2009 WRAP-UP REVIEW NOTES

2. Why are tax exemptions are strictly construed

TAXATION against the taxpayer and liberally in favor of the State ?
VER. 2009.08.17 SUGGESTED ANSWER: Taxes are necessary for the
copyrighted 2009 continued existence of the State.

Prepared by Prof. Abelardo T. Domondon 3. Strict interpretation of tax exemption laws.

(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL Taxes are what civilized people pay for civilized society. They
(Cand.). Lawyer-CPA-Customs Broker, Management are the lifeblood of the nation. Thus, statutes granting tax
Consultant, Professor of Law and Pre-Bar Reviewer) exemptions are construed stricissimi juris against the taxpayer
and liberally in favor of the taxing authority. A claim of tax
How to use the Notes: These Notes in the form of exemption must be clearly shown and based on language in
textual materials and representative review questions were law too plain to be mistaken. Otherwise stated, taxation is the
prepared by Prof. Domondon for the use of UST Law Bar rule, exemption is the exception. (Quezon City, et al., v. ABS-
Candidates. CBN Broadcasting Corporation, G. R. No. 166408, October 6,
The purpose of these Notes is to test the candidate’s 2008 citing Mactan Cebu International Airport Authority v.
ability to answer probable questions that may be asked in the Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA
September 13, 2009 Bar Examinations in Taxation. 667, 680) The burden of proof rests upon the party claiming the
exemption to prove that it is in fact covered by the exemption
DO NOT MEMORIZE the suggested answers. Some of so claimed. (Quezon City, supra citing Agpalo, R.E., Statutory
the answers were purposely made to be lengthy in order to Construction, 2003 ed., p. 301)
serve as explanatory devices. This is so because you do not
have time anymore to refer back to your review materials. 4. Rationale for strict interpretation of tax
exemption laws. The basis for the rule on strict construction
The materials are arranged in accordance with the bar to statutory provisions granting tax exemptions or deductions is
examination coverage. The actual bar questions may not be so to minimize differential treatment and foster impartiality,
arranged. Likewise, these Notes are only indicative of the fairness and equality of treatment among taxpayers. (Quezon
areas from where Bar questions may be sourced. The City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No.
questions shown in these Notes may or may not be exactly 166408, October 6, 2008) He who claims an exemption from
worded in the actual Bar questions. his share of common burden must justify his claim that the
legislature intended to exempt him by unmistakable terms. For
The reader is advised to take note of the areas marked exemptions from taxation are not favored in law, nor are they
with stars: presumed. They must be expressed in the clearest and most
unambiguous language and not left to mere implications. It
If pressed for time, the reader should read only the has been held that “exemptions are never presumed the burden
items marked  and . These areas represent 70% to 80% is on the claimant to establish clearly his right to exemption
of the areas that would probably be given in the 2009 Bar and cannot be made out of inference or implications but must
exams. The reader should merely browse the areas marked  be laid beyond reasonable doubt. In other words, since
and the unmarked areas because they represent only 20% to taxation is the rule and exemption the exception, the intention
30% of the areas that may probably be given this year. to make an exemption ought to be expressed in clear and
unambiguous terms. (Quezon City, supra citing Agpalo, R.E.,
WARNING: Statutory Construction, 2003 ed., p. 302)

These materials are copyrighted and/or based on the 5. What is the effect of a BIR reversal of a previous
writer’s books on Taxation and future revisions. It is prohibited ruling interpreting a law as exempting a taxpayer ?
to reproduce any part of these Notes in any form or any SUGGESTED ANSWER: A reversal of a BIR ruling
means, electronic or mechanical, including photocopying favorable to a taxpayer would not necessarily create a perpetual
without the written permission of the author. These materials exemption in his favor, for after all the government is never
are authorized for the use only of Bar reviewees the author has estopped from collecting taxes because of mistakes or errors on
personally authorized. Unauthorized users shall not be the part of its agents. (Lincoln Philippine Life Insurance
prosecuted but SHALL BE SUBJECT TO THE LAW OF Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92,
KARMA SUCH THAT THEY WILL NEVER PASS THE BAR 99)
OR WOULD BE UNHAPPY IN LIFE for stealing the
intellectual property of the author. 6. Why is the right to collect taxes
imprescriptible ?
TAXATION SUGGESTED ANSWER:
a. As a general rule, revenue laws are not intended
GENERAL PRINCIPLES OF TAXATION to be liberally construed, and exemptions are not given
retroactive application, considering that taxes are the lifeblood of
TAXATION, IN GENERAL the government and in Holmes’ memorable metaphor, the price
we pay for civilization, tax laws must be faithfully and strictly
1. Why are tax laws construed strictly against the implemented. (Commissioner of Internal Revenue v. Acosta,
State and liberally in favor of the State ? etc.,G. R. No. 154068, August 3, 2007) However, statutes
SUGGESTED ANSWER: In case of doubt, tax laws may provide for prescriptive periods for the collection of
must be construed strictly against the State and liberally in favor particular kinds of taxes.
of the taxpayer because taxes, as burdens which must be b. Tax laws, unlike remedial laws, are not to be
endured by the taxpayer, should not be presumed to go beyond applied retroactively. Revenue laws are substantive laws and
what the law expressly and clearly declares. (Lincoln Philippine their application must not be equated with remedial laws.
Life Insurance Company, Inc., etc., v. Court of Appeals, et al., (Acosta, supra)
293 SCRA 92, 99)
 2
7. It is said that taxes are the lifeblood of the b. BASIS: A tax is imposed under the power of
government and any delay in its collection would impair the taxation WHILE a license fee is imposed under police power.
rendition of government services. May the collection of c. AMOUNT: There is no limit as to the amount of a
taxes be restrained by a court ? tax WHILE the amount of license fee that could be collected is
SUGGESTED ANSWER: As a general rule, “No court limited to the cost of the license and the expenses of police
shall have the authority to grant an injunction to restrain the surveillance and regulation.
collection of any national internal revenue tax, fee or charge.” d. TIME OF PAYMENT: Taxes are normally paid after
(Sec. 218, NIRC) the start of a business WHILE a license fee before the
However, the Court of Tax Appeals is empowered to commencement of business.
enjoin the collection of taxes through administrative remedies e. EFFECT OF NON-PAYMENT: Failure to pay a tax
when collection could jeopardize the interest of the government does not make the business illegal WHILE failure to pay a
or taxpayer. (Sec. 11, Rep. Act No. 1125) license fee makes the business illegal.
f. SURRENDER: Taxes being the lifeblood of the
8. What are the grounds and procedure for state, cannot be surrendered except for lawful consideration
suspension of collection of taxes ? WHILE a license fee may be surrendered with or without
SUGGESTED ANSWER: Where the collection of the consideration.
amount of the taxpayer’s liability, sought by means of a demand
for payment, by levy, distraint or sale of property of the taxpayer, 12. Distinguish taxation from police power.
or by whatever means, as provided under existing laws, may SUGGESTED ANSSWER: Taxation is distinguishable
jeopardize the interest of the government or the taxpayer, an from police power as to the means employed to implement these
interested party may file a motion for the suspension of the public goals. Those doctrines that are unique to taxation arose
collection of the tax liability (Sec. 1, Rule 10, RRCTA effective from peculiar considerations such as those especially punitive
December 15, 2005) with the Court of Tax Appeals. effects (Southern Cross Cement Corporation v. Cement
The motion for suspension of the collection of the tax Manufacturers Association of the Philippines, et al., G. R. No.
may be filed together with the petition for review or with the 158540, August 3, 2005 citing U. S. Chief Marshall who once
answer, or in a separate motion filed by the interested party at said, the power to tax involves the power to destroy, McCulloch
any stage of the proceedings. (Sec. 3, Rule 10, RRCTA effective v. Maryland, 4 Wheaton 316, cited in Sison v. Ancheta, G. R. No.
December 15, 2005) L – 59431, July 25, 130 SCRA 654) and the belief that taxes are
lifeblood of the state. (Southern Cross Cement Corporation v.
9. Explain the sumptuary purpose of taxation. Cement Manufacturers Association of the Philippines, et al., G.
SUGGESTED ANSWER: The sumptuary purpose of R. No. 158540, August 3, 2005 citing “[T]axes being the lifeblood
taxation is to promote the general welfare and to protect the of the government, their prompt and certain availability is of the
health, safety or morals of the inhabitants. It is in the joint essence.” Sison v. Ancheta, id., citing Vera v. Fernandez, G. R.
exercise of the power of taxation and police power where No. L-31364, March 30, 1979, 89 SCRA 199]
regulatory taxes are collected. These considerations necessitated the evolution of
Taxation may be made the implement of the state’s police taxation as a distinct legal concept from police power. (Southern
power. The motivation behind many taxation measures is the Cross Cement Corporation, supra)
implementation of police power goals. [Southern Cross Cement If the question asks for an enumeration of the distinctions
Corporation v. Cement Manufacturers Association of the between the power of taxation and police power, the candidate
Philippines, et al., G. R. No. 158540, August 3, 2005 citing Lutz should reformulate no. 17 above.
v. Araneta, 98 Phil. 148, 152 (1955); in turn citing Great Atl. &
Pac. Tea Co. v. Grosjean, 302 U.S. 412; U.S. v. Biutler, 297 U.S. 13. What is the purpose of the Sugar Adjustment
1; McCulloch v. Maryland, 4 Wheaton 316] The reader should Act ?
note that the August 3, 2005 Southern Cross case is the decision SUGGESTED ANSWER: The Sugar Adjustment Act
on the motion for reconsideration of the July 8, 2004 Southern which increased existing taxes on sugar was enacted to stabilize
Cross decision. the sugar industry to prepare it for the loss of its quota in the
The so-called “sin taxes” on alcohol and tobacco U.S. market was levied for a regulatory purpose to protect and
manufacturers help dissuade the consumers from excessive promote the sugar industry which is also for a public purpose.
intake of these potentially harmful products. (Southern Cross (Lutz v. Araneta, 98 Phil. 148)
Cement Corporation v. Cement Manufacturers Association of the The Philsugin fund, an imposition on sugar, to raise funds
Philippines, et al., G. R. No. 158540, August 3, 2005) to conduct research for the improvement of the sugar industry, is
for the purpose of stabilizing the sugar industry which one of the
10. Explain the compensatory purpose of pillars of the Philippine economy which affects the welfare of the
taxation. SUGGESTED ANSWER: The compensatory State. The levy is not so much an exercise of the power of
purpose of taxation is to implement the social justice provisions taxation, nor the imposition of a special levy, but the exercise of
of the constitution through the progressive system of taxation, police power which is for the general welfare of the entire
which would result to equal distribution of wealth, etc. country, therefore for a public purpose. (Republic v. Bacolod-
Progressive income taxes alleviate the margin between Murcia Co., et al., G.R. No. L-19824, July 9, 1966)
rich and poor. (Southern Cross Cement Corporation v. Cement
Manufacturers Association of the Philippines, et al., G. R. No. 14. Section 40 (g) of the Public Service Act
158540, August 3, 2005) authorizes the collection of “x x x fees as reimbursement of
its expenses in the authorization, supervision and/or
11. What are the distinctions between a tax and a regulation of the public services: x x x g) For each permit,
license fee ? authorizing the increase in equipment, the installation of
SUGGESTED ANSWER: The following are the new units or authorizing the increase of capacity, or the
distinctions between a tax and a license fee: extension of means or general extensions in the services,
a. PURPOSE: A tax is imposed for revenue twenty centavos for each one hundred pesos or fraction of
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purposes WHILE a license fee is imposed for regulatory the additional capital necessary to carry out the permit.”
purposes. (Unless it is a joint exercise of both the police power (paraphrasing supplied)
and the power of taxation) Is the imposition a tax measure ? Explain.
 3
SUGGESTED ANSWER: No. It is not a tax measure but general. An alternative meaning is that tax proceeds should be
a simple regulatory provision for the collection of fees imposed utilized only to attain the objectives of government.
pursuant to the exercise of the State’s police power. A tax is Public use is no longer confined to the traditional notion
imposed under the taxing power of government principally for the of use by the public but held synonymous with public interest,
purpose of raising revenues. The law in question, however, public benefit, public welfare, and public convenience.
merely authorizes and requires the collection of fees for the (Commissioner of Internal Revenue v. Central Luzon Drug
reimbursement of the Commission’s expenses in the Corporation, G.R. No. 159647, April 16, 2005)
authorization, supervision and/or regulation of public services.
(Republic, etc., v. International Communications Corporation 3. Define a taxpayer’s suit.
(ICC), G. R. No. 141667, July 17, 2006) SUGGESTED ANSWER: Taxpayers’ suit is a case where
the act complained of directly involves the illegal disbursement
15. How may the power of taxation also be used of public funds derived from taxation. (Justice Melo, dissenting
to implement power of eminent domain ? in Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110)
SUGGESTED ANSWER: Tax measures are but
”enforced contributions exacted on pain of penal sanctions” and 4. What is locus standi ?
“clearly imposed for public purpose.” In most recent years, the SUGGESTED ANSWER: Locus standi is “a right of
power to tax has indeed become a most effective tool to realize appearance in a court of justice on a given question. (Abaya v.
social justice, public welfare, and the equitable distribution of Ebdane, G. R. No. 167919, February 14, 2007)
wealth. (Commissioner of Internal Revenue v. Central Luzon It is a party’s personal and substantial interest in the
Drug Corporation, G.R. No. 159647, April 16, 2005) case, such that the party has sustained or will sustain
Establishments granting the 20% senior citizens (Ibid.)direct injury as a result of the government act being
discount may claim the discounts granted to senior citizens as challenged. It calls for more than just a generalized grievance.
tax deduction based on the net cost of the goods sold or A party need not be a party to the contract to challenge
services rendered: Provided, That the cost of the discount shall its validity. (Ibid.)
be allowed as deduction from gross income for the same
taxable year that the discount is granted. Provided, further, 5. What is meant by the term “material
That the total amount of the claimed tax deduction net of value interest” ? SUGGESTED ANSWER: The term “interest”
added tax if applicable, shall be included in their gross sales means a material interest, an interest in issue affected by the
receipts for tax purposes and shall be subject to proper decree, as distinguished from mere interest in the question
documentation and to the provisions of the National Internal involved, or a mere incidental interest. (Abaya v. Ebdane, G. R.
Revenue Code, as amended. [M.E. Holding Corporation v. No. 167919, February 14, 2007)
Court of Appeals, et al., G.R. No. 160193, March 3, 2008 citing
Expanded Senior Citizens Act of 2003, Sec. 4 (a)] 6. What is the rationale for locus standi ?
SUGGESTED ANSWER: The rationale for requiring a
16. What is purpose for the limitations on the party who challenges the constitutionality of a statute to allege
power of taxation ? such a personal stake in the outcome of the controversy is “to
SUGGESTED ANSWER: The inherent and constitutional ensure that a concrete adverseness which sharpens the
limitations to the power of taxation are safeguards which presentation of issues upon which the court so largely depends
would prevent abuse in the exercise of this otherwise unlimited for illumination of different constitutional questions.” (Abaya v.
and plenary power. Ebdane, G. R. No. 167919, February 14, 2007)
The limitations also serve as a standard to measure the
validity of a tax law or the act of a taxing authority. A violation of 7. When may locus standi be brushed aside ?
the limitations serves to invalidate a tax law or act in the exercise SUGGESTED ANSWER: In cases of paramount
of the power to tax. importance where serious constitutional questions are involved,
the standing requirements may be relaxed and a suit may be
INHERENT LIMITATIONS allowed to prosper even where there is no direct injury to the
party claiming the right of judicial review. [Coconut Oil Refiners
 1. What are the inherent limitations on the power Association, Inc., etc., et al., vs. Torres, etc., et al., G. R. No.
of taxation ? 132527, July 29, 2005 citing Bayan (Bagong Alyansang
SUGGESTED ANSWER: The inherent limitations are Makabayan) v. Zamora, G. R. No. 138570, October 10, 2000,
a. Public purpose. The revenues collected from 342 SCRA 449, in turn citing Kilosbayan, Inc. v. Guingona, Jr.,
taxation should be devoted to a public purpose. G. R. No. 113375, May 5, 1994, 232 SCRA 110]
b. No improper delegation of legislative authority to
tax. Only the legislature can exercise the power of taxes unless  8. What are the requirements that must be met
the same is delegated to some other governmental body by the before taxpayers, concerned citizens and legislators may
constitution or through a law which does not violate any be accorded standing to sue ?
provision of the constitution. SUGGESTED ANSWER:
c. Territoriality. The taxing power should be a. The case should involve constitutional issues;
exercised only within territorial boundaries of the taxing authority. b. For taxpayers, there must be a claim of illegal
d. Recognition of government exemptions; and disbursement of public funds or that the tax measure is
e. Observance of the principle of comity. Comity is unconstitutional.
the respect accorded by nations to each other because they are c. For voters, there must be a showing of obvious
equals. On the other hand taxation is an act of sovereign. Thus, interest in the validity of the election law in question.
the power should be imposed upon equals out of respect. d. For concerned citizens, there must be a showing
Some authorities include no double taxation. that the issues raised are of transcendental importance which
must be settled early.
2. When are taxes considered as being for a public e. For legislators, there must be a claim that the
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purpose ? official action complained of infringes upon their prerogatives

