the sugar
industry?

Yes. It is a public purpose because the government
has deemed the sugar industry as impressed with
public character.
2. Non-delegation of legislative power to tax
3. Exemption from taxation of government entities
4. International comity
o An executive agreement or treaty providing for exemptions, for
instance, is valid
5. Territorial jurisdiction
o Even if a contract is entered into abroad, if majority of the
incidents or the contract are in the Philippines (ex. beneficiary,
payment, etc.) then the situs can be said to be local
o Place of activity is different from place of business. So a
foreign business can perform taxable activities here.
o What are the general principles of income taxation in the
NIRC (i.e. source rule of income tax)?
o
1. RC  taxable on all income from sources within
and without the RP

2. NRC  taxable on income derived from sources
within the RP

3. RA  taxable on income from sources within the
RP

4. NRA  taxable on income from sources within the
RP

5. Domestic corp.  income from sources within and
without the RP

6. Foreign corp.  income from sources within the RP
Note the rule on air carriers with ticketing offices in the RP

Can be taxed on sale of tickets (30%)

If there are flights from the RP, then subject to GPB
tax. But not for flights into the RP but no passengers
or cargo going out.
Constitutional provisions and limitations
General limitations


5
1. Due process clause and EPC (Art III, Sec 1)
o There can be a valid distinction between self-employed
persons and professionals vis-à-vis compensation earners
because of how they earn their income
o Ex. Tiu v. CA case, where there was distinction between
businesses inside the SESZ and those outside the secure area
o Spreading out of input tax across depreciable life of asset is
not a violation of property right. Input tax is not property or a
property right.
2. Uniformity and equitability of tax
o Uniformity  tax operates with same force and effect in every
place where the subject may be found

Not an intrinsic, but a geographic uniformity
o Uniformity does not prohibit classification by congress
o An ordinance imposed on all motor vehicles operating in
Manila violates uniformity – it does not distinguish between
private and public, those registered in MLA and those merely
passing by, etc. (Association of Customs Brokers v. MLA)



3. Non-impairment of contracts
o What is prohibited – tax statute that alters the relative rights of
the parties with each other
o Does not prohibit a tax that makes business more expensive or
activity more difficult
o Is revocation of a tax exemption before the time it was set
to expire a violation of this right?

No. A tax exemption may be withdrawn any time.
o Same with Congress changing the terms of a franchise it
granted. This is valid.
4. Free exercise of religion
o Tax on free distribution or sale of bibles (not for profit) and
religious literature is invalid as impairment of constitutional
right to free exercise of religion
o But can impose license or permit on sale of such because it’s
just incidental to the exercise of religious freedom






Kinds of taxes

Specific limitations



4. Laws granting tax exemption shall be passed with concurrence of a
majority of members of Congress
o Remember the John Hay case where a mere Executive Order
tried to extend the exemption in Subic to Clark and John Hay.
This was invalid because there was no concurrence of majority
of members of Congress
5. No imprisonment for non-payment of poll tax
6. Uniform, equitable, progressive tax
7. Presidential item-veto in A-R-T bills
8. Delegation of tariff-setting to President
9. Money on tax collected for special purpose only used for such
purpose; balance, if any go to general funds
10. LG taxation, and automatic release of their IRA
1. Tax exemption for properties for religious, charitable, educational
purposes
o This exemption is only for real property taxes

So the sale of the property to the institution is taxable

Or any such transactions afterwards
o Test is usage, not ownership

So if a church owns property but it leases such out to
commercial entities, this is taxable
o Must be actually, directly, exclusively used for R/C/E purposes
2. Tax exemption of all revenues and assets of NS-NP educational
institutions used A, D, E for educational purposes
o This one covers revenues and assets, and applies specifically
to educational institutions
o Note that the test is application of the revenue or assets
3. All appropriation, revenue, and tariff bills must originate from the
HOR. The Senate may propose or concur with amendments.
o Check discussion in Political law about how it is only the idea
that need to come from HOR and then Senate may completely
junk the bill and substitute its own version

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

6
Distinguish direct from indirect taxes:
o Direct taxes are demanded from the very person who is
intended to pay the tax. Cannot shift the burden to another.

Ex. income tax, estate tax, donor’s tax
o Indirect taxes are first demanded from a person with the
expectation that he can shift the burden to someone else as
part of the purchase price.

Ex. VAT, excise tax, percentage tax, DST
Taxes distinguished based on object:
o 1. Personal/poll tax
o 2. Property tax
o 3. Privilege tax
Based on tax rates:
o 1. Ad valorem

Tax based on value of property
o 2. Specific
o 3. Mixed
Based on purpose:
o 1. General/fiscal
o 2. Specific, regulatory, sumptuary (sin tax)
Based on scope:
o 1. National – NIRC
o 2. Local – RPT, municipal tax

Based on graduation:
o 1. Progressive tax

Tax rate increases as the base increases
o 2. Regressive

Tax rate decreases as the base increases
o 3. Proportionate

Amount of tax is in proportion to the amount subject to
taxation


INCOME TAX

Income tax systems



What is the global tax system?
o Taxable income is gross income minus deductions and
exemptions, whichever is applicable, which is then applied to
graduated tax rates for individuals or corporate income tax
rate, for corporations.
o Does not distinguish among compensation income, capital
gains, business or professional income, passive investment
income, or other income.
o One tax return only.
What is the schedular tax system?
o Different types of income are subject to different sets of
graduated or flat income tax rates. Basis could be gross
income (no deductions) or net income.
o Separate regular income tax return from capital gains return.
Passive income needs no return because it’s subject to WH
tax.
What is the semi-schedular/semi-global tax system?
o Compensation income, business/professional income, capital
gain, and passive income not subject to final tax, and other
income are added together as gross income. Deductions and
exemptions, whichever apply, are deducted to arrive at the
taxable income. This is subject to a “global system.”
o But passive income subject to WH tax and capital gains from
sale/transfer of real properties as capital assets and shares of
stocks in domestic corp. are subject to different taxes and
different tax returns. This is subject to a “schedular system.”
What are the features of Phil. Income Tax Law?
o 1. Direct tax
o 2. Progressive

Higher tax base, higher tax rate
o 3. Comprehensive
o 4. Semi-schedular/semi-global
What are the criteria in imposing Phil. Income tax?
o 1. Citizenship principle:
o 2. Residence principle
o 3. Source principle
What are the taxable periods?
o 1. Calendar period

Starts with January 1, ends December 31
o 2. Fiscal period

Starts in the middle of the year and ends at the same
point the following year
o 3. Short period

For change in taxable period
Kinds of taxpayers


7
1. Resident citizens (RC)
o What is taxed?

Worldwide income
o What is dual tax status?

For a citizen, one can only be either a RC or NRC. If
an RC emigrates from the Philippines and becomes
an NRC (or vice versa), the taxable income also
changes from worldwide to Philippine only (or vice
versa)
o Why is it important to determine if a taxpayer is engaged
in trade/business/profession as opposed to being a
compensation earner?

Those engaged in trade/business/profession are
entitled to deductions from business income and other
income not subject to FWT
2. Non-resident citizens (NRC)

o

What is taxed?

Income within the Philippines only
o Who are NRCs?

1. Immigrants

2. Permanent employees hired by foreigners abroad

3. Contract workers who spend at least 183 days/year
abroad (need not be continuous)
o What is the rule when one spouse is NRC and the other is
a RC?

For income pertaining to ACP, split it 50-50, and apply
the respective rules.

What if the jointly owned property was a foreign
currency deposit?

Taxed at 7.5% for the RC spouse

Exempt from tax for the NRC spouse
3. Resident aliens (RA)
o What is taxed?

Income within the Philippines only
o Who is an RA?

A resident alien is one who is not merely a transient.
o What governs transience?

Intent. Mere floating intent to return is not sufficient.
There must be definite purpose for coming here, and
he intends to leave soon after.

If purpose requires an extended stay that he ends up
living here, he is a resident.
o Special aliens

Who are these?

1. Employed in RAH/ROH of MNCs

2. Employed by OBUs in the Philippines

3. Employed by foreign petroleum service
contractors and subcontractors

Rates?

15% of gross income
o Same tax treatment to Filipinos
employed in the same position as
those above

But any other income derived from Philippine
sources subject to regular tax rates



8
4. Non-resident aliens (NRA)
o Doing business

What is taxed?

Income within the Philippines only

N.B. But there are higher tax rates for
dividends (20%, not 10%) and gross income
from cinematographic films and other works
(25%)

When is an alien presumed to be an NRA doing
business?

More than 180 days stay in the Philippines

What is the rule on deductions and exemptions?

1. Can deduct

2. Can avail of personal exemptions but
subject to the rule on reciprocity

3. Cannot claim for dependents
o Not doing business

What is taxed?

Income within the Philippines only

But all of their income is taken together and taxed a
blanket 25%

What is the exception?

Except capital gains from sale of real
property and shares of stock – subject to
FWT
5. Minimum wage earner
o N.B. Exempt from income tax
6. Domestic Corporations
o
“Place of incorporation” test governs.
7. Foreign corporations
o Resident

When is one an RFC?

Engaged in trade or business in the
Philippines – when there is continuity in
business, such as appointing local agent.
There is progressive pursuit of commercial
gain.



What is the status of a Philippine branch of a
foreign corporation?

It is an RFC because the branch is not a
separate juridical entity from the home office,
which is in turn organized abroad.

What is the taxable in their earnings?

Earned within the Philippines, whether by the
head office or branch

What is the difference?

If the head office itself earns, the Philippine
payer must withhold it and remit it to the BIR.

If it is attributed to the branch, then no need
to withhold.

Which RFCs are exempt from income tax?

Those that do not derive income from
Philippine sources, such as RAHs.

Which RFCs are entitled to preferential tax rates?

1. ROHs – 10%

2. OBUs and FCDUs of Philippine branches
of foreign banks – 10% on interest income to
residents

3. International air carriers – 2.5% of GPBs

4. Foreign service contractors and subcontractors engaged in petroleum operations
in the Philippines

5. Registered enterprises in special and
Freeport zones

What is the rule for all other Philippine branches
of foreign corporations?

30% tax on net taxable income, unless MCIT
of 2% is higher
o Non-resident

Not engaged in trade or business in the Philippines

Tax must be withheld by Philippine payer
8. Partnerships and Joint Ventures
o What tax regime applies?

Same rules as corporations
o What are the peculiar rules though?

9
1. Law presumes that the entire net income is
deemed received by the partners in the year it was
earned, even if some part was actually not distributed
to the partners

Ex. A and B’s partnership earned 2M, but
distributed only 800K to each, the law
presumes each got 1M and they are taxable
for such

2. If the partnership claims itemized deductions, the
partners must also claim itemized deductions. They
are barred from choosing the Optional Standard
Deduction.
o Not partnerships:

1. General professional partnerships

2. JV or consortium for undertaking construction
projects or energy operations under a service contract
with Government

Must be reported by the JV partners
separately, according to participation in the
project

N.B. NOTE that the JV or consortium here
must be unregistered to be exempt. If it is
registered, it is taxable like an ordinary P.

When is the coverage of the exemption?
o As long as under contract
o Are co-heirs of inherited properties which produce income
considered as partners in an unregistered partnership?

No because there is no intent to enter into a
partnership; mere shared income is not enough
o What makes a JV different from partnership?

For single business transaction
o An insurance pool/clearing house of several insurance
corporations to allocate/distribute risk is a partnership.
9. General Professional Partnerships
o What are these?

Formed by persons for sole purpose of exercising
common profession
o What is the tax regime?



Not taxable as a partnership. Individuals are taxable
in their own capacity. They report their distributive
shares as income

Those actually or constructively received
o When is a GPP exempt from income?

When the income is from exercise of the profession
o When is it taxable as a partnership?

When it has active (not passive) income, it loses
status as a GPP and is treated as an ordinary
partnership
10. Estates and Trusts
o How are estates and trusts taxed?

Generally, same manner and basis as individuals.

But income that is distributed to beneficiaries by the
fiduciaries can be deducted from gross income of
estate or trust.

But included in taxable income of the
beneficiaries
o What are exempt?

Employee’s trust (part of employer’s pension, stock,
or profit-sharing plan)
o What is the exemption granted these entities?

20K/50K, depending if the higher exemptions granted
by RA 9504 also applies to these entities
o Who is taxed for income of a trust?

Trustor, if the trust is revocable

Trustee, if the trust is irrevocable
11. Co-ownerships
o Not a separate taxable entity. Income of co-owners reported
separately in their respective ITRs (see discussion in
partnerships above).
o Co-ownerships resulted from death of decedent are not taxable
partnerships per se.






Income

What is income?
o 1. Money coming to a person within a specified time, whether
as payment for services, interest, or profit from investment
10
o 2. Gain from capital
Does income include illegal earnings?
o Yes.
ABC Corp. purchased a golf membership privilege worth 300K. It
then assigned it to Mr. X, a consultant, so he can avail of the
privileges, without consideration. He then transferred it to Mr. Y,
who would be his replacement, expressly acknowledging ABC
Corp. as absolute owner of the membership. By this time, the value
of the membership increased to P800K. Is there income?
o No. There is no transfer of ownership. Neither is there a
donation, which also requires such transfer of ownership.
Examples of income:
o 1. Increase in inventory at the end of the tax year
o 2. Transfer of appreciated property to employee for services
rendered
o 3. Just compensation paid by government for property
acquired by expropriation
What are not examples of income:
o Mere increase in capital

1. Increase in value of property

2. Voluntary assessments by a corporation paid by its
SHs

3. Contributions by lot owners to memorial park for
care fund
o No flow

1. Increase in net worth due to correction of errors in
book entries

2. Security deposit paid to a lessor

3. Money received as loan
Differentiate income from capital:
o Capital is the tree, income is the fruit.
o Return of capital is not subject to income tax
What are the tests in determining income?
o 1. Realization test

There must be a separation from capital of something
of value

Ex. stock dividends are not income subject to tax
because one merely holds more shares of the same
equity interest
o
o

2. Claim of right doctrine

Doctrine of ownership, command, control

Absence of a definite unconditional obligation to
return or repay that alleged gain
3. Economic benefit test

Any economic benefit that increases the employee’s
net worth, whatever may be the mode by which it is
effected
Gross Income





When can the Philippines tax?
o 1. Income, gain, profit
o 2. Incurred during taxable year
o 3. No law exempting the income from tax
What is gross income?
o All income from whatever source derived, including
compensation, fees, commissions, business income, gains
from property dealings, interest, rents, royalties, dividends,
annuities, prizes/winnings, pensions, partner’s distributive
share in GPP
o X borrowed money from Y, without interest, payable in a
year. When it was due, X told Y he was unable to pay due
to business reverses. Y took pity on X and condoned the
debt. Did X derive income?

No. In the absence of consideration, it can be
considered a gift not subject to income tax.
What is “net income”?
o Gross income – deductions – exemptions = net income
Loans by FCDUs to resident borrowers earn interest income. Who
is liable for the income tax?
o The FCDU
o But the borrower is the one tasked to withhold.
What are the source rules for income?
o 1. Interest earnings by lender – residence of the debtor

Regardless of where agreement is signed or where
proceeds are directed
o 2. Dividends – residence of corporation paying dividends

Whether DC or RFC
o
o
o
o
11
Except: if less than 50% of the gross income of the
foreign corporation for the 3-year period preceding the
declaration was derived from sources within the
Philippines. Here, the ratio of dividends to gross
income of the corporation for the period from sources
within the Philippines is the income from Philippine
sources.

A foreign reinsurance company receives
dividends from a domestic insurance company –
is the income from the Philippines?

Yes
3. Income from services – place of performance of the service

Regardless of residence of payer, place in which the
service contract was made, or place of payment

How are turnkey contracts treated?

Services in construction of the materials do
not have situs in the Philippines if they were
already finished products once shipped here.

What about international air carriers and
international shippers?

Outgoing flights from the Philippines are
sourced here

If there is transshipment, then the aliquot
portion flown from the Philippines is taxable

For mere sale of tickets:

Not taxed as IAC but the resident ticket
agent is deemed a RFC
4. Rentals and royalties – location of property or interest
5. Sale of real property – location of real property
6. Sale of personal property –

1. Produced here/sold outside or produced
outside/sold here: partially within and partially without
the Philippines

2. Purchased here/sold outside or purchased
outside/sold here: where it is sold

3. Shares of stock in domestic corporation:
Philippines regardless of where they are sold by
express provision of law

o

X and Y are both NRAs. X sold shares of ABC
Corp, a Filipino corporation, to Y. Is it taxable
under Philippine law?

Yes. Sale of shares of domestic corporation
is always taxable under Philippine law.
7. Other intangible property – where the right is exercised
(“business situs”)

Old rule: mobilia sequuntur personam (follow
domicile of the owner)
o
Income subject to tax:


o
1. Compensation income
o For services performed under an EER
o How is it taxed?

The ER withholds the taxes from the salary paid to
the EE.
o Includes remuneration paid in cash and in any other medium

But Additional Compensation Allowance given by
Government to its employees under EO219 is not
subject to WH tax – it is considered as “other benefits”
excluded from compensation
o What is not treated as “compensation”?

1. Remuneration for agricultural labor paid entirely in
farm products where labor is performed

2. Domestic service in private home

3. Casual labor not in course of ER’s trade or
business

4. Services by citizen or resident of Philippines for
foreign government or IO
2. Fringe benefits
o What is the treatment of fringe benefits of managers and
supervisors?

The ER assumes the fringe benefits tax (FBT)
imposed on taxable fringe benefits of the managerial
or supervisory EE

But the ER can deduct such tax as a business
expense (see deductions)
o What about fringe benefits of rank and file employees?
o
12
Treated as part of compensation income subject to
income tax. The ER has to withhold tax on
compensation income.
What are fringe benefits?

Goods, services, or benefits furnished or granted in
cash/kind by an ER to an individual employee, except
rank and file employees.

Examples: housing, vehicle, expense account, loan
with low interest (to extent of difference), club
membership, household personnel, holiday expenses,
education assistance, etc.
Which fringe benefits are not subject to FBT?

1. Necessary to the trade/business/profession

2. For convenience of employer

3. Exempted from income tax under law

4. Contributions of the ER for benefit of EE to
retirement, insurance, hospitalization benefit plans

5. Benefits to R&F employees

6. De minimis benefits

Applies to both managers and R&F
What are de minimis benefits?

1. Monetized unused vacation leave credits of EEs

Not exceeding 10 days per year

2. Medical cash allowance to EEs’ dependents

Not exceeding P750/semester or
P125/month

3. Rice subsidy

Not more than P1K or 50kg per month

4. Uniforms and clothing allowance

Not exceeding P3K/year

5. Actual yearly medical benefits

Not exceeding P10K/year

6. Laundry allowance

Not exceeding P300/month

7. Employee achievement awards

In form of tangible personal property other
than cash or GC with monetary value not
exceeding P10K/year


o
Received by EE under a written plan that
does not discriminate against highly paid
employees

8. Gifts given during Christmas and major anniversary
celebrations

Not exceeding P5K/year

9. Flowers, fruits, books, similar items to EEs under
special circumstance, e.g. illness, marriage, birth of
baby

10. Daily meal allowances for OT work

Not exceeding 25% of basic minimum wage
o When do these de minimis benefits fall under de minimis
benefits and when do these fall under the 30K “other
benefits” under exclusions from income?

Amounts under the ceiling are de minimis benefits

Anything in excess fall under the 30K exclusions from
income

Anything in excess of 30K exclusions are taxable
o Can the ER deduct de minimis benefits as ordinary
expenses too?

Yes, just like fringe benefits
3. Trade or business income
o General definition: gross sales – (sales returns + discounts
+ allowances + cost of goods) = gross income
o “Cost of goods sold”

Sales: all costs to produce the thing and bring it to its
location

Trading: invoice cost, import duties, freight, insurance

Manufacturing: costs of production, raw materials,
labor and overhead, freight, insurance, cost to bring it
to its location
o Definition for sale of services: gross receipts – (sales returns
+ discounts + allowances) = gross income

“Cost of services” – all direct costs and expenses
necessary to provide services required, including
salaries and facility costs

For banks: this includes interest expense
o What is the character of lease of property?

Part of gross income.


13
What if the lessee builds a building on leased property and
there is an agreement that the building becomes the
property of the lessor after the end of the lease period?

The lessor has two options –

1. Report as income the market value of the building
at the time it was completed (usually, depreciated
value)

2. Spread over the life of the lease the estimated
depreciated value of the building at the end of the
lease and report as income the aliquot parts thereof.

Pre-termination of lease:

Lessor deemed to have incurred
ADDITIONAL INCOME beyond what was
reported

Improvement destroyed before end of lease:

Lessor may report loss from amount
previously reported, less salvage value
o What does sale or exchange of property also cover?

1. Deed of reconveyance with assumption of mortage

2. Mortgage foreclosure

3. Expropriation sale
4. Professional income
o When is there professional income?

No ER-EE relationship between him and his clients
o What if a lawyer is hired as private counsel of a
corporation and is in the payroll?

He receives compensation income and is taxable
based on the graduated rate
5. Sale or exchange of capital assets
o What are the types of capital assets?

1. Shares of stock of domestic corporation

2. Real property of individuals or land/building of
corporations

3. Other types of assets, including shares of stock in
foreign corporations
o What are the tax rules on shares of stock of DCs?

1. If seller is a dealer in securities, the shares are
treated as ordinary assets

normal tax rate


o
2. If seller is not a dealer in securities, the shares are
capital assets, and thus:

A. If listed in local stock exchange, subject to
stock transaction taxes equal to 0.5% of
gross selling price.
o Selling price is the FMV of the
shares of stock, not FMV of the
property given in exchange
o Stock broker withholds and remits

B. If not listed in stock exchange:
o 5% on first P100K of net capital
gains
o 10% on any net capital gains more
than P100K

C. Listed, but sold outside stock exchange
o 5% and 10% rates
o Any capital loss can be deducted
from capital gains from sale of
unlisted stocks or listed stocks also
sold outside the stock exchange.
What are the rules on sale of real property?

A. If the seller is a real estate dealer, the real property
is an ordinary asset

Normal tax rate

May deduct cost or adjusted basis of the
asset

B. If the seller is not a real estate dealer, determine
whether the real property is used in his trade,
business, or profession, or is treated as a fixed asset
used in trade, business, or profession, subject to
depreciation. If this is the case, it is an ordinary
asset:

Normal tax rate

May deduct cost or adjusted basis of the
asset

C. If the seller is not a real estate dealer and the real
property is not among those listed above, it is a
capital asset:


14
CGT of 6% presumed gains based on gross
selling price or FMV, whichever is higher.

Imposed on entire selling price or FMV
(“presumed gains”)

What is the nature of the presumption for
presumed capital gains from sale of real
property?
o It is conclusive, so you cannot rebut
it with proof that there actually was
loss

X bought a lot from a developer and then
decided to exchange it for a lot with a
better view. What is the tax?
o CGT on the FMV (no “selling price”
as option B) of the property he
received in exchange.

What if the seller is a foreign
corporation?
o RFC: falls under normal corporate
tax rate
o NRFC: flat 30% tax rate
What if the real property is not found in the
Philippnes?

CGT cannot apply because it only applies to
real property in the Philippines. Use normal
tax rates.

Only RCs and DCs can be taxed on it
because of source rules
When is sale of principal residence not subject to
CGT?

1. Proceeds fully utilized to acquire new
principal residence
o Unused portion subject to CGT

2. Within 18 calendar months from sale

3. Inform CIR within 30 days from sale of
intent to avail of exemption

4. Availed only once every 10 years
o
o
o
o
o

What is the rule on other capital assets such as real
property outside of the Philippines and shares of stock of
a foreign corporation?

Normal tax rates apply

What are examples of these?

Motor vehicles and jewelries not used in the
trade or business, shares of stocks of foreign
corporation, investments in short-term
commercial papers not deposit substitutes
What is the “holding period” rule for capital assets?

For individual taxpayers:

100% CGT if asset sold or exchanged was
held 12 months or less

50% CGT considered if asset sold or
exchanged was held more than 12 months

For corporate taxpayer:

100%, always
What is the offset rule on capital losses?

Capital losses can only be offset against capital gains.
They cannot be deducted from ordinary gains or
income.

N.B. obviously when one speaks of capital losses,
this shouldn’t apply to real property held as capital
assets because there is always a presumed gain for
sale of these, and never a loss. This rule instead
applies to other capital assets (ex. automobiles not
used in business, jewelry, etc.)
What is the cost or basis of amount gained or lost?

1. Acquired by purchase – actual cost paid

2. Acquired by inheritance – FMV during date of
acquisition

3. Acquired by gift – value when held by the donor

But to determine loss, if the prior value is
greater than FMV, the FMV is used instead

4. Acquired for less than adequate consideration –
amount paid by transferee for the property
What is the general rule for exchanges of property?

Entire amount of gain/loss recognized
o
15
Both parties are subjected to CGT; there are two
taxable transactions. So one has a gain, the other
has a loss.
As an exception, what are the Tax-Free Exchanges?

1. In merger/consolidation, no gain/loss recognized if:

A. Property-for-stock
o Corporation-party exchanges
property solely for stock of the other
corporation-party

B. Stock-for-stock
o SH exchanges stock of one
corporation-party for the stock of
another corporation-party

C. Securities-for-stock/securities
o SH exchanges securities in one
corporation-party for
stock/securities of the other
corporation-party

2. Person exchanges property for stock in a
corporation where he ends up controlling the
corporation (alone, or together with max 4 other
people/entities)

N.B. Only property-for-stock, not servicesfor-stock

Who are counted in the control
requirement?
o Only those who transferred property
will be counted in the control
requirement

What if they sell the shares as to lose
control thereafter?
o Subject to income tax on gains for
exchange. Use historical cost/basis
of the transfer (value of shares) to
determine gain or loss (annotated
at the back of the title of land or
certificate of stock).
o N.B. The law merely defers
recognition of the gain or loss as

o
regards the transferor and
transferee.

“Historical basis” (RR 18-200): a) original
basis in the hands of the transferor PLUS
amount of gain recognized to the transferor
in the transfer (ex. what he got in shares of
stock) [DOMONDON QUESTION]
o What are the mergers/consolidations contemplated here?

Those with bona fide business purpose (ex.
continuing life of expiring corporation), not for tax
purposes only (ex. transferee never conducted
business).
o What is transfer of “substantially all” the assets?

Transfer of at least 80% of the assets, including cash,
with some degree of permanence
o What is the income tax treatment of capital loss?

1. Capital loss limitation rule –

Applies to both corporations and individuals

Losses from sale/exchange of capital assets
only allowed to the extent of capital gains

2. Net Capital Loss Carry Over (NCLC)

Applies only to individuals

Any NCL carried over to the next year is
treated as loss from sale of asset not held for
more than 1 year (so 100% of the loss is
considered, even if it actually was held
longer)
6. Passive investment income
o What kinds of income are covered by Passive Investment
Income?

1. Interest

2. Dividend

3. Royalty

4. Rental
o What is covered by interest income?

A. Interest income from Philippine currency deposits
and deposit substitutes

What are the rates?
o In general, 20% FWT



16
NRA not engaged in business, flat
tax of 25%

What is a deposit substitute?
o Obtaining funds from the public (at
least 20 or more individual or
corporate lenders), through
issuance of debt instruments, for
the purpose of relending or
purchasing receivables and other
obligations or financing needs of
agent or dealer
o But debt instruments issued for
inter-bank call loans with maturity of
at most 5 days, issued to cover
reserves deficiency, are NOT
considered deposit substitute debt
instruments
B. Interest income on FCDU

From FCD with OBU or FCDU in the
Philippines – 7.5% FWT

From FCD transactions of banks – 10% FWT

From FCD with a bank outside the
Philippines:
o RC or DC – normal tax rate
o NRC, RA, NRA, or FC – exempt
(source rules)
C. Interest income from loans and other transactions
other than those enumerated above

Normal tax rates
D. Interest income from long-term deposits or
investments of individuals

5 years or more – exempt

4 years to less than 5 years – 5% FWT

3 years to less than 4 years – 12% FWT

Less than 3 years – 20% FWT

To which taxpayers do these rates NOT
apply?
o NRA not doing business
o
o Any corporation
What is the tax treatment of discount?

