These materials are copyrighted and/or based on the writers books

BAR STAR NOTES on Taxation and future revisions. It is prohibited to reproduce any part of
these Notes in any form or any means, electronic or mechanical, including
photocopying without the written permission of the author. Unauthorized
users shall not be prosecuted but SHALL BE SUBJECT TO THE LAW

TAXATION
OF KARMA SUCH THAT THEY WILL NEVER PASS THE BAR OR
WOULD BE UNHAPPY IN LIFE for stealing the intellectual property of
the author.
VER. 2010.06.12
copyrighted 2010 THE BEST OF LUCK AND
Prepared by Prof. Abelardo T. Domondon
(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.).
ADVANCE CONGRATULATIONS
Lawyer-CPA-Customs Broker, Management Consultant, Professor of Law
and Pre-Bar Reviewer)
TAXATION
How to use the BAR STAR NOTES. The BAR STAR
NOTES in the form of questions and answers as well as textual GENERAL PRINCIPLES OF TAXATION
discussion were specially prepared by Prof. Domondon for the
exclusive use of Bar Reviewees who attended his 2010 Lectures on
TAXATION held at the University of the Philippines. Included in the
TAXATION, IN GENERAL
presentation are doctrines contained in Supreme Court decisions up to
April 2010. 1. State briefly and concisely the nature of taxation.
Alternatively, define taxation.
The purpose of the BAR STAR NOTES is to provide the Bar SUGGESTED ANSWER: The inherent power of the sovereign
Reviewee with a handy review material which serves as memory- exercised through the legislature to impose burdens upon subjects and
joggers for the September 12, 2010 Bar Examinations in Taxation. The objects within its jurisdiction for the purpose of raising revenues to carry
author tries to second guess what would be included in the Bar Exams out the legitimate objects of government.
using statistical analysis. The actual Bar questions may not be
formulated in the same manner as the BAR STAR NOTES. However, 2. What is the nature of the States power to tax ?
the doctrines tested in the Bar would in all probability be included in these Explain briefly.
Notes. SUGGESTED ANSWER: The nature of the states power to tax is
two-fold. It is both an inherent power and a legislative power.
If pressed for time, the author suggests that the reader should It is inherent in nature being an attribute of sovereignty. This is so,
focus his attention on the following: because without the taxes, the states existence would be imperiled.
Nice to know There is thus, no need for a constitutional grant for the state to exercise
Should know this power.
Must know and master It is a legislative power because it involves the promulgation of
It is further suggested that the reader should merely browse those rules. Taxation is a set of rules, how much is the tax to be paid, who pays
without stars. the tax, to whom it should be paid, and when the tax should be paid.
3. What is the underlying theory of taxation ? Explain
WARNING: briefly.
 2
SUGGESTED ANSWER: Taxes are the and should not work to prejudice a taxpayers

lifeblood of the nation. Without revenue property.

raised from taxation, the government will not

5. Discuss briefly the
survive, resulting in detriment to society. basis/bases, or rationale of taxation.

Without taxes, the government would be SUGGESTED ANSWER: a.

Reciprocal duties of protection and
paralyzed for lack of motive power to activate support between the state and its citizens and
residents. Also called symbiotic relation
and operate it. (Commissioner of Internal Revenue between the state and its citizens.
b. Jurisdiction by the state over
v. Algue, Inc. et al., 158 SCRA 8, 16-17) persons and property within its territory.
6. Discuss briefly but
4. Marshall said that, the power comprehensively the objectives or
purposes of taxation.
to tax involves the power to destroy. On SUGGESTED ANSWER: The purposes
or objectives of taxation are the following:
the other hand, Holmes stated that the
a. The primary purpose:
1)
power to tax is not the power to Revenue purpose.
b. The secondary
destroy while the court sits. purposes
1) Sumptuary or regulatory
purpose. 2)
Compensatory purpose.
Reconcile the statements. 3) To implement
the power of eminent domain.
In the
7. Distinguish a tax from a
alternative, what are the implications that license fee. SUGGESTED
ANSWER: The following are the distinctions:
flow from the above statements ? a. Purpose: Tax imposed for revenue
while license fee for regulation. Tax for general
SUGGESTED public purposes while license fee for regulatory
purposes only.
ANSWERS: Marshalls view refers to a valid tax b. Basis: Tax
imposed under power of taxation while license
while the Holmes view refers to an invalid tax. fee under police power.
c. Amount:
a. The In taxation, no limit as to amount while license
fee limited to cost of the license and the
imposition of a valid tax could not be judicially expenses of police surveillance and regulation.

restrained merely because it would prejudice d. Time of

payment: Taxes normally paid after
taxpayers property. b. An commencement of business while license fee
before. e. Effect of
illegal tax could be judicially declared invalid payment: Failure to pay a tax does not make
the business illegal while failure to pay license
fee makes business illegal. f.
Surrender: Taxes, being the lifeblood of
 3
the state, cannot be surrendered except for
lawful consideration while a license fee may be 10. Taxation distinguished from
surrendered with or without consideration. police power. Taxation is distinguishable from
(Cooley on Taxation, pp. 1137-1138; Pacific police power as to the means employed to
Commercial Company v. Romualdez, et al., 49 Phil. implement these public goals. Those doctrines
924) that are unique to taxation arose from peculiar
8. How may the power to tax be considerations such as those especially punitive
utilized to carry out the social justice effects (Southern Cross Cement Corporation v.
Cement Manufacturers Association of the
program of our government ?
Philippines, et al., G. R. No. 158540, August 3,
SUGGESTED ANSWER: The 2005) as the power to tax involves the power to
compensatory purpose of taxation is to implement destroy and the belief that taxes are lifeblood of
the social justice provisions of the constitution the state. (Ibid.) taxes being the lifeblood of the
through the progressive system of taxation, which government, their prompt and certain availability
would result to equal distribution of wealth, etc. is of the essence.
Progressive income taxes alleviate the These considerations necessitated the
margin between rich and poor. (Southern Cross evolution of taxation as a distinct legal concept
Cement Corporation v. Cement Manufacturers from police power. (Ibid.)
Association of the Philippines, et al., G. R. No. 158540,
August 3, 2005)
In recent years, the increasing social 11. How the power of taxation may
challenges of the times expanded the scope of be used to implement power of eminent
the state activity, and taxation has become a tool domain. Tax measures are but enforced
to realize social justice and the equitable contributions exacted on pain of penal sanctions
distribution of wealth, economic progress and and clearly imposed for public purpose. In most
the protection of local industries as well as public recent years, the power to tax has indeed
welfare and similar objectives. (Batangas become a most effective tool to realize social
Power Corporation v. Batangas City, et al., G. R. No. justice, public welfare, and the equitable
152675, and companion case, April 28, 2004 citing distribution of wealth. (Commissioner of Internal
National Power Corporation v. City of Cabanatuan, G. Revenue v. Central Luzon Drug Corporation, G.R. No.
R. No. 149110, April 9, 2003) 159647, April 16, 2005)
Establishments granting the 20% senior
9. Explain the sumptuary citizens discount may claim the discounts
purpose of taxation. granted to senior citizens as tax deduction
SUGGESTED ANSWER: The sumptuary based on the net cost of the goods sold or
purpose of taxation is to promote the general services rendered: Provided, That the cost of the
welfare and to protect the health, safety or morals discount shall be allowed as deduction from
of the inhabitants. It is in the joint exercise of the gross income for the same taxable year that the
power of taxation and police power where discount is granted. Provided, further, That the
regulatory taxes are collected. total amount of the claimed tax deduction net of
Taxation may be made the implement of value added tax if applicable, shall be included in
the states police power. The motivation behind their gross sales receipts for tax purposes and
many taxation measures is the implementation of shall be subject to proper documentation and to
police power goals. [Southern Cross Cement the provisions of the National Internal Revenue
Corporation v. Cement Manufacturers Association of Code, as amended. [M.E. Holding Corporation v.
the Philippines, et al., G. R. No. 158540, August 3, Court of Appeals, et al., G.R. No. 160193, March 3,
2005) The reader should note that the August 3, 2008 citing Expanded Senior Citizens Act of 2003, Sec.
4 (a)]
2005 Southern Cross case is the decision on the
motion for reconsideration of the July 8, 2004
Southern Cross decision. 12. What are the three basic
The so-called sin taxes on alcohol and principles of a sound tax system?
tobacco manufacturers help dissuade the Explain each briefly.
consumers from excessive intake of these SUGGESTED ANSWER: The canons of
potentially harmful products. (Southern Cross a sound tax system, also known as the
Cement Corporation v. Cement Manufacturers characteristics or, principles of a sound tax
Association of the Philippines, et al., G. R. No. 158540, system, are used as a criteria in order to
August 3, 2005)
 4
determine whether a tax system is able to meet privilege or the engaging in an occupation.
the purposes or objectives of taxation. They are: Example income tax, estate tax.
a. Fiscal adequacy.
b. Administrative feasibility. 16. What are the kinds of taxes
c. Theoretical justice. classified as to who bears the burden ?
Explain each briefly.
SUGGESTED ANSWER: Based on the
13. What are the elements or possibility of shifting the incidence of taxation, or
characteristics of a tax ? SUGGESTED as to who shall bear the burden of taxation,
ANSWER: taxes may be classified into:
a. Enforced contribution. a. Direct taxes. Those that are
b. Generally payable in money. extracted from the very person who, it is
c. Proportionate in character. intended or desired, should pay them
d. Levied on persons, property or (Commissioner of Internal Revenue v. Philippine Long
exercise of a right or privilege. Distance Telephone Company, G. R. No. 140230,
e. Levied by the state having December 15, 2005); they are impositions for
jurisdiction. which a taxpayer is directly liable on the
f. Levied by the legislature. transaction or business he is engaged in,
g. Levied for a public purpose. (Commissioner of Internal Revenue v. Philippine Long
h. Paid at regular periods or intervals. Distance Telephone Company, supra) which
liability cannot be shifted or transferred to
another. Example income tax, estate tax,
14. State the requisites of a valid
donors tax, etc.
tax. SUGGESTED ANSWER: b. Indirect taxes are those that are
a. A demanded in the first instance, from, or are paid
valid tax should be within the jurisdiction of the by, one person in the expectation and intention
taxing authority. that he can shift the burden to (Commissioner of
b. That the assessment and collection Internal Revenue v. Philippine Long Distance
of certain kinds (The same as the inherent Telephone Company, supra) to someone else not
limitations of the power of taxation) should be for as a tax but as part of the purchase price.
a public purpose. (Commissioner, of Internal Revenue v. American
c. The rule of taxation should be Express International, Inc. (Philippine Branch),
uniform. G. R. No. 152609, June 29, 2005 citing various
d. That either the person or cases and authorities) Example value added
property of taxes guarantees against injustice to tax (VAT), documentary stamp tax, excise tax,
individuals, especially by way or notice and percentage tax, etc.
opportunity for hearing be provided.
e. The tax must not impinge on the 17. Silkair (Singapore) PTE, Ltd.,
inherent and Constitutional limitations on the an international carrier, purchased
power of taxation. aviation gas from Petron Corporation,
which it uses for its operations. It now
15. claims for refund or tax credit for the
What are the classes or kinds of taxes excise taxes it paid claiming that it is
according to the subject matter or exempt from the payment of excise taxes
object ? under the provisions of Sec. 135 of the
SUGGESTED ANSWER:
NIRC of 1997 which provides that
a. Personal,
poll or capitalization imposed on all residents,
petroleum products are exempt from
whether citizen or not. Example Community excise taxes when sold to Exempt entities or
agencies covered by tax treaties, conventions, and
Tax.
other international agreements for their use and
b. Property - Imposed on property. consumption: Provided, however, That the country of
Example Real property tax. said foreign international carrier or exempt entities or
agencies exempts from similar taxes petroleum
products sold to Philippine carriers, entities or
c. Excise imposed upon the
agencies
performance of an act, the enjoyment of a
 5
Silkair further anchors its claim on NIRC of 1997 and Article 4(2) of the Air Transport
Article 4(2) of the Air Transport Agreement between RP and Singapore.
Agreement between the Government of Even if Petron Corporation passed on to
the Republic of the Philippines and the Silkair the burden of the tax, the additional
amount billed to Silkair for jet fuel is not a tax but
Government of the Republic of Singapore
part of the price which Silkair had to pay as a
(Air Transport Agreement between RP purchaser. [Philippine Acetylene Co., Inc. v.
and Singapore) which reads: Fuel, lubricants, Commissioner of Internal Revenue, 127 Phil. 461, 470
spare parts, regular equipment and aircraft stores (1967)]
introduced into, or taken on board aircraft in the b. Silkair could not seek refuge under
territory of one Contracting party by, or on behalf of, a Maceda v. Macaraig, Jr., G.R. No. 88291, May
designated airline of the other Contracting Party and
intended solely for use in the operation of the agreed
31, 1991, 197 SCRA 771.which upheld the claim
services shall, with the exception of charges for tax credit or refund by the National Power
corresponding to the service performed, be exempt Corporation (NPC) on the ground that the NPC is
from the same customs duties, inspection fees and exempt even from the payment of indirect taxes.
other duties or taxes imposed in the territories of the In Commissioner of Internal Revenue v.
first Contracting Party , even when these supplies are Philippine Long Distance Telephone Company,
to be used on the parts of the journey performed over G.R. No. 140230, December 15, 2005, 478
the territory of the Contracting Party in which they are SCRA 61 the Supreme Court clarified the ruling
introduced into or taken on board. The materials in Maceda v. Macaraig, Jr., viz: It may be so that
referred to above may be required to be kept under
customs supervision and control.
in Maceda vs. Macaraig, Jr., the Court held that
an exemption from all taxes granted to the
Silkair likewise argues that it is
National Power Corporation (NPC) under its
exempt from indirect taxes because the charter includes both direct and indirect taxes.
Air Transport Agreement between RP and An exemption from all taxes excludes
Singapore grants exemption from the indirect taxes, unless the exempting statute, like
same customs duties, inspection fees NPCs charter, is so couched as to include
and other duties or taxes imposed in the indirect tax from the exemption. The amendment
territory of the first Contracting Party. It under Republic Act No. 6395 enumerated the
invokes Maceda v. Macaraig, Jr., G.R. No. details covered by NPCs exemption.
88291, May 31, 1991, 197 SCRA 771.which Subsequently, P.D. 380, made even more specific
upheld the claim for tax credit or refund the details of the exemption of NPC to cover,
among others, both direct and indirect taxes on
by the National Power Corporation (NPC)
all petroleum products used in its operation.
on the ground that the NPC is exempt Presidential Decree No. 938 [NPCs amended
even from the payment of indirect taxes. charter] amended the tax exemption by
Is Silkair entitled to the tax refund or simplifying the same law in general terms. It
credit it seeks ? Reason out your answer. succinctly exempts NPC from all forms of taxes,
SUGGESTED ANSWER: Silkair is not duties, fees The use of the phrase all forms
entitled to tax refund or credit for the following of taxes demonstrates the intention of the law to
reasons: give NPC all the tax exemptions it has been
a. The excise tax on aviation fuel is an enjoying before.
indirect tax. The proper party to question, or seek The exemption granted under Section
a refund of, an indirect tax is the statutory 135 (b) of the NIRC of 1997 and Article 4(2) of
taxpayer, the person on whom the tax is imposed the Air Transport Agreement between RP and
by law and who paid the same even if he shifts Singapore cannot, without a clear showing of
the burden thereof to another. (Philippine legislative intent, be construed as including
Geothermal, Inc. v. Commissioner of Internal Revenue, indirect taxes. Statutes granting tax exemptions
G.R. No. 154028, July 29, 2005, 465 SCRA 308, 317- must be construed in strictissimi juris against the
318) The NIRC provides that the excise tax taxpayer and liberally in favor of the taxing
should be paid by the manufacturer or producer authority, and if an exemption is found to exist, it
before removal of domestic products from place must not be enlarged by construction. (Silkair
of production. Thus, Petron Corporation, not (Singapore) PTE, Ltd., v. Commissioner of Internal
Silkair, is the statutory taxpayer which is entitled Revenue, G.R. No. 173594, February 6, 2008)
to claim a refund based on Section 135 of the
18. What are
 6
the different kinds of taxes classified as
to purpose ? 2. What are the principles to
SUGGESTED ANSWER: consider in the determination of whether
a. General, tax revenues are devoted for a public
fiscal or revenue imposed for the purpose of purpose ?
raising public funds for the service of the SUGGESTED ANSWER:
government. b.
a. The tax revenues are for a public
Special or regulatory imposed primarily
for the regulation of useful or non-useful purpose if utilized for the benefit of the
occupation or enterprises and secondarily only community in general. An alternative meaning is
for the raising of public funds. that tax proceeds should be utilized only to attain
the objectives of government.
b. Inequalities resulting from the
LIMITATIONS OR RESTRICTIONS ON singling out of one particular class for taxation or
THE POWER exemption infringe no constitutional limitation.
REASON: It is inherent in the power to
1. Purpose for the limitations on tax that the legislature is free to select the
the power of taxation. subjects of taxation.
The inherent and constitutional limitations to the BASIS: The lifeblood theory.
power of taxation are safeguards which would c. An individual taxpayer need not
prevent abuse in the exercise of this otherwise derive direct benefits from the tax.
unlimited and plenary power. REASON: The paramount consideration
The limitations also serve as a standard to is the welfare of the greater portion of the
measure the validity of a tax law or the act of a population.
taxing authority. A violation of the limitations d. A tax may be imposed, not so much
serves to invalidate a tax law or act in the for revenue purposes, but under police power for
exercise of the power to tax. the general welfare of the community. This would
still be for a public purpose.
INHERENT LIMITATIONS e. Public purpose continually
expanding. Areas formerly left to private
initiative now lose their boundaries and may be
1. What are the inherent undertaken by the government if it is to meet the
limitations on the power of taxation ? increasing social challenges of the times.
SUGGESTED ANSWERS: f. Tax revenue must not be used for
a. Public purpose. The revenues purely private purposes or for the exclusive
collected from taxation should be devoted to a benefit of private persons.
public purpose. g. Private persons may be benefited
b. No improper delegation of legislative but such benefit should be merely incidental as
authority to tax. Only the legislature can exercise its main object is the benefit of the community in
the power of taxes unless the same is delegated general.
to some other governmental body by the h. Determined at the time of
constitution or through a law which does not enactment of tax law and not at the time of
violate any provision of the constitution. implementation.
c. Territoriality. The taxing power i. There is a presumption of public
should be exercised only within territorial purpose even if the tax law does not specifically
boundaries of the taxing authority. provide for its purpose. (Santos & Co., v.
d. Recognition of government Municipality of Meycauayan, et al., 94 Phil. 1047)
exemptions; and j. Public use is no longer confined to the
e. Observance of the principle of traditional notion of use by the public but held
comity. Comity is the respect accorded by synonymous with public interest, public benefit,
nations to each other because they are equals. public welfare, and public convenience .
On the other hand taxation is an act of sovereign. (Commissioner of Internal Revenue v. Central Luzon
Thus, the power should be imposed upon equals Drug Corporation, G.R. No. 159647, April 16, 2005)
out of respect.
Some authorities include no double 3. A law was enacted imposing a tax
taxation. on manufacturers of coconut oil, the
 7
proceeds of which are to be used unconstitutional law. (Abaya v. Ebdane, G.
exclusively for the protection and R. No. 167919, February 14, 2007;
promotion of the coconut industry, Garcia v. Enriquez, Jr. G.R. No. 112655
namely, to improve the working December 9, 1993, Minute Resolution)
A taxpayers suit is properly brought
conditions in coconut mills and to
only when there is an exercise of the
conduct research on the use of coconut spending or taxing power of Congress.
oil for motor fuel. Some of the (Automotive Industry Workers Alliance
manufacturers of coconut oil challenge (AIWA),etc., et al., v. Romulo, etc. ,et al.,
the validity of the law, contending that G. R. No. 157509, January 18, 2005 citing
the tax is to be used for a private Gonzales v. Narvasa, G. R. No. 140835,
August 14, 2000, 337 SCRA 733, 741)
purpose, and therefore, the law violates
c. For voters, there must be a
the rule that public revenues shall not be showing of obvious interest in the validity of the
appropriated for anything but a public election law in question.
purpose. Decide with reason. d. For concerned citizens, there must
SUGGESTED ANSWER: The levy is for a be a showing that the issues raised are of
public purpose. It cannot be denied that the transcendental importance which must be settled
coconut industry is one of the major industries early.
supporting the national economy. It is, e. For legislators, there must be a
therefore, the states concern to make it a strong claim that the official action complained of
and secure source not only of the livelihood of infringes upon their prerogatives as legislators.
the significant segment of the population, but (David, et al., v. President Gloria Macapagal-
also of export earnings, the sustained growth Arroyo, etc., et al., G. R. No. 171396, May 3,
of which is one of the imperatives of economic 2006)
growth. (Philippine Coconut Producers
Federation, Inc. (Cocofed v. Presidential 5. Only those directly affected
Commission on Good Government, 178 SCRA 236,
252)
have locus standi to impugn the alleged
encroachment by the executive
department into the legislative domain of
4. Requisites for taxpayers,
Congress.
concerned citizens, voters or legislators a. Only those who shall be directly
to have locus standi to sue. affected by such executive encroachment, such
a.In general, the case should involve as for example employees who would find
constitutional issues. (David, et al., v. President themselves subject to disciplinary powers that
Gloria Macapagal-Arroyo, etc., et al., G. R. No. may be imposed under the questioned Executive
171396, May 3, 2006) Order as they have a direct and specific interest
b. For taxpayers, there must be a in raising the substantive issue therein
showing: (Automotive Industry Workers Alliance
1) That tax money is being (AIWA),etc., et al., v. Romulo, etc. ,et al., G. R.
extracted and spent in violation of specific No. 157509, January 18, 2005) or employees
constitutional protections against abuses of who are going to be demoted, transferred or
legislative power. (Flast v. Cohen, 392 otherwise affected by any personnel action
U.S. 83) subject o the rule on exhaustion of administrative
2) That public money is being remedies.
deflected to any improper purpose b. Moreover, and if at all, only
(Pascual v. Secretary of Public Works, 110 Phil. 33) Congress, can claim any injury from the alleged
or a claim of illegal disbursement of public executive encroachment of the legislative
funds or that the tax measure is function to amend, modify and/or repeal laws.
unconstitutional. (David, supra) (Automotive Industry Workers Alliance
3) A taxpayer is allowed to sue (AIWA),etc., et al., supra, citing Gonzales v.
where there is a claim that public funds are Narvasa, G. R. No. 140835, August 14,2000,
illegally disbursed, or that public money is being 337 SCRA 733, 741)
deflected to any improper purpose, or that
there is a wastage of public funds
through the enforcement of an invalid or
 8
6. Locus standi being merely a (etc.) v. Ermita, etc., et al., G. R. No. 168056,
September 1, 2005 and companion cases citing
matter of procedure, have been waived in
various cases]]
certain instances where a party who is
not personally injured may be allowed to 8. Instances of proper delegation:
bring suit. The following are examples of When taxing power could be delegated:
instances where suits have been brought by
Exceptions to the rule on non-
parties who have not have been personally
injured by the operation of a law or any other delegation:
government act but by concerned citizens, a. Delegation of tariff powers by
taxpayers or voters who actually sue in the public Congress to the President under the flexible tariff
interest: clause, Section 28 (2), Article VI of the
a. Taxpayers suits to question Constitution.
contracts entered into by the national government b. Delegation of emergency powers to
or government-owned or controlled corporations the President under Section 23 (2) of Article VI of
allegedly in contravention of the law. the Constitution.
b. A taxpayer is allowed to sue where c. The delegation to the President of the
there is a claim that public funds are illegally Philippines to enter into executive agreements,
disbursed, or that public money is being deflected and to ratify treaties which may contain tax
to any improper purpose, or that there is a exemption provisions subject to the concurrence
wastage of public funds through the enforcement by the Senate in the ratification made by the
of an invalid or unconstitutional law. (Abaya v. President.
Ebdane, G. R. No. 167919, February 14, 2007) d. Delegation to the people at large.
e. Delegation to administrative bodies
7. The VAT law provides that, the [Abakada Guro Party List (Formerly AASJS),
President, upon the recommendation of etc., v, Ermita, et al., G. R. No.168056,
September 1, 2005], which is referred to as
the Secretary of Finance, shall, effective
subordinate legislation.
January 1, 2006, raise the rate of value- In this instance, there is a requirement
added tax to twelve percent (12%) after that the law is complete in all aspects so what is
any of the following conditions have been delegated is merely the implementation of the
satisfied. (i) value-added tax collection law or there exists sufficiently determinate
as a percentage of Gross Domestic standards to guide the delegate and prevent a
Product (GDP) of the previous year total transference of the taxing power.
exceeds two and four-fifth percent (2
4/5%) or (ii) national government deficit 9. Paradigm shift from
as a percentage of GDP of the previous exclusive Congressional power to direct
year exceeds one and one-half percent (1 grant of taxing power to local legislative
%). bodies. The power to tax is no longer vested
Was there an invalid delegation of exclusively on Congress; local legislative bodies
legislative power ? are now given direct authority to levy taxes, fees
SUGGESTED ANSWER: No. There is no and other charges pursuant to Article X, section 5
undue delegation of legislative power but only of of the 1987 Constitution. (Batangas Power
Corporation v. Batangas City, et al. G. R. No. 152675,
the discretion as to the execution of the law. This and companion case, April 28, 2004 citing National
is constitutionally permissible. Power Corporation v. City of Cabanatuan, G. R. No.
Congress does not abdicate its functions or 149110, April 9, 2003)
unduly delegate power when it describes what job Local government legislation, is not
must be done, who must do it, and what is the regarded as a transfer of general legislative
scope of his authority. In the above case the power, but rather as the grant of authority to
Secretary of Finance becomes merely the agent prescribe local regulations, according to
of the legislative department, to determine and immemorial practice, subject, of course, to the
declare the even upon which its expressed will interposition of the superior in cases of
takes place. The President cannot set aside the necessity. (People v. Vera, 65 Phil. 56)
findings of the Secretary of Finance, who is not
under the conditions acting as the execute alter
ego or subordinate. . [Abakada Guro Party List
 9
10. Taxing power of the local
government is limited. The taxing power of 12. Reconciliation of the local
local governments is limited in the sense that governments authority to tax and the
Congress can enact legislation granting tax Congressional general taxing power.
exemptions. Congress has the inherent power to tax, which
While the system of local government includes the power to grant tax exemptions. On
taxation has changed with the onset of the 1987 the other hand, the power of local governments,
Constitution, the power of local government units such as provinces and cities for example
to tax is still limited. Quezon City, to tax is prescribed by Section 151
While the power to tax by local in relation to Section 137 of the LGC which
governments may be exercised by local expressly provides that notwithstanding any
legislative bodies, no longer merely by virtue of a exemption granted by any law or other special
valid delegation as before, but pursuant to direct law, the City or a province may impose a
authority conferred by Section 5, Article X of the franchise tax. It must be noted that Section 137
Constitution, the basic doctrine on local taxation of the LGC does not prohibit grant of future
remains essentially the same, the power to tax exemptions.
is [still] primarily vested in the Congress. The Supreme Court in a series of cases
(Quezon City, et al., v. ABS-CBN Broadcasting has sustained the power of Congress to grant
Corporation, G. R. No. 166408, October 6, 2008 citing tax exemptions over and above the power of the
City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6,
local governments delegated power to tax.
(Quezon City, et al., v. ABS-CBN Broadcasting
2006, 484 SCRA 169 in turn referring to Mactan Cebu
Corporation, G. R. No. 166408, October 6, 2008 citing
International Airport Authority, v. Marcos, G.R. No.
City Government of Quezon City, et al. v. Bayan
120082, September 11, 1996, 261 SCRA 667, 680)
Telecommunications, Inc., G.R. No. 162015, March 6,
2006, 484 SCRA 16)
11. Further amplification by Indeed, the grant of taxing powers to
Bernas of the local governments power local government units under the Constitution
to tax. What is the effect of Section 5 on the and the LGC does not affect the power of
fiscal position of municipal corporations? Congress to grant exemptions to certain
Section 5 does not change the doctrine that persons, pursuant to a declared national policy.
municipal corporations do not possess inherent The legal effect of the constitutional grant to
powers of taxation. What it does is to confer local governments simply means that in
municipal corporations a general power to levy interpreting statutory provisions on municipal
taxes and otherwise create sources of revenue. taxing powers, doubts must be resolved in favor
They no longer have to wait for a statutory grant of municipal corporations. [Ibid., referring to
of these powers. The power of the legislative Philippine Long Distance Telephone Company, Inc.
authority relative to the fiscal powers of local (PLDT) vs. City of Davao]
governments has been reduced to the authority
to impose limitations on municipal powers. 13. General principles of
Moreover, these limitations must be consistent income taxation in the Philippines or
with the basic policy of local autonomy. The
the source rule of income taxation as
important legal effect of Section 5 is thus to
reverse the principle that doubts are resolved provided in the NIRC of 1997.
against municipal corporations. Henceforth, in a. A citizen of the Philippines residing
interpreting statutory provisions on municipal therein is taxable on all income derived from
fiscal powers, doubts will be resolved in favor of sources within and without the Philippines;
municipal corporations. It is understood, b. A nonresident citizen is taxable
however, that taxes imposed by local only on income derived from sources within the
government must be for a public purpose, Philippines;
uniform within a locality, must not be c. An individual citizen of the
confiscatory, and must be within the jurisdiction Philippines who is working and deriving income
of the local unit to pass. (Quezon City, et al., v. abroad as an overseas contract worker is
ABS-CBN Broadcasting Corporation, G. R. No. taxable only on income from sources within the
166408, October 6, 2008 citing City Government of Philippines: Provided, That a seaman who is a
Quezon City, et al. v. Bayan Telecommunications, citizen of the Philippines and who receives
Inc., G.R. No. 162015, March 6, 2006, 484 SCRA compensation for services rendered abroad as a
169)
 10
member of the complement of a vessel engaged which has a duly licensed Philippine
exclusively in international trade shall be treated branch. Due to worldwide restructuring
as an overseas contract worker; of the Ensite Ltd.,. group, Ensite Ltd.,.
d. An alien individual, whether a decided to sell all its shares in Philippine
resident or not of the Philippines, is taxable
Stamping Plant, Inc. and Susanto Co.
only on income derived from sources within the
Philippines; The negotiations for the buy-out and the
e. A domestic corporation is taxable on signing of the Agreement of Sale were all
all income derived from sources within and done in the Philippines. The Agreement
without the Philippines; and provides that the purchase price will be
f. A foreign corporation, whether engaged paid to Ensite Ltds bank account in the
or not in trade or business in the Philippines, is U.S. and that title to the Philippine
taxable only on income derived from sources Stamping Plant, Inc. and Susanto Co.
within the Philippines. (Sec. 23, NIRC of 1997, shall be transferred to General Co., in
emphasis supplied)
Toronto Canada where stock certificates
will be delivered. General Co. seeks your
14. Juliane a non-resident alien
advice as to whether or not it will subject
appointed as a commission agent by a
the payments of the purchase price to
domestic corporation with a sales
withholding tax. Explain your advice.
commission of 10% all sales actually
SUGGESTED ANSWER: The payments
concluded and collected through her of the purchase price will be subject to
efforts. The local company withheld the withholding tax. Considering that all the activities
amount of P107,000 from her sales (sales) occurred within the Philippines, the
commission and remitted the same to the income is considered as income from within,
BIR. subject to Philippine income taxation. Ensite,
She filed a claim for refund alleging Ltd. being a foreign corporation is to be taxed on
that her sales commission is not taxable its income derived from sources within the
because the same was a compensation Philippines.
for her services rendered in Germany and
therefore considered as income from
sources outside the Philippines. 16. Ensite, Ltd. is a Canadian
Is her contention correct ? corporation, which has a duly licensed
SUGGESTED ANSWER: Yes. The Philippine branch engage in trading
important factor which determines the source of activities in the Philippines. Ensite, Ltd..
income of personal services is not the residence also invested directly in 40% of the
of the payor, or the place where the contract for shares of stock of Philippine Stamping
service is entered into, or the place of payment, Plant, Inc.., a Philippine corporation.
but the place where the services were actually
These shares are booked in the Head
performed.
Since the activity of securing the sales Office of Ensite, Ltd.. and are not
were in Germany, then the income did not reflected as assets of the Philippine
originate from sources from within the Philippines. branch. In 2009, Philippine Stamping
(Commissioner of Internal Revenue v. Baier-Nickel, G. Plant, Inc.. declared dividends to its
R. No. 153793, August 29, 2006) stockholders. Before remitting the
dividends to Ensite Ltd.,., Philippine
15. Ensite, Ltd.. is a Canadian Stamping Plant, Inc. Co. seeks your
corporation not doing business in the advice as to whether it will subject the
Philippines. It holds 40% of the shares remittance to withholding tax. There is
of Philippine Stamping Plant, Inc.,., a no need to discuss WT rates, if
Philippine company while the 60% is applicable. Focus your discussion on
owned by Fred Corporation, a Filipino- what is the issue.
owned Philippine corporation. Ensite SUGGESTED ANSWER:
Co. also owns 100% of the shares of Philippine Stamping Plant, Inc.. should subject
Susanto Co., an Indonesian company the remittance to withholding tax.. Since
 11
Philippine Stamping Plant. is a Philippine SUGGESTED ANSWER: Yes. The source
corporation, its shares of stock have obtained a of income which is taxable is that activity which
business situs in the Philippines, hence the produced the income. The sale of tickets in the
dividends are considered as income from within. Philippines is the activity that determines whether
Ensite. Ltd., being a foreign corporation, should such income is taxable in the Philippines.
be subject to tax on its income from within. The tickets exchanged hands here and
payments for fares were also made here in
17. Philippine Stamping Plant, Philippine currency. The situs of the source of
Inc., a Philippine corporation, has an payments is the Philippines. the flow of wealth
executive Larry who is a Filipino citizen. proceeded from and occurred, within the
Philippine Stamping Plant, Inc,. has a Philippine territory, enjoying the protection
subsidiary in Malaysia (Kuala Lumpur accorded by the Philippine Government. In
Manufacturing, Inc.) and will assign Larry consideration of such protection, the flow of
for an indefinite period to work full time wealth should share the burden of supporting the
for Kuala Lumpur Manufacturing, Inc.. government. [Commissioner of Internal Revenue
v. British Overseas Airways Corporation (BOAC),
Larry will bring his family to reside in
149 SCRA 395]
Malaysia and will lease out his residence Off-line air carriers having general sales
in the Philippines. The salary of Larry agents in the Philippines are engaged in or doing
will be shouldered 50% by Philippine business in the Philippines and their income
Stamping Plant, Inc.. while the other 50% from sales of passage documents here is
plus housing, cost of living and income from within the Philippines. Thus, the off-
educational allowances of Larrys line air carrier liable for the 32% (now 30%) tax
dependents will be shouldered by Kuala on its taxable income. [South African Airways v.
Lumpur Manufacturing, Inc.. Philippine Commissioner of Internal Revenue, G.R. No. 180356,
February 16, 2010 citing Commissioner of Internal
Stamping Plant, Inc.. will credit the 50% Revenue v. British Overseas Airways Corporation
of Larrys salary to his Philippine bank (British Overseas Airways), No. L-65773-74, April 30,
account. Larry will sign the contract of 1987, 149 SCRA 395]
employment in the Philippines. He will b. Supposing that Obama, Inc.,
also be receiving rental income for the sells tickets outside of the Philippines for
lease of his Philippine residence. passengers it carry from Gold City, South
Africa to the Philippines but returns to
Are these salaries, allowances South Africa without any cargo or
and rentals subject to Philippine income passengers. Would it then be subject to
tax? Explain briefly. any Philippine tax on such sales ?
SUGGESTED ANSWER: The salaries SUGGESTED ANSWER: It would not be
and allowances of Larry, being derived from subject to any tax. It is not subject to any income
labor or personal services rendered outside of tax because the activity which generated the
the Philippines is considered as income from income (the sale of the tickets) was performed
without. Since Larry is an OCW, then he is to be outside of the Philippines.
taxed only on his income derived from within the It is not subject to the carriers tax based
Philippines such as the rentals on his Philippine on gross Philippine billings because there were
residence, and not on his income from without. no lifts that originated from the Philippines.
Gross Philippine Billings refers to the amount
18. Obama Airlines, Inc., a foreign of gross revenue derived from carriage of
airline company which does not maintain persons, excess baggage, cargo and mail
any flight to and from the Philippines sold originating from the Philippines in a continuous
air tickets in the Philippines, through a and uninterrupted flight, irrespective of the place
general sales agent, relating to the of sale or issue and the place of payment of the
carriage of passengers and cargo ticket or passage document. [NIRC of 1997, Sec.
between two points, both outside the 28(A)(3)(a)]
Philippines. c. Would your answer be the
a. Is Obama, Inc., subject to same if Obama, Inc. sold tickets outside
income taxes on the sale of the tickets ? of the Philippines for travelers who are
 12
going to picked up by Obama, Inc., planes 2) Three (3) readings on three
from the Diosdado Macapagal Intl. Airport separate days;
at Clark, Angeles, Pampanga, bound for 3) Printed copies in final form
Nairobi, Kenya ? Reason out your distributed three (3) days before passage.
h. Presidential power to grant
answer.
reprieves, commutations and pardons and
SUGGESTED ANSWER: No more. This
remittal of fines and forfeiture after conviction by
time Obama, Inc., would be subject to the
final judgment.
carriers tax based on Gross Philippine Billings.
(GPB).
Gross Philippine Billings refers to the 3. The specific or direct
amount of gross revenue derived from carriage constitutional limitation.
of persons, excess baggage, cargo and mail a. No imprisonment for non-payment of
originating from the Philippines in a continuous a poll tax;
and uninterrupted flight, irrespective of the place b. Taxation shall be uniform and
of sale or issue and the place of payment of the equitable;
ticket or passage document. [NIRC of 1997, Sec. c. Congress shall evolve a progressive
28(A)(3)(a)] system of taxation;
The place of sale is irrelevant; as long d. All appropriation, revenue or tariff
as the uplifts of passengers and cargo occur bills shall originate exclusively in the House of
from the Philippines, income is included in GPB. Representatives, but the Senate may propose
(South African Airways v. Commissioner of Internal and concur with amendments;
Revenue, G.R. No. 180356, February 16, 2010) e. The President shall have the power to
veto any particular item or items in an
19. No improper delegation of appropriation, revenue, or tariff bill, but the veto
legislative authority to tax. The power to shall not affect the item or items to which he does
tax is inherent in the State, such power being not object;
inherently legislative, based on the principle that f. Delegated power of the President to
taxes are a grant of the people who are taxed, impose tariff rates, import and export quotas,
and the grant must be made by the immediate tonnage and wharfage dues:
representatives of the people; and where the 1) Delegation by Congress
people have laid the power, there it must remain 2) through a law
and be exercised. (Commissioner of Internal 3) subject to Congressional
Revenue v. Fortune Tobacco Corporation, G. R. Nos. limits and restrictions
167274-75, July 21, 2008) 4) within the framework of
national development program.
CONSTITUTIONAL LIMITATIONS g. Tax exemption of charitable
institutions, churches, parsonages and convents
1. Constitutional limitations on appurtenant thereto, mosques, and all lands,
buildings and improvements of all kinds actually,
the power of taxation . The general or indirect
directly and exclusively used for religious,
constitutional limitations as well as the specific or
charitable or educational purposes;
direct constitutional limitations.
h. No tax exemption without the
concurrence of majority vote of all members of
2. The general or indirect Congress;
constitutional limitations on the power of i. No use of public money or property
taxation are: for religious purposes except if priest is assigned
a. Due process clause; to the armed forces, penal institutions,
b. Equal protection clause; government orphanage or leprosarium;
c. Freedom of the press; j. Money collected on tax levied for a
d. Religious freedom; special purpose to be used only for such purpose,
e. No taking of private property without balance if any, to general funds;
just compensation; k. The Supreme Court's power to
f. Non-impairment clause; review judgments or orders of lower courts in all
g. Law-making process: cases involving the legality of any tax, impose,
1) Bill should embrace only one assessment or toll or the legality of any penalty
subject expressed in the title thereof; imposed in relation to the above;
 13
l. Authority of local government units enforced. (Santos v. People, et al, G. R. No. 173176,
to create their own sources of revenue, to levy August 26, 2008)
taxes, fees and other charges subject to It is imperative to duly establish that the
guidelines and limitations imposed by Congress one invoking equal protection and the person to
consistent with the basic policy of local autonomy; which she is being compared were indeed
m. Automatic release of local similarly situated, i.e., that they committed
government's just share in national taxes; identical acts for which they were charged with
n. Tax exemption of all revenues and the violation of the same provisions of the NIRC;
assets of non-stock, non-profit educational and that they presented similar arguments and
institutions used actually, directly and exclusively evidence in their defense - yet, they were treated
for educational purposes; differently. (Santos, supra)
o. Tax exemption of all revenues and
assets of proprietary or cooperative educational 8. Tests to determine validity of
institutions subject to limitations provided by law classification. The United States Supreme
including restrictions on dividends and provisions Court has established different tests to
for reinvestment of profits; determine the validity of a classification and
p. Tax exemption of grants, compliance with the equal protection clause.
endowments, donations or contributions used The recognized tests are:
actually, directly and exclusively for educational a. The traditional (or rational basis)
purposes subject to conditions prescribed by law. test.
b. The strict scrutiny (or compelling
5. Equal protection of the law interest) test.
clause is subject to reasonable c. The intermediate level of scrutiny (or
classification. If the groupings are quasi-suspect class) test.
characterized by substantial distinctions that 9. The traditional (or rational
make real differences, one class may be treated basis) test used in order to determine the
and regulated differently from another. The validity of classification. The classification
classification must also be germane to the is valid if it is rationally related to a
purpose of the law and must apply to all those constitutionally permissible state interest.
belonging to the same class. (Tiu, et al., v. Court of The complainant must prove that the
Appeals, et al., G.R. No. 127410, January 20, 1999) classification is invidous, wholly arbitrary, or
capricious, otherwise the classification is
6. Requisites for valid presumed to be valid. (Lindsley v. Natural
classification. All that is required of a valid Carboinic Gas Co., 220 U.S. 61; McGowan v.
classification is that it be reasonable, which Maryland, 366 U.S. 420; United States Railroad
means that a. the classification should be Retirement Board v. Fritz, 449 U.S. 166)
based on substantial distinctions which make for
real differences, 10. The strict scrutiny (or
b. that it must be germane to the compelling interest) test used in order to
purpose of the law; determine the validity of the
c. that it must not be limited to existing classification. Government regulation that
conditions only; and intentionally discriminates against a suspect
d. that it must apply equally to each class such as racial or ethnic minorities, is
member of the class. subject to strict scrutiny and considered to
The standard is satisfied if the violate the equal protection clause unless found
classification or distinction is based on a necessary to promote a compelling state
reasonable foundation or rational basis and is interest.
not palpably arbitrary. [ABAKADA Guro Party List, A classification is necessary when it is
etc., v. Purisima, etc., et al., G. R. No. 166715, August narrowly drawn so that no alternative, less
14, 2008] burdensome means is available to accomplish
the state interest.
7. Equal protection does not Thus, it was held that denial of free public
demand absolute equality. It merely education to the children of illegal aliens
requires that all persons shall be treated alike, imposes an enormous and lasting burden based
under like circumstances and conditions, both as on a status over which the children have no
to the privileges conferred and liabilities control is violative of equal protection because
 14
there is no showing that such denial furthers a property taxes he paid. The municipal
substantial state goal. (Plyler v. Doe, 457 U.S. attorney rendered an opinion that Benjie
202) cannot be reimbursed because the
ordinance did not provide for such
11. The intermediate level of
reimbursement. Benjie files suit to
scrutiny (or quasi-suspect class) test
declare the ordinance void on the ground
used in order to determine the validity of
that it is a class legislation. Will his suit
he classification. Classification based on
prosper ? Explain your answer briefly.
gender or legitimacy are not suspect, but
neither are they judged by the traditional or SUGGESTED ANSWER: No. There is
rational basis test. no class legislation because there is no violation
Intentional discriminations against of the equal protection suit. There is a valid
members of a quasi-suspect class violate equal classification between those who already paid
protection unless they are substantially related to their taxes and those who have not.
important government objectives. (Craig v. Furthermore, the taxing authority has the
Boren, 429 U.S. 190) prerogative to select the subjects and objects of
Thus, a state law granting a property tax taxation, including granting a 50% discount in
exemption to widows, but not widowers, has the payment of unpaid real estate taxes, and
been held valid for it furthers the state policy of the condonation of all penalties on fines resulting
cushioning the financial impact of spousal loss from late payment.
upon the sex for whom that loss usually imposes
a heavier burden. (Kahn v. Shevin, 416 U.S. 10. The rewards law to tax
351) collectors does not violate equal
protection. The equal protection clause
12. Equality and uniformity of recognizes a valid classification, that is, a
taxation may mean the same as equal classification that has a reasonable foundation or
protection. In such a case, the terms would rational basis and not arbitrary. With respect to
mean that all subjects and objects of taxation RA 9335, its expressed public policy is the
which are similarly situated shall be subject to the optimization of the revenue-generation capability
same burdens and granted the same privileges and collection of the BIR and the BOC. Since the
without any discrimination whatsoever. subject of the law is the revenue- generation
capability and collection of the BIR and the BOC,
13. It is inherent in the power to
the incentives and/or sanctions provided in the
tax that the State be free to select the law should logically pertain to the said agencies.
subjects of taxation, and it has been Moreover, the law concerns only the BIR and the
repeatedly held that, "inequalities which result BOC because they have the common distinct
from a singling out of one particular class of primary function of generating revenues for the
taxation, or exemption, infringe no constitutional national government through the collection of
limitation." (Commissioner of Internal Revenue, taxes, customs duties, fees and charges.
et al., v. Santos, et al., 277 SCRA 617) Indubitably, such substantial distinction is
germane and intimately related to the purpose of
9. Benjie is a law-abiding citizen the law. Hence, the classification and treatment
who pays his real estate taxes promptly. accorded to the BIR and the BOC under RA
Due to a series of typhoons and adverse 9335 fully satisfy the demands of equal
economic conditions, an ordinance is protection. (ABAKADA Guro Party List, etc., v.
passed by Soliman City granting a 50% Purisima, etc., et al., G. R. No. 166715, August 14,
2008)
discount for payment of unpaid real
estate taxes for the preceding year and 11. The prosecution of one guilty
the condonation of all penalties on fines person while others equally guilty are
resulting from the late payment. not prosecuted, however, is not, by itself,
Arguing that the ordinance rewards a denial of the equal protection of the
delinquent tax payers and discriminates laws. Where the official action purports to be in
against prompt ones, Benjie demands conformity to the statutory classification, an
that he be refunded an amount erroneous or mistaken performance of the
equivalent to one-half of the real statutory duty, although a violation of the statute,
 15
is not without more a denial of the equal 14. A lawful tax on a new subject,
protection of the laws. or an increased tax on an old one, does
The unlawful administration by officers of not interfere with a contract or impairs its
a statute fair on its face, resulting in its unequal obligation, within the meaning of the
application to those who are entitled to be
constitution. (Tolentino v. Secretary of Finance, et
treated alike, is not a denial of equal protection al., and companion cases, 235 SCRA 630)
unless there is shown to be present in it an
element of intentional or purposeful
15. The withdrawal of a tax
discrimination. This may appear on the face of
the action taken with respect to a particular class exemption should not be construed as
or person, or it may only be shown by extrinsic prohibiting future grants of exemption
evidence showing a discriminatory design over from all taxes. (Philippine Long Distance
another not to be inferred from the action itself. Telephone Company, Inc., v. City of Davao, et al., etc.,
(Santos v. People, et al, G. R. No. 173176, August 26, G. R. No. 143867, August 22, 2001)
2008)
16. Tax exemptions in franchises
12. Equal protection should not are always subject to withdrawal. A
be used to protect commission of crime. legislative franchise is granted with the express
While all persons accused of crime are to be condition that it is subject to amendment,
treated on a basis of equality before the law, it alteration, or repeal. (1987 Constitution, Art. XII,
does not follow that they are to be protected in Sec. 11)
the commission of crime. It would be It is enough to say that the parties to a
unconscionable, for instance, to excuse a contract cannot, through the exercise of
defendant guilty of murder because others have prophetic discernment, fetter the exercise of the
murdered with impunity. taxing power of the State. For not only are
Likewise, if the failure of prosecutors to existing laws read into contracts in order to fix
enforce the criminal laws as to some persons obligations as between parties, but the
should be converted into a defense for others reservation of essential attributes of sovereign
charged with crime, the result would be that the power is also read into contracts as a basic
trial of the district attorney for nonfeasance postulate of the legal order. The policy of
would become an issue in the trial of many protecting contracts against impairment
persons charged with heinous crimes and the presupposes the maintenance of a government
enforcement of law would suffer a complete which retains adequate authority to secure the
breakdown. (Santos v. People, et al, G. R. No. peace and good order of society. (Smart
173176, August 26, 2008) Communications, Inc. v. The City of Davao, etc., et al.,
G. R. No. 155491, September 16, 2008)
NOTES AND COMMENTS: Philippine
13. Illustration of double taxation Long Distance Telephone Company, Inc., v. City of
in local taxation. there is indeed double Davao, et al., etc., G. R. No. 143867, August 22, 2001
taxation if Coca-Cola is subjected to the taxes made the observation that since Smarts franchise was
under both Sections 14 and 21 of Tax Ordinance granted after the effectivity of the Local Government
No. 7794, since these are being imposed: (1) on Code that its tax exemption privilege was reinstated.
the same subject matter the privilege of doing However, Smart Communications, Inc. v. The City of
business in the City of Manila; (2) for the same Davao, etc., et al., G. R. No. 155491, September 16,
2008 is explicit in its holding that Smart is not entitled
purpose to make persons conducting business to a tax exemption.
within the City of Manila contribute to city
revenues; (3) by the same taxing authority
City of Manila; (4) within the same taxing
17. When withdrawal of a tax
jurisdiction within the territorial jurisdiction of exemption impairs the obligation of
the City of Manila; (5) for the same taxing contracts. The Contract Clause has never
periods per calendar year; and (6) of the same been thought as a limitation on the exercise of
kind or character a local business tax imposed the States power of taxation save only where a
on gross sales or receipts of the business. (The tax exemption has been granted for a valid
City of Manila, et al., v. Coca-Cola Bottlers consideration. (Smart Communications, Inc. v. The
Philippines, Inc., G. R. No. 181845, August 4, 2009) City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008) citing Tolentino v. Secretary of
Finance, G. R. No. 115455, August 25, 1994, 235
 16
SCRA 630, 685) The author opines that since The right to exemption from local
practically all franchises granted to franchise tax must be clearly established and
telecommunications companies are similarly cannot be made out of inference or implications
worded that the above doctrine finds application but must be laid beyond reasonable doubt.
to the others) Verily, the uncertainty in the in lieu of all taxes
provision should be construed against ABS-
18. The primary reason for the CBN. ABS-CBN has the burden to prove that it
is in fact covered by the exemption so claimed
withdrawal of tax exemption privileges
but has failed to do so. (Quezon City, et al., v.
granted to government owned and ABS-CBN Broadcasting Corporation, G. R. No.
controlled corporations and all other units of 166408, October 6, 2008)
government was that such privilege resulted to NOTES AND COMMENTS: This is
serious tax base erosion and distortions in the tax practically the same holding in an earlier case
treatment of similarly situated enterprises, hence involving another telecommunications company Smart
resulting in the need for these entities to share in Communications, Inc. v. The City of Davao, etc., et
the requirements of development, fiscal or al., G. R. No. 155491, September 16, 2008. The
otherwise, by paying the taxes and other charges author opines that since practically all franchises
granted to telecommunications companies are
due them. (Philippine Ports Authority v. City of Iloilo, similarly worded that the above doctrine finds
G. R. No. 109791, July 14, 2003)
application to the others.)