SUGGESTED ANSWER: The tax revenues are for a as legislators. (David, et al., v. President Gloria Macapagal-
public purpose if utilized for the benefit of the community in Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)
 4
Clark Special Economic Zone or the John Hay Economic
9. What are the requisites for challenging Zone of consumer goods tax and duty-free ?
constitutionality of law including a tax law ? SUGGESTED ANSWER: The answer would not be the
SUGGESTED ANSWER: The party bringing suit must same. This time the Presidential Proclamation would be invalid
show “not only that the law or act is invalid, but also that he as the statutory tax exempt privilege was granted only to the
has sustained or is in immediate, or imminent danger of Subic Special Economic Zone and not to John Hay or Clark.
sustaining some direct injury as a result of its enforcement and This is so because the Constitution mandates that no law
not merely that he suffers thereby in some indefinite way.” granting tax exemption shall be passed without the concurrence
(Soriano III v. Lista, et al., G. R. No. 153881, March 24, 2003) of a majority of all the members of Congress. (Coconut Oil
Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R.
10. Locus standi being merely a matter of No. 132527, July 29, 2005 citing John Hay People’s Alternative
procedure, have been waived in certain instances where a Coalition, et al., v. Lim, etc., et al., G.R. No. 119775, October 24,
party who is not personally injured may be allowed to bring 2003, 414 SCRA 356)
suit. Give some examples. Furthermore, the law is very clear that the “exportation or
SUGGESTED ANSWER: The following are examples of removal of goods from the territory of the Subic Special
instances where suits have been brought by parties who have Economic Zone to other parts of the Philippine territory shall be
not have been personally injured by the operation of a law or any subject to customs duties and taxes under the Customs and
other government act but by concerned citizens, taxpayers or Tariff Code and other relevant tax laws of the Philippines.” (Ibid.)
voters who actually sue in the public interest:
a. Taxpayer’s suits to question contracts entered into 12. Nature of actual case or controversy. An
by the national government or government-owned or controlled actual case or controversy involves a conflict of legal rights, an
corporations allegedly in contravention of the law. assertion of opposite legal claims susceptible of judicial
b. A taxpayer is allowed to sue where there is a adjudication. (ABAKADA Guro Party List, etc., v. Purisima,
claim that public funds are illegally disbursed, or that public etc., et al., G. R. No. 166715, August 14, 2008 citing Cruz,
money is being deflected to any improper purpose, or that there Isagani, PHILIPPINE CONSTITUTIONAL LAW, 1995 edition, p.
is a wastage of public funds through the enforcement of an 23)
invalid or unconstitutional law. (Abaya v. Ebdane, G. R. No.
167919, February 14, 2007) 13. Criteria of being ripe for judicial
determination. A closely related requirement is ripeness, that
11. The petitioners impugn the validity of the is, the question must be ripe for adjudication. And a
establishment of tax and duty-free shops within the Subic constitutional question is ripe for adjudication when the
Special Economic Zone (SSEZ) and the removal of governmental act being challenged has a direct adverse effect
consumer goods and items from the zones without payment on the individual challenging it. (ABAKADA Guro Party List,
of corresponding duties and taxes for the reason that this etc., v. Purisima, etc., et al., G. R. No. 166715, August 14,
constitute executive legislation in violation of the rule on 2008 citing Bernas, Joaquin, THE 1987 CONSTITUTION OF
separation of powers, that only “raw material, capital and THE REPUBLIC OF THE PHILIPPINES: A COMMENTARY,
equipment” should be allowed the privilege. Rule on the 1996 edition, pp. 848-849) Thus, to be ripe for judicial
objections and reason out your answer briefly. adjudication, the petitioner must show a personal stake in the
SUGGESTED ANSWER: The objections should not be outcome of the case or an injury to himself that can be
given credence. It is legal to setup duly authorized duty-free redressed by a favorable decision of the Court. [ABAKADA
shops in the SSEZ to sell tax and duty-free consumer items in Guro Party List, etc., supra, v. Purisima, etc., citing Cruz v.
the Secured Area. This is in line with the policy enunciated in the Secretary of Environment and Natural Resources, 400 Phil.
law that “the Subic Special Economic Zone shall be developed 904 (2000), Vitug, J., separate opinion]
into a self-sustaining, industrial, commercial, financial and
investment center to generate employment opportunities in and 14. Personal injury must be shown for judicial
around the zone and to attract and promote productive foreign controversy to be ripe for judicial determination. In this
investments.” case, aside from the general claim that the dispute has ripened
While it is true that Section 12 (b) of Rep. Act No. 7227 into a judicial controversy by the mere enactment of the law
mentions only raw materials, capital and equipment, this does even without any further overt act. (ABAKADA Guro Party List,
not necessarily mean that the tax and duty free buying privilege etc., v. Purisima, etc., et al., G. R. No. 166715, August 14,
is limited to these types of articles to the exclusion of consumer 2008 citing La Bugal-B’Laan Tribal Association, Inc. v. Ramos,
goods. G.R. No. 127882, 01 December 2004, 445 SCRA 1)
It must be remembered that in construing statutes, the Thus, where petitioners fail either to assert any specific
proper course is to start out and follow the true intent of the and concrete legal claim or to demonstrate any direct adverse
Legislature and to adopt that sense which harmonizes best with effect of the law on them or are unable to show a personal
the context and promotes to the fullest manner the policy and stake in the outcome of this case or an injury to themselves
objects of the Legislature. their petition is procedurally infirm. (ABAKADA Guro Party List,
The concept of inclusio unius est exclusio alterius does etc., supra)
not find application because the phrase “tax and duty-free
importations of raw materials, capital and equipment” was 15. Constitutionality of law is exception to the
merely cited as an example of incentives that the SSEZ is doctrine of “ripe for judicial determination”. This
authorized to grant, in line with its being a free port zone. Thus, notwithstanding, public interest requires the resolution of the
the legislative intent is that consumer goods entering the SSEZ constitutional issues raised by petitioners. The grave nature of
which satisfy the needs of the zone and are consumed there are their allegations tends to cast a cloud on the presumption of
not subject to duties and taxes in accordance with Philippine law. constitutionality in favor of the law. And where an action of the
(Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc., legislative branch is alleged to have infringed the Constitution,
et al., G. R. No. 132527, July 29, 2005) it becomes not only the right but in fact the duty of the judiciary
Page63