Same as interest (both called “yield”)
Dividend income:

Distinguish between cash dividends and stock
dividends:

Cash dividend is disbursement to the SH of
accumulated earnings and the corporation
parts irrevocably with all interest therein

Stock dividends involve no disbursement;
the corporation parts with certificates of
stock. It is still property of the corporation.

What is the rule on stock dividends?

Generally exempt from tax because it is
essentially the same interest in the
corporation.

EXCEPT: when the interest of the SHs after
distribution is essentially different from his
former interest

What is the rule on cash dividends?

Before 1998, cash dividends were exempt

For individuals:
o General rule: taxed – 10%
o NRA engaged in business – 20%
o NRA not engaged – 25%

For DCs or RFCs –
o Exempt from tax

For NRFCs –
o 15%, with reciprocity condition
o Condition: country of NRFC must
allow credit against tax due from
NRFC deemed paid in Philippines
equivalent to 15%
o If the country imposes no taxes on
dividends received by that NRFC
from Philippine companies, then
deem it as compliance with the
condition

o

17
Royalty income:

RC, NRC, RA, NRA engaged, DC, RFC –

20%

10% if royalty is from books, other literary
works, musical compositions

NRA not engaged –

25% unless lower tax under treaty

NRFC –

30% unless lower tax under treaty

Do “royalties” include consultancy and technical
services rendered incidental to distribution,
support, and use of computer systems?

Yes. The term royalty is broad enough to
include technical advice, assistance, or
services rendered in connection with
technical management or administration of
scientific, commercial, or industrial
undertakings.
o Rental income

What are the special rates of rental income for
NRFCs and NRAs?

Vessels –
o 4.5% if NRFC
o 25% if NRA

Aircraft, machineries, other equipment –
o 7.5% if NFC
o 25% if NRA

Other assets –
o 30% if NRFC
o 25% if NRA
7. Prizes and Awards
o Tax rates?

Individuals:

20% final tax

NRAs not engaged – 25%

Except:
o Prizes P10K or less – normal tax
o PCSO and Lotto winnings – exempt


o
o
Corporation, domestic or foreign

30% tax
o Requisites to exclude prizes and awards from gross
income?

1. Recipient was selected without action on his part to
enter the contest

2. Recipient was not required to render future
services as condition for receiving the award
o When do you exclude athlete’s prizes from gross income?

Local and international sports and tournaments held
here or abroad and sanctioned by their national sports
associations

The donor of said prize or award is also exempt from
donor’s tax
8. Income from whatever source
o X introduced Y to a business client, leading Y to profitable
ventures. To show appreciation, Y gifted X a brand new
car. X was being taxed, but X claimed that it was a gift. Is
the car taxable?

Yes. It was not given out of detached generosity but
as compensation for services rendered.
o What is the rule on forgiveness of indebtedness?

It is in effect a donation and NOT included in gross
income. This is if the creditor merely desired to
benefit the debtor in light of absence of consideration
for cancellation.
o What is the “tax benefit rule” in recovery of bad debts?

Recovery of bad debts previously allowed as
deduction in the preceding year/s  included as part
of gross income in the year of recovery, to the extent
of the income tax benefit of said deduction

So if despite the write-off of the bad debt, the income
tax due on the taxpayer did not get reduced, the
recovery of the bad debt the following year is not
treated as receipt of taxable income




Exclusions from gross income

What is the rationale for the exclusions?
18
1. Some involve mere return of capital
2. Some are covered by other internal revenue tax (ex. estate
or donor’s taxes)
o 3. Some expressly exempt under Constitution, treaty, or law.
Distinguish exclusions from tax credits and deductions.
o Exclusion is completely not included in gross income.
o A deduction is taken away from the gross income.
What items are just mere returns of capital?
o 1. Deducted cost of property from the gross selling price
o 2. Deduction from gross income of depreciation relating to
property used in trade or business before sold
o 3. Indemnities – such as life insurance paid to beneficiaries
o 4. Return of premiums paid
o 5. Damages, in general
What are the exclusions under the Constitution?
o 1. Income derived by government or subdivisions from the
exercise of official functions
o 2. Assets and revenues of NSNP private educational
institutions used A, D, E for private educational purposes
What are the exclusions under the Tax Code?
o 1. Proceeds of life insurance policies

Excluded from gross income of beneficiaries

What is the exception?

By agreement, the proceeds are held by the
insurer, which instead pays interest.

Does it matter w/n the beneficiary designated is
revocable or not?

No. That only matters in estate taxes

What if a corporation is the beneficiary, is it still
exempt?

Yes, the law doesn’t seem to distinguish
o 2. Amounts received under life insurance, endowment, or
annuity contracts

NOT exceeding the aggregate premiums paid

What if there is transfer of policy for valuable
consideration?

Only the amounts actually paid by the
transferee and other sums subsequently
paid by the transferee are exempt from tax
o
o
o
o

3. Value of property acquired by gift, bequest, devise, or
descent

These fall under estate or donor’s taxes
4. Amounts received through accident or health insurance

Damages are compensatory and are thus not taxable
(libel, ECSIF, breach of promise to marry, recovery by
corporation of insider’s profits, moral damages, etc.)
5. Income exempt under treaty

Ex. Income to the extent required by any treaty
binding upon the RP

Ex. Business profits from foreign corporation
organized under laws of treaty country from sources
within Philippines

Unless profits are from permanent
establishment of foreign corporation
created/deemed created in the Philippines

Ex. Capital gains from sale of shares of stock of
domestic corporation (generally has situs in the RP)
exempt if there exists no real property interest
6. Retirement benefits, pensions, gratuities

N.B. This is commonly asked

Requisites to claim retirement benefits (RA 4917):

1. At least 50 years old

2. Served for at least 10 years

3. Avail only once

What if a retirement plan provides other
requirements (ex. 25 years of service)?
o Follow the retirement plan.

Requirement exemption from taxes of separation
pay:

Separated due to causes not within his
control (death, disability, etc)

This is regardless of age

What about terminal leave pay?

Those paid pursuant to separation due to
death, sickness, or disability (ex.
accumulated leaves) are exempt

Also includes:

19
Benefits administered under US Veterans
Administration

SSS

GSIS

RA 1983: employee’s trusts are exempt from tax
o 7. Income derived by foreign government

Includes:

1. Financing institutions owned, controlled,
or refinanced by foreign governments

2. International or regional financial
institutions established by foreign
governments

Entity that got a loan from a bank owned by a foreign
government is NOT an agent of the foreign
government and cannot claim exclusion. [This is the
Eximbank of Japan case]
o 8. Income derived by public utilities or exercise of any essential
governmental function
o 9. 13th month pay and other benefits

MUST NOT exceed P30K (correlate with de minimis
benefits discussion)
o 10. Gains from sales, exchange, or retirement of
bonds/debentures/certificate of indebtedness with maturity of
MORE THAN 5 YEARS

Does the term “gains” include interest income?

No. It must be gains from sale, and not
passive income.

To do so would be inequitable because the
only ones exempt from tax on interest of long
term investments/deposits are RC, NRC,
RA, and NRA engaged in business. Any
corporation and NRAs not engaged in
business are subject to tax.
What are the exclusions under Special Law?
o 1. Coop Code: Transactions between an agricultural multipurpose cooperative registered with the Cooperative
Development Authority and its members

Within 10 years from registration
o
o
o
o
2. Urban Development Housing Act: National Housing
Authority exempt from all fees and charges of all kinds,
whether national or local

Also, private sector participating in socialized housing
exempted from income directly realized from
socialized housing projects and CGT on sale of raw
lands for use in socialized housing
3. PEZA Law: income tax holidays of 4 (non-pioneer) or 6
years (pioneer) for registered enterprises
4. Barangay Micro Business Enterprises: BMBEs exempt
from tax from operation of enterprise (these are those that
produce commodities with total business assets not including
land on which the business is on not exceeding 3M)
o
o
o
o
o
Deductions




o
Who can make deductions?
o 1. RC, NRC, RA

EXCEPT compensation earners – can only deduct
health and hospital insurance premiums
o 2. NRA doing business in the Philippines
o 3. DC
o 4. RFC
General rule on deductions:
o 1. Must be paid/incurred in connection with the taxpayer’s
business, trade, or profession
o 2. Deductions must be supported by adequate receipts or
invoices (except OSD)
What are the deductions relating to return of capital?
o SALES OF GOODS IN INVENTORY – a) sales returns, b)
discounts, c) allowances, d) cost of goods

“Cost of goods”: all costs to produce the thing and
bring it to its location
o SALES OF STOCK IN TRADE BY REAL ESTATE DEALER
OR DEALER IN SECURITIES – normally not allowed to deduct
amount representing return of capital through cost of sales
o SERVICES – a) sales returns, b) discounts, c) allowances

Entire gross receipts part of income
Enumerate the deductions itemized under the NIRC:
o
o
o
o
o
1. Ordinary and necessary trade, business, professional
expenses
2. Interest paid or incurred within taxable year on indebtedness
in connection with profession, trade, or business
3. Taxes paid or incurred within the taxable year in connection
with the profession
4. Ordinary losses, losses from casualty, theft or
embezzlement, net operating losses
5. Bad debts due to the taxpayer, actually ascertained to be
worthless and charged off within the taxable year, connected
with business, trade, or profession

Not between related parties
6. Depreciation or reasonable allowance for exhaustion, wear
and tear of property used in trade/business
7. Depletion or deduction from exhaustion of a non-replaceable
asset (usually natural resources)
8. Charitable and other contributions
9. Research and development expenditures treated as
deferred expenses paid or incurred by the taxpayer in
connection with trade, business, or profession

Not deducted as expenses

Chargeable to capital account but not chargeable to
property subject to depreciation/depletion
10. Contributions to pension trusts
11. Insurance premiums for health and hospitalization
12. Personal and additional exemptions
Specific deductions
Expenses

20
Requisites for deduction of expenses?
o 1. Ordinary and necessary expenses

Is bonus given to officers when they did not
render actual service covered?

No. Not ordinary and necessary expenses.

Is stock listing fee covered?

Yes. It is necessary to have stock listed and
sold.


o
o
o
When are contributions to government
deductible?

Only if there is a purely public purpose for it.

Ex. Gifts to families of policemen are not
deductible, but donation to PNP trust fund is.

Distinguish ordinary and necessary expenses
here from capital expenses:

A. Ordinary expenses – common to incur in
trade or business of the taxpayer

B. Capital expenses – incurred to improve
assets and benefits for more than 1 taxable
year

What is the character of suit expenses to protect
title of property?

Part of capital; therefore, not deductible as
ordinary expenses.
2. Paid or incurred during taxable year

When are expenses deemed pair or incurred,
depending on the methods of accounting used?

1. Accrual method – income accrues when
right to receive them becomes fixed and
there is an enforceable liability

2. Cash method – income is based on actual
receipt of cash payment
3. Directly attributable to conduct of business/profession

What kind of advertising falls under this
provision?

Advertising for current sales, but not for
future sales or just to build-up goodwill.

What about tickets and gifts?

Only if connected to business.

What about mixed business and pleasure trips?

SC has allowed 50% deduction, if extent is
not ascertainable.
4. Not bribes, kickbacks, other illegal consideration

N.B. This is asked pretty often in the Bar

Payment for police protection cannot be deducted –
illegal because it is their duty to protect anyway.



21
Specifically:
o 1. Bonuses and gross value of fringe benefits

When are bonuses reasonable?

Given as compensation for personal services
actually rendered and when added to the
salaries, are reasonable to actual work done
o 2. Travel expenses
o 3. Cost of materials
o 4. Rentals
o 5. Repairs and maintenance costs
o 6. Entertainment, amusement, recreation directly connected to
business/profession

Except:

Amusement contrary to law

What are representation expenses?

Entertainment, amusement, dining, etc. with
guests in connection with business

What is the rule on entertainment facilities?

Yacht, house, condominium, and the like
used to receive guests/employees fall under
this provision as long as use is not restricted
to certain officers/employees

If use is restricted, it would become fringe
benefit.
o 7. Under lease agreements
o 8. To hire professionals (audit, legal, etc.)
o 9. Political campaign expenses
o 10. Training expenses
Are preferred shares deductible ordinary expenses?
o No. Preferred shares are considered capital regardless of
conditions under which they were issued.
o Any dividends or interests paid thereon are not allowed as
deductions.
Must substantiate with evidence:
o 1. The amount of expense
o 2. The direct connection to business/profession
Special rules on private educational institutions:
o
o
1. May deduct expenditures otherwise considered as capital
outlays of depreciable assets incurred during taxable year (for
school facilities)
2. May deduct allowance for depreciation instead
Interest






S, A, D, siblings whether full or half blood
2. Individual and corporation, where individual owns more than
50% of outstanding stock
o 3. Two corporations more than 50% in value of both are owned
by one individual
o 4. Trustor and trustee
o 5. Two trustees if the trustor is the same for both
o 6. Trustee and cestui que trust
Option: to either treat interest expense incurred to acquire property for
trade as a deduction or a capital expenditure – IN FULL
o Example of deduction:

XYZ Corp. incurred a 1M loan to build a
manufacturing facility, with 8% interest rate. XYZ can
outright treat P80K as a deduction.
o Example of capitalization:

Same facts, XYZ Corp. can add the P80K to the cost
of the facility (it becomes P1080000) and then deduct
each amortization against this amount.
o Can the CIR force an option?

No. The taxpayer has full discretion to avail of either
option
o Are delinquency interests over taxes deductible?

Yes. “Debt” is defined as “unconditional and legally
enforceable claim for payment of money,” under
which TAXES can fit under (even if they are not debts
per se).
o What about interests incurred in payment for preferred
shares?
o
Requisites?
o 1. Valid and existing indebtedness incurred by the tax payer
o 2. Interest is legally due and stipulated in writing
o 3. Interest paid or incurred during taxable year
o 4. Connected with trade, business, profession
What is the general rule?
o Interest expenses incurred or paid during taxable year on
indebtedness connected with taxpayer’s profession or
business allowed as deduction
How much is deductible?
o Only 67% (100% reduced by 33%) of the interest subject to tax
is deductible (the deduction should be based on the amount of
the interest income, not the interest expense)

Cannot deduct interest expense without considering
interest income, else there would be undue
advantage (BIR Ruling 006-00)
o Except: interest paid on UNPAID BUSINESS-RELATED
TAXES are fully deductible
Exceptions:
o 1. If the interest is “paid” in advance through a
discount/otherwise (Ex. 1M loan with 8% interest: the amount
lent is just PHP 9,920,000)

BUT allow deduction when debt is paid by the
taxpayer

If in several amortizations, deduct the corresponding
interest for each amortization paid
o 2. If both taxpayer and the person paid are persons specified
under Sec. 36(B) [FAMILY, FIDUCIARY, COMMON INTEREST IN CORP]
o 3. If indebtedness incurred to finance petroleum exploration 
expressly disallowed by law to be deducted
What is the “36(B)” related parties enumeration?
o 1. Members of same family

Does not stem from a debt so it cannot be deducted as
interest. It is capital.
Taxes

22
General rule?
o Taxes incurred/paid within taxable year in connection with
profession/business can be deducted
o





But for NRA (engaged in business) or RFC – deductions only
to extent that they are income from Philippine sources

Except:
o 1. Philippine Income tax
o 2. Income taxes imposed by authority of foreign country –

When can these be deducted?

If taxpayer says that he does not want to
avail of tax credit for foreign taxes

In a case, the taxpayer did not signify intent
to NOT avail of tax credits – cannot claim
deductions for tax paid to foreign country
(CIR v Lednicky)
o 3. Estate and donor’s taxes
o 4. Special assessments on real property

Taxes against local benefits tending to increase value
of property assessed
o 5. (Electric energy consumption tax under B.P. 36)
o 6. VAT
What can be deducted?
o Professional tax, DST, excise tax, RPT, other percentage tax,
etc. which were incurred in connection with trade or profession
Credit against taxes imposed by foreign countries:
o Citizens/domestic corporations: taxes paid to foreign countries

Partnerships and estates: proportionate share of the
individual over the taxes, if his distributive share is
reported for taxation
o Alien/foreign corporation: no credits for foreign taxes
What is the limit on credit on taxes?
o Credit for foreign taxes cannot exceed proportion of the taxable
income from Philippine sources to entire taxable income
o N.B. One may choose to take credit in year the tax was
INCURRED, although if there is overpayment or deficiency in
actual payment, report the excess/deficiency to the CIR
Compare tax credits with tax deductions:
o Tax credit – applies to final tax payable

So if X has to pay 100K in taxes, and has P100K in
credits, he pays no taxes.
o Tax deductions – still have to apply final tax rate.
So if X is in the 25% tax bracket and he has to pay
100K in taxes (thus taxable for 400K), if has a P100K
deduction, he effectively deducts 25K in taxes and
only pays P75K.
Losses




23
What are the types of losses that can be deducted?
o 1. Losses incurred in trade or business for profit
o 2. Losses incurred in any transaction entered into for profit
although not connected with trade or business
o 3. Casualty losses from calamity or theft even if not connected
to trade or business

Report within 30-90 days of cause
Does the 36(B) related parties prohibition apply here too?
o Yes. So all in all, the related parties prohibition applies to
interest, losses, and bad debts.
Requisites for deductible losses?
o 1. Loss belongs to taxpayer
o 2. Sustained and charged off during taxable year
o 3. Evidenced by closed and completed transaction
o 4. Not compensated by insurance or indemnity
o 5. Not claimed as deduction for estate tax purposes for
individual taxpayers
o 6. If casualty loss, reported in time
What is the Net Operating Loss Carry-Over (NOLCO)?
o Generally: operating losses of business may be carried over as
deductions from gross income for the next 3 consecutive years
o Conditions:

1. Not previously offset as deduction from gross
income

2. Not exempt from income tax

3. No substantial change in ownership in the
subsequent year/s:

At least 75% of outstanding shares held by
same persons

At least 75% of paid up capital is held by
same persons

What if there is merger?





o
In general, one loses the privilege
Compare to BIR Ruling 30-00, where there
was no merger but a mere integration of
businesses

But if the surviving entity is the same
corporation given the privilege, the NOLCO
stays
o The NOLCO and OSD/MCIT are mutually exclusive.

With OSD – because claiming OSD takes out the
itemized deductions, which includes losses

With MCIT – because in MCIT, taxes are paid at a
lower rate already of taxable income, as opposed to
NOLCO where there is a net loss
o What if business involves mines other than oil or gas?

Losses in the first 10 years may be carried over for
next 5 years

All the losses carried over to 1st year of the 5 years

If there is excess loss, deducted in same manner over
next 4 years
o Who cannot claim NOLCO?

1. OBUs and FCDUs of domestic banking corps, and
International air carriers/shippers

2. Registered with BOI, PEZA, SBMA

3. Exempt entities from tax

N.B. These are entities already enjoying preferential
tax rates or exemptions
Foreign Exchange Losses
o When can For-ex losses be deducted?

When loss is actually sustained. Mere fluctuation in
for-ex rate is not yet deductible.
What are wash sales of stock/securities?
o When 30 days before or after the sale (61 days = 30 days
before, day of sale, 30 days after), the seller acquires
substantially identical stock/securities
o What is the rule?

1. Generally non-deductible

2. Unless the claim was made by a dealer in
stock/securities and in ordinary trade or business
Abandonment losses:

All accumulated exploration and development expenditures for
a petroleum operation/producing well, after abandonment can
be deducted

All un-amortized costs and un-depreciated equipment
costs directly used – may be claimed as deductions in
the year of abandonment
o But if the producing well is reentered, then it will be deemed an
income that could be amortized or depreciated
What is the tax treatment of securities becoming worthless?
o If ordinary assets, they cannot be deducted from gross income
because the loss is not realized.
o But if they are capital assets, the owner is considered to have
incurred capital loss – deductible to the extent of capital gains.

Except for bank/trust company engaged in business
of receipt of deposits
Bad debts





24
Requisites?
o 1. Existing indebtedness due to the taxpayer
o 2. Connected with trade, business, or profession
o 3. Not related parties (36(B))
o 4. Actually charged off the books of the taxpayer at the end of
the taxable year
o 5. Debt actually ascertained to be worthless and uncollectible
during taxable year
o 6. Debts are uncollectible despite diligent effort of the taxpayer
o 7. Reported as receivables in ITR of current and prior years
What if the amount is too small and recovery through court would
cost more than the debt?
o Deemed a bad debt.
What if the debtor is a bank or insurance company?
o The BSP or insurance commissioner, respectively, must
declare the entity closed or insolvent.
Can a partnership contribution be written off as a bad debt?
o No. It is not a debt.
What are some prerequisites showing diligent efforts to collect?
o Send statement of accounts
o Send collection letters



o Give account to lawyer for collection
o File collection case
What about conditional debts?
o Not bad debts, because they are not unconditionally collectible.
What is the “tax benefit rule”?
o Recovery of bad debts previously allowed as deduction in the
preceding year/s  included as part of gross income in the
year of recovery, to the extent of the income tax benefit of said
deduction

So if despite the write-off of the bad debt, the income
tax due on the taxpayer did not get reduced, the
recovery of the bad debt the following year is not
treated as receipt of taxable income
o
Depreciation





General rule: Allow deductions for exhaustion, wear and tear, or
obsolescence of property used in trade/business
o If life tenant, treat that person as absolute owner
o If in trust, then follow instrument for distribution (if none, basis
of trust income allowable to each)
What is the limit on depreciation?
o Cannot claim any depreciation beyond the acquisition cost of
the property, even when reassessed
o Cannot claim depreciation just because buildings are old and
out of style. Depreciation is by fact, not theory.
o Cannot claim depreciation from mere reduction in market
value. It must be due to exhaustion, wear and tear, or
obsolescence.
How does depreciation apply to intangible assets?
o These must have limited duration of use for the business.
o So the goodwill of the business, in general, is not depreciable
because it doesn’t have definite limited use duration.
Requisites?
o 1. Allowance for depreciation is reasonable
o 2. For property used in trade or business
o 3. Charged off during taxable year from books of account
Methods (assuming 5 years useful life):
o 1. Straight-line method:
o
o
25
A vehicle costs PHP 170,000 and it depreciates over
5 years. The estimated salvage value is PHP 20,000.

So depreciation is PHP 30,000/year.

Per year:

170K  -30K

140K  -30K

110K  -30K

80K  -30K

50K  -30K

20K = scrap value
2. Declining balance:

A vehicle costs PHP 100,000 and it depreciates over
5 years. The estimated salvage value is PHP 10,000.

Usual rate of depreciation is double the straight line
rate. (So straight-line is 20% since depreciation is 5
years, so rate is double = P40%).

Then deduct enough to reach the salvage value at the
last year.

Per year:

100K  x .0.4 = -40K

60K  x. 0.4 = -24K

36K  x 0.4 = -14.4K

21.6K  x 0.4 = -8.64K

12.96K  -2.96K = 10K (salvage value)
3. Sum-of-the-years-digit method:

A vehicle costs PHP100K and it depreciates over 5
years. The estimated salvage value is PHP10K. The
depreciable costs is this PHP 90K.

Add the digits (5 + 4 + 3 + 2 +1) = 15. This is the
denominator. Use the years as the numerator.

Per year:

100K  90K x 5/15 which is 1/3 = -30K

70K  90K x 4/15 = -24K

46K  90K x 3/15 which is 1/5 = -18K

28K  90K x 2/15 = -12K

16K  90K x 1/15 = -6K = 10K (scrap value)
Any other method


o
Additional requirements for deductibility for depreciation and
amortizations:
o ONLY allowed to deduct if shown that the tax required to be
deducted and withheld has been paid to the BIR
o Still deductible even if not withheld and paid, but only paid
during AUDIT if:

1. Payee reported the income and withholding agent
paid during audit (including penalties)

2. Payee did not report the income but withholding
agent paid during audit (including penalties)

3. Withholding agent erroneously under withheld, but
paid difference during audit
Check Taxation Law bar notes for notes on:
o Depreciation of petroleum industry property and mining
operations property
o Depletion of oil and gas wells
o Research and development



Pension trusts
Charitable and other contributions





3. Accredited NGOs

Must be a domestic NGO (BIR Ruling 19-01)
What is the definition of NGOs above?
o 1. Must be exclusively for science, education, research, health,
charity, etc.
o 2. No part of net income inures to benefit of private individual
o 3. When dissolved, must transfer property to similar
organization
o 4. Administrative expenses must not exceed 30% of total
expenses
When is it deductible?
o When the donation has been both perfected and
consummated.
What about donations to individuals (ex. a crippled child)?
o Not deductible because it has to be to organizations
What are partially deductible?
o 1. To government, exclusively for public purposes
o 2. To accredited domestic corporations/associations –
organized and operated exclusively for eleemosynary
purposes
o 3. To social welfare institutions
o 4. To non-accredited NGOs
o Rates:

Individual – deduction cannot exceed 10% of taxable
income

Corporation – deduction cannot exceed 5% of taxable
income
What are fully deductible (notwithstanding and even beyond the
limits imposed above)?
o 1. To government, exclusively to finance activities in education,
health, youth and sports development, human settlements,
science and culture, and economic development according to
NEDA National Priority plan
o 2. By treaty, to certain foreign institutions or IOs
Employer maintaining pension trusts for employees – allowed to be
deducted
As long as not previously deducted
Spread out in 10 years, starting from year first payment made
Premium payments on health and/or hospitalization insurance of individual
taxpayer



What is the limit?
o Limit: P2400 a year or P200 a month
o AS LONG AS gross income of family does not exceed P250K
a year
For oneself, including family
What is special about this deduction?
o It CAN BE CLAIMED even by compensation earners
Optional Standard Deduction:


26
Instead of deductions [except premium payments on health or
hospitalization]: can claim OSD
Who can claim?



o 1. Corporations, except NRFCs
o 2. Individuals except NRA (regardless of doing business)
How much can be deducted?
o 40% of gross income
Irrevocable for the year in which it was made, if chosen
Is there need for proof of actual expenses?
o No.
o
Non-deductible expenses

Personal and additional exemptions







Those who are taxed on their gross income, such as those
being taxed 15% on gross earnings as an employee of an
RAH, ROH, or OBU.
Individual (personal) – P50,000
Additional (per dependent) – P25,000
o Not exceeding 4 dependents
o N.B. whether the one claiming is married or not
o Claimed by just one spouse, if married

If separated, claimed by one with custody

By default, the husband claims it, unless he waives it
in favor of his wife (RR 2-98)
What is the status-at-the-end-of-the-year rule?
o If there is new dependent born, can claim that exemption
gained for the entire taxable year
o If there is death or a dependent attains majority age, the
exemption can still be claimed for the entire taxable year
For NRA doing business in Philippines:
o At exemption rate allowed by his country to non-resident
Filipinos, not exceeding what is allowed here (P50,000)
o But cannot claim 25K for dependents

N.B. Domondon’s MCQ says they can claim
additional exemptions
Definition of dependent:
o 1. Not more than 21 years, unmarried, and not gainfully
employed
o 2. OR regardless of age, incapable of self-support because of
mental/physical defect
What is RA 9504’s effect on minimum wage earners?
o Their compensation income is exempt from income tax
Which residents are not allowed to claim exemptions?