19. National Power Corporation 21. In lieu of all taxes refers to

(NPC) is of the insistence that it is not
national internal revenue taxes and not
subject to the payment of franchises
to local taxes. The in lieu of all taxes clause
taxes imposed by the Province of Isabela applies only to national internal revenue taxes
because all of its shares are owned by the and not to local taxes. As appropriately pointed
Republic of the Philippines. It is thus, an out in the separate opinion of Justice Antonio T.
instrumentality of the National Carpio in a similar case involving a demand for
Government which is exempt from local exemption from local franchise taxes:
taxation. As such it is not a private [T]he "in lieu of all taxes" clause in Smart's
corporation engaged in business franchise refers only to taxes, other than income
enjoying franchise tax, imposed under the National Internal
Is such contention meritorious ? Revenue Code. The "in lieu of all taxes" clause
SUGGESTED ANSWER: No. Philippine does not apply to local taxes. The proviso in the
Long Distance Telephone Company, Inc., v. City first paragraph of Section 9 of Smart's franchise
of Davao, et al., etc., G. R. No. 143867, August states that the grantee shall "continue to be
22, 2001, upheld the authority of the City of liable for income taxes payable under Title II of
Davao, a local government unit, to impose and the National Internal Revenue Code." Also, the
collect a local franchise tax because the Local second paragraph of Section 9 speaks of tax
Government Code has withdrawn all tax returns filed and taxes paid to the
exemptions previously enjoyed by all persons and "Commissioner of Internal Revenue or his duly
authorized local government units to impose a tax authorized representative in accordance with the
on business enjoying a franchise tax National Internal Revenue Code." Moreover, the
notwithstanding the grant of tax exemption to same paragraph declares that the tax returns
them. "shall be subject to audit by the Bureau of
Internal Revenue." Nothing is mentioned in
Section 9 about local taxes. The clear intent is
20. In lieu of all taxes in the
for the "in lieu of all taxes" clause to apply only to
franchise of ABS-CBN does not exempt it taxes under the National Internal Revenue Code
from local franchise taxes. It does not and not to local taxes. Even with respect to
expressly provide what kind of taxes ABS-CBN national internal revenue taxes, the "in lieu of all
is exempted from. It is not clear whether the taxes" clause does not apply to income tax.
exemption would include both local, whether If Congress intended the "in lieu of all
municipal, city or provincial, and national tax. taxes" clause in Smart's franchise to also apply
Whether the in lieu of all taxes provision would to local taxes, Congress would have expressly
include exemption from local tax is not mentioned the exemption from municipal and
unequivocal. provincial taxes. Congress could have used the
 17
language in Section 9(b) of Clavecilla's old equitableness of taxation. Indirect duplicate
franchise, as follows: taxation is not anathematized by the above
x x x in lieu of any and all taxes of any constitutional limitations.
kind, nature or description levied, established or
collected by any authority whatsoever, 24. Elements of direct duplicate
municipal, provincial or national, from which the taxation:
grantee is hereby expressly exempted, x x x. a. Same
(Emphasis supplied). 1) Subject or object is taxed
However, Congress did not expressly twice
exempt Smart from local taxes. Congress used 2) by the same taxing authority
the "in lieu of all taxes" clause only in reference 3) for the same taxing purpose
to national internal revenue taxes. The only 4) during the same taxable
interpretation, under the rule on strict period
construction of tax exemptions, is that the "in lieu b. Taxing all of the subjects or objects
of all taxes" clause in Smart's franchise refers for the first time without taxing all of them for the
only to national and not to local taxes. [Smart
second time.
Communications, Inc. v. The City of Davao, etc., et al.,
G. R. No. 155491, September 16, 2008 citing
If any of the elements are absent then
Philippine Long Distance Telephone Company, Inc. v. there is indirect duplicate taxation which is not
City of Davao, 447 Phil. 571, 594 (2003)] prohibited by the constitution.
NOTES AND COMMENTS: The author NOTES AND COMMENTS:
opines that the above finds application to all a. Presence of the 2nd element violates
telecommunications companies. the equal protection clause. If only the 1st element is
present, taxing the same subject or object twice, by the
22. The in lieu of all taxes same taxing authority, etc., there is no violation of the
equal protection clause because all subjects and
clause in the franchise of ABS-CBN has objects that are similarly situated are subject to the
become functus officio with the abolition same burdens and granted the same privileges without
of the franchise tax on broadcasting any discrimination whatsoever,
companies with yearly gross receipts The presence of the 2 nd element, taxing all of
exceeding Ten Million Pesos. The clause the subjects and objects for the first time, without taxing
all for the second time, results to discrimination among
in lieu of all taxes does not pertain to VAT or subjects and objects that are similarly situated, hence
any other tax. It cannot apply when what is paid violative of the equal protection clause.
is a tax other than a franchise tax. Since the 25. Double taxation a valid defense
franchise tax on the broadcasting companies
against the legality of a tax measure if the
with yearly gross receipts exceeding ten million
pesos has been abolished, the in lieu of all double taxation is direct duplicate
taxes clause has now become functus officio, taxation, because it would violate the equal
rendered inoperative. (Quezon City, et al., v. ABS- protection clause of the constitution.
CBN Broadcasting Corporation, G. R. No. 166408,
October 6, 2008) 26. When an item of income is
NOTES AND COMMENTS: This is taxed in the Philippines and the same
practically the same holding in an earlier case income is taxed in another country, this
involving another telecommunications company.
Smart Communications, Inc. v. The City of Davao,
would be known as international juridical
etc., et al., G. R. No. 155491, September 16, 2008. double taxation which is the imposition of
The author opines that since practically all franchises comparable taxes in two or more states on the
granted to telecommunications companies are same taxpayer in respect of the same subject
similarly worded that the above doctrine finds matter and for identical grounds. (Commissioner of
application to the others.) Internal Revenue v. S.C. Johnson and Son, Inc., et al.,
G.R. No. 127105, June 25, 1999)
23. Double taxation in its generic
sense, this means taxing the same 27. Methods for avoiding double
subject or object twice during the same taxation (indirect duplicate taxation).
taxable period. In its particular sense, it may a. Tax treaties which exempts foreign
mean direct duplicate taxation, which is prohibited nationals from local taxation and local nationals
under the constitution because it violates the from foreign taxation under the principle of
concept of equal protection, uniformity and reciprocity.
 18
b. Tax credits where foreign taxes are SUGGESTED ANSWER: No. There was
allowed as deductions from local taxes that are no grave abuse of discretion because all the
due to be paid. changes and modifications made by the
c. Allowing foreign taxes as a Bicameral Conference Committee were germane
deduction from gross income. to subjects of the provisions referred to it for
reconciliation.
28. Tax credit generally refers to an The Bicameral Conference Committee
amount that is subtracted directly from ones total merely exercised the judicially recognized long-
tax liability, an allowance against the tax itself, or standing legislative practice of giving said
a deduction from what is owned. conference committee ample latitude for
A tax credit reduces the tax due, including compromising differences between the Senate
whenever applicable the income tax that is and the House. [Abakada Guro Party List (etc.) v.
determined after applying the corresponding tax Ermita, etc., et al., G. R. No. 168056, September 1,
rates to taxable income. (Commissioner of Internal 2005 and companion cases]
Revenue v. Central Luzon Drug Corporation, G. R. No.
159647, April 15, 2005) 31. The VAT while regressive is
NOT violative of the mandate to evolve a
29. A tax deduction is defined as a progressive system of taxation. Do you
subtraction fro income for tax purposes, or an agree ? The mandate to Congress is not to
amount that is allowed by law to reduce income prescribe but to evolve a progressive system of
prior to the application of the tax rate to compute taxation. Otherwise, sales taxes which perhaps
the amount of tax which is due. are the oldest form of indirect taxes, would have
A tax deduction reduces the income that is been prohibited with the proclamation of the
subject to tax in order to arrive at taxable income. constitutional provision. Sales taxes are also
(Commissioner of Internal Revenue v. Central Luzon regressive. . [Abakada Guro Party List (etc.) v.
Drug Corporation, G. R. No. 159647, April 15, 2005) Ermita, etc., et al., G. R. No. 168056, September 1,
2005 and companion cases citing Tolentino v.
30. The petitioners allege that the Secretary of Finance, et al., G. R. No. 115455, August
25, 1994, 235 SCRA 630]
R-VAT law is constitutional because the
Bicameral Conference Committed has
32. All revenues and assets of
exceeded its authority in including
non-stock, non-profit educational
provisions which were never included in
institutions that are actually, directly and
the versions of both the House and
exclusively used for educational
Senate such as inserting the stand-by
purposes shall be exempt from taxation.
authority to the President to increase the
VAT from 10% to 12%; deleting entirely 33. Revenues and assets of
the no pass-on provisions found in both proprietary educational institutions,
the House and Senate Bills; inserting the including those which are cooperatively
provision imposing a 70% limit on the owned, may be entitled to exemptions
amount of input tax to be credited against subject to limitations provided by law
the output tax; and including the including restrictions on dividends and
amendments introduced only by Senate
provisions for reinvestments. There is no
Bill No. 1950 regarding other kinds of law at the present which grants exemptions, other
taxes in addition to the value-added tax. the exemptions granted to cooperatives.
Thus, there was a violation of the
constitutional mandate that revenue bills OTHER CONCEPTS
shall originate exclusively from the House
of Representatives. 1. Distinguish tax from debt.
Are the contentions of such weight
as to constitute grave abuse of discretion TAX DEBT
which may invalidate the law ? Explain Basis based on law based on contract o
briefly. judgment
Failure to Pay may result in no imprisonment
 19
imprisonment Commissioner of Internal Revenue, G.R. No. 180356,
February 16, 2010 reiterating Caltex Philippines,
Mode of generally payable in payable in money, Inc. v. Commission on Audit, which applied
Payment money property or service Francia v. Intermediate Appellate Court)
Assignability not assignable assignable
Payment unless it becomes a may be a subject 4. Exceptions: When set-off or
debt is not subject to compensation allowed for local taxes.
compensation or set- a.
off Where both claims already become
overdue and demandable as well as fully
Interest does not draw interest draws interest if liquidated. Compensation takes place by
unless delinquent stipulated or delayed operation of law under Art. 1200 in relation to
Authority imposed by public can be imposed by Arts. 1279 and 1290 all of the Civil Code.
authority private individuals (Domingo v. Garlitos, 8 SCRA 443)
b. Compensation takes place
Prescription Prescriptive periods debt under the Civil by operation of law, where the government and
for tax under NIRC Code the taxpayer are in their own right reciprocally
debtors and creditors of each other, and that the
WARNING: Do not use the above debts are both due and demandable. This is in
arrangement in answering Bar questions. consequence of Article 1278 and 1279 of the
Civil Code. (Domingo v. Garlitos, 8 SCRA 443)
2. Compensation takes place by c.
operation of law, where the local government and ,The Supreme Court upheld the validity of
the taxpayer are in their own right reciprocally a set-off between the taxpayer and the
debtors and creditors of each other, and that the government. In both cases, the claims of the
debts are both due and demandable, in taxpayers therein were certain and liquidated.
consequence of Articles 1278 and 1279 of the The claims were certain since there were no
Civil Code. (Domingo v. Garlitos, 8 SCRA 443) doubts or disputes as to their refundability. In
fact, the government admitted the fact of over-
3. May there be compensation or payment. (Commissioner of Internal
Revenue v. Esso Standard Eastern, Inc., 172 SCRA
set-off between a national tax and a 364) d. In case of a tax
debt ? Reason out your answer. overpayment, the BIRs obligation to refund or
SUGGESTED ANSWER: As a off-set arises from the moment the tax was paid.
general rule, there could be no compensation or REASON: Solutio indebeti. (Commissioner of
set-off between a tax and a debt for the following Internal Revenue v. Esso Standard Eastern, Inc 172
reasons: SCRA 364)
a. Lifeblood e. While
theory. judgment should be rendered in favor of
b. Taxes are not contractual Republic for unpaid taxes, judgment ought at the
obligations but arise out of a duty to, and are the same time to issue for Sampaguita Pictures
positive acts of government, to the making and commanding payment to the latter by the
enforcing of which the personal consent of the Republic of the value of the backpay certificates
individual taxpayer is not required. (Republic v. which the Republic received. (Republic v. Ericta,
Mambulao Lumber Co., 4 SCRA 622) 172 SCRA 623)
c. Taxes cannot be the
subject of compensation because the 5. Gilbert obtained a judgment
government and taxpayer are not mutually for a sum of money against the
creditors and debtors of each other and a claim municipality of Camiling. The judgment
for taxes is not such a debt, demand, contract or has become final although execution has
judgment as is allowed to be set-off. not issued. Upon receiving an
Thus, it is correct to say that the
assessment for municipal sales taxes
offsetting of a taxpayers tax refund with its
alleged tax deficiency is unavailing under Art. from the Municipal Treasurer, Gilbert
1279 of the Civil Code. (South African Airways v. executed a partial assignment of his
judgment sufficient to cover the
 20
assessment in favor of the Municipality. people pay for civilized society. They are the
May the Municipal Treasurer validly lifeblood of the nation. Thus, statutes granting
accept the assignment? Why? tax exemptions are construed stricissimi juris
SUGGESTED ANSWER: Yes. The against the taxpayer and liberally in favor of the
parties in this case are mutually debtors and taxing authority. A claim of tax exemption must
creditors of each other, and since both of the be clearly shown and based on language in law
claims became overdue, demandable and fully too plain to be mistaken. Otherwise stated,
liquidated, compensation takes place by taxation is the rule, exemption is the exception.
operation of law. Such was the holding in (Quezon City, et al., v. ABS-CBN Broadcasting
Corporation, G. R. No. 166408, October 6, 2008 citing
Domingo v. Garlitos, 8 SCRA 443, a case Mactan Cebu International Airport Authority v. Marcos,
decided by the Supreme Court whose factual G.R. No. 120082, September 11, 1996, 261 SCRA
antecedents are similar to the problem. 667, 680) The burden of proof rests upon the
party claiming the exemption to prove that it is in
fact covered by the exemption so claimed.
6. In case of doubt, (Quezon City, supra citing Agpalo, R.E., Statutory
tax laws must be construed strictly Construction, 2003 ed., p. 301)
against the State and liberally in favor of
the taxpayer because taxes, as burdens which 9. Rationale for strict
must be endured by the taxpayer, should not be interpretation of tax exemption laws. The
presumed to go beyond what the law expressly basis for the rule on strict construction to
and clearly declares. (Lincoln Philippine Life statutory provisions granting tax exemptions or
Insurance Company, Inc., etc., v. Court of Appeals, et deductions is to minimize differential treatment
al., 293 SCRA 92, 99) and foster impartiality, fairness and equality of
treatment among taxpayers. (Quezon City, et al., v.
7. Interpretation in the ABS-CBN Broadcasting Corporation, G. R. No.
imposition of taxes, is not the similar 166408, October 6, 2008) He who claims an
doctrine as that applied to tax exemption from his share of common burden
exemptions. The rule in the interpretation of must justify his claim that the legislature
tax laws is that a statute will not be construed as intended to exempt him by unmistakable terms.
imposing a tax unless it does so clearly, For exemptions from taxation are not favored in
expressly, and unambiguously. A tax cannot be law, nor are they presumed. They must be
imposed without clear and express words for expressed in the clearest and most
that purpose. Accordingly, the general rule of unambiguous language and not left to mere
requiring adherence to the letter in construing implications. It has been held that exemptions
statutes applies with peculiar strictness to tax are never presumed the burden is on the
laws and the provisions of a taxing act are not to claimant to establish clearly his right to
be extended by implication. In answering the exemption and cannot be made out of inference
question of who is subject to tax statutes, it is or implications but must be laid beyond
basic that in case of doubt, such statutes are to reasonable doubt. In other words, since taxation
be construed most strongly against the is the rule and exemption the exception, the
government and in favor of the subjects or intention to make an exemption ought to be
citizens because burdens are not to be imposed expressed in clear and unambiguous terms.
nor presumed to be imposed beyond what (Quezon City, supra citing Agpalo, R.E., Statutory
statutes expressly and clearly import. Construction, 2003 ed., p. 302)
[Commissioner of Internal Revenue v. Fortune
Tobacco Corporation, G. R. Nos. 167274-75, July 21, 10. Why are tax exemptions are
2008 citing CIR v. Court of Appeals, 338 Phil. 322, strictly construed against the taxpayer
330-331 (1997)] As burdens, taxes should not be and liberally in favor of the State ?
unduly exacted nor assumed beyond the plain
SUGGESTED ANSWER: Taxes are
meaning of the tax laws. (Ibid., citing CIR v.
necessary for the continued existence of the
Philippine American Accident Insurance Company,
Inc., G.R. No. 141658, March 18, 2005, 453 SCRA State.
668)
11. In case of a tax overpayment,
8. Strict interpretation of tax where the BIRs obligation to refund or
exemption laws. Taxes are what civilized set-off arises from the moment the tax
 21
was paid under the principle of solutio not unjustly enrich itself at the expense of
indebeti. (Commissioner of Internal Revenue v. taxpayers. [Commissioner, supra citing AB Leasing
Esso Standard Eastern, Inc, 172 SRCA 364) and Finance Corporation v. Commissioner of Internal
Revenue, 453 Phil. 297 in turn citing BPI-Family
Savings Bank, Inc. v. Court of Appeals, 330 SCRA
12. But note Nestle Phil. v. Court
507, 510, 518 (2000)] And so, given its essence, a
of Appeals, et al., G.R. No. 134114, July 6, claim for tax refund necessitates only
2001 which held that in order for the rule on preponderance of evidence for its approbation
solutio indebeti to apply it is an essential condition like in any other ordinary civil case.
that the petitioner must first show that its payment (Commissioner, supra)
of the customs duties was in excess of what was
required by the law at the time the subject 16 14. Tax refunds premised upon a
importations of milk and milk products were tax exemption strictly construed, Tax
made. Unless shown otherwise, the disputable exemption is a result of legislative grace. And he
presumption of regularity of performance of duty who claims an exemption from the burden of
lies in favor of the Collector of Customs. taxation must justify his claim by showing that
13. Strict interpretation of a tax the legislature intended to exempt him by words
refund that partakes of the nature of a too plain to be mistaken. [Commissioner of
tax does not apply to tax refund based Internal Revenue v. Fortune Tobacco Corporation, G.
on erroneous payment or where there is R. Nos. 167274-75, July 21, 2008 citing Surigao
no law that authorizes collection of the Consolidated Mining Co. Inc. v. Commissioner of
Internal Revenue and Court of Tax Appeals, 119 Phil.
tax. There is parity between tax refund and tax 33, 37 (1963)]
exemption only when the former is based either The rule is that tax exemptions must be
on a tax exemption statute or a tax refund strictly construed such that the exemption will
statute. (Commissioner of Internal Revenue v. not be held to be conferred unless the terms
Fortune Tobacco Corporation, G. R. Nos. 167274-75, under which it is granted clearly and distinctly
July 21, 2008)
show that such was the intention. [Commissioner,
Tax refunds (or tax credits), on the other supra citing Phil. Acetylene Co. v. Commission of
hand, are not founded principally on legislative Internal Revenue, et al., 127 Phil. 461, 472 (1967);
grace but on the legal principle which underlies Manila Electric Company v. Vera, G.R. No. L-29987,
all quasi-contracts abhorring a persons unjust 22 October 1975, 67 SCRA 351, 357-358; Surigao
enrichment at the expense of another. Consolidated Mining Co. Inc. v. Commissioner of
[Commissioner, supra citing Ramie Textiles, Inc. v. Internal Revenue, supra]
Hon. Mathay, Sr., 178 Phil. 482 (1979); Puyat & Sons A claim for tax refund may be based on
v. City of Manila, et al., 117 Phil. 985 (1963)] statutes granting tax exemption or tax refund. In
The dynamic of erroneous payment of tax such case, the rule of strict interpretation against
fits to a tee the prototypic quasi-contract, solutio the taxpayer is applicable as the claim for refund
indebiti, which covers not only mistake in fact but partakes of the nature of an exemption, a
also mistake in law. (Commissioner, supra citing legislative grace, which cannot be allowed
CIVIL CODE, Arts. 2142, 2154 and 2155) unless granted in the most explicit and
The Government is not exempt from the categorical language. The taxpayer must show
application of solutio indebiti. (Commissioner, that the legislature intended to exempt him from
supra citing Commissioner of Internal Revenue v. the tax by words too plain to be mistaken.
Firemans Fund Insurance Co., G.R. No. L-30644, 9
[Commissioner, supra with a note to see Surigao
March 1987, 148 SCRA 315, 324-325; Ramie
Consolidated Mining Co. Inc. v. CIR, supra at 732-
Textiles, Inc. v. Mathay, supra; Gonzales Puyat &
733; Philex Mining Corp. v. Commissioner of Internal
Sons v. City of Manila, supra)
Revenue, 365 Phil. 572, 579 (1999); Davao Gulf
Indeed, the taxpayer expects fair dealing Lumber Corp. v. Commissioner of Internal Revenue,
from the Government, and the latter has the duty 354 Phil. 891-892 (1998); . Commissioner of Internal
to refund without any unreasonable delay what it Revenue v. Tokyo Shipping Co., Ltd., 314 Phil. 220,
has erroneously collected. (Commissioner, supra 228 (1995)]
citing Commissioner of Internal Revenue v. Tokyo
Shipping Co., supra at 338) If the State expects its 15. Effect of a BIR reversal of a
taxpayers to observe fairness and honesty in previous ruling interpreting a law as
paying their taxes, it must hold itself against the exempting a taxpayer. A reversal of a BIR
same standard in refunding excess (or ruling favorable to a taxpayer would not
erroneous) payments of such taxes. It should necessarily create a perpetual exemption in his
 22
favor, for after all the government is never 20. Tax evasion connotes the
estopped from collecting taxes because of integration of three factors:
mistakes or errors on the part of its agents. a. The end to be achieved, i.e., the
(Lincoln Philippine Life Insurance Company, Inc., etc., payment of less than that known by the taxpayer
v. Court of Appeals, et al., 293 SCRA 92, 99)
to be legally due, or the non-payment of tax when
it is shown that a tax is due;
16. A tax amnesty is a general b. an accompanying state of mind
pardon or intentional overlooking by the State of which is described as being evil on bad faith,
its authority to impose penalties on persons willful, or deliberate and not accidental; and
otherwise guilty of evasion or violation of a
c. a course of action or failure of action
revenue or a tax law.
which is unlawful. (Commissioner of Internal
It partakes of an absolute waiver by the Revenue v. The Estate of Benigno P. Toda, Jr., , etc., G.
government of its right to collect what is due it R. No. 147188, September 14, 2004)
and to give tax evaders who wish to relent a
chance to start with a clean slate. A tax amnesty, 21. Tax avoidance distinguished
much like a tax exemption, is never favored nor
from tax evasion.
presumed in law. The grant of a tax amnesty,
a. Tax avoidance is legal while tax
similar to a tax exemption, must be construed
evasion is illegal.
strictly against the taxpayer and liberally in favor
b. The objective of tax avoidance in
of the taxing authority. (Philippine Banking
Corporation, etc., v. Commissioner of Internal
most instances is merely to reduce the tax that is
Revenue, G. R. No. 170574, January 30, 2009) due while is tax evasion the object is to entirely
escape the payment of taxes.
17. The purpose of tax amnesty is c. Tax evasion warrants the imposition
to of civil, administrative and criminal penalties while
a. give tax evaders who wish to relent a tax avoidance does not.
chance to start a clean slate, and to
b. give the government a chance to 22. Tax sparing is a provision in some
collect uncollected tax from tax tax treaties which provides that the state of
evaders without having to go through the residence allows as credit the amount that would
tedious process of a tax case. (Banas, Jr. v. Court have been paid, as if no reduction has been
of Appeals, et al., G.R. No. 102967, February made. (Vogel, Klaus on Double Taxation
10, 2000) Conventions, Third Edition, p.1255 cited in Segarra,
Venice H, Tax Treaties: Trick or treat ?, Philippine
Daily Inquirer, December 6, 2002, p. C5)
18. Tax amnesty distinguished
There may be instances where a
from tax exemption. particular income is exempt from taxation in
a. Tax amnesty is an immunity from all order to encourage foreign investments which
criminal, civil and administrative liabilities arising may lead to economic development. If the tax
from nonpayment of taxes (People v. Castaneda, credit method is used, there would be no more
G.R. No. L-46881, September 15, 1988) WHILE a tax to credit since there is no more tax to credit
tax exemption is an immunity from civil liability as a result of the tax exemption. Consequently,
only. It is an immunity or privilege, a freedom when the tax method credit method is applied to
from a charge or burden to which others are these items of income, such incentives are
subjected. (Florer v. Sheridan, 137 Ind. 28, 36 siphoned off since, in effect, the tax benefits are
NE 365) cancelled out. (Ibid.) Thus, the need for the tax
b. Tax amnesty applies only to past tax sparing provision.
periods, hence of retroactive application
(Castaneda, supra) WHILE tax exemption has
prospective application. NATIONAL INTERNAL REVENUE
CODE
19. Tax avoidance is the use of
legally permissible means to reduce the tax while ORGANIZATION AND FUNCTIONS OF
tax evasion is the use of illegal means to escape THE BUREAU OF INTERNAL REVENUE
the payment of taxes.
1. Rep. Act No. 1405, the Bank
Deposits Secrecy Law prohibits inquiry
 23
into bank deposits. As exceptions to Rep. 3. Certain business
Act No. 1405, the Commissioner of organizations do not fall under the
Internal Revenue is only authorized to category of corporations under the Tax
inquire into the bank deposits of: Code, and therefore not subject to tax as
a. a decedent to determine his gross corporations, include:
estate; and a. General professional partnerships;
b. any taxpayer who has filed an b. Joint venture or consortium formed
application for compromise of his tax liability by for the purpose of undertaking construction
reason of financial incapacity to pay his tax projects engaging in petroleum, coal, geothermal,
liability. [Sec. 5 (F), NIRC of 1997] and other energy operations, pursuant to an
c. A taxpayer who authorizes the operation or consortium agreement under a
Commissioner to inquire into his bank deposits. service contract with the Government. [1 st
sentence, Sec. 22 (B), BIRC of 1997]
2. Purpose of the NIRC of 1997.
Revenue generation has undoubtedly 4. Co-heirs who own inherited
been a major consideration in the properties which produce income should
passage of the Tax Code. (Commissioner of not automatically be considered as
Internal Revenue v. Fortune Tobacco Corporation, G. partners of an unregistered corporation
R. Nos. 167274-75, July 21, 2008) subject to income tax for the following
reasons:
3. a. The sharing of gross returns does not
Purpose of shift from ad valorem of itself establish a partnership, whether or not the
system to specific tax system in taxation persons sharing them have a joint or common
of cigarettes. The shift from the ad valorem right or interest in any property from which the
system to the specific tax system is likewise returns are derived. There must be an
meant to promote fair competition among unmistakable intention to form a partnership or
the players in the industries concerned, to joint venture. (Obillos, Jr. v. Commissioner of Internal
ensure an equitable distribution of the tax burden Revenue, 139 SCRA 436)
and to simplify tax administration by classifying b. There is no contribution or
cigarettes, among others, into high, medium and investment of additional capital to increase or
low-priced based on their net retail price and expand the inherited properties, merely continuing
accordingly graduating tax rates. (Commissioner the dedication of the property to the use to which
of Internal Revenue v. Fortune Tobacco Corporation, it had been put by their forebears. (Ibid.)
G. R. Nos. 167274-75, July 21, 2008) c. Persons who contribute property or
funds to a common enterprise and agree to share
TAX ON INCOME the gross returns of that enterprise in proportion
to their contribution, but who severally retain the
1. The Tax Code has included title to their respective contribution, are not
under the term corporation thereby rendered partners. They have no
partnerships, no matter how created or common stock capital, and no community of
interest as principal proprietors in the business
organized, joint-stock companies, joint accounts
itself from which the proceeds were derived.
(cuentas en participacion), associations, or
(Elements of the Law of Partnership by Floyd R.
insurance companies. [Sec. 24 now Sec. 24 (B) Mechem, 2nd Ed., Sec. 83, p. 74 cited in Pascual v.
of the NIRC of 1997] Commissioner of Internal Revenue, 166 SCRA 560)