` Would your answer be the same if a Presidential to settle the dispute. [ABAKADA Guro Party List, etc., v.
Proclamation allowed for the limited withdrawal from the Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing
Tañada v. Angara, 338 Phil. 546 (1997)]
 5
residence of the taxpayer and the place where the property
16. The VAT law provides that, the President, upon is located. Please refer to estate and donor’s taxes.
the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax 26. Juliane a non-resident alien appointed as a
to twelve percent (12%) after any of the following conditions commission agent by a domestic corporation with a sales
have been satisfied. “(i) value-added tax collection as a commission of 10% all sales actually concluded and
percentage of Gross Domestic Product (GDP) of the collected through her efforts. The local company withheld
previous year exceeds two and four-fifth percent (2 4/5%) or the amount of P107,000 from her sales commission and
(ii) national government deficit as a percentage of GDP of remitted the same to the BIR.
the previous year exceeds one and one-half percent (1 ½ She filed a claim for refund alleging that her sales
%).” commission is not taxable because the same was a
Was there an invalid delegation of legislative power ? compensation for her services rendered in Germany and
SUGGESTED ANSWER: No. There is no undue therefore considered as income from sources outside the
delegation of legislative power but only of the discretion as to the Philippines.
execution of the law. This is constitutionally permissible. Is her contention correct ?
Congress does not abdicate its functions or unduly SUGGESTED ANSWER: Yes. The important factor
delegate power when it describes what job must be done, who which determines the source of income of personal services is
must do it, and what is the scope of his authority. In the above not the residence of the payor, or the place where the contract
case the Secretary of Finance becomes merely the agent of the for service is entered into, or the place of payment, but the place
legislative department, to determine and declare the even upon where the services were actually performed.
which its expressed will takes place. The President cannot set Since the activity of securing the sales were in Germany,
aside the findings of the Secretary of Finance, who is not under then the income did not originate from sources from within the
the conditions acting as the execute alter ego or subordinate. . Philippines. (Commissioner of Internal Revenue v. Baier-Nickel,
[Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. G. R. No. 153793, August 29, 2006)
168056, September 1, 2005 and companion cases citing various NOTE AND COMMENTS: In the above case, the
cases]] Supreme Court reiterated the rule that “source of income”
relates to the property, activity or service that produced the
17. The power to tax should be exercised only income. With respect to rendition of labor or personal service, it
within the territorial boundaries of the taxing authority. In is the place where the labor or service was performed that
theory, it is only within a state’s territorial boundaries that a state determines the source of the income.
could give protection, hence it is only within that territory that it The above Baier-Nickel case discussed the import of the
could demand support in the form of taxes. landmark cases (Howden and BOAC) involving sources of
income for tax purposes both of which may be dangerous for Bar
18. Situs of taxation is the place or the authority purposes:
that has the power to collect taxes. It is premised upon the
symbiotic relation between the taxpayer and the State. 27. A domestic insurance company decided to
reinsure with a foreign reinsurer the risks it has undertaken
19. The place that gives protection is the place with its local clients. The foreign reinsurer does not have
that has the right to demand that it be supported in the form an office, neither does it do business in the Philippines. Are
of taxes so it could continually give protection. the reinsurance premiums subject to Philippine income
taxation ?
20. The situs of real property taxes is the place SUGGESTED ANSWER: Yes because the undertaking
where the property is located because it is that place that of the foreign insurance company to indemnify the local
gives protection. The applicable concept is lex situs or lex insurance company is the activity that produced the income.
rei sitae. The reinsurance premiums remitted to the foreign
reinsurer had for their source the undertaking to indemnify the
21. The situs of taxation of tangible personal local insurer against liability. Said undertaking is the activity that
property is the place where the owner is located because it is produced there insurance premiums, and the same took place in
that place that gives protection to the owner which protection the Philippines. The reinsured, the liabilities insured and the risk
extends to the tangible personal property. The applicable originally undertaken by the local insurance company, upon
concept is mobilia sequuntur personam. which the reinsurance premiums and indemnity were based,
were all situated in the Philippines. (Alexander Howden & Co.,
22. Intangible personal property may have Ltd. v. Collector of Internal Revenue, 121 Phil. 579; 13 SCRA
obtained a business situs in a particular place even if 601 (1965) cited in Baier-Nickel)
located elsewhere. Thus, the dividends earned from domestic
corporations are considered as income from within, irrespective 28. BOAC, a foreign airline company which does
where the shares of stock of such domestic corporation is not maintain any flight to and from the Philippines sold air
located. tickets in the Philippines, through a general sales agent,
relating to the carriage of passengers and cargo between
23. The situs of income taxation is determined by two points, both outside the Philippines.
the nationality, residence of the taxpayer and source of Is BOAC subject to income taxes on the sale of the
income. Please refer to general principles of income taxation tickets ?
under income taxation. SUGGESTED ANSWER: Yes. The source of income
which is taxable is that “activity” which produced the income.
24. The situs of excise taxes is the place where The ”sale of tickets” in the Philippines is the activity that
the privilege is exercised because it is that place that gives determines whether such income is taxable in the Philippines.
protection. The tickets exchanged hands here and payments for
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fares were also made here in Philippine currency. The situs of

25. The situs of transfer taxes, such as estate and the source of payments is the Philippines. the flow of wealth
donor’s taxes, is determined by the nationality and proceeded from and occurred, within the Philippine territory,
 6
enjoying the protection accorded by the Philippine Government. as amended by Executive Order (E.O.) No. 273, on
In consideration of such protection, the flow of wealth should pawnshops. The Commissioner anchored the imposition on the
share the burden of supporting the government. (Commissioner definition of lending investors provided in the 1977 Tax Code
of Internal Revenue v. British Overseas Airways Corporation which, according to him, was broad enough to include
(BOAC), 149 SCRA 395 cited in Bauer-Nickel) pawnshop operators. However, the Court noted that
NOTES AND COMMENTS: The concept of imposition of pawnshops and lending investors were subjected to different
the gross Philippine billings that taxes only flights that originate tax treatments under the Tax Code prior to its amendment by
from the Philippines apply only to resident foreign corporations the executive order; that Congress never intended to treat
doing business in the Philippines [Sec. 28 (A) (3) (a), NIRC of pawnshops in the same way as lending investors; and that the
1997] AND NOT TO incomes of non-resident foreign particularly involved section of the Tax Code explicitly subjected
corporations that are taxed on the gross income. [Sec. 28 (B) lending investors and dealers in securities only to percentage
(1)] tax. And so the Court affirmed the invalidity of the challenged
circulars, stressing that “administrative issuances must not
29. No improper delegation of legislative override, supplant or modify the law, but must remain
authority to tax. The power to tax is inherent in the State, consistent with the law they intend to carry out.” (Ibid., citing
such power being inherently legislative, based on the principle Commissioner of Internal Revenue v. Michel J. Lhuillier
that taxes are a grant of the people who are taxed, and the Pawnshop, Inc., 453 Phil. 1043 (2003), at 1052 in turn citing
grant must be made by the immediate representatives of the Commissioner of Internal Revenue v. Court of Appeals, G.R.
people; and where the people have laid the power, there it must No. 108358, 20 January 1995, 240 SCRA 368, 372; Romulo,
remain and be exercised. (Commissioner of Internal Revenue v. Mabanta, Buenaventura, Sayoc & De los Angeles v. Home
Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, Development Mutual Fund, G.R. No. 131082, 19 June 2000;
2008 citing COOLEY TAXATION, 3rd Ed., p. 43 cited in 333 SCRA 777, 786)
DIMAAMPAO, TAX PRINCIPLE AND REMEDIES, p. 13) e. The then acting Commissioner issued RMC 7-
85, changing the prescriptive period of two years to ten years
30. Instances where the national revenue officers for claims of excess quarterly income tax payments, thereby
had ventured in the area of unauthorized administrative creating a clear inconsistency with the provision of Section 230
legislation. of the 1977 Tax Code. The Court nullified the circular, ruling
a. By adding the qualification that the tax due after that the BIR did not simply interpret the law; rather it legislated
the 12% increase becomes effective shall not be lower than the guidelines contrary to the statute passed by Congress. [Ibid.,
tax actually paid prior to 1 January 2000, Revenue Regulation Philippine Bank of Communications v. Commissioner of Internal
No. 17-99 effectively imposes a tax which is the higher amount Revenue, 361 Phil. 916 (1999)]
between the ad valorem tax being paid at the end of the three f. The Supreme Court ruled as invalid RMO 4-87
(3)-year transition period and the specific tax under paragraph which had construed the amnesty coverage under E.O. No. 41
C, sub-paragraph (1)-(4), as increased by 12%—a situation not (1986) to include only assessments issued by the BIR after the
supported by the plain wording of Section 145 of the Tax Code. promulgation of the executive order on 22 August 1986 and not
(Commissioner of Internal Revenue v. Fortune Tobacco assessments made to that date. The Supreme Court resolved
Corporation, G. R. Nos. 167274-75, July 21, 2008) in the negative. [Ibid., Commissioner of Internal Revenue v.
b. Respondent was not informed in writing of the CA, et al., 310 Phil. 392 (1995)]
law and the facts on which the assessment of estate taxes was
made pursuant to Section 228 of the 1997 Tax Code, as 31. The rule-making power must be confined to
amended by Republic Act (R.A.) No. 8424. She was merely details for regulating the mode or proceedings in order to
notified of the findings by the Commissioner, who had simply carry into effect the law as it has been enacted.
relied upon the old provisions of the law and Revenue a. It cannot be extended to amend or expand the
Regulation No. 12-85 which was based on the old provision of statutory requirements or to embrace matters not covered by
the law. The Court held that in case of discrepancy between the the statute. [Commissioner of Internal Revenue v. Fortune
law as amended and the implementing regulation based on the Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008
old law, the former necessarily prevails. The law must still be citing Landbank of the Philippines v. Court of Appeals, 327 Phil.
followed, even though the existing tax regulation at that time 1047, 1052 (1996)] An administrative agency issuing
provided for a different procedure. (Ibid., Commissioner of regulations may not enlarge, alter or restrict the provisions of
Internal Revenue v. Reyes, G.R. No. 159694, 27 January 2006, the law it administers, and it cannot engraft additional
480 SCRA 382 in turn citing Philippine Petroleum Corp. v. requirements not contemplated by the legislature. (Ibid.,
Municipality of Pililla, Rizal, 198 SCRA 82, 88, 3 June 1991, Commissioner of Internal Revenue v. Central Luzon Drug
likewise citing Shell Philippines, Inc. v. Central Bank of the Corporation, G.R. No. 159647, 15 April 2005, 456 SCRA 414)
Philippines, 162 SCRA 628, 634, 27 June 1988) The “plain meaning rule” or verba legis in statutory
c. The tax authorities gave the term “tax credit” in construction should be applied such that where the words of a
Sections 2(i) and 4 of Revenue Regulation 2-94 a meaning statute are clear, plain and free from ambiguity, it must be
utterly disparate from what R.A. No. 7432 provides. Their given its literal meaning and applied without attempted
interpretation muddled up the intent of Congress to grant a interpretation. (Ibid.)
mere discount privilege and not a sales discount. The Court, b. Administrative regulations must always be in
striking down the revenue regulation, held that an harmony with the provisions of the law because any resulting
administrative agency issuing regulations may not enlarge, discrepancy between the two will always be resolved in favor of
alter or restrict the provisions of the law it administers, and it the basic law. [Commissioner of Internal Revenue v. Fortune
cannot engraft additional requirements not contemplated by the Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008
legislature. (Ibid., Commissioner of Internal Revenue v. Central citing Landbank of the Philippines v. Court of Appeals, 327 Phil.
Luzon Drug Corporation, G.R. No. 159647, 15 April 2005, 456 1047, 1052 (1996)]
SCRA 414)
d. Commissioner Jose Ong issued Revenue CONSTITUTIONAL LIMITATIONS
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Memorandum Order (RMO) No. 15-91, as well as the