27
In general:
o 1. Personal, living, family expenses
o 2. Capital expenditures

Amount paid for new buildings or permanent
improvements or betterments to increase property
value

N.B. as opposed to ordinary and necessary
expenses, which are deductible
o 3. Major repairs

Amount to restore property or to make good its
exhaustion for which an allowance has been made
o 4. Premiums paid on any life insurance policy for
officer/employee, if taxpayer is directly or indirectly a
beneficiary of this same policy

N.B. the usual situation here is a corporation taking a
life insurance policy over a key employee (Keyman
Insurance) and designates itself as beneficiary
o 5. Losses from wash sales of stock or securities
o 6. Losses from sales or exchange of property (because these
are not the usual “losses” covered by the provision)
In sales and exchanges of property:
o “36(B)” enumeration of related interests
Under RR2:
o Insurance payments on life and house
o Rented property for residential purposes, but received clients
there – rent is not deductible

Except if part of one’s own house was used for
business
o Allowance by parent to children
o Alimony/allowance in separation agreement
o Cost of defending property, attorney’s fees, administrator’s
fees
o
o
o
Amount between bondholders and shareholders of corporation
for reorganization (not usual purpose)
Architect’s fees
Margin fees imposed by Central Bank (Esso Standard v CIR)

Exempt corporations



What is the rule on GOCCs?
o In general, even GOCCs are subject to tax.
o Exceptions:

1. PCSO

2. GSIS

3. SSS

4. Philippine Health Insurance Corporation (PHIC)
Which corporations are expressly exempt from tax?
1. Labor, agricultural, horticultural organization NOT for profit
2. Mutual savings bank/cooperative bank with no capital stock
represented by shares, and NOT for profit
3. Beneficiary society for exclusive benefit of members (ex. fraternal
organization, mutual aid association)
4. Cemetery company for exclusive benefit of members
5. Non-stock corporation for EXCLUSIVELY for religion, charitable,
scientific, etc purposes – where NONE of its income inures to
benefit of members
6. Business league not for profit – where NONE of its income inures to
benefit of members
7. Civic league/organization NOT for profit
8. Nonstock and nonprofit educational institution
9. Government educational institution
10. Farmers’, typhoon/fire insurance, ditch/irrigation company, etc –
income consist solely of dues for sole purpose of meeting its
expenses
11. Farmers’, fruit growers’, etc associations operated as sales agent –
for purpose of marketing members’ products and turning back to
them proceeds of sales (less necessary selling expenses)



Glenn’s assessment – GENERAL RULES when corporations exempt
from tax:
o If NOT for profit
28
o For exclusive benefit of members
o None of income insures to benefit of members
BUT what if any of their activities are for profit?
o Subject to TAX
o Regardless of purpose disposition made
o Is payment of salaries “distribution of profits”?

No. Payment of modest salaries as necessary
expense of school is NOT considered as distributing
profits. It is a necessary expense.

Likewise, an isolated sale of real property used to
construct another building for the offices of the NSNP
organization is not taxable because it is not for profit.
(YMCA case) Are NSNP institutions exempt from income tax for
income from real property?
o No. They are only exempt on activities not conducted for
profit; so properties are not exempt. Also:

Interest from bank deposits/deposit substitutes – 20%

Interest from FCDUs – 7.5%

Wait, I thought that the constitution exempts
religious, charitable, and social welfare
organizations from taxes? (IMPT)

This exemption under the Constitution is only
for real property taxes.

It does not exempt them from income taxes.
This is where you distinguish if the income
was from religious/charitable/social welfare
activities or activities for profit.
Compare with NSNP educational institutions?
o The constitutional exempts from income tax all revenues and
assets A, D, E used for educational purposes.
o NOTE: this exemption in the Constitution relates to the
use/disposition of the income, not from the source (unlike
above)
Compare with proprietary educational institutional and nonprofit
hospitals?
o Preferential rate of 10% of taxable income, except those falling
under passive income
o When does it lose the privilege of the 10% tax rate?


When more than 50% of its gross income comes from
unrelated trade/business/activities

It becomes subject to normal 30% tax rate
o Also discussed in corporate income tax
Which individuals are exempt from income tax?
o 1. Senior citizens
o 2. Minimum wage earners
o 3. Exemptions under international agreements
Capital
Gains
(final
tax,
except
for
NRA[N
E])
Passiv
e
income
(final
tax,
except
for
NRA[N
E])
RC
NRC
RA
NRA(E)
Stocks1
<= 100K –
5%
>100K –
10%
Stocks
<= 100K –
5%
>100K –
10%
Stocks
<= 100K –
5%
>100K –
10%
Stocks
<= 100K –
5%
>100K – 10%
Real
property2
On GSP
or FMV
(higher) –
6%
Real
property
On GSP
or FMV
(higher) –
6%
Real
property
On GSP
or FMV
(higher) –
6%
Real property
On GSP or
FMV (higher)
– 6%
Interest
under
EFCDS –
7.5%
Interest
under
EFCDS –
exempt
Interest
under
EFCDS –
7.5%
Interest
under
EFCDS –
exempt
Royalties
from
Royalties
from
Royalties
from
Royalties
from books,
NRA(N
E)
Stocks
<=
100K –
5%
>100K
– 10%
Real
propert
y
On
GSP or
FMV
(higher)
– 6%
books,
literary
works,
musical
compositio
ns – 10%
Interest on
any
currency
bank
deposit,
deposit
substitutes
, trust
funds,
etc.;
Royalties
other than
above;
Prize
exceeding
10K;
Other
winnings,
except
PCSO or
Lotto –
20%
Dividends3
– 10%
books,
literary
works,
musical
compositio
ns – 10%
Interest on
any
currency
bank
deposit,
deposit
substitutes
, trust
funds,
etc.;
Royalties
other than
above;
Prize
exceeding
10K;
Other
winnings,
except
PCSO or
Lotto –
20%
Dividends
– 10%
books,
literary
works,
musical
compositio
ns – 10%
Interest on
any
currency
bank
deposit,
deposit
substitutes
, trust
funds,
etc.;
Royalties
other than
above;
Prize
exceeding
10K;
Other
winnings,
except
PCSO or
Lotto –
20%
Dividends
– 10%
Interest on
long term
deposit or
investment
Interest on
long term
deposit or
investment
Interest on
long term
deposit or
investment
literary
works,
musical
compositions
– 10%
Interest on
any currency
bank deposit,
deposit
substitutes,
trust funds,
etc.;
Royalties
other than
above;
Prize
exceeding
10K;
Other
winnings,
except PCSO
or Lotto –
20%
Dividends –
20%
Gross
income within
Phil. from
cinematograp
hic films and
similar works
– 25%
Interest on
long term
deposit or
investment in
1
From domestic corp.; not traded through stock exchange; held as capital
asset
2
In the Philippines; held as capital asset
3
Cash dividends, from domestic corp., joint stock company, insurance or
mutual fund, ROH or MNC, partnership except GPP, JV taxable as corp.
29
Other
income
in banks
(mature 5
years or
more) –
exempt
Taxable
income4
within and
outside
Philippines
– 5% to
32%
in banks
(mature 5
years or
more) –
exempt
Taxable
income
within and
outside
Philippines
– 5% to
32%
in banks
(mature 5
years or
more) –
exempt
Taxable
income
within and
outside
Philippines
– 5% to
32%
banks
(mature 5
years or
more) –
exempt
Taxable
income within
and outside
Philippines –
5% to 32%
o
o

Gross
income
– 25%
Taxation of RCs, NRCs, and RAs





What is subject to graduated rates under 24(A)?
o 1. Compensation income
o 2. Business, professional, and trade income
o 3. Capital gains not subject to final tax
o 4. Passive income not subject to final tax
o 5. Other income

Benefits not exempt

Director’s fees

Fringe benefits not subject to FBT
What is the rule for 24(A) income of married individuals?
o Compute separately.
o If certain income cannot be attributed, it is divided equally.
What is excluded?
o 1. Fringe benefit subject to tax (the ER pays)
o 2. De minimis benefits
o 3. Benefits (13th month pay, etc.) specifically excluded from
taxable income
What are the allowed deductions from above?
o 1. Personal and additional exemptions [50K/25K]
o 2. Premium payments on health and hospitalization insurance
What is the rule on statutory minimum wage earners?

4
(Gross income from w/n or w/o) – (allowable deductions and personal
exemptions) = taxable income
30
Not subject to income tax.
Even the holiday pay, OT pay, night shift differential, hazard
pay are exempt, if one is a MW earner.
Rates for passive income:
o A. Interest income:

1. From bank deposits, deposit substitutes, trust funds
– 20%

2. Foreign currency deposit system – 7.5%

This rate only applies to RCs and RAs
(resident individuals)

BUT if by OFW – exempt

If in bank account of OFW and spouse –
50% subject to 7.5%, 50% exempt

3. Long term deposits (5 years maturity or more) –
exempt. But if there is pre-termination:

4 years to less than 5 years – 5%

3 years to less than 4 years – 12%

Less than 3 years – 20%
o B. Royalties:

1. Books, literary works, musical compositions – 10%

2. From other sources – 20%
o C. Prizes:

1. Exceeding P10,000 – 20%

P10,000 and under – compute with 24(A)

2. Other winnings – 20%

Sweepstakes and Lotto winnings – exempt
o D. Cash or property dividends (corp./partnership) – 10%
Rates for capital gains:
o A. Shares of stock NOT listed in stock exchange

1. Net capital gain in excess of P100,000 – 10%

2. Net capital gain P100,000 or less – 5%
o B. Shares of stock listed and traded in stock exchange –

0.25% of selling price
o C. Real property held as capital asset – 6%

Tax base:

On FMV

or gross selling price, whichever is higher

What if it is sold to the government/GOCC?

May include in normal income tax rate
Why is it “presumed” capital gains tax?

Because it doesn’t matter w/n there was
actual gain or loss. What is taxed is the
transaction.
D. Real property held as ordinary asset

Habitually engaged in real estate business

Sale price less than P500,000 – 1.5%

P500,000 – P2,000,000 – 3%

P2,000,000 and above – 5%

Not habitually engaged in real estate business –

7.5%
Sale of principal residence – exempt IF:

Proceeds fully utilized within 18 months

To acquire a new principal residence

Availed only once per 10 years

What is the procedure for CGT under this
section? CGT deposited in escrow first with Auth.
Agent Bank, and released when there is full utilization


o
o
o
Taxation of Domestic Corporations

Taxation of NRAs





3. Aliens employed by foreign petroleum service
contractors and subcontractors (foreigners but
assigned in Philippines)
Privileged tax rates:

15% of gross income

Same tax treatment applied to Filipinos employed in
same position as those above

But any other income by these individuals from
sources within the Philippines subject to regular
income tax provisions
Engaged in business:
o Same rates as RC/NRC/RA except:

Cash and property dividends are taxed 20%, not 10%

Gross income from cinematographic films and other
works – 25%
Not engaged in business:
o All income taken together taxed at rate of 25%
o But what is still subject to FWT?

Capital gains from sales of real property

Capital gains from sales of shares of stock
Special aliens
o Three classes:

1. Aliens employed by RAHs and ROHs of MNCs

2. Aliens employed by offshore banking units
established in the Philippines
31
Includes: corporations, joint stock companies, joint accounts,
associations, insurance companies, mutual fund companies, ROHs of
MNCs, joint accounts
o Does not include:

General professional partnerships

JV for construction projects or for energy operations
pursuant to government service contract
What is the regular tax rate?
o 30% of taxable income, worldwide
What is the Minimum Corporate Income Tax (MCIT)?
o Rules:

Beginning on the 4th taxable year

2% of GROSS income

Applies if it is larger than the 30% taxable income
o Credit of excess minimum tax

What is this amount?

MCIT minus the 30% taxable income

Can be carried over for the 3 next succeeding years
o When the MCIT is not imposed, upon recommendation of
Secretary of Finance:

1. Losses on account of prolonged labor dispute

2. Losses because of force majeure

3. Losses because of legitimate business reverses
o Which corporations are exempt from MCIT?

1. RFC engaged as international carrier – 2.5% of
Gross Phil. Billings






2. RFC engaged as OBU
3. Interest income from foreign currency loans to
Filipinos – 10%

4. RFC as ROH – 10% of taxable income

Firms under special tax regime, ex. PEZA
What are the allowable deductions for DCs?
o 1. Itemized deductions
o 2. OSD
Passive Income Tax Rates:
o Same rates as usual, except:

1. ALL types of royalties – 20%

2. Dividends from another domestic corporation –
exempt
o Income from foreign currency transactions by a depository
bank under the expanded foreign currency deposit system:

1. With nonresidents, OBUs in Philippines, local
commercial banks, authorized branches of foreign
banks, other depositary banks in FCD system –
exempt

Except net income from transactions, which
the Sec. of Finance may subject to regular
income tax (upon M.B. recommendation)

2. But interest income from foreign currency loans to
residents (other than OBUs in Philippines and other
depositary banks in FCD system) – 10%
Rates for capital gains:
o 1. Same rates for sales of lands/buildings
o 2. Same rates for sales of shares of stock not traded in Stock
Exchange5


o
5
Sales of shares of stock under RR 6-2008

Who are liable: individual and corporate taxpayers, both citizen and
alien

Who are NOT liable:

Gains by dealers in securities

Gains to extent deposited in NEW SHARES OF STOCK
in banks, financial intermediaries, and corporations that
primarily hold equities in banks

To determine tax base:

Listed and traded in SE: actual selling price
What is the preferential rate for proprietary educational institutions
and nonprofit hospitals?
o 10% of taxable income

Except those that fall under passive income (usual
final tax rates)
o When are they subject to regular corporate income tax
rates?

If gross income from unrelated trade, business, or
activities exceeds 50% of the gross income
CONTRAST with comparable institutions (RMC 76-03):
o 1. Non-stock and non-profit institutions still liable for taxes for:

Income from real property

Activities done for profit (regardless of disposition)

Interest from bank deposits/deposit substitutes (20%)
and foreign currency deposits (7.5%) – what matters
is the source

Will be withholding agents for employee’s
compensation income subject to withholding tax
o 2. Non-stock, non-profit educational institutions:

Revenues and assets ACTUALLY, DIRECTLY, and
EXCLUSIVELY used for educational purposes (Art
XIV, Sec 4 of the Constitution) – what matters is the
disposition/use
o 3. Private educational institutions

Exempt from VAT as long as accredited by DECS, etc

Taxable for activity not related to educational
purposes

Unlike non-stock non-profit institutions, EXEMPT from
20%/7.5% tax on deposits – as long as it is actually
used for educational purposes
What is the treatment of GOCCs under the law?
o General rule: still subject to 30% tax rate
o Except:

GSIS


32
Listed but not traded through SE: highest closing price on
sale date
Non listed and not traded through SE: book value nearest
the valuation date



Tax of Non-resident Foreign Corporations (NRFCs)
SSS
PHIC (Phil. Health Insurance Corporation)
PCSO

Tax of Resident Foreign Corporations (RFCs)




General rule:
o 30% on taxable income from Philippine sources
o MCIT also applies
Tax on other income:
o Deposits – same (20%, 7.5%, exempt for long term)
o Interest income by depositary bank in FCD system:

Exempt from nonresidents, etc.

10% from residents
o Capital gains from sales of shares of stock – same (5%, 10%)
o Inter-corporate dividends – same (exempt)
Special corporations (excluded by syllabus)6



6
International carrier
o
2.5% tax on GROSS PHILIPPINE BILLINGS (GPB)

GPB is gross revenue from carriage of persons, excess baggage,
cargo and mail from Philippines

Return trip not included in GPB

In a CONTINUOUS and UNINTERRUPTED FLIGHT

Wherever the ticket was issued

Special rules:

Still GPB even if ticket endorsed to another carrier, as
long as boarded in Philippines

For transfer flights, only the aliquot portion from
Philippines to transit point is counted

Includes international shipping
o
For international carriers with no flights in and out of the Philippines (offline
flights), BUT with resident ticketing agents, they are considered RESIDENT
FOREIGN CORPORATIONS taxable with 30% rate (Air New Zealand v CIR,
CIR v BOAC)

Because 2.5% on GPB is mere excise tax
Offshore Banking Units (OBUs)
o
Foreign currency transactions with nonresidents, other OBUs, local commercial
banks, and authorized branches of foreign banks – exempt

Fees, commissions, and other necessarily included charges in foreign
currency transactions – also exempt (RR 14-77)
o
Foreign currency transactions with residents (non OBUs/local commercial banks,
and authorized branches of foreign banks) – 10% final tax
o
Rules on interest income from Foreign Currency Deposit:



33
General rule:
o 30% tax from gross income received from all Philippine
sources

Except reinsurance premiums
What are the special tax rates?
o 1. Interest on foreign loans – 20%
o 2. Inter-corporate dividends (from domestic corporation) – 15%

CONDITION: country of NRFC must allow credit
against tax due from NRFC deemed paid in
Philippines equivalent to 15%

If the foreign country imposes no taxes on dividends
received by that foreign corporation from Philippine
companies, then
o 3. Capital gains from sales of shares of stock not traded in
Stock Exchange –

5%/10% rule
Most favored nation clause
o Accord same privileges as that enjoyed by the nation with the
lowest tax rate in bilateral agreements
o BUT the two rates/agreements must be similar or under the
same circumstances, such as similar tax credit provisions
When is a corporation taxable as a NRFC?

Income by residents (RC/RA/RC/RFC) – 7.5% withholding tax

Income by nonresidents (NRC/NRA)– exempt
Branch Profit Remittance Tax
o
15% tax on profit earmarked for remittance without any deduction for the tax
component thereof
o
Withheld
o
Not included:

Interests, dividends, rents, royalties, remuneration, wages, etc.,
capital gains, income received by foreign corporation from Philippines
sources NOT treated as branch profits

UNLESS these are connected with conduct of trade/business in
Philippines
RAH/ROH
o
RAH – branch established which acts as supervisory, communications, and
coordinating center for affiliates, subsidiaries, branches – exempt from tax
o
ROH – branch for general administration, planning, sourcing and procurement of
raw materials, finance advice (not engaged in actual transactions of sale, etc.) –
10% on taxable income
o

o
When the foreign corporation transacts independently from its
branch, ignore the principal-agent relationship. The
transaction becomes one of the foreign corporation, not the
branch.
o There must be continuity of business transactions to be
considered as “doing business in the Philippines”
Special NRFCs (excluded by syllabus)7


Improperly Accumulated Earnings of Corporations (IAE tax)



What is the rate?
o 10% of improperly accumulated amount
When does it apply?
o Corporations formed or availed for purpose of avoiding income
tax with respect to SHs or SHs of any other corporation, by
permitting earnings and profits to accumulate instead of being
divided/distributed
Exceptions:
o 1. Publicly-held corporations (So, only close corporations are
liable for IAET)

Where 50% of stock is owned by 20 or less
individuals = close corporation (BIR Ruling 25-02)
o (Those that require a lot of accumulated earnings)
o 2. Banks/other financial intermediaries
o 3. Insurance companies
o (Non-corporations)
o 4.Taxable partnerships
o 5. General professional partnerships
o 6. Non-taxable joint ventures
o (Those with special privileges/rates)


7. Enterprises registered with PEZA/BCDA/special economic
zones
When is there prima facie evidence of IAE?
o When the company is a mere holding or investment company

Merely subdividing lots and selling them for profits
without developing subdivisions is act of a HOLDING
company, thus there is prima facie evidence of IAET.
o Accumulation of more than 100% of paid-up capital is usually
prima-facie evidence (RR 2-01)
When is there IAET?
o Not mere accumulation per se, but the purpose behind it.
o To determine purpose: fact that earnings accumulated beyond
reasonable purpose

But can be refuted by clear preponderance of
evidence in favor of the company
How to compute IAET?
o Taxable income adjusted by:

1. Income exempt from tax

2. Income excluded from gross income

3. Income subject to final tax

4. Amount of NOLCO deducted
o Reduced by the sum of:

1. Dividends actually/constructively paid

2. Income tax paid for the taxable year
What does “Reasonable needs of business” as an exception
mean?
o Includes reasonably anticipated needs of business
o Generally means immediate needs. Investment of funds in
stocks/securities of unrelated business usually indicates
beyond reasonable need. Intention during the accumulation
governs, not the post hoc justification given.
Taxation of Estates and Trusts




Cinematographic film owner, lessor, distributor – 25% of gross income from Phil. sources
Nonresident owner/lessor of vessels chartered by Filipinos – 4.5% of gross rentals, lease,
charter fees to Filipino citizens
Nonresident owner/lessor of aircraft, machineries, other equipment – 7.5% of gross
rentals/fees
7

34
What is the application of these taxes to estates and trusts?
o The rates for individuals apply.
What are included as taxable estates and trusts?
o




Withholding taxes
1. Income accumulated in trust for benefit of unborn or
unascertained person, persons with contingent interests, or
income for future distribution
o 2. Income to be distributed by trustee to beneficiaries or by
guardian to an infant
o 3. Income of estates of deceased persons during
administration of estate
o 4. Income which, under trustee’s discretion, is to be distributed
to beneficiaries or accumulated
What is the exception in the coverage?
o Employee’s trust funds where ER/EEs make contributions
o When it is distributed to the EE, is it taxable as income?

No, unless it exceeds the amount contributed by the
EE.
Who pays?
o The trustee.
o When does the trustor pay, as an exception?

1. Revocable trusts

2. Trust is for benefit of the trustor

Part of income is distributable to the trustor,
in his discretion, the discretion of a
disinterested party, or jointly
o What if there are two or more trusts where the trustor and
the beneficiary is the same?

The income can be consolidated
What is the taxable income?
o Same rules and manner as individuals.
o But allow deductions for amounts which are distributed
(actually or constructively) to beneficiaries.
o It is the beneficiary that gets credited with income and is
taxable for it.
o What if the trust is administered in a foreign country?

No deductions allowed.

Although the distributions to the beneficiaries are not
reported as income.
What is the exemption?
o 50K, same as individuals (or 20K, if the perspective is that the
increased exemption rates did not affect trusts)






35
What is the concept of withholding taxes?
o Method of collecting income tax, and not a tax in itself
o The payer acts as an agent of government for the collection of
tax and to ensure its payment
What kind of income is the only kind of income NEVER subject to
FWT?
o Business income. This is because compensation income can
also be subjected to WTs, as with passive, interest, and capital
gains.
What are the kinds of withholding taxes?
o 1. Final withholding tax
o 2. Creditable withholding tax
When is it FWT and when is CWT?
o FWT – 57(A)

Ex. interest income from deposits, royalties, etc.
o CWT – 57(B)

Ex. compensation income, rental income, etc.
What is FWT?
o The amount of income tax withheld by the withholding agent is
constituted as a full and final payment of income tax.

If the agent fails, he has to pay for the income tax.

The payee is not required to file an income tax return
or directly pay the tax.
o Called “withholding taxes-at-source” – particularly Important
where the payee is an NRA or NRFC

Ex. When an NRFC earns lease income from, say,
rentals, the payor must withhold the tax upon paying
the NRFC. The government cannot require the NRFC
to file an ITR, after all.
What is CWT?
o The taxes withheld on the income payment are intended to
equal or approximate the tax due of the payee.
o The payee is still required to file an ITR to report the income,
and pay the difference between the tax withheld and the tax
due.



o
Ex. Rental income: lessee is the agent; he pays to the
lessor P95K and withholds P5K. The lessor reports
P100K income

Then it can be deducted from global income
o How CWT comes in to determine income tax:

Gross income – deductions – exemptions = net
taxable income * applicable tax rate = IT due – CWT
= balance
o Is withheld salary from compensation FWT or CWT?

It is CWT, although usually tax due and tax withheld
are the same so you don’t have to pay anymore
Who are constituted as WH agents?
o 1. Any juridical person w/n engaged in business
o 2. An individual, for payments made in connection with trade or
business.

But in taxable sale/exchange/transfer of real property,
individual buyers w/n engaged in business are WHAs
o 3. All government offices, including GOCCs, and LGUs
What is the rule on withholding of wages?
o Every ER making payment of wages must deduct and withhold
the tax payable by the recipient.

Except, of course, minimum wage earners.
o What if the ER fails to withhold and pay and the tax is paid
by the recipient?

The liability stays even if the EE subsequently pays
for the tax. The payment by the EE of the tax does
not relieve the ER from liability for penalties and
additions to the tax, due to failure to deduct and
withhold.

The ER will not be relieved of his liability for payment
of the tax required to be withheld unless he can show
that the tax has been paid by the EE.
o What is the rule on refunds or credits?

Any amount deducted and withheld is a tax credit by
the EE against his 24(A) income.

Any excess withheld over the tax due is returned or
credited within 3 months from April 15.

It earns interest of 6% per annum if held
beyond 3 months.


36
What is the year-end adjustment?

Before end of calendar year but before last payday of
the year: check difference between taxes due and the
taxes withheld.

Any deficiency is withheld from the EE’s last salary.

Any excess is refunded to the employee not later than
January 25 the next year.
o What if the ER fails to withhold and remit the proper
amount of tax?

The tax will be collected from the ER, along with
penalties/additions
o What if the EE fails to give withholding exemption
certificate (showing personal/additional exemptions) or
puts inaccurate information?

The tax deficiency will be claimed from the EE, along
with penalties/additions
o What if the ER ends up withholding too much because the
EE failed to file the proper exemption certificate or a false
one?

The excess tax will not be refunded; forfeited in favor
of the government
What are the three types of creditable WH taxes?
o 1. Expanded WHT on certain income payments by private
persons to resident taxpayers
o 2. WHT on compensation income for services done in the
Philippines
o 3. WHT on money payments of the government
What are the requisites for expanded WHT?
o 1. Expense is paid or payable by the taxpayer which is income
to the recipient thereof subject to income tax
o 2. Income is fixed or determinable at time of payment
o 3. Income is one of the income payments listed in the
regulations subject to WHT
o 4. Income recipient is resident of Philippines subject to income
tax

Note: if the recipient of the income is a non-resident
taxpayer, then he is subject to final withholding tax,
not creditable WHT
o 5. Payor-withholding agent is also a resident of the Philippines





o
Regardless of status or character of the payor-agent
(corporation, association, tax-exempt, etc.)
What is the rule on withholding of VAT?
o The government or any of its subdivisions or GOCCs, before
making payment due to purchase of goods/services subject to
VAT –

Deducts and withholds 5% of the gross payment

For payment for lease/use of property of nonresident
owners, 10%
o The government person in charge of payment is the
withholding agent.
Whose income earnings are not subject to WHT?
o 1. National government and subdivisions, including GOCCs
o 2. Persons enjoying exemption from payment of income taxes
Who files return and pays tax withheld?
o 1. If it is FWT, the payor-agent files the return and pays the tax.
o 2. If it is CWT, the payor-agent pays the tax, but the income
recipient-payee still files the return.
What is the treatment of Fringe Benefit Tax?
o 32% of the grossed-up monetary value of the fringe benefit
o Who pays?

The ER, paid in the same manner as other items
subject to WHT
o What is the grossed-up monetary value?

Divide actual monetary value of the FB by 68%.

But for individuals with special rates (NRA not
engaged, RAH/ROH EE, OBU EE, petroleum service
EE) – Divide actual monetary value of the FB by
(100% - tax rate). The rate of the FBT is also equal to
the special tax rate of these individuals.