2. In Evangelista v. Collector, 102 Phil. 5. The common ownership of

140, the Supreme Court held citing Mertens that property does not itself create a
the term partnership includes a syndicate,
group, pool, joint venture or other unincorporated
partnership between the owners, though
they may use it for purpose of making gains, and
organization, through or by means of which any
they may, without becoming partners, are among
business, financial operation, or venture is carried
themselves as to the management and use of
on.
such property and the application of the proceeds
therefrom.. (Spurlock v,. Wilson, 142 S.W. 363,
160 No. App. 14, cited in Pascual v.
 24
Commissioner of Internal Revenue, 166 SCRA creditor to the debtor and need not be
560) included in the latters income.
6. The income from the rental of 14. If a corporation to which a
the house, bought from the earnings of stockholder is indebted forgives the debt,
co-owned properties, shall be treated as the transaction has the effect of payment
the income of an unregistered partnership of a dividend. (Sec. 50, Rev. Regs. No. 2)
to be taxable as a corporation because of the
clear intention of the brothers to join together in a 15. Members of cooperatives not
venture for making money out of rentals. subject to tax on the interest earned from
their deposits with the cooperative. No less
7. Income is gain derived and than our Constitution guarantees the protection of
severed from capital, from labor or from both cooperatives. Section 15, Article XII of the
combined. For example, to tax a stock dividend Constitution considers cooperatives as instruments
would be to tax a capital increase rather than the for social justice and economic development. At the
income. (Commissioner of Internal Revenue v. same time, Section 10 of Article II of the Constitution
Court of Appeals, et al., G.R. No. 108576, declares that it is a policy of the State to promote
January 20, 1999) social justice in all phases of national development.
In relation thereto, Section 2 of Article XIII of the
8. The term taxable income means Constitution states that the promotion of social justice
the pertinent items of gross income specified in shall include the commitment to create economic
the Tax Code, less the deductions and/or opportunities based on freedom of initiative and self-
personal and additional exemptions, if any, reliance. Bearing in mind the foregoing provisions,
authorized for such types of income by the Tax we find that an interpretation exempting the members
Code or other special laws. (Sec. 31, NIRC of of cooperatives from the imposition of the final tax
1997) under Section 24(B)(1) of the NIRC (tax on interest
earned by deposits) is more in keeping with the letter
9. The cancellation and and spirit of our Constitution. (Dumaguete Cathedral
forgiveness of indebtedness may amount to Credit Coopertive [DCCC)] etc., v. Commissioner of
(a) payment of income; (b) gift; or to a (c) capital Internal Revenue, G. R. No. 182722, January 22,
transaction depending upon the circumstances. 2010)
In closing, cooperatives, including their
10. If an individual performs members, deserve a preferential tax treatment
services for a creditor who, in because of the vital role they play in the attainment of
economic development and social justice. Thus,
consideration thereof, cancels the debt, it
although taxes are the lifeblood of the government,
is income to the extent of the amount realized the States power to tax must give way to foster the
by the debtor as compensation for his services. creation and growth of cooperatives. To borrow the
words of Justice Isagani A. Cruz: The power of
11. An insolvent debtor does not taxation, while indispensable, is not absolute and
realize taxable income from the may be subordinated to the demands of social
cancellation or forgiveness. (Commissioner justice. (Ibid., citing Commissioner of Internal
v. Simmons Gin Co., 43 Fd 327 CCA 10th) Revenue v. American Express International, Inc.
(Philippine Branch), 500 Phil. 586 (2005).
12. The insolvent debtor realizes
income resulting from the cancellation or 16. The Global system of income
forgiveness of indebtedness when he taxation is a system employed where the tax
becomes solvent. (Lakeland Grocery Co., v. system views indifferently the tax base and
Commissioner 36 BTA (F) 289) generally treats in common all categories of
taxable income of the individual. (Tan v. del
Rosario, Jr., 237 SCRA 324, 331)
13. If a creditor merely desires to
benefit a debtor and without any
17. The Schedular system of
consideration therefor cancels the
income taxation is a system employed where
amount of the debt it is a gift from the the income tax treatment varies and is made to
 25
depend on the kind or category of taxable income f. Laundry allowance not exceeding
of the taxpayer. (Tan v. del Rosario, Jr., 237 P300 per month;
SCRA 324, 331) g. Employees achievement awards,
e.g. for length of service or safety achievement,
18. Under the National Internal which must be in the form of a tangible persona
Revenue Code the global system is property other than cash or gift certificate, with an
applicable to taxable corporations and the annual monetary value not exceeding P10,000.00
schedular to individuals. received by an employee under an established
written plan which does not discriminate in favor
of highly paid employees;
19. Compensation income is
h. Gifts given during Christmas and
considered as having been earned in the major anniversary celebrations not exceeding
place where the service was rendered and P5,000 per employee per annum;
not considered as sourced from the place of origin i. Flowers, fruits, books, or similar
of the money. items given to employees under special
circumstances, e.g. on account of illness,
20. Payment for services, other marriage, birth of a baby, etc.; and
than compensation income, is considered j. Daily meal allowance for overtime
as having been earned at the place where work not exceeding twenty five percent (25%) of
the activity or service was performed. the basic minimum wage.
The amount of de minimis benefits
21. A non-resident alien, who has conforming to the ceiling herein prescribed shall
stayed in the Philippines for an aggregate not be considered in determining the P30,000
ceiling of other benefits provided under Section
period of more than 180 days during any
32 (B)(7)(e) of the Code. However, if the
calendar year, shall be considered as a employer pays more than the ceiling prescribed
non-resident alien doing business in the by these regulations, the excess shall be taxable
Philippines. Consequently, he shall be subject to the employee receiving the benefits only if such
to income tax on his income derived from sources excess is beyond the P30,000.00 ceiling,
from within the Philippines. [Sec. 25 (A) (1), provided, further, that any amount given by the
NIRC] employer as benefits to its employees, whether
He is allowed to avail of the itemized classified as de minimis benefits or fringe
deductions including the personal and additional benefits, shall constitute as deductible expense
exemptions subject to the rule on reciprocity. upon such employer. [Sec. 2.78.1 (A) (3), Rev.
Regs. 2-98 as amended by Rev. Regs. No. 8-
22. What are considered as de 2000]
minimis benefits not subject to
withholding tax on compensation income 23. Income subject to final tax
of both managerial and rank and file refers to an income collected through the
employees ? withholding tax system. The payor of the
SUGGESTED ANSWER: income withholds the tax and remits it to the
a. Monetized unused vacation leave government as a final settlement of the income
credits of employees not exceeding ten (10) days tax as a final settlement of the income tax due on
during the year; said income. The recipient is no longer required
b. Medical cash allowance to to include the income subjected to a final tax as
dependents of employees not exceeding P750.00 part of his gross income in his income tax return.
per employee per semester or P125 per month;
c. Rice subsidy of P1,000.00 or one (1) 24. Distinguish exclusions from
sack of 50-kg. rice per month amounting to not deductions.
more than P1,000.00; SUGGESTED ANSWER:
d. Uniforms and clothing allowance not a. Exclusions from gross income refer
exceeding P3,000.00 per annum; to a flow of wealth to the taxpayer which are not
e. Actual yearly medical benefits not treated as part of gross income for purposes of
exceeding P10,000.00 per annum; computing the taxpayers taxable income, due to
the following reasons: (1) It is exempted by the
 26
fundamental law; (2) It is exempted by statute; officials and employees of private firms, whether
and (3) It does not come within the definition of individual or corporate, in accordance with the
income (Sec. 61, Rev. Regs. No. 2) WHILE employers reasonable private benefit plan
deductions are the amounts which the law allows approved by the BIR.
to be subtracted from gross income in order to b. Retiring official or employee
arrive at net income. 1) In the service of the same
b. Exclusions pertain to the employer for at least ten (10) years;
computation of gross income WHILE deductions 2) Not less than fifty (50) years
pertain to the computation of net income. of age at time of retirement;
c. Exclusions are something received 3) Availed of the benefit of
or earned by the taxpayer which do not form part exclusion only once. [Sec. 32 (B) (6) (a),
of gross income WHILE deductions are NIRC of 1997] The retiring official or
something spent or paid in earning gross income. employee should not have previously
An example of an exclusion from gross availed of the privilege under the retirement
income are life insurance proceeds, and an plan of the same or another employer. [1 st
example of a deduction are losses. par., Sec. 2.78 (B) (1), Rev. Regs. No. 2-
98]
25. What are excluded from gross
income ? 27. What kind of separation
SUGGESTED ANSWER: (retirement) pay is excluded from gross
a. Proceeds of life insurance policies income, hence tax-exempt ?
paid to the heirs or beneficiaries upon the death SUGGESTED ANSWER:
of the insured whether in a single sum or a. Any amount received by an official,
otherwise. employee or by his heirs,
b. Amounts received by the insured as b. From the employer
a return of premiums paid by him under life c. As a consequence of separation of
insurance, endowment or annuity contracts either such official or employee from the service of the
during the term, or at maturity of the term employer because of
mentioned in the contract, or upon surrender of 1) Death, sickness or other
the contract. physical disability; or
c. Value of property acquired by gift, 2) For any cause beyond the
bequest, devise, or descent. control of said official or employee [Sec.
d. Amounts received, through accident or 32 (B) (6) (b), NIRC of 1997], such as
health insurance or Workmens Compensation retrenchment, redundancy and cessation
Acts as compensation for personal injuries or of business. [1st par., Sec. 2.78 (B), (1)
sickness, plus the amounts of any damages (b), Rev. Regs. No. 2-98]
received on whether by suit or agreement on
account of such injuries or sickness. 28. What are the Itemized
e. Income of any kind to the extent
deductions from gross income and who
required by any treaty obligation binding upon the
Government of the Philippines. may avail of them ?
f. Retirement benefits received under a. Ordinary and necessary trade,
Republic Act No. 7641. Retirement received from business or professional expenses.
reasonable private benefit plan after compliance b. The amount of interest paid or
with certain conditions. Amounts received for incurred within a taxable year on indebtedness in
beyond control separation. Foreign social connection with the taxpayers profession, trade
security, retirement gratuities, pensions, etc. or business.
USVA benefits, SSS benefits and GSIS benefits. Resident citizens, resident alien
individuals and nonresident alien individuals who
are engaged in trade and business, on their
26. What are the conditions for gross incomes other from compensation income
excluding retirement benefits from gross are allowed to deduct these expenses. Domestic
income, hence tax-exempt ? corporations, estates and trusts may also deduct
SUGGESTED ANSWER: this expense. Nonresident citizens and foreign
a. Retirement benefits received under corporations on their gross incomes from within
Republic Act No. 7641 and those received by may also deduct this expense.
 27
Nonresident alien individuals not Resident citizens, resident alien
engaged in trade or business in the Philippines individuals and nonresident alien individuals who
are not allowed to deduct this expense. are engaged in trade and business, on their
c. Taxes paid or incurred within the gross incomes other from compensation income
taxable year in connection with the taxpayers are allowed to deduct these expenses. Domestic
profession. corporations, estates and trusts may also deduct
Resident citizens, resident alien this expense. Nonresident citizens and foreign
individuals and nonresident alien individuals who corporations on their gross incomes from within
are engaged in trade and business, on their may also deduct this expense.
gross incomes other from compensation income Nonresident alien individuals not
are allowed to deduct these expenses. Domestic engaged in trade or business in the Philippines
corporations, estates and trusts may also deduct are not allowed to deduct this expense.
this expense. Nonresident citizens and foreign g. Depletion or deduction arising from
corporations on their gross incomes from within the exhaustion of a non-replaceable asset,
may also deduct this expense. usually a natural resource.
Nonresident alien individuals not Resident citizens, resident alien
engaged in trade or business in the Philippines individuals and nonresident alien individuals who
are not allowed to deduct this expense. are engaged in trade and business, on their
d. Ordinary losses, losses from gross incomes other from compensation income
casualty, theft or embezzlement; and net are allowed to deduct these expenses. Domestic
operating losses. corporations, estates and trusts may also deduct
Resident citizens, resident alien this expense. Nonresident citizens and foreign
individuals and nonresident alien individuals who corporations on their gross incomes from within
are engaged in trade and business, on their may also deduct this expense.
gross incomes other from compensation income Nonresident alien individuals not
are allowed to deduct these expenses. Domestic engaged in trade or business in the Philippines
corporations, estates and trusts may also deduct are not allowed to deduct this expense.
this expense. Nonresident citizens and foreign h. Charitable and other contributions.
corporations on their gross incomes from within Resident citizens, resident alien individuals and
may also deduct this expense. nonresident alien individuals who are engaged in
Nonresident alien individuals not trade and business, on their gross incomes other
engaged in trade or business in the Philippines from compensation income are allowed to deduct
are not allowed to deduct this expense. these expenses. Domestic corporations, estates
e. Bad debts due to the taxpayer, and trusts may also deduct this expense.
actually ascertained to be worthless and charged Nonresident citizens and foreign corporations on
off within the taxable year, connected with their gross incomes from within may also deduct
profession, trade or business, not sustained this expense.
between related parties. Nonresident alien individuals not
Resident citizens, resident alien engaged in trade or business in the Philippines
individuals and nonresident alien individuals who are not allowed to deduct this expense.
are engaged in trade and business, on their i. Research and development
gross incomes other from compensation income expenditures treated as deferred expenses paid
are allowed to deduct these expenses. Domestic or incurred by the taxpayer in connection with his
corporations, estates and trusts may also deduct trade, business or profession, not deducted as
this expense. Nonresident citizens and foreign expenses and chargeable to capital account but
corporations on their gross incomes from within not chargeable to property of a character which is
may also deduct this expense. subject to depreciation or depletion.
Nonresident alien individuals not Resident citizens, resident alien
engaged in trade or business in the Philippines individuals and nonresident alien individuals who
are not allowed to deduct this expense. are engaged in trade and business, on their
f. Depreciation or a reasonable gross incomes other from compensation income
allowance for the exhaustion, wear and tear are allowed to deduct these expenses. Domestic
(including reasonable allowance for corporations, estates and trusts may also deduct
obsolescence) of property used in trade or this expense. Nonresident citizens and foreign
business. corporations on their gross incomes from within
may also deduct this expense.
 28
Nonresident alien individuals not 30. What are the requisites for the
engaged in trade or business in the Philippines
deductibility of business expenses ?
are not allowed to deduct this expense.
SUGGESTED ANSWER: The following
j. Contributions to pension trusts.
are the requisites for deductibility of business
Resident citizens, resident alien individuals and
expenses:
nonresident alien individuals who are engaged in
a. Compliance with the business test:
trade and business, on their gross incomes other
1) Must be ordinary and
from compensation income are allowed to deduct
necessary;
these expenses. Domestic corporations, estates
2) Must be paid or incurred
and trusts may also deduct this expense.
within the taxable year;
Nonresident citizens and foreign corporations on
3) Must be paid or incurred in
their gross incomes from within may also deduct
carrying on a trade or business.
this expense.
4) Must not be bribes, kickbacks
Nonresident alien individuals not
or other illegal expenditures
engaged in trade or business in the Philippines
b. Compliance with the substantiation test.
are not allowed to deduct this expense.
Proof by evidence or records of the deductions
k. Insurance premiums for health and
allowed by law including compliance with the
hospitalization. Resident citizens, resident alien
business test.
individuals and nonresident alien individuals who
are engaged in trade and business, on their
gross incomes other from compensation income 31. What are the requisites for the
are allowed to deduct these expenses. deductibility of ordinary and necessary
Nonresident citizens and nonresident alien trade, business, or professional
individual engaged in trade or business in the expenses, like expenses paid for legal
Philippine on their gross incomes from within may and auditing services ?
also deduct these premiums. SUGGESTED ANSWER:
Nonresident alien individuals not a. the expense must be ordinary and
engaged in trade or business in the Philippines necessary;
are not allowed to deduct these premiums. b. it must have been paid or incurred
l. Personal and additional exemptions. during the taxable year dependent upon the
Resident citizens, and resident alien on their method of accounting upon the basis of which the
gross incomes and from compensation income net income is computed.
are allowed to deduct these premiums. c. it must be supported by receipts,
Nonresident citizens on their gross incomes from records or other pertinent papers.
within may also deduct this expense. (Commissioner of Internal Revenue v, Isabela
Nonresident alien individuals engaged in trade or cultural Corporation, G. R. No. 172231, February
business in the Philippines are allowed to deduct 12, 2007)
these exemptions under reciprocity.
Nonresident alien individuals not
engaged in trade or business in the Philippines 32. TMG Corporation is issuing
are not allowed to deduct this expense. the accrual method of accounting. In
2005 XYZ Law Firm and ABC Auditing
29. Distinguish ordinary Firm rendered various services which
expenses from capital expenditures. were billed by these firms only during the
SUGGESTED ANSWER: Ordinary following year 2006. Since the bills for
expenses are those which are common to incur in legal and auditing services were received
the trade or business of the taxpayer WHILE only in 2006 and paid in the same year,
capital expenditures are those incurred to improve TMG deducted the same from its 2006
assets and benefits for more than one taxable gross income. The BIR disallowed the
year. Ordinary expenses are usually incurred
deduction ?
during a taxable year and benefits such taxable
year. Necessary expenses are those which are Who is correct, TMG or BIR ?
appropriate or helpful to the business. Explain.
SUGGESTED ANSWER: The BIR is
correct. TMG should have deducted the
professional and legal fees in the year they were
 29
incurred in 2005 and not in 2006 because at the income or deduction. (Commissioner of Internal
time the services were rendered in 2005, there Revenue v, Isabela cultural Corporation, G. R.
was already an obligation to pay them. No. 172231, February 12, 2007)
(Commissioner of Internal Revenue v, Isabela d. Under the cash method income is
Cultural Corporation, G. R. No. 172231, February to be construed as income for tax purposes only
12, 2007) upon actual receipt of the cash payment. It is
NOTES AND COMMENTS: also referred to as the cash receipts and
a. Accounting methods for tax disbursements method because both the receipt
purposes comprise a set of rules for determining and disbursements are considered. Thus,
when and how to report income and deductions. income is recognized only upon actual receipt of
(Commissioner of Internal Revenue v, Isabela the cash payment but no deductions are allowed
cultural Corporation, G. R. No. 172231, February from the cash income unless actually disbursed
12, 2007) through an actual payment in cash.
The two (2) principal accounting methods
for recognition of income are the (a) accrual 33. The fringe benefits tax is a final
method; and the (b) cash method. withholding tax imposed on the grossed-up
b. Recognition of income and monetary value of fringe benefits furnished,
expenses under the accrual method of granted or paid by the employer to the employee,
accounting. Amounts of income accrue where except rank and file employees. [1st par., Sec. 2.33
the right to receive them becomes fixed, where (A), Rev. Regs. No. 3-98]
there is created an enforceable liability. Liabilities,
are incurred when fixed and determinable in 34. What is meant by fringe
nature without regard to indeterminacy merely of
benefit for purposes of taxation ?
time of payment.. (Commissioner of Internal
SUGGESTED ANSWER: For purposes of
Revenue v, Isabela cultural Corporation, G. R.
taxation, fringe benefit means any good, service,
No. 172231, February 12, 2007)
or other benefit furnished or granted in cash or in
The accrual of income and expense is
kind by an employer to an individual employee
permitted when the all-events test has been met.
(except rank and file employees), such as but not
(Ibid.)
limited to:
c. All-events test. This test requires:
a. Housing;
1) fixing of a right to income or
b. Expense account;
liability to pay; and
c. Vehicle of any kind;
2) the availability of the
d. Household personnel, such as maid,
reasonable accurate determination of such
driver and others;
income or liability.
e. Interest on loan at less than market
The test does not demand that the amount
rate to the extent of the difference between the
of such income or liability be known absolutely,
market rate and actual rate granted;
only that a taxpayer has at his disposal the
f. Membership fees, dues and other
information necessary to compute the amount
expenses borne by the employer for the
with reasonable accuracy.
employee in social and athletic clubs or other
The all-events test is satisfied where
similar organizations;
computation remains uncertain; if its basis is
g. Expenses for foreign travel;
unchangeable, the test is satisfied where a
h. Holiday and vacation expenses;
computation may be unknown, but is not as much
i. Educational assistance to the
as unknowable, within the taxable year. The
employee or his dependents; and
amount of liability does not have to be determined
j. Life or health insurance and other
exactly,; it must be determined with reasonable
non-life insurance premiums or similar amounts in
accuracy implies something less than an exact or
excess of what the law allows. [Sec. 33 (B), NIRC
completely accurate amount. of 1997; 1st par., Sec. 2.33 (B), Rev. Regs. No. 3-98]
The propriety of an accrual must be judged
by the fact that a taxpayer knew, or could
35. Fringe benefits that are not
reasonably be expected to have known, at the
closing of its books for the taxable year. Accrual subject to the fringe benefits tax:
method of accounting presents largely a question a. When the fringe benefit is required
of fact; such that the taxpayer bears the burden of by the nature of, or necessary to the trade,
proof of establishing the accrual of an item of business or profession of the employer; or
 30
b. When the fringe benefit is for the half-blood), spouse, ancestors, and lineal
convenience or advantage of the employer. [Sec. descendants;
32(A), NIRC of 1997; 1st par., Sec. 2.33 (A), Rev. b. An individual and a corporation
Regs. No. 3-98] more than fifty percent (50%) in value of the
c. Fringe benefits which are authorized outstanding stock of which is owned, directly or
and exempted from income tax under the Tax indirectly, by or for such individual;
Code or under any special law; c. Two corporations more than fifty
d. Contributions of the employer for the percent (50%) in value of the outstanding stock of
benefit of the employee to retirement, insurance which is owned, directly or indirectly, by or for the
and hospitalization benefit plans; same individual;
e. Benefits given to the rank and file d. A grantor and a fiduciary of any
employees, whether granted under a collective trust; or
bargaining agreement or not; and e. The fiduciary of a trust and the
f. De minimis benefits as defined in fiduciary of another trust if the same person is a
the rules and regulations to be promulgated by grantor with respect to each trust; or
the Secretary of Finance upon recommendation f. A fiduciary of a trust and a
of the Commissioner of Internal Revenue. [1st par., beneficiary of such. [Sec. 36 (B), NIRC of 1997]
Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs.
No. 3-98]
40. What are the requisites for
36. De minimis benefits are valid deduction of bad debts from gross
facilities and privileges (such as income ?
entertainment, medical services, or so-called SUGGESTED ANSWER:
courtesy discounts on purchases), furnished or a. There must be an existing indebtedness
offered by an employer to his employees. They due to the taxpayer which must be valid and
are not considered as compensation subject to legally demandable;
income tax and consequently to withholding tax, if b. The same must be connected with the
such facilities are offered or furnished by the taxpayers trade, business or practice of
employer merely as a means of promoting the profession;
health, goodwill, contentment, or efficiency of his c. The same must not be sustained in a
employees. [Sec. 2.78,1 (A) (3), Rev. Regs. 2-98 as transaction entered into between related parties;
amended by Rev. Regs. No. 8-2000] d. The same must be actually charged off
the books of accounts of the taxpayer as of the
end of the taxable year; and
37. Preferred shares are considered e. The debt must be actually
capital regardless of the conditions under ascertained to be worthless and uncollectible
which such shares are issued and during the taxable year;
dividends or interests paid thereon are f. The debts are uncollectible despite
not allowed as deductions from the gross diligent effort exerted by the taxpayer. [Sec. 34
income of corporations. (Revenue (E) (1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-
Memorandum Circular No. 17-71) 99 reiterated in Rev. Regs. No. 25-2002;
Philippine Refining Corporation v. Court of
38. Bad debts are those which result Appeals, et al., 256 SCRA 667]
from the worthlessness or uncollectibility, in whole g. Must have been reported as receivables
or in part, of amounts due the taxpayer by others, in the income tax return of the current or prior
arising from money lent or from uncollectible years. (Sec. 103, Rev. Regs. No. 2)
amounts of income from goods sold or services :
rendered. (Sec. 2.a, Rev. Regs. 5-99) 41. What is the tax benefit rule ?
SUGGESTED ANSWER: The tax benefit
39. Who are related parties ? rule posits that the recovery of bad debts
SUGGESTED ANSWER: The following previously allowed as deduction in the preceding
are related parties: year or years shall be included as part of the
a. Members of the same family. The taxpayers gross income in the year of such
family of an individual shall include only his recovery to the extent of the income tax benefit of
brothers and sisters (whether by the whole or said deduction.
NOTES AND COMMENTS:
 31
a. If in the year the taxpayer claimed predetermined by Congress. [Pansacola v.
deduction of bad debts written-off, he realized a Commissioner of Internal Revenue, G. R. No. 159991,
reduction of the income tax due from him on November 16, 2006 citing Madrigal and Paterno v.
account of the said deduction, his subsequent Rafferty and Concepcion, 38 Phil. 414, 418 (1918)]
recovery thereof from his debtor shall be treated
as a receipt of realized taxable income. (Sec. 4, 45. What is the amount allowed as
Rev. Regs. 5-99) basic personal exemption ?
b. If the said taxpayer did not benefit SUGGESTED ANSWER: There shall be
from the deduction of the said bad debt written-off allowed a basic personal exemption amounting
because it did not result to any reduction of his to Fifty thousand pesos (P50,000) for each
income tax in the year of such deduction (i.e. individual taxpayer.
where the result of his business operation was a In the case of married individuals where
net loss even without deduction of the bad debts only one of the spouse is deriving gross income,
written-off), then his subsequent recovery thereof only such spouse shall be allowed the personal
shall be treated as a mere recovery or a return of exemption. [Sec. 35 (A), NIRC of 1997 as amended
capital, hence, not treated as receipt of realized by Rep. Act No. 9504; Sec. 2.79 (I) (1) (a), Rev. Regs.
taxable income. (Sec. 4, Rev. Regs. 5-99) No. 2-98 as amended by Rev. Regs. No. 10-2008]
NOTES AND COMMENTS: It is clear
42. Depreciation is the gradual from Rep. Act No. 9504 that each of the spouses
diminution in the useful value of tangible property may claim the P50,000.00. Thus, the total
resulting from ordinary wear and tear and from familial basic personal exemption for spouses is
normal obsolescence. The term is also applied to P100,000.00.
amortization of the value of intangible assets the Furthermore, the distinctions between the
use of which in the trade or business is definitely concepts of single, married and head of the
limited in duration. family for purpose of availing of the basic
personal exemption has already been eliminated
43. The methods of depreciation by Rep. Act No. 9504.
are the following:
a. Straight line method; 45. What are the amounts of
b. Declining balance method; additional exemptions ?
c. Sum of years digits method; and SUGGESTED ANSWER: An individual,
d. Any other method prescribed by the a. whether single or married,
Secretary of Finance upon the recommendation b. shall be allowed an additional
of the Commissioner of Internal Revenue: exemption of Twenty-Five Thousand Pesos
1) Apportionment to units of (P25,000.00)
production; c. for each qualified dependent child,
2) Hours of productive use; d. provided that the total number of
3) Revaluation method; and dependents for which additional exemptions may
4) Sinking fund method. be claimed
1) shall not exceed four (4)
44. What are personal and dependents. [1st par., Sec. 2.79 (I) (1) (b),
Rev. Regs. No. 2-98 as amended by Rev.
additional exemptions ? Regs. No. 10-2008, arrangement and
SUGGESTED ANSWER: These are the numbering supplied; Sec. 35 (B), NIRC of
theoretical persona, living and family expenses of 1997 as amended by Rep. Act No. 9504]
an individual allowed to be deducted from the NOTES AND COMMENTS:
gross or net income of an individual taxpayer. a. It is clear that under the
These are arbitrary amounts which have amendment, single individuals may now claim
been calculated by our lawmakers to be roughly for the additional exemptions. Furthermore, the
equivalent to the minimum of subsistence, taking concept of head of a family does not find
into account the personal status and additional application anymore.
qualified dependents of the taxpayer. They are b. A dependent means
fixed amounts in the sense that the amounts have a. a legitimate, illegitimate or legally
been predetermined by our lawmakers and until adopted child
our lawmakers make new adjustments on these b. chiefly dependent upon and living
personal exemptions, the amounts allowed to be with the taxpayer
deducted by a taxpayer are fixed as c. if such dependent is
 32
1) not more than twenty-one 1997, capitalized words, numbering and arrangement
(21) years of age, supplied; Sec. 2.a, Rev. Regs. No. 7-2003]
2) unmarried and
3) not gainfully employed or 48. Examples of capital assets:
d. if such dependent, a. Stock and securities held by
1) regardless of age taxpayers other than dealers in securities;
2) is incapable of self-support b. Jewelry not used for trade and
3) because of mental or business;
physical defect. [2nd par., Sec. 2.79 (I) (1) c. Residential houses and lands
(b), Rev. Regs. No. 2-98 as amended by Rev. owned and used as such;
Regs. No. 10-2008, arrangement and d. Automobiles not used in trade and
numbering supplied; Sec. 35 (b), NIRC of business;
1997, as amended by Rep. Act No. 9504] e. Paintings, sculptures, stamp
c. It is to be noted that under the collections, objects of arts which are not used in
NIRC of 1997, as amended by Rep. Act No. trade or business;
9504, only qualified dependent children are f. Inherited large tracts of agricultural
considered for additional exemptions. land which were subdivided pursuant to the
Grandparents, parents, as well, as brothers or government mandate under land reform, then
sisters, and other collateral relatives are not sold to tenants. (Roxas v. Court of Tax Appeals,
qualified dependents to be claimed as additional etc. L-25043, April 26, 1968)
exemptions. g. Real property used by an exempt
However, if they are senior citizens they corporation in its exempt operations, such as a
may qualify as additional exemptions under the corporation included in the enumeration of
Senior Citizens Law but not under the NIRC of Section 30 of the Code, shall not be considered
1997, as amended by Rep. Act No. 9504. used for business purposes, and therefore
Senior citizen shall be treated as considered as capital asset. (last sentence, 3rd
dependents provided for in the National Internal par., Sec. 3.b, Rev. Regs. No. 7-2003)
Revenue Code, as amended, and as such, h. Real property, whether single
individual taxpayers caring for them, be they detached, townhouse, or condominium unit, not
relatives or not shall be accorded the privileges used in trade or business as evidenced by a
granted by the Code insofar as having certification from the Barangay Chairman or from
dependents are concerned. [last par. Sec. 5 (a), the head of administration, in case of
Rep. Act No. 7432, as amended by Rep. Act 9257, condominium unit, townhouse or apartment, and
The Expanded Senior Citizens Act of 2003]
as validated from the existing available records of
the Bureau of Internal Revenue, owned by an
47. Capital assets shall refer to all real individual engaged in business, shall be treated
properties held by a taxpayer, whether or not as capital asset. (last par., Sec. 3.b., Rev. Regs. No.
connected with his trade or business, and which 7-2003)
are not included among the real properties
considered as ordinary assets. (Sec. 2.a, Rev.
Regs. No. 7-2003)
49. Ordinary assets shall refer to all
The term capital assets means property real properties specifically excluded from
held by the taxpayer (whether or not connected the definition of capital assets, namely:
with his trade or business), BUT DOES NOT a. Stock in trade of a taxpayer or other real
INCLUDE: property of a kind which would properly be
a. Stock in trade of the taxpayer, or included in the inventory of a taxpayer if on hand
b. Other property of a kind which would at the close of the taxable year; or
properly be included in the inventory of the b. Real property held by the taxpayer
taxpayer if on hand at the close of the taxable primarily for sale to customers in the ordinary
year, or course of his trade or business; or
c. Property held by the taxpayer c. Real property used in trade or business
primarily for sale to customers in the ordinary (i.e. buildings and/or improvements), of a
course of his trade or business, or character which is subject to the allowance for
d. Property used in the trade or business, of a depreciation; or
character which is subject to the allowance for d. Real property used in trade or business
depreciation; or real property used in the trade or of the taxpayer. (Sec. 2. b, Rev. Regs. No. 7-2003)
business of the taxpayer. [Sec. 39 (A) (1), NIRC of
 33
50.. Examples of ordinary assets treated as capital assets in the hands of the
recipient even if the corporation which declared
hence not capital assets:
the real property dividend is engaged in real
a. The machinery and equipment of a
estate business.
manufacturing concern subject to depreciation;
c. The real property received in an
b. The tractors, trailers and trucks of a
exchange shall be treated as ordinary asset in the
hauling company;
hands of the transferee in the case of a tax-free
c. The condominium building owned by a
exchange by taxpayer not engaged in real estate
realty company the units of which are for rent or
business to a taxpayer who is engaged in real
for sale;
estate business, or to a taxpayer who, even if not
d. The wood, paint, varnish, nails, glue,
engaged in real estate business, will use in
etc. which are the raw materials of a furniture
business the property received in the exchange.
factory; (Sec. 3.f., Rev. Regs. No. 7-2003)
e. Inherited parcels of land of
substantial areas located in the heart of Metro
Manila, which were subdivided into smaller lots 52. The tax is imposed upon
then sold on installment basis after introducing capital gains presumed to have been
comparatively valuable improvements not for the realized from the sale, exchange, or other
purpose of simply liquidating the estate but to disposition of real property located in the
make them more saleable ; the employment of an Philippines, classified as capital assets.
attorney-in-fact for the purpose of developing, [Sec. 24 (D) (1`), NIRC of 1997] Revenue
managing, administering and selling the lots; Regulations No. 7-2003 has defined real property
sales made with frequency and continuity; annual as having the same meaning attributed to that
sales income from the sales was considerable; term under Article 415 of Republic Act No. 386,
and the heir was not a stranger to the real estate otherwise known as the Civil Code of the
business. (Tuazon, Jr. v. Lingad, 58 SCRA 170) Philippines. (Sec. 2.c, Rev. Regs. No. 7-2003)
f. Inherited agricultural property improved
by introduction of good roads, concrete gutters, 53. Transactions covered by the
drainage and lighting systems converts the
presumed capital gains tax on real
property to an ordinary asset. The property forms
part of the stock in trade of the owner, hence an property:
ordinary asset. This is so, as the owner is now a. sale,
engaged in the business of subdividing real b. exchange,
estate. (Calasanz v. Commissioner of Internal c. or other disposition, including pacto
Revenue, 144 SCRA at p. 672) de retro sales and other forms of conditional
sales. [Sec. 24 (D) (1), NIRC of 1997, numbering
51. Tax treatment of real properties and arrangement supplied]
d. Sale, exchange, or other disposition
that have been transferred. Real properties
includes taking by the government through
classified as capital or ordinary asset in the hands
condemnation proceedings. (Gutierrez v. Court of
of the seller/transferor may change their character Tax Appeals, et al., 101 Phil. 713; Gonzales v. Court of
in the hands of the buyer/transferee. The Tax Appeals, et al., 121 Phil. 861)
classification of such property in the hands of the
buyer/transferee shall be determined in 54. In case the mortgagor
accordance with the following rules:
exercises his right of redemption within
a. Real property transferred through
one (1) year from the issuance of the certificate of
succession or donation to the heir or donee who
sale, in a foreclosure of mortgage sale of real
is not engaged in the real estate business with
property, no capital gains tax shall be imposed
respect to the real property inherited or donated,
because no capital gains has been derived by the
and who does not subsequently use such
mortgagor and no sale or transfer of real property
property in trade or business, shall be considered
was realized. [Sec. 3 (1), Rev. Regs. No. 4-99]
as a capital asset in the hands of the heir or
donee.
b. Real property received as dividend by 55. In case of non-redemption of
stockholders who are not engaged in the real the property sold upon a foreclosure of
estate business and who not subsequently use mortgage sale, the presumed capital gains tax
such real property in trade or business shall be shall be imposed, based on the bid price of the
highest bidder but only upon the expiration of the
 34
one year period of redemption provided for under 1) Citizen, whether resident or not
Sec. 6 of Act No. 3135, as amended by Act No. [Ibid.];
4118, and shall be paid within thirty (30) days 2) Resident alien [Ibid.];
from the expiration of the said one-year 3) Nonresident alien engaged in
redemption period. [Sec. 3 (2), Rev. Regs. No. 4-99] trade or business in the Philippines [Sec.
25 (A) (3) in relation to Sec. 24 (D) (1),
56. The basis for the final both of the NIRC of 1997];
4) Nonresident alien not engaged
presumed capital gains tax of six per cent
in trade or business in the Philippines
(6%) is whichever is the higher of the [Sec. 25 (B) in relation to Sec. 24 (D) (1),
a. gross selling price, or both of the NIRC of 1997];
b. the current fair market value as b. an estate or trust (Ibid.);
determined below: c. a domestic corporation. [Sec. 27 (D) (5),
1) the fair market value or real NIRC of 1997]
properties located in each zone or area
as determined by the Commissioner of
Internal Revenue after consultation with 60. Excepted from the payment of
competent appraisers both from the the presumed capital gains tax are those
private and public sectors; or presumed to have been realized from the
2) the fair market value as disposition by natural persons of their
shown in the schedule of values of the principal place of residence
Provincial and City Assessors. [Sec. 24 a. the proceeds of which is fully utilized
(D) (1) in relation to Sec. 6 (E), both of the in acquiring or constructing a new principal
NIRC of 1997] residence;
It does not matter whether there was an b. within eighteen (18) calendar
actual gain or loss because the tax is a months from the date of sale or disposition
presumed capital gains tax. It is the transaction c. the BIR Commissioner shall have
that is taxed not the gain. been duly notified by the taxpayer within thirty
(30) days from the date of sale or disposition
57. Holding period not applied to the through a prescribed return of his intention to
taxation of the presumed capital gains derived avail of the tax exemption; and
from the sale of real property considered as d. the said tax exemption can only be
capital assets. availed of once every ten (10) years. [Sec. 24 (D)
(2), NIRC of 1997]
58. The tax liability, of individual
taxpayers (not corporate), if any, on gains 61. MBC was incorporated in 1961
from sales or other dispositions of real and engaged in commercial banking
property, classified as capital assets, to operations since 1987. On May 22, 1987,
the government or any of its political it ceased operations that year by reason
subdivisions or agencies or to government owned of insolvency and its assets and liabilities
or controlled corporations shall be determined, at were placed under the charge of a
the option of the taxpayer, by including the government-appointed receiver. On June
proceeds as part of gross income to be subjected 23, 1999, the BSP authorized MBC to
to the allowable deductions and/or personal and operate as a thrift bank.
additional exemptions, then to the schedular tax
In 2000, It filed its tax return for the
[Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both
of the NIRC of 1997] or the final presumed capital year 1999 paying the amount of P33
gains tax of six percent (6%). [Sec. 24 (D) (1) in million computed in accordance with the
relation to Sec. 6 (E), both of the NIRC of 1997] minimum corporate income tax (MCIT). It
sought the BIRs ruling on whether it is
59. The seller of the real property, entitled to the four (4) year grace period
classified as a capital asset, pays the for paying on the basis of MCIT reckoned
presumed capital gains tax whether: from 1999. BIR then ruled that cessation
a. an individual [Sec. 24 (D) (1), NIRC of of business activities as a result of being
1997]; placed under involuntary receivership
 35
may be an economic reason for corporation becomes subject to the MCIT
suspending the imposition of the MCIT. (minimum corporate income tax) -
As a result of the ruling MBC filed For purposes of the MCIT, the taxable year
an application for refund of the P33 in which business operations commenced shall
be the year in which the domestic corporation
million. Due to the BIRs inaction, MBC
registered with the Bureau of Internal Revenue
filed a petition for review with the CTA. (BIR).
The CTA denied the petition on the Firms which were registered with BIR in
ground that MBC is not a newly organized 1994 and earlier years shall be covered by the
corporation. In a volte facie the BIR now MCIT beginning January 1, 1998. x x x (Rev.
maintains that MBC should pay the MCIT Regs. No. 9-98)
beginning January 1, 1998 as it did not Manila Banking Corporation v.
close its business operations in 1987 but Commissioner of Internal Revenue, G. R. No.
merely suspended the same. Even if 168118, August 26, 2006 did not apply Rev. Regs.
placed under receivership, the corporate No. 9-98 because Rev. Regs. No. 4-95
specifically refers to thrift banks.)
existence was never affected. Thus, it
c. Purpose of the four (4) year grace
falls under the category of an existing period. The intent of Congress relative to the
corporation recommencing its banking MCIT is to grant a four (43) year suspension of
operations. tax payment to newly organized corporations.
Should the refund be granted ? Corporations still starting their business