clarificatory Revenue Memorandum Circular (RMC) 43-91, 1. What are the constitutional limitations on the
imposing a 5% lending investor’s tax under the 1977 Tax Code, power of taxation ?
 7
SUGGESTED ANSWER: The general or indirect n. Tax exemption of all revenues and assets of non-
constitutional limitations as well as the specific or direct stock, non-profit educational institutions used actually, directly
constitutional limitations. and exclusively for educational purposes;
o. Tax exemption of all revenues and assets of
2. What are the general or indirect constitutional proprietary or cooperative educational institutions subject to
limitations on the power of taxation ? limitations provided by law including restrictions on dividends
SUGGESTED ANSWER: The general or indirect and provisions for reinvestment of profits;
constitutional limitations are the following: p. Tax exemption of grants, endowments, donations
a. Due process clause; or contributions used actually, directly and exclusively for
b. Equal protection clause; educational purposes subject to conditions prescribed by law.
c. Freedom of the press;
d. Religious freedom; 4. No denial of due process when the
e. No taking of private property without just respondent is given the opportunity to file affidavits and
compensation; other pleadings during the preliminary investigation. A
f. Non-impairment clause; respondent cannot claim denial of due process when she was
g. Law-making process: given the opportunity to file her affidavits and other pleadings
1) Bill should embrace only one subject and submit evidence before the DOJ during the preliminary
expressed in the title thereof; investigation of her case and before the Information was filed
2) Three (3) readings on three separate days; against her.
3) Printed copies in final form distributed Due process is merely an opportunity to be heard. In
three (3) days before passage. addition, preliminary investigation conducted by the DOJ is
h. Presidential power to grant reprieves, merely inquisitorial. It is not a trial of the case on the merits.
commutations and pardons and remittal of fines and forfeiture Its sole purpose is to determine whether a crime has been
after conviction by final judgment. committed and whether the respondent therein is probably
guilty of the crime. It is not the occasion for the full and
3. What are the specific or direct constitutional exhaustive display of the parties’ evidence. Hence, if the
limitation ? investigating prosecutor is already satisfied that he can
SUGGESTED ANSWER: reasonably determine the existence of probable cause based
a. No imprisonment for non-payment of a poll tax; on the parties’ evidence thus presented, he may terminate the
b. Taxation shall be uniform and equitable; proceedings and resolve the case. (Santos v. People, et al, G.
c. Congress shall evolve a progressive system of R. No. 173176, August 26, 2008 citing De Ocampo v.
taxation; Secretary of Justice, G.R. No. G.R. No. 147932, 25 January
d. All appropriation, revenue or tariff bills shall 2006, 480 SCRA 71, 81-82)
originate exclusively in the House of Representatives, but the
Senate may propose and concur with amendments; 5. Equal protection of the law clause is subject
e. The President shall have the power to veto any to reasonable classification. If the groupings are
particular item or items in an appropriation, revenue, or tariff bill, characterized by substantial distinctions that make real
but the veto shall not affect the item or items to which he does differences, one class may be treated and regulated differently
not object; from another. The classification must also be germane to the
f. Delegated power of the President to impose tariff purpose of the law and must apply to all those belonging to the
rates, import and export quotas, tonnage and wharfage dues: same class. (Tiu, et al., v. Court of Appeals, et al., G.R. No.
1) Delegation by Congress 127410, January 20, 1999)
2) through a law
3) subject to Congressional limits and 6. The equal protection of the laws clause of the
restrictions Constitution allows classification. Classification in law, as in
4) within the framework of national the other departments of knowledge or practice, is the grouping
development program. of things in speculation or practice because they agree with
g. Tax exemption of charitable institutions, churches, one another in certain particulars. A law is not invalid because
parsonages and convents appurtenant thereto, mosques, and all of simple inequality. The very idea of classification is that of
lands, buildings and improvements of all kinds actually, directly inequality, so that it goes without saying that the mere fact of
and exclusively used for religious, charitable or educational inequality in no manner determines the matter of
purposes; constitutionality.
h. No tax exemption without the concurrence of All that is required of a valid classification is that it be
majority vote of all members of Congress; reasonable, which means that the classification should be
i. No use of public money or property for religious based on substantial distinctions which make for real
purposes except if priest is assigned to the armed forces, penal differences, that it must be germane to the purpose of the law;
institutions, government orphanage or leprosarium; that it must not be limited to existing conditions only; and that it
j. Money collected on tax levied for a special must apply equally to each member of the class. This Court
purpose to be used only for such purpose, balance if any, to has held that the standard is satisfied if the classification or
general funds; distinction is based on a reasonable foundation or rational
k. The Supreme Court's power to review judgments basis and is not palpably arbitrary. [ABAKADA Guro Party
or orders of lower courts in all cases involving the legality of any List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14,
tax, impose, assessment or toll or the legality of any penalty 2008]
imposed in relation to the above;
l. Authority of local government units to create their 7. State has discretion to make the
own sources of revenue, to levy taxes, fees and other charges classification. In the exercise of its power to make
subject to guidelines and limitations imposed by Congress classifications for the purpose of enacting laws over matters
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consistent with the basic policy of local autonomy; within its jurisdiction, the state is recognized as enjoying a wide
m. Automatic release of local government's just range of discretion. It is not necessary that the classification be
share in national taxes; based on scientific or marked differences of things or in their
 8
relation. Neither is it necessary that the classification be made end purposes of the law, are not categorized further. They are all
with mathematical nicety. Hence, legislative classification may similarly treated, both in privileges granted and in obligations
in many cases properly rest on narrow distinctions, for the required. (Coconut Oil Refiners Association, Inc., etc., et al., v.
equal protection guaranty does not preclude the legislature Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Tiu, et
from recognizing degrees of evil or harm, and legislation is al., v. Court of Appeals, et al., G.R. No. 127410, January 20,
addressed to evils as they may appear. [ABAKADA Guro Party 1999, 301 SCRA 278)
List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14,
2008]  11. Is the statutory grant of tax and duty-free
importation into the Subic Special Economic Zone violative
8. Equal protection does not demand absolute the “preferential use” concept of the Constitution ?
equality. The equal protection clause exists to prevent undue SUGGESTED ANSWER: No. The mere fact that the law
favor or privilege. It is intended to eliminate discrimination and authorizes the importation and trade of foreign goods does not
oppression based on inequality. Recognizing the existence of suffice to declare it unconstitutional on this ground.
real differences among men, the equal protection clause does While the Constitution does not encourage the unlimited
not demand absolute equality. It merely requires that all entry of foreign goods, services and investments into the country,
persons shall be treated alike, under like circumstances and it does not prohibit them either. In fact, it allows an exchange on
conditions, both as to the privileges conferred and liabilities the basis of equality and reciprocity, frowning only in foreign
enforced. (Santos v. People, et al, G. R. No. 173176, August competition that is unfair. (Coconut Oil Refiners Association,
26, 2008 citing Himagan v. People, G.R. No. 113811, 7 Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29,
October 1994, 237 SCRA 538, 551. 2005 citing Tanada v. Angara, G. R. No. 118295, May 2, 1997,
It is imperative to duly establish that the one invoking 272 SCRA 18)
equal protection and the person to which she is being
compared were indeed similarly situated, i.e., that they 12. Equality and uniformity of taxation may mean
committed identical acts for which they were charged with the the same as equal protection. In such a case, the terms
violation of the same provisions of the NIRC; and that they would mean that all subjects and objects of taxation which are
presented similar arguments and evidence in their defense - similarly situated shall be subject to the same burdens and
yet, they were treated differently. (Santos, supra) granted the same privileges without any discrimination
whatsoever.
9. What are the requisites for the validity of a
classification ? 13. Uniformity may have a restrictive meaning
SUGGESTED ANSWER: Classification, to be valid, different from equality and equal protection. It would mean
must then that the same rate shall be imposed for the same subjects
(a) rest on substantial distinctions, and objects within the territorial boundaries of a taxing authority.
(b) be germane to the purpose of the law,
(c) not be limited to existing conditions only, and 14. It is inherent in the power to tax that the State
(d) apply equally to all members of the same class. be free to select the subjects of taxation, and it has been
(Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January repeatedly held that, "inequalities which result from a singling out
20, 1999) of one particular class of taxation, or exemption, infringe no
constitutional limitation." (Commissioner of Internal Revenue, et
 10. The law grant of tax and duty-free status under al., v. Santos, et al., 277 SCRA 617)
Rep. Act No. 7227, to retailers inside the SSEZ without
granting the same to those outside the SSEZ. Is there a 15. The law providing financial rewards to tax
violation of the equal protection clause ? collectors is constitutional. Public service is its own reward.
SUGGESTED ANSWER: There is no violation of equal Nevertheless, public officers may by law be rewarded for
protection because there exists a valid classification as shown exemplary and exceptional performance. A system of
below: incentives for exceeding the set expectations of a public office
a. Significant distinctions exist between the two is not anathema to the concept of public accountability. In fact,
groups. Those outside of the SSEZ maintain their business it recognizes and reinforces dedication to duty, industry,
within Philippine customs territory while those within the SSEZ efficiency and loyalty to public service of deserving government
operate within the so-called “separate customs territory.” To personnel.
grant the same privileges would clearly defeat the statue’s intent The U.S. Supreme Court validated a law which awards
to carve a territory out of the military reservations in Subic Bay to officers of the customs as well as other parties an amount
where free flow of goods and capital is maintained. not exceeding one-half of the net proceeds of forfeitures in
b. The classification is germane to the purpose of violation of the laws against smuggling. [ABAKADA Guro Party
Rep. Act No. 7227. As held in Tiu, the real concern of the law is List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14,
to convert the lands formerly occupied by the US military bases 2008 citing United States v. Matthews, 173 U.S. 381 (1899)]
into economic or industrial areas. In furtherance of such The offer of a portion of such penalties to the collectors
objective, Congress deemed it necessary to extend economic is to stimulate and reward their zeal and industry in detecting
incentives, in terms of a complete package of tax incentives and fraudulent attempts to evade payment of duties and taxes.
other benefits, to the establishments within the zone to attract [ABAKADA Guro Party List, etc., supra citing Dorsheimer v.
and encourage foreign and local investors. United States, 74 U.S. 166 (1868)]
c. The classification is not limited to the existing In the same vein, employees of the BIR and the BOC
conditions when the law was promulgated but to future may by law be entitled to a reward when, as a consequence of
conditions as well, inasmuch as the law envisioned the former their zeal in the enforcement of tax and customs laws, they
military reservation to ultimately develop into a self-sustaining exceed their revenue targets. Public service is its own reward.
investment center. Nevertheless, public officers may by law be rewarded for
d. The classification applies equally to all retailers exemplary and exceptional performance. A system of
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found within the “secured area.” As ruled in Tiu, the individuals incentives for exceeding the set expectations of a public office
and businesses within the “secured area,” being in like is not anathema to the concept of public accountability. In fact,
circumstances or contributing directly to the achievement of the it recognizes and reinforces dedication to duty, industry,
 9
efficiency and loyalty to public service of deserving government accorded to the BIR and the BOC under RA 9335 fully satisfy
personnel. (ABAKADA Guro Party List, etc., supra) the demands of equal protection. [ABAKADA Guro Party List,
etc. supra)]
16. Rewards law establishes safeguards to 18. The prosecution of one guilty person while
ensure that the reward system will not create “bounty others equally guilty are not prosecuted, however, is not,
hunters.” The Attrition Act of 2005 RA 9335 establishes by itself, a denial of the equal protection of the laws.
safeguards to ensure that the reward will not be claimed if it Where the official action purports to be in conformity to the
will be either the fruit of “bounty hunting or mercenary activity” statutory classification, an erroneous or mistaken performance
or the product of the irregular performance of official duties. of the statutory duty, although a violation of the statute, is not
One of these precautionary measures is embodied in Section 8 without more a denial of the equal protection of the laws. The
of the law: unlawful administration by officers of a statute fair on its face,
SEC. 8. Liability of Officials, Examiners and resulting in its unequal application to those who are entitled to
Employees of the BIR and the BOC. – The officials, be treated alike, is not a denial of equal protection unless there
examiners, and employees of the [BIR] and the [BOC] is shown to be present in it an element of intentional or
who violate this Act or who are guilty of negligence, purposeful discrimination. This may appear on the face of the
abuses or acts of malfeasance or misfeasance or fail to action taken with respect to a particular class or person, or it
exercise extraordinary diligence in the performance of may only be shown by extrinsic evidence showing a
their duties shall be held liable for any loss or injury discriminatory design over another not to be inferred from the
suffered by any business establishment or taxpayer as a result action itself.
of such violation, negligence, abuse, malfeasance, But a discriminatory purpose is not presumed, there
misfeasance or failure to exercise extraordinary diligence. must be a showing of “clear and intentional discrimination.
(ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. [Santos v. People, et al, G. R. No. 173176, August 26, 2008
No. 166715, August 14, 2008) citing People v. Dela Piedra, 403 Phil. 31, 54-56 (2001)]