It is an excise or privilege tax on the transfer of the property
from the dead to the living
What is the tax formula?
o Gross estate – deductions = net taxable estate
Is the approval of the probate court needed prior to collection of
estate taxes?
o No. The probate court only determines the claims against the
property right or interest of the heirs or legatees/devisees, and
not the transfer of the estate.
Gross estate:

Overview:
Inclusions
Exclusions
Decedent’s
interest
(actual
and interest in
property
possessed)
Donations mortis
causa
Merger
of
usufruct in naked
owner
Revocable
transfers
Property passing
under
general
power
of
appointment
Life
insurance
proceeds
ESTATE TAX

Prior interests
Transfers
insufficient
consideration
What is the nature and object of estate tax?
o Laid neither on the property, nor the transferor, or the
transferee
for
Transfer from first
fiduciary heir to
CQT
Transfer from first
beneficiary
to
another
beneficiary
pursuant to will
Bequests
to
charitable
institutions
(qualified)
Under
special
laws (GSIS, SSS,
war, veterans)
Ordinary
deductions
Funeral expenses
Special
deductions
Family
home
Judicial expenses
of settlement
Standard
deduction
Claims
estate
Medical
expenses
Claims of estate
against insolvent
persons
Unpaid mortgages
or
indebtedness
on property
Losses
Transfers
for
public use
Vanishing
deduction
37
against
Retirement
benefits of
private EE

What is covered by “decedent’s interest”?
o A. Property owned
o B. Interest in the property possessed

Undistributed but dividends already declared

Partnership profits

Proceeds of life insurance policy payable to revocable
beneficiary

Right of usufruct
3.
d.
Properties in estate
1.
2.
RC/NRC/RA –
a. Real property, worldwide
b. Personal (tangible or intangible) property, worldwide
i. NOTE: for Bar questions, the usual situation is a
resident alien, and whether his properties abroad are
included in his gross estate (Yes)
ii. Whereas, for income tax, only RCs have worldwide
coverage
NRA –
a. real estate in Philippines,
b. tangible personal property in Philippines,
c. intangible personal property with situs in the Philippines:
i. Usual rule:
1. “Mobilia sequuntur personam” – intangible
personal
properties
have
situs
at
domicile/residence of the owner
ii. Specifically provided:
1. Franchise which must be exercised in
Philippines
2. Shares, obligations, or bonds:
a. Issued by corporation/partnership
organized or constituted in Phil
b. issued by foreign corporation 85%
of business is located in Phil
c. Issued by any foreign corporation, if
the S/O/Bs have acquired business
situs in Phil.
Shares or rights in any partnership,
business, or industry in Phil.
Exception to intangible personal property – reciprocity:
i. Decedent at time of death was RC of foreign country
which does not impose transfer/death taxes of any
character to intangible personal property of Phil NRCs
ii. Or of country which allows similar exemption from
transfer or death taxes for intangible personal
property of Phil NRCs
iii. Case doctrine: if Federal State, and there is an
exception in from state taxes, but no federal taxes (or
vice versa) – then there is no exemption from all
taxes, and thus no reciprocity.
Properties also INCLUDED in the estate
1.
2.
38
Transfer in contemplation of death (Donations Mortis Causa)
a. What are the requisites of DMC?
i. Death must be the controlling motive
1. Ex. Read obituary of friend in newspaper –
then transferred all properties to only son
2. Ex. Poor state of health or at advanced age
– then transferred all properties to an heir
3. Ex. made will and transferred properties on
the same day or the two things were done
close to each other
ii. In the form of a will
iii. Donor has no intention to relinquish the thing as long
as he survives
b. N.B. if there is acceptance, it is inter vivos because a donation
mortis causa need not be accepted during the donor’s lifetime
Revocable transfer
a. What is a revocable transfer?
i. Transfer where terms of enjoyment of the property
may be altered, amended, revoked, or terminated by
the decedent (alone or conjunction with another
person)
b. Must he actually exercise the power?
i. No. As long as he has the power to revoke
c.
3.
4.
5.
Reason: because the disposition is not deemed to have been
complete, so the property is still credited to the decedent’s
estate
Transfer under general power of appointment
a. What is a General power of appointment?
i. Where the donee-decedent was given the power to
designate ANYONE as the successor to the property
of a prior decedent
1. Ex. P Q can transfer land to anyone  R.
Thus, include land in Q’s estate when he
dies.
2. Rationale: this is akin to full ownership by Q
(donee-decedent)
ii. Exception?
1. When the transfer was a bona fide sale for
adequate and full consideration
b. Contra: it is special power of appointment where the doneedecedent can only appoint among a restricted class of persons
i. Ex. P  Q can transfer land only to his children  R,
who is a child. Thus, exclude land in Q’s estate when
he dies
Proceeds of life insurance if:
a. Beneficiary is the estate of the decedent, his executor, or
administrator
i. Whether revocable or irrevocable
b. Beneficiary is a third person
i. But the designation must be revocable
ii. If there is no express designation of irrevocability, it is
presumed revocable
c. Contra: what are not included in the estate?
i. Accident insurance proceeds or proceeds to survivors
or deceased military personnel
ii. Proceeds of group insurance policy by a company for
its employees
iii. Benefits accruing under SSS law
Transfers for insufficient consideration
a. If the transfer was a bona fide sale for full consideration, then
no value included in estate
b.
c.
If less than adequate consideration, include in gross estate the
excess of the FMV at time of death over consideration
If no consideration, include FMV of property at time of death in
gross estate
FMV at time of
transfer
Consideration
received
FMV at time of
death
Value in Gross
Estate
Case 1
100K
Case 2
100K
Case 3
100K
100K
60K
0K
180K
180K
180K
0K (because at
time of transfer,
there
was
adequate
consideration)
120K
180K
Exceptions
1.
2.
3.
4.
5.
39
Merger of usufruct in owner of naked title
a. Ex. X died, and left Y the usufruct and Z the naked ownership.
X’s estate paid for the estate tax. Y died – usufruct merged into
Z’s ownership. No estate tax.
Transmission or delivery of inheritance/legacy by the fiduciary
heir/legatee to the CQT
Transmission from first heir/legatee/donee in favor of another
beneficiary, according to will of the predecessor
All bequests, devises, legacies, or transfers to social welfare, cultural,
and charitable institutions (not educational or religious) – no part of
which inures to benefit of any individual
a. As long as not more than 30% of the transfer is used by the
institution for administrative purposes
b. Include the value first in gross estate – because BIR has to
verify first compliance with the “no individual” requirements
Under special laws:
a. War damages
b. From US Veterans Administration
c. From GSIS
d. From SSS
ii.
Rules for valuation



Real property
o Current and FMV
o Whichever is higher between values by assessors and
determination of CIR
Personal property
o Recently acquired: purchase price
o Not recently acquired: evidence of FMV
Shares of stock
o Listed and traded in stock exchange: arithmetic mean between
highest and lowest quotation of shares on valuation date
o Not listed in stock exchange: book value (common) or par
value (if preferred)
Deductions from gross estate
Ordinary deductions
1.
Ordinary expenses
a. Funeral expenses
i. How much (choose the lowest):
1. Actual funeral expenses OR
2. 5% of gross estate
3. 200K ceiling
ii. Must be paid out of estate, not from contributions by
family members or other people
iii. What is the cut-off point?
1. interment
b. Judicial expenses of testamentary/intestate proceedings
i. What is the cut-off point?
1. Until period for filing estate tax return and
payment of estate tax only
ii. Includes administration expenses, whether judicial or
extra-judicial
c. Claims against estate
i. When must it be notarized?
1. Only if it’s a debt instrument. Otherwise, no
need.
d.
e.
f.
40
What is the special rule for debts contracted
within 3 years before death?
1. Then A/E must submit a statement showing
disposition of proceeds of loan
2. If cannot determine how proceeds were
used, no deduction
iii. Dizon v. CIR – The estate claims deductions from the
gross estates. The BIR claims the deduction must be
based on the lower amounts paid as compromise
payments during settlement of the estate. The estate
claimed that the actual amount of the claim must be
allowed as deductions. What must be deducted – the
actual amount of the claim or the compromise
payments made by the estate?
1. HELD: The deductions of the amounts must
be based on the value upon the time of
death (consistent with point of death theory),
notwithstanding the actual lower compromise
amount.
Claims by the estate against insolvent persons
i. Include in the estate the entire amount of the claim,
BUT THEN deduct in whole or the part uncollectible
ii. Ex. Z died with a receivable of 20K from Y. Y has
100K assets and 400K liabilities:
1. Include 20K value in gross estate of Z
2. Deduct 15K
3. Which is [(400K-100K)/400K] * 20K = 15K
Unpaid mortgage or indebtedness on property
i. Include FMV of property then deduct the
mortgage/indebtedness
ii. Ex. X’s Property has 1M FMV, but subject to
mortgage in favor of Y for 600K – then include 1M
value, then deduct 600k
iii. Even if mere accommodation loan, still include the
value of unpaid loan in receivable of estate
Losses:
i. Must arise from fire, storm, shipwreck, other casualty,
robbery, theft, or embezzlement
ii. What are the caveats?
1.
2.
3.
Not compensated by insurance or any other
compensation
a. If partially compensated, claim what
is not covered
2. Not claimed as deduction in ITR (correlate
with deductions for losses in income tax)
iii. When must the loss happen?
1. During settlement of estate
2. Before last day for payment of estate tax
Transfer for public use
a. In last will/testament or intended to take effect after death
b. To Government or any political subdivision for exclusively
public purposes
Vanishing deduction
a. Requisites:
i. Decedent died within 5 years from receipt of property
from prior decedent or donor
ii. Property is in Philippines
iii. Property identified as one received prior
iv. Estate or donor’s tax of prior decedent/donor was
determined and paid
v. No vanishing deduction claimed by prior decedent
b. How to compute vanishing deduction:
i. Value of property in prior estate or present estate,
whichever is lower
ii. Value reduced by any payment made by present
decedent on any mortgage/lien on property – where
such mortgage or lien was a deduction from the gross
estate of the prior decedent, or gift of the donor
iii. (Value in [ii]/Gross estate) * (ordinary expenses,
transfers for public use)
iv. Percentage deducted (100% if within 1 year, 80% for
within 2, 60% for within 3, 40% for within 4, 20% for
within 5)
c. Ex.
i. X Inherited land with FMV of 870K, with mortgage of
80K. X paid 70K off the mortgage. X died within 2
years of inheriting the land. The ordinary expenses in
settlement of estate are 600K. The total estate was
3.2 M.
ii. Compute:
1. Land value – 870K
2. Deduct 70K paid on M – 800K
3. (800K/3.2M) * 600K = 150K
4. Basis of V.D. = 650K
5. 60% of 650K = 390K
Special deductions
1.
2.
3.
4.
Family home
a. How much can be deducted?
i. Current FMV of family home
ii. Maximum: 1M
b. Barangay captain of the locality certifies that it is the family
home
c. If married, and was under ACP/CPG, then deduct half of FMV
Standard deduction
a. 1M amount
Medical expenses
a. When incurred?
i. 1 year prior to death, substantiated with receipts
ii. Whether paid or unpaid at the time of death
b. Limit?
i. Not exceeding 500K
Retirement benefits of private employee
a. Received under RA 4917
Deductions for an NRA




41
1. Ordinary expenses
o (Gross Phil estate/Gross world estate) * (Ordinary expenses)
2. Transfers for public use of property in the Phil
3. Vanishing deduction on property in the Phil
N.B. So in other words, NRA can only claim ordinary deductions
DONOR’S TAX






o
What are covered by donor’s taxes?
o 1. Gratuitous disposal of property in favor of another
o 2. Giving a thing to another on account of services/merits,
when there was no demandable debt
o 3. Giving a thing that imposes upon the donee a burden less
than the value of the thing given
o 4. Sales or exchanges for less than adequate and full
consideration
What is the nature of donor’s tax?
o Not a property tax but an excise tax on the privilege to give
Purposes of donor’s tax?
o 1. Supplement estate tax
o 2. Prevent avoidance of income tax through splitting income
among numerous donees
Apply gift taxes whether:
o Transfer is in trust or otherwise
o Gift is direct or indirect
o Property is real or personal, tangible or intangible
What are the requisites of a valid donation?
o 1. Capacity of the donor
o 2. Donative intent

Not required for transfers for less than adequate and
full consideration. It is superfluous.
o 3. Delivery, whether actual or constructive, of the SM
o 4. Acceptance of the gift by the donee
What are transfers that are deemed donations?
o 1. Sale/exchange/transfer for less than full and adequate
consideration

EXCEPT real property classified as capital assets.
WHY?

Because capital assets are taxed on the
whole sale price (CGT on “presumed gains”)

While ordinary assets are taxable on sale
price minus acquisition cost

Amount by which FMV exceeded consideration –
deemed a gift
o 2. Condonation or remission of debt



42
Is the renunciation per se of a hereditary share by an heir
a donation?

No.
o Is the renunciation of a hereditary share by an heir in favor
of another heir a donation?

Yes.
What is the classification of donors and the implications on
taxability?
o 1. (RC/NRC/RA): worldwide gifts
o 2. (NRA): only in Philippines, at time of donation.

N.B. the following rules applicable to estate taxes
are also applicable to donor’s taxes:

Situs rules of intangible property for NRAs

Reciprocity exception on these property
What are the tax rates?
o 1. (In general) Tax base: total net gifts made during calendar
year – follow schedule of rates

NOTE: the first P100,000 in gifts are exempt

This is important for the concept of “gift
splitting.” Illustrate.

Instead of donation 200K in one year, you
can donate 100K in one year and 100K the
next – both are exempt from donor’s taxes.
o 2. (If donation to a stranger): 30% of net gifts. A stranger is
everyone who is NOT a:

A. SADS:

Spouse

Ascendant

Descendant

Sibling (whole/half)

B. Relative by consanguinity in collateral line within 4 th
degree
o 3. Contribution in cash or kind to any candidate, political party,
or coalition for campaign purposes

The Election Code governs
How are properties valuated?
o REAL PROPERTY:

o
o
The higher between two values: a) FMV as
determined by CIR [zonal value], or b) FMV shown in
schedule of values fixed by provincial or city
assessors
PERSONAL PROPERTY:

Market value of property at time of gifting


Deductions from gross gifts:
1.
2.
3.


Dowries or gifts on account of marriage:
a. BEFORE its celebration or WITHIN one year thereafter
b. By parents to their legitimate children
c. To extent of P10K [Both husband and wife can separately
claim the P10K]
Gifts to National Government or any non-profit entity created by it or
political subdivision
Gifts in favor of education/charitable/religious/cultural/social welfare
corporation/institution/organization
a. AS LONG AS not more than 30% of gifts are used for nonadministration purposes
b. MUST BE:
i. Incorporated as non-stock entity and not paying
dividends
ii. Governed by trustees with no compensation
iii. Devoting all its income to achieving its purposes in its
AOI
What deductions can be claimed by RC, NRC, and RA?
o All three
What deductions can be claimed by NRA?
o Just 2 and 3. NOT 1.
Limitation 2: Not exceed proportion of gifts outside Philippines
vis-à-vis entire net gifts
Limitation 1:
o A: Foreign donor’s tax paid: PXXX
o B: (Net foreign gifts / Net world gifts) * Phil. donor tax: PXXX
o Allowed tax credit: whichever is lower bet. A and B
Limitation 2:
o When does this apply?

When there are two or more foreign countries to
which donor’s taxes were paid
o Step 1:

A: Total foreign donor’s tax paid: PXXX

B: (Net gifts outside Phil. / Net world gifts) * Phil.
donor tax: PXXX

Allowed tax credit: whichever is lower bet. A and B
o Step 2:

Allowed tax credit: whichever is lower bet. Lim 1
and 2
Filing of return and payment of tax:


Person who gave gift makes return in duplicate, stating:
o 1. Each gift made during calendar year
o 2. Deductions claimed and allowable
o 3. Previous net gifts made during same calendar year
o 4. Name of donee
o 5. Information required under R&R
Time and place of filing/payment?
o File and pay within 30 days after gift is made
o To AAB, RDO, RCO, authorized treasurer of city/municipality
of domicile, CIR (if non-resident)
Tax credits


Who may claim these tax credits?
o RC, NRC, RA – may claim tax credit on donor’s tax imposed
by foreign country
Limits on credit:
o Limitation 1: Not exceed proportion of tax in foreign country
vis-à-vis entire net gifts
VALUE ADDED TAX
Characteristics of VAT

43
What are the characteristics of VAT?

o
o
o
o



1. Tax on value added of a taxpayer
2. Collected through tax-credit method
3. Transparent form of sales tax
4. Broad-based tax on consumption of goods, properties, or
services in the Philippines
o 5. Indirect tax
o 6. “Tax-inclusive method”

Sale of goods by supplies subjected to VAT to entitle
the buyer to credit the input tax from his output tax in
a taxable sale
o 7. No cascading in the VAT system

There is no VAT on VAT

The VAT payable expressly excludes the VAT passed
on by the sellers to the buyers [usually, they just
integrate the cost in the selling price]
What is “tax on value added”?
o Value added is the difference between total sales of the
taxpayer for the taxable period subject to VAT and his total
purchases for the same period subject to VAT
o What is “output tax”?

VAT due on sale or lease of taxable goods,
properties, or services of a VAT-taxable person
o What is “input tax”?

VAT due from or paid by a VAT-taxable person in the
course of trade or business, on importation of goods
or local purchase of goods, properties, or services,
including lease, from a VAT-registered person
What is the tax credit method?
o The input taxes (shifted by the seller to the buyer) are credited
against the buyer’s output taxes when he in turn sells the
goods, properties, or services
In general there must be an actual sale of goods, properties, or
services in the Philippines so that VAT may be imposed. What are
the exceptions?
o 1. Importation of goods

Importation of goods by any person, who may or may
not be engaged in business or trade in the Philippines
o 2. Issuance of VAT invoice or receipt for exempt sales of
goods, properties, or services



The seller should issue a non-VAT invoice or receipt
for these exempt sales

If he issues a VAT invoice or receipt for the exempt
sales, it is VAT-able still
o 3. Deemed sales of goods/properties
What is the “destination principle”?
o The destination of the goods determines taxation or exemption
from tax.

Export sales are subject to 0% VAT

Imports are subject to 12% VAT
o Ex. Sales of goods located and consumed outside the
Philippines is VAT-exempt even if both parties involved are
domestic corporations
o What about services?

The “situs of service principle” applies – the
consumption takes place where the service is
performed
What is the impact of tax and what is the incidence of tax?
o 1. Impact of tax is on the seller upon whom the tax is imposed
o 2. Incidence of tax is on the final consumer, the place where
the tax comes to rest
What is the principle of recoupment of tax?
o When there is a VAT-exempt transaction in the chain, the
transaction is recouped from the succeeding consumer who is
liable to pay VAT
Persons liable to pay VAT



44
Who are liable?
o 1. Those who sell in ordinary course of business
o 2. Those who render service in ordinary course of business
o 3. Those who import goods (even if not in ordinary course)
o N.B. Again, take note of the destination principle
What is “Ordinary course of business”?
o Generally, rule of regularity
o EXCEPTION: services in Phil. by NRA is considered
automatically in the ordinary course of business
What is the implication of registration?

o

A VAT taxable person must register. But failure to register
does not exculpate him from liability to pay VAT.
Special rules:
o 1. Spouses – for VAT, treated as separate taxpayers
o 2. Unincorporated joint venture

While in income tax, not taxable (taxed separately), it
is liable for VAT and must register and issue invoices

But the BIR sometimes allows these entities to be
treated as “flow-through entities” where the members
of the JV are ultimately liable for VAT
o 3. Government

RA 9337: Required to withhold final VAT of 5% for
purchases of taxable goods, properties, or services

Distinguish:

Governmental functions: exempt from VAT.

Proprietary functions: subject to VAT

N.B. While there is standard Input Tax for sales to
government of 7%
o 4. NSNP association

Not subject to VAT because they do not engage in
business or taxable sale of goods, properties, or
services.

N.B. But note – it’s NOT lack of profit that
matters but non-regularity of business

Usually operate for exclusive benefit of its members

But if they operate restaurant, shop, or lease property,
etc. – this is taxable
o 5. Importers

XYZ Corp. is a RFC with a branch in the
Philippines. The head office in Japan buys
materials from a Japanese corporation and sells
the goods in the Philippines. Is the branch liable
for VAT on importation?

No. The sale of materials happened in
Japan exclusively (destination principle).

The VAT on importation is due on the local
buyers.


VAT on sale of goods or properties
45
When is sale of goods taxable under VAT – requisites?
o 1. Actual or deemed sale of goods or properties for valuable
consideration (actual or deemed sale)

Valuable consideration may be something other than
money

If no valuable consideration, not VAT-able, it is a
donation
o 2. In regular course of trade or business (regularity rule)
o 3. For use or consumption in the Philippines (destination
principle)
o 4. Not exempt under law or treaty
o What are included in “goods”?

Intangible properties (rights, privileges, etc.) capable
of pecuniary estimation
When is sale of real properties taxable under VAT – requisites?
o 1. Seller executes deed of sale, barter, exchange,
assignment/conveyance, or CTS of real property
o 2. Real property found in Philippines
o 3. Seller/transferor is engaged in real estate business
o 4. Real property held primarily for sale or lease in ordinary
course of business
o 5. Sale not exempt from VAT under law or treaty
o Are the rules on installment sales of real property adopted
for VAT?

Yes. So sales with initial payments of 25% or less of
the gross selling price shall be reported only in period
of sales.
What is the tax rate?
o 12% on gross selling price

“Gross selling price” is total amount of money which
purchaser pays – including excise taxes

If grossly inadequate, vis-à-vis FMV, the CIR can
determine the proper tax base.
o Deductions:

Sales returns

Sales allowances

Sales discount granted and indicated in invoice at
time of sale, and not contingent on future event




Includes 20% sales discount to senior
citizens, which is deducted from gross sales
before applying the VAT rate
What if the entity that sells goods, properties, or services does not
act through a profit-based motive?
o It doesn’t matter. If there is sale of goods, properties, or
services for a fee, it is subject to VAT. The absence of profit
motive such as that of a non-exempt NSNP organization is of
no matter.
o “In the course of business or trade” does not require a motive;
it just requires regularity in the performance of such
commercial or economic activity.
When does output tax accrue?
o At the time of sale of goods or properties, when the VAT sales
invoice is issued
o What if only a part of the gross selling price or none of it is
paid at the time of sale?

It doesn’t matter. Output taxes accrue already.
o What is the exception to the “time of sale” rule?

Real property sold on installment basis with initial
payments 25% or less – tax base during this period is
only the amount received

Viz. if the initial payment is more than 25%, then the
tax base in the whole gross selling price, even if not
yet actually received

Types of sales


A. Actual sales
o VAT registered person is the seller and another VAT-registered
person is the buyer
B. Deemed sales:
o 1. Transfer, use, or consumption not in ordinary course of
business of goods/properties originally intended for sale or
use in ordinary course of business

What if Fortune Tobacco gives away cigarettes as
samples to advertise them?
46
It’s not taxable because it has to be “not in
the ordinary course of business.” This use is
for business use.
o 2. Distribution/transfer of goods to:

Shareholders/investors as share in profits of VATregistered person

Creditors in payment of debt

Dacion en pago
o 3. Consignment of goods if actual sale not made within 60
days
o 4. Retirement from business, with respect to existing inventory
o What is the nature of these “deemed sales”?

The seller is also the buyer and no valuable
consideration is paid. In all these scenarios, the seller
benefits from the use of the goods or disposes it as if
it were the final consumer.
o What is the CIR’s authority to determine the tax base for
“deemed sales”?

Where gross selling price is unreasonably lower than
actual market value
o What if there is change or cessation in VAT-registered
status?

May apply 12% VAT to goods disposed of/existing at
certain date
C. Zero (0%) rated sales:
o 1. Export sales, including:

A. Sale and actual shipment to foreign country,
irrespective of shipping arrangement, and paid in
foreign currency (accdg. to BSP rules)

B. Sale of raw materials/packaging materials to
nonresident buyer for delivery to local exportoriented enterprise, and paid in foreign currency
(accdg. to BSP rules)

C. Sale of raw materials/packaging materials to
export-oriented enterprise with export sales
exceeding 70% of total annual production

D. Considered export sales under Omnibus
Investment Code of 1987



o
Ex. sale of goods and services to a taxpayer
in a SEZ or Freeport zone

What is a customs territory?
o Territory in the Philippines, minus
those by
fiction of law
are
considered foreign territory

What is a special economic zone?
o Territory within the Philippines
which by fiction of law is considered
foreign territory

N.Bs. Sale from customs territory to SEZ is
an export

E. Sale of goods to persons engaged in international
shipping or international air transport business
o 2. Foreign currency denominated sale, defined:

Sale of goods, assembled and manufactured in the
Philippines to non-resident, for delivery to resident in
Philippines – paid in foreign currency and accdg. to
BSP rules

Except:

Automobiles

and non-essential goods (ex. jewelry,
perfumes, toilet waters, yachts)

NOTE: Foreign currency denominated sales are an
exception to the destination principle
o 3. Sales to persons or entities exempt under international
agreements/special laws

Example is PAGCOR which is exempt from “tax of
any kind or form,” so this includes indirect taxes.
o 4. Sale of gold to BSP

Again, an exception to the destination principle
What is an effectively zero-rated transaction?
o Sale of goods or properties by a VAT-able person to one that
has been granted indirect tax exemption under special law or
international agreement.
Distinguish zero-rated transactions and effectively-zero rated
transactions as re: application therefore?
o Automatic zero-rating: no need to file application form and to
secure BIR approval.

Effectively zero-rated needs application to and approval of BIR.
Otherwise, the sale is exempt (see below for implications on
treating it as exempt, and not zero-rated)
What is essential to have zero-rated transactions?
o You must be a VAT-registered person
VAT on importation of goods


In general: 12% tax rate based on total value used by Bureau of
Customs in determining tariff and customs duties, plus:
o 1. Customs duties
o 2. Excise taxes
o 3. Any and other charges paid by importer prior to release
Transfer of goods by tax-exempt persons
o Where person who imported goods tax-free has sold,
transferred, or exchanged the goods to non-exempt entities:
o The recipient is considered the importer liable for importation
tax

Tax is lien on goods

Superior to all charges or liens – irrespective of
possessor
VAT on sale of service or use/lease of properties

47
What are the requisites for taxability of services?
o 1. Service performed in the course of trade/business

Even if performed through a sub-contractor

What is the situs rule?

Where the service is performed – so it must
be in the Philippines

Regardless of where contracting or payment
happens

What if a NR person gains income from lease of
properties in the Philippines?

Taxable, because performance of service is
in the Philippines
o 2. Service performed in the Philippines
o 3. For valuable consideration actually or constructively
received





This is important, because for sale of services, it is
not the issuance of VAT invoice that matters, but
actual or constructive receipt of payment
o 4. Service not exempt under law or treaty
What are some categories of VAT-able services?
o 1. Professional or technical consultancy
o 2. Transfer of technology

This is the service of providing knowledge (taxable
under “services” and has situs where the service is
performed)

Contra: the intangible property or right, which is
taxable under “goods” and has situs in the place
where the right is exercised
o 3. Lease or use of intangible property

A. Intellectual property

B. Media time
o 4. Lease or use of tangible property

A. Equipment

B. Media
Who are the enumerated sellers of VAT-able services?
o 1. Construction and service contractors
o 2. Brokers, Dealers in securities
o 3. Lessors of real property, warehouse servicers, lessors or
distributors of cinematographic films
o 4. Those engaged in milling, processing, manufacturing, or
repacking for others
o 5. Proprietors of hotels, restaurants, and similar establishments
o 6. Lending investors
o 7. Domestic air and sea carriers between points in the
Philippines, Transporters of goods and cargoes

N.B. take note of this
o 8. Sales of electricity, Services of franchise grantees except
water and gas
o 9. Non-life insurance companies except crop insurance
What is the usual rule?
o 12% on gross receipts derived from sale or exchange of
services, including lease of property

Total amount of money representing consideration



48
Including amount charged for materials supplied with
services and deposits and advance payments
When is there VAT liability?
o For sale of services, the test is not whether services have been
performed or not, but whether amount of compensation is
received actually or constructively.
o RULE: no receipt of payment, no VAT liability
o Viz. for sale of goods, it is the consummation of sale plus issue
of VAT sales invoice, whether payment has been given or not
What are zero-rated transactions?
o 1. Processing, manufacturing, repacking goods for other
persons doing business outside Philippines, which goods are
subsequently exported (paid for in foreign currency, accdg. to
BSP rules)
o 2. Services other than those in #1, rendered to person
engaged in business conducted outside Philippines or to nonresident not engaged in business who is outside Phil. (paid for
in foreign currency, accdg. to BSP rules)
o 3. Services rendered to persons/entities exempt under special
laws or international agreements to which Phil. is signatory of
o 4. Services rendered to persons in international shipping or airtransport business, including lease of property

N.B. this pertains only to services rendered for
outbound trips. For services rendered for inbound
trips, subject to 12% VAT (fall back to the situs rule
again)
o 5. Services performed by subcontractors/contractors in
processing, converting, manufacturing goods for an enterprise
with 70% export sales vis-à-vis total annual production
o 6. Transport of passengers and cargo by air/sea vessels from
Philippines to foreign country

C.f. If from Philippines to Philippines (air or sea) 
subject to VAT

C.f. Domestic land transport  subject to % tax

C.f. If International Air Carrier (outbound)  GPB
o 7. Sale of power/fuel generated through renewable sources of
energy
Distinguish American Express case from Burmeister case:

o


AMEX: the American Express Philippine branch is a VATregistered person that facilitates collection and payment of
receivables of American Express International, a NRFC and it
is paid in foreign currency inwardly remitted. Thus, it is zerorated.
o BURM: BWSCMI was made a subcontractor to perform a
foreign consortium’s contract with NPC to operate and
maintain two power barges. Since the consortium, even if it is
a foreign corporation, is doing business in the Philippines, the
service performed by BWSCMI is performing services with
situs in the Philippines. These are subject to 12% VAT.
o What is the principle that is clarified by this distinction?