SUGGESTED ANSWER: Yes. The MCIT operations have to stabilize their venture in order
shall be imposed beginning in the fourth taxable to obtain a stronghold in the industry. It does not
year immediately following the year in which the come as a surprise then when many companies
corporation commenced its business operations. reported losses in their initial years of operations.
[Sec. 27 (E) (1), NIRC of 1997] Thus, in order to allow new corporations to
The date of commencement of operations grow and develop at the initial stages of their
of a thrift bank is the date it was registered with operations, the lawmaking body saw the need to
the SEC or the date when the Certificate of provide a grace period of four years from their
Authority to Operate was issued to it by the registration before they pay their minimum
Monetary Board, whichever comes later. (Sec. 6, corporate income tax. (Manila Banking
Rev. Regs. No. 4-95) Corporation v. Commissioner of Internal
Clearly then. MBC is entitled to the grace Revenue, G. R. No. 168118, August 26, 2006)
period of four years from June 23, 1999 when it
was authorized by the BSP to operate as a thrift ESTATE TAXES
bank before the MCIT should be applied to it.
(Manila Banking Corporation v. Commissioner of 1. In determining the gross
Internal Revenue, G. R. No. 168118, August 26,
estate of a decedent, are his properties
2006)
NOTES AND COMMENTS: abroad to be included, and more
a. The MCIT and when should be particularly, what constitutes gross
imposed and the four (4) year grace period. A estate ?
minimum corporate income tax of two percent SUGGESTED ANSWER: Yes, if the
(2%) of the gross income as of the end of the decedent is a Filipino citizen or a resident alien.
taxable year, as defined herein, is hereby The gross estate of a Filipino citizen or a
imposed on a corporation taxable under this Title, resident alien comprises all his real property,
beginning on the fourth taxable year immediately wherever situated; all his personal property,
following the year in which such corporation tangible, intangible or mixed, wherever situated,
commenced its business operations, when the to the extent of his interest existing therein at the
minimum corporate income tax is greater than the time of his death.
tax computed under Subsection (A) of this section The gross estate of a non-resident alien
for the taxable year. [Sec. 27 (E) (1), NIRC of comprises all his real property, situated in the
1997] Philippines; all his personal property, tangible,
b. Period when a corporation intangible or mixed, situated in the Philippines, to
becomes subject to the MCIT. (5) Specific the extent of his interest existing therein at the
rules for determining the period when a time of his death.
 36
4. Proceeds of life insurance NOT
2. William Smith, an American included in a decedents gross estate.
citizen, was a permanent resident of a. The decedent takes the insurance
the Philippines. He died in San policy on his own life, and
Francisco, California. He left 10,000 b. the proceeds are receivable by a
shares of San Miguel Corporation, a beneficiary designated as irrevocable . [Sec. 85
condominium unit at the Twin Towers (E), NIRC of 1997)
NOTES AND COMMENTS: The beneficiary
Building at Pasig, Metro Manila and a must not be the decedents estate, executor or
house and lot in Miami, Florida. administrator, because the proceeds are includible as
What assets shall be included in the part of gross estate whether or not the decedent
Estate Tax Return to be filed with the BIR retained the power of revocation. (Ibid.)
? c. Where the insurance was NOT
SUGGESTED ANSWER: All of the assets taken by the decedent upon his own life and the
should be included in the Estate Tax Return to beneficiary is not the decedents estate, his
be filed with the BIR. executor or administrator.
Smith, an American citizen and a permanent
resident of the Philippines is considered, for 4. Items deductible from the
Philippine estate tax purposes, a resident alien. gross estate of a resident or nonresident
Consequently, the assets to be included in the Filipino decedent or resident alien
Estate Tax Return to be filed with the BIR should decedent:
be all property, real or personal, tangible, a. Expenses, losses, claims,
intangible or mixed, wherever situated, to the indebtedness and taxes;
extent of the interest that Smith has at the time b. Property previously taxed;
of his death. Thus, all of the properties c. Transfers for public use;
enumerated in the problem irrespective of where d. The Family Home up to a value not
they are situated are includible in the gross exceeding P1 million;
estate of Smith. e. Standard deduction of P1 million;
f. Medical expenses not exceeding
3. Proceeds of life insurance P500,000.00;
includible in a decedents gross estate. g. Amount of exempt retirement
a. The decedent takes the insurance received by the heirs under Rep. Act Mo. 4917;
policy on his own life h. Net share of the surviving spouse in
1) The amounts are receivable by the conjugal partnership.
a) the decedents estate,
b) his executor, or 5. There is no transfer in
c) administrator contemplation of death if there is no
irrespective of whether or not the showing that the transferor retained for his life
insured retained the power of or for any period which does not in fact end
revocation, OR before his death: (1) the possession or
2) The amounts are receivable enjoyment of, or the right to the income from the
by any beneficiary designated in property, or (2) the right, either alone or in
the policy of insurance as revocable beneficiary. conjunction with any person, to designate the
[Sec. 85 (E), NIRC of 1997] person who shall possess or enjoy the property or
b. One, other than the decedent takes the income therefrom. [Sec. 85 (B), NIRC of
the insurance policy on the life of the decedent 1997]
1) The amounts are receivable
by 6. Vanishing deduction (deduction
a) the decedents estate, for property previously taxed), defined.
b) his executor, or The deduction allowed from the gross
c) administrator estates of citizens, resident aliens and
2) irrespective of whether or not nonresident estates for properties which were
the insured retained the power of previously subject to donors or estate taxes.
revocation. The deduction is called a vanishing deduction
 37
because the deduction allowed diminishes over 8. The approval of the court
a period of five (5) years.
sitting in probate, or as a settlement
It is also known as a deduction for property
previously taxed. tribunal over the estate of the deceased is
not a mandatory requirement for the
7. Vanishing deduction (property collection of the estate. The probate court is
determining issues which are not against the
previously taxed) allowed as a deduction
property of the decedent, or a claim against the
from the gross estate of a Filipino estate as such, but is against the interest or
citizen, whether resident or not, of a property right which the heir, legatee, devisee,
resident alien decedent, or of a etc. has in the property formerly held by the
nonresident alien decedent. decedent.
a. An amount equal to the value The notices of levy were regularly issued
specified below of within the prescriptive period.
b. Any property forming a part of the The tax assessment having become final,
gross estate situated in the Philippines executory and enforceable, the same can no
c Of any person who died within longer be contested by means of a disguised
five years prior to the death of the decedent, or protest. (Marcos, II v. Court of Appeals, et al.,
transferred to the decedent by gift within five 273 SCRA 47)
years prior to his death,
d. Where such property can be DONORS TAXES
identified as having been received by the
decedent from the donor by gift, or from such 1. What is the donors tax rate if
prior decedent by gift, bequest, devise, or the donee is a stranger ?
inheritance, or SUGGESTED ANSWER: When the
e. Which can be identified as having donee or beneficiary is a stranger, the tax payable
been acquired in exchange for property so by the donor shall be 30% of the net gifts.
received:
100% of the value if the prior decedent
2. For purposes of the donors
died within one year prior to the death of the
decedent, or if the property was transferred to tax who is a stranger ?
him by gift within the same period prior to his SUGGESTED ANSWER: A stranger is a
death; is person who is not a:
80% of the value if the prior decedent died a. Brother, sister (whether by whole or
more than one year but not more than two years half-blood), spouse, ancestor and lineal
prior to the death of the decedent, or if the descendant; or
property was transferred to him by gift within the b. Relative by consanguinity in the
same period prior to his death; collateral line within the fourth degree of
60% of the value if the prior decedent died relationship. [Sec. 99 (B), NIRC of 1997]
more than two years but not more than three NOTES AND COMMENTS: All relatives by
years prior to the death of the decedent, or if the affinity, irrespective of the degree, are considered
property was transferred to him by gift within the as strangers.
same period prior to his death;
40% of the value if the prior decedent died 3. What is the tax base for
more than three years but not more than four donations ?
years prior to the death of the decedent, or if the SUGGESTED ANSWER: The net gifts
property was transferred to him by gift within the made during the calendar year. [Sec. 99 (A), NIRC
same period prior to his death; and of 1997]
20% of the value if the prior decedent died
more than four years but not more than five 4. For purposes of the donors
years prior to the death of the decedent, or if the tax, what is meant by net gifts ?
property was transferred to him by gift within the SUGGESTED ANSWER: The net
same period prior to his death. [Sec. 86 (A) (2) economic benefit from the transfer that accrues
and (B) (2), NIRC of 1997, numbering, arrangement to the donee. Accordingly, if a mortgaged
and underlining supplied] property is transferred as a gift, but imposing
upon the donee the obligation to pay the
 38
mortgage liability, then the net gift is measured SUGGESTED ANSWER: My answer
by deducting from the fair market value of the would be different. The renunciation in favor of
property the amount of the mortgage assumed. X would be subject to donors tax.
(last par., Sec. 11, Rev. Regs.No.2-2003) This is so because the renunciation was
specifically and categorically done in favor of X
5. How are gifts of personal and identified heir to the exclusion or
property to be valued for donors tax disadvantage of Y and Z, the other co-heirs in
purposes ? the hereditary estate. (4th par., Sec. 11, Rev. Regs.
SUGGESTED ANSWER: The market No. 2-2003)
value of the personal property at the time of the
gift shall be considered the amount of the gift. 8. Give some donations that are
(Sec. 102, NIRC of 1997) exempt from donors tax.
SUGGESTED ANSWER:
6. What is the valuation of a. The first P100,000.00 net donation
donated real property for donors tax during a calendar year is exempt from donors tax
[Sec. 99 (A), NIRC of 1997] made by a resident or
purposes ?
non resident;
SUGGESTED ANSWER: The real
b. The donation by a resident or non-
property shall be appraised at its fair market value
resident of a prize to an athlete in an international
as of the time of the gift.
sports tournament held abroad and sanctioned by
However, the appraised value of the real
the national sports association is exempt from
property at the time of the gift shall be whichever
donors tax (Sec. 1, Rep. Act No. 7549)
is the higher of:
c. Political contributions made by a
a. the fair market value as determined
resident or non-resident individual if registered
by the Commissioner of Internal Revenue (zonal
with the COMELEC irrespective of whether
valuation) or
donated to a political party or individual.
b. the fair market value as shown in the
However, the Corporation Code prohibits
schedule of values fixed by the Provincial and
corporations from making political contributions.
City Assessors. [Sec. 102, in relation to Sec. 88 (B)
both of the NIRC of 1997]
(Corp. Code, Title IV, Sec. 36.9)
d. Dowries or gifts made on
account of marriage and before its celebration or
7. A died leaving as his only
within one year thereafter by residents who are
heirs, his surviving spouse B, and three parents to each of their legitimate, recognized
minor children, X, Y and Z. Since B does natural, or adopted children to the extent of the
not want to participate in the distribution first ten thousand pesos (P10,000.00);
of the estate, she renounced her e. Gifts made by residents or non-
hereditary share in the estate. residents to or for the use of the National
a. Is the renunciation subject to Government or any entity created by any of its
donors tax ? Explain. agencies which is not conducted for profit,
SUGGESTED ANSWER: No. The or to any political subdivisions of the said
general renunciation by an heir, including the Government;
surviving spouse, as in the case B, of her share f. Gifts made by residents or non
in the hereditary estate left by the decedent is residents in favor of an educational and/or
not subject to donors tax. (4th par., Sec. 11, Rev. charitable, religious, cultural or social welfare
Regs. No. 2-2003) corporation, institution, foundation, trust or
This is so because the general philanthropic organization or research institution
renunciation by B was not specifically and or organization: Provided, however, That not
categorically done in favor of identified heir/s to more than thirty percent (30%) of said gifts shall
the exclusion or disadvantage of the other co- be used by such donee for administration
heirs in the hereditary estate. purposes. [Sec. 101 (A), NIRC of 1997,
b. Supposing that instead of a numbering and arrangement supplied]
general renunciation, B renounced her g. Gifts made by non-resident aliens
hereditary share in As estate to X who is outside of the Philippines to Philippine residents
a special child, would your answer be the are exempt from donors taxes because taxation
same ? Explain. is basically territorial. The transaction, which
should have been subject to tax was made by
 39
non-resident aliens and took place outside of the WARNING !!! Approximately 10% of the
Philippines. total questions asked in the Bar Examination are
sourced from VAT and its concepts. This area is
9. What is the concept of donation probably the most difficult area to forecast
or gift splitting ? Illustrate. because there are no statistically perceived
SUGGESTED ANSWER: Donation or gift patterns. The author has retained the Stars
splitting is spreading the gift over numerous System for VAT. Considering the limited period of
calendar years in order to avail of lower donors time, the reader is advised to focus on areas
taxes. marked with stars and just browse the unmarked
In 2008 Leon was thinking of donating a areas.
P200,000.00 to Miklos, his first cousin. The
P200,000.00 is the totality of the net gifts for 1. Value-added tax (VAT) is a tax
2008. If he donated the P200,000.00 in which is imposed only on the increase in the
2008 the first P100,000 would be exempt and worth, merit or importance of goods, properties
the remaining P50,000.00 would be subject to or services, and not on the total value of the
donors tax goods or services being sold or rendered.
If Leon spreads the P200,000 donation
over two (2) calendar years, donating 2. Nature of VAT. VAT is an indirect
P100,000.00 on December 30, 2008 and the tax that may be shifted or passed on to the
remaining P100,000.00 on January 1, 2009 the buyer, transferee or lessee of the goods,
transaction would be exempt from donors tax. properties or services. As such, it should be
This is so even if the donation is separated only understood not in the context of the person or
by two days because the basis is the calendar entity that is primarily, directly liable for its
year. Leon would be enjoying the exemption for payment, but in terms of its nature as a tax on
the first P100,000.00 net gifts for each calendar consumption. [Commissioner of Internal Revenue v.
year. Seagate Technology (Philippines), G. R. No. 153866,
February 11, 2005 citing various authorities}
10. A, who is engaged in the VAT is a percentage tax imposed on any
car buy and sell business sold to B P7 person whether or not a franchise grantee, who
million Jaguar for only P4 million. The in the course of trade or business, sells, barters,
exchanges, leases, goods or properties, renders
proper VAT on the sale was paid. If you
services. It is also levied on every importation of
are the BIR examiner assigned to review goods whether or not in the course of trade or
the sale, would you issue a tax business. The tax base of the VAT is limited only
assessment on the transaction ? Explain to the value added to such goods, properties, or
your answer briefly. services by the seller, transferor or lessor.
SUGGESTED ANSWER: Donors taxes Further, the VAT is an indirect tax and can be
would be due on the insufficiency of passed on to the buyer. (Quezon City, et al., v.
consideration. ABS-CBN Broadcasting Corporation, G. R. No.
Where property, other than real property 166408, October 6, 2008)
that has been subjected to the final capital gains
tax, is transferred for less than an adequate and 3. Effect of exemptions from VAT
full consideration in money or moneys worth, which is an indirect tax. If a special law
then the amount by which the fair market value merely exempts a party as a seller from its direct
of the property at the time of the execution of the liability for payment of the VAT, but does not
Contract to Sell or execution of the Deed of Sale relieve the same party as a purchaser from its
which is not preceded by a Contract to Sell indirect burden of the VAT shifted to it by its VAT-
exceeded the value of the agreed or actual registered suppliers, the purchase transaction is
consideration or selling price shall be deemed a not exempt.
gift, and shall be included in computing the REASON: The VAT is a tax on
amount of gifts made during the calendar year. consumption, the amount of which may be
(5th par., Sec. 11, Rev. Regs. No. 2-2003) shifted or passed on by the seller to the
purchaser of the goods, properties or services.
VALUE-ADDED TAXES (VAT) [Commissioner of Internal Revenue v. Seagate
Technology (Philippines), G. R. No. 153866, February
11, 2005)
 40
b. any person who imports goods
4. Illustration of effects of xxx
exemptions from VAT which is an However, in the case of importation of
indirect tax. A VAT exempt seller sells to a taxable goods, the importer, whether an
non-VAT exempt purchaser. The purchaser is individual or corporation and whether or not
subject to VAT because the VAT is merely added made in the course of his trade or business,
as part of the purchase price and not as a tax shall be liable to VAT xxx . (Rev. Regs. No. 16-
because the burden is merely shifted. The seller 2005,Sec. 4.105-1, paraphrasing supplied)
is still exempt because it could pass on the
burden of paying the tax to the purchaser . 8. Various VAT methods and
systems.
5. The VAT is a tax on a. Cost deduction method. This is a
consumption. Meaning of consumption single-stage tax which is payable only by the
original sellers. (Abakada Guro Party List (etc.)
as used under the VAT system. v. Ermita, etc., et al., G. R. No. 168056, September 1,
Consumption is "the use of a thing in a way that 2005 and companion cases) This was subsequently
thereby exhausts it." modified and a mixture of cost deduction
Applied to services, the term means the method and tax credit method was used to
performance or "successful completion of a determine the value-added tax payable. (Ibid.)
contractual duty, usually resulting in the b. Tax credit method. This method
performer's release from any past or future relies on invoices, an entity can credit against or
liability x x x" Unlike goods, services cannot be subtract from the VAT charged on its sales or
physically used in or bound for a specific place outputs the VAT paid on its purchases, inputs
when their destination is determined. Instead, and imports. [Commissioner of Internal
there can only be a "predetermined end of a Revenue v. Seagate Technology (Philippines),
course" when determining the service "location G. R. No. 153866, February 11, 2005]
or position x x x for legal purposes." If at the end of a taxable period, the output
[Commissioner of Internal Revenue v. Placer Dome taxes charged by a seller are equal to the input
Technical Services (Phils.), Inc. G. R. No. 164365,
June 8, 2007]
taxes passed on by the suppliers, no payment is
required. It is when the output taxes exceed the
input taxes that the excess has to be paid.
6. Illustration of the meaning of
If however, the input taxes exceed the
consumption as used under the VAT output taxes, the excess shall be carried over to
system. For example the services rendered by the succeeding quarter or quarters. Should the
a local firm to its foreign client are performed or input taxes result from zero-rated or effectively
successfully completed upon its sending to a zero-rated transactions or from acquisition of
foreign client the drafts and bills it has gathered capital goods, any excess over the output taxes
from service establishments here. Its services, shall instead be refunded to the taxpayer or
having been performed in the Philippines, are credited against other internal revenue taxes.
therefore also consumed in the Philippines. (Ibid.)
Such facilitation service has no physical
existence, yet takes place upon rendition, and 9. How the VAT is imposed on
therefore upon consumption, in the Philippines. the increase in worth, merit or
[Commissioner of Internal Revenue v. Placer Dome
Technical Services (Phils.), Inc. G. R. No. 164365, improvement of the goods or services.
June 8, 2007] The VAT utilizes the concept of the output and
input taxes.
7. Who are liable for the value- Output VAT less Input VAT = VAT due on
added tax. the increase in worth, merit or improvement f the
a. Any person who, in the course of goods or services.
his trade or business,
1) Sells, barters, exchanges or 10. The right to credit the input
leases goods or tax be limited by legislation because it is
properties, or a mere creation of law. Prior to the
2) renders services, and enactment of multi-stage sales taxation, the
sales taxes paid at every level of distribution are
 41
not recoverable from the taxes payable. With b. materials purchased for further
the advent of Executive Order No. 273 imposing processing, but which have not yet undergone
a 10% multi-stage tax on all sales, it was only processing;
then that the crediting of the input tax paid on c. goods which have been
purchase or importation of goods and services manufactured by the taxpayer;
by VAT-registered persons against the output tax d. goods in process for sale; or
was established. This continued with the e. goods and supplies for use in the
Expanded VAT Law (R.A. No. 7716), and The course of the taxpayers trade or business as a
Tax Reform Act of 1997 (R.A. No. 8424). The VAT-registered person. [Rev. Regs. No. 16-2005,
right to credit input tax as against the output tax Sec.4.111-1, (a), 1st par., arrangement and numbering
is clearly a privilege created by law, a privilege supplied]
that also the law can limit. It should be stressed
that a person has no vested right in statutory 15. Concept of presumptive input
privileges. (ABAKADA Guro Party List, etc. et al. vs. tax credits. Persons or firms engaged in the
Ermita, G.R. No. 168207, October 15, 2005, and processing of sardines, mackerel, and milk, and
companion cases, on the motion for reconsideration) in manufacturing refined sugar, cooking oil and
packed noodle-based instant meals, shall be
11. Output tax is the value-added tax allowed a presumptive input tax, creditable
due on the sale or lease or taxable goods, against the output tax, equivalent to four percent
properties or services by any VAT-registered (4%) of the gross value in money of their
person. purchases of primary agricultural products which
are used as inputs to their production.
12. Input tax is the value-added tax As used in this paragraph, the term
due on or paid by a VAT-registered person on processing shall mean pasteurization, canning
importation of good or local purchases of goods and activities which through physical or chemical
or services, including lease or use of properties, process alter the exterior texture or form or inner
in the course of his trade or business. (Rev. substance of a product in such a manner as to
Regs. No. 4.110-1, 1st par.) prepare it for special use to which it could not
have been put in its original form or condition.
13. Included in the input tax. [Rev. Regs. No. 16-2005, Sec.4.111-1, (b)]
a. the transitional input tax and
b. the presumptive input tax xxx. 16. The VAT registration fee does
It includes NOT violate religious freedom. The VAT
c. input taxes which can be directly registration fee imposed on non-VAT enterprises
attributed to transactions subject to the VAT plus which includes among others, religious sects
a ratable portion of any input tax which cannot which sells and distributes religious literature is
be directly attributed to either the taxable or not violative of religious freedom, although a
exempt activity. (Rev. Regs. No. 4.110-1, 1st fixed amount is not imposed for the exercise of a
par., 2nd sentence,. And 2nd par., paraphrasing, privilege but only for the purpose of defraying
arrangement and numbering supplied ) part of the cost of registration.
14. Concept of transitional input The registration fee is thus more of an
tax credits on beginning inventories. administrative fee, one not imposed on the
Taxpayers who become VAT-registered persons exercise of a privilege, much less a constitutional
upon exceeding the minimum turnover of right. (Tolentino v. Secretary of Finance, et al., and
P1,500,000.00 in any 12-month period, or who companion cases, 235 SCRA 630)
voluntarily register even if their turnover does not
exceed P1,500,000.00 (except franchise
grantees of radio and television broadcasting 17. Interpretation of the term In
whose threshold is P10,000,000.00) shall be the Course of Trade or Business as
entitled to a transitional input tax on the used in the VAT system. The term "doing
inventory on hand as of the effectivity of their business" or course of business conveys the
VAT registration, on the following: idea of business being done, not from time to
a. goods purchased for resale in their
time, but all the time. It does not include isolated
present condition;
transactions. (Commissioner of Internal Revenue v.
 42
Magsaysay Lines, Inc., et al., G. R. No. 146984, July which was involuntary and made pursuant to the
28, 2006) declared policy of Government for privatization
could no longer be repeated or carried on with
18. Pursuant to a government regularity. It should be emphasized that the
program of privatization, NDC, a VAT- normal VAT-registered activity of NDC is leasing
registered entity created for the purpose personal property. This finding is
confirmed by the Revised Charter of the NDC
of selling real property, decided to sell to
which bears no indication that the NDC was
private enterprise all of its shares in its created for the primary purpose of selling real
wholly-owned subsidiary the National property. (Commissioner of Internal Revenue v.
Marine Corporation (NMC). The NDC Magsaysay Lines, Inc., et al., G. R. No. 146984, July
decided to sell in one lot its NMC shares 28, 2006)
and five (5) of its ships, which are 3,700
DWT Tween-Decker, "Kloeckner" type 19. Under the Value Added Tax
vessels. The vessels were constructed (VAT), the tax is imposed on sales, barter,
for the NDC between 1981 and 1984, then or exchange or goods and services. The
initially leased to Luzon Stevedoring VAT is also imposed on certain
Company, also its wholly-owned transactions deemed sales which
subsidiary. Subsequently, the vessels include:
were transferred and leased, on a a. Transfer, use or
bareboat basis, to the NMC. The consumption not in the course of business or
NMC shares and the vessels were properties originally intended for sale or for use
offered for public bidding. Among the in the course of business. xxx
stipulated terms and conditions for the
public auction was that the winning b. Distribution or transfer to:
bidder was to pay "a value added tax of 1) Shareholders or investors as
10% on the value of the vessels." share in the profits of the VAT- registered
Magsaysay Lines, Inc., offered to buy the person; xxx or
2) Creditors in payment of debt
shares and the vessels for
or obligation
P168,000,000.00. The bid was made by c. Consignment of goods if actual
Magsaysay Lines, purportedly for a new sale is not made within sixty (60) days following
company still to be formed composed of the date such goods were consigned.
itself, Baliwag Navigation, Inc., and FIM Consigned goods returned by the consignee
Limited of the Marden Group based in within the 60-day period are not deemed sold.
Hongkong . The bid was approved by the d. Retirement from or cessation of
Committee on Privatization, and a Notice business, with respect to all goods on hand,
of Award was issued to Magsaysay 1) whether capital goods, stock-
Lines. Is the in-trade, supplies or materials as of the
date of such retirement, or cessation,
sale subject to VAT ?
2) whether or not the business
SUGGESTED ANSWER: No. The term is continued by the new owner or
"carrying on business" does not mean the successor. xxx [Rev. Regs. No. 16-2005,
performance of a single disconnected act, but Sec. 4.106-7, paraphrasing, arrangement
means conducting, prosecuting and continuing and numbering supplied]
business by performing progressively all the acts
normally incident thereof; while "doing 20. Transactions considered
business" conveys the idea of business being
retirement or cessation of business
done, not from time to time, but all the time.
"Course of business" is what is usually done in deemed sale subject to VAT.
the management of trade or business. "Course a. Change of ownership of the
of business" or "doing business" connotes business. There is change in the ownership of
regularity of activity. In the instant case, the sale the business where a single proprietorship
was an isolated transaction. incorporates; or
The sale 1) the proprietor of a single
proprietorship sells his entire business.
 43
b. Dissolution of a partnership and after November 1, 2005, provided, That not later
creation of a new partnership which takes over than January 31, 2009 and every three (3) years
the business. [Rev. Regs. No. 16-2005, Sec. thereafter, the amounts stated herein shall be
4.106-7 (a), (4) paraphrasing, arrangement and adjusted to its present value using the Consumer
numbering supplied] Price Index, as published by the National
Statistics Office (NSO); provided, further, that
21. Sale of or lease of real such adjustment shall be published through
properties subject to VAT. Sale of real revenue regulations to be issued not later than
properties primarily for sale to customers or held March 31 of each year.
for lease in the ordinary course of trade or If two or more adjacent residential lots are
business of the seller shall be subject to VAT. sold or disposed in favor of one buyer, for the
(Rev. Regs. No. 16-2005, Sec. 4.106-3, 1st par.) purpose of utilizing the lots as one residential lot,
Thus, capital transactions of individuals the sale shall be exempt from VAT only if the
are not subject to VAT. Only real estate dealers aggregate value of the lots do not exceed
are subject to VAT. P1,500,000.00. Adjacent residential lots,
although covered by separate titles and/or
separate tax declarations, when sold or disposed
22. On
of to one and the same buyer, whether covered
September 4, 2009, XYZ, Inc., a domestic by one or separate Deed of Conveyance, shall
corporation engaged in the real estate be presumed as a sale of one residential lot.
business, sold a building for [Rev. Regs. No. 4.109-1 (B), (p), paraphrasing
P10,000,000.00. Is the sale subject to the and numbering supplied]
value-added tax (VAT)? If so, how much?
Explain. 24. VAT on services and lease of
SUGGESTED ANSWER: Yes. 12% on properties.
the gross selling price because the sale was a. There shall be levied, assessed,
made in the ordinary course of trade of business and collected,
of X, a domestic corporation engaged in the real b. a value-added tax equivalent to
estate business. twelve percent (12%) of gross receipts
c. derived from the sale or exchange
23. The following sales of real of services,
properties are exempt from VAT, namely: 1) including the use or lease of
a. Sale of real properties not properties. [NIRC of 1997, Sec. 108 (A), as
primarily held for sale to customers or held for amended by R.A. No. 9337, arrangement and
lease in the ordinary course of trade or business; numbering supplied]
b. Sale of real properties utilized for
low-cost housing as defined by RA No. 7279, 25. Sale or exchange of
otherwise known as the Urban and services, defined. The term sale or
Development Housing Act of 1992 and other exchange of services means the performance of
related laws, such as RA No. 7835 and RA No. all kinds of services in the Philippines for others
8763. for a fee, remuneration or consideration, whether
xxx xxx xxx in kind or in cash, including those performed or
c. Sale of real properties utilized for rendered by the following:
socialized housing as defined under RA No. a.
7279, and other related laws wherein the price construction and service contractors;
ceiling per unit is P225,000.00 or as may from b. stock, real
time to time be determined by the HUDCC and estate, commercial, customs and immigration
the NEDA and other related laws. brokers;
xxx xxx xxx c. lessors of
d. Sale of residential lot valued at property, whether personal or real;
One Million Five Hundred Thousand Pesos d. persons engaged in
(P1,500,000.00) and below, or house & lot and warehousing services
other residential dwellings valued at Two Million e. lessors or distributors of cinematographic
Give Hundred Thousand Pesos (P2,500,000.00) films; f. persons
and below where the instrument of engaged in milling, processing, manufacturing or
sale/transfer/disposition was executed on or repacking goods for others;
 44
g. c. The supply of scientific, technical,
proprietors, operators or keepers of hotels, industrial or commercial knowledge or
motels, rest-houses, pension houses, inns, information;
resorts; theaters, and movie houses; d. The supply of any assistance that
h. proprietors or operators of restaurants, is ancillary and subsidiary to and is furnished as
refreshment parlors, cafes and other eating a means of enabling the application or
places, including clubs and caterers; enjoyment of any such property, or right as is
i. dealers in securities; mentioned in subparagraph (2) hereof or any
j. lending such knowledge or information as is mentioned
investors; in subparagraph (3) hereof; or
k. transportation contractors on e. The supply of services by a non-
their transport of goods or cargoes, including resident person or his employee in connection
persons who transport goods or cargoes for hire with the use of property or rights belonging to, or
and other domestic common carriers by land the installation or operation of any brand,
relative to their transport of goods or cargoes; machinery or other apparatus purchased from
such non-resident person;
l. common carriers by air and f. The supply of technical advice,
sea relative to their transport of passengers, assistance or services rendered in connection
goods or cargoes from one place in the with technical management or administration of
Philippines to another place in the Philippines; any scientific, industrial or commercial
undertaking, venture, project of scheme;
m. sales of electricity by generation g. The lease of motion picture films,
companies, transmission, and/or distribution film tapes and discs;
companies; h. The lease or the use of or the
n. franchise grantees of electric right to use radio, television, satellite
utilities, telephone and telegraph, radio and transmission and cable television time. (Rev.
television broadcasting and all other franchise Regs. No. 16-2005, Sec. 4.108-2, 2nd par.)
grantees except franchise grantees of radio
and/or television broadcasting whose annual 27. Zero-rated Sales of Goods or
gross receipts of the preceding year do not Properties. A zero-rated sale of goods or
exceed Ten Million Pesos (P10,000,000.00), and properties by a sale by a VAT-registered person
franchise grantees of gas and water utilities; is a taxable transaction for VAT purposes but the
sale does not result in any output tax.
o. non-life insurance However, the input tax on the purchases of
companies (except their crop insurances), goods, properties or services related to such
including surety, fidelity, indemnity and bonding zero-rated sale shall be available as tax credit or
companies; and refund in accordance with Rev. Regulations No.
16-2005. (Rev. Regs. No. 16-2005, 1st par.)
p. similar services regardless of
whether or not the performance thereof calls for 28. Concept of VAT zero-rating.
the exercise or use of the physical or mental The tax rate is set at zero. When applied to the
faculties. [NIRC of 1997, Sec. 108 (A), as amended tax base, such rate obviously results in no tax
by R.A. No. 9337; Rev. Regs. No. 16-2005, Sec.
4,108-2, 1st par., arrangement and numbering
chargeable against the purchaser. The seller of
supplied] such transactions charges no output tax, but can
claim a refund or a tax credit certificate for the
VAT previously charged by suppliers.
26. Also included in the phrase
[Commissioner of Internal Revenue v. Seagate
sale or exchange of services. Technology (Philippines), G. R. No. 153866,
a. The lease or the use of or the right February 11, 2005]
or privilege to use any copyright, patent, design Under a zero-rating scheme, the sale or
or model, plan, secret formula or process, exchange of a particular service is completely
goodwill, trademark, trade brand or other like freed from the VAT, because the seller is entitled
property or right; to recover, by way of a refund or as an input tax
b. The lease or the use of, or the credit, the tax that is included in the cost of
right to use any industrial, commercial or purchases attributable to the sale or exchange.
scientific equipment; The tax paid or withheld is not deducted from the
 45
tax base. (Commissioner, of Internal Revenue v. Doctrine is also known as the destination
American Express International, Inc. (Philippine principle.
Branch), G. R. No. 152609, June 29, 2005 citing Hence, actual or constructive export of
various cases) goods and services from the Philippines to a
foreign country must be zero-rated for VAT;
29. Situs of taxation of zero-rated while, those destined for use or consumption
VAT services such as facilitating the within the Philippines shall be imposed the
collection of receivables from credit card twelve percent (12%) VAT.
members situated in the Philippines and
payment to service establishments in the 33. Zero-rated sale distinguished
Philippines. The place where the service is from exempt transactions:
rendered determines the jurisdiction to impose a. A zero-rated sale is a taxable
the VAT transaction but does not result in an output tax
Performed in the Philippines, the service WHILE an exempt transaction is not subject to
is necessarily subject to its jurisdiction for the the output tax.
State necessarily has to have a substantial b. The input tax on the purchases of
connection to it in order to enforce a zero rate. a VAT registered person who has zero-rated
The place of payment is immaterial much less is sales may be allowed as tax credits or refunded
the place where the output of the service will be WHILE the seller in an exempt transaction is not
further or ultimately used. entitled to any input tax on his purchases despite
This is so because the law neither makes the issuance of a VAT invoice or receipt.
a qualification nor adds a condition in c. Persons engaged in transactions
determining the tax situs of a zero-rated service. which are zero rated being subject to VAT are
(Commissioner of Internal Revenue v. American required to register WHILE registration is
Express International, Inc. (Philipppine Branch), G. R. optional for VAT-exempt persons.
No. 152609, June 29, 2005)
34. Zero-rated sales by VAT-
30. Destination principle under
the VAT System. As a general rule, the VAT registered persons. The following sales by
system uses the destination principle as a basis VAT-registered persons shall be subject to zero
for the jurisdictional reach of the tax. percent (0%) rate:
Goods and services are taxed only in a. Export sales;
the country where they are consumed. Thus, b. Considered export sales under
exports are zero-rated, while imports are taxed. Executive Order No. 224;
This is also known as the Cross Border c. Foreign currency denominated
Doctrine. sale; and
d. Sales to persons or entities
deemed tax-exempt under special law or
31. Exception to the destination
international agreement. (Rev. Regs. No. 16-2005,
principle. The law clearly provides for an Sec. 4.106-5, 2nd par., paraphrasing supplied)
exception to the destination principle; that is, for
a zero percent VAT rate for services that are 35. Sale of gold to the Central
performed in the Philippines, "paid for in
Bank considered as export sales. As
acceptable foreign currency and accounted for in
export sales, the sale of gold to the Central
accordance with the rules and regulations of the
Bank is zero-rated, hence, no tax is chargeable
[BSP]."
to it as purchaser. Zero rating is primarily
intended to be enjoyed by the seller, which
32. Rationale for zero-rating of charges no output VAT but can claim a refund of
exports. The Philippine VAT system adheres or a tax credit certificate for the input VAT
to the Cross Border Doctrine, according to previously charged to it by suppliers.
which, no VAT shall be imposed to form part of (Commissioner of Internal Revenue v. Manila Mining
the cost of goods destined for consumption Corporation, G.R. No. 153204, August 31, 2005)
outside of the territorial border of the taxing
authority. [Commissioner of Internal Revenue v. 36. Sales to ecozone, such as
Toshiba Information Equipment (Phils.), Inc., G. R.. PEZA, considered export-sale. Notably,
No. 150154, August 9, 2005] The Cross Border while an ecozone is geographically within the
 46
Philippines, it is deemed a separate customs b. Such service is commercial in
territory and is regarded in law as foreign soil. nature; carried on over a sustained period of
Sales by suppliers from outside the borders of time; on a significant scale with a reasonable
the ecozone to this separate customs territory degree of frequency; and not at random,
are deemed as exports and treated as export fortuitous, or attenuated.
sales. These sales are zero-rated or subject to a c. For this service, it definitely
tax rate of zero percent. (Commissioner of Internal receives consideration in foreign currency that is
Revenue v. Sekisui Jushi Philippines, Inc., G. R. No. accounted for in conformity with law.
149671, July 21, 2006 citing various authorities) d. It is not an entity exempt under any
of our laws or international agreements .
37. Ecozone, defined. An (Commissioner, of Internal Revenue v. American
ECOZONE or a Special Economic Zone has Express International, Inc. (Philippine Branch), G. R.
been described as [S]elected areas with No. 152609, June 29, 2005)
highly developed or which have the potential to
be developed into agro-industrial, industrial, 40. While the service performed
tourist, recreational, commercial, banking, by American Express is subject to VAT it
investment and financial centers whose metes is zero-rated, and BIR Revenue
and bounds are fixed or delimited by Presidential Regulations that alter the legal
Proclamations. An ECOZONE may contain any requirements for zero-rating are ultra
or all of the following: industrial estates (IEs), vires and invalid. The VAT system uses the
export processing zones (EPZs), free trade destination principle which posits that the goods
zones and tourist/recreational centers. The and services are taxed only in the country where
national territory of the Philippines outside of the they are consumed,
proclaimed borders of the ECOZONE shall be However, the law itself provides for clear
referred to as the Customs Territory. exceptions under which the supply of services
[Commissioner of Internal Revenue v. Toshiba shall be zero-rated, among which are the
Information Equipment (Phils.), Inc., G. R.. No.
150154, August 9, 2005]
following:
a. The service is performed in the
Philippines;
38. Zero-rated sale of service, b. The services are within the
defined. A zero-rated sale of service (by a categories provided for under the Tax Code; and
VAT-registered person) is a taxable transaction c. It is paid for in acceptable foreign
for VAT purposes, but shall not result in any currency of the Bangko Sentral ng Pilipinas.
output tax. However, the input tax on purchases American Express renders assistance to
of goods, properties or services related to such its foreign clients by receiving the bills of service
zero-rated sale shall be available as tax credit or establishments located in the country and
refund in accordance with Rev. Regs. No. 16- forwarding them to their clients abroad. The
2005. [Rev. Regs. No. 16-2005, Sec. Sec. 4.108-5 services are performed or successfully
(a), words in italics supplied) completed upon send to its foreign clients the
drafts and bills it has gathered from service
39. Service performed by establishments here, Its services, having been
American Express in facilitating the performed in the Philippines are therefore also
collection of receivables from credit card consumed in the Philippines. Thus, its services
members situated in the Philippines and are exempt from the destination principle and
payment to service establishments in the are zero-rated.
Philippines in behalf of its Hong-Kong The BIR could not change the law.
[Commissioner, of Internal Revenue v. American
based client is subject to VAT but zero- Express International, Inc. (Philippine Branch), G. R.
rated. This is so because it meets all the No. 152609, June 29, 2005]
requirements for VAT imposition, as follows:
a. It regularly renders in the 41. A foreign Consortium
Philippines the service of facilitating the composed of BWSC-Denmark, Mitsui
collection and payment of receivables belonging
Engineering and Shipbuilding Ltd., and
to a foreign company that is a clearly separate
and distinct entity. Mitsui and Co., Ltd., which entered into a
contract with NAPOCOR for the
 47
operation and maintenance of two power a. Do not confuse the BWSCMI
barges appointed BWSC-Denmark as its case with the American Express case.
coordination manager. BWSCMI was American Express International, Inc. (Philippine
established as the subcontractor to Branch)] is a VAT-registered person that
perform the actual work in the facilitates the collection and payment of
Philippines. The Consortium paid receivables belonging to its non-resident
foreign client [American Express International,