17. The rewards law to tax collectors does not 19. There is no denial of equal protection where
violate equal protection. Equality guaranteed under the the prosecution exercises its discretion in determining
equal protection clause is equality under the same conditions probable cause. The discretion of who to prosecute depends
and among persons similarly situated; it is equality among on the prosecution’s sound assessment whether the evidence
equals, not similarity of treatment of persons who are classified before it can justify a reasonable belief that a person has
based on substantial differences in relation to the object to be committed an offense. The presumption is that the prosecuting
accomplished. When things or persons are different in fact or officers regularly performed their duties, and this presumption
circumstance, they may be treated in law differently. can be overcome only by proof to the contrary, not by mere
The guaranty of equal protection of the laws is not a speculation. There must be evidence to overcome this
guaranty of equality in the application of the laws upon all presumption. The mere allegation a Cebuana, was charged
citizens of the [S]tate. It is not, therefore, a requirement, in with the commission of a crime, while a Zamboangueña, was
order to avoid the constitutional prohibition against inequality, not, is insufficient to support a conclusion that the prosecution
that every man, woman and child should be affected alike by a officers acted in denial of the equal protection of the laws.
statute. Equality of operation of statutes does not mean (Santos v. People, et al, G. R. No. 173176, August 26, 2008)
indiscriminate operation on persons merely as such, but on
persons according to the circumstances surrounding them. It 20. Equal protection should not be used to
guarantees equality, not identity of rights. protect commission of crime. While all persons accused of
The Constitution does not require that things which are crime are to be treated on a basis of equality before the law, it
different in fact be treated in law as though they were the same. does not follow that they are to be protected in the commission
The equal protection clause does not forbid discrimination as of crime. It would be unconscionable, for instance, to excuse a
to things that are different. It does not prohibit legislation which defendant guilty of murder because others have murdered with
is limited either in the object to which it is directed or by the impunity. The remedy for unequal enforcement of the law in
territory within which it is to operate. [ABAKADA Guro Party such instances does not lie in the exoneration of the guilty at
List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, the expense of society x x x. Protection of the law will be
2008] extended to all persons equally in the pursuit of their lawful
The equal protection clause recognizes a valid occupations, but no person has the right to demand protection
classification, that is, a classification that has a reasonable of the law in the commission of a crime.
foundation or rational basis and not arbitrary. 1[22] With respect Likewise, [i]f the failure of prosecutors to enforce the
to RA 9335, its expressed public policy is the optimization of criminal laws as to some persons should be converted into a
the revenue-generation capability and collection of the BIR and defense for others charged with crime, the result would be that
the BOC. Since the subject of the law is the revenue- the trial of the district attorney for nonfeasance would become
generation capability and collection of the BIR and the BOC, an issue in the trial of many persons charged with heinous
the incentives and/or sanctions provided in the law should crimes and the enforcement of law would suffer a complete
logically pertain to the said agencies. Moreover, the law breakdown. (Santos v. People, et al, G. R. No. 173176, August
concerns only the BIR and the BOC because they have the 26, 2008)
common distinct primary function of generating revenues for
the national government through the collection of taxes, 21. A fixed annual license fee on those engaged
customs duties, fees and charges. in the business of general enterprise was also imposed on
Both the BIR and the BOC are bureaus under the DOF. the sale of bibles by a religious sect. Is this valid or
They principally perform the special function of being the violative of the constitutionally guaranteed freedom of
instrumentalities through which the State exercises one of its religion ?
great inherent functions – taxation. Indubitably, such SUGGESTED ANSWER: It is not valid because it
substantial distinction is germane and intimately related to the violates the constitutionally guaranteed freedom of religion. As
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purpose of the law. Hence, the classification and treatment a license fee is fixed in amount and unrelated to the receipts of
the taxpayer, such a license fee, when applied to a religious sect
1 is actually imposed as a condition for the free exercise of
 10
religion. A license fee “restrains in advance those constitutional taxation, it was held that said provisions cannot be considered
liberties of press and religion and inevitably tends to suppress as extending its application to franchises such as that of PLDT.
their exercise.” (Philippine Long Distance Telephone Company, Inc., v. City of
Davao, et al., etc., G. R. No. 143867, August 22, 2001)
22. A lawful tax on a new subject, or an increased
tax on an old one, does not interfere with a contract or 26. The primary reason for the withdrawal of tax
impairs its obligation, within the meaning of the constitution. exemption privileges granted to government owned and
Even though such taxation may affect particular contracts, as it controlled corporations and all other units of government was
may increase the debt of one person and lessen the security of that such privilege resulted to serious tax base erosion and
another, or may impose additional burdens upon one class and distortions in the tax treatment of similarly situated enterprises,
release the burdens of another, still the tax must be paid unless hence resulting in the need for these entities to share in the
prohibited by the constitution, nor can it be said that it impairs requirements of development, fiscal or otherwise, by paying the
the obligations of any existing contract in its true and legal taxes and other charges due them. (Philippine Ports Authority v.
sense. (Tolentino v. Secretary of Finance, et al., and companion City of Iloilo, G. R. No. 109791, July 14, 2003)
cases, 235 SCRA 630)
27. National Power Corporation (NPC) is of the
23. The withdrawal of a tax exemption should not insistence that it is not subject to the payment of franchises
be construed as prohibiting future grants of exemption from taxes imposed by the Province of Isabela because all of its
all taxes. Indeed, the grant of taxing powers to local shares are owned by the Republic of the Philippines. It is
government units under the Local Government Code does not thus, an instrumentality of the National Government which
affect the power of Congress to grant exemptions to certain is exempt from local taxation. As such it is not a private
persons, pursuant to a declared national policy. The legal effect corporation engaged in “business enjoying franchise”
of the constitutional grant to local governments simply means Is such contention meritorious ?
that in interpreting statutory provisions on municipal taxing SUGGESTED ANSWER: No. Philippine Long Distance
powers, doubts must be resolved in favor of municipal Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No.
corporations. (Philippine Long Distance Telephone Company, 143867, August 22, 2001, upheld the authority of the City of
Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, Davao, a local government unit, to impose and collect a local
2001) franchise tax because the Local Government Code has
withdrawn all tax exemptions previously enjoyed by all persons
24. Tax exemptions in franchises are always and authorized local government units to impose a tax on
subject to withdrawal. Moreover, Smart’s franchise was business enjoying a franchise tax notwithstanding the grant of
granted with the express condition that it is subject to tax exemption to them.
amendment, alteration, or repeal. (1987 CONSTITUTION, Art.
XII, Sec. 11) 28. “In lieu of all taxes in the franchise of ABS-
It is enough to say that the parties to a contract cannot, CBN does not exempt it from local franchise taxes.” The
through the exercise of prophetic discernment, fetter the “in lieu of all taxes” provision in the franchise of ABS-CBN does
exercise of the taxing power of the State. For not only are not expressly provide what kind of taxes ABS-CBN is exempted
existing laws read into contracts in order to fix obligations as from. It is not clear whether the exemption would include both
between parties, but the reservation of essential attributes of local, whether municipal, city or provincial, and national tax.
sovereign power is also read into contracts as a basic Whether the “in lieu of all taxes provision” would include
postulate of the legal order. The policy of protecting contracts exemption from local tax is not unequivocal.
against impairment presupposes the maintenance of a The right to exemption from local franchise tax must be
government which retains adequate authority to secure the clearly established and cannot be made out of inference or
peace and good order of society. implications but must be laid beyond reasonable doubt. Verily,
In truth, the Contract Clause has never been thought as the uncertainty in the “in lieu of all taxes” provision should be
a limitation on the exercise of the State’s power of taxation construed against ABS-CBN. ABS-CBN has the burden to
save only where a tax exemption has been granted for a valid prove that it is in fact covered by the exemption so claimed but
consideration. (Smart Communications, Inc. v. The City of has failed to do so. (Quezon City, et al., v. ABS-CBN
Davao, etc., et al., G. R. No. 155491, September 16, 2008 Broadcasting Corporation, G. R. No. 166408, October 6, 2008.
citing Tolentino v. Secretary of Finance, G. R. No. 115455, This is practically the same holding in an earlier case involving
August 25, 1994, 235 SCRA 630, 685. The author opines that another telecommunications company. Smart
since practically all franchises granted to telecommunications Communications, Inc. v. The City of Davao, etc., et al., G. R.
companies are similarly worded that the above doctrine finds No. 155491, September 16, 2008. The author opines that
application to the others) since practically all franchises granted to telecommunications
companies are similarly worded that the above doctrine finds
25. When Congress approved a provision that, application to the others.)
“Any advantage, favor, privilege, exemption, or immunity granted
under existing franchises, or may hereafter be granted, shall ipso 29. “In lieu of all taxes” refers to national internal
facto become part of previously granted telecommunications revenue taxes and not to local taxes. The “in lieu of all
franchises and shall be accorded immediately and taxes” clause applies only to national internal revenue taxes
unconditionally to the grantees of such franchises: Provided, and not to local taxes. As appropriately pointed out in the
however, That the foregoing shall neither apply to nor affect separate opinion of Justice Antonio T. Carpio in a similar case
provisions of telecommunications franchises concerning territory involving a demand for exemption from local franchise taxes:
covered by the franchise, the life span of the franchise, or the [T]he "in lieu of all taxes" clause in Smart's franchise
type of service authorized by the franchise.” (Underscoring refers only to taxes, other than income tax, imposed under the
supplied) there was no intention for it to operate as a blanket National Internal Revenue Code. The "in lieu of all taxes"
tax exemption to all telecommunications entities. Applying clause does not apply to local taxes. The proviso in the first
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the rule of strict construction of laws granting tax exemptions paragraph of Section 9 of Smart's franchise states that the
and the rule that doubts should be resolved in favor of municipal grantee shall "continue to be liable for income taxes payable
corporations in interpreting statutory provisions on municipal under Title II of the National Internal Revenue Code." Also, the
 11
second paragraph of Section 9 speaks of tax returns filed and On the other hand, radio and/or television companies
taxes paid to the "Commissioner of Internal Revenue or his with yearly gross receipts exceeding P10,000,000.00 were
duly authorized representative in accordance with the National subject to 10% VAT, pursuant to Section 102 of the NIRC.
Internal Revenue Code." Moreover, the same paragraph On January 1, 1998, R.A. No. 8424 was passed
declares that the tax returns "shall be subject to audit by the confirming the 10% VAT liability of radio and/or television
Bureau of Internal Revenue." Nothing is mentioned in Section 9 companies with yearly gross receipts exceeding
about local taxes. The clear intent is for the "in lieu of all taxes" P10,000,000.00.
clause to apply only to taxes under the National Internal R.A. No. 9337 was subsequently enacted and became effective
Revenue Code and not to local taxes. Even with respect to on July 1, 2005. The said law further amended the NIRC by
national internal revenue taxes, the "in lieu of all taxes" clause increasing the rate of VAT to 12%. The effectivity of the
does not apply to income tax. imposition of the 12% VAT was later moved from January 1,
If Congress intended the "in lieu of all taxes" clause in 2006 to February 1, 2006.
Smart's franchise to also apply to local taxes, Congress would In consonance with the above survey of pertinent laws on the
have expressly mentioned the exemption from municipal and matter, ABS-CBN is subject to the payment of VAT. It does not
provincial taxes. Congress could have used the language in have the option to choose between the payment of franchise
Section 9(b) of Clavecilla's old franchise, as follows: tax or VAT since it is a broadcasting company with yearly gross
x x x in lieu of any and all taxes of any kind, nature or receipts exceeding Ten Million Pesos (P10,000,000.00).
description levied, established or collected by any authority (Quezon City, et al., v. ABS-CBN Broadcasting
whatsoever, municipal, provincial or national, from which the Corporation, G. R. No. 166408, October 6, 2008. The author
grantee is hereby expressly exempted, x x x. (Emphasis opines that since practically all franchises granted to
supplied). telecommunications companies are similarly worded that the
However, Congress did not expressly exempt Smart above doctrine finds application to the others.)
from local taxes. Congress used the "in lieu of all taxes" clause
only in reference to national internal revenue taxes. The only 32. Double taxation in its generic sense, this
interpretation, under the rule on strict construction of tax means taxing the same subject or object twice during the
exemptions, is that the "in lieu of all taxes" clause in Smart's same taxable period.
franchise refers only to national and not to local taxes. In its particular sense, it may mean direct duplicate
[Smart Communications, Inc. v. The City of Davao, etc., et al., taxation, which is prohibited under the constitution because it
G. R. No. 155491, September 16, 2008 citing Philippine Long violates the concept of equal protection, uniformity and
Distance Telephone Company, Inc. v. City of Davao, 447 Phil. equitableness of taxation. Indirect duplicate taxation is not
571, 594 (2003)] anathematized by the above constitutional limitations.