The performance of services must be for one who is
doing business outside the Philippines
Diaz v. Sec of Finance – May toll fees collected by toll operators be
subject to VAT?
o HELD: Yes. Toll operators are just like those who lease
property. Not among those enumerated as exempt
transactions under Sec. 109.
o Cannot claim that the imposition of tax on toll is a “tax on tax.”
Toll fees are not like tax because they’re collected by private
operators and do not go to government.
o Assuming arguendo that it’s a tax, it’s not a “tax on tax”
because the toll fees are levied on the users, and the VAT is
levied on the toll operators – there are two different taxpayers.
CIR v. Sony –
o Sony was paying advertising expenses. It was charged by
advertising companies. These advert expenses, however, are
being reimbursed by Sony Singapore. Can Sony claim input
taxes on the advert expenses even if they were being
reimbursed for it?

HELD: Yes, entitled to input VAT, because Sony in
fact incurred the expenses. That is sufficient to grant
it input tax credits. The fact of reimbursement does
not change the complexion that VAT was passed on
to Sony by its advert companies. How it pays for it
doesn’t matter.
o Are the reimbursements paid by Sony Singapore to Sony
Philippines subject to VAT?


HELD: No, it lacked the essential element that there
must be a sale, barter, or exchange of goods or
services. Sony SG paid out of goodwill.
o Why is this different from the Comaserco case where there
was a reimbursement too and it was subject to VAT?

In that other case, there was a service being
performed by the affiliate. So even if the payment
was through reimbursement only, the SC said that
there was VAT because there was a sale of services.
Remember: profit is not a required element for VAT –
but there must be a sale, barter, or exchange of
goods/services.
CIR v. SM Prime – Are gross receipts of cinema operators from
admission tickets subject to VAT?
o HELD: No. The showing of a film is not a lease of motion
pictures films, films, apes, and discs.
Tambunting Pawnshop v. CIR – By virtue of RA 9258, pawnshops are
no longer subject to VAT, but to percentage tax.
VAT-exempt transactions

In general, what are VAT exempt transactions?
o Transactions in certain goods, properties, services, which are
not subject to VAT even if such are sold by a VAT-registered
person and regardless of annual gross sales/receipts derived
therefrom
[agricultural stuff]
1.
2.
49
Sale/importation of agricultural or marine food products in original
state, livestock for or used for human consumption, breeding stock and
genetic materials
a. Still “original state” even if they have undergone simple
processes of preparation or preservation
b. Ex. brown sugar is exempt, not white sugar
Sale/importation of fertilizers; seeds, seedlings, fingerlings; feeds, or
ingredients for such
a. Except specialty feeds for race horses, fighting cocks, zoo
animals, aquarium fish, pets
[settlement stuff]
3.
4.
9.
Services rendered by individuals pursuant to employer-employee
relationship
10. Services rendered by RAH in Phil. by MNCs, as supervisory,
communications, or coordinating centers for affiliates
a. Must not earn or derive income from Phil.
Importation of personal & household effects belonging to Phil. residents
returning from abroad and NRCs resettling in Philippines
a. If goods are exempt from customs duties
Importation of professional instruments, implements, apparel, domestic
animals, personal household effects of persons coming to settle in the
Philippines – for own use and not for sale
a. …accompanying persons within 90 days before/after arrival
b. Upon evidence to CIR that persons are actually coming to
settle in Phil.
c. Except vehicle/vessel/machinery used in commercial
enterprise
[under international agreements]
11. Transactions exempt under international agreements
[cooperatives]
12. Sales by agricultural cooperatives registered with Cooperative
Development Authority (CDA) to their members
a. And sale of produce (original or processed state) to nonmembers
b. Importation of direct farm inputs, machineries, equipment,
spare parts for production
13. Gross receipts by lending activities of credit/multi-purpose cooperatives
registered with CDA
14. Sales by non-agricultural, non-electric, and non-credit cooperatives
registered with CDA
a. PROVIDED, share capital contribution of each member does
not exceed P15K
b. Regardless of aggregate capital/net surplus distributed
[services]
5.
6.
7.
8.
Services subject to percentage tax
a. 3% tax on VAT-exempt persons
b. 3% common carrier’s tax on domestic land carriers
c. 3% common carrier’s tax on international carriers
d. Franchise tax on gas, water, and mass media
e. Overseas communication tax
f. Gross receipts tax on banks
g. Gross receipts tax on finance companies
h. 5% premium tax on life insurance companies (on premiums)
i. Tax on agents of insurance companies (on premiums)
j. Amusement taxes
k. Tax on winnings
l. Stock transaction tax and IPO tax
Services by agricultural contract growers and milling for others (palay to
rice, corn into grits, sugar cane into raw sugar)
Medical, dental, hospital, veterinary services except those rendered by
professionals
a. N.B. sales of hospitals or clinics of medicines to in-patients are
exempt from VAT
Educational services rendered by private educational institutions – duly
accredited
a. N.B. review centers are not accredited, so not exempt
[non-VAT]
15. Export sales of non-VAT registered persons
a. Differentiate: if VAT-registered, the export sales become zerorated
[real properties]
16. Sale of real properties:
a. Not primarily held for sale to customers or
b. Not held for lease in ordinary course of business or
c. Real property utilized for low-cost/socialized housing, where:
i. residential lot valued at 1.5M and below
ii. house and lot valued at 2.5M and below
50

17. Lease of residential unit with monthly rental not exceeding 10K
a. N.B. if commercial unit, not subject to this exemption
[Publications]
18. Sale or importation, printing, publication of books, newspaper,
magazine, or bulletin, provided:
a. 1. it appears at regular intervals
b. 2. has fixed prices for subscription and sale
c. 3. not devoted principally to publication of paid advertisements

[crafts]
19. Sale, importation, or lease of passenger or cargo vessels/aircraft for
domestic or international transport operations
a. N.B. So sale of goods or services to them is zero-rated, but
sale or lease of the crafts themselves – exempt
20. Importation of fuel, goods, or supplies by persons engaged in
international shipping or air transport operations
a. N.B. So sale of goods to them is zero-rated, while importation
of the goods by the carriers themselves is exempt
What is the treatment for transactions with VAT-exempt persons?
o If the law merely exempts an entity as a seller from VAT and it
does not relieve the same person as purchaser from direct
burden of VAT (because the seller to the exempt person is
VAT-able), the purchase is not VAT-exempt.
What are the scopes of exemption?
o 1. Partial exemption

Seller has no output VAT liability

But input taxes passed on to him by suppliers form
part of assets/expenses
o 2. Total exemption

Seller has no output VAT liability

And input taxes passed on him by his suppliers may
be recovered through BIR through claim for refund or
tax credits
Sources of input tax

[banks]

21. Services of banks, non-bank financial intermediaries performing quasibanking functions, other non-bank financial intermediaries
[catch basin – important; see % taxes]
22. Sale or lease of goods or properties or performance of services other
than those mentioned above, the gross annual sales/receipts DO NOT
exceed 1.5M
a. What is the tax payable by these persons exempt here,
and are not VAT-registered?
i. 3% of gross receipts
NOTE: but VAT-registered person may elect that the exemptions do not
apply to his goods or services – irrevocable choice for period of 3 years from
quarter election was made
51
What is the implication of excess output or input VAT?
o Excess output: paid by VAT-registered person
o Excess input: carried over to succeeding quarter or quarters
o Input tax attributable to zero-rated sales by VAT-registered
person: may be refunded or credited against other taxes
What are the types of input taxes?
o 1. Input tax on importation of goods and purchase of goods,
properties, services (usual):

N.B. remember the amortization rule for depreciable
capital goods
o 2. Transitional input tax credit

When is there transitional input tax?

1. Person becomes liable for VAT for the first
time

2. Elects to register as a VAT-registered
person, and he is eligible

What is the creditable input tax here?

2% of value of beginning inventory of goods,
materials, supplies

Or actual VAT paid on such goods,
materials, supplies

Whichever is higher
3. Presumptive input tax credit

To whom does this apply?

Persons or firms engaged in processing
sardines, mackerel, or milk or manufacturing
refined sugar and cooking oil and noodlebased instant meals:

Allowed presumptive input tax of 4% on gross value
of purchases of primary agricultural products used as
inputs in production
o 4. Final WHT credit
o 5. Excess input tax credit
Creditable input taxes are derived from any input tax evidenced by
VAT invoice or official receipt for –
o Purchase or importation of goods

For sale

Conversion to finished product

Supplies in ordinary course of business

Materials in sale of service

Use in trade/business for which deduction for
depreciation or amortization allowed
o Purchase of services on which VAT was paid
When is it creditable?
o To purchaser, upon consummation of sale/importation
o To importer, upon payment of VAT prior to release of goods
from custody of Customs
o If for purchase of services, lease or use of properties – input
tax is creditable upon payment of compensation, rental,
royalty, or fee
Rules on depreciable capital goods:
o If aggregate acquisition of goods exceeds P1M – spread
evenly over 60 months
o If useful life of capital goods is less than 5 years – spread over
that period
What if the VAT-registered person is engaged in both VAT-able and
VAT-exempt transactions?
o Tax credit for input tax which can be directly attributed to
transactions subject to VAT
o
o






AND ratable portion of any input tax which cannot be directly
attributed to either activity
How is creditable input tax determined?
o (Sum of excess input tax from preceding month/quarter + input
tax creditable during taxable month/quarter) - (claim for refund
or tax credit + adjustments like returns and allowances + input
tax from exempt sale)
Fort Bonifacio v. CIR – Fort Bonifacio bought lands and there was still
no VAT then. But when it was selling the lands, there already was VAT.
So it’s subject to VAT on its sale. But it can’t claim input VAT because
there was no VAT then yet. So it tried to claim transitional input VAT.
Can it do so?
o HELD: Yes, transitional input VAT is applicable. The
entitlement to transitional input VAT is either based on 2% of
inventory or actual VAT paid. So in this case, because there
was no actual VAT paid, it can claim on 2% of its inventory.
o Also, the CIR cannot just base transitional input on the
improvements only, because the law does not distinguish. The
transitional input is on lands and improvements.
Refund or tax credit of excess input tax


52
What is the period for the seller to file a claim for input tax refund
or tax credit?
o 2 year prescriptive period, from close of the taxable quarter
when the sales were made (and not time when it was actually
paid or from when the OR was issued)
What is the period for giving credit/refund?
o By CIR, who decides within 120 days of application

If denied?

May appeal to CTA within 30 days of receipt
of decision

If no action is taken by CIR after 120 days?

May appeal to the CTA within 30 days of
lapse of period
o IMPT: This is where the Aichi doctrine comes in. Unlike usual
rules for refunds, for excess input tax, even if the two year
period has lapsed, if the CIR hasn’t had a full 120 days lapse




yet, then there is no cause of action to file for a judicial claim
for refund to the CTA yet.
When is refund of excess-input taxes or tax credit allowed?
o 1. Zero-rated or effectively zero-rated sales of goods

The seller claims

Rationale: the seller entered into a zero-rated sale,
whereas he paid input taxes on his goods. So he’s at
a disadvantage.
o 2. Cessation of business/dissolution of corporation
o N.B. So for regular VAT-registered taxpayers, refund or tax
credits are not available. They have to make do with carryovers.
What are the requirements for refund or tax credit?
o 1. Input tax payments are duly supported by VAT invoices or
receipts
o 2. The input tax payments are attributed to zero-rated sales
o 3. Claimed input tax payments not applied against output tax or
carried over to succeeding months/quarters
o 4. Administrative and judicial claims for refund or tax credit filed
within 2-year prescriptive period
CIR v. Sekisui Jushi – Sekisui is a PEZA registered entity engaged in
manufacture and export of strapping bands and packaging materials.
Being a PEZA exporter, can Petitioner claim its unutilized input VAT on
VAT passed on to it?
o HELD: Yes. What is material fact to consider is that it is an
exporter. The fact of its exporting nature gives it VAT zerorating. So it can claim input taxes.
o It is not relevant what type of tax incentive it is availing (normal
corporate tax or income tax holiday) because that is an
altogether different issue – it’s a matter of income tax.
Microsoft Philippines v. CIR – Microsoft wanted to claim refund, but its
official receipts issued did not say “zero-rated” on its face and thus
could not validly evince Microsoft’s sales.
o HELD: Microsoft is NOT entitled to a refund. The reason for
this rule for requiring the word “zero-rated” imprinted in the
invoice is because without such, the invoice is not considered
as VAT invoices and thus could not give rise to any input tax.
Rate
Input
Refund, when
I>O?
Need to VAT
register?
VAT
12%
Creditable
No, because the
code does not
say so [Old rule:
can claim refund
on capital goods,
but now, not
allowed]
Yes
Exempt
0%
Not creditable
No, because I
would never
even exceed O
Zero rated
0%
Creditable
Yes, as provided
by the NIRC
No
Yes
Re: government transactions – the unrecoverable component can be
deducted as a loss. (But this will only be exposed to 30%, instead of 100%
because of the income tax formula.) But if the actual input tax spending (ex.
2,000) is lower than the amount allowed to be credited (ex. 7,000), then the
5,000 can be reported as income – exposed to 30% income tax, rather than
full 100%.
DISTINGUISH:
53
o
COMPLIANCE REQUIREMENTS

Administrative requirements



When must a person register (options) with the RDO?
o 1. Within 10 days from employment
o 2. Before commencement of business
o 3. Before payment of any tax due
o 4. Upon filing return, statement, or declaration required by the
NIRC
o What is the annual registration fee?

P500 for every separate establishment or place of
business

Paid upon registration and every year thereafter on or
before January 31
o Who are not required to pay the registration fee?

1. Cooperatives registered with CDA enjoying tax
exemption

2. Individuals with purely compensation income

3. Overseas workers
o Where must it be paid?

AAB, Revenue collection officer, treasurer of
city/municipality
o What is the rule for those subject to several types of
internal revenue tax?

The person must register each type of internal
revenue tax for which he is obligated, and file a return
and pay for such
o What if a registered person transfers place of business,
head office, or branch?

Must update registration status by filing application for
registration information update

Same rule for other updates (ex. change in tax type,
taxpayer details, etc.)
What is the general rule for cancellation of registration?
o If a person ceases to be liable for a tax type, file a registration
information update with the RDO
What if a taxpayer fails to register?
o The CIR can temporarily close/suspend business




54
For at least 5 days, and only until there is compliance by the
taxpayer
Who are required to register for VAT?
o Person who in course of trade/business sells
goods/properties/services and –

Gross sales or receipts for past 12 months (and not
exempt) exceed 1.5M pesos

OR there are reasonable grounds to believe his gross
sales or receipts for the next 12 months will exceed
1.5M pesos
o What must he do if required to register?

Must register with RDO and pay annual registration
fee
o What if he fails to register?

Still liable for output VAT, but won’t be able to credit
input VAT
What is optional registration for VAT of exempt persons?
o One not liable to pay for VAT may still register for VAT with
RDO
o If he chooses this, can’t cancel registration for the next THREE
years
When can a VAT-registered person cancel his registration?
o 1. He makes written application and can demonstrate to CIR
that his gross sales/receipts will not exceed 1.5M
o 2. OR he has ceased to carry on his trade or business and
does not expect to recommence within next 12 months
Important stuff re: TIN –
o 1. Can only have one TIN

Else, criminally liable
o 2. Indicate TIN in documents enumerated in NIRC
o 3. When a registered taxpayer dies the estate gets a new TIN
for itself
What is the requirement for issue of receipts or invoices?
o For sale of merchandise or services P25 or more, must issue
registered receipts or invoices (sales/commercial) prepared at
least in duplicate. It must show date, quantity, cost, and
description of goods/service.

If the receipt covers rentals, commissions,
compensations, or fees:

o
o
o

Must show name, business style (if any), and
address of purchaser/client

If purchaser is VAT-registered:

Must show TIN of the purchaser

Who keeps what:

Original receipt  purchaser/client
o Must keep for at least 3 years if
engaged in business

Duplicate  seller
o keep for 3 years too
What is important to remember re: printing of
receipts/invoices?

1. Business person must secure BIR approval before
having a printer print his receipts

2. Receipts must show: name, business style, TIN,
business address

And the receipts are serially numbered

3. Printers must keep logbook or register of all
business who availed their printing service
What are the invoicing requirements for VAT?

1. VAT invoice for sale of goods/properties

2. VAT OR for lease of goods/properties or sale of
services

What must be contained therein?

1. That the person is VAT-registered, and his
TIN

2. Total amount the purchaser pays or is
obligated to pay the seller, saying if it already
contains VAT
o Indicate the tax amount, or if it is
exempt, zero-rated

3. Date of transaction, quantity, unit cost,
description of goods

4. If the sale is P1K or more and transfer is
to VAT-registered person: name, business
style, address, and TIN of the purchaser
What is the consequence of issuing an erroneous VAT
invoice or O.R.?


1. If the person is not VAT-registered and issues an
invoice/OR that shows TIN and the word “VAT,”:

Liable for VAT, without benefit of input taxes

50% surcharge

2. If the person is VAT-registered but issues an
invoice/OR that fails to display prominently the term
“VAT-exempt sale” – he is liable for output VAT
What is the requirement re: the certificate of payment of tax?
o Must be prominently displayed in place of business
o If roving, carry on one’s person
There is no additional tax/registration requirement for:
o 1. Continuation of business of deceased person
o 2. Removal of business to another location
Tax returns
Income tax returns:

55
A. Individual returns
o Who are required to file?

1. RC,

2. NRC and RA, on Philippine income

3. NRA engaged in trade/business/profession

What about husband and wife?

If they do not derive purely compensation
income, must file a joint return

Separate only if impracticable

What about income of minor from property
received from living parents?

Include in parent’s ITR.

Except:
o 1. If donor’s tax was paid
o 2. If exempt from donor’s tax

What if a person is under disability and cannot
make/file own return?

The guardian or representative does it
o Who are not required to file?

1. Individual whose gross income does not exceed
total personal and additional exemptions




But one engaged in business/profession
within Philippines must file ITR regardless of
amount of income

2.Person earning pure compensation income which
has been withheld

Except those with two or more ERs and
earning compensation income

3. Person whose sole income was subjected to final
WHT

4. Minimum wage earner
o Where to file?

AAB, RDO, collection agent, treasurer of
city/municipality where business or residence is

If no residence or place of business, with CIR’s office
o When to file?

1. On or before April 15 the next taxable year

2. For sales of shares of stock not through stock
exchange, within 30 days of each transaction

Submit final consolidated return on or before
April 15

3. Sale of real property held as capital asset, within 30
days of the sale
B. Corporate returns
o What is required for corporate returns?

1. Corporation is taxable and is not a NRFC

2. Must file quarterly returns and then a final
adjustment return

3. Filed by P, VP, or other principal officer and sworn
to by that officer and treasurer/asst. treasurer
o What is the taxable year of a corporation?

Either calendar year or fiscal year
o When and where is a quarterly CIT declared? How does it
work?

Filed and paid not later than 60 days from close of the
quarter. Applies to the first 3 quarters of the taxable
year.

AAB, RDO, collection gent, treasure of
municipality/city where the principal office is or where
books of account/data are kept


56
Include: gross income, deductions.
Tax paid: deduct taxes paid or assessed on preceding
quarters.
o When and where is a FAR declared? How does it work?

Filed on or before April 15 or on or before the15th day
of the 4th month following the close of the fiscal year

Will cover entire taxable year.

Will either result in:

1. Payment of balance still due

2. Carry-over of excess credit to succeeding
years.

3. Claim for tax credit or refund (within 2
years)
o When can the CIR grant extensions to file a return?

Meritorious cases
o What is required for corporations contemplating
dissolution or reorganization?

File with CIR within 30 days of adoption of
resolution/plan for dissolution or liquidation or capital
stock, including involuntary dissolution

Must present certificate of tax clearance from BIR
prior to securing certificate of dissolution from SEC
o What is the rule for sale of shares of stock not through
stock exchange?

Same as individuals, file return after 30 days of
transaction, and a consolidated return on April 15 (or
corresponding month for fiscal year)
C. Returns of receivers, trustees in bankruptcy, or assignees
o Same as above except that it is the receiver, trustee, or
assignee that makes returns and pays taxes – as if the
corporation itself did it
D. Returns of GPPs
o GPPs are NOT subject to income tax but must file tax returns
of their income, to give information on shares of the partners
o Return information:

1. Gross income

2. Deductions

3. Names, TIN, addresses, shares of partners
Estate Tax Returns
Donor’s Tax Returns






What is the requirement on notice of death?
o Executor, administrator, or heir must within 2 months of
decedent’s death (or within 2 months after qualifying the E/A)
give written notice to the CIR
o Applies to:

All transfers subject to estate tax

Or, although exempt, gross value of estate exceeds
20K

[Though some say this should be 50K, to reflect
change – not yet settled]
What are required for estate tax returns?
o 1. Value of gross estate of decedent at time of death, or for an
NRA, value of gross estate in the Philippines
o 2. Deductions
o 3. Supplemental data
o 4. If value of estate exceeds 2M, must provide itemized assets
and deductions certified by a CPA
When must it be filed? Is an extension allowed?
o Within 6 months from death
o Reasonable extension of 30 days for filing return, for
meritorious cases
Where is it filed?
o AAB, RDO, collection agent, duly authorized treasurer of
municipality/city of domicile
o No residence – with CIR
When is an executor or administrator discharged from personal
liability?
o When the E/A makes a written application and tax return to the
CIR to determine the estate tax due and for discharge. The
effect is that after the tax is determined and paid by the E/A, he
gets a certificate of discharge from any personal liability for
deficiency.
o What is the definition of deficiency?

1. Amount imposed by the NIRC exceeds that
indicated in the return (take into account prior
deficiency assessments, abatements, refunds)

2. No amount in the return or no return

Requirements in return?
o 1. Each gift made during calendar year
o 2. Deductions
o 3. Previous net gifts made during same year
o 4. Name of donee
o 5. Further information required by IRRs
Time and place of filing and payment?
o Within 30 days after the gift is made.

Pay tax during filing.
o Pay to AAB, RDO, collection agent, or city/municipal treasurer
of donor’s residence
VAT returns


What is the rule?
o File quarterly return of amount of gross sales/receipts within 25
days from close of each taxable quarter
o But VAT-registered persons must pay VAT on a monthly basis
o Those who registration is cancelled:

Must file return and pay within 25 days from date of
cancellation
Where must it be filed?
o AAB, revenue collection officer, or city/municipal treasurer
where taxpayer is registered or required to register
Withholding tax returns


57
What is the rule on returns and payments?
o Taxes deducted by the withholding agent are a special fund in
trust for the government until paid to the collecting officers.
o Return for final WH tax: submitted within 25 days from close of
each calendar quarter
o Return for creditable WH tax: filing and payment made not later
than the last day of the month following the close of quarter
during which withholding was made.
What is an annual information return?
o
o
o
o
It is a list of payees and income payments, and amount of
taxes withheld from each
For final WH tax:

Return filed on or before January 31 the next year
For creditable WH tax:

Return filed on or before March 1 the next year

Deadline for returns
Income tax
Quarterly return
Annual return
CGT return
WHT
Creditable WT
Final WT
Exception:
Annual info return, CWT
Annual info return, FWT
VAT
Monthly declaration
Quarterly return
Other percentage tax
Monthly return
DST
DST return
RCIT: 60 days after end of the
quarter
Self-employed: April 15 and 45 days
after EOQ
15th day of fourth month of following
year
30 days from date of sale
10 days after close of every month
10 days after close of every month
December, which can be Jan 15 of
following year
Mar 1 the following year
Jan 31 the following year

20th day of following month
25th day following close of quarter
20th day of following month
5th day of following month
REMEDIES
Government Remedies
Assessment


What is the concept of an assessment?
58
A written notice and demand made by the BIR on the taxpayer
for the settlement of a due tax liability that is set and fixed.
o Presumed to be correct.
What are the requisites of a valid assessment (FAN)?
o 1. Computation of tax liabilities
o 2. Statement of factual and legal basis for assessment
o 3. Demand for payment on the taxpayer
o 4. Made within prescriptive period
o 5. Signed by the CIR or his authorized representative
o 6. Served by personal delivery or through registered mail
o 7. Issued on account of a valid letter of authority
o When is a tax assessment made or deemed made?

When it is released, mailed, or sent to the taxpayer.
o When is the letter deemed duly mailed?

1. Letter properly addressed with postage prepaid

2. It must be mailed
o Can the CIR delegate his power to make an assessment
(i.e. have another officer sign the assessment)?

Yes.
What are the methods of income determination?
o 1. Inventory method:

The CIR anytime during the taxable year may order
inventory-taking of goods of a taxpayer to determine
his internal revenue tax. He may also place any
business under surveillance. The findings are
deemed prima facie correct.
o 2. Constructive method:

If a taxpayer failed to issue receipts and invoices or
there is ground to believe the records and books do
not reflect the return – CIR may look into sales,
receipts, income, or other taxable base of similarlysituated business/persons to prescribe a minimum
amount of gross receipts/sales that will serve as tax
base.

N.B. usually done to motels and nightclubs because
usually their declarations do not come near their
actual receipts
When is a jeopardy assessment issued?
o 1. Retiring from business subject to tax

o
o
o



2. Intending to leave Philippines or remove his property
3. Seeking to hide/conceal property
4. Performing acts tending to obstruct proceeding for collection
of tax for the past/current year/quarter OR render it partially or
totally ineffective unless proceedings begin immediately
What is the effect of a jeopardy assessment?
o The tax period is terminated.
o The CIR sends the taxpayer notice of this decision AND
demand for immediate payment of taxes yet unpaid.
o These taxes are due and payable immediately and subject to
penalties unless paid within time prescribed.
Differentiate delinquency tax from deficiency tax:
o 1. Delinquency tax can immediately be collected
administratively (levy or distraint) or judicially

Subject to 25% surcharge, interest, compromise
penalty

When is a tax payer delinquent?

1. Self-assessed based on return not paid at
all or not completely

2. Deficiency tax assessed by BIR became
final and executory
o 2. Deficiency tax has to be assessed first and go through the
whole process (since the amount is not yet settled)

Subject to interest, compromise penalty
What is the power of the CIR to make assessments and prescribe
requirements for tax administration and enforcement?
o 1. To examine books, records, and obtain information

Can this power to receive information cover other
persons apart from the one whose tax liability is
in question?

Yes. This power can include other persons
with books or records, or even government
offices, the BSP, and GOCCs.

Can the CIR summon a person to answer for
liabilities?

Yes.

Can he require production of records?
o Yes.
o
59
Can he take testimony under oath?
o Yes.

Can the CIR issue subpoenas duces tecum and ad
testificandum?

Yes to both.

CIR can also have revenue officers/employees
conduct a canvass.

Does this power include ability to inquire into
bank deposits?