BWSCMI in acceptable foreign exchange
Inc. (Hongkong Branch)], for which it gets paid in
and accounted for in accordance with acceptable foreign currency inwardly remitted
the rules and regulations of the BSP. and accounted for in accordance with BSP rules
Through a February 14, 1995 ruling and regulations. (Commissioner of Internal
the BIR declared that BWSCMI may Revenue v. Burmeister and Wain Scandinavian
choose to register as a VAT persons Contractor Mindanao, Inc., G. R. No. 153205,
subject to VAT at zero rate. For 1996, it January 22, 2007)
filed the proper VAT returns showing 42. What are VAT-Exempt transactions ?
zero rating. On December 29, 1997, SUGGESTED ANSWER: The sale of goods
believing that it is covered by Rev. Regs. or properties and/or services and the use or
5-96, dated February 20, 1996, BWSCMI lease of properties that is
paid 10% output VAT for the period April- b. not subject to VAT (output tax) and
c. the seller is not allowed any tax
December 1996, through the Voluntary
credit on VAT (input tax) purchases.
Assessment Program (VAP). The person making the exempt sale of
On January 7, 1999, BWSCMI was goods, properties or services shall not bill any
able to obtain a Ruling from the BIR output tax to his customers because the said
reconfirming that it is subject to VAT at transaction is not subject to VAT . [Rev. Regs. No.
zero-rating. On this basis, BWSCMI 16-2005, Sec. 4.109-1 (A), arrangement and
applied for a refund of the output VAT it numbering supplied]
paid.
a. Is BWSCMI subject to the 10% 43. VAT-exempt transactions
VAT or is it zero rated ? distinguished from VAT-exempt entities.
SUGGESTED ANSWER: Yes. BWSCMI
is not zero rated and is subject to the 10% VAT. a. An exempt transaction, on the one
It is rendering service for the Consortium which hand, involves goods or services which, by their
is not doing business in the Philippines. Zero- nature, are specifically listed in and expressly
rating finds application only where the recipient exempted from the VAT under the Tax Code,
of the services are other persons doing business without regard to the tax status VAT-exempt or
outside of the Philippines. BWSCMI provides not of the party to the transaction.
services to the Consortium which by virtue of its An exempt party, on the other hand, is a
contract with NAPOCOR is doing business person or entity granted VAT exemption under
within the Philippines. (Commissioner of Internal the Tax Code, a special law or an international
Revenue v. Burmeister and Wain Scandinavian agreement to which the Philippines is a
Contractor Mindanao, Inc., G. R. No. 153205, signatory, and by virtue of which its taxable
January 22, 2007) transactions become exempt from VAT.
b. Could it obtain a refund of the [Commissioner of Internal Revenue v. Toshiba
VAT it paid through the VAP ? Explain. Information Equipment (Phils.), Inc., G. R. No.
150154, August 9, 2005]
SUGGESTED ANSWER: Yes. BWSCMI b. An exempt transaction shall not be
is entitled to refund of the 10% output VAT it paid the subject of any billing for output VAT but it
the based on the non-retroactivity of the shall not also be allowed any input tax credits
prejudicial revocation of the BIR Rulings which WHILE an exempt party being zero-rated is
held that its services are subject to 0% VAT and allowed to claim input tax credits.
which BWSCMI invoked in applying for refund of
the output VAT. (Commissioner of Internal
Revenue v. Burmeister and Wain Scandinavian 44. Transactions are exempt from
Contractor Mindanao, Inc., supra) VAT. (Subject to the election by a VAT-registered
NOTES AND COMMENTS:
 48
person not to be subject to the value-added tax), feeds (except specialty feeds for race horses,
the following shall be exempt from VAT: fighting cocks, aquarium fish, zoo animals and
(A) Sale or importation of agricultural and other animals generally considered as pets);
marine food products in their original state, Specialty feeds refers to non-agricultural
livestock and poultry of a kind generally used as, feeds or food for race horses, fighting cocks,
or yielding or producing foods for human aquarium fish, zoo animals and other animals
consumption; and breeding stock and genetic generally considered as pets.
materials therefor. (C) Importation of personal and
Livestock shall include cows, bulls and household effects belonging to the residents of
calves, pigs, sheep, goats and rabbits. Poultry the Philippines returning from abroad and
shall include fowls, ducks, geese and turkey, nonresident citizens coming to resettle in the
Livestock or poultry does not include fighting Philippines: Provided, That such goods are
cocks, race horses, zoo animals and other exempt from customs duties under the Tariff and
animals generally considered as pets. Customs Code of the Philippines;
Marine food products shall include fish (D) Importation of professional
and crustaceans, such as, but not limited to, instruments and implements, wearing apparel,
eels, trout, lobster, shrimps, prawns, oysters, domestic animals, and personal household
mussels and clams. effects (except any vehicle, vessel, aircraft,
Meat, fruit, fish, vegetables and other machinery, other goods for use in the
agricultural and marine food Products classified manufacture and merchandise of any kind in
under this paragraph shall be considered in their commercial quantity) belonging to persons
original state even if they have undergone the coming to settle in the Philippines, for their own
simple processes of preparation or preservation use and not for sale, barter or exchange,
for the market, such as freezing, drying, salting, accompanying such persons, or arriving within
broiling, roasting, smoking or stripping, including ninety (90) days before or after their arrival, upon
those using advanced technological means of the production of evidence satisfactory to the
packaging, such as shrink wrapping in plastics, Commissioner of Internal Revenue, that such
vacuum packing, tetra-pack, and other similar persons are actually coming to settle in the
packaging methods. Polished and/or husked Philippines and that the change of residence is
rice, corn grits, raw cane sugar and molasses, bona fide;
ordinary salt, and copra shall be considered in (E) Services subject to percentage tax
their original state. under Title V of the Tax Code, as enumerated
Sugar whose content of sucrose by below:
weight, in the dry state, has a polarimeter (1) Sale or lease of goods or
reading of 99.5o and above are presumed to be properties or the performance of
refined sugar. services of non-VAT-registered persons,
Cane sugar produced from the following other than the transactions mentioned in
shall be presumed, for internal revenue paragraphs (A) to (U) of Sec. 109 (1) of
purposes, to be refined sugar: the Tax Code, the annual sales and/or
(1) product of a refining process, receipts of which does not exceed the
(2) products of a sugar refinery, amount of One Million Five Hundred
or thousand Pesos (P1,500,000.00),
(3) product of a production line of a Provided, That not later than January
sugar mill accredited by the BIR to be producing 31, 2009 and every three (3) years
sugar with polarimeter reading of 99.5o and thereafter, the amount herein stated
above, and for which the quedanissued therefor, shall be adjusted to its present value
and verified by the Sugar Regulatory using the Consumer Price Index, as
Administration, identifies the same to be of a published by the National Statistics
polarimeter reading of 99.5o and above. Office (NSO). (Sec. 116, Tax Code)
Bagasse is not included in the exemption (2) Services rendered by
provided for under this section. domestic common carriers by land for
(B) Sale or importation of fertilizers; the transport of passengers and keepers
seeds, seedlings and fingerlings; fish, prawn, of garages. (Sec. 117)
livestock and poultry feeds, including (3) Services rendered by
ingredients, whether locally produced or international air/shipping carriers. (Sec.
imported, used in the manufacture of finished 118)
 49
(4) Service rendered by accredited by the DepED, the CHED and TESDA
franchise grantees of radio and/or and those rendered by government educational
television broadcasting whose annual institutions and it does not include seminars, in-
gross receipts of the preceding year do service training, review classes and other similar
not exceed Ten Million Pesos services rendered by persons who are not
(P10,000,000.00) and by franchises of accredited by the DepED, the CHED and/or the
gas and water utilities. (Sec. 119) TESDA.
(5) Service rendered for (I) Services rendered by individuals
overseas dispatch message or pursuant to an employer-employee relationship;
conversation originating from the (J) Services rendered by regional or
Philippines. (Sc. 120) area headquarters established in the Philippines
(6) Services rendered by any by multinational corporations which act as
person, company or corporation (except supervisory, communications and coordinating
purely cooperative companies or centers for their affiliates, subsidiaries or
associations ) doing life insurance branches in the Asia-Pacific Region and do not
business of any sort in the Philippines. earn or derive income from the Philippines;
(Sec. 123) (K) Transactions which are exempt
(7) Services rendered by fire, under international agreements to which the
marine or miscellaneous insurance Philippines is a signatory or under special laws,
agents of foreign insurance companies. except those under Presidential Decree No. 529
(Sec. 124) Petroleum Exploration Concessionaires under
(8) Services of proprietors, the Petroleum Act of 1949; and;
lessees or operators of cockpits, (L) Sales by agricultural cooperatives
cabarets, night or day clubs, boxing duly registered with the Cooperative
exhibitions professional basketball Development Authority (CDA) to their members
games, jai-Alai and race tracks. (Sec. as well as sale of their produce, whether in its
125). and original state or processed form, to non-
(9) Receipts on sale, barter or members; their importation of direct farm inputs,
exchange of shares of stock listed and machineries and equipment, including spare
traded through the local stock exchange parts thereof, to be used directly and exclusively
or through initial public offering. (Sec. in the production and/or processing of their
127) produce;
(F) Services by agricultural contract (M) Gross receipts from lending
growers and milling for others of palay into rice, activities by credit or multi-purpose cooperatives
corn into grits and sugar cane into raw sugar; duly registered and in good standing with the
Agricultural contract growers refers to Cooperative Development Authority;
those persons producing for others poultry, (N) Sales by non-agricultural, non-
livestock or other agricultural and marine food electric and non-credit cooperatives duly
products in their original state. registered with the Cooperative Development
(G) Medical, dental, hospital and Authority: Provided, That the share capital
veterinary services except those rendered by contribution of each member does not exceed
professionals; Fifteen thousand pesos (P15,000) and
Laboratory services are exempted. If the regardless of the aggregate capital and net
hospital or clinic operates a pharmacy or drug surplus ratably distributed among the members;
store, the sale of drugs and medicine is subject Importation by non-agricultural, non-
to VAT. electric and non-credit cooperatives of
(H) Educational services rendered by machineries and equipment, including spare
private educational institutions, duly accredited parts thereof, to be used by them are subject to
by the Department of Education (DEPED), the VAT.
Commission on Higher Education (CHED), the (O) Export sales by persons who are
Technical Education And Skills Development not VAT-registered;
Authority (TESDA) and those rendered by (P) Sale of real properties not primarily
government educational institutions; held for sale to customers or held for lease in the
Educational services shall refer to ordinary course of trade or business, or real
academic, technical or vocational education property utilized for low-cost and socialized
provided by private educational institutions duly housing as defined by Republic Act No. 7279,
 50
otherwise known as the Urban Development and stopping at any other port in the Philippines;
Housing Act of 1992, and other related laws, provided, further, that if any portion of such fuel,
such as RA No. 7835 and RA No. 8765, goods or supplies is used for purposes other
residential lot valued at One million five hundred than that mentioned in this paragraph, such
thousand pesos (P 1,500,000) and below, house portion of fuel, goods and supplies shall be
and lot, and other residential dwellings valued at subject to 10% VAT (now 12%);
Two million five hundred thousand pesos (P (U) Services of banks, non-bank financial
2,500,000) and below: Provided, That not later intermediaries performing quasi-banking
than January 31, 2009 and every three (3) years functions, and other non-bank financial
thereafter, the amounts herein stated shall be intermediaries; and
adjusted to their present values using the (V) Sale or lease of goods or properties
Consumer Price Index, as published by the or the performance of services other than the
National Statistics Office (NSO); transactions mentioned in the preceding
(Q) Lease of a residential unit with a paragraphs, the gross annual sales and/or
monthly rental not exceeding Ten thousand receipts do not exceed the amount of One
pesos (P 10,000) Provided, That not later than million five hundred thousand pesos
January 31, 2009 and every three (3) years (P1,500,000): Provided, That not later than
thereafter, the amount herein stated shall be January 31, 2009 and every three (3) years
adjusted to its present value using the Consumer thereafter, the amount herein stated shall be
Price Index as published by the National adjusted to its present value using the Consumer
Statistics Office (NSO); Price Index as published by the National
(R) Sale, importation, printing or Statistics Office (NSO).
publication of books and any newspaper, For purposes of the threshold of
magazine, review or bulletin which appears at P1,500,000.00, the husband and wife shall be
regular intervals with fixed prices for subscription cnsidered separate taxpayers. However, the
and sale and which is not devoted principally to aggregation rule for each taxpayer shall apply.
the publication of paid advertisements; For instance, if a profesional, aside from the
(S) Sale, importation or lease of practice ofhis profession, also derives revenue
passenger or cargo vessels and aircraft, from other lines of business which are otherwise
including engine, equipment and spare parts subject to VAT, the same shall be combined for
thereof for domestic or international transport purposes of determining whether the threshold
operations; Provided, that the exemption from has been exceeded. Thus, the VAT-exempt
VAT on the importation and local purchase of sales shall to be icluded in determining the
passenger and/or cargo vessels shall be limited threshold. [NIRC of 1997, Sec. 109 (1), as amended
to those of one hundred fifty (150) tons and by R. A. No. 9337; words in italics from Rev. Regs.
above, including engine and spare parts of said No. 16-2005, Sec. 4.109-1 (B), words in parentheses
vessels; Provided, further, that the vessels be supplied]
imported shall comply with the age limit
requirement, at the time of acquisition counted 45. Tax to be paid by persons
from the date of the vessels original exempt from VAT.
commissioning, as follows: (i) for passenger a. Any person, whose sales or
and/or cargo vessels, the age limit is fifteen receipts are exempt under Sec. 109 (1) (V) of
years (15) years old, (ii) for tankers, the age the Tax Code,
limit is ten (10) years old, and (iii) For high- (V) Sale or lease of goods or
speed passenger cars, the age limit is five (5) properties or the performance of
years old, Provided, finally, that exemption shall services other than the transactions
be subject to the provisions of section 4 of mentioned in the preceding paragraphs,
Republic Act No. 9295, otherwise known as The the gross annual sales and/or receipts
Domestic Shipping Development Act of 2004. do not exceed the amount of One million
(T) Importation of fuel, goods and five hundred thousand pesos
supplies by persons engaged in international (P1,500,000): Provided, That not later
shipping or air transport operations; Provided, than January 31, 2009 and every three
that the said fuel, goods and supplies shall be (3) years thereafter, the amount herein
used exclusively or shall pertain to the transport stated shall be adjusted to its present
of goods and/or passenger from a port in the value using the Consumer Price Index
Philippines directly to a foreign port without as published by the National Statistics
 51
Office (NSO), from the payment of VAT not derive income purely from
and compensation required file a consolidated
b. who is not a VAT-registered person return for the taxable year but could not
c. shall pay a tax equivalent to three do so. For married individuals, the husband
percent (3%) of his gross monthly sales or and wife, subject to no. 2, supra,, shall compute
receipts; separately their individual income tax based on
Provided, that cooperatives shall be their respective total taxable income: Provided,
exempt from the three (3%) gross receipts tax that if any income cannot be definitely attributed
herein imposed. (Rev. Regs. No. 16-2005, Sec. to or identified as income exclusively earned or
4.116-1, arrangement, numbering and words in italics
supplied)
realized by either of the spouses, the same shall
be divided equally between the spouses for the
purpose of determining their respective taxable
RETURNS AND WITHHOLDING income. [2nd to the last par., Sec. 24 (A) (2), NIRC of
1997 as amended by Rep. Act No. 9504]
1. Income tax returns being
public documents, until controverted by 6. Individuals who are not
competent evidence, are competent evidence, required to file an income tax return.
are prima facie correct with respect to the entries a. An individual whose gross income
therein. (Ropali Trading v. NLRC, et al., 296 SCRA does not exceed his total personal and additional
309, 317) exemptions for dependents, Provided, That a
citizen of the Philippines and any alien individual
2. Individuals required to file an engaged in business or practice of profession
income tax return. within the Philippines shall file an income tax
a. Every Filipino citizen residing in the return regardless of the amount of gross income
Philippines; [Sec. 51 (A) (2), NIRC of 1997]
b. Every Filipino citizen residing b. An individual with respect to pure
outside the Philippines on his income from compensation income, derived from such
sources within the Philippines; sources within the Philippines, the income tax on
c. Every alien residing in the which has been correctly withheld: Provided,
Philippines on income derived from sources That an individual deriving compensation
within the Philippines; and concurrently from two or more employers at any
d. Every nonresident alien engaged in time during the taxable year shall file an income
trade or business or in the exercise of profession tax return [Sec. 51 (A) (2), NIRC of 1997, as amended
in the Philippines. [Sec. 51 (A) (1), NIRC of 1997] by Rep. Act No. 9504, paraphrasing supplied]
c. An individual whose sole income
3. Married individuals who are has been subject to final withholding tax;
earning purely compensation income d. A minimum wage earner (is a
allowed to file separate returns. worker in the private sector paid the statutory
minimum wage, or is an employee in the public
4. Married individuals, whether sector with compensation income of not more
than the statutory minimum wage in the non-
citizens, resident or non-resident aliens, agricultural sector where he/she is assigned), an
who do not derive income purely from individual who is exempt from income tax
compensation shall file a consolidated pursuant to the provisions of the Tax Code and
return for the taxable year to include the other laws, general or special. [Sec. 51 (A) (2),
income of both spouses, but where it is NIRC of 1997 in relation to Sec. 22 (HH), both as
impracticable for the spouses to file one return, amended by Rep. Act. 9504]
each spouse may file a separate return of income
but the returns so filed shall be consolidated by 7. Minimum wage earners are
the Bureau for purposes of verification. [Section exempt from income taxation. That
51 (D) of the NIRC of 1997] minimum wage earners (is a worker in the
private sector paid the statutory minimum wage,
5. Computation of income tax for or is an employee in the public sector with
married individuals whether citizens, compensation income of not more than the
resident or non-resident aliens, who do statutory minimum wage in the non-agricultural
sector where he/she is assigned) shall be
 52
exempt from the payment of income tax on their Revenue. It is also known as collection of the
taxable income: Provided, further, That the tax at source.
holiday pay, overtime pay, night shift differential
pay and hazard pay received by such minimum 14. A withholding agent is
wage earners shall likewise be exempt from explicitly made personally liable under
income tax. [Sec. 51 (A) (2), NIRC of 1997 in relation to the Tax Code for the payment of the tax
Sec. 22 (HH), both as amended by Rep. Act. 9504]
required to be withheld, in order to compel
the withholding agent to withhold the tax under
8. An individual who is not
any and all circumstances. In effect, the
required to file an income tax return may responsibility for the collection of the tax as well
nevertheless be required to file an as the payment thereof is concentrated upon the
information return. [Sec. 51 (A) (3), NIRC of person over whom the Government has
1997] jurisdiction. (Filipinas Synthetic Fiber Corporation v.
Court of Appeals, et al., G.R. Nos. 118498 & 124377,
9. A corporation files its income October 12, 1999) The system facilitates tax
tax return and pays its income tax four (4) collection and reduces tax evasion.
times during a single taxable year.
Quarterly returns are required to be filed for the 15. The two (2) types of
first three quarters, then a final adjustment return withholding at source are the 1) final
is filed covering the total taxable income for the withholding tax; and 2) creditable
whole taxable year, be it calendar or fiscal. withholding tax.
10. An individual earning from the 16. Under the final withholding tax
practice of his profession or who engages system the amount of income tax
in trade or business files his income tax withheld by the withholding agent is
return and pays his income tax four (4) constituted as a full and final payment of
times during a single taxable year . the income due from the payee on the
Quarterly returns are required to be filed for the said income. [1st sentence, 1st par., Sec. 2.57 (A),
first three quarters, then an annual income tax Rev. Regs. No. 2-98]
return is filed covering the total taxable income for The liability for payment of the tax rests
the whole of the previous calendar year. primarily on the payor or the withholding agent..
Thus, in case of his failure to withhold the tax or in
11. The purpose of the above four case of under withholding, the deficiency tax shall
(4) times a year requirement is to make be collected from the payor withholding agent.
available sufficient funds to meet the The payee is not required to file an income tax
budgetary requirements, on a quarterly basis return for the particular income.
thereby increasing government liquidity. It also
eases hardships on the part of individuals who 17. Under the creditable
are required to make this four time return. Thus, withholding tax system, taxes withheld on
the taxpayer does not have to raise large sums of certain income payments are intended to
money in order to pay the tax. equal or at least approximate the tax due
from the payee on the said income. The
12. An individual earning purely income recipient is still required to file an income
compensation income files only one tax return and/or pay the difference between the
annual income tax return covering the total tax withheld and the tax due on the income . [1st
taxable compensation income for the whole of the and 2nd sentences, Sec. 257(B), Rev. Regs. No. 2-98]
previous calendar year.
18. The two kinds of creditable
13. Under the withholding tax withholding taxes are (a) taxes withheld on
system, taxes imposed or prescribed by income payments covered by the expanded
the NIRC of 1997 are to be deducted and withholding tax; and (b) taxes withheld on
withheld by the payors from payments compensation income.
made to payees for the former to pay
directly to the Bureau of Internal
 53
19. Payments to the following are 2. What are the two (2) kinds of
exempt from the requirement of civil penalties ?
withholding or when no withholding taxes SUGGESTED ANSWER:
required: a. the 25% surcharge for late filing or
a. National Government and its late payment [Sec. 248 (A), NIRC of 1997] (also
instrumentalities including provincial, city, or known as the delinquency surcharge), and
municipal governments; b. the 50% willful neglect or fraud
b. Persons enjoying exemption from surcharge. [Sec. 248 (B), Ibid.]
payment of income taxes pursuant to the
provisions of any law, general or special, such as 3. Define deficiency income tax.
but not limited to the following: SUGGESTED ANSWER: Deficiency
1) Sales of real property by a income tax is the amount by which the tax
corporation which is registered with and imposed under the NIRC of 1997 exceeds the
certified by the HLURB or HUDCC as amount shown as the tax due by the taxpayer
engaged in socialized housing project upon his return. [Sec. 56 (B) (1), NIRC of 1997]
where the selling price of the house and lot
or only the lot does not exceed 4. Deficiency interest, defined.
P180,000.00 in Metro Manila and other The interest assessed and collected on any
highly urbanized areas and P150,000.00 in unpaid amount of tax at the rate of 20% per
other areas or such adjusted amount of annum or such higher rate as may be prescribed
selling price for socialized housing as may by regulations, from the date prescribed for
later be determined and adopted by the payment until the amount is fully paid. [Sec. 249
HLURB; (A) (B), NIRC of 1997]
2) Corporations registered with the
Board of Investments and enjoying 5. Delinquency interest, defined.
exemptions from income under the The interest assessed and collected on the
Omnibus Investment Code of 1997; unpaid amount until fully paid where there is
3) Corporations exempt from failure on the part of the taxpayer to pay the
income tax under Sec. 30, of the Tax amount die on any return required to be filed; or
Code, like the SSS, GSIS, the PCSO, etc. the amount of the tax due for which no return is
However, income payments arising from required; or a deficiency tax, or any surcharge or
any activity which is conducted for profit or interest thereon, on the date appearing in the
income derived from real or personal notice and demand by the Commissioner of
property shall be subject to a withholding Internal Revenue. [Sec.249 (c), NIRC of 1997]
tax. (Sec. 57.5, Rev. Regs. No. 2-98)
6. After resolving the issues the
20. For tax amnesty purposes, the BIR Commissioner reduced the
withholding agent is not a taxpayer. He is assessment. Was it proper to impose
made to pay the tax where he fails to withhold as delinquency interest despite the
a penalty and not because the tax is due from reduction of the assessment ? Why ?
him. (Commissioner of Internal Revenue v. Court of SUGGESTED ANSWER: Yes. The
Appeals, et al., G.R. No. 108576, January 20, 1999, the
Anscor case)
intention of the law is to discourage delay in the
payment of taxes due to the State and in this
sense the surcharge and interest charged are not
PENALTIES, INTERESTS AND penal but compensatory in nature they are
SURCHARGES compensation to the State for the delay in
payment, or for the concomitant tuse of the funds
1. Surtaxes or surcharges, also known by the taxpayer beyond the date he is supposed
as the civil penalties, are the amounts imposed in to have paid them to the State. (Bank of the
addition to the tax required. Philippine Islands v. Commissioner of Internal
They are in the nature of penalties and Revenue, G. R. No. 137002, July 27, 2006)
shall be collected at the same time, in the same
manner, and as part of the tax. [Sec.248 (A), 7. Compromise penalty is the
NIRC of 1997] amount agreed upon between the taxpayer and
 54
the Government to be paid as a penalty in cases 3. What are the purposes for the
of a compromise. creation of the Court of Tax Appeals ?
8. As a result of divergent rulings SUGGESTED ANSWER:
on whether it is subject to tax or not, the a. To prevent delay in the disposition of
taxpayer was not able to pay his taxes on tax cases by the then Courts of First Instance
time. Imposed surcharges and interests (now RTCs), in view of the backlog of civil,
for such delay, the taxpayer not invokes criminal, and cadastral cases accumulating in the
good faith with the BIR countering by dockets of such courts; and
saying that good faith is not a valid b. To have a body with special
defense for violation of a special law. knowledge which ordinary Judges of the then
Furthermore, the BIR further raises the Courts of First Instance (now RTCs), are not likely
to possess, thus providing for an adequate
defense that the government is not bound
remedy for a speedy determination of tax cases.
by the errors of its agents. Who is correct (Ursal v. Court of Tax Appeals, et al., 101 Phil. 209)
?
SUGGESTED ANSWER: The taxpayer is 4. Jurisdiction of the Court of Tax
correct. The settled rule is that good faith and
Appeals.
honest belief that one is not subject to tax on the
a. Exclusive appellate jurisdiction to
basis of previous interpretation of government
review by appeal, as herein provided:
agencies tasked to implement the tax, are
1. Decisions of the Commissioner of
sufficient justification to delete the imposition of
Internal Revenue in cases involving disputed
surcharges. (Michel J. Lhuillier Pawnshop, Inc. v.
Commissioner of Internal Revenue, G. R. No. 166786,
assessments, refunds of internal revenue taxes,
September 11, 2006) fees or other charges, penalties, in relation
thereto, or other matters arising under the
National Internal Revenue Code or other laws
REPUBLIC ACT NO. 1125, administered by the Bureau of Internal Revenue;
CREATING THE COURT OF TAX (DIVISION)
APPEALS INCLUDING 2. Inaction by the Commissioner of
Internal Revenue in cases involving disputed
JURISDICTION OF THE CTA, AS assessments, refunds or internal revenue taxes,
AMENDED fees or other charges, penalties in relation
thereto, or other matter arising under the National
Internal Revenue Code or other laws
COURT OF TAX APPEALS, IN
administered by the Bureau of Internal Revenue,
GENERAL where the National Internal Revenue Code
provides a specific period of action, in which case
1. Discuss the role of the the inaction shall be deemed a denial; (The
judiciary in taxation. SUGGESTED inaction on refunds in two years from the time tax
ANSWER: The role of the judiciary is to be the was paid. Thus, if the prescriptive period of two
sympathetic or vigilant court which would check years is about to expire, the taxpayer should
injustices or abuses of the legislative and interpose a petition for review with the CTA
administrative agents of the State in their DIVISION)
exercise of the power of taxation. 3. Decisions, orders or resolutions of
the Regional Trial Courts in local tax cases
2. What is the nature and originally decided or resolved by them in the
composition of the Court of Tax Appeals ? exercise of their original or appellate jurisdiction;
(If original DIVISION; if appellate EN BANC)
SUGGESTED ANSWER: The Court of Tax 4. Decisions of the Commissioner of
Appeals is the special tax court created under Customs in cases involving liability for customs
Republic Act No. 1125, as amended, and is duties, fees or other money charges, seizure,
composed of a Presiding Justice and eight (8) detention or release of property affected, fines,
Associate Justices, organized into three (3) forfeitures or other penalties in relation thereto, or
divisions. other matters arising under the Customs Law or
 55
other laws administered by the Bureau of Trial Courts in tax cases originally decided by
Customs; (DIVISION) them, in their respective territorial jurisdiction.
5. Decisions of the Central Board of b) Over petitions for review of
Assessment Appeals in the exercise of its the judgments, resolutions or orders of the
appellate jurisdiction over cases involving the Regional Trial Courts in the exercise of their
assessment and taxation of real property appellate jurisdiction over tax cases originally
originally decided by the provincial or city board of decided by the Metropolitan Trial Courts,
assessment appeals; (EN BANC) Municipal Trial Courts and Municipal Circuit Trial
6. Decisions of the Secretary of Courts in their respective jurisdiction.
Finance on customs cases elevated to him c. Jurisdiction over tax collection
automatically for review from decisions of the cases:
Commissioner of Customs which are adverse to 1. Exclusive original jurisdiction in tax
the Government under Section 2315 of the Tariff collection cases involving final and executory
and Customs Code; (This has reference to assessments for taxes, fees, charges and
forfeiture cases where the decision is to release penalties: Provided, however, That collection
the seized articles DIVISION) cases where the principal amount of taxes and
7. Decisions of the Secretary of Trade fees, exclusive of charges and penalties, claimed
and Industry, in case of nonagricultural product, is less than One million pesos (P1,000,000) shall
commodity or article, and the Secretary of be tried by the proper Municipal Trial Court,
Agriculture in the case of agricultural product, Metropolitan Trial Court and Regional Trial Court.
commodity or article, involving dumping and 2. Exclusive appellate jurisdiction in tax
countervailing duties under Section 301 and 302, collection cases:
respectively, of the Tariff and Customs Code, and a) Over appeals from
safeguard measures under Republic Act No. judgments, resolutions, or orders of the
8800, where either party may appeal the decision Regional Trial Courts in tax collection cases
to impose or not to impose said duties. originally decided by them, in their
(DIVISION) respective territorial jurisdiction.
b. Jurisdiction over cases involving b) Over petitions for review of
criminal offenses as herein provided: the judgments, resolutions or orders of the
1. Exclusive original jurisdiction Regional Trial Courts in the exercise of their
over all criminal cases arising from violations of appellate jurisdiction over tax collection cases
the National Internal Revenue Code or Tariff and originally decided by the Metropolitan Trial
Customs Code and other laws administered by Courts, Municipal Trial Courts and Municipal
the Bureau of Internal Revenue or the Bureau of Circuit Trial Courts, in their respective
Customs: Provided, however, That offenses or jurisdiction. (Sec. 7, R. A. No. 1125, as
felonies mentioned in this paragraph where the amended by R. A. No. 9282, emphasis and words in
principal amount of taxes and fees, exclusive of parentheses supplied)
charges and penalties claimed, is less than One The petition for review to be filed
million pesos (P1,000,000.00) or where there is with the CTA en banc as the mode for
no specified amount claimed shall be tried by the appealing a decision, resolution, or order
regular Courts and the jurisdiction of the CTA of the CTA Division, under Section 18 of
shall be appellate. Any provision of law or the Republic Act No. 1125, as amended, is
Rules of Court to the contrary notwithstanding, not a totally new remedy, unique to the
the criminal action and the corresponding civil
CTA, with a special application or use
action for the recovery of civil liability for taxes
and penalties shall at all times be simultaneously therein. To the contrary, the CTA merely
instituted with, and jointly determined in the same adopts the procedure for petitions for review and
proceeding by the CTA, the filing of the criminal appeals long established and practiced in other
action being deemed to necessarily carry with it Philippine courts. Accordingly, doctrines,
the filing of the civil action, and no right to reserve principles, rules, and precedents laid down in
the filing of such civil action separately from the jurisprudence by this Court as regards petitions
civil action will be recognized. for review and appeals in courts of general
2. Exclusive appellate jurisdiction in jurisdiction should likewise bind the CTA, and it
criminal offenses: cannot depart therefrom. (Santos v. People, et al,
G. R. No. 173176, August 26, 2008)
a) Over appeals from the
judgments, resolutions or orders of the Regional
 56
5. It is the Regional Trial Court anti-dumping and countervailing duty cases are
that has jurisdiction to rule upon the appealable to the Court of Tax Appeals within
constitutionality of a tax law or a thirty (30) days from receipt of such decisions.
b. In case of automatic review by the
regulation issued by the taxing
Secretary of Finance in seizure or forfeiture cases
authorities. Where what is assailed is the where the value of the importation exceeds P5
validity or constitutionality of a law, or a rule or million or where the decision of the Collector of
regulation issued by the administrative agency in Customs which fully or partially releases the
the performance of its quasi-legislative function, shipment seized is affirmed by the Commissioner
the regular courts have jurisdiction to pass upon of Customs.
the same. The determination of whether a c. In case of automatic review by the
specific rule or set of rules issued by an Secretary of Finance of a decision of a Collector
administrative agency contravenes the law or the of Customs acting favorably upon a customs
constitution is within the jurisdiction of the protest.
regular courts.
Indeed, the Constitution vests the power
of judicial review or the power to declare a law,
ASSESSMENT OF INTERNAL
treaty, international or executive agreement, REVENUE TAXES
presidential decree, order, instruction, ordinance,
or regulation in the courts, including the regional 1. Outline of tax remedies of a
trial courts. This is within the scope of judicial taxpayer and the government relative to
power, which includes the authority of the courts ASSESSMENT of internal revenue taxes.
to determine in an appropriate action the validity a. The taxpayer files his tax return.
of the acts of the political departments. Judicial b. A Letter of Authority is issued
power includes the duty of the courts of justice to authorizing BIR examiner to audit or examine the
settle actual controversies involving rights which tax return and determines whether the full and
are legally demandable and enforceable, and to complete taxes have been paid.
determine whether or not there has been a grave c. If the examiner is satisfied that the
abuse of discretion amounting to lack or excess tax return is truly reflective of the taxable
of jurisdiction on the part of any branch or transaction and all taxes have been paid, the
instrumentality of the Government. (British process ends. However, if the examiner is not
American Tobacco v. Camacho et al., G. R. No. satisfied that the tax return is truly reflective of the
163583, August 20, 2008 with an intervenor) taxable transaction and that the taxes have not
NOTES AND COMMENTS: The above been fully paid, a Notice of Informal Conference is
doctrine supersedes Asia International issued inviting the taxpayer to explain why he
Auctioneers, Inc., etc et al., .v. Parayno, Jr., etc.,, should not be subject to additional taxes.
et al., G. R. No. 103445, December 18, 2007 d. If the taxpayer attends the informal
which ruled that it is the Court of Tax Appeals that conference and the examiner is satisfied with the
has jurisdiction relative to matters involving the explanation of the taxpayer, the process is again
constitutionality of regulations issued by the BIR. ended.
The reason was that this falls under the concept If the taxpayer ignores the invitation to
of decisions of the BIR Commissioner on other the informal conference, or if the examiner is not
matter arising under the provisions of laws satisfied with taxpayers explanation,, and he
administered by the Commission. Issuance of believes that proper taxes should be assessed,
revenue regulations are authorized under the the Commissioner of Internal Revenue or his duly
NIRC. authorized representative shall then notify the
British American Tobacco reversed Asia taxpayer of the findings in the form of a pre-
International Auctioneers upon the concept of the assessment notice. The pre-assessment notice
judiciarys expanded power. requires the taxpayer to explain within fifteen (15)
days from receipt why no notice of assessment
6. Instances where the Court of and letter of demand for additional taxes should
Tax Appeals would have jurisdiction even be directed to him.
if there is no decision of the e. If the Commissioner is satisfied with
Commissioner of Customs: the explanation of the taxpayer, then the process
a. Decisions of the Secretary of Trade is again ended.
and Industry or the Secretary of Agriculture in
 57
If the taxpayer ignores the pre- h. If the protest is denied in whole or in
assessment notice by not responding or his part, or is not acted upon within one hundred
explanations are not accepted by the eighty (180) days from the submission of
Commissioner, then a notice of assessment and a documents, the taxpayer adversely affected by
letter of demand is issued. the decision or inaction may appeal to the Court
The notice of assessment must be issued of Tax Appeals within thirty (30) days from receipt
by the Commissioner to the taxpayer within a of the adverse decision, or from the lapse of the
period of three (3) years from the time the tax one hundred eighty (180-) day period, with an
return was filed or should have been filed application for the issuance of a writ of preliminary
whichever is the later of the two events. Where injunction to enjoin the BIR from collecting the tax
the taxpayer did not file a tax return or where the subject of the appeal.
tax return filed is false or fraudulent, then the If the taxpayer fails to so appeal, the
Commissioner has a period of ten (10) years from denial of the Commissioner or the inaction of the
discovery of the failure to file a tax return or from Commissioner would result to the notice of
discovery of the fraud within which to issue an assessment becoming final and collectible and
assessment notice. The running of the above the BIR could then utilize its administrative and
prescriptive periods may however be suspended judicial remedies to collect the tax.
under certain instances. i. A decision of a division of the Court
The notice of assessment must be issued of Tax Appeals adverse to the taxpayer or the
within the prescriptive period and must contain government may be the subject of a motion for
the facts, law and jurisprudence relied upon by reconsideration or new trial, a denial of which is
the Commissioner. Otherwise it would not be appealable to the Court of Tax Appeals en banc
valid. by means of a petition for review.
f. The taxpayer should then file an The Court of Tax Appeals, has a period of
administrative protest by filing a request for twelve (12) months from submission of the case
reconsideration or reinvestigation within thirty (30) for decision within which to decide.
days from receipt of the assessment notice. j. If the decision of the Court of Tax
The taxpayer could not immediately Appeals en banc affirms the denial of the protest
interpose an appeal to the Court of Tax Appeals by the Commissioner or the assessment in case
because there is no decision yet of the of failure by the Commissioner to decide the
Commissioner that could be the subject of a taxpayer must file a petition for review on
review. certiorari with the Supreme Court within fifteen
To be valid the administrative protest (15) days from notice of the judgment on
must be filed within the prescriptive period, must questions of law. An extension of thirty (30) days
show the error of the Bureau of Internal Revenue may for justifiable reasons be granted. If the
and the correct computations supported by a taxpayer does not so appeal, the decision of the
statement of facts, and the law and jurisprudence Court of Tax Appeals would become final and this
relied upon by the taxpayer. There is no need to has the effect of making the assessment also final
pay under protest. If the protest was not and collectible. The BIR could then use its
seasonably filed the assessment becomes final administrative and judicial remedies to collect the
and collectible and the Bureau of Internal tax.
Revenue could use its administrative and judicial
remedies in collecting the tax. 2. The word assessment when
g. Within sixty (60) days from filing of used in connection with taxation, may
the protest, all relevant supporting documents have more than one meaning. More
shall be submitted, otherwise the assessment commonly the word assessment means the
shall become final and collectible and the BIR official valuation of a taxpayers property for
could use its administrative and judicial remedies purpose of taxation. The above definition of
to collect the tax. assessment finds application under tariff and
Once an assessment has become final customs taxation as well as local government
and collectible, not even the BIR Commissioner taxation.
could change the same. Thus, the taxpayer could For real property taxation, there may be
not pay the tax, then apply for a refund, and if a special meaning to the burdens that are
denied appeal the same to the Court of Tax imposed upon real properties that have been
Appeals. benefited by a public works expenditure of a
local government. It is sometimes called a
 58
special assessment or a special levy. believe that the taxpayer had taxable income
(Commissioner of Internal Revenue v. Pascor Realty larger than that reported. Necessarily, this inquiry
and Development Corporation, et al., G.R. No. 128315, would have to be outside of the books because
June 29, 1999) they supported the return as filed. He may take
For internal revenue taxation the sworn testimony of the taxpayer, he may take
assessment as laying a tax. The ultimate the testimony of third parties; he may examine
purpose of an assessment to such a connection and subpoena, if necessary, traders and brokers
is to ascertain the amount that each taxpayer is to accounts and books and the taxpayers books of
pay. (Ibid.) accounts. The Commissioner is not bound to
follow any set of patterns. The existence of
3. An assessment is a notice unreported income may be shown by any
duly sent to the taxpayer which is deemed particular proof that is available in the
made only when the BIR releases, mails circumstances of the particular situation.