30. The “in lieu of all taxes” clause in the  33. What are the elements of direct duplicate
franchise of ABS-CBN has become functus officio with the taxation ?
abolition of the franchise tax on broadcasting companies SUGGESTED ANSWER:
with yearly gross receipts exceeding Ten Million Pesos. a. Same
The clause “in lieu of all taxes” does not pertain to VAT or any 1) Subject or object is taxed twice
other tax. It cannot apply when what is paid is a tax other than 2) by the same taxing authority
a franchise tax. Since the franchise tax on the broadcasting 3) for the same taxing purpose
companies with yearly gross receipts exceeding ten million 4) during the same taxable period
pesos has been abolished, the “in lieu of all taxes” clause has b. Taxing all of the subjects or objects for the first
now become functus officio, rendered inoperative. (Quezon time without taxing all of them for the second time.
City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. If any of the elements are absent then there is indirect
166408, October 6, 2008. This is practically the same holding duplicate taxation which is not prohibited by the constitution.
in an earlier case involving another telecommunications NOTES AND COMMENTS:
company. Smart Communications, Inc. v. The City of Davao, a. Presence of the 2nd element violates the equal
etc., et al., G. R. No. 155491, September 16, 2008. The author protection clause. If only the 1st element is present, taxing the
opines that since practically all franchises granted to same subject or object twice, by the same taxing authority, etc.,
telecommunications companies are similarly worded that the there is no violation of the equal protection clause because all
above doctrine finds application to the others.) subjects and objects that are similarly situated are subject to the
same burdens and granted the same privileges without any
31. Historical background on why ABS-CBN is discrimination whatsoever,
subject to VAT and not to the franchise tax. At the time of The presence of the 2nd element, taxing all of the subjects
the enactment of its franchise on May 3, 1995, ABS-CBN was and objects for the first time, without taxing all for the second
subject to 3% franchise tax under Section 117(b) of the 1977 time, results to discrimination among subjects and objects that
National Internal Revenue Code (NIRC), as amended. are similarly situated, hence violative of the equal protection
On January 1, 1996, R.A. No. 7716, otherwise known as the clause.
Expanded Value Added Tax Law, took effect and subjected to
VAT those services rendered by radio and/or broadcasting 34. Double taxation a valid defense against the
stations. legality of a tax measure if the double taxation is direct
Notably, under the same law, “telephone and/or telegraph duplicate taxation, because it would violate the equal protection
systems, broadcasting stations and other franchise grantees” clause of the constitution.
were omitted from the list of entities subject to franchise tax.
The impression was that these entities were subject to 10% 35. When an item of income is taxed in the
VAT but not to franchise tax. Subsequently, R.A. No. 8241 took Philippines and the same income is taxed in another
effect on January 1, 1997 containing more amendments to the country, this would be known as international juridical
NIRC. Radio and/or television companies whose annual gross double taxation which is the imposition of comparable taxes in
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receipts do not exceed P10,000,000.00 were granted the two or more states on the same taxpayer in respect of the same
option to choose between paying 3% national franchise tax or subject matter and for identical grounds. (Commissioner of
10% VAT
 12
Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No. SUGGESTED ANSWER: No. The VAT does not violate
127105, June 25, 1999) the progressive system of taxation. The mandate to Congress is
not to prescribe but to evolve a progressive system of taxation.
 36. What are the methods for avoiding double Otherwise, sales taxes which perhaps are the oldest form of
taxation (indirect duplicate taxation) ? indirect taxes, would have been prohibited with the proclamation
SUGGESTED ANSWER: The following are the methods of the constitutional provision. Sales taxes are also regressive. .
of avoiding double taxation: [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No.
a. Tax treaties which exempts foreign nationals from 168056, September 1, 2005 and companion cases citing
local taxation and local nationals from foreign taxation under the Tolentino v. Secretary of Finance, et al., G. R. No. 115455,
principle of reciprocity. August 25, 1994, 235 SCRA 630]
b. Tax credits where foreign taxes are allowed as
deductions from local taxes that are due to be paid. 41. All revenues and assets of non-stock, non-
c. Allowing foreign taxes as a deduction from gross profit educational institutions that are actually, directly and
income. exclusively used for educational purposes shall be exempt
from taxation.
37. Tax credit generally refers to an amount that is
subtracted directly from one’s total tax liability, an allowance 42. Revenues and assets of proprietary
against the tax itself, or a deduction from what is owned. educational institutions, including those which are
A tax credit reduces the tax due, including –whenever cooperatively owned, may be entitled to exemptions subject
applicable – the income tax that is determined after applying the to limitations provided by law including restrictions on
corresponding tax rates to taxable income. (Commissioner of dividends and provisions for reinvestments. There is no law
Internal Revenue v. Central Luzon Drug Corporation, G. R. No. at the present which grants exemptions, other the exemptions
159647, April 15, 2005) granted to cooperatives.