No, this would violate secrecy of bank
deposits, unless exceptions exist.
2. To inquire in bank deposits of taxpayers

When is the CIR allowed to do this?

1. For a decedent, to determine gross estate

2. Taxpayers who filed application for
compromise of tax liability based on financial
incapacity
o The taxpayer must execute a
waiver to this effect

3. RA 10021 – pursuant to request by proper
authority from a treaty country (new)
o Effect: such information can also be
used by the BIR after such request
o Only the courts may authorize the
release of ITRs under this law (but
upon order of the President)
o CIR gives notice in writing to the
taxpayer that a foreign tax authority
is requesting for his information

What is the duty of a bank that discovers death of
a person holding an account (solely or joint)?

Disallow withdrawals without certification by
the CIR that transfer taxes have been paid

Allow only maximum 20K withdrawal

Are these grounds recognized in RA 1405
(Secrecy of Bank deposits)?

Yes, these are recognized as exceptions.

Does authority under #1 include joint accounts?

Yes.
3. To assess and collect tax

Does the non-filing of a return bar the CIR from
authorizing assessment of a taxpayer?

No.

When can the CIR resort to “best evidence
available”?

Failure to file a return required, or filing a
false/fraudulent return

What is the character of this best evidence
available?

It is presumed prima facie correct.
o 4. Not to allow withdrawal of return, statement, or declaration

What is the general rule?

A return, statement, declaration filed with the
BIR may not be withdrawn

What is the exception?

It may be amended within 3 years, as long
as there is no notice for audit or investigation
of the return served upon the taxpayer
o 5. Power to delegate his powers to subordinate official

What is the limit?

Not lower than Division Chief

Which powers cannot be delegated?

1. Power to recommend R&R by the Sec. of
Finance

2. To issue rulings of first impression or
reverse, revoke, modify any existing ruling

3. Power to compromise or abate any tax
liability; except:
o A. Regional assessments involving
basic tax of P500K or less, and
o B. Minor criminal violations

4. Power to assign or reassign revenue
officers to establishments where articles
subject to excise tax are produced or kept
What is the prescriptive period for an assessment?
o
o



60
1. 3 years to assess from the last day allowed by law to file the
return or if filed after the last day, count 3 years from date of
actual filing

What is the prescriptive period for a revised
assessment?

The CIR may issue this if it is still within the
original prescriptive period, and even if there
is already a pending appeal of the original
assessment

What if the last day to issue a tax assessment
falls on a Saturday?

It may be done the next office day
o 2. 10 years to assess from discovery of a false or fraudulent
return, or non-filing thereof

What if someone files an income tax return
instead of another return (ex. VAT)?

It is deemed not filed so the 10 year period
applies

No fraud if there is just an honest mistake in the
assessment. But there is “falsity” so 10 years still
apply, but there would be no 50% surcharge (see
below).

What is the prescriptive period for a WH agent
who fails to file a WH tax return?

10 years from discovery of the omission
o 3. Within the period agreed upon between government and
taxpayer if there is a waiver
Requisites of valid waiver:
o 1. acceptance date
o 2. date of expiry
o 3. signed by authorized officer of taxpayer and BIR
o 4. notarized
o 5. fact of receipt indicated in the copies
When is a waiver of prescriptive period defective (grounds)?
o 1. Did not specify new extended period: it cannot be indefinite
o 2. Just signed by the RDO, and not the CIR if 1M or more

Signed by taxpayer too
o 3. No proof it was made within the prescriptive period
o 4. No copy furnished to the taxpayer



o
o 5. The taxes have already prescribed
Who can sign the waiver?
o CIR for tax cases involving more than 1M
o RDO – re: tax pending investigation and period to assess is
about to prescribe, regardless of amount
RCBC v. CIR – RCBC was assessed. Before period to assess has
already prescribed, RCBC and CIR executed a waiver of prescriptive
period. There were discussions and RCBC agreed to pay 2 out of 10
items it was assessed for. RCBC claimed that for the other 8 items,
there was already prescription. RCBC claimed the waiver was defective
because the CIR did not sign the waiver (and the amount was 1M or
more). Correct?
o HELD: No, BIR is correct. By paying something, RCBC was
already estopped for questioning the validity of the waiver (the
payment was a waiver on the invalidity of the waiver). If it
really believed the waiver was defective, it shouldn’t have paid
before disputing.
When is the prescriptive period interrupted (both for assessment
and collection)?
o [N.B. prohibited, reinvestigate, 3 “cannot locate”]
o 1. CIR is prohibited from making the assessment or beginning
distraint/levy or proceeding in court, and for 60 days thereafter
o 2. Taxpayer requests for reinvestigation, which is granted by
the CIR
o 3. Taxpayer cannot be located in the address given by him in
the return filed and did not inform the CIR in case of change of
address
o 4. Warrant of distraint/levy duly served upon the taxpayer (or
his representative or a member of household with sufficient
discretion), and no property can be located
o 5. Taxpayer is out of the Philippines


What is the entire assessment process?

1. Tax audit
o Examination of books of account and other records of the
taxpayer to determine correct tax liability

See notes above
o Also note the “best evidence available” rule
61
How long is this?

120 days, with allowable 120 days extension
2. Preparation of tentative findings and informal conference
o What if the taxpayer does not agree?

The RDO/Chief of Division prepares a report of the
discrepancies found, to give the taxpayer a chance to
prepare for the informal conference

NOTE: obviously, if the taxpayer agrees, he will just
pay.
o What if the taxpayer fails to respond within 15 days of
receipt of notice of informal conference?

He is deemed in default

The RDO/COD will forward the report to the
Assessment Division or the CIR for issuance of
deficiency tax assessment
o Can the mistakes of a tax officer estop the government?

No, unless equity demands it.
3. Issuance of the Pre-Assessment Notice (PAN)
o Who does this?

CIR or Assessment Division
o What if the taxpayer fails to respond within 15 days?

He can be given a Final Assessment Notice
o When is a PAN not required (i.e. FAN agad)?

1. Finding of deficiency is due to mathematical error

2. Discrepancy between tax withheld and amount
actually remitted by withholding agent

3. Taxpayer opted to claim refund or tax credit for a
period and then still chose to carry over the excess
tax paid to the liabilities for the next year

4. Excise tax on excisable articles not paid

5. Article imported or locally purchased by an exempt
person transferred to non-exempt person (violation
of conditionally-free importation)
o Is the failure to issue a PAN (and not exempted) fatal?

Yes. It’s a substantive and not just a procedural
requirement.
o CIR v. Metro Star – Taxpayer denied receipt of a PAN. Was it
denied due process?

HELD: Yes. The PAN is mandatory.



Also, there is presumed receipt of the assessment
notices sent to the taxpayer, but it has to be shown
that it was in fact mailed. If challenged, it must show
the received copy or the registry receipt. The only
methods allowed for sending assessment now:
personal sending or registered mail. Ordinary mail
not allowed.

4. Reply
o How does a reply differ from a protest?

In general, reply is against a PAN, while protest is
against a FAN

15 day period for PAN, 30 day period for FAN
o What is the effect of failure to file a reply?

The FAN will be issued
o Compare – what is the effect of failing to protest to a FAN?

The FAN becomes final and executory and the
taxpayer loses all right to contest the assessment in
administrative and judicial levels (so it’s very
important to protest against a FAN)
5. Issuance of a FAN and letter of demand
o What is the significance of the letter of demand?

It always goes with the FAN. The LOD explains the
factual and legal bases of the assessment. Without
this, the FAN is void because there would be no
explanation of the basis.
o What is the effect?

Creates legal obligation for taxpayer to pay tax.
o When does deficiency interest come in?

It runs from the date the tax was due up to the date of
payment
o CIR v. Enron Subic – Enron was assessed. But Enron said
the FAN did not include details of the assessment. The CIR
said that it’s not required, because the PAN had the details
already. Is it OK that they were just merely notified of the
assessment in the FAN?

HELD: No, the assessment was not valid. Even if
they were informed in the PAN, the law is clear it has
to be in the FAN stage. The fact that the taxpayer
was able to file an intelligent protest through counsel
62
(Atty. Montero, hehe), it doesn’t change the fact that
the FAN is void.
6. Taxpayer files administrative protest against the FAN
o Within what period?

30 days
o To whom?

CIR
o What if there are undisputed issues?

The taxpayer must pay these undisputed assessment
items first. Without doing this, no action shall be
taken on the disputed issues
o What if there is no protest filed?

The FAN becomes final and executory
o Differentiate this from a reinvestigation:

Protest – request for reconsideration, anchored on
materials, arguments, authorities submitted already to
the BIR

Does not interrupt the prescriptive period

Reinvestigation – grounded on new/additional
materials, arguments, authorities not yet submitted to
the BIR

Interrupts the prescriptive period

What is the main difference?

For reinvestigation, submission of additional
evidence is required. For reconsideration, it
is not. Thus, for reconsideration, failure to
submit additional evidence will just make the
180 day period commence from the filing of
the protest. (Royal Bank of Scotland v.
CIR)
o Allied Banking Corp. v. CIR – ABC received a PAN which it
disputed. In response, the BIR issued a FAN which contained
the word “final decision” and made reference to “appeal.”
Instead of going through with protest, ABC went through a
petition for review with the CTA. The CTA dismissed the
petition saying that what is appealable is the decision of the
CIR on a disputed assessment. Can the FAN be construed as
the decision which is appealable to the CTA?



HELD: YES. The tenor of the FAN is that the CIR
had already made a final decision and that the
remedy of the Petitioner was to appeal the same
within 30 days of receipt. This can be gleaned from
the use of the terms “final decision” and “appeal.”

If the tenor of what is sent to the taxpayer is that it
seems like a final decision, then it’s appealable to the
CTA, allowing you to skip the entire protest
procedure.
7. Submission of documentary evidence and arguments
o When must the taxpayer file these documents?

Within 60 days of filing of protest
o What is the effect of failure to file these papers?

As if no protest was filed.
o CIR v. First Express Pawnshop – CIR issued assessment
notices against Respondent for deficiency income tax and DST
on deposit of subscription and on pawn tickets. First Express
Pawnshop (FEP) protested it in time. So normally, it has 60
days to submit documentary evidence. CIR told them to
submit DST receipts, but since FEP did not have them, it did
not submit anything in the 60 days. Did the assessment
become final?

HELD: No, it did not prescribe. The CIR cannot
demand what the taxpayer should submit within 60
days. It is up to the taxpayer to choose what to
submit. The CIR cannot deem the assessment final
just because the taxpayer did not submit the specific
documents the CIR was asking for.
o What if the taxpayer did not submit the supplementary
protest within 60 days?

It does not defeat the protest. This requirement is just
directory. Count the 180 days to decide from the date
of filing of protest. (Oceanic Wireless v. CIR)
8. Decision by the CIR or his authorized representative
o What is required from the CIR?

1. Decision stating facts, law, R&R, jurisprudence

2. The decision states its finality
o What are the courses of action by the CIR?

1. Deny the protest

63

2. Grant the protest

3. Inaction
o What are actions tantamount to denial?

1. Filing criminal action against taxpayer

2. Issuing warrant of distraint or levy

3. Reiterating demand for immediate payment of the
tax

4. Not ruling on the MR

N.B. because the CIR can only do this if the taxpayer
is found to actually be liable for the taxes.
o CIR v. Hambrecht – Hambrecht failed to protest an
assessment. But it went up to the CTA to contest the BIR’s
right to assess, claiming prescription. The CTA held that the
BIR failed to collect within the prescribed time and thus
ordered the cancellation of the assessment notice. The CIR
disputed the jurisdiction of the CTA, arguing that since the
assessment had become final and unappealable, the CTA
can’t take cognizance. Can it still?

HELD: Yes. The CTA can take jurisdiction over other
matters arising from the NIRC, and not just relating to
assessment or refunds. The issue here is whether
the CIR can still collect from an assessment that has
prescribed.

So even if the assessment is final and unappealable
already, you can still go to CTA for other
matters/issues like prescription of right to collect.
9. Appeal to the CTA
o When can one appeal to the CTA? – Either:

1. Within 30 days of denial of protest by the CIR

2. Within 30 days after lapse of the 180 days where
the CIR did not render a decision
o N.B. Note the RCBC case, which states that these are
mutually exclusive. So if the 30 day period after the 180
days of inaction has lapsed, do not attempt to file an appeal to
the CTA, because it will fail. Just wait for the CIR to deny the
protest and file thereafter. If you wrongly file out of time after
180-day lapse, there can be no appeal after denial.
o What is the effect of failure to appeal?

The assessment becomes final.
Fishwealth Canning Corp v. CIR – Filed MR to the disputed
assessment instead of filing appeal to the CTA from receipt of
the CIR’s decision.

HELD: Filing MR does NOT toll the 30-day period to
appeal to the CTA.
10. Last remedies
o 15 days MR to CTA
o 15 days appeal to CTA en banc

CIR v. Marina Sales – the appeal from CTA to CTA
en banc is mandatory
o 15 days Rule 45 to SC

o

Collection




What are two types of options the government has?
o 1. Distraint and levy (discussed below)
o 2. Civil or criminal action (discussed in the next section)
What are the requisites before government can collect?
o Final assessment and letter of demand
o Filed within proper period
What is the prescriptive period?
o 1. May be collected by distraint, levy, or proceeding in court
within 5 years from date of assessment

Count this period from the assessment of the tax, not
from the filing of the return

What is the effect of filing an amended return?

If the amended return contained substantial
changes the counting of the collection period
is from the filing of the later return
o 2. 10 years, if without assessment in case of false return, or
fraudulent return with intent to evade the tax, or failure to file a
return
Distraint of personalties, levy of real property, or garnish of bank
deposits
o What is actual distraint?

Actual seizure and taking of personal property of the
tax payer in case of failure to pay delinquency tax
o What is constructive distraint?

64
It is a preventive measure, where the taxpayer is
required to sign a receipt covering the property
distrained, obligating him to preserve it and not
dispose such.

When is constructive distraint done?

1. Taxpayer is retiring from taxable business

2. Taxpayer intends to leave the Philippines

3. He removes property from the country

4. Performs any act tending to obstruct
collecting tax from him

What happens here?

Signing of receipt covering property and
obligating preservation and non-disposal of
such

If taxpayer refuses to sign, leave document
where the property is, in the presence of 2
witnesses
o How is levy done?

Writing upon an authenticated certificate showing the
name of the taxpayer the amounts of the tax and
penalty due, with description of the property

Notice of levy given to the ROD and the taxpayer or
his representative
o Can levy and distraint be repeated?

Yes, until the liability is covered for
o When do distraint and levy begin?

Issuance of warrant and service on the taxpayer
o In estate tax proceedings, can the BIR collect estate tax
deficiencies through summary remedy of levy on real
properties without going through the probate court?

Yes. Collection of estate tax is exempted from the
statute of non-claims. There is no need for cognition
and authority of the probate court.
Sale of property after distraint
o What is the notice requirement?

1. Public posting in at least 2 public places in the
city/municipality where the distraint is made (at least
one here must be the Office of the Mayor)

2. Notice to the owner/possessor

o


When must sale be?

Not less than 20 days after notice to the owner and
public posting
o What happens to the excess?

Returned to the owner of the property
Sale of property after levy
o What is the notice requirement?

Must cover 30 days

1. Posting at the main entrance of the city
hall/municipal building and a conspicuous place
where the real property is located

2. Publication once a week for 3 weeks in newspaper
of GC
o What is the redemption rule?

May redeem 1 year from sale

With 15% annum interest

N.B. the taxpayer is not deprived of possession
before the expiration of this interim period
Forfeiture
o ONLY applies to real property
o When does forfeiture happen?

When there is no bidder or the highest bid is not
enough to cover the taxes, penalties, charges
o What happens?

The property is turned over to the government

The government subsequently sells the property

After 20 days notice

In public sale

Or private sale, if approved by the Sec. of
Finance

The funds go to the treasury
o What is the remedy for the taxpayer?

He can pay the full amount due within a year to
redeem the property
o When is the property forfeited destroyed?

When the sale of such for consumption or use is
either injurious to public health or prejudicial to lawenforcement


65
Ex. apparatus to counterfeit stamps or money, drugs,
etc.
Tax lien
o What is the nature of a tax lien?

It is a preferred claim over property, in favor of the
government

It arises from neglect or failure to pay tax even after
demand
o When does the lien become valid against any mortgagee,
purchaser or judgment creditor?

The CIR must file notice of the lien in the office of the
ROD where the property is located
o N.B. Note preference and concurrence of credits – this is the
highest
o N.B. No court injunctions allowed for collection of NIR taxes
o When, however, is there suspension of collection of
taxes?

When collection by levy, distraint, sale, or any means
under law would jeopardize the interest of the
government or the taxpayer.

Motion is filed together with the petition for review, the
answer, or as a separate motion in the CTA.
Compromise and abatement
o When can there be compromise?

1. Reasonable doubt as to validity of the claim against
the taxpayer

2. Financial position of the taxpayer shows clear
inability to pay the tax
o What are the minimum amounts of the compromise
amount?

1. Financial incapacity: at least 10% of the tax

2. Other cases: at least 40%
o When is the compromise subject to approval of the
Evaluation Board (composed of CIR and Deputies)?

1. Basic tax exceeds 1M

2. Settlement offered is less than minimum amount
o When can the CIR abate a tax liability?

1. Tax or a portion thereof appears to be unjustly or
excessively assessed

o
2. Administration and collection costs do not justify
the collection of the amount due
Can power to abate be delegated by the CIR?

No, in general.

What are the exceptions (can be delegated to
regional evaluation board)?

1. Assessments issued by regional offices
involving basic taxes of 500K or less

2. Minor criminal violations
Grounds
Minimum Amt
Who
acts
(usual)
Exception
o
o
o
Compromise
Reasonable doubt as to
validity of the claim
Poor financial position
40% of tax (doubt)
10% of tax (poor finances)
CIR
actually upon him but he is just an agent in the
procedure to collect.
CANNOT be compromised
Criminal cases already in court
Criminal cases involving fraud, any
stage
Withholding tax cases
Delinquent amounts with approved
schedule of payments
Cases with reduced assessment
after protest/reinvestigation and the
taxpayer agreed
Final and executory
Estate tax cases where compromise
is requested on ground of financial
incapacity of taxpayer
Abatement
Unjustly
or
excessively
assessed
Costs do not justify collection
Total
or
partial
(unjust/excessive)
Total (costs do not justify)
CIR

Evaluation Board (more
than 1M)
Evaluation board (500K or
less, basic taxes, and
assessed by regional offices;
or Minor criminal violations)
Can cases under administrative protest after issuance of
FAN, and still pending, be compromised?

Yes.
Can cases where final reports for reinvestigation or
reconsideration have been issued, pursuant to a signed
agreement between the BIR and taxpayer, be
compromised?

No. The assent given by the taxpayer to the reduced
amount is an admission that he accepts the amount
and can pay it.
Can the CIR compromise payment of withholding tax
where the taxpayer’s financial position demonstrates clear
inability to pay it?

No. The Withholding Agent only holds the funds in
trust, with an obligation to remit. The tax is not
CAN be compromised
Collection cases already in court
Criminal tax cases not involving
fraud, any stage
Civil tax cases
Delinquent accounts
Cases under administrative protest,
after issuance of FAN
Civil and criminal actions
o See below (government remedies)
o What is the rule in suits to collect tax based on false or
fraudulent returns?

The tax collected under such assessment cannot be
recovered in suit unless the taxpayer proves that the
return is not false or fraudulent

Rule does not apply for statements on returns made
in GF for depreciation of oil or gas wells and mines
Judicial remedies of government

66
What are the two ways by which civil tax liability of a taxpayer is
enforced by the government?
o 1. Filing civil case for collection of sum of money with the
regular courts

Which court has jurisdiction?

Up to P1M, RTC

Exceeding P1M, CTA
o 2. Filing an answer to the petition for review filed by the
taxpayer with the CTA








o
This is akin to filing civil case in regular courts and will
stop the running of the prescriptive period
When does self-assessed tax become delinquent?
o When the return filed shows a certain amount, and it is not fully
paid for. The taxpayer is automatically deemed delinquent in
this case.
When does a FAN result into delinquency tax?
o Failing to protest the FAN within 30 days – this gains finality.
When else does a disputed assessment become delinquency tax?
o Failure to file timely appeal to the CTA on the CIR’s final
decision
What is the period by which the BIR can file a case for collection?
o Within 5 years from date of assessment
What are the two common crimes punishable under the Tax Code?
o 1. Attempt to evade or defeat tax
o 2. Failure to file return, supply correct and accurate
information, pay tax, withhold and remit tax, and refund excess
taxes withheld on compensation
Can tax liability be collected through a criminal action?
o Yes.
What are the important principles on criminal tax actions?
o 1. No criminal action can be filed in court without approval of
the CIR

This power has been delegated by the CIR to
subordinates in his administrative issuances
o 2. The case is RP v. accused taxpayer (as opposed to civil
cases, where it is RP v. delinquent taxpayer)

Conducted by BIR’s legal officers

But can they get assistance of DOJ prosecutors?

Yes.

When is the Solicitor General required to appear
or sign pleadings?

During appellate proceedings

Action by the CIR without Sol-Gen
concurrence will lead to dismissal of the
case
o
o
o
o
67
3. Filing criminal case brings the civil collection case with it.
But acquittal in criminal action does not bar further civil
collection action.
4. Period of prescription: 5 years

From when do you count the five years?

From commission of the violation

If not known, from discovery thereof and
institution of judicial proceedings for its
investigation and punishment

When is prescription interrupted?

1. When proceedings are instituted

2. When the offender is absent from the
country
5. Payment of civil liability will not extinguish criminal liability
6. If a person is convicted for violation of Tax Code and he has
no property to meet the fine, he can be subject to subsidiary
personal liability
7. If the CIR is convinced that the taxpayer is guilty, he cannot
impose an arbitrary penalty – must file criminal proceedings

Exception?

Entering into a compromise penalty

Distinguish a compromise penalty from a
compromise:

1. Compromise penalty is money paid to
compromise a tax violation that a taxpayer
has committed which may be subject of
criminal prosecution. Compromise is the
amount of money paid by the taxpayer to
settle his civil liability.

2. Compromise penalty’s basis for amount
paid is gross sales and receipts during the
year or the tax due. Compromise’s basis is
the basic tax assessed.

3. Minimum amount:
o Compromise penalty – depends on
the tax violation, and in general is
not less than P1K
o Compromise – 40% or 10%





When can a criminal action proceed before or during pendency of
assessment?
o There must be prima facie showing of willful attempt to evade
taxes
As assessment is required prior to the filing of a civil case for
collection. Is this same requirement applicable before criminal
prosecution?
o No. There is no need for precise computation and assessment
of tax before criminal prosecution.
o What is the important element of the circumstances for
this principle to apply, based on Ungab, as qualified by
CIR v. CA and Fortune?

There must be prima facie showing of willful attempt
to evade. For instance, the taxpayer failed to declare
in his ITR his income derived from sale of bananas.

In Fortune, meanwhile, the registered wholesale price
of the goods approved by the BIR is presumed to be
the correct taxes, so there is no prima facie showing
of willful attempt to evade.
o So how did this case change the principle stated above?

In general, there must be final finding that a tax is
due, unless there is prima facie showing of willful
attempt to evade.
Is there need for a prior deficiency assessment before a criminal
tax case can be filed?
o No. Prior deficiency assessment is only needed for civil cases
For corporations, who will be held criminally liable?
o The president, GM, managing partner, treasurer, or officer
responsible for violation

Remedies of Taxpayers

Give an overview/comparison of the taxpayers’ remedies under the
NIRC and the TCC:
o NIRC – before payment

Administrative – filing protest within 30 days of FAN to
the CIR

Judicial – appeal of adverse decision of CIR to the
CTA, then to CTA en banc, and to the SC
68
When else can the taxpayer go to the
CTA, apart from denial?
o 180 days of inaction by the CIR
over the protest
o NIRC – after payment

Pay assessed tax within 30 days and then file a claim
for refund or tax credit within 2 years from date of
payment

If denied by CIR, appeal to CTA within 30 days of
denial and within 2 years from date of payment

If the 2 years are about to expire and there is
still no CIR action, deem it as denial and go
straight to CTA
o TCC – before payment

No such thing
o TCC – after payment

Administrative – file claim for refund, which may take
the form of abatement or drawback

Protest within 15 days from payment if he disagrees
with Collector’s decision re: legality/assessment of
customs duties

Go to Commissioner within 15 days

Go to CTA within 30 days

NOTE: there is automatic review to the
Commissioner, and then to the Sec. of Finance if the
Collector decision is in favor of the taxpayer
What are the substantive remedies/protections available to the
taxpayer?
o 1. Taxpayer may question constitutionality or validity of tax
statutes or regulations
o 2. Subsequent BIR rulings do not prejudice prior acts (Nonretroactivity of rulings)

What are the exceptions to the general rule that
BIR rulings are not retroactive?

1. Taxpayer deliberately misstates or omits
material facts from the return

2. Facts gathered by the BIR are materially
different from the facts where the ruling is
based

3. Taxpayer acted in bad faith
Give an example where a taxpayer was acting in
good faith.

An HMO (Health Maintenance Organization)
described itself as performing medical
services, so it was VAT exempt. But in fact,
HMOs do not actually perform the services;
they are just conduits. Since there was no
statute governing HMOs until recently, it was
acting in GF and there is no retroactivity.
o 3. Failure to inform taxpayer in writing of legal and factual
bases of assessment may be challenged as a void assessment
o 4. Examination is limited to only once a year.

What are the exceptions, when there can be more
than one examination or inspection in a taxable
year?

1. Fraud, irregularity, mistakes

2. Taxpayer requests reinvestigation

3. Verification of compliance with withholding
tax laws and regulations

4. Verification of capital gains tax liabilities

5. Exercise of CIR’s power to obtain
information from other persons
o 5. Publication requirement for RMC and RMO
What are the procedural remedies?
o 1. Notice of informal conference
o 2. Post-reporting/audit notice – submit written explanation
within 15 days
o 3. PAN – taxpayer submits written explanation of findings
within 15 days
o 4. FAN and Letter of Demand – must be issued 3 years from
date of filing of return or 10 years from date of filing of
fraudulent return

N.B. The FAN is the assessment that must comply
with the statutory prescriptive periods under the NIRC
o 5. Submission of protest – within 30 days – and documentary
evidence – within 60 days thereafter
o 6. Reinvestigation

What is this?







69
BIR evaluates legal and factual arguments,
including documentary evidence
o 7. Denial of protest/remedies for such

Who usually denies the protest?

The Regional Director – within 180 days
from date of filing of protest or submission of
documentary evidence

Where to next?

Go to the CIR for administrative appeal

What happens at the CIR level which can be
appealed?

1. Denial of protest

2. Or inaction within 180 days of protest
o 8. Appeal to CTA of taxpayer – 30 days from receipt of
decision or after the 180 days of inaction (RCBC doctrine)
o 9. MR to CTA, within 15 days
o 10. Appeal to the CTA en banc, within 15 days
o 11. Appeal to the SC – Rule 45
What is the course of judicial remedies when the BIR employs
administrative remedies, like distraint?
o Appeal to CIR  CTA  CTA en banc  SC
What is the course of judicial remedies when the BIR files a civil
case for collection?
o RTC (less than 1M)  CTA (start here for claims at least 1M
Pesos)  CTA en banc  SC
What about refund cases?
o CIR  CTA  CTA en banc  SC
When is there no need for assessment prior to collection in a civil
case?
o For self-assessed taxes by taxpayers, the assessment takes
the place of the FAN in the process. So collection can ensue
within 5 years of the date of filing of the return.
o What are the taxes that require prior assessment before
being established?

1. Tax, when period of taxpayer is terminated

Ex. retiring from business, intending to leave
Philippines, removal or concealment of
property, etc.
o

2. Deficiency tax liability arising from BIR tax audit

3. Tax lien on property

4. Dissolving corporation

N.B. some here require jeopardy assessment
What taxes do not require assessment to establish tax
liability or delinquency?