or sends such notice to the taxpayer. (Commissioner of Internal Revenue v. Hantex Trading
(Commissioner of Internal Revenue v. Pascor Realty Co., Inc. G. R. No. 136975, March 31, 2005)
and Development Corporation, et al., G.R. No. 128315,
June 29, 1999) 6. General rule: When the
Commissioner of Internal Revenue may
4. Self-assessed tax, defined. A rely on estimates. The rule is that in the
tax that the taxpayer himself assesses or absence of accounting records of a taxpayer, his
computes and pays to the taxing authority. It is a tax liability may be determined by estimation. The
tax that self-assessed by the taxpayer without the petitioner (Commissioner of Internal Revenue) is
intervention of an assessment by the tax authority not required to compute such tax liabilities with
to create the tax liability. mathematical exactness. Approximation in the
The Tax Code follows the pay-as-you-file calculation of taxes due is justified. To hold
system of taxation under which the taxpayer otherwise would be tantamount to holding that
computes his own tax liability, prepares the return, skillful concealment is an invincible barrier to
and pays the tax as he files the return. The pay- proof. (Commissioner of Internal Revenue v. Hantex
as-you-file system is a self-assessing tax return. Trading Co., Inc. G. R. No. 136975, March 31, 2005)
Internal revenue taxes are self-assessing. However, the rule does not apply where the
(Dissent of J. Carpio in Philippine National Oil estimation is arrived at arbitrarily and
Company v. Court of Appeals, et al., G. R. No. 109976, capriciously. (Ibid.)
April 26, 2005 and companion case)
A clear example of a self-assessed tax is
7. Meaning of "best evidence
the annual income tax, which the taxpayer himself
computes and pays without the intervention of obtainable" under Sec. 6 (B), NIRC of 1997.
any assessment by the BIR. The annual income This means that the original documents must
tax becomes due and payable without need of be produced. If it could not be produced,
any prior assessment by the BIR. The BIR may secondary evidence must be adduced. (Hantex
Trading Co., Inc. v. Commissioner of Internal Revenue,
or may not investigate or audit the annual income CA - G.R. SP No. 47172, September 30, 1998)
tax return filed by the taxpayer. The taxpayers
liability for the income tax does not depend on
8. The following are the general
whether or not the BIR conducts such subsequent
investigation or audit. methods developed by the Bureau of
However, if the taxing authority is first Internal Revenue for reconstructing a
required to investigate, and after such taxpayers income where the records do not
investigation to issue the tax assessment that show the true income or where no return was filed
creates the tax liability, then the tax is no longer or what was filed was a false and fraudulent
self-assessed. (Ibid.) return
(a) Percentage method;
5. Sec. 6 (B) of the NIRC of 1997 (b) Net worth method.;
(c) Bank deposit method;
allows the BIR to make or amend a tax
(d) Cash expenditure method;
return from his own knowledge or (e) Unit and value method;
obtained through testimony or otherwise. (f) Third party information or access to
Thus, the Commissioner of Internal Revenue records method;
investigates any circumstance which led him to
 59
(g) Surveillance and assessment withholding tax for a taxable period was
method. (Chapter XIII. Indirect Approach to determined to have carried over and
Investigation, Handbook on Audit Procedures and automatically applied the same amount claimed
Techniques Volume I, pp. 68-74) against the estimated tax liabilities for the taxable
quarter or quarters of the succeeding table year;
9. Third party information or or
access to records method. The BIR may d. When the excess tax due on excisable
require third parties, public or private to supply articles has not been paid; or
information to the BIR, and thus, obtain on a e. When an article locally purchased or
regular basis from any person other than the imported by an exempt person, such as, but not
person whose internal revenue tax liability is limited to vehicles, capital equipment,
subject to audit or investigation, or from any office machineries and spare parts, has been sold,
or officer of the national and local governments, trade or transferred to non-exempt persons. (Sec.
government agencies and instrumentalities 228, NIRC of 1997)
including the Bangko Sentral ng Pilipinas and
government-owned or controlled corporations, 12. Prescriptive periods for
any information such as, but not limited to, costs making assessments of internal revenue
and volume of production, receipts or sales and taxes.
gross incomes of taxpayers, and the names , a. Three (3) years from the last day
addresses, and financial statements of within which to file a return or when the return
corporations, mutual fund companies, insurance was actually filed, whichever is later (Sec. 203,
companies, regional operating headquarters or NIRC of 1997). The CIR has three (3) years from
multinational companies, joint accounts, the date of actual filing of the tax return to
associations, joint ventures or consortia and assess a national internal revenue tax or to
registered partnerships, and their members; xxx commence court proceedings for the collection
[Sec. 5 (B), NIRC of 1997) thereof without an assessment. [Bank of
Philippine Islands (Formerly Far East Bank and Trust
10. A pre-assessment notice is a Company) v. Commissioner of Internal Revenue, G.
letter sent by the Bureau of Internal Revenue to a R. No. 174942, March 7, 2008]
taxpayer asking him to explain within a period of b. ten years from discovery of the
fifteen (15) days from receipt why he should not failure to file the tax return or discovery of falsity
be the subject of an assessment notice. It is part or fraud in the return [Sec. 222 (a), NIRC of 1997 [ ;
of the due process rights of a taxpayer. or
As a general rule, the BIR could not issue c. within the period agreed upon
an assessment notice without first issuing a pre- between the government and the taxpayer where
assessment notice because it is part of the due there is a waiver of the prescriptive period for
process rights of a taxpayer to be given notice in assessment (Sec. 222 (b), NIRC of 1997).
the form of a pre-assessment notice, and for him
to explain why he should not be the subject of an 13. Purpose of period of limitations
assessment notice. in taxation. For the purpose of safeguarding
taxpayers from any unreasonable examination,
11. Instances where a pre- investigation or assessment, our tax law provides a
assessment notice is not required before statute of limitations in the collection of taxes.
[Commissioner of Internal Revenue v. B.F. Goodrich
a notice of assessment is sent to the Phils, Inc., (now Sime Darby International Tire Co., Inc.),
taxpayer. et al., G.R. No. 104171, February 24, 1999, 303 SCRA
a. When the finding for any deficiency tax 546; Philippine Journalists, Inc. v. Commissioner of
is the result of mathematical error in the Internal Revenue, G. R. No. 162852, December 16,
computation of the tax as appearing on the face 2004], as well as their assessments.
of the return; or The law prescribing a limitation of actions
b. When a discrepancy has been for the collection of the income tax is beneficial
determined between the tax withheld and the both to the Government and to its citizens; to the
amount actually remitted by the withholding Government because tax officers would be
agent; or obliged to act promptly in the making of
c. When a taxpayer opted to claim a assessment, and to citizens because after the
refund or tax credit of excess creditable lapse of the period of prescription citizens would
 60
have a feeling of security against unscrupulous December 16, 2004 citing Commissioner of Internal
tax agents who will always find an excuse to Revenue v. B.F. Goodrich Phils, Inc (now Sime Darby
inspect the books of taxpayers, not to determine International Tire Co., Inc.),., et al., G.R. No. 104171,
the latters real liability, but to take advantage of February 24, 1999, 303 SCRA 546]
every opportunity to molest peaceful, law-abiding The prescriptive period was precisely
citizens. Without such a legal defense taxpayers intended to give the taxpayers peace of mind.
(Commissioner of Internal Revenue v. B.F. Goodrich
would furthermore be under obligation to always Phils., Inc., et al., G.R. No. 104171, February 24,
keep their books and keep them open for 1999)
inspection subject to harassment by unscrupulous
tax agents. The law on prescription being a 15. A jeopardy assessment is a
remedial measure should be interpreted in a way delinquency tax assessment which was assessed
conducive to bringing about the beneficent without the benefit of complete or partial audit by
purpose of affording protection to the taxpayer an authorized revenue officer, who has reason to
within the contemplation of the Commission which believe that the assessment and collection of a
recommend the approval of the law. [Bank of deficiency tax will be jeopardized by delay
Philippine Islands (Formerly Far East Bank and Trust
Company) v. Commissioner of Internal Revenue, G. R.
because of the taxpayers failure to comply with
No. 174942, March 7, 2008] the audit and investigation requirements to
This mandate governs the question of present his books of accounts and/or pertinent
prescription of the governments right to assess records, or to substantiate all or any of the
internal revenue taxes primarily to safeguard the deductions, exemptions, or credits claimed in his
interests of taxpayers from unreasonable return. [Sec. 3.1 (a), Rev. Regs. No. 6-2000)
investigation. Accordingly, the government must Jeopardy assessment is an indication of
assess internal revenue taxes on time so as not the doubtful validity of the assessment, hence it
to extend indefinitely the period of assessment may be subject to a compromise. [Sec. 3.1 (a),
and deprive the taxpayer of the assurance that it Rev. Regs. No. 6-2000]
will no longer be subjected to further
investigation for taxes after the expiration of 16. Requisites for Formal Letter
reasonable period of time. (Commissioner of
of Demand and Assessment Notice. The
Internal Revenue v. FMF Development Corporation,
formal letter of demand and assessment notice
G. R. No. 167765, June 30, 2008 citing Philippine shall be issued by the Commissioner or his duly
Journalists, Inc. v. Commissioner of Internal Revenue authorized representative. The letter of demand
G.R. No. 162852, December 16, 2004, 447 SCRA calling for payment of the taxpayers deficiency
214, 225) tax or taxes shall state the facts, the law, rules
and regulations, or jurisprudence on which the
14. Unreasonable investigation assessment is based, otherwise, the formal letter
contemplates cases where the period for of demand and assessment notice shall be void.
assessment extends indefinitely because The same shall be sent to the taxpayer only by
this deprives the taxpayer of the assurance that it registered mail or by personal delivery.
will not longer be subjected to further investigation
for taxes after the expiration of a reasonable 17. What are the requirements for
period of time. (Philippine Journalists, Inc. v. the validity of a formal letter of demand
Commissioner of Internal Revenue, G. R. No. 162852, and assessment notice ?
December 16, 2004 with note to see Republic v.
Ablaza, 108 Phil. 1105. 1108)
SUGGESTED ANSWER:
Laws on prescription should be liberally a. There must have been previously
construed in favor of the taxpayer. Reason: for issued a pre-assessment notice until excepted;
the purpose of safeguarding taxpayers from an b. It must have been issued prior to the
unreasonable examination, investigation or prescriptive period; and
assessment, our tax laws provide a statute of c. The letter of demand calling for
limitation on the collection of taxes. Thus, the law payment of the taxpayers deficiency tax or taxes
on prescription, being a remedial measure, shall state the facts, the law, rules and
should be liberally construed in order to afford regulations, or jurisprudence on which the
such protection, As a corollary, the exceptions to assessment is based, otherwise, the formal letter
the law on prescription should perforce be strictly of demand and assessment notice shall be void.
(Sec. 3.1.4, Rev. Regs. No. 12-99)
construed. [Philippine Journalists, Inc. v.
Commissioner of Internal Revenue, G. R. No. 162852,
 61
18. What are the reasons for b. When the taxpayer requests for and
presumption of correctness of is granted a reinvestigation by the commissioner;
assessments ? c. When the taxpayer could not be
SUGGESTED ANSWER: located in the address given by him in the return
a. Lifeblood theory filed upon which the tax is being assessed or
b. Presumption of regularity collected;
(Commissioner of Internal Revenue v. Hantex Trading d. When the warrant of distraint and
Co., Inc., G, R. No. 136975, March 31, 2005) in the levy is duly served upon the taxpayer, his
performance of public functions. (Commissioner of authorized representative, or a member of his
Internal Revenue v. Tuazon, Inc., 173 SCRA 397) household with sufficient discretion, and no
c. The likelihood that the taxpayer will property could be located; and
have access to the relevant information e. When the taxpayer is out of the
[Commissioner of Internal Revenue, supra citing United Philippines.
States v. Rexach, 482 F.2d 10 (1973). The certiorari NOTES AND COMMENTS:
was denied by the United States Supreme Court on The holding in Commissioner of Internal
November 19, 1973] Revenue v. Court of Appeals, et al., G.R. No.
d. The desirability of bolstering the 115712, February 25, 1999 (Carnation case) that
record-keeping requirements of the NIRC. (Ibid.) the waiver of the period for assessment must be
in writing and have the written consent of the BIR
19. Give instances where prima Commissioner is still doctrinal because of the
facie correctness of a tax assessment provisions of Sec. 223, NIRC of 1997 which
does not apply. provides for the suspension of the prescriptive
SUGGESTED ANSWER: The prima facie period:
correctness of a tax assessment does not apply
upon proof that an assessment is utterly without
foundation, meaning it is arbitrary and capricious.
Where the BIR has come out with a naked 21. Under RMO No. 20-90, which
assessment i.e., without any foundation implements Sections 203 and 222 (b), the
character, the determination of the tax due is following procedures should be followed
without rational basis. [Commissioner of Internal for a valid waiver of the prescriptive
Revenue v. Hantex Trading Co., Inc., G, R. No. 136975,
March 31, 2005 citing United States v. Janis, 49 L. Ed.
period for an assessment:
2d 1046 (1976); 428 US 433 (1976)] In such a
a.
situation, the determination of the Commissioner The waiver must be in the proper form;
contained in a deficiency notice disappears. b. The waiver shall
[Commissioner of Internal Revenue, supra citing a U.S. be signed by the taxpayer himself or his duly
Court of Appeals ruling, in Clark and Clark v. authorized representative. In the case of a
Commissioner of Internal Revenue, 266 F. 2d 698 corporation, the waiver must be signed by any of
(1959)] Hence, the determination by the CTA its responsible officials.
must rest on all the evidence introduced and its Soon after the waiver is signed by the
ultimate determination must find support in taxpayer, the Commissioner of Internal Revenue
credible evidence. [Commissioner of Internal or the revenue official authorized by him, as
Revenue, supra] hereinafter provided, shall sign the waiver
indicating that the Bureau has accepted and
20. What are the instances that agreed to the waiver. The date of such
suspends the running of the prescriptive acceptance by the Bureau should be
periods (Statute of Limitations) within indicated. Both the date of execution by the
taxpayer and date of acceptance by the Bureau
which to make an assessment and the
should be before the expiration of the period of
beginning of distraint or levy or of a prescription or before the lapse of the period
proceeding in court for the collection, in agreed upon in case a subsequent agreement is
respect of any tax deficiencies? executed. c. The following
SUGGESTED ANSWER: revenue officials are authorized to sign the
a. When the Commissioner is waiver.
prohibited from making the assessment, or A. In
beginning distraint, or levy or proceeding in court the National Office
and for sixty (60) days thereafter;
 62
xxxx can be presumed, nor can it be contended that
3. the concurrence to such waiver is a mere
Commissioner formality. (Commissioner of Internal Revenue v. FMF
For tax cases Development Corporation, G. R. No. 167765, June
involving more than P1M B. 30, 2008 citing Philippine Journalists, Inc. v.
In the Regional Offices Commissioner of Internal Revenue G.R. No. 162852,
1. The December 16, 2004, 447 SCRA 214, 229 in turn citing
Id. at 229, citing Commissioner of Internal Revenue v.
Revenue District Officer with respect to tax Court of Appeals, G.R. No. 115712, February 25,
cases still pending investigation and the 1999, 303 SCRA 614, 620-622.)
period to assess is about to prescribe
regardless of amount.
23. BIR cannot rely on its
xxxx
d. The waiver invocation of the rule that the government
must be executed in three (3) copies, the cannot be estopped by the mistakes of its
original copy to be attached to the docket of the revenue officers in the enforcement of
case, the second copy for the taxpayer and RMO No. 20-90 because the law on prescription
the third copy for the Office accepting the waiver. should be interpreted in a way conducive to
The fact of receipt by the taxpayer of his/her bringing about the beneficent purpose of affording
file copy shall be indicated in the original protection to the taxpayer within the contemplation
copy. of the Commission which recommended the
d. The foregoing procedures shall approval of the law. To the Government, its tax
be strictly followed. Any revenue official found officers are obliged to act promptly in the making of
not to have complied with this Order resulting in assessment so that taxpayers, after the lapse of
prescription of the right to assess/collect shall be the period of prescription, would have a feeling of
administratively dealt with. (Renumbering and security against unscrupulous tax agents who will
emphasis supplied.) always try to find an excuse to inspect the books of
If the above are not followed there is no taxpayers, not to determine the latters real liability,
valid waiver and prescription would run. but to take advantage of a possible opportunity to
(Commissioner of Internal Revenue v. FMF harass even law-abiding businessmen. Without
Development Corporation, G. R. No. 167765, June such legal defense, taxpayers would be open
30, 2008 citing Philippine Journalists, Inc. v. season to harassment by unscrupulous tax agents.
Commissioner of Internal Revenue G.R. No. 162852, [Commissioner of Internal Revenue v. FMF
December 16, 2004, 447 SCRA 214, 228-229) Development Corporation, G. R. No. 167765, June
30, 2008 citing Republic of the Phils. v. Ablaza, 108
22. The procedures in RMO No. Phil. 1105, 1108 (1960)]
20-90 are NOT merely directory and that
the execution of a waiver is a 24. The signatures of both the
renunciation of a taxpayers right to Commissioner and the taxpayer, are
invoke prescription. RMO No. 20-90 must required for a waiver of the prescriptive
be strictly followed. A waiver of the statute of period, thus a unilateral waiver on the part of the
limitations under the NIRC, to a certain extent taxpayer does not suspend the prescriptive
being a derogation of the taxpayers right to period. [Commissioner of Internal Revenue v. Court of
security against prolonged and unscrupulous Appeals, et al., G.R. No. 115712, February 25, 1999
investigations, must be carefully and strictly (Carnation case)]
construed. The waiver of the statute of limitations
does not mean that the taxpayer relinquishes the 47. The act of requesting a
right to invoke prescription unequivocally, reinvestigation alone does not suspend
particularly where the language of the document the running of the prescriptive period.
is equivocal. The request for reinvestigation must be
Thus a waiver becomes unlimited in time, granted by the CIR. The Supreme Court
and invalid, because it did not specify a definite declared that the burden of proof that the
date, agreed upon between the BIR and the request for reinvestigation had been actually
taxpayer, within which the former may assess and granted shall be on the Commissioner of Internal
collect taxes. It also would have no binding effect Revenue. Such grant may be expressed in its
on the taxpayer if there was no consent by the communications with the taxpayer or implied
Commissioner. On this basis, no implied consent from the action of the Commissioner or his
 63
authorized representative in response to the reinvestigation which is granted by the
request for reinvestigation. [Bank of Philippine Commissioner (Sec. 223, NIRC of 1997), that
Islands (Formerly Far East Bank and Trust Company) suspends the running of the statute of limitations
v. Commissioner of Internal Revenue, G. R. No. for collection of the tax. (Commissioner of Internal
174942, March 7, 2008] Revenue v. Philippine Global Communication, Inc., G.
R. No. 167146, October 31, 2006 citing Sec. 271, now
PROTESTING INTERNAL REVENUE Sec. 223, NIRC of 1997) When a taxpayer
TAX ASSESSMENTS demands a reinvestigation, the time employed in
reinvestigation should be deducted from the total
1. What is the presumption that period of limitation. [Commissioner of Internal
Revenue, supra citing Republic v. Lopez, 117 Phil. 575,
flows from a taxpayers failure to protest 578; 7 SCRA 566, 568-569 (1963)]
an assessment ? Undoubtedly, a reinvestigation, which
SUGGESTED ANSWER: Tax entails the reception and evaluation of additional
assessments by tax examiners are presumed evidence, will take more time than a
correct and made in good faith. The taxpayer has reconsideration of a tax assessment which will be
the duty to prove otherwise. In the absence of limited to the evidence already at hand; this
proof of any irregularities in the performance of justifies why the former can suspend the running
duties, an assessment duly made by a Bureau of of the statute of limitations on collection of the
Internal Revenue examiner and approved by his assessed tax, while the latter cannot.
superior officers will not be disturbed. All (Commissioner of Internal Revenue v. Philippine Global
presumptions are in favor of the correctness of Communication, Inc., G. R. No. 167146, October 31,
tax assessments. (Commissioner of Internal 2006 citing Bank of Philippine Islands v. Commissioner
Revenue v. Bank of Philippine Islands., G, R. No. of Internal Revenue, G. R. No. 139736, 17 October
134062, April 17, 2007 citing Sy Po v. Court of Appeals, 2005, 473 SCRA 205, 230-231)
G. R. No. L-81446, 18 August 1988, 164 SCRA 524,
530, citations omitted)
4. What are the requirements for
the validity of a taxpayers protest ?
2. What are the two ways of SUGGESTED ANSWER:
protesting an assessment notice for an a. It must be filed within the
internal revenue tax ? Alternatively, what reglementary period of thirty (30) days from
are the two types of protests ? Explain receipt of the notice of assessment.
briefly. b. The taxpayer must not only show
SUGGESTED ANSWER: the errors of the Bureau of Internal Revenue but
a. Request for reconsideration which also the correct computation through
refers to a plea for re-evaluation of an 1) A statement of the facts, the
assessment on the basis of existing records applicable law, rules and regulations, or
without need of additional evidence. It may jurisprudence on which the taxpayers
involve both a question of fact or of law or both. protest is based,
b. Request for reinvestigation which 2) If there are several issues
refers to a plea for re-evaluation of an involved in the disputed assessment and
assessment on the basis of newly-discovered the taxpayer fails to state the facts, the
evidence or additional evidence that a taxpayer applicable law, rules and regulations, or
intends to present in the investigation. It may also jurisprudence in support of his protest
involve a question of fact or law or both. against some of the several issues on
(Commissioner of Internal Revenue v. Philippine Global which the assessment is based, the same
Communication, Inc., G. R. No. 167146, October 31, shall be considered undisputed issue or
2006 citing Rev. Regs. No. 12-85) issues, in which case, the taxpayer shall be
required to pay the corresponding
3. What is that type of protest deficiency tax or taxes attributable thereto.
that suspends the running of the statute (Sec. 3.1.5, Rev. Regs. 12-99)
of limitations for the beginning of distraint c. Within sixty (60) days from filing of
or levy or a proceeding in court for the protest, the taxpayer shall submit all relevant
supporting documents. [4th par., Sec. 228 (e), NIRC
collection ? Why ? of 1997]
SUGGESTED ANSWER: It is that type of
protest when the taxpayer requests for a
 64
5. Relevant supporting the CIRs final act regarding the request for
reconsideration. The very title expressly indicated
documents, defined. The term relevant
that it was a final notice prior to seizure of
supporting documents should be understood as
property. The letter itself clearly stated that the
those documents necessary to support the legal
taxpayer was being given this LAST
basis in disputing a tax assessment as
OPPORTUNITY to pay; otherwise, its properties
determined by the taxpayer. The BIR can only
would be subjected to distraint and levy.
inform the taxpayer to submit additional
documents.
The BIR cannot demand what type of 2. The taxpayer seasonably
supporting documents should be submitted. protested the assessment issued by the
Otherwise, a taxpayer will be at the mercy of the Commissioner of Internal Revenue.
BIR, which may require the production of During the pendency of the protest the
documents that a taxpayer cannot submit. CIR issued a warrant of distraint and levy
(Commissioner of Internal Revenue v. First Express to collect the taxes subject of the protest.
Pawnshop Company, Inc., G. R. 172045-46, June 16, As counsel what advice shall you
2009)
give the taxpayer. Explain briefly your
answer.
JUDICIAL REMEDIES INVOLVING
SUGGESTED ANSWER: The taxpayer
PROTESTED ASSESSMENTS should appeal, by way of a petition for review, to
the Court of Tax Appeals not on the ground of the
1. Acts of BIR Commissioner that denial of the protest but on other matter arising
may be considered as denial of a protest under the provisions of the National Internal
which serve as basis for appeal to the Revenue Code. The actual issuance of a warrant
Court of Tax Appeals. of distraint and levy in certain cases cannot be
a. Filing by the BIR of a civil suit for considered a final decision on a disputed
collection of the deficiency tax is considered a assessment.
denial of the request for reconsideration. To be a valid decision on a disputed
(Commissioner of Internal Revenue v. Union Shipping assessment, the decision of the Commissioner or
Corporation, 185 SCRA 547) his duly authorized representative shall (a) state
b. An indication to the taxpayer by the the facts, the applicable law, rules and
Commissioner in clear and unequivocal regulations, or jurisprudence on which such
language of his final denial not the issuance of decision is based, otherwise, the decision shall be
the warrant of distraint and levy. What is the void, in which case the same shall not be
subject of the appeal is the final decision not the considered a decision on the disputed
warrant of distraint. (Ibid.) assessment; and (b) that the same is his final
c. A BIR demand letter sent to the decision. (Sec. 3.1.6, Rev. Regs. 12-99) These
taxpayer after his protest of the assessment conditions are not complied with by the mere
notice is considered as the final decision of the issuance of a warrant of distraint and levy.
Commissioner on the protest. (Surigao Electric (Commissioner of Internal Revenue v. Union Shipping
Co., Inc. v. Court of Tax Appeals, et al., 57 SCRA 523) Corp., 185 SCRA 547)
d. A letter of the BIR Commissioner Furthermore, a motion for the suspension
reiterating to a taxpayer his previous demand to of the collection of the tax may be filed together
pay an assessment is considered a denial of the with the petition for review (Sec. 3, Rule 10, RRCTA
request for reconsideration or protest and is effective December 15, 2005) because the collection
appealable to the Court of Tax Appeals. of the tax may jeopardize the interest of the
(Commissioner v. Ayala Securities Corporation, 70 taxpayer.
SCRA 204)
e. Final notice before seizure 3. As a general rule, there must
considered as commissioners decision of always be a decision of the
taxpayers request for reconsideration who Commissioner of Internal Revenue or
received no other response. Commissioner of
Commissioner of Customs before the
Internal Revenue v. Isabela Cultural Corporation,
G.R. No. 135210, July 11, 2001 held that not only Court of Tax Appeals, would have
is the Notice the only response received: its jurisdiction. If there is no such decision, the
content and tenor supports the theory that it was petition would be dismissed for lack of jurisdiction
 65
unless the case falls under any of the following
exceptions. 1. General rule: Collection of
taxes is imprescriptible. While this may be
4. Instances where the Court of so, statutes may provide for periods of
Tax Appeals would have jurisdiction even prescription,
if there is no decision yet by the
Commissioner of Internal Revenue: 2. Why is the collection of taxes
a. Where the Commissioner has not imprescriptible ?
acted on the disputed assessment after a period SUGGESTED ANSWER:
of 180 days from submission of complete a. As a general rule, revenue laws are
supporting documents, the taxpayer has a period not intended to be liberally construed, and
of 30 days from the expiration of the 180 day exemptions are not given retroactive application,
period within which to appeal to the Court of Tax considering that taxes are the lifeblood of the
Appeals. (last par., Sec. 228 (e), NIRC of 1997; government and in Holmes memorable
Commissioner of Internal Revenue v. Isabela Cultural metaphor, the price we pay for civilization, tax
Corporation, G.R. No. 135210, July 11, 2001) laws must be faithfully and strictly implemented.
b. Where the Commissioner has not (Commissioner of Internal Revenue v. Acosta, etc.,G.
acted on an application for refund or credit and R. No. 154068, August 3, 2007) However, statutes
the two year period from the time of payment is may provide for prescriptive periods for the collection of
about to expire, the taxpayer has to file his appeal particular kinds of taxes.
with the Court of Tax Appeals before the b. Tax laws, unlike remedial laws, are
expiration of two years from the time the tax was not to be applied retroactively. Revenue laws are
paid. substantive laws and their application must not be
It is disheartening enough to a taxpayer equated with remedial laws. (Acosta, supra)
to be kept waiting for an indefinite period for the
ruling,. It would make matters more exasperating 3. What is the prescriptive period
for the taxpayer if the doors of justice would be for collecting internal revenue taxes ?
closed for such a relief until after the SUGGESTED ANSWER: There are four
Commissioner, would have, at his personal (4) prescriptive periods for the collection of an
convenience, given his go signal. (Commissioner internal revenue tax:
of Customs, et al, v. Court of Tax Appeals, et al., G.R. a. Collection upon a false or fraudulent
No. 82618, March 16, 1989, unrep.) return or no return without assessment. In case
of a false or fraudulent return with the intent to
5. The characteristic of a BIR evade tax or of failure to file a return, a
denial of a protest such as would enable proceeding in court for the collection of such tax
the taxpayer to appeal the same to the may be filed without assessment, at any time
Court of Tax Appeals. The Commissioner of within ten (10) years after the discovery of the
Internal Revenue should always indicate to the falsity, fraud or omission. [Sec. 222 (a), NIRC of
taxpayer in clear and unequivocal language 1997]
whenever his action on an assessment b. Collection upon a false or fraudulent
questioned by a taxpayer constitutes his final return or no return with assessment. Any internal
determination on the disputed assessment. revenue tax which has been assessed (because
On the basis of his statement indubitably the return is false or fraudulent with intent to
showing that the Commissioners communicated evade tax or of failure to fail a return), within a
action is his final decision on the contested period of ten (10) years from discovery of the
assessment, the aggrieved taxpayer would then falsity, fraud or omission may be collected by
be able to take recourse to the tax court at the distraint or levy or by a proceeding in court
opportune time. Without needless difficulty, the within five (5) years following the assessment
taxpayer would be able to determine when his of the tax. [Sec. 222 (c), in relation to Sec. 222 (a)
right to appeal to the tax court accrues. NIRC of 1997, emphasis supplied]
(Commissioner of Internal Revenue v. Bank of the c. Collection upon an extended
Philippines Islands, G. R. No. 134062, April 17, 2007) assessment. Where a tax has been assessed
with the period agreed upon between the
COLLECTION OF INTERNAL Commissioner and the taxpayer in writing (which
should initially be within three (3) years from the
REVENUE TAXES
time the return was filed or should have been
 66
filed), or any extensions before the expiration of A perusal of Sec. 222 of the NIRC is clear
the period agreed upon, the tax may be that it covers only three scenarios only. 1) No
collected by distraint or levy or by a assessment was made upon a false or fraudulent
proceeding in court within the period agreed return or omission to file a return; 2) an
upon in writing before the expiration of the assessment was made upon a false or fraudulent
five (5) year period. The period so agreed upon return or omission to file a return; and 3) an
may be extended by subsequent written extended assessment issued within a period
agreements made before the expiration of the agreed upon by the Commissioner and the
period previously agreed upon. [Sec. 222 (d), in taxpayer. The same scenarios are those referred
relation to Secs. 222 (b) and 203, NIRC of 1997, to in the former Sec. 269 which provided for a
emphasis supplied] prescriptive period for collection of three (3)
d. Collection upon a return that is not years.
false or fraudulent, or where the assessment is It is clear therefore that neither Sec. 222
not an extended assessment. Except as nor the former Sec. 269 provide for an instance
provided in Section 222, internal revenue taxes where the assessment was made upon a regular
shall be assessed within three (3) years after the return or one that is not false or fraudulent, or
last day prescribed by law for the filing of the that there was an agreement to extend the period
return, and no proceeding in court without for assessment.
assessment for the collection of such taxes Resort should therefore be made to the
shall be begun after the expiration of such three (3) year period referred to in Sec. 203 of the
period; Provided, That in case where a return is NIRC of 1997 which reads, Except as provided
filed beyond the period prescribed by law, the in Section 222, internal revenue taxes shall be
three (3) year period shall be computed from the assessed within three (3) years after the last day
day the return was filed. For purposes of this prescribed by law for the filing of the return, and
Section, a return filed before the last day no proceeding in court without assessment
prescribed by law for the filing thereof shall be for the collection of such taxes x x x
considered filed on such last day. (Sec. 203, NIRC (paraphrasing and emphasis supplied)
of 1997, emphasis supplied)
When the BIR validly issues an
assessment within the three (3)-year period, it 4. What is a compromise ?
has another three (3) years within which to SUGGESTED ANSWER: A compromise is
collect the tax due by distraint, levy, or court a contract whereby the parties, by making
proceeding. The assessment of the tax is reciprocal concessions, avoid a litigation or put an
deemed made and the three (3)-year period for end to one already commenced. (Art. 2028, Civil
collection of the assessed tax begins to run on Code)
the date the assessment notice had been A compromise penalty could not be
released, mailed or sent to the taxpayer. [Bank of imposed by the BIR, if the taxpayer did not agree.
Philippine Islands (Formerly Far East Bank and Trust A compromise being, by its nature, mutual in
Company) v. Commissioner of Internal Revenue, G. essence requires agreement. The payment made
R. No. 174942, March 7, 2008 citing BPI v. under protest could only signify that there was no
Commissioner of Internal Revenue, G.R. No. 139736, agreement that had effectively been reached
17 October 2005, 473 SCRA 205, 222-223] between the parties. (Vda. de San Agustin, et al., v.
NOTES AND COMMENTS: Commissioner of Internal Revenue, G. R. No. 138485,
a. Both the former Sec. 269, NIRC of September 10, 2001)
1977 and Sec.222 of NIRC of 1997 do not refer
to a regular return. It is clear that in enacting 5. What tax cases may be the
Sec. 222, entitled Exceptions as to the period of subject of a compromise ?
limitation of assessment and collection of taxes, SUGGESTED ANSWER: The following
the NIRC of 1997 has eliminated sub-paragraph c cases may, upon taxpayers compliance with the
of the former Sec. 269 of the NIRC, also entitled basis for compromise, be the subject matter of
Exceptions as to the period of limitation of compromise settlement:
assessment and collection of taxes. Said Sec. a. Delinquent accounts;
269 (c), reads Any internal revenue tax which b. Cases under administrative protest
has been assessed within the period of limitation after issuance of the Final Assessment Notice to
above-prescribed may be collected by distraint or the taxpayer which are still pending in the
levy or by a proceeding in court within three years Regional Offices, Revenue District Offices, Legal
following the assessment of the tax. Service, Large Taxpayer Service (LTS), Collection
 67
Service, Enforcement Service and other offices in tax provided that the minimum compromise
the National Office; entered into is equivalent to ten percent (10%) of
c. Civil tax cases being disputed before the basic assessed tax
the courts; In the above instances the Commissioner
d. Collection cases filed in courts; is allowed to enter into a compromise only if the
e. Criminal violations, other than those basic tax involved does not exceed One million
already filed in court, or those involving criminal pesos (P1,000,000.00), and the settlement
tax fraud. (Sec. 2, Rev. Regs. No. 30-2002) offered is not less than the prescribed
percentages. [Sec. 204 (A), NIRC of 1997]
6. What tax cases could not be the In instances where the Commissioner is
subject of compromise ? not authorized, the compromise shall be subject
SUGGESTED ANSWER: to the approval of the Evaluation Board
a. Withholding tax cases unless the composed of the Commissioner and the four (4)
applicant-taxpayer invokes provisions of law that Deputy Commissioners.
cast doubt on the taxpayers obligation to
withhold.; 8. When is the Commissioner of
b. Criminal tax fraud cases, confirmed as Internal Revenue authorized to abate or
such by the Commissioner of Internal Revenue or cancel a tax liability ?:
his duly authorized representative; SUGGESTED ANSWER:
c. Criminal violations already filed in a. The tax or any portion thereof appears
court; to be unjustly or excessively assessed; or
d. Delinquent accounts with duly b. The administration and collection costs
approved schedule of installment payments; involved do not justify the collection of the amount
e. Cases where final reports of due. [Sec. 204 (B), NIRC of 1997]
reinvestigation or reconsideration have been
issued resulting to reduction in the original 9. The collection of a tax may not
assessment and the taxpayer is agreeable to be suspended. Only the Court of Tax Appeals
such decision by signing the required agreement may issue an order suspending the collection of a
form for the purpose. On the other hand, other tax.
protested cases shall be handled by the Regional
Evaluation Board (REB) or the National
10. As a general rule, No court
Evaluation Board (NEB) on a case to case basis;
f. Cases which become final and shall have the authority to grant an
executory after final judgment of a court where injunction to restrain the collection of any
compromise is requested on the ground of national internal revenue tax, fee or
doubtful validity of the assessment; and charge. (Sec. 218, NIRC)
g. Estate tax cases where compromise No appeal taken to the CTA from the
is requested on the ground of financial incapacity decision of the Commissioner of Internal Revenue
of the taxpayer. (Sec. 2, Rev. Regs. No. 30-2002) or the Commissioner of Customs or the Regional
Trial Court, provincial, city or municipal treasurer
7. When may the Commissioner of or the Secretary of Finance, the Secretary of
Internal Revenue compromise the Trade and Industry and Secretary of Agriculture,
payment of any internal revenue tax ? as the case may be shall suspend the payment,
levy, distraint, and/or sale of any property of the
Alternatively, what are the grounds for a
taxpayer for the satisfaction of his tax liability as
compromise, and what are the amounts provided by existing law: Provided, however, That
for which a compromise may be entered when in the opinion of the Court the collection by
into ? the aforementioned government agencies may
SUGGESTED ANSWER: jeopardize the interest of the Government and/or
a. A reasonable doubt as to the validity the taxpayer the Court at any stage of the
of the claim against the taxpayer exists provided proceeding may suspend the said collection and
that the minimum compromise entered into is require the taxpayer either to deposit the amount
equivalent to forty percent (40%) of the basic tax; claimed or to file a surety bond for not more than
or double the amount with the Court. (Sec. 11, Rep.
b. The financial position of the taxpayer Act No. 1125, as amended by Sec. 9, Rep. Act No.
demonstrates a clear inability to pay the assessed 9282 )
 68
The Supreme Court may enjoin the b. It is shown on the return of the
collection of taxes under its general judicial power recipient that the income payment received was
but it should be apparent that the source of the declared as part of the gross income; and
power is not statutory but constitutional. c. The fact of withholding is
established by a copy of a statement duly issued
11. What is the procedure for by the payee showing the amount paid and the
suspension of collection of taxes ? amount of tax withheld therefrom. (Banco Filipino
SUGGESTED ANSWER: Where the Savings and Mortgage Bank v. Court of Appeals, et al.,
G. R. No. 155682, March 27, 2007)
collection of the amount of the taxpayers liability,
NOTES AND COMMENTS:
sought by means of a demand for payment, by
a. Proof of fact of withholding. Sec.
levy, distraint or sale of property of the taxpayer,
10. Claim for tax credit or refund. (a) Claims
or by whatever means, as provided under
for Tax Credit or Refund of Income tax deducted
existing laws, may jeopardize the interest of the
and withheld on income payments shall be given
government or the taxpayer, an interested party
due course only when it is shown on the return
may file a motion for the suspension of the
that the income payment received has been
collection of the tax liability (Sec. 1, Rule 10,
declared as part of the gross income and the fact
RRCTA effective December 15, 2005) with the Court
of withholding is established by a copy of the
of Tax Appeals.
Withholding Tax Statement duly issued by the
The motion for suspension of the
payor to the payee showing the amount paid and
collection of the tax may be filed together with
the amount of the tax withheld therefrom xxx
the petition for review or with the answer, or in a
(Rev. Regs. No. 6-85, as amended)
separate motion filed by the interested party at
The document which may be accepted as
any stage of the proceedings. (Sec. 3, Rule 10,
RRCTA effective December 15, 2005)
evidence of the third condition, that is, the fact of
withholding, must emanate from the payor itself,
and not merely from the payee, and must indicate
REFUND OF INTERNAL REVENUE the name of the payor, the income payment basis
TAXES of the tax withheld, the amount of the tax withheld
and the nature of the tax paid. (Banco Filipino
1. What are the grounds for Savings and Mortgage Bank v. Court of Appeals, et al.,
G. R. No. 155682, March 27, 2007)
refund or credit of internal revenue
taxes ?
3. What should be established by
SUGGESTED ANSWER: The grounds for
a taxpayer for the grant of a tax refund ?
refund or credit or internal revenue taxes are the
following: Why ?
a. The tax was illegally collected. SUGGESTED ANSWER: A taxpayer
There is no law that authorizes the collection of needs to establish not only that the refund is
the tax. justified under the law, but also the correct
b. The tax was excessively collected. amount that should be refunded.
There is a law that authorizes the collection of a If the latter requisite cannot be ascertained
tax but the tax collected was more than what the with particularity, there is cause to deny the
law allows. refund, or allow it only to the extent of the sum
c. The tax was paid through a that is actually proven as due.
mistaken belief that the taxpayer should pay the Tax refunds partake of the nature of tax
tax (solution indebeti) exemptions and are thus construed strictissimi
juris against the person claiming the exemption.
The burden in proving the claim for refund
2. What are the three (3) necessarily falls on the taxpayer. (Far East Bank
conditions for the grant of a claim for Trust and Company, etc., v. Commissioner of Internal
refund of creditable withholding tax ? Revenue, et al., G. R. No. 138919, May 2, 2006)
SUGGESTED ANSWER:
a. The claim is filed with the 4. What is The legal remedy
Commissioner of Internal Revenue within the two- under the NIRC of 1997 at the judicial
year period from the date of the payment of the level with respect to refund or recovery of
tax. tax erroneously or illegally collected ?
 69
SUGGESTED ANSWER: Filing of a suit or 89 SCRA 586 (1979)]. It is an ancient principle
proceeding with the Court of Tax Appeals that no one, not even the state, shall enrich
a. before the expiration of two (2) years oneself at the expense of another. Indeed,
from the date of payment of the tax regardless of simple justice requires the speedy refund of the
any supervening cause that may arise after wrongly held taxes. (Ibid.)
payment (2nd par., Sec. 229, NIRC of 1997), or
b. within thirty (30) days from receipt of
the denial by the Commissioner of the application
for refund or credit. (Sec. 11, R.A. No. 1125)