38. A tax deduction is defined as a subtraction fro OTHER CONCEPTS

income for tax purposes, or an amount that is allowed by law to
reduce income prior to the application of the tax rate to compute 1. What is a tax amnesty ?
the amount of tax which is due. SUGGESTED ANSWER: A tax amnesty is a general
A tax deduction reduces the income that is subject to tax pardon or intentional overlooking by the State of its authority to
in order to arrive at taxable income. (Commissioner of Internal impose penalties on persons otherwise guilty of evasion or
Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, violation of a revenue or a tax law.
April 15, 2005) It partakes of an absolute waiver by the government of
its right to collect what is due it and to give tax evaders who
 39. The petitioners allege that the R-VAT law is wish to relent a chance to start with a clean slate. A tax
constitutional because the Bicameral Conference amnesty, much like a tax exemption, is never favored nor
Committed has exceeded its authority in including presumed in law. The grant of a tax amnesty, similar to a tax
provisions which were never included in the versions of exemption, must be construed strictly against the taxpayer and
both the House and Senate such as inserting the stand-by liberally in favor of the taxing authority. (Philippine Banking
authority to the President to increase the VAT from 10% to Corporation, etc., v. Commissioner of Internal Revenue, G. R.
12%; deleting entirely the no pass-on provisions found in No. 170574, January 30, 2009 citing Commissioner of Internal
both the House and Senate Bills; inserting the provision Revenue v. Marubeni Corp., 423 Phil. 862, 874 (2001).
imposing a 70% limit on the amount of input tax to be
credited against the output tax; and including the 2. What is the purpose of a tax amnesty ?
amendments introduced only by Senate Bill No. 1950 SUGGESTED ANSWER: The purpose of tax amnesty
regarding other kinds of taxes in addition to the value- is to
added tax. Thus, there was a violation of the constitutional a. give tax evaders who wish to relent a chance to
mandate that revenue bills shall originate exclusively from start a clean slate, and to
the House of Representatives. b. give the government a chance to collect
Are the contentions of such weight as to constitute uncollected tax from tax evaders without having to go
grave abuse of discretion which may invalidate the law ? through the tedious process of a tax case. (Banas, Jr. v.
Explain briefly. Court of Appeals, et al., G.R. No. 102967, February 10, 2000)
SUGGESTED ANSWER: No. There was no grave
abuse of discretion because all the changes and modifications 3. Distinguish tax amnesty from tax exemption.
made by the Bicameral Conference Committee were germane to SUGGESTED ANSWER:
subjects of the provisions referred to it for reconciliation. a. Tax amnesty is an immunity from all criminal, civil
The Bicameral Conference Committee merely exercised and administrative liabilities arising from nonpayment of taxes
the judicially recognized long-standing legislative practice of (People v. Castaneda, G.R. No. L-46881, September 15, 1988)
giving said conference committee ample latitude for WHILE a tax exemption is an immunity from civil liability only. It
compromising differences between the Senate and the House. is an immunity or privilege, a freedom from a charge or burden
[Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. to which others are subjected. (Florer v. Sheridan, 137 Ind. 28,
168056, September 1, 2005 and companion cases citing 36 NE 365)
Philippine Judges Association v. Pardo, G. R. No. 105371, b. Tax amnesty applies only to past tax periods,
November 11, 1993, 227 SCRA 703; Tolentino v. Secretary of hence of retroactive application (Castaneda, supra) WHILE tax
Finance, et al., G. R. No. 115455, August 25, 1994, 235SCRA exemption has prospective application.
630]
4. Define tax avoidance and tax evasion.
 40. The VAT is assailed as being regressive and SUGGESTED ANSWER: Tax avoidance is the use of
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therefore violative of the mandate to evolve a progressive legally permissible means to reduce the tax while tax evasion is
system of taxation. Do you agree ? Explain your answer. the use of illegal means to escape the payment of taxes.
NOTES AND COMMENTS:
 13
a. Tax evasion connotes the integration of three cases, citing Maceda v. Macaraig, Jr., G.R. No. 88291, June 8,
factors: 1993, 223 SCRA 217)
1) the end to be achieved, i.e., the payment
of less than that known by the taxpayer to be legally due, 11. Franchise tax is a direct tax. The franchise tax
or the non-payment of tax when it is shown that a tax is is a percentage tax imposed only on franchise holders. It is
due; imposed under Section 119 of the Tax Code and is a direct
2) an accompanying state of mind which is liability of the franchise grantee. (Quezon City, et al., v. ABS-
described as being “evil” on “bad faith,” “willful,” or CBN Broadcasting Corporation, G. R. No. 166408, October 6,
”deliberate and not accidental”; and 2008. The author opines that since practically all franchises
3) a course of action or failure of action which granted to telecommunications companies are similarly worded
is unlawful. (Commissioner of Internal Revenue v. The that the above doctrine finds application to the others.)
Estate of Benigno P. Toda, Jr., , etc., G. R. No. 147188,
September 14, 2004) 12. The main difference between direct taxes and
indirect taxes is that the burden of direct taxes could not be
 5. Distinguish between the tax avoidance and tax shifted by the taxpayer to another while the burden of indirect
evasion. taxes could be shifted to another person, such the burden value-
SUGGESTED ANSWER: added taxes being shifted or transferred by the taxpayer, the
a. Tax avoidance is legal while tax evasion is illegal. seller, to the buyer.
b. The objective of tax avoidance in most instances
is merely to reduce the tax that is due while is tax evasion the 13. Acesite is the owner and operator of
object is to entirely escape the payment of taxes. restaurant which caters to the patrons of a casino operated
c. Tax evasion warrants the imposition of civil, by PAGCOR within its premises. it billed PAGCOR for the
administrative and criminal penalties while tax avoidance does cost of the food and beverages consumed by the PAGCOR’s
not. patrons as well as the lease of the premises plus the VAT on
these items. PAGCOR paid Acesite minus the VAT claiming
6. What are the reasons why national taxes exemption while Acesite, in order to avoid legal
cannot be the subject of compensation and set-off with implications, paid the P30 million tax and applied for a
debts ? refund on the ground of solutio indebeti.
SUGGESTED ANSWER: Acesite cites the tax exemption grant in PAGCOR’s
a. The lifeblood theory; franchise as follows: “The exemptions herein granted for
b. Taxes are not contractual obligations but arise out earnings derived from the operations conducted under the
of a duty to, and are the positive acts of government, to the franchise specifically from the payment of any tax, income, or
making and enforcing of which the personal consent of the otherwise, as well as any form of charges, fees or levies, shall
individual taxpayer is not required. (Republic v. Mambulao inure to the benefit of and extend to corporation(s),
Lumber Co., 4 SCRA 622) association (s), agency (cies), or individual(s) with whom the
c. The government and the taxpayer are not Corporation or operator has any contractual relationship in
mutually creditors and debtors of each other and a claim for connection with the operations of the casino (s) authorized
taxes is no such debt, demand, contract or judgment as is to be conducted under this Franchise and to those receiving
allowed to be set-off. (Caltex Philippines, Inc. v. Commission on compensation or other remuneration from the Corporation or
Audit, 208 SCRA 726, 756) operator as a result of essential facilities furnished and/or
technical services rendered to the Corporation or operator.”
7. Compensation takes place by operation of law, (emphasis supplied)
where the local government and the taxpayer are in their own The BIR denied the claim on the ground that
right reciprocally debtors and creditors of each other, and that PAGCOR is exempt only from direct taxes and not from
the debts are both due and demandable, in consequence of indirect taxes so Acesite may not avail of the exemption. Is
Articles 1278 and 1279 of the Civil Code. (Domingo v. Garlitos, this correct ?
8 SCRA 443) SUGGESTED ANSWER: No. As the law is worded the
exemption flows to Acesite. The law is clear that the exemption
8. In case of a tax overpayment, where the BIR’s extends the exemption to entities or individuals dealing with
obligation to refund or set-off arises from the moment the PAGCOR. (Commissioner of Internal Revenue v. Acesite
tax was paid under the principle of solutio indebeti. (Philippines) Hotel Corporation, G. R. No. 147295, February 16,
(Commissioner of Internal Revenue v. Esso Standard Eastern, 2007)
Inc, 172 SRCA 364) NOTES AND COMMENTS:
a. The above holding should be differentiated from
 9. But note Nestle Phil. v. Court of Appeals, et al., Philippine Acetylene Co. v. Commissioner of Internal Revenue, 20
G.R. No. 134114, July 6, 2001 which held that in order for the SCRA 1056, where the tax exemption did not flow to private
rule on solutio indebeti to apply it is an essential condition that entities. (cited in Abaya v. Ebdane, G. R. No. 167919, February
the petitioner must first show that its payment of the customs 14, 2007), and in the following case of Silkair (Singapore) PTE,
duties was in excess of what was required by the law at the time Ltd., v. Commissioner of Internal Revenue, G.R. No. 173594,
the subject 16 importations of milk and milk products were February 6, 2008.
made. Unless shown otherwise, the disputable presumption of b. So also, the tax exemption of PAGCOR has
regularity of performance of duty lies in favor of the Collector of already been withdrawn by Rep. Act No. 9337.
Customs.  14. Silkair (Singapore) PTE, Ltd., an international
carrier, purchased aviation gas from Petron Corporation,
10. A direct tax is a tax for which a taxpayer is which it uses for its operations. It now claims for refund or
directly liable on the transaction or business it engages in, tax credit for the excise taxes it paid claiming that it is
without transferring the burden to someone else. Examples exempt from the payment of excise taxes under the
Page63

are individual and corporate income taxes, transfer taxes, and provisions of Sec. 135 of the NIRC of 1997.
residence taxes. (Abakada Guro Party List (etc.) v. Ermita, etc., Silkair further anchors its claim on Article 4(2) of the
et al., G. R. No. 168056, September 1, 2005 and companion Air Transport Agreement between the Government of the
 14
Republic of the Philippines and the Government of the
Republic of Singapore (Air Transport Agreement between  14.What is meant by tax sparing ?
RP and Singapore). SUGGESTED ANSWER: This is a provision in some
Silkair likewise argues that it is exempt from indirect tax treaties which provides that the state of residence allows as
taxes because the Air Transport Agreement between RP credit the amount that would have been paid, as if no reduction
and Singapore grants exemption “from the same customs has been made. (Vogel, Klaus on Double Taxation
duties, inspection fees and other duties or taxes imposed Conventions, Third Edition, p.1255 cited in Segarra, Venice H,
in the territory of the first Contracting Party. It invokes Tax Treaties: Trick or treat ?, Philippine Daily Inquirer,
Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 December 6, 2002, p. C5)
SCRA 771.which upheld the claim for tax credit or refund There may be instances where a particular income is
by the National Power Corporation (NPC) on the ground exempt from taxation in order to encourage foreign investments
that the NPC is exempt even from the payment of indirect which may lead to economic development. If the tax credit
taxes. method is used, there would be no more tax to credit since
Is Silkair entitled to the tax refund or credit it there is no more tax to credit as a result of the tax exemption.
seeks ? Reason out your answer. Consequently, when the tax method credit method is applied to
SUGGESTED ANSWER: Silkair is not entitled to tax these items of income, such incentives are siphoned off since,
refund or credit for the following reasons: in effect, the tax benefits are cancelled out. (Ibid.) Thus, the
a. The excise tax on aviation fuel is an indirect tax. need for the tax sparing provision.
The proper party to question, or seek a refund of, an indirect tax
is the statutory taxpayer, the person on whom the tax is NATIONAL INTERNAL REVENUE CODE
imposed by law and who paid the same even if he shifts the
burden thereof to another. (Philippine Geothermal, Inc. v. ORGANIZATION AND FUNCTIONS OF THE BUREAU OF
Commissioner of Internal Revenue, G.R. No. 154028, July 29, INTERNAL REVENUE
2005, 465 SCRA 308, 317-318) The NIRC provides that the
excise tax should be paid by the manufacturer or producer  1. Rep. Act No. 1405, the Bank Deposits Secrecy
before removal of domestic products from place of production. Law prohibits inquiry into bank deposits. As exceptions to
Thus, Petron Corporation, not Silkair, is the statutory taxpayer Rep. Act No. 1405, the Commissioner of Internal Revenue is
which is entitled to claim a refund based on Section 135 of the only authorized to inquire into the bank deposits of:
NIRC of 1997 and Article 4(2) of the Air Transport Agreement a. a decedent to determine his gross estate; and
between RP and Singapore. b. any taxpayer who has filed an application for
Even if Petron Corporation passed on to Silkair the compromise of his tax liability by reason of financial incapacity to
burden of the tax, the additional amount billed to Silkair for jet pay his tax liability. [Sec. 5 (F), NIRC of 1997]
fuel is not a tax but part of the price which Silkair had to pay as c. A taxpayer who authorizes the Commissioner to
a purchaser. [Philippine Acetylene Co., Inc. v. Commissioner of inquire into his bank deposits.
Internal Revenue, 127 Phil. 461, 470 (1967)] 2. Purpose of the NIRC of 1997. Revenue
b. Silkair could not seek refuge under Maceda v. generation has undoubtedly been a major consideration in
Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA the passage of the Tax Code. (Commissioner of Internal
771.which upheld the claim for tax credit or refund by the Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-
National Power Corporation (NPC) on the ground that the NPC 75, July 21, 2008)
is exempt even from the payment of indirect taxes. 3.
In Commissioner of Internal Revenue v. Philippine Long Purpose of shift from ad valorem system to specific
Distance Telephone Company, G.R. No. 140230, December 15, tax system in taxation of cigarettes. The shift from the ad
2005, 478 SCRA 61 the Supreme Court clarified the ruling in valorem system to the specific tax system is likewise meant
Maceda v. Macaraig, Jr., viz: It may be so that in Maceda vs. to promote fair competition among the players in the
Macaraig, Jr., the Court held that an exemption from “all taxes” industries concerned, to ensure an equitable distribution of the
granted to the National Power Corporation (NPC) under its tax burden and to simplify tax administration by classifying
charter includes both direct and indirect taxes. cigarettes, among others, into high, medium and low-priced
An exemption from “all taxes” excludes indirect taxes, based on their net retail price and accordingly graduating tax
unless the exempting statute, like NPC’s charter, is so couched rates. (Commissioner of Internal Revenue v. Fortune Tobacco
as to include indirect tax from the exemption. The amendment Corporation, G. R. Nos. 167274-75, July 21, 2008 citing
under Republic Act No. 6395 enumerated the details covered by Record of the Senate, pp. 224-225)
NPC’s exemption. Subsequently, P.D. 380, made even more
specific the details of the exemption of NPC to cover, among TAX ON INCOME
others, both direct and indirect taxes on all petroleum products
used in its operation. Presidential Decree No. 938 [NPC’s 1. The Tax Code has included under the term
amended charter] amended the tax exemption by simplifying the “corporation” partnerships, no matter how created or
same law in general terms. It succinctly exempts NPC from “all organized, joint-stock companies, joint accounts (cuentas en
forms of taxes, duties[,] fees…” The use of the phrase “all participacion), associations, or insurance companies. [Sec. 24
forms” of taxes demonstrates the intention of the law to give now Sec. 24 (B) of the NIRC of 1997]
NPC all the tax exemptions it has been enjoying before.
The exemption granted under Section 135 (b) of the 2. In Evangelista v. Collector, 102 Phil. 140, the
NIRC of 1997 and Article 4(2) of the Air Transport Agreement Supreme Court held citing Mertens that the term partnership
between RP and Singapore cannot, without a clear showing of includes a syndicate, group, pool, joint venture or other
legislative intent, be construed as including indirect taxes. unincorporated organization, through or by means of which any
Statutes granting tax exemptions must be construed in business, financial operation, or venture is carried on.
strictissimi juris against the taxpayer and liberally in favor of the
taxing authority, and if an exemption is found to exist, it must 3. Certain business organizations do not fall
Page63