1. Self-assessing tax

2. Tax paid is lower than the tax due on the return
filed
o
Refund




NOTE: relate with discussion under VAT since the principle is the same
– that for those liable for FAR, like VAT-able persons, the 3 possible
outcomes are:
o 1. Pay balance
o 2. Carry over excess credit

Choosing this option is irrevocable for that tax period

So if the carry over still leads to excess credits, you
cannot ask for it back through refund. Just carry it
over again.
o 3. Ask for credit or refund
Grounds and requisites for refund?
o 1. Taxes illegally collected
o 2. Taxes excessively collected
o 3. Tax paid by taxpayer by mistake
Compare – Tax credit:
o Claim for issuance of tax credit certificate showing an amount
owed by the government to the taxpayer, which the latter can
offset or credit against his NIRC taxes.
o EXCEPT final withholding taxes. No credit from or against can
apply to FWT.
What are the requirements for refunds/credits?
o 1. Written claim for refund/credit
o 2. Must contain categorical demand for refund/credit
o 3. File administrative claim, and then suit before the CTA within
2 years from payment

REGARDLESS OF SUPERVENING CAUSE

What are the exceptions to this clause?





70
1. Corporate income tax: If the
company incurred income taxes the
first 3 quarters, but incurs a net loss
at the end of the year, count the 2
years from the F.A.R.
o 2. Income tax paid in installments:
the tax is deemed paid on the last
installment

VERY IMPORTANT: So if the 2 year period is about
to run out, and the CIR hasn’t decided, you can
already go to the CTA

What about WH taxes? When is the 2 year period
counted?

Upon submission of monthly returns on WH
taxes and NOT the annual report of income
payments.

How does the rule differ between FWT and CWT?

1. Final WH tax: from monthly returns

2. Creditable WH tax: from annual report,
which is kind of like a FAR
Necessity of proof for claim or refund:
o Submission of a tax return, which is proved to be valid.
Who has the burden of proof and what is it?
o The taxpayer claiming refund, because they are in the nature
of exemptions and thus construction is strictly against the
claimant
What is the legal basis of tax refunds?
o Solutio indebiti. If something is received when there is no right
to demand it, and it was delivered through mistake, the
obligation to return arises.
Who may claim a refund or apply for tax credit?
o 1. Taxpayer
o 2. WH tax agent

WHY – because under the law, the agent is the one
liable for violation of WH tax law. Since the WH agent
is personally liable to deduct and WH taxes, he is
deemed the party-in-interest.
What if there was no prior written claim filed with the CIR?

o


Then one cannot file a suit with the CTA to claim a refund or
credit. The written claim with the CIR is a mandatory
prerequisite.
How long does a taxpayer have to use a tax credit or claim the
refund?
o Use tax credit within 5 years, or else unusable
o Claim tax refund within 5 years, or else forfeited to government
CIR v. Aichi Forging – Claim of refund of unutilized input VAT
o Remember: general rule, when you file claim for refund, you
reckon it from date of payment. In VAT, what applies is the
date of filing of return.
o Was the filing of the judicial claim premature in this case
even when the two year period was about to run out?

Remember, in so many cases, if the two year period
is about to lapse, you have to go straight to the court.
o CIR won here because Sec. 112 gives the CIR a 120-period to
decide before filing a judicial claim EVEN IF either of those two
dates comes after the two-year period. So you can’t go
straight to court even if the two years have lapsed but only for
refund on unutilized VAT input taxes.




Statutory offenses and penalties


When is the surcharge of 25% imposed?
o 1. Failure to file any return and pay the tax due
o 2. Filing a return with an internal revenue officer other than
those with whom it is required to be filed

Unless authorized by the CIR
o 3. Failure to pay deficiency tax within time prescribed in the
FAN
o 4. Failure to pay the full/part amount of tax shown on a return
or full amount due when no return is required to be filed
When is the surcharge 50% instead?
o 1. Willful neglect to file the return
o 2. False or fraudulent return
o What is prima facie evidence of false/fraudulent return?

Substantial under-declaration of sales or income or
substantial overstatement of deductions

“Substantial” = 30%

When will surcharge not be imposed?
o 1. When the taxpayer acted in good faith in paying less than
what is actually required (ex. an electric cooperative paid lower
rates fixed by its franchise)
o 2. Highly controversial issue (difficult to interpret)
X asked his accountant to file his ITR.
The accountant
substantially under-declared his income and overstated his
deductions. Is he liable for 25% or 50% surcharge?
o 25%, because there is a deficiency, but not fraud. The
fraudulent calculation of the accountant is beyond his authority
and was not sanctioned by X.
o The accountant, meanwhile, is criminally liable under the Tax
Code.
Is there a prescriptive period for the surcharges?
o No. The 3 year period does not apply because no return is
required by law for this.
What is deficiency interest?
o It is a 20% interest (or Manila Reference Rate, whichever is
higher) imposed on any unpaid amount of tax, from date
prescribed for payment until it is paid
What is delinquency interest?
o It is a 20% interest (or Manila Reference Rate), whichever is
higher, required to be paid in case of failure to pay:

1. Amount of tax due on any return required to be filed

2. Amount of tax due for which return is required

3. Deficiency tax or surcharge or interest thereon, on
the due date appearing in the notice and demand of
the CIR
When is interest on extended payment imposed?
o 1. Person requests to have payment by installments, but:

Fails to pay the tax

Fails to pay any installment

Or fails to pay the installment on time
o 2. Or CIR authorized an extension of time to pay taxes or
deficiency tax
o What is the value?

Also 20%
Organization and Function of the BIR
71





What are the powers and duties of the BIR?
o 1. Assess and collect national taxes, fees, charges
o 2. Enforce forfeitures, penalties, fines
o 3. Execute judgment in cases decided in its favor
o 4. Effect and administer supervisory and police powers granted
by the NIRC and special laws
What are the powers of the CIR as re: rules and regulations?
o The power to interpret tax laws and decide tax cases.

Subject to review of the Sec. of Finance
o What is the purpose of this provision?

To prevent conflicting opinions issued by the DOJ,
DOF, BOI, etc. – instead the CIR is given the primary
power to interpret and decide
o Who has jurisdiction to review rulings of the CIR?

The CTA, not the RTC

Does availability of recourse to Sec. of Finance
stop the prescriptive period to the CTA?

No.
o X was questioning the validity of a Revenue Memorandum
Order (RMO) of the CIR. Where should he file?

With the CTA. Note that an RMO is in fact an opinion
issued by the CIR in interpreting the NIRC.
o Who has the power to decide disputed assessments,
refunds, and penalties?

The CIR, subject to review by the CTA.
o What about assessments issued by Regional Directors,
Deputy Commissioners, etc?

Can be appealed administratively to the CIR.
When can the CIR suspend the business operations of a taxpayer?
o A. VAT-registered persons:

1. Failure to issue receipts/invoices

2. Failure to file VAT tax return

3. Understatement of VAT-able sales by 30% or more
o B. Any person – failure to register, when required to do so
How long is closure?
o 1. At least 5 days
o 2. AND will only be lifted upon compliance by the taxpayer with
requirements imposed
Who are constituted as agents of the CIR in collection of NIRC
taxes?
o 1. Commissioner of Customs and his subordinates, as re:
collection of VAT and excise tax on imported goods
o 2. Head of appropriate government office and his subordinates,
as re: collection of energy tax
o 3. Authorized agent banks, to receive payment of taxes
through banks
o Who can be included here?

Withholding agents, who are tasked to make
deductions and remit taxes, as re: compensation
income, passive investment income, etc.
LOCAL GOVERNMENT TAXATION


72
What are the fundamental principles of local taxation?
o 1. Uniformity
o 2. Taxes, fees, and charges must be equitable and be based
on the ability to pay, for public purposes, not unjust, excessive,
oppressive, or confiscatory; not contrary to law, public policy,
national economic policy or in restraint of trade
o 3. Levy and collection not let to a private person
o 4. Inures solely to the LGU levying the tax
o 5. progressivity principle is followed
What is the constitutional basis of Local business taxes?
o Art. X, Sec 5 – LGUs have the power to create own sources of
revenue and to levy taxes, fees, and charges subject to
Congressional limitations
o These taxes accrue exclusively to LGUs
o What can LGUs not tax?

Instrumentalities of the National Government, like
PAGCOR

This is as opposed to GOCCs, which can generally be
taxed. (See discussion below)
o Can Congress abolish the power of LGUs to tax?





No.
This would contravene the Constitution.
Congress can only impose limitations, but not destroy
this power to tax.
o What is the paradigm shift in local government taxation?

There is a paradigm shift from exclusive
Congressional power to also allowing local legislative
bodies to exercise these powers
o What is the limit on this power of LGUs, as pertaining to
the National Congress?

The Congress can impose tax exemptions, which will
prevail over LGUs’ power to tax. But in the new
Constitution, the LGU no longer has to wait for an
express grant of power before being able to exercise
power to tax.
o The repeal of exemptions by the LGC does not apply to
franchises enacted after its passing. The “in lieu of all taxes
provision” has become functus officio since Smart does not
pay national franchise tax anymore; it pays VAT. (Smart v.
Davao)

Exemptions must be strictly construed against
taxpayers. The “in lieu of all taxes” provisions with
respect to ABS-CBN should not exclude other nonfranchise taxes. (Quezon City v. ABS-CBN)
What is the scope of LGUs’ taxing power?
o 1. It must not be specifically enumerated in the LGC or taxed
under the NIRC or other applicable laws
o 2. It must not be unjust, excessive, oppressive, confiscatory, or
contrary to national economic policy
o 3. Need public hearing prior to enactment of ordinance
o 4. Copies of the ordinance must be published for 3 consecutive
days in a newspaper of local circulation or posted in two
conspicuous public places
Who can impose a tax in the LGU?
o The Sanggunian of the LGU concerned.
o Can the mayor impose a tax?

No. The city mayor alone could not order the
collection of tax.
Can collection of local taxes be let to any private person?
o No.


73
What is the process for approval and review of tax ordinance?
o 1. Copies furnished to the higher Sanggunian

Barangay  Municipality/City, within 10 days from
enactment

Municipality/Component City  Provincial, within 3
days after approval
o 2. Higher Sanggunian has 30 days to review the ordinance

Powers of Provincial Sanggunian?

May declare ordinance invalid, in whole or in
part

Powers of Municipality/City Sanggunian?

If it finds the ordinance inconsistent with law,
it can return it for adjustment or amendment

It can also send notice that the ordinance is
suspended until revision is done
o What if no action is done within 30 days?

Deemed approved
o N.B. this is the same procedure as that discussed under the
LGC in Political Law
What are the tests of a valid ordinance (Magtajas v. Pryce)?
o 1. Not contravene Constitution or statute
o 2. Not unfair or oppressive
o 3. Not partial or discriminatory
o 4. Not prohibit, but may regulate trade
o 5. General and consistent with public policy
o 6. Not unreasonable
What cannot be covered by local taxes?
o [Covered by NIRC provisions and other laws]
o 1. Income tax (except banks, financial institutions) (NIRC)
o 2. DST (NIRC)
o 3. Estate, gift, inheritance, gifts, legacies, acquisitions mortis
causa (NIRC)

What are the exceptions (i.e. taxable)?

Transfer of real property owned by provinces

And by cities
o 4. All customs duties, except wharfages on wharves
constructed by LGU (TCC)
o 5. Over products sold by marginal farmers or fishermen (NIRC)

o

6. Excise taxes on articles in NIRC and taxes, fees, charges on
petroleum products (NIRC)

Petron v. Malabon: While the LGC does not bar
imposition of business taxes on articles burdened by
excise taxes (because they are different taxes), it
specifically prohibits LGUs from extending any kind of
taxes, fees, or charges on petroleum products, EVEN
BUSINESS TAXES.
o 7. Percentage or value added tax on sale, barter, exchange
(NIRC)
o 8. Gross receipts on transportation contractors and common
carriers (NIRC)
o 9. On premiums for reinsurance, or retrocession (NIRC)
o 10. Over Philippine products actually exported (NIRC – vat)
o 11. On the National Government, agencies, instrumentalities,
other LGUs (NIRC)

BUT: One of the most significant abolitions in the LGC
is the removal of the blanket exemption against
taxation of GOCCs. So in this case, Cabanatuan can
impose a franchise tax over NAPOCOR. (NPC v.
Cabanatuan, Batangas Power v. NPC) So this is an
exception.
o [special things to take note of ]
o 12. On goods entering, exiting, passing through LGU in guise
of wharfage, tolls, or other taxes, fees, charges (TAKE NOTE)

What is allowed?

Can impose taxes on use of roads, piers,
wharfs, etc constructed by the LGUs.

But not over goods or merchandise in the
guise of wharfage or fees.
o 13. Pioneer or non-pioneer business enterprises certified by
BOI
o 14. Registration or licenses of motor vehicles, except tricycles
o 15. On Countryside and Barangay Business Enterprises and
Cooperatives (TAKE NOTE)
What taxes may be imposed by provinces? (TP-FS-PAD)
o N.B.: All rates are maximum
o 1. Transfer of real property ownership

0.5% of consideration or FMV, whichever is higher
o
o
o
o
o
74
What is the consequence of payment of transfer
of RP ownership?

Prerequisite to registration with ROD

When?

Transferor or E/A must pay the tax within 60
days of execution of deed or death of
transferor
2. Business of printing and publication

0.5% of gross annual receipts

0.05% for new businesses

Exempt if printing Dep. Ed. required books
3. Franchise tax

0.5% of gross annual receipts

0.05% for new businesses
4. Sand, gravel, other quarry resources

10% of FMV per cubic meter of stones, gravel, earth,
etc.

How are proceeds divided?

30% province

40% city/municipality

40% barangay

Cannot impose local taxes on extraction of minerals
on private lands, because this is already covered
under excise taxes in the NIRC. But may impose
local taxes on extraction of minerals from public
lands. (Bulacan v. CA)
5. Professional tax

Where is it paid?

A. Where he practices profession OR

B. Where principal office is

Can practice wherever without being without
subjected to any other professional tax elsewhere

When paid?

Before 31 January
6. Amusement tax

30% of gross receipts

What are exempt from tax?

Operas, concerts, art shows, exhibitions

EXCEPT pop/rock concerts
PBA falls under national amusement taxes (15%) and
cannot fall under the LGC allowing the province to tax
theater, cinema, etc. which are all kinds of artistic
expression. (PBA v. CA)
o 7. Annual fixed tax for every delivery truck/van of
manufacturers, producers, wholesalers, dealer, or retailers of
certain products
What taxes may be imposed by municipalities?
o In general, those not otherwise levied by provinces.
o 1. Manufacturers, assemblers, repackers, processors, etc. of
article of commerce (any kind/nature)
o 2. Wholesalers, distributors, dealers in any article of commerce
o 3. Exporters, manufacturers, millers, producers, wholesalers or
essential commodities

Half rates than usual
o 4. Retailers

BUT barangays have exclusive power to levy if
receipts/sales are 50K or less for cities, 30K or less
for municipalities
o 5. Contractors
o 6. Banks/financial institutions
o 7. Peddlers of any merchandise or article of commerce

With at most P50 income
o 8. Any business not otherwise specified above

X City imposed a business on ABC Corp., a
manufacturer, under par. 1. Can it impose a
business tax again under this (#8) paragraph?

No. #8 only contemplates those businesses
that do not fall in the above enumeration
o 9. Fees and charges – may impose on any business,
occupation, or profession

EXCEPT professional tax, reserved for provinces
o 10. Exclusive for fishery rentals, fees, and charges
o Cases:

Oil pipeline operators are considered common
carriers.
Taxpayer already paying 3% common
carrier’s tax in NIRC – thus LGU cannot impose






75
business tax over it anymore. (First Phil. Industrial
v. CA)

Local government can tax sales of goods to people
outside the city, as long as the sales were booked
and paid within the city, and delivered to a carrier
within the city. (Phil. Match v. Cebu)

Business taxes based on gross receipts, not gross
revenue,
so
those
constructively
received/receivables/assets may be taxed. (Ericsson
Telecommunications v. Pasig
What about cities?
o Same as municipalities and provinces, but can tax up to 50%
more, except rates for amusement and professional taxes
What taxes may be imposed by a barangay?
o 1. Taxes of fixed business establishments with gross
sales/receipts of not more than 50K for those in cities and
30K for those in municipalities
o 2. Service fees and charges

For use of barangay owned properties or service
facilities such as palay dryers
o 3. Barangay clearance fee

Prerequisite to a city or province issuing a business
permit or license
o 4. Other fees/charges on:

Commercial breeding of fighting cocks

Recreation places that charge admission fees

Billboards, signboards, neon advertisements
What are the common revenue raising powers of all LGUs?
o 1. Service fees and charges
o 2. Public utility charges
o 3. Toll fees and charges

For the use of public road, pier, wharf, waterway,
bridge, ferry – if funded and constructed by that LGU

But cannot collect form:

1. PNP/AFP personnel on mission

2. Post office personnel delivering mail

3. Physically handicapped, and disabled
citizens more than 65 years old
What rate may be imposed by municipalities within Metro Manila?
o



o
Rate not exceeding 50% of the maximum rates for other
municipalities
The municipality of Malolos imposed a tax on transfer/sale of real
property at 0.25% of the total consideration. X sold such property,
but refused to pay the tax, claiming the tax is void. Is he right?
o Yes, he is right. Municipalities have no capacity to impose
taxes on transfer or sale of real property, which is within the
power of provinces.
X resides in QC is a CPA and a Lawyer. He has his main office in
Makati, and a branch in Pasig. He pays his professional tax as CPA
in Makati and his professional tax as Lawyer in Pasig.
o What is the transaction taxed?

The exercise of profession requiring government
licensure exam
o What is the tax base and tax rate?

Tax base – reasonable classification by the
sanggunian

Tax rate – in accordance with taxing ordinance which
must not exceed P300
o May Makati City require him to pay professional tax as a
lawyer?

No need. He already paid in Pasig. He may pay in
the place where he practices his profession or where
he maintains his principal office. His payment in Pasig
entitles him to practice everywhere else, without
having to pay professional tax again.
o May QC go after him for his professional taxes as CPA and
lawyer?

No, for two reasons: 1) professional tax is paid only
once per taxable year, and he has already paid
(before Jan 31); and 2) place of residence is not
included in the places where professional tax can be
imposed (must be place of principal office or place of
practice).
o What is the exception for payment of professional taxes?

Professionals
exclusively
employed
in
the
government
Municipality XYZ imposes a professional tax on all lawyers, over
2% of gross income. Valid?



76
No. First, provinces, not municipalities are allowed to impose
professional tax.
o Second, no LGU can impose a tax on income.
May a city impose business taxes on condominium corporations?
o No. Business taxes in the LGC are taxes on business, which
are regularly engaged in trade or commercial activity as a
means of livelihood or with a view to profit. A condominium
corporation is not engaged in business, by its very nature.
When do local taxes accrue?
o One the first day of the calendar year.
o What if a new ordinance is passed on another date?

It is considered as falling and accruing at the
beginning of the next ensuing quarter.
o What is the tax period?

By default, calendar year

When may payment be made?

Quarterly installments, within 20 days of
each subsequent quarter

May the time be extended?

Yes, by the Sanggunian, for period not
exceeding 6 months (no penalties or
surcharges)

Business taxes are paid at the beginning of the year
to allow operations for the rest of the year (even if, as
in this case, calculated based on previous year’s
figures). Income taxes, meanwhile, are paid on 15th
day of 4th month, and are for previous year’s
operations. (Mobil Phils. v. Treasurer of Makati)
o What surcharges may be imposed for delinquency?

Not exceeding 25% of the amount due
o What interest may be imposed for delinquency?

Up to 2%/month not exceeding total interest
corresponding to 36 months
Situs rules:
o What if a manufacturer or contractor has a sales branch or
sales outlet?

Record the sale in the municipality or city where the
branch or outlet is found






If there is no sales outlet or branch in municipality or
city, then record in the principal office
o What if a manufacturer, contractor, exporter, or producer
has factories, offices, plants, or plantations?

30% of sales recorded in the principal office are
taxable by the city or municipality where the principal
office is

70% of all sales recorded in the city or municipality
where the factory, office, plant, or plantation is found

What if the plantation is in a place other than
where the factory is found?

60% to the city/municipality where the
factory is located

40% where the plantation is located
What are the LGU’s remedies for collection of tax?
o 1. Tax Lien

Over property or rights subject to the tax, and
property used in business/profession with respect to
which the lien is imposed
o 2. Distraint and levy (administrative)
o 3. Judicial action
o Can both administrative and judicial actions be pursued?

Yes, they can be pursued concurrently or
simultaneously
What is the period to assess for local taxes?
o Within 5 years from date they became due
o In case of fraud or intent to evade, within 10 years from
discovery of fraud/intent to evade
o Viz. 3 years to assess for NIRC
What is the period to collect?
o Within 5 years from date of assessment by administrative or
judicial action
When are these periods suspended?
o 1. Treasurer is legally prevented from assessing or collecting
o 2. Taxpayer requests for reinvestigation, executing a waiver in
writing re: period
o 3. Taxes is out of the country or cannot be located
What are the remedies of the taxpayer –
o Before an assessment?

77

1. Administrative appeal to Sec. of Justice

2. Action for declaratory relief
o After an assessment?

1. Protest of assessment

2. Or Action for refund
Procedure for admin action?
o A. Distraint of personal property

1. Issue duly authenticated certificate showing
delinquency.

2. Seize property.

3. Render accounting, signed by officer and left with
taxpayer, persons possessing the goods taken,
dwelling place or business of person with person of
suitable age

4. Posting in at least 3 public places in the LGU (note:
for NIRC, just 2 notices)

5. Sale held at least 20 days form notice to the
taxpayer

6. Goods sold and within 5 days, treasurer reports to
local CE

What if the property is not sold within 120 days
from distraint, what is the implication?

Forfeited to government

7. Apply proceeds
o B. Levy of real property

1. Certificate showing what is due

How is levy effected upon?

Write the description of the property upon
which levy is effected

The treasurer does this

2. Written notice of levy given to ROD and assessor –
annotated on the title

3. Levy and sale on real property happens if the
personal property on distraint is not sufficient

4. Within 30 days from levy: notice

At least 30 days posting in the entrance of
the city or municipal hall, and in the
barangay (conspicuous place)



And at least 3 weeks publication in
newspaper of GC

5. If there is no bidder or lack of sufficient bid, the
local treasurer can purchase the property on behalf of
the local government

6. Redemption period: within1 year from sale

Plus interest of at most 2%/month

Return purchase price to purchaser with
interest (2%/month as well, maximum
interest)
o There can be further distraint or levy after the first
o What are personal properties exempt from distraint/levy?

1. Tools of trade

2. 1 beast of burden used in occupation

3. Necessary clothing of family

4. Household furniture not exceeding 10K

5. Provisions and crops for four months

6. Professional libraries

7. Fishing boat and net not exceeding 10K for
fisherman

8.
Material
or
article
forming
part
of
house/improvement on real property
o When is a treasurer penalized?

Failure to issue or execute the warrant of distraint/levy
after expiration of time prescribed

Found guilty of abusing exercise thereof
Judicial action:
o Filed by treasurer
o Follow prescriptive periods listed above (5 or 10 to assess + 5
to collect)
What is the remedy if a taxpayer wants to question
constitutionality or legality of a tax ordinance?
o Raise to the Sec. of Justice within 30 days from effectivity
o How long to render a decision?

Within 60 days from receipt of appeal
o Does this suspend effectivity of the ordinance?

No.
o When can the aggrieved party file appropriate proceedings
with the courts?


78

Either –

1. Within 30 days of receipt of decision of SOJ

2. Lapse of 60 day period without SOJ action
o Taxpayer may file complaint alleging invalidity of municipal
ordinance and request for tax refund, even without filing a tax
protest. But need to question ordinance within 30 days of its
enactment – first to Sec. of Justice, then within 30 days to
courts if he decides, or if no decision in 60 days. (Jardine
Davies v. Aliposa)
What is an action for protest?
o After receiving what he feels is a wrong assessment – 60 days
to protest and treasurer has 60 days to decide.

Viz. For NIRC, 15/30 days for PAN/FAN
o What if it’s denied?

Can elevate within 30 days to the RTC.
o When do you count the 30 days?

From denial of the protest

OR from lapse of 60 days

Like the RCBC case
o Is there a requirement to pay under protest?

No, but since you are a going concern, you won’t get
a license and you may be closed down.
What is the procedure to claim for refund?
o The filing of a written claim with the local treasurer is a
condition precedent
o What if the treasurer fails to act and the 2-year period is
about to expire?

The taxpayer can initiate court action for refund
o What is the period to appeal to the court if the treasurer
denies the claim?

The period is not specifically provided; therefore, it is
valid as long as:

1. Action is filed within the 2 year period

2. There is a prior written claim to the treasurer
o What is the difference in the 2 year period here compared
to national taxes?

There is a concept of supervening period here, but
not in national taxes.

REAL PROPERTY TAXATION



What is the nature of RPT?
o It is a tax imposed by the national legislative, and enforced
throughout the Philippines – not just in a particular political
subdivision
o However, bulk of the proceeds accrue to the LGU where the
property is located
What are the fundamental principles of RPT?
o 1. Appraisal at current and FMV
o 2. Classification based on actual use

What does “actual use” mean here?

The policy is that even if the user is not the
owner, he can be subject to RPT (ex. person
using government property covered by
mining leases)
o 3. Assessment based on uniform classification
o 4. Appraisal, assessment, levy and collection shall not be let to
a private person

Can there be a law stating that RPT shall be based
on consideration appearing in the deed of
conveyance?

No. This is illegal because appraisal must
not be let to any private person; and it also
destroys the principle that classification and
valuation must be based on actual use. The
private parties cannot simply dictate the
FMV.

Schedule of values of real property must be prepared
jointly by all City Assessors of districts under P.D.
921. When schedules were created individually, even
if approved by the undersecretary, they were still void.
(Mathay v. Macalincag)
o 5. Appraisal and assessment shall be equitable
When does RPT accrue?
o January 1.
o What is the nature of the accrued tax?

It is a lien superior to all other liens, mortgages, or
encumbrances

79
It can only be removed by payment of the delinquent
taxes, with expenses and interest
o Can it be paid in installments?

Yes, up to four installments (Mar 31, June 30, Sept
30, Dec 31)
o What is the rule on application of payments?

Apply first to prior delinquencies, before applying to
current period
What are the types of RPT?
o 1. Annual ad valorem tax

Provinces – not exceeding 1% of assessed value

Cities and municipalities in MM – not exceeding 2% of
assessed value

What about municipalities outside MM?

No can do, brother.

Does this need prior public hearing before rates
can be increased?

No. Not required. That’s just for special
levies.
o 2. Special levies (optional)

1. Additional 1% tax for Special Education Fund

2. Additional 5% tax on idle lands

What are idle lands?
o A. Agricultural lands at least ½ of
which are uncultivated
o B. Non-agricultural lands of more
than 1000 sq. m., at least ½ of
which is unimproved

Which LGU may impose this?
o ONLY a) provinces, b) cities, and c)
municipalities within MM

3. Special levy or assessment

To which does this apply?
o Property
that
is
especially
benefitted
by
infrastructure
developments/improvements

What is the limit?

o

The total must not exceed 60% of
the actual cost of the expenses,
including land acquisition

Which are exempted?
o 1. Lands exempt from basic RPT
o 2. Remainder of land, the portion of
which was donated to the LGU for
such construction of improvements

What is the procedural requirement?
o Before enacting an ordinance
imposing a special levy, there must
be a public hearing, with notice to
owners of RP that are affected, or
persons with legal interest therein
o Inform about date and place of
hearing, and give them opportunity
to express positions

What is the period for protest?
o Not later than 30 days from
publication of the ordinance
o Follow usual LBAA-CBAA route

Bar Q: X filed a protest that the special
assessment imposed in light of road widening
projects in Ermita was more than the maximum
rate of 2% of the real property. Does his protest
have ground?