5. The two (2) year period and

the thirty (30) day period should be 56. What are the reasons for
applied on a whichever comes first basis. requiring the filing of an administrative
Thus, if the 30 days is within the 2 years, the 30 application for refund or credit with the
days applies, if the 2 year period is about to lapse
but there is no decision yet by the Commissioner BSUGGESTED 8.
which would trigger the 30-day period, the Why is it necessary to file an
taxpayer should file an appeal, despite the administrative claim for refund with the
absence of a decision. (Commissioners, etc. v. BIR, before filing a case with the Court of
Court of Tax Appeals, et al., G. R. No. 82618, March Tax Appeals ?
16, 1989, unrep.)

6. Where the taxpayer is a

corporation the two year prescriptive
period from date of payment for refund
of income taxes should be the date when
the corporation filed its final adjustment
return not on the date when the taxes were paid
on a quarterly basis. (Philippine Bank of
Communications v. Commissioner of Internal Revenue,
et al., G.R. No. 112024, January 28, 1999)
It is only when the return, covering the
whole year, is filed that the taxpayer will be able
to ascertain whether a tax is still due or refund a. a.
can be claimed based on the adjusted and To afford the Commissioner an
audited figures. (Bank of the Philippine Islands v. opportunity to correct his errors or that of
Commissioner of Internal Revenue, G.R. No. 144653, subordinate officers. (Gonzales v. Court of Tax
August 28, 2001) Appeals, et al., 14 SCRA79)

7. What is solutio indebeti as

applied to tax cases ?
SUGGESTED ANSWER: Under the
principle of solutio indebiti provided in Art. 2154,
Civil Code, If something is received when there
is no right to demand it, and it was unduly
delivered through mistake, the obligation to
return it arises. The BIR received something
when there [was] no right to demand it, and
thus, it has the obligation to return it. [State
Land Investment Corporation v. Commissioner
of Internal Revenue, G. R. No. 171956, January
18, 2008citing Citibank, N. A. v. Court of Appeals
b. To notify the Government that such
and Commissioner of Internal Revenue, G.R.
taxes have been questioned and the notice
No. 107434, October 10, 1997, 280 SCRA 459,
should be borne in mind in estimating the revenue
in turn citing Ramie Textiles, Inc. v. Mathay, Sr.,
 70
available for expenditures.

SUGGESTED ANSWER: Yes. The failure to first

file a written claim for refund or credit is not fatal
to a petition for review involving a disputed
assessment where an assessment was disputed
but the protest was

denied by the Bureau of Internal

Revenue. To hold that the taxpayer has now lost
the right to appeal from the ruling on the disputed
assessment and require him to file a claim for a
refund of the taxes paid as a condition precedent
to his right to appeal, would in effect require of
him to go through a useless and needless
ceremony that would only delay the disposition of
the case, for the Commissioner would certainly
disallow the claim for refund in the same way as
he disallowed the protest against the assessment.
The law, should not be interpreted as to result in
absurdities. (vda. de San Agustin., etc., v.
Commissioner of Internal Revenue, G.R. No. 138485,
September 10, 2001 citing Roman Catholic Archbishop
of Cebu v. Collector of Internal Revenue, 4 SCRA 279)
9. As a general rule the filing of NOTE: Reconciliation between above two
an application for refund or credit with the numbers (8 and 9). An application for refund or
Bureau of Internal Revenue is an credit under Sec. 229 of the NIRC of 1997 is
administrative precondition before a suit required where the case filed before the CTA is a
may be filed with the Court of Tax Appeals refund case, which is not premised upon a
? disputed assessment. There is no need for a
prior application for refund or credit, if the refund
is merely a consequence of the resolution of the
BIRs denial of a protested assessment.

SUGGESTED ANSWER:
 71
Who could apply for a tax refund 12. What is the irrevocability
or credit ? rule in claims for refund and what is the
rationale behind this ?
SUGGESTED ANSWER: A corporation
entitled to a tax credit or refund of the excess
10. Who could apply for a refund estimated quarterly income taxes paid has two
or credit ? options: (1) to carry over the excess credit or (2)
SUGGESTED ANSWER: The person to apply for the issuance of a tax credit certificate
who paid the tax may apply for a refund or credit. or to claim a cash refund. If the option to carry
A withholding tax agent may also apply over the excess credit is exercised, the same
for a refund. In a sense, he is also a taxpayer shall be irrevocable for that taxable period.
because the tax may be collected from him if he In exercising its option, the corporation
does not withhold. must signify in its annual corporate adjustment
return (by marking the option box provided in the
11. What is the nature of the BIR form) its intention either to carry over the
taxpayers remedy of either to ask for a excess credit or to claim a refund. To facilitate
refund of excess tax payments or to apply tax collection, these remedies are in the
the same in payment of succeeding alternative and the choice of one precludes the
other. [Systra Philippines, Inc., v. Commissioner of
taxable periods taxes ? Internal Revenue, G. R. No. 176290, September 21,
SUGGESTED ANSWER: Sec. 69 of the 2007 citing Philippine Bank of Communications v.
1977 NIRC (now Sec. 76 of the NIRC of 1997) Commissioner of Internal Revenue, 361 Phil. 916
provides that any excess of the total quarterly (1999)]
payments over the actual income tax computed in This is known as the irrevocability rule
the adjustment or final corporate income tax and is embodied in the last sentence of Section
return, shall either (a) be refunded to the 76 of the Tax Code. The phrase such option
corporation, or (b) may be credited against the shall be considered irrevocable for that taxable
estimated quarterly income tax liabilities for the period means that the option to carry over the
quarters of the succeeding taxable year. To ease excess tax credits of a particular taxable year
the administration of tax collection, these can no longer be revoked.
remedies are in the alternative and the choice of The rule prevents a taxpayer from
one precludes the other. Since the Bank has claiming twice the excess quarterly taxes paid:
chosen the tax credit approach it cannot anymore (1) as automatic credit against taxes for the
avail of the tax refund. (Philippine Bank of taxable quarters of the succeeding years for
Communications v. Commissioner of Internal which no tax credit certificate has been issued
Revenue, et al., G.R. No. 112024, January 28, and (2) as a tax credit either for which a tax
1999) credit certificate will be issued or which will be
NOTES AND COMMENTS: claimed for cash refund. (Systra Philippines, Inc.,
a. The choice, is given to the supra citing De Leon, Hector, THE NATIONAL
taxpayer, whether to claim for refund under INTERNAL REVENUE CODE, Seventh Edition, 2000,
Sec. 76 or have its excess taxes applied as tax p. 430)
credit for the succeeding taxable year, such
election is not final. Prior verification and 13. In the year 2000 Systra
approval by the Commissioner of Internal derived excess tax credits and exercised
Revenue is required. The availment of the the option to carry them over as tax
remedy of tax credit is not absolute and credits for the next taxable year.
mandatory. It does not confer an absolute right However, the tax due for the next taxable
on the part of the taxpayer to avail of the tax year is lower than excess tax credits. It
credit scheme if it so chooses. Neither does it
now applies for a refund of the unapplied
impose a duty on the part of the government to sit
back and allow an important facet of tax collection tax credits. May its refund be granted ?
to be at the sole control and discretion of the If the refund is denied, does Systra lose
taxpayer. (Paseo Realty & Development the unapplied tax credits ? Explain
Corporation v. Court of Appeals, et al., G. R. No. briefly your answer.
119286, October 13, 2004) SUGGESTED ANSWER: Systras claim
for refund should be denied. Once the carry
 72
over option was made, actually or constructively, c. The law fixed the same period two
it became forever irrevocable regardless of years for filing a claim for refund with the
whether the excess tax credits were actually or Commissioner under Sec. 204, par. 3, NIRC (now
fully utilized Under Section 76 of the Tax Code, a Sec. 204 [C], NIRC of 1997), and for filing suit in
claim for refund of such excess credits can no court under Sec. 230, NIRC (now Sec. 229, NIRC
longer be made. The excess credits will only be of 1997), unlike in protests of assessments under
applied against income tax due for the taxable Sec. 229 (now Sec. 228, NIRC of 1997), which
quarters of the succeeding taxable years. fixed the period (thirty days from receipt of
Despite the denial of its claim for refund, decision) for appealing to the court, thus clearly
Systra does not lose the unapplied tax credits. implying that the prior decision of the
The amount will not be forfeited in favor of the Commissioner is necessary to take cognizance of
government but will remain in the taxpayers the case. (Commissioner of Internal Revenue v. Bank
account. Petitioner may claim and carry it over in of Philippine Islands, etc. et al., CA-G.R. SP No. 34102,
the succeeding taxable years, creditable against September 9, 1994; Gibbs v. Collector of Internal
future income tax liabilities until fully utilized. Revenue, et al., 107 Phil, 232; Johnston Lumber Co. v.
(Systra Philippines, Inc., v. Commissioner of Internal CTA, 101 Phil. 151)
Revenue, G. R. No. 176290, September 21, 2007
citing Philam Asset Management, Inc. v. 15. The grant of a refund is
Commissioner of Internal Revenue, G.R. Nos. founded on the assumption that the tax
156637/162004, 14 December 2005, 477 SCRA 761) return is valid, i.e. that the facts stated therein
Supposing in the above problem that are true and correct. (Commissioner of Internal
Systra permanent ceased operations, what Revenue v. Court of Tax Appeals, G. R. No.
happens to the unapplied credits ? 106611, July 21, 1994, 234 SCRA 348) Without
SUGGESTED ANSWER: Where, the the tax return it would be virtually impossible to
corporation permanently ceases its operations determine whether the proper taxes have been
before full utilization of the tax credits it opted to assessed and paid. After all, it is axiomatic that a
carry over, it may then be allowed to claim the claimant has the burden of proof to establish the
refund of the remaining tax credits. In such a factual basis of his or her claim for tax credit or
case, the remaining tax credits can no longer be refund. Tax refunds, like tax exemptions, are
carried over and the irrevocability rule ceases to construed strictly against the taxpayer. (Paseo
apply. Cessante ratione legis, cessat ipse lex. Realty & Development Corporation v. Court of Appeals,
(Footnote no. 23, Systra Philippines, Inc., v. et al., G. R. No. 119286, October 13, 2004)
Commissioner of Internal Revenue, G. R. No. However, in BPI-Family Savings Bank v.
176290, September 21, 2007) Court of Appeals, 386 Phil. 719; 326 SCRA 641
NOTES AND COMMENTS: The holding (2000), refund was granted, despite the failure to
in State Land Investment Corporation v. present the tax return, because other evidence
Commissioner of Internal Revenue, G. R. No. was presented to prove that the overpaid taxes
171956, January 18, 2008 that the taxpayer is were not applied. (Ibid.)
entitled to a refund because during the
succeeding year there was no tax due against 16. Discuss the difference between
which the excess tax credits may be applied is tax refund and tax credit..
not doctrinal. This is so because it interpreted SUGGESTED ANSWER: There are
the provisions of then Sec. 69 of the NIRC, unmistakable formal and practical differences
which did not provide for the irrevocability rule between the two modes. Formally, a tax refund
now contained in Sec. 76 of the NIRC of 1997. requires a physical return of the sum erroneously
paid by the taxpayer, while a tax credit involves
14. A simultaneous filing of the the application of the reimbursable amount
application with the BIR for refund/credit against any sum that may be due and collectible
and the institution of the court suit with from the taxpayer.
the CTA is allowed. There is no need to wait On the practical side, the taxpayer to whom
for a BIR denial. REASONS: the tax is refunded would have the option, among
a. The positive requirement of Section others, to invest for profit the returned sum, an
230 NIRC (now Sec. 229, NIRC of 1997); option not proximately available if the taxpayer
b. The doctrine that delay of the chooses instead to receive a tax credit.
Commissioner in rendering decision does not (Commissioner of Customs v. Philippine Phosphate
extend the peremptory period fixed by the statute;
 73
Fertilizer Corporation, G. R. No. 144440, September 1, correctness of the summary listing and
2004) the CPA certification. CTA Circular No. 1-95,
NOTES AND COMMENTS: It may be that issued on 25 January 1995, reads:
there is no essential difference between a tax 1. The party who desires to introduce
refund and a tax credit since both are moves of as evidence such voluminous documents must
recovering taxes erroneously or illegally paid to present: (a) Summary containing the total
the government. (Commissioner of Customs v. amount/s of the tax account or tax paid for the
Philippine Phosphate Fertilizer Corporation, G. R. No.
144440, September 1, 2004)
period involved and a chronological or numerical
list of the numbers, dates and amounts covered
by the invoices or receipts; and (b) a Certification
17. A bank-trustee of employee
of an independent Certified Public Accountant
trusts filed an application for the refund attesting to the correctness of the contents of the
of taxes withheld on the interest incomes summary after making an examination and
of the investments made of the funds of evaluation of the voluminous receipts and
the employees trusts. Instead of invoices. Such summary and certification must
presenting separate accounts for interest properly be identified by a competent witness
incomes made of these investments, the from the accounting firm.
bank-trustee instead presented witness 2. The method of individual presentation
to establish that it would next to of each and every receipt or invoice or other
impossible to single out the specific documents for marking, identification and
comparison with the originals thereof need not
transactions involving the employees
be done before the Court or the Commissioner
trust funds from the totality of all interest anymore after the introduction of the summary
income from its total investments. On and CPA certification. It is enough that the
the above basis will the application for receipts, invoices and other documents
refund prosper ? covering the said accounts or payments
SUGGESTED ANSWER: No. The must be pre-marked by the party concerned
application for refund will not prosper. and submitted to the Court in order to be
The bank-trustee needs to establish not made accessible to the adverse party
only that the refund is justified under the law whenever he/she desires to check and verify
(which is so because incomes of employees the correctness of the summary and CPA
trusts are tax exempt), but also the correct certification. However, the originals of the said
amount that should be refunded. receipts, invoices or documents should be ready
Tax refunds partake of the nature of tax for verification and comparison in case doubt on
exemptions and are thus construed strictissimi the authenticity of the particular documents
juris against the person or entity claiming the presented is raised during the hearing of the
exemption. The burden in proving the amount to case. (Emphasis supplied)
be refunded necessarily falls on the bank-
trustee, and there is an apparent failure to do so. 19. Manila Electric Company a
A necessary consequence of the special grantee of a legislative franchise under
exemption enjoyed alone by employees trusts Act No. 484, as amended by Republic Act
would be a necessary segregation in the
No. 4159 and Presidential Decree No.
accounting of such income, interest or otherwise,
earned from those trusts from that earned by the 551,1[3] had been paying a 2% franchise
other clients of the bank-trustee. (Far East tax based on its gross receipts, in lieu of
Bank and Trust Company, etc., v. Commissioner, all other taxes and assessments of
etc., et al., G.R. No. 138919, May 2, 2006) The whatever nature. Upon the effectivity of
amounts that are the exempt earnings of the Executive Order No. 72 on February 10,
employees trust has not been shown as they 1987, however, respondent became
have been commingled with the interest income subject to the payment of regular
of the other clients of the bank-trustee. corporate income tax.
For the last quarter ending
18. CTA Circular No. 1-95 clearly December 31, 1987, respondent filed on
requires that photocopies of the receipts April 15, 1988 its tentative income tax
or invoices must be pre-marked and
submitted to the CTA to verify the 1
 74
reflecting a refundable amount of consist mainly of checking mathematical
P101,897,741, but only P77,931,812 was accuracy of the figures in the return. After such
applied as tax credit for the succeeding checking, the purpose of which being to insure
taxable year 1988. prompt action on corporate annual income tax
returns showing refundable amounts arising from
Acting on a yearly routinary Letter
overpaid quarterly income taxes, (Revenue
of Authority No. 0018064 NA dated June Memorandum Order No. 32-76 dated June 11,
27, 1988 issued by petitioner, directing 1976) the refund or tax credit is granted.
the investigation of tax liabilities of (Commissioner of Internal Revenue v. Manila
respondent for taxable year 1987, an Electric Company, G. R. No. 121666, October
investigation was conducted by Revenue 10, 2007)
Officer Frederick Capitan which showed
that respondent was liable for 1.
deficiency income tax in the amount of
TARIFF AND CUSTOMS LAWS
P2,340,902.52; and 2. deficiency
ORGANIZATION AND FUNCTIONS OF
franchise tax in the amount of
P2,838,335.84. THE BUREAU OF INTERNAL
On April 17, 1989, respondent filed REVENUE
an amended final corporate Income Tax
Return ending December 31, 1988 TARIFF AND CUSTOMS CODE
reflecting a refundable amount of
P107,649,729. 1. When does importation begin,
Respondent thus filed on March 30, and why is it important to know whether
1990 a letter-claim for refund or credit in importation has already begun or not ?
the amount of P107,649,729 representing SUGGESTED ANSWER: Importation
overpaid income taxes for the years 1987 begins when the conveying vessel or aircraft
and 1988. enters the jurisdiction of the Philippines with
intention to unlade therein. (Sec. 1202, TCCP)
Petitioner not having acted on its
The jurisdiction of the Bureau of Customs
request, respondent filed on April 6, 1990 to enforce the provisions of the TCCP including
a judicial claim for refund or credit with seizure and forfeiture also begins from the
the Court of Tax Appeals. beginning of importation. Thus, the Bureau of
It is gathered that respondent paid Customs obtains jurisdiction over imported
the deficiency franchise tax in the articles only after importation has begun.
amount of P2,838,335.84. It protested the
payment of the alleged deficiency 2. When is importation deemed
income tax and claimed as an alternative terminated and why is it important to
remedy the deduction thereof from its know whether importation has already
claim for refund or credit. ended?
The Court of Tax Appeals granted SUGGESTED ANSWER: Importation is
the P107,649,729 claim for refund, or in deemed terminated upon payment of the duties,
the alternative for the BIR to issue a tax taxes and other charges due upon the agencies,
credit. Is the Court of Tax Appeals or secured to be paid, at the port of entry and the
correct ? legal permit for withdrawal shall have been
SUGGESTED ANSWER: Yes. Section granted.
69 of the National Internal Revenue Code of In case the articles are free of duties, taxes
1986, now Sec. 76 provides, if the sum of the and other charges, until they have legally left the
quarterly tax payments made during a taxable jurisdiction of the customs. (Sec. 1202, TCCP)
year is not equal to the total tax due on the entire The Bureau of Customs loses jurisdiction to
taxable income of that year as shown in its final enforce the TCCP and to make seizures and
adjustment return, the corporation has the option forfeitures after importation is deemed terminated.
to either: (a) pay the excess tax still due, or (b)
be refunded the excess amount paid. The 3. The flexible tariff clause is a
returns submitted are merely pre-audited which provision in the Tariff and Customs Code,
 75
which implements the constitutionally delegated SUGGESTED ANSWER: The anti-
power to the Congress to further delegate to the dumping duty is imposed
President of the Philippines, in the interest of a. Where a product, commodity or article
national economy, general welfare and/or national of commerce is exported into the Philippines at a
security upon recommendation of the NEDA (a) price less than its normal value when destined for
to increase, reduce or remove existing protective domestic consumption in the exporting country,
rates of import duty, provided that, the increase b. and such exportation is causing or is
should not be higher than 100% ad valorem; (b) threatening to cause material injury to a domestic
to establish import quota or to ban imports of any industry, or materially retards the establishment of
commodity, and (c) to impose additional duty on a domestic industry producing the like product.
all imports not exceeding 10% ad valorem, [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752,
among others. Anti-Dumping Act of 1999]

4. Customs duties defined. 9. Normal value for purposes of

Customs duties is the name given to taxes on the imposing the anti-dumping duty is the
importation and exportation of commodities, the comparable price at the date of sale of like
tariff or tax assessed upon merchandise imported product, commodity, or article in the ordinary
from, or exported to, a foreign country. (Nestle course of trade when destined for consumption in
Phils. v. Court of Appeals, et al., G.R. No. 134114, the country of export. [Sec. 301 (s) (3 ), TCC, as
July 6, 2001) amended by Rep. Act No. 8752, Anti-Dumping
Act of 1999]
5. Special customs duties are
additional import duties imposed on 10. The imposing authority for the
specific kinds of imported articles under anti-dumping duty is the Secretary of
certain conditions. The special customs Trade and Industry in the case of non-
duties under the Tariff and Customs Code (TCCP) agricultural product, commodity, or article
are the anti-dumping duty, the countervailing duty, or the Secretary of Agriculture, in the
the discriminatory duty, and the marking duty, and case of agricultural product, commodity
under the Safeguard Measures Act (SMA) or article, after formal investigation and
additional tariffs as safeguard measures. affirmative finding of the Tariff Commission. [Sec.
301 (a), TCC, as amended by Rep. Act No. 8752, Anti-
6. The special customs duties are Dumping Act of 1999]
imposed for the protection of consumers
and manufacturers, as well as Philippine 11. Even when all the
products. requirements for the imposition have
been fulfilled, the decision on whether or
7. Dumping duty is an additional not to impose a definitive anti-dumping
special duty amounting to the difference duty remains the prerogative of the Tariff
between the export price and the normal Commission. [Sec. 301 (a), TCC, as amended by
value of such product, commodity or Rep. Act No. 8752, Anti-Dumping Act of 1999] Thus,
article (Sec. 301 (s) (1), TCC, as amended by Rep. the cabinet secretaries could not contravene the
Act No. 8752, Anti-Dumping Act of 1999.) imposed recommendation of the Tariff Commission. They
on the importation of a product, commodity or could not impose the anti-dumping duty or any
article of commerce into the Philippines at less special customs duty without the favorable
than its normal value when destined for domestic recommendation of the Tariff Commission.
consumption in the exporting country which is
causing or is threatening to cause material injury 12. In the determination of whether
to a domestic industry, or materially retarding the to impose the anti-dumping duty, the
establishment of a domestic industry producing Tariff Commission, may consider among
the like product. [Sec. 301 (s) (5), TCC, as amended others, the effect of imposing an anti-
by Rep. Act No. 8752, Anti-Dumping Act of 1999] dumping duty on the welfare of the
consumers and/or the general public, and
8. When is the anti-dumping duty other related local industries. (Sec. 301 (a),
imposed ?
 76
TCC, as amended by Rep. Act No. 8752, Anti-
17. Marking duties are the additional
Dumping Act of 1999)
customs duties imposed on foreign articles (or its
containers if the article itself cannot be marked),
13. The amount of anti-dumping
not marked in any official language in the
duty that may be imposed is the Philippines, in a conspicuous place as legibly,
difference between the export price and indelibly and permanently in such manner as to
the normal value of such product, indicate to an ultimate purchaser in the
commodity or article. (Sec. 301 (s) (1), TCC, as Philippines the name of the country of origin.
amended by Rep. Act No. 8752, Anti-Dumping Act of
1999) 18. The Commissioner of Customs
The anti-dumping duty shall be equal to the
imposes the marking duty.
margin of dumping on such product, commodity
or article thereafter imported to the Philippines
under similar circumstances, in addition to 19. The marking duty is equivalent
ordinary duties, taxes and charges imposed by to five percent (5%) ad valorem.
law on the imported product, commodity or article.
20. A discriminatory duty is a new
14. What are countervailing duties and additional customs duty imposed upon
and when are they imposed ? articles wholly or in part the growth or product of,
SUGGESTED ANSWER: Countervailing or imported in a vessel, of any foreign country
duties are additional customs duties imposed on which imposes, directly or indirectly, upon the
any product, commodity or article of commerce disposition or transportation in transit through or
which is granted directly or indirectly by the re-exportation from such country of any article
government in the country of origin or exportation, wholly or in part the growth or product of the
any kind or form of specific subsidy upon the Philippines, any unreasonable charge, exaction,
production, manufacture or exportation of such regulation or limitation which is not equally
product commodity or article, and the importation enforced upon like articles of every foreign
of such subsidized product, commodity, or article country, or discriminates against the commerce of
has caused or threatens to cause material injury the Philippines, directly or indirectly, by law or
to a domestic industry or has materially retarded administrative regulation or practice, by or in
the growth or prevents the establishment of a respect to any customs, tonnage, or port duty,
domestic industry. (Sec. 302, TCCP as amended fee, charge, exaction, classification, regulation,
by Section 1, R.A. No. 8751) condition, restriction or prohibition, in such
manner as to place the commerce of the
15. The imposing authority for the Philippines at a disadvantage compared with the
countervailing duties is the Secretary of commerce of any foreign country.
Trade and Industry in the case of non-
agricultural product, commodity, or article 21. The President of the Philippines
or the Secretary of Agriculture, in the imposes the discriminatory duties.
case of agricultural product, commodity
or article, after formal investigation and 22. Safeguard measures are
affirmative finding of the Tariff Commission. emergency measures, including tariffs, to protect
Even when all the requirements for the domestic industries and producers from increased
imposition have been fulfilled, the decision on imports which inflict or could inflict serious injury
whether or not to impose a definitive anti-dumping on them.
duty remains the prerogative of the Tariff The CTA is vested with jurisdiction to
Commission. (Sec. 301 (a), TCC, as amended by review decisions of the Secretary of Trade and
Rep. Act No. 8752, Anti-Dumping Act of 1999) Industry imposing safeguard measures as
provided under Rep. Act No. 8800 the Safeguard
16. The countervailing duty is Measures Act (SMA). (Southern Cross Cement
equivalent to the value of the specific Corporation v. The Philippine Cement Manufacturers
Corp., et al., G. R. No. 158540, July 8, 2004)
subsidy. The DTI Secretary cannot impose the
safeguard measures if the Tariff Commission
does not favorably recommend its imposition.
 77
accordance with law, shall certify the same to the
23. Imposing authority for Commissioner of Customs with his
safeguard measures. The imposing recommendation together with all necessary
authority for the countervailing duties is papers and documents. Upon receipt by the
the Secretary of Trade and Industry in the Commissioner of such certified claim he shall
cause the same to be paid if found correct. (Sec.
case of non-agricultural product, 1708, TCC)
commodity, or article or the Secretary of
Agriculture, in the case of agricultural 28. What is mean by the term
product, commodity or article, after formal entry in Customs Law ?
investigation and affirmative finding of the Tariff SUGGESTED ANSWER: It has a triple
Commission. meaning.
a. the documents filed at the Customs
24. Safeguards measures that house;
may be imposed. Additional tariffs, import b. the submission and acceptance of
quotas or banning of imports. the documents; and
c. Customs declaration forms or
25. The basis of dutiable value of customs entry forms required to be
merchandise that is subject to ad valorem accomplished by passengers of incoming
vessels or passenger planes as envisaged under
customs duties is the transaction value,
Sec. 2505 of the TCCP (Failure to declare
which shall be the price actually paid or payable
baggage). (Jardeleza v. People, G.R. No.
for the goods when sold for export to the
165265, February 6, 2006)
Philippines, adjusted by adding certain cost
elements to the extent that they are incurred by
the buyer but are not included in the price actually 29. A flight stewardess arrived from
paid or payable for the imported goods, and may Singapore. Upon her arrival she was
include the following: asked whether she has anything to
a. Cost of containers and packing, declare. She answered none, and she
b. Insurance, and submitted her Customs Baggage
c. Freight. (Sec. 201, TCC as Declaration Form which she
amended by Sec. 1, Rep. Act No. 9135) accomplished and signed with nothing or
written on the space for items to be
26. The above transaction value is declared. When her hanger bag was
the primary method of determining examined some pieces of jewelry were
dutiable value. If the transaction value of found concealed within the lining of said
the imported article could not be bag.
determined using the above, the She was then convicted of violating
following alternative methods should be of Sec. 3601 of the Tariff and Customs
used one after the other: Code for unlawful importation which
a. Transaction value of identical goods penalizes any person who shall
b. Transaction value of similar goods fraudulently import or bring into the
c. Deductive method Philippines any article contrary to law.
d. Computed method She now appeals claiming that
e. Fallback method
lower court erred n convicting her under
Sec. 3601 when the facts alleged both in
27. How and to whom should
the information and those shown by the
claims for refund of customs duties be
prosecution constitute the offense under
made ?
SUGGESTED ANSWER: All claims for Sec. 2505 Failure to Declare Baggage,
refund of duties shall be made in writing and of which she was acquitted. Is she
forwarded to the Collector of Customs to whom correct ?
such duties are paid, who upon receipt of such SUGGESTED ANSWER: No. Sec. 3601
claim, shall verify the same by the records of his does not define a crime. It merely provides, inter
Office, and if found to be correct and in alia, the administrative remedies which can be
 78
resorted to by the Bureau of Customs when aircraft enters the jurisdiction of the Philippines
seizing dutiable articles found the baggage of with intention to unload therein.
any person arriving in the Philippines which is not b. When unlawful importation is
included in the accomplished baggage complete. In the absence of a bona fide intent
declaration submitted to the customs authorities, to make entry and pay duties when the
and the administrative penalties that such person prohibited article enters the Philippine territory.
must pay for the release of such goods if not Importation is complete when the taxable,
imported contrary to law. dutiable commodity is brought within the limits of
Such administrative penalties are the port of entry. Entry through a custom house
independent of the criminal liability for smuggling is not the essence of the act. (Jardeleza v.
that may be imposed under Sec. 3601, and other People, G.R. No. 165265, February 6, 2006)
provisions of the TCC which can only be
determined after the appropriate criminal 32. The Collector of Customs
proceedings, prescinding from the outcome in any
sitting in seizure and forfeiture
administrative case that may have been filed and
disposed of by the customs authorities. proceedings has exclusive jurisdiction to
Indeed the second paragraph of Sec. 2505 hear and determine all questions
provides that nothing shall prevent the bringing of touching on the seizure and forfeiture of
a criminal action against the offender for dutiable goods. RTCs are precluded from
smuggling under Section 3601. (Jardeleza v. assuming cognizance over such matters
People, G. R. No. 165265, February 6, 2006) even through petitions of certiorari,
prohibition or mandamus. (The Bureau of
30. Payment is not a defense in Customs, et al., v. Ogario, et al., G.R. No.
smuggling. When upon trial for violation of this 138081, March 20, 2000)
section, the defendant is shown to have What is the rationale for this
possession of the article in question, possession doctrine ?
shall be deemed sufficient evidence to authorize SUGGESTED ANSWER:
conviction, unless the defendant shall explain the a. Regional Trial Courts have no
possession to the satisfaction of the court: jurisdiction to replevin a property which is subject
Provided, however, That payment of the tax due to seizure and forfeiture proceedings for violation
after apprehension shall not constitute a valid of the Tariff and Customs Code otherwise, actions
defense in any prosecution under this section. for forfeiture of property for violation of the
(last par., Sec. 3601, TCC) Customs laws could easily be undermined by the
simple device of replevin. (De la Fuente v. De
31. How is smuggling Veyra, et al., 120 SCRA 455)
committed ? b. The doctrine of exclusive customs
SUGGESTED ANSWER: Smuggling is jurisdiction over customs cases to the exclusion of
committed by any person who: the RTCs is anchored upon the policy of placing
a. fraudulently imports or brings into no unnecessary hindrance on the governments
the country any article contrary to law; drive, not only to prevent smuggling and other
b. assists in so doing any article frauds upon Customs,
contrary to law; or c. but more importantly, to render
c. receives, conceals, buys, sells or in effective and efficient the collection of import and
any manner facilitates the transportation, export duties due the State, which enables the
concealment or sale of such goods after government to carry out the functions it has been
importation, knowing the same to have been instituted to perform. (Jao, et al., v. Court of
imported contrary to law. (Jardeleza v. People, Appeals, et al., and companion case, 249 SCRA
G.R. No. 165265, February 6, 2006 citing 35, 43)
Rodriguez v. Court of Appeals, G. R. No. d. The issuance by regular courts of
115218, September 18, 1995, 248 SCRA 288, writs of preliminary injunction in seizure and
296) forfeiture proceedings before the Bureau of
NOTES AND COMMENTS: Customs may arouse suspicion that the issuance
a. Importation consists of bringing an or grant was for consideration other than the strict
article into the country from the outside. merits of the case. (Zuno v. Cabredo, 402 SCRA
Importation begins when the conveying vessel or 75 [2003])
 79
e. Under the doctrine of primary by enforcing the tax lien on the imported
jurisdiction, the Bureau of Customs has exclusive article when the imported articles could
administrative jurisdiction to conduct searches, be found and be subject to seizure and
seizures and forfeitures of contraband without forfeiture.
interference from the courts. It could conduct
searches and seizures without need of a judicial
36. The Tariff and Customs Code
warrant except if the search is to be conducted in
a dwelling place. allows the Bureau of Customs to resort to the
Where an administrative office has judicial remedy of filing an action in court
obtained a technical expertise in a specific when the imported articles could not
subject, even the courts must defer to this anymore be found.
expertise.
NOTES AND COMMENTS: The Bureau of 37. Section 2301 of the TCCP
Customs could search and seize articles without states that seized articles may not be
need of a judicial warrant unless the place to be released under bond if there is prima
searched is a dwelling place. In such a case facie evidence of fraud in their
customs requires a judicial warrant.
importation. Commissioner of Customs v.
Court of Tax Appeals, et al., G. R. No. 171516-
33. A claiming to be the owner 17, February 13, 2009
of a vessel which is the subject of Section 2301. Warrant for Detention of
customs warrant of seizure and Property-Cash Bond. Upon making any
detention sought the intercession of the seizure, the Commissioner shall issue a warrant
RTC to restrain the Bureau of Customs for the detention of the property; and if the owner
from interfering with his property rights or importer desires to secure the release of the
over the vessel. Would the suit prosper? property for legitimate use, the Collector shall,
SUGGESTED ANSWER: No. His with the approval of the Commissioner of
remedy was not with the RTC but with the CTA, Customs, surrender it upon the filing of a cash
as issues of ownership of goods in the custody bond, in an amount fixed by him, conditioned
of customs officials are within the power of the upon the payment of the appraised value of the
CTA to determine. article and/or any fine, expenses and costs
The Collector of Customs has exclusive which may be adjudged in the case: Provided,
jurisdiction over seizure and forfeiture That such importation shall not be released
proceedings and trial courts are precluded from under any bond when there is prima facie
assuming cognizance over such matters even evidence of fraud in the importation of the
through petitions for certiorari, prohibition or article: Provided, further, That articles the
mandamus. (Commissioner of Customs v. Court importation of which is prohibited by law shall not
of Appeals, et al., G. R. Nos. 111202-05, January be released under any circumstances
31, 2006) whatsoever: Provided, finally, That nothing in this
section shall be construed as relieving the owner
34. The customs authorities do or importer from any criminal liability which may
not have to prove to the satisfaction of arise from any violation of law committed in
connection with the importation of the article.
the court that the articles on board a
(emphasis supplied)
vessel were imported from abroad or are
intended to be shipped abroad before 38. Instances where there is no
they may exercise the power to effect right of redemption of seized and forfeited
customs searches, seizures, or arrests articles:
provided by law and continue with the a. There is fraud;
administrative hearings. (The Bureau of b. The importation is absolutely
Customs, et al., v. Ogario, et al., G.R. No. prohibited, or
138081, March 20, 2000) c. The release of the property would
be contrary to law. (Transglobe International, Inc. v.
35. The Tariff and Customs Code Court of Appeals, et al., G.R. No. 126634, January 25,
allows the Bureau of Customs to resort to the 1999)
administrative remedy of seizure, such as
 80
39. In Aznar v. Court of Tax Appeals, proceedings. This means that to acquire
58 SCRA 519, reiterated in Farolan, Jr. v. Court of jurisdiction over the vessel, as a defendant, the
Tax appeals, et al., 217 SCRA 298, the Supreme trial court must have obtained either actual or
Court clarified that the fraud contemplated constructive possession over it. Neither was
by law must be actual and not accomplished by the RTC as the vessel was
constructive. It must be intentional, consisting already in the possession of the Bureau of
of deception, willfully and deliberately done or Customs. (Commissioner of Customs v. Court of
resorted to in order to induce another to give up Appeals, et al., G. R. Nos. 111202-05, January
some right. 31, 2006)
NOTES AND COMMENTS:
a. Forfeiture of seized goods in the
40. Requisites for forfeiture of Bureau of Customs is in the nature of a
imported goods: proceeding in rem, i.e. directed against the res
a. Wrongful making by the owner, or imported goods and entails a determination of
importer, exporter or consignee of any declaration the legality of their importation. In this
or affidavit, or the wrongful making or delivery by proceeding, it is in legal contemplation the
the same person of any invoice, letter or paper property itself which commits the violation and is
all touching on the importation or exportation of treated as the offender, without reference
merchandise. whatsoever to the character or conduct of the
b. the falsity of such declaration, owner.
affidavit, invoice, letter or paper; and The issue is limited to whether the
c. an intention on the part of the imported goods should be forfeited and disposed
importer/consignee to evade the payment of the of in accordance with law for violation of the Tariff
duties due. (Republic, etc., v. The Court of and Customs Code. .(Transglobe International,
Appeals, et al., G.R. No. 139050, October 2, Inc. v. Court of Appeals, et al., G.R. No. 126634,
2001) January 25, 1999)
Forfeiture of seized goods in the Bureau of
41. On January 7, 1989, the vessel Customs is a proceeding against the goods and
M/V Star Ace, coming from Singapore not against the owner. (Asian Terminals, Inc. v.
laden with cargo, entered the Port of San Bautista-Ricafort, G .R. No. 166901, October 27,
Fernando, La Union for needed repairs. 2006 citing Transglobe)
When the Bureau of Customs later
became suspicious that the vessels real 42. The Collector of Customs upon
purpose in docking was to smuggle cargo probable cause that the articles are
into the country, seizure proceedings imported or exported, or are attempted to
were instituted and subsequently two be imported or exported, in violation of
Warrants of Seizure and Detention were the tariff and customs laws shall issue a
issued for the vessel and its cargo. warrant of seizure. (Sec. 6, Title III, CAO No.
9-93)
Cesar does not own the vessel or
If the search and seizure is to be
any of its cargo but claimed a preferred conducted in a dwelling place, then a search
maritime lien. Cesar then brought several warrant should be issued by the regular courts not
cases in the RTC to enforce his lien. the Bureau of Customs.
Would these suits prosper ? There may be instances where no warrants
SUGGESTED ANSWER: No. The Bureau issued by the Bureau of Customs or the regular
of Customs having first obtained possession of courts is required, as in search and seizures of
the vessel and its goods has obtained jurisdiction motor vehicles and vessels.
to the exclusion of the trial courts.
When Cesar has impleaded the vessel as 43. Smuggled goods seized by
a defendant to enforce his alleged maritime lien, virtue of a court warrant should be
in the RTC, he brought an action in rem under the surrendered to the court that issued the
Code of Commerce under which the vessel may
warrant and not to the Bureau of Customs
be attached and sold.
because the goods are in custodia legis.
However, the basic operative fact is the
actual or constructive possession of the res by the
tribunal empowered by law to conduct the
 81
44. Decisions of the 47. The following letters of
Commissioner of Customs in cases demand can not be considered as a
involving liability for customs duties, liquidation or an assessment of Shells
fees or other money charges that must import tax liabilities that can be the
be appealed to the Court of Tax Appeals subject of an administrative tax protest
Division within thirty (30) days from proceeding before the Commissioner of
receipt specifically refer to his decisions on Customs whose decision is appealable
administrative tax protest cases, as stated in to the Court of Tax Appeals:
Section 2402 of the Tariff and Customs Code of a. the One Stop Shop Inter-Agency
the Philippines (TCCP): Tax Credit and Duty Drawback Center (the
Center) November 3 letter, signed by the
Section 2402. Review Secretary of Finance, informing it of the
by Court of Tax Appeals. The cancellation of the Tax Credit Certificates
party aggrieved by a ruling of (TCCs);
the Commissioner in any b. the Commissioner of Customs
matter brought before him November 19 letter requiring Shell to replace the
upon protest or by his action or amount equivalent to the amount of the
ruling in any case of seizure cancelled TCCs used by Shell; and
may appeal to the Court of c. the Commissioner of Customs
Tax Appeals, in the manner and collection letters, issued through Deputy
within the period prescribed by Commissioner Atty. Valera, formally demanding
law and regulations. the amount covered by the cancelled TCCs.
None of these letters, however, can be
Unless an appeal is made to the Court of considered as a liquidation or an assessment of
Tax Appeals in the manner and within the Shells import tax liabilities that can be the
period prescribed by laws and regulations, subject of an administrative tax protest
the action or ruling of the Commissioner shall be proceeding before the respondent whose
final and conclusive. [Emphasis supplied.] decision is appealable to the CTA. Shells import
(Pilipinas Shell Petroleum Corporation v. tax liabilities had long been computed and
Commissioner of Customs, G. R. No. 176380, June ascertained in the original assessments, and
18, 2009) Shell paid these liabilities using the TCCs
transferred to it as payment.
45. Administrative tax protest It is even an error to consider the letters
under the Tariff and Customs Code as a reassessment because they refer to the
(TCCP). A tax protest case, under the TCCP, same tax liabilities on the same importations
involves a protest of the liquidation of import covered by the original assessments. The
entries. (Pilipinas Shell Petroleum Corporation v. letters merely reissued the original assessments
Commissioner of Customs, G. R. No. 176380, June that were previously settled by Shell with the use
18, 2009) of the TCCs. However, on account of the
cancellation of the TCCs, the tax liabilities of
46. Liquidation, defined. A Shell under the original assessments were
considered unpaid; hence, the letters and the
liquidation is the final computation and
actions for collection.
ascertainment by the collector of the duties on
When Shell went to the CTA, the issues it
imported merchandise, based on official reports
raised in its petition were all related to the fact
as to the quantity, character, and value thereof,
and efficacy of the payments made, specifically
and the collectors own finding as to the
the genuineness of the TCCs; the absence of
applicable rate of duty; it is akin to an
due process in the enforcement of the decision
assessment of internal revenue taxes under the
to cancel the TCCs; the facts surrounding the
National Internal Revenue Code where the tax
fraud in originally securing the TCCs; and the
liability of the taxpayer is definitely determined.
(Pilipinas Shell Petroleum Corporation v.
application of estoppel. These are payment and
Commissioner of Customs, G. R. No. 176380, June collection issues, not tax protest issues within
18, 2009) the CTAs jurisdiction to rule upon.
Shell never protested the original
assessments of its tax liabilities and in fact
 82
settled them using the TCCs. These original
assessments, therefore, have become final,
incontestable, and beyond any subsequent LOCAL GOVERNMENT
protest proceeding, administrative or judicial, to TAXATION
rule upon.
To be very precise, Shells petition
1. The fundamental principles of
before the CTA principally questioned the validity
of the cancellation of the TCCs a decision that local taxation are:
was made not by the Commissioner of Customs, a. Uniformity;
but by the Center. As the CTA has no jurisdiction b. Taxes, fees, charges and other
over decisions of the Center, Shells remedy impositions shall be equitable and based on
against the cancellation should have been a ability to pay, for public purposes, not unjust,
certiorari petition before the regular courts, not a excessive, oppressive or confiscatory, not
tax protest case before the CTA. Records do not contrary to law, public policy, national economic
show that Shell ever availed of this remedy. policy or in restraint of trade;
Alternatively, as held in Shell v. Republic c. The levy and collection shall not be
of the Philippines, G.R. No. 161953, March 6, let to any private person;
2008, 547 SCRA 701, the appropriate forum for d. Inures solely to the local government
Shell under the circumstances of this case unit levying the tax;
should be at the collection cases before the RTC e. The progressivity principle must be
where Shell can put up the fact of its payment as observed.
a defense. (Pilipinas Shell Petroleum
Corporation v. Commissioner of Customs, G. R. 2. A law which deprives local
No. 176380, June 18, 2009) government units of their power to tax
would be unconstitutional. The constitution
48. A case becomes ripe for filing has delegated to local governments the power to
with the Regional Trial Court (RTC), as a levy taxes, fees and other charges. This
collection matter after the finality of the constitutional delegation may only be removed by
Commissioner of Customs assessment. a constitutional amendment.
(Pilipinas Shell Petroleum Corporation v.
Commissioner of Customs, G. R. No. 176380, June 3. Under the now prevailing
18, 2009 citing Shell v. Republic of the Philippines, Constitution, where there is neither a
G.R. No. 161953, March 6, 2008, 547 SCRA 701) grant nor prohibition by statute, the
taxing power of local governments must
The assessment has long been final, and
be deemed to exist although Congress
this recognition of finality removes all perceived
hindrances, based on this case, to the may provide statutory limitations and
continuation of the collection suits. guidelines in order to safeguard the viability and
self-sufficiency of local government units by
A suit for the collection of internal revenue directly granting them general and broad tax
taxes, where the assessment has already powers. (City Government of San Pablo, Laguna,
become final and executory, the action to collect et al., v. Reyes, et al., G.R. No. 127708, March
is akin to an action to enforce the judgment. No 25, 1999)
inquiry can be made therein as to the merits of
the 4. The Local Government Code
In light of the conclusion that the present explicitly authorizes provinces and cities,
case does not involve a decision of the notwithstanding any exemption granted
Commissioner of Customs on a matter brought by any law or other special law to
to him as a tax protest, Atty. Valeras lack of impose a tax on businesses enjoying a
authority to issue the collection letters and to franchise. Indicative of the legislative intent to
institute the collection suits is irrelevant. For this carry out the constitutional mandate of vesting
same reason, the injunction against Atty. Valera broad tax powers to local government units, the
cannot be invoked to enjoin the collection of Local Government Code has withdrawn tax
unpaid taxes due from Shell. (Pilipinas Shell exemptions or incentives theretofore enjoyed by
Petroleum Corporation v. Commissioner of certain entities. (City Government of San Pablo,
Customs, supra)
 83
Laguna, et al., v. Reyes, et al., G.R. No. 127708, Congress can enact legislation granting tax
March 25, 1999) exemptions.
While the system of local government
5. Philippine Long Distance taxation has changed with the onset of the 1987
Telephone Company, Inc., v. City of Constitution, the power of local government units
Davao, et al., etc., G. R. No. 143867, to tax is still limited.
August 22, 2001, upheld the authority of the While the power to tax by local
City of Davao, a local government unit, to impose governments may be exercised by local
and collect a local franchise tax because the legislative bodies, no longer merely be virtue of a
Local Government has withdrawn all tax valid delegation as before, but pursuant to direct
exemptions previously enjoyed by all persons and authority conferred by Section 5, Article X of the
authorized local government units to impose a tax Constitution, the basic doctrine on local taxation
on business enjoying a franchise tax remains essentially the same, the power to tax
notwithstanding the grant of tax exemption to is [still] primarily vested in the Congress.
(Quezon City, et al., v. ABS-CBN Broadcasting
them. Corporation, G. R. No. 166408, October 6, 2008 citing
City Government of Quezon City, et al. v. Bayan
6. Explain the concept of the Telecommunications, Inc., G.R. No. 162015, March 6,
paradigm shift in local government 2006, 484 SCRA 169 in turn referring to Mactan Cebu
International Airport Authority, v. Marcos, G.R. No.
taxation. 120082, September 11, 1996, 261 SCRA 667, 680)
SUGGESTED ANSWER: Paradigm shift
from exclusive Congressional power to direct
9. Further amplification by
grant of taxing power to local legislative bodies.
The power to tax is no longer vested exclusively Bernas of the local governments power
on Congress; local legislative bodies are now to tax. What is the effect of Section 5 on the
given direct authority to levy taxes, fees and other fiscal position of municipal corporations?
charges pursuant to Article X, section 5 of the Section 5 does not change the doctrine that
1987 Constitution. (Batangas Power Corporation municipal corporations do not possess inherent
v. Batangas City, et al. G. R. No. 152675, and powers of taxation. What it does is to confer
companion case, April 28, 2004 citing National municipal corporations a general power to levy
Power Corporation v. City of Cabanatuan, G. R. taxes and otherwise create sources of revenue.
No. 149110, April 9, 2003) They no longer have to wait for a statutory grant
of these powers. The power of the legislative
7. The fundamental law did not authority relative to the fiscal powers of local
intend the direct grant to local governments has been reduced to the authority
to impose limitations on municipal powers.
government units to be absolute and
Moreover, these limitations must be consistent
unconditional, the constitutional objective with the basic policy of local autonomy. The
obviously is to ensure that, while local important legal effect of Section 5 is thus to
government units are being strengthened and reverse the principle that doubts are resolved
made more autonomous, the legislature must still against municipal corporations. Henceforth, in
see to it that: interpreting statutory provisions on municipal
a. the taxpayer will not be over- fiscal powers, doubts will be resolved in favor of
burdened or saddled with multiple and municipal corporations. It is understood,
unreasonable impositions; however, that taxes imposed by local
b. each local government unit will have government must be for a public purpose,
its fair share of available resources; uniform within a locality, must not be
c. the resources of the national confiscatory, and must be within the jurisdiction
government will be unduly disturbed; and of the local unit to pass. (Quezon City, et al., v.
d. local taxation will be fair, uniform ABS-CBN Broadcasting Corporation, G. R. No.
and just. (Manila Electric Company v. Province of 166408, October 6, 2008 citing City Government of
Laguna, et al., G.R. No. 131359, May 5, 1999) Quezon City, et al. v. Bayan Telecommunications,
Inc., G.R. No. 162015, March 6, 2006, 484 SCRA
8. Taxing power of the local 169)
government is limited. The taxing power of
local governments is limited in the sense that
 84
10. Reconciliation of the local where he maintains his principal office in case he
governments authority to tax and the practices his profession in several places.
Congressional general taxing power.
Congress has the inherent power to tax, which 12. Requirements: Any individual or
includes the power to grant tax exemptions. On the corporation employing a person subject to
other hand, the power of local governments, such as professional tax shall require payment by that
provinces and cities for example Quezon City, to tax
is prescribed by Section 151 in relation to Section 137
person of the tax on his profession before
of the LGC which expressly provides that employment and annually thereafter.
notwithstanding any exemption granted by any law or Any person subject to the professional tax
other special law, the City or a province may impose a shall write in deeds, receipts, prescriptions,
franchise tax. It must be noted that Section 137 of the reports, books of account, plans and designs,
LGC does not prohibit grant of future exemptions. surveys and maps, as the case may be, the
The Supreme Court in a series of cases number of the official receipt issued to him.
has sustained the power of Congress to grant Exemption: Professionals exclusively
tax exemptions over and above the power of the employed in the government shall be exempt
local governments delegated power to tax. from payment. (Sec. 139, LGC)
(Quezon City, et al., v. ABS-CBN Broadcasting NOTE: For the purpose of collecting the tax,
Corporation, G. R. No. 166408, October 6, 2008 citing the provincial or city treasurer or his duly
City Government of Quezon City, et al. v. Bayan authorized representative shall require from such
Telecommunications, Inc., G.R. No. 162015, March 6, professionals their current annual registration
2006, 484 SCRA 16)
cards issued by competent authority before
Indeed, the grant of taxing powers to accepting payment of their professional tax for the
local government units under the Constitution current year. The PRC shall likewise require the
and the LGC does not affect the power of professionals presentation of proof of payment
Congress to grant exemptions to certain before registration of professionals or renewal of
persons, pursuant to a declared national policy. their licenses. (last par., Art. 228, Rules and
The legal effect of the constitutional grant to Regulations Implementing the Local Government
local governments simply means that in Code of 1991)
interpreting statutory provisions on municipal
taxing powers, doubts must be resolved in favor
of municipal corporations. [Ibid., referring to 13. Who are the professionals who,
Philippine Long Distance Telephone Company, if they are in practice of their profession,
Inc. (PLDT) vs. City of Davao] are subject to professional tax ?
SUGGESTED ANSWER: The
11. Professional tax may be professionals subject to the professional tax are
only those who have passed the bar
imposed by a province or city but not by a
examinations, or any board or other examinations
municipality or barangay. conducted by the Professional Regulation
a. Transaction taxed: Exercise or Commission (PRC). for example, a lawyer who is
practice of profession requiring government also a Certified Public Accountant (CPA) must pay
licensure examination. the professional tax imposed on lawyers and that
b. Tax rate: In Accordance with a taxing fixed for CPAs, if he is to practice both
ordinance which should not exceed P300.00. professions. [Sec. 238 (f), Rule XXX, Rules and
c. Tax base: Reasonable classification Regulations Implementing the Local Government
by the sanggunian. Code of 1991]
d. Exception: Payment to one
province or city no longer subject to any other
national or local tax, license or fee for the practice 14. X City issued a notice of
of such profession in any part of the Philippine assessment against ABC Condominium
professionals exclusively employed in the Corporation for unpaid business taxes.
government. The Condominium Corporation is a duly
e. Date of payment: or on before constituted condominium corporation in
January 31 or engaging in the profession. accordance with the Condominium Act
f. Place of payment: Province or city which owns and holds title to the
where the professional practices his profession or
common and limited common areas of
the condominium. Its membership
 85
comprises the unit owners and is No. 7794 [which is based on Section 143(a) of
authorized under its By-Laws to collect the LGC], can no longer be made liable for local
regular assessments from its members business tax under Section 21 of the same Tax
for operating expenses, capital Ordinance [which is based on Section 143(h) of
expenditures on the common areas and the LGC]. (The City of Manila, et al., v. Coca-
other special assessments as provided Cola Bottlers Philippines, Inc., G. R. No. 181845,
for in the Master Deed with ?Declaration August 4, 2009)
of Restrictions of the Condominium.
ABC Condominium Corporation
insists that the X City Revenue Code and REAL PROPERTY TAXATION
the Local Government Code do not
contain provisions upon which the 1. The fundamental principles of
assessment could be based. Resolve the real property taxation are:
controversy. a. Appraisal at current and fair market
SUGGESTED ANSWER: ABC is correct. value;
Condominium corporations are generally exempt b. Classification for assessment on the
from local business taxation under the Local basis of actual use;
Government Code, irrespective of any local c. Assessment on the basis of uniform
ordinance that seeks to declare otherwise. classification;
X City, is authorized under the Local d. Appraisal, assessment, levy and
Government Code, to impose a tax on business, collection shall not be let to a private person;
which is defined under the Code as trade or e. Appraisal and assessment shall be
commercial activity regularly engaged in as a equitable.
means of livelihood or with a view to profit. By its NOTES AND COMMENTS: Real
very nature a condominium corporation is not properties shall be appraised at the current and
engaged in business, and any profit that it derives fair market value prevailing in the locality where
is merely incidental, hence it may not be subject the property is situated and classified for
to business taxes. (Yamane , etc. v. BA Lepanto assessment purposes on the basis of its actual
Condominium Corporation, G. R. No. 154993, use. (Allied Banking Corporation, etc., v. Quezon City
October 25, 2005) Government, et al., G. R. No. 154126, October 11,
2005)

15. Authority of Local 2. The reasonable market value

Government Units (LGUs) such as the is determined by the assessor in the form
City of Manila to impose business taxes. of a schedule of fair market values.
Section 143 of the LGC, is the very source of the The schedule is then enacted by the local
power of municipalities and cities to impose a sanggunian.
local business tax, and to which any local
business tax imposed by cities or municipalities 3. Fair market value is the price
such as the City of Manila must conform. It is
at which a property may be sold by a
apparent from a perusal thereof that when a
municipality or city has already imposed a seller who is not compelled to sell and
business tax on manufacturers, etc. of liquors, bought by a buyer who is not compelled
distilled spirits, wines, and any other article of to buy, taking into consideration all uses to
commerce, pursuant to Section 143(a) of the which the property is adopted and might in reason
LGC, said municipality or city may no longer be applied.
subject the same manufacturers, etc. to a The criterion established by the statute
business tax under Section 143(h) of the same contemplates a hypothetical sale. Hence, the
Code. Section 143(h) may be imposed only on buyers need not be actual and existing
businesses that are subject to excise tax, VAT, or purchasers. (Allied Banking Corporation, etc., v.
percentage tax under the NIRC, and that are Quezon City Government, et al., G. R. No.
not otherwise specified in preceding 154126, October 11, 2005 )
paragraphs. In the same way, businesses NOTES AND COMMENTS: In fixing the
such as respondents, already subject to a local value of real property, assessors have to consider
business tax under Section 14 of Tax Ordinance all the circumstances and elements of value and
 86
must exercise prudent discretion in reaching of fair market values. (Allied Banking
conclusions. (Allied Banking Corporation, etc., v. Corporation, etc., v. Quezon City Government, et
Quezon City Government, et al., G. R. No. al., G. R. No. 154126, October 11, 2005 citing
154126, October 11, 2005) Local Assessment Regulations No. 1-92)
Preparation of fair market values:
a. The city or municipal assessor shall 5. An ordinance whereby the
prepare a schedule of fair market values for the parcels of land sold, ceded, transferred
different classes of real property situated in their and conveyed for remuneratory
respective Local Government Units for the
consideration after the effectivity of this
enactment of an ordinance by the sanggunian
concerned; and revision shall be subject to real estate tax
b. The schedule of fair market values shall based on the actual amount reflected in
be published in a newspaper of general the deed of conveyance or the current
circulation in the province, city or municipality approved zonal valuation of the Bureau of
concerned or the posting in the provincial capitol Internal Revenue prevailing at the time of
or other places as required by law. (Lopez v. City sale, cession, transfer and conveyance,
of Manila, et al., G.R. No. 127139, February 19, whichever is higher, as evidenced by the
1999) certificate of payment of the capital gains
Proposed fair market values of real tax issued therefore is INVALID being
property in a local government unit as well as contrary to public policy and for restraining trade
the ordinance containing the schedule must for the following reasons:
be published in full for three (3) consecutive a. It mandates an exclusive rule in
days in a newspaper of local circulation, where determining the fair market value and departs
available, within ten (10) days of its approval, and from the established procedures such as the
posted in at lease two (2) prominent places in the sales analysis approach, the income capitalization
provincial capitol, city, municipal or barangay hall approach and the reproduction approach
for a minimum of three (3) consecutive weeks. provided under the rules implementing the
(Figuerres v. Court of Appeals, et al,. G.R. No. statute. It unduly interferes with the duties
119172, March 25, 1999) statutorily placed upon the local assessor by
completely dispensing with his analysis and
4. Approaches in estimating the discretion which the Local Government Code and
fair market value of real property for real the regulations require to be exercised. An
property tax purposes ? ordinance that contravenes any statute is ultra
a. Sales Analysis Approach. The sales vires and void.
price paid in actual market transactions is b. The consideration approach in the
considered by taking into account valid sales data ordinance is illegal since the appraisal,
accumulated from among the Registrar of Deeds, assessment, levy and collection of real property
notaries public, appraisers, brokers, dealers, bank tax shall not be let to any private person, it will
officials, and various sources stated under the also completely destroy the fundamental principle
Local Government Code. in real property taxation that real property shall
b. Income Capitalization Approach. be classified, valued and assessed on the basis
The value of an income-producing property is no of its actual use regardless of where located,
more than the return derived from it. An analysis whoever owns it, and whoever uses it. Allowing
of the income produced is necessary in order to the parties to a private sale to dictate the fair
estimate the sum which might be invested in the market value of the property will dispense with the
purchase of the property. distinctions of actual use stated in the Local
c. Reproduction cost approach is a Government Code and in the regulations.
formal approach used exclusively n appraising c. The invalidity is not cured by the
man-made improvements such as buildings and prhase whichever is higher because an integral
other structures, based on such data as materials part of that system still permits valuing real
and labor costs to reproduce a new replica of the property in disregard of its actual use.
improvement. d. The ordinance would result to real
The assessor uses any or all of these property assessments more than once every
approaches in analyzing the data gathered to three (3) years and that is not the congressional
arrive at the estimated fair market value to be intent as shown in the provisions of the Local
included in the ordinance containing the schedule Government Code and the regulations.
 87
Consequently, the real property tax burden should Transit Authority v. Central Board of Assessment
not be interpreted to include those beyond what Appeals, et al., G. R. No. 127316, October 12, 2000)
the Code or the regulations expressly clearly c. Barges on which were mounted gas
state. turbine power plants designated to generate
e. The proviso would provide a chilling electrical power, the fuel oil barges which supplied
effect on real property owners or administrators to fuel oil to the power plant barges, and the
enter freely into contracts reflecting the increasing accessory equipment mounted on the barges
value of real properties in accordance with were subject to real property taxes.
prevailing market conditions. Moreover, Article 415(9) of the Civil Code
While the Local Government Code provides that [d]ocks and structures which,
provides that the assessment of real property though floating, are intended by their nature and
shall not be increased once every three (3) years, object to remain at a fixed place on a river, lake or
the questioned proviso subjects the property to a coast are considered immovable property by
higher assessment every time a sales transaction destination being intended by the owner for an
is made. Real property owners would therefore industry or work which may be carried on in a
postpone sales until after the lapse of the three building or on a piece of land and which tend
(3) year period, or if they do so within the said directly to meet the needs of said industry or
period they shall be compelled to dispose of the work. (FELS Energy, Inc., v. Province of Batangas, G.
property at a price not exceeding the last prior R. No. 168557, February 16, 2007 and companion
conveyance in order to avoid a higher tax case)
assessment.
In the above two scenarios real property 7. Unpaid realty taxes attach to the
owners are effectively prevented from obtaining property and is chargeable against the
the best price possible for their properties and person who had actual or beneficial use
unduly hampers the equitable distribution of and possession of it regardless of
wealth. (Allied Banking Corporation, etc., v. Quezon whether or not he is the owner. To impose
City Government, et al., G. R. No. 154126, October 11, the real property tax on the subsequent owner
2005) which was neither the owner not the beneficial
user of the property during the designated periods
6. Examples of personal property would not only be contrary to law but also unjust.
under the civil law that may be Consequently, MERALCO the former
considered as real property for purposes owner/user of the property was required to pay
of taxes. Personal property under the civil law the tax instead of the new owner NAPOCOR.
(Manila Electric Company v. Barlis, G.R. No. 114231,
may be considered as real property for purposes May 18, 2001)
of taxes where the property is essential to the NOTES AND COMMENTS: The above
conduct of the business. May 18, 2001 decision was set aside by the
a. Underground tanks are essential to Supreme Court when it granted the petitioners
the conduct of the business of a gasoline station second motion for reconsideration on June 29,
without which it would not be operational. (Caltex 2004. The author submits that the above ruling in
Phils., Inc. v. Central Board of Assessment Appeals, et
al., 114 SCRA 296)
the May 18, 2001 decision is still valid, not on the
b. Light Rail Transit (LRT) improvements basis of the May 18, 2001 decision but in the light
such as buildings, carriageways, passenger of pronouncements of the Supreme Court in other
terminals stations, and similar structures do not cases. Thus, do not cite the doctrine as
form part of the public roads since the former are emanating from the May 18, 2001 decision.
constructed over the latter in such a way that the
flow of vehicular traffic would not be impaired. 8. Secretary of Justice can take
The carriageways and terminals serve a function cognizance of a case involving the
different from the public roads. Furthermore, they constitutionality or legality of tax
are not open to use by the general public hence ordinances where there are factual issues
not exempt from real property taxes. Even involved. (Figuerres v. Court of Appeals, et al., G.R.
granting that the national government owns the No. 119172, March 25, 1999)
carriageways and terminal stations, the property Taxpayer files appeal to the
is not exempt because their beneficial use has
Secretary of Justice, within 30 days from
been granted to LRTA a taxable entity. (Light Rail
effectivity thereof. In case the Secretary
 88
decides the appeal, a period also of 30 days is responsible for all real estate taxes and
allowed for an aggrieved party to go to court. But assessments. FELS then received an
if the Secretary does not act thereon, after the assessment of real property taxes on its
lapse of 60 days, a party could already seek relief power barges from the Provincial
in court within 30 days from the lapse of the 60
Assessor of Batangas. If filed a motion
day period.
These three separate periods are clearly for reconsideration with the Provincial
given for compliance as a prerequisite before Assessor.
seeking redress in a competent court. Such a. Upon denial, FELS elevated
statutory periods are set to prevent delays as well the matter to the Local Board of
as enhance the orderly and speedy discharge of Assessment Appeals (LBAA), where it
judicial functions. For this reason the courts raised the following issues:
construe these provisions of statutes as 1) Since NPC is tax-exempt
mandatory. (Reyes, et al., v. Court of Appeals, et al., then FELs should also be tax-
G.R. No. 118233, December 10, 1999)
exempt because of its contract with
NPC.
9. Public hearings are mandatory
2) The power barges are
prior to approval of tax ordinance, but this
still requires the taxpayer to adduce evidence to not real property subject to real
show that no public hearings ever took place. property taxes.
(Reyes, et al., v. Court of Appeals, et al., G.R. No. b. Upon the other hand the Local
118233, December 10, 1999) Public hearings are Treasurer insists that the assessment has
required to be conducted prior to the enactment of attained a state of finality hence the
an ordinance imposing real property taxes. appeal to the LBAA should be dismissed.
(Figuerres v. Court of Appeals, et al., G.R. No. 119172, Rule on the conflicting contentions.
March 25, 1999)
SUGGESTED ANSWER:
a. All the contentions of FELS are
10. The concurrent and without merit:
simultaneous remedies afforded local 1) NPC is not the owner of the
government units in enforcing collection power barges nor the operator of the
of real property taxes: power barges. The tax exemption privilege
a. Distraint of personal property; granted to NPC cannot be extended to
b. Sale of delinquent real property, and FELS. the covenant is between NPC and
c. Collection of real property tax FELs and does not bind a third person not
through ordinary court action. privy to the contract such as the Province
of Batangas.
11. Notice and publication, as well 2) The Supreme Court of New
as the legal requirements for a tax York in Consolidated Edison Company of
delinquency sale, are mandatory, and the New York, Inc., et al., v. The City of New
failure to comply therewith can invalidate the sale. York, et al., 80 Misc. 2d 1065 (1975) cited
The prescribed notices must be sent to comply in FELS Energy, Inc., v. Province of
with the requirements of due process. (De Knecht, Batangas, G. R. No. 168557, February 16,
et al,. v. Court of Appeals; De Knecht, et al., v. 2007 and companion case, held that
Honorable Sayo, 290 SCRA 223,236) barges on which were mounted gas turbine
power plants designated to generate
12. The reason behind the notice electrical power, the fuel oil barges which
requirement is that tax sales are supplied fuel oil to the power plant barges,
administrative proceedings which are in and the accessory equipment mounted on
personam in nature. (Puzon v. Abellera, 169 the barges were subject to real property
SCRA 789, 795; De Asis v. I.A.C., 169 SCRA 314) taxes.
Moreover, Article 415(9) of the Civil
Code provides that [d]ocks and structures
13. FELS Energy, Inc., had a
which, though floating, are intended by
contract to supply NPC with the electricity their nature and object to remain at a fixed
generated by FELS power barges. The place on a river, lake or coast are
contract also stated that NPC shall be considered immovable property by
 89
destination being intended by the owner for b. The treasurer has a period of sixty
an industry or work which may be carried (60) days from receipt of the protest within to
on in a building or on a piece of land and decide.
which tend directly to meet the needs of c. Within thirty (30) days from receipt
said industry or work. of treasurers decision or if the treasurer does not
b. The Treasurer is correct. The decide, within thirty (30) days from the expiration
procedure do not allow a motion for of the sixty (60) period for the treasurer to decide,
reconsideration to be filed with the Provincial the taxpayer should file an appeal with the Local
Assessor. Board of Assessment Appeals.
To allow the procedure would indeed invite d. The Local Board of Assessment
corruption in the system of appraisal and Appeals has 120 days from receipt of the appeal
assessment. it conveniently courts a graft-prone within which to decide.
situation where values of real property ay be e. The adverse decision of the Local
initially set unreasonably high, and then Board of Assessment Appeals should be
subsequently reduced upon the request of a appealed within thirty (30) days from receipt to the
property owner. In the latter instance, allusions of Central Board of Assessment Appeals.
possible cover, illicit trade-off cannot be avoided, f. The adverse decision of the Central
and in fact can conveniently take place. Such Board of Assessment Appeals shall be appealed
occasion for mischief must be prevented and to the Court of Tax Appeals (En Banc) by means
excised from our system. (FELS Energy, Inc., v. of a petition for review within thirty (30) days from
Province of Batangas, G. R. No. 168557, February 16, receipt of the adverse decision.
2007 and companion case) g. The decision of the CTA may be the
subject of a motion for reconsideration or new trial
14. A special levy or special after which an appeal may be interposed by
assessment is an imposition by a means of a petition for review on certiorari
province, a city, a municipality within the directed to the Supreme Court on pure questions
Metropolitan Manila Area, a municipality of law within a period of fifteen (15) days from
or a barangay upon real property specially receipt extendible for a period of thirty (30) days.
benefited by a public works expenditure of the
LGU to recover not more than 60% of such 18. The entitlement to a tax refund
expenditure. does not necessarily call for the
automatic payment of the sum claimed.
15. If the ground for the protest is The amount of the claim being a factual matter, it
validity of the real property tax ordinance must still be proven in the normal course and in
and not the unreasonableness of the amount accordance with the administrative procedure for
collected the tax must be paid under protest, and obtaining a refund of real property taxes, as
the issue of legality may be raised to the proper provided under the Local Government Code.
courts on certiorari without need of exhausting (Allied Banking Corporation, etc., v. Quezon City
administrative remedies. Government, et al., G. R. No. 154126, September 15,
2006)
NOTES AND COMMENTS: In the above
16. If the ground for the protest is Allied Banking case, the Supreme Court provided
unreasonableness of the amounts for the starting date of computing the two-year
collected there is need to pay under prescriptive period within which to file the claim
protest and administrative remedies must be with the Treasurer, which is from finality of the
resorted to before recourse to the proper courts. Decision. The procedure to be followed is that
shown below.
17. Procedure for refund of real
property taxes based on 19. Procedure for refund of real
unreasonableness or excessiveness of property taxes based on validity of the tax
amounts collected. measure or solutio indebeti.
a. Payment under protest at the time of a. Payment under protest not required,
payment or within thirty (30) days thereafter, claim must be directed to the local treasurer,
protest being lodged to the provincial, city or in within two (2) years from the date the taxpayer is
the case of a municipality within the Metro Manila entitled to such reduction or readjustment, who
Area the municipal treasurer. must decide within sixty (60) days from receipt.
 90
b. The denial by the local treasurer of (Lung Center of the Philippines v. Quezon City, et
the protest would fall within the Regional Trial al., etc., G. R. No. 144104, June 29, 2004)
Courts original jurisdiction, the review being the
initial judicial cognizance of the matter. Despite 22. The 1935 Constitution stated
the language of Section 195 of the Local that the lands, buildings, and
Government Code which states that the remedy improvements are used exclusively but
of the taxpayer whose protest is denied by the the present Constitution requires that the
local treasurer is to appeal with the court of
lands, buildings and improvements are
competent jurisdiction, labeling the said review
as an exercise of appellate jurisdiction is actually, directly and exclusively used.
inappropriate since the denial of the protest is not The change should not be ignored. Reliance on
the judgment or order of a lower court, but of a past decisions would have sufficed were the
local government official. (Yamane , etc. v. BA words actually as well as :directly are not
Lepanto Condominium Corporation, G. R. No. added. There must be proof therefore of the
154993, October 25, 2005) actual and direct use to be exempt from taxation.
(Lung Center of the Philippines v. Quezon City, et al.,
c. The decision of the Regional Trial etc., G. R. No. 144104, June 29, 2004)
Court should be appealed by means of a petition
for review directed to the Court of Tax Appeals
(Division). 23. The actual, direct and
d. The decision of the Court of Tax exclusive use of the property for
Appeals (Division) may be the subject of a review charitable purposes is the direct and
by the Court of Tax Appeals (en banc). immediate and actual application of the
e. The decision of the Court of Tax property itself to the purposes for which the
Appeals (en banc) may be the subject of a charitable institution is organized. It is not the use
petition for review on certiorari on pure questions of the income from the real property that is
of law directed to the Supreme Court. determinative of whether the property is used for
tax-exempt purposes.
20. Charitable institutions, If real property is used for one or more
churches and parsonages or convents commercial purposes, it is not exclusively used
appurtenant thereto, mosques, non-profit for the exempted purpose but is subject to
cemeteries, and all lands, buildings and taxation,. The words dominant use or principal
improvements that are actually, directly use cannot be substituted for the words used
exclusively without doing violence to the
and exclusively used for religious,
Constitution and the law. Solely is synonymous
charitable or educational purposes are with exclusively. (Lung Center of the Philippines v.
exempt from taxation. [Sec.28 (3) Article VI, Quezon City, et al., etc., G. R. No. 144104, June 29,
1987 Constitution] 2004)

21. The constitutional tax 24. Portions of the land of a

exemptions refer only to real property that charitable institution, such as a hospital,
are actually, directly and exclusively used for leased to private entities as well as those
religious, charitable or educational purposes, and parts of the hospital leased to private
that the only constitutionally recognized individuals are not exempt from real
exemption from taxation of revenues are those
property taxes. On the other hand, the portion
earned by non-profit, non-stock educational
of the land occupied by the hospital and portions
institutions which are actually, directly and
of the hospital used for its patients, whether
exclusively used for educational purposes.
paying or non-paying, are exempt from real
(Commissioner of Internal Revenue v. Court of
property taxes. (Lung Center of the Philippines v.
Appeals, et al., 298 SCRA 83)
Quezon City, et al., etc., G. R. No. 144104, June
The constitutional tax exemption covers
29, 2004)
property taxes only. What is exempted is not the
institution itself, those exempted from real estate
taxes are lands, buildings and improvements 25. As a general principle, a
actually, directly and exclusively used for charitable institution does not lose its
religious, charitable or educational purposes. character as such and its exemption from
taxes simply because it derives income
 91
from paying patients, whether out-patient, institutions and government-owned or controlled
or confined in the hospital, or receives corporations. [Sec. 2 (10), Introductory
subsidies from the government. So long as Provisions, Administrative Code of 1987] It is an
the money received is devoted or used altogether instrumentality exercising not only governmental
to the charitable object which it is intended to but also corporate powers. It exercises
achieve; and no money inures to the private governmental powers of eminent domain, police
benefit of the persons managing or operating the power authority, and levying of fees and
institution. (Lung Center of the Philippines v. Quezon charges.
City, et al., etc., G. R. No. 144104, June 29, 2004) Finally, the airport lands and buildings
are property owned by the government that are
26. Property that are exempt from devoted to public use and are properties of the
the payment of real property tax under the public domain. (Manila International Airport
Authority v. City of Pasay, et al., G. R. No. 163072,
Local Government Code. April 2, 2009)
a. Real property owned by the
Republic of the Philippines or any of its political 28. A telecommunications
subdivisions except when the beneficial use
company was granted by Congress on
thereof has been granted to a taxable person for
a consideration or otherwise; July 20, 1992, after the effectivity of the
b. Charitable institutions, churches, Local Government Code on January 1,
parsonages or convents appurtenant thereto, 1992, a legislative franchise with tax
mosques, non-profit or religious cemeteries, and exemption privileges which partly reads,
all lands, buildings and improvements actually, The grantee, its successors or assigns
directly and exclusively used for religious, shall be liable to pay the same taxes on
charitable and educational purposes; their real estate, buildings and personal
c. Machineries and equipment, property, exclusive of this franchise, as
actually, directly and exclusively used by local other persons or corporations are now or
water districts; and government owned and
hereafter may be required by law to pay.
controlled corporations engaged in the supply and
distribution of water and generation and This provision existed in the companys
transmission of electric power; franchise prior to the effectivity of the
d. Real property owned by duly Local Government Code. A City then
registered cooperatives; enacted an ordinance in 1993 imposing a
e. Machinery and equipment used for real property on all real properties
pollution control and environmental protection. located within the city limits, and
withdrawing all tax exemptions
27. Manila International Airport previously granted. Among properties
Authority (MIAA) it is not a government covered are those owned by the
owned or controlled corporation but an company from which the City is now
instrumentality of the government that is collecting P43 million. The properties of
exempt from taxation. the company were then scheduled by the
It is not a stock corporation because its City for sale at public auction.
capital is not divided into shares, neither is it a The company then filed a petition
non-stock corporation because there are no
for the issuance of a writ of prohibition
members. It is instead an instrumentality of the
government upon which the local governments claiming exemption under its legislative
are not allowed to levy taxes, fees or other franchise. The City defended its position
charges. raising the following:
An instrumentality refers to any agency a. There was no exhaustion of
of the National Government, not integrated administrative remedies because the
within the department framework vested with matter should have first been filed before
special functions or jurisdiction by law, endowed the Local Board of Assessment Appeals;
with some if not all corporate powers, b. The companys properties are
administering special funds, and enjoying exempt from tax under its franchise.
operational autonomy, usually through a charter.
Resolve the issues raised.
This term includes regulatory agencies chartered
SUGGESTED ANSWERS:
 92

AND SEE YOU IN

a. There is no need to exhaust
administrative remedies as the appeal to the
LBAA is not a speedy and adequate remedy
within the law. This is so because the properties COURT
are already scheduled for auction sale.
Furthermore one of the recognized
exceptions to the rule on exhaustion is that if the
issue is purely legal in character which is so in
this case.
b. The properties are exempt from
taxation. The grant of taxing powers to local
governments under the Constitution and the
Local Government Code does not affect the
power of Congress to grant tax exemptions.
The term exclusive of this franchise is
interpreted to mean properties actually, directly
and exclusively used in the radio or
telecommunications business. The subsequent
piece of legislation which reiterated the phrase
exclusive of this franchise found in the previous
tax exemption grant to the company is an
express and real intention on the part of
Congress to once against remove from the
LGCs delegated taxing power, all of the
companys properties that are actually, directly
and exclusively used in the pursuit of its
franchise. (The City Government of Quezon
City, et al., v. Bayan Telecommunications, Inc.,
G. R. No. 162015, March 6, 2006)

29. The owner operator of a BOT

and not the ultimate owner is subject to
real property taxes. Consistent with the BOT
concept and as implemented, BPPC the
owner-manager-operator of the project is the
actual user of its machineries and equipment.
BPPCs ownership and use of the machineries
and equipment are actual, direct, and immediate,
while NAPOCORs is contingent and, at this
stage of the BOT Agreement, not sufficient to
support its claim for tax exemption. (National
Power Corporation v. Central Board of Assessment
Appeals, et al., G, R. No. 171470, January 30, 2009)

ADVANCE
CONGRATULATIONS