not be enlarged by construction. (Silkair (Singapore) PTE, Ltd., under the category of “corporations” under the Tax Code,
v. Commissioner of Internal Revenue, G.R. No. 173594, February and therefore not subject to tax as corporations, include:
6, 2008) a. General professional partnerships;
 15
b. Joint venture or consortium formed for the 11. An insolvent debtor does not realize taxable
purpose of undertaking construction projects engaging in income from the cancellation or forgiveness. (Commissioner
petroleum, coal, geothermal, and other energy operations, v. Simmons Gin Co., 43 Fd 327 CCA 10th)
pursuant to an operation or consortium agreement under a
service contract with the Government. [1st sentence, Sec. 22 (B), 12. The insolvent debtor realizes income resulting
BIRC of 1997] from the cancellation or forgiveness of indebtedness when
he becomes solvent. (Lakeland Grocery Co., v. Commissioner
 4. Co-heirs who own inherited properties which 36 BTA (F) 289)
produce income should not automatically be considered as
partners of an unregistered corporation subject to income 13. If a creditor merely desires to benefit a debtor
tax for the following reasons: and without any consideration therefor cancels the amount
a. The sharing of gross returns does not of itself of the debt it is a gift from the creditor to the debtor and
establish a partnership, whether or not the persons sharing them need not be included in the latter’s income.
have a joint or common right or interest in any property from
which the returns are derived. There must be an unmistakable 14. If a corporation to which a stockholder is
intention to form a partnership or joint venture. (Obillos, Jr. v. indebted forgives the debt, the transaction has the effect of
Commissioner of Internal Revenue, 139 SCRA 436) payment of a dividend. (Sec. 50, Rev. Regs. No. 2)
b. There is no contribution or investment of
additional capital to increase or expand the inherited properties, 15. The Global system of income taxation is a
merely continuing the dedication of the property to the use to system employed where the tax system views indifferently the
which it had been put by their forebears. (Ibid.) tax base and generally treats in common all categories of
c. Persons who contribute property or funds to a taxable income of the individual. (Tan v. del Rosario, Jr., 237
common enterprise and agree to share the gross returns of that SCRA 324, 331)
enterprise in proportion to their contribution, but who severally
retain the title to their respective contribution, are not thereby 16. The Schedular system of income taxation is a
rendered partners. They have no common stock capital, and no system employed where the income tax treatment varies and is
community of interest as principal proprietors in the business made to depend on the kind or category of taxable income of the
itself from which the proceeds were derived. (Elements of the taxpayer. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)
Law of Partnership by Floyd R. Mechem, 2 nd Ed., Sec. 83, p. 74
cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 17. Under the National Internal Revenue Code the
560) global system is applicable to taxable corporations and the
schedular to individuals.
5. The common ownership of property does not
itself create a partnership between the owners, though they 18. What are general principles of income taxation
may use it for purpose of making gains, and they may, without in the Philippines OR the situs of income taxation in the
becoming partners, are among themselves as to the Philippines OR the source rule of income taxation as
management and use of such property and the application of the applied in the Philippines ?
proceeds therefrom.. (Spurlock v,. Wilson, 142 S.W. 363, 160 SUGGESTED ANSWER:
No. App. 14, cited in Pascual v. Commissioner of Internal a. A citizen of the Philippines residing therein is
Revenue, 166 SCRA 560) taxable on all income derived from sources within and without
the Philippines.
6. The income from the rental of the house, b. A nonresident citizen is taxable only on income
bought from the earnings of co-owned properties, shall be derived from sources within the Philippines.
treated as the income of an unregistered partnership to be c. An individual citizen of the Philippines who is
taxable as a corporation because of the clear intention of the working and deriving income from abroad as an overseas
brothers to join together in a venture for making money out of contract worker is taxable only on income from sources within
rentals. the Philippines: Provided, That a seaman who is a citizen of the
7. Income is gain derived and severed from capital, Philippines and who receives compensation for services
from labor or from both combined. For example, to tax a stock rendered abroad as a member of the complement of a vessel
dividend would be to tax a capital increase rather than the engaged exclusively in international trade shall be treated as an
income. (Commissioner of Internal Revenue v. Court of Appeals, overseas contract worker.
et al., G.R. No. 108576, January 20, 1999) d. An alien individual, whether resident or not of the
Philippines, is taxable only on income derived from sources
8. The term taxable income means the pertinent within the Philippines.
items of gross income specified in the Tax Code, less the e. A domestic corporation is taxable on all income
deductions and/or personal and additional exemptions, if any, derived from sources within and without the Philippines.
authorized for such types of income by the Tax Code or other f. A foreign corporation, whether engaged or not in
special laws. (Sec. 31, NIRC of 1997) trade or business in the Philippines, is taxable only on income
derived from sources within the Philippines. (Sec. 23, NIRC of
9. The cancellation and forgiveness of 1997)
indebtedness may amount to (a) payment of income; (b) gift;
or to a (c) capital transaction depending upon the circumstances. 19. Compensation income is considered as
having been earned in the place where the service was
10. If an individual performs services for a rendered and not considered as sourced from the place of origin
creditor who, in consideration thereof, cancels the debt, it is of the money.
income to the extent of the amount realized by the debtor as
compensation for his services. 20. Payment for services, other than
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compensation income, is considered as having been earned

at the place where the activity or service was performed.
 16
21. A non-resident alien, who has stayed in the fundamental law; (2) It is exempted by statute; and (3) It does
Philippines for an aggregate period of more than 180 days not come within the definition of income (Sec. 61, Rev. Regs.
during any calendar year, shall be considered as a non- No. 2) WHILE deductions are the amounts which the law allows
resident alien doing business in the Philippines. to be subtracted from gross income in order to arrive at net
Consequently, he shall be subject to income tax on his income income.
derived from sources from within the Philippines. [Sec. 25 (A) b. Exclusions pertain to the computation of gross
(1), NIRC] income WHILE deductions pertain to the computation of net
He is allowed to avail of the itemized deductions including income.
the personal and additional exemptions subject to the rule on c. Exclusions are something received or earned by
reciprocity. the taxpayer which do not form part of gross income WHILE
deductions are something spent or paid in earning gross income.
 22. What are considered as de minimis benefits An example of an exclusion from gross income are life
not subject to withholding tax on compensation income of insurance proceeds, and an example of a deduction are losses.
both managerial and rank and file employees ?
SUGGESTED ANSWER:  25. What are excluded from gross income ?
a. Monetized unused vacation leave credits of SUGGESTED ANSWER:
employees not exceeding ten (10) days during the year; a. Proceeds of life insurance policies paid to the
b. Medical cash allowance to dependents of heirs or beneficiaries upon the death of the insured whether in a
employees not exceeding P750.00 per employee per semester or single sum or otherwise.
P125 per month; b. Amounts received by the insured as a return of
c. Rice subsidy of P1,000.00 or one (1) sack of 50- premiums paid by him under life insurance, endowment or
kg. rice per month amounting to not more than P1,000.00; annuity contracts either during the term, or at maturity of the
d. Uniforms and clothing allowance not exceeding term mentioned in the contract, or upon surrender of the
P3,000.00 per annum; contract.
e. Actual yearly medical benefits not exceeding c. Value of property acquired by gift, bequest,
P10,000.00 per annum; devise, or descent.
f. Laundry allowance not exceeding P300 per d. Amounts received, through accident or health
month; insurance or Workmen’s Compensation Acts as compensation
g. Employees achievement awards, e.g. for length of for personal injuries or sickness, plus the amounts of any
service or safety achievement, which must be in the form of a damages received on whether by suit or agreement on account
tangible persona property other than cash or gift certificate, with of such injuries or sickness.
an annual monetary value not exceeding P10,000.00 received by e. Income of any kind to the extent required by any
an employee under an established written plan which does not treaty obligation binding upon the Government of the Philippines.
discriminate in favor of highly paid employees; f. Retirement benefits received under Republic Act
h. Gifts given during Christmas and major No. 7641. Retirement received from reasonable private benefit
anniversary celebrations not exceeding P5,000 per employee per plan after compliance with certain conditions. Amounts received
annum; for beyond control separation. Foreign social security, retirement
i. Flowers, fruits, books, or similar items given to gratuities, pensions, etc. USVA benefits, SSS benefits and GSIS
employees under special circumstances, e.g. on account of benefits.
illness, marriage, birth of a baby, etc.; and
j. Daily meal allowance for overtime work not  26. What are the conditions for excluding
exceeding twenty five percent (25%) of the basic minimum retirement benefits from gross income, hence tax-exempt ?
wage. SUGGESTED ANSWER:
The amount of de minimis benefits conforming to the a. Retirement benefits received under Republic Act
ceiling herein prescribed shall not be considered in determining No. 7641 and those received by officials and employees of
the P30,000 ceiling of “other benefits” provided under Section 32 private firms, whether individual or corporate, in accordance with
(B)(7)(e) of the Code. However, if the employer pays more than the employer’s reasonable private benefit plan approved by the
the ceiling prescribed by these regulations, the excess shall be BIR.
taxable to the employee receiving the benefits only if such b. Retiring official or employee
excess is beyond the P30,000.00 ceiling, provided, further, that 1) In the service of the same employer for at
any amount given by the employer as benefits to its employees, least ten (10) years;
whether classified as de minimis benefits or fringe benefits, shall 2) Not less than fifty (50) years of age at time
constitute as deductible expense upon such employer. [Sec. of retirement;
2.78.1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 3) Availed of the benefit of exclusion only
8-2000] once. [Sec. 32 (B) (6) (a), NIRC of 1997] The retiring
official or employee should not have previously availed of
23. Income subject to “final tax” refers to an the privilege under the retirement plan of the same or
income collected through the withholding tax system. The another employer. [1 st par., Sec. 2.78 (B) (1), Rev. Regs.
payor of the income withholds the tax and remits it to the No. 2-98]
government as a final settlement of the income tax as a final
settlement of the income tax due on said income. The recipient  27. What kind of separation (retirement) pay is
is no longer required to include the income subjected to a final excluded from gross income, hence tax-exempt ?
tax as part of his gross income in his income tax return. SUGGESTED ANSWER:
a. Any amount received by an official, employee or
 24. Distinguish exclusions from deductions. by his heirs,
SUGGESTED ANSWER: b. From the employer
a. Exclusions from gross income refer to a flow of c. As a consequence of separation of such official or
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wealth to the taxpayer which are not treated as part of gross employee from the service of the employer because of
income for purposes of computing the taxpayer’s taxable 1) Death, sickness or other physical
income, due to the following reasons: (1) It is exempted by the disability; or
 17
2) For any cause beyond the control of said Nonresident citizens and foreign corporations on their gross
official or employee [Sec. 32 (B) (6) (b), NIRC of 1997], incomes from within may also deduct this expense.
such as retrenchment, redundancy and cessation of Nonresident alien individuals not engaged in trade or
business. [1st par., Sec. 2.78 (B), (1) (b), Rev. Regs. business in the Philippines are not allowed to deduct this
No. 2-98] expense.
g. Depletion or deduction arising from the
28. What are the Itemized deductions from gross exhaustion of a non-replaceable asset, usually a natural
income and who may avail of them ? resource.
a. Ordinary and necessary trade, business or Resident citizens, resident alien individuals and
professional expenses. nonresident alien individuals who are engaged in trade and
b. The amount of interest paid or incurred within a business, on their gross incomes other from compensation
taxable year on indebtedness in connection with the taxpayer’s income are allowed to deduct these expenses. Domestic
profession, trade or business. corporations, estates and trusts may also deduct this expense.
Resident citizens, resident alien individuals and Nonresident citizens and foreign corporations on their gross
nonresident alien individuals who are engaged in trade and incomes from within may also deduct this expense.
business, on their gross incomes