No. Note that the 2% limit is for basic RPT
(ad valorem). The only limit for special levy
is that it must not exceed 60% of the cost of
the improvement.
What are real properties subject to tax?
o Land, buildings, machinery and other improvements not
exempt under the LGC
o What does “machinery” cover?

Machines, equipment, contrivances, instruments,
appliances, or apparatus

Must it be permanently affixed or attached to the
RP?

No.
o
o
o
80
What is the requirement?

These machines must actually, directly, and
essentially meet the needs of the particular
industry
Does RPT require that the machines or equipment be
embedded on the land?

No. Power barges, even if they are floating and
movable, they are intended by their nature and object
to remain at a fixed place on a river, lake, or coast.
They are considered immovable property.

See: While not embedded on the land, storage tanks
considered taxable improvements on the land,
enhancing its utility and rendering it useful to the oil
industry. The tanks were installed with “some degree
of permanence.” (Manila Electric v. CBA)

Contra: Steel towers of electric company not real
property. Not adhered to soil, but screwed to metal
frames. Can be unbolted, and moved. (BAA v.
Manila Electric)
Does RPT cover equipment placed by the lessee, and not
the owner of the land?

Yes.
It is a usual occurrence that properties
considered as personal under general law become
treated as real property under taxation law. This
includes machines not permanently affixed, but
placed with some degree of permanence. In the
same way, even if placed only by the lessee, because
the machine has some degree of permanence and
tends to directly, actually, and essentially meet the
needs of the industry, it is taxable as RP.
Does RPT cover LRT improvements?

Yes, because even if the national government owns
the terminals, beneficial use has been granted to a
taxable entity.

But aren’t these national roads?

No, because they are not open to use by the
general public.
They serve a function
different from public roads. Beneficial use
granted to taxable persons.





So they are not exempt from RPT.
X owned real property declared as residential, since it was used as
family residence. X left for the US and leased out the property to
Y, who used the property in sale of appliances. The Provincial
Assessor reclassified the property as commercial, for tax
purposes. X appealed to the LBAA, insisting that the prior
classification that their RP is residential is binding. Who wins?
o The State wins. What governs is actual use, regardless of who
owns the property.
How often can property be reassessed?
o Every 3 three years

Not more than once per 3 years
o Exceptions?

1. New improvements substantially increasing value
of property

2. Change in actual use (such as in above example)
When is there condonation of RPT?
o 1. Failure of agricultural crops
o 2. Substantial decrease of price of agri-based products
o 3. Calamity
o 4. Public interest (if President declares – see below)
o What does it cover?

Subsequent year
o Who may declare?

Sanggunian concerned

President can also condone for province, city, or
municipality within MM
What are the classes of RP?
o Residential, agricultural, commercial, industrial, mineral,
timberland, and special
o What are covered under “special”?

Lands, buildings, improvements that are actually,
directly, and exclusively used for hospitals, cultural, or
scientific purposes

Also, those owned and used by local water districts,
GOCCs rendering essential electric or water services
(N.B. See exemptions below)
o What else are included under “special”?


81
Also facilities which are incidental to and reasonably
necessary for accomplishment of its purposes
o So what if they’re special?

Tax rates are lower

Under RA 7160, land, buildings, improvements,
actually, directly, exclusively used for hospitals are
special cases of real property subject to 10% special
RPT. A medical arts center built by hospital to house
its doctors is an appurtenant to a hospital subject to
10% tax, not a separate commercial establishment.
(City Assessor of Cebu v. Association of
Benevola)
What are exempted from RPT?
o 1. RP owned by the State or any of its subdivisions

What is the exception?

When beneficial use granted to a taxable
person

Whether for consideration or gratuitously

Are GOCCs exempt from RPT?

No. They are subject to RPT.

What about MIAA? Is it subject to RPT as a
GOCC?

In general unlike GOCCs, instrumentalities
of the national government, like MIAA, are
exempt from local taxes pursuant to Section
133 (o) of the LGC. This exemption,
however, admits of an exception with respect
to RPT. Applying Section 234 (a) of the LGC,
when an instrumentality of the national
government grants to a taxable person the
beneficial use of a real property owned by
the Republic, the instrumentality becomes
liable to pay RPT. Thus, while MIAA was
held to be an instrumentality of the national
government which is generally exempt from
local taxes, it was at the same time declared
liable to pay real property taxes on the
airport lands and buildings which it leased to
private persons. (MIAA v. Paranaque)
o
o



2. Lands/buildings/improvements actually, directly, and
exclusively used for religious, charitable, or educational
purposes

N.B. this is a Constitutional provision, as with #1
(exempting government)

So, just memorize the three below: water/electricity,
cooperatives, environment
o 3. Machineries and equipment actually, directly, and
exclusively used by local water districts and GOCCs engaged
in supplying and distributing water or electric services
o 4. RP owned by duly registered cooperatives
o 5. Machinery and equipment for pollution control and
environmental protection
How did the enactment of the LGC affect prior exemptions
granted?
o All such exemptions were withdrawn unless provided otherwise
or reinstated
Article VI, Section 28(3) of the Constitution provides that charitable
institutions, etc. are exempt from taxes. To what kind of tax does
this exemption apply?
o Only to property taxes. What is exempted is not the entity itself
but the lands, buildings, and improvements actually,
exclusively, and directly used for religious, charitable, and
educational purposes.
o Can “primarily” or “dominantly” be substituted for
“exclusively”?

NO. It must be sole or exclusive use.
What are the remedies available to LGUs to enforce collection of
taxes, fees, and charges?
o 1. Levy
o 2. Judicial action
o Are these two actions mutually exclusive?

No.
They can be done alternatively or
simultaneously.
o Can levy be pursued by putting up for sale the RP where
the lien attaches, even if the one using it and thus owes
the tax is not the owner?

Yes. Again, basis of RPT is beneficial or actual use,
not ownership.



Which court has jurisdiction over cases involving
enforcement and collection of RPT?

The RTC.
X owns real property, a portion of which was expropriated by the
government for PHP 6,700 which it paid for. For 10 years, X has
failed to pay RPT on her property, and her delinquencies amounted
to PHP 5,800. The property was sold at a public auction, where Y
bought it for PHP 5,800.
o 1. X claimed that her tax delinquency should have been
offset with the expropriation compensation. Valid claim?

No. Jurisprudence does not recognize the doctrine of
equitable recoupment.
And in any case, the
Government has already paid X and owes nothing
further.
o 2. X claimed that the price paid was grossly inadequate
and must vitiate the sale. Valid claim?

No. Sale of RPT is simply to satisfy all taxes and
penalties due; thus, selling price is not based on FMV
but amount of taxes due. In any case, X can still
redeem within 1 year.
What is the period to collect?
o [Note the comparison with local business taxes above, where
there is usually an assessment first. Here, collection agad
because the RPT accrues at the start of the year automatically]
o 1. Within 5 years from date RPT becomes due
o 2. In case of fraud or intent to evade, 10 years from discovery
What events suspend the prescriptive period?
o 1. Local treasurer legally prevented from collecting the tax
o 2. Owner of property or person with legal interest requests for
reinvestigation and executes a waiver in writing
o 3. Owner of property or person with legal interest is out of the
country or cannot be located
Remedies applicable to the various situations

82
1. Contesting an assessment value
LBAA/CBAA)
o When must appeal be done?
of
real
property
(60-30



Within 60 days from receipt of written notice of
assessment by the provincial, city, or municipal
assessor

Appeal to LBAA

LBAA decides in 120 days

Important case. If you lose at the level of Provincial
Assessor, DON’T FILE AN M.R. to the provincial
assessor. This does not suspend. Instead, appeal to
Board of Assessment Appeals within 60 days. (Fels
v. Batangas)
o What is the next level of appeal?

To the CBAA, within 30 days of receipt of denial by
the LBAA
o And then?

Follow CTA en banc  SC

NOT CTA because the CBAA is the same level as the
CTA.
o Does appeal suspend collection of the taxes?

No.

No prejudice to subsequent adjustment depending on
final outcome of appeal.
o X is owner of machineries in its plant in Muntinlupa. The
city assessor classified these as RP subject to RPT. X
appealed to the Local Board of Assessment Appeals
(LBAA), which ruled in favor of Muntinlupa. X brought a
petition for review to the CTA the decision of the LBAA.
Valid?

No. Appeal of LBAA decisions goes to the Central
Board of Assessment Appeals (CBAA).
2. An erroneous assessment is where assessor has the power but errs
in the exercise of such. (Pay-30/60-30 Treasurer/LBAA/CBAA)
o When is protest done?

Upon payment or within 30 days thereafter

The treasurer has 60 days to decide
o Is payment under protest required?

Yes
o When can it be appealed to the LBAA?

Within 30 days from receipt of treasurer’s denial


83
OR within 30 days from lapse of 60 day period to
decide
o What is the period to appeal to the LBAA?

LBAA has 120 days to decide
o What is the next level of appeal?

To the CBAA, within 30 days from receipt of the LBAA
decision
o What is the next level?

Appeal to CTA en banc within 30 days of receipt of
adverse decision
o What’s next?

Petition for review on certiorari (Rule 45) within 15
days of receipt of decision, extendible for 30 days
3. An illegal/void assessment is where assessor has no power to act at
all. (i.e. invalidity of tax measure/solution indebiti)) (RTC/CTA)
o In this case, is payment under protest required?

Not required.
o What is the initial step?

Direct claim to the local treasurer, within 2 years from
date
the
taxpayer
is
entitled
to
reduction/readjustment. Treasurer must decide within
60 days.
o If treasurer denies?

Go to the RTC. This is NOT an appeal, but an
original judicial cognizance of the matter (since the
treasurer’s decision is not a lower court decision).

N.B. that this rule is different because the LBAA has
no power to act on this claim (the tax measure is
claimed as invalid.)
o And then?

Petition for review to the CTA
o And then?

Review by the CTA en banc
o And then?

Rule 45 to the SC
What happens when a protest is decided in favor of a taxpayer?
o The excess paid tax is either:

1. Refunded

2. Applied as tax credit


o
X obtained a loan from GSIS for P800K and put up his property as
mortgage. In 1977, X defaulted and GSIS foreclosed his property,
and X failed to redeem. However, in 1979, GSIS allowed X to
repurchase the lot. When he was assessed RPT, the city assessor
also assessed the RPT for 1977 and 1978 against X. He paid under
protest and sent a demand letter for refund. It was refused. What
is his next recourse? Action for recovery with RTC or appeal to
the LBAA?
o Appeal to the LBAA. What is involved here is not an
illegal/void assessment, because the assessor has jurisdiction
or power to assess. What is merely involved is an erroneous
assessment. So appeal to the LBAA is proper.
o X should not pay RPT for 1977 and 1978 because he was not
actually using the property then.
Quezon City published a list of delinquent Real property taxpayers
in 2 newspapers of GC, saying that if there is no payment within 30
days from the date of publication, the properties will be auctioned.
X bought one such property but failed to register it, so he did not
receive personal notice. He claimed lack of due process when the
property was sought to be sold. Valid claim?
o No. He bought it upon himself by failing to register the
property. Only the registered owners are given notice.
o What if he was the registered owner, will the answer
change?

Yes. He would have been entitled to notice and lack
thereof is failure of due process, because the auction
sale is an action in personam.

TARIFF AND CUSTOMS CODE



What are customs duties?
o Taxes on the importation or exportation of commodities,
assessed upon the merchandise imported from or exported to
a foreign country
What is the general rule?
o All imported articles subjected to duties
o Importation by the government is taxable too
What is a flexible tariff clause?

84
It is the authority given to the President to adjust the tariff rates
under Art. 401 of the TCC, which effectively delegates taxing
power to the president, as authorized by the Constitution
o What are the things covered by the flexible tariff clause?

1. Power to increase, reduce, or remove existing
protective rates of import duty – as long as the
increase is not more than 100% ad valorem

2. Establish import quota or ban imports of
commodities

3. Impose additional duty on all imports not exceeding
10% ad valorem

Among others
When does importation begin and when does it end?
o 1. Importation begins when the vessel or aircraft enters
Philippine territorial jurisdiction with intent to unload

Note: jurisdiction of BOC to enforce provisions of
TCC including seizure and forfeiture begins from
beginning of importation
o 2. Importation ends when the goods are released or withdrawn
from the customhouse (upon payment of duties), with granting
of legal permit to withdraw

What if the goods are duty-free?

Importation ends when they have legally left
the jurisdiction of customs

What is the implication of this period?

Until the importation has been fully
terminated, the goods are within the
jurisdiction of the BOC.
o What about goods illegally imported?

These are, regardless, subject to seizure and
forfeiture

This would include irregular importations such as
those imported without proper appraisal, to the
detriment of the government (Bar Question 1991)
XYZ Corp. brought into the country 2 foreign barges to be used in
coastwise trade, and to be returned after the charter/lease period.
When the barges arrived, the BOC subjected these to duties. XYZ
refused to pay, claiming that there will be returned to the foreign
owner when the charter expires. Who is right?
o



o
o
The BOC is right. Importation includes the entry into the
Philippines of any article from a foreign country, even if these
shall be re-exported. The BOC, however, will sometimes allow
a taxpayer to obtain a refund.
o An example of this is importation of articles used to
manufacture of products for export within 3 years after the
importation.
What are the obligations of the importer?
o 1. Cargo manifest
o 2. Import entry
o 3. Declaration of correct weight/value
o 4. Liability for payment of duties
o 5. Liquidation of duties
o 6. Keeping of records

All importers/brokers required to keep in principal
place of business within 3 years ALL RECORDS re:
importation of goods
How is smuggling committed?
o By a person who:

1. Fraudulently imports or brings into the country an
article, contrary to law

2. Assists in so doing

3. Receives, conceals, buys, sells, or facilitates the
transportation, concealment, or sale of such goods
post-importation, knowing that they were imported
contrary to law
o In the absence of bona fide intent to make entry and pay
duties (in smuggling), when is unlawful importation
complete?

Dutiable commodity brought within the limits of the
port of entry
What cannot be imported into the Philippines (PROHIBITED
IMPORTATIONS)?
o 1. Dynamite, gunpowder, ammunition, explosives (except
when authorized by law)
o 2. Articles advocating treason, rebellion, etc.
o 3. Articles of obscene or immoral character
o 4. Materials for preventing human conception or inducing
unlawful abortion



85
5. Gambling devices
6. Lottery and sweepstakes tickets except those authorized by
government
o 7. Articles manufactured in precious materials the marks of
which do not indicte actual fineness or quality of the metals
o 8. Adulterated or misbranded food or drug articles
o 9. Drugs
o 10. Opium pipes and parts thereof
o 11. All other articles prohibited by law to be imported
What are the materials subject to conditionally-free importation?
o Check the list and memorize. It’s too long.
o For all, check the additional requirements that must be
complied with to establish free importation (this is why it’s
“conditionally free”)
o Some significant items:

1. Articles for repair/reconditioning, but for reexportation within 6 months

2. Personal effects for balik-bayans, except cars. But
not in commercial quantities.

3. Samples not for commercial sale (ex. medicines) –
but these have to be items not generally available for
sale in Philippines

4. Books, publications – scientific, cultural, historical,
etc. importance
X served 5 years as military attaché in Jakarta, and subsequently
returned to the Philippines with his car and personal effects.
Would he be liable for taxes?
o No, if he complies with the following:
o 1. The car must be purchased before the recall order
o 2. The car must be registered in X’s name
o 3. The exemption shall apply to the value of the car
o 4. The exemption re: personal effects shall apply to value not
exceeding 30% of the total amount received by X as
salary/allowance – but not exceeding four years
o 5. Exemption must not have been availed of more often than
once every four years
Differentiate “returning residents” from travelers or tourists?
o Returning residents are nationals who have stayed in a foreign
country for at least 6 months. If the period is shorter, they are




o
mere travelers. In any case, both enjoy conditionally-free
importation (105f and 105g, respectively).
What are the bases of dutiable value of an imported article subject
to ad valorem tax in the TCC?
o 1. Transaction value

What does transaction value include?

Price actually paid

Commissions and brokerage fees

Cost of containers

Cost of packing (labor and materials)

Value of materials, components, parts,
similar items incorporated

Royalties and license fees related to the
goods

Cost of transport

Loading, unloading, handling charges

Insurance cost
o What if it cannot be determined?

2. Transaction value of identical goods

3. Transaction value of similar goods

4a. Deductive value8

4b. Computed value9

5. Fallback value
When are imported articles deemed “entered” in the Philippines?
o First, the article arrived within the limits of the port of entry.
And then, the specified entry forms and documents must be
filled in, and submitted to the customs official tasked to receive
them. Finally, lawful charges must be paid.
When are imported articles deemed “withdrawn” from warehouse?
o Specified forms are filed with and accepted by the customs
official tasked to receive
o And payment of duties, taxes, fees, other lawful charges
What are dumping duties?




8
Most common selling price of goods, minus general expenses involved in
sale and average profit
9
Cost of production of the goods, plus amount for normal profit and
general expenses when selling the same type of goods
86
Duties imposed when the price of the articles is deliberately or
continually fixed at less than the FMV, and importation would
likely cause injury to local industries producing the same
articles or similar
o What is the amount of dumping duties imposed?

Difference between the export price and the normal
value of the product
o Who imposes this?

For non-agricultural products, Secretary of DTI

For agricultural products, Secretary of Agriculture
What are countervailing duties?
o Duties imposed upon prior investigation and report of the Tariff
Commission to offset: a) excise or internal revenue tax upon
articles of the same class manufactured at home; b) subsidies
to foreign producers by their governments
o What is the amount of countervailing duties imposed?

Equivalent to the value of the specific subsidy
o Who imposes?

Same rule as in dumping duties (DTI or Agriculture)
o N.B. for BOTH dumping and countervailing  appeal is to the
CTA division [see next section below]
What are marking duties?
o Duties equivalent to 5% ad valorem imposed on improperly
marked articles
o Exception?

When the goods are exported or destroyed under
customs supervision
o Who imposes it?

Commission of Customs
What are discriminatory duties?
o Duties collected in amount not exceeding 100% ad valorem,
imposed by the President against goods of a foreign country
which discriminates against Philippine goods or commerce
o Who imposes these duties?

President
What are safeguard measures?
o Emergency measures, including tariffs, to protect domestic
industries and producers from increased imports that could
inflict serious injury to them

o




What are these measures?

Additional tariffs

Import quotas

Banning of imports
What is the basis of the automatic review procedure of the Bureau
of Customs?
o This applies to seizure and protest cases where the decision is
adverse to government (beneficial to taxpayer). Otherwise, the
government would not be aware of decisions of the collector of
customs that are adverse to it, since the taxpayer would not
protest anyway.
o What is the automatic review procedure?

Decisions adverse to government are elevated to the
Commissioner of Customs, from the collector of
customs

Then automatically elevated to the Sec. of Finance
What are the requisites for forfeiture of imported goods?
o 1. Wrongful marking by owner, importer, exporter, or
consignee of any declaration/affidavit, or wrongful making or
delivery by the same person of any invoice, letter, or paper –
all touching on the importation or exportation of merchandise
o 2. Falsity of such declaration, affidavit, invoice, letter, or paper
o 3. Intent to evade the payment of duties due
What is the nature of forfeiture proceedings?
o It is a proceeding in rem. Meaning, the action is against the
goods, and not against a specific person.
Can the RTC exercise jurisdiction over property subject to a
forfeiture and seizure proceeding (e.g. replevin)?
o No. The exclusive jurisdiction is with the Collector of Customs.
o When is there judicial recourse?

With the CTA, but only after exhausting all remedies
with the Bureau of customs, within 30 days from
receipt of decisions on admin tax protest case.
o N.B. this is the most asked question in the Bar tax exams.
Take note. As long as it’s seizure and forfeiture, the RTC has
no jurisdiction!
o Does this include other ancillary questions (e.g. w/n the
ship seized was within territorial waters of the
Philippines)?




87
Yes. It must be raised as a defense/issue in the
proceedings before the Collector, and not as a
separate case in the RTC.
o What if the imported articles cannot be found anymore?

The BOC can resort to judicial remedy of filing action
in court
Can the CTA modify the decision of the Commissioner of Customs
as to fines, forfeitures, or other penalties?
o Yes. It has exclusive appellate jurisdiction over these matters.
The Collector of Customs issued an assessment for unpaid
customs and taxes of X’s importation. What is hierarchy of X’s
remedies?
o 1. Protest with Collector of customs

Participate in the hearing pursuant to the Collector’s
issuance of warrant for detention and forfeiture of the
articles (protest)

What does an administrative protest under the
TCC involve?

Liquidation of import entries. Liquidation
refers to the final computation and
assessment of the collector of customs on
imported merchandise (akin to the
assessment of taxes by the BIR).

N.B. This must involve the COMPUTATION,
and not issues on fact and efficacy of
payments made, which is not covered by
liquidation, which is the proper subject of
administrative tax protest.
o 2. Review with Commissioner of customs, within 15 days
o 3. Appeal with CTA, within 30 days
o 4. CTA en banc
o 5. SC, under Rule 45
When is a case ripe for filing with the RTC?
o After the finality of the assessment of the Collector of customs.
At this point, it becomes a mere collection case and not
anymore an assessment protest.
When does the BOC resort to administrative remedy of seizure and
forfeiture, and when does it resort to the judicial remedy of filing
court action?
o




It resorts to administrative remedy of seizure, which leads to
enforcement of tax lien on the articles, if the goods are still in
government custody.

N.B. for prohibited or undeclared importations,
seizure and forfeiture can apply even if the goods are
no longer with BOC’s custody
o It resorts to judicial remedies when the goods are properly
released and beyond the reach of tax liens. In this case, the
action is one in personam, since the unpaid tax is a personal
debt to the government.
X complained when his business premises were searched by
agents of the BOC, who seized his illegally imported goods. He
claimed a violation of his rights under the Bill of Rights, because
the search and seizure was warrantless. Valid claim?
o No. Searches and seizures by the BOC is one of the
exceptions to the rule against unreasonable searches.
o What is the exception?

The agents cannot search dwelling houses.

What is the remedy for dwelling houses?

Need to ask for a judicial warrant
What is the remedy of an importer who wishes to have the property
released from seizure?
o He can post a cash bond – conditioned upon payment of
appraised value of article and/or any fines, costs, and
expenses adjudged
o When can the importer NOT have the property released on
bond?

1. When there is prima facie evidence of fraud in the
importation of the article

2. When the article imported is prohibited by law – in
fact, he can never have these released
Is the vehicle used to transport illegally imported goods subject to
seizure?
o Yes, if there is knowledge and participation in that illegal act.

If the common carrier is not registered, it is prima
facie evidence of participation/knowledge.
o No, if there is no knowledge and participation.
What are the taxpayer’s remedies?
o 1. Protest
o
o
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
(see above)
2. Abandonment

When is an article abandoned?

1. Owner, importer, consignee expressly
signifies in writing to the Collector his intent
to abandon

2. Failure to file an entry within 30 days after
due notice, or after filing entry, failing to
claim within 15 days

What is the effect of abandonment

Deemed property of government

Does not relieve importer of any criminal
liability from the importation
3. Abatement and refund

A. This applies to goods wherein the product is
missing or deficient even prior to arrival – refund
excess customs duties paid.

B. Also applies to goods lost or destroyed after arrival
(while in customs custody or under irrevocable LOC,
bank guarantee, or bond)

What about those lost in voyage?

In general, no abatement/refund for damage
incurred during voyage

There must be investigation to verify the loss

What is the rule on mere manifest clerical errors?

Excess duties paid can be refunded

Remedy lasts from before duties are paid
until 1 year after payment

What is the procedure?

1. File written claim for refund with Collector
of Customs

2. Collector verifies this and if correct, sends
to the Commissioner with recommendation

3. Commissioner pays refund. If there are
NIRC taxes involved, the Commissioner can
also refund, with the advice of CIR.
o
JUDICIAL REMEDIES AND THE CTA





What is the exclusive appellate jurisdiction of the CTA division
over civil tax cases?
o 1. Over decisions of the CIR on:

disputed assessments and refunds

fees, other charges, penalties, and other matters
arising under NIRC
o 2. Inaction by CIR over these cases

Where the NIRC provides a specific period of action,
the inaction is deemed a denial
o 3. Decisions, orders, resolutions of the RTC in local tax cases
originally decided or resolved by them (whether original or
appellate)

Remember  collection cases, up to 1M are with
regular courts
o 4. Decisions of COC for liability for customs duties, fees,
seizure, detention, release of property, forfeiture, penalties,
etc.

Remember  when the COC has decided with
finality, then it’s a mere collection case with RTC
o 5. Decisions of CBAA in appellate jurisdiction (originally
decided by LBAA)
o 6. Decisions of Sec. of Finance on customs cases elevated to
him automatically for review in customs cases

Remember  this is when the government loses
o 7. Decisions of Sec. of Trade and Industry (non-agricultural
products) or Sec. of Agriculture (agricultural products) involving
dumping and countervailing duties in the TCC
What is the exclusive appellate jurisdiction of the CTA en banc
over civil tax cases?
o Adverse resolution on an MR by the CTA division
What is the exclusive original jurisdiction of the CTA over criminal
cases?
o 1. All criminal offenses under the NIRC or TCC and the amount
involved is 1M or more
What is the appellate jurisdiction of the CTA over criminal cases?
o 1. All criminal offenses under the NIRC or TCC and the amount
involved is less than 1M  decided by RTC, appealed to CTA




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2. Over petitions for review of judgments of RTC over tax
cases originally decided by the MTC
What is the procedure for judicial collection of taxes?
o See sections above discussed. Note the different prescriptive
periods, and distinguish between national and local taxes.
Who may appeal in civil cases?
o Aggrieved party in decsion by CIR, COC, DOF Sec., DTI Sec.,
DOA Sec., RTC, or CBAA as discussed above.
o Mode of appeal?

Petition for review within 30 days from decision or
expiration of period of law to decide (Follow Rule 42)

But for CBAA and RTC exercising appellate
jurisdiction (Follow Rule 43)
o What is the rule on MR?

There must be an MR, filed within 15 days of decision
of CTA in division. NOTE that the CTA en banc only
decides on resolutions denying MR.
o What is the effect of appeal?

It does not suspend the payment, levy, distraint, or
sale of property.

EXCEPT: if the collection may jeopardize interest of
the government or taxpayer, the CTA may suspend
collection and require the taxpayer to either deposit
the amount claimed or file a surety bond (double the
amount) with the court
What is the rule on taking of evidence?
o The court may motu propio or upon motion have one of its
members take evidence on the case or any issue when:

1. There is need to determine Q of fact

2. Taking of account is necessary

3. There is need to examine a long account
o Court may adopt, reject, modify the report
What is the remedy from adverse decisions of the CTA en banc?
o Rule 45 to SC
How is a criminal action instituted?
o File information on behalf of the People.
o Must be approved by CIR or COC, as applicable.
o Prosecution is by public prosecutor’s control but may be
conducted by the legal officers of the BIR or BOC.
o


NOTE: when the criminal action is instituted, the corresponding
civil action for recovery of taxes/penalties are always
simultaneously instituted and determined by the CTA.
o Who represents the People or government officials acting
in official capacity when they are sued?

Solicitor General
How many days for appeal from CTA division to CTA en banc?
o Follow Rule 43  15 days.
Taxpayer’s suit:
o Requisites:

1. Case involving expenditure of public funds

2. Sufficient interest in preventing illegal expenditure
of money raised by taxation

3. Direct injury from enforcement of statute
o Gonzales v. Narvasa: Does not apply to mere augmentation
powers of the President. It has to be exercise by Congress of
taxing/spending powers
o What are the other requirements?

1. Locus standi

2. Doctrine of transcendental importance  as
exception to locus standi

3. Ripeness for judicial determination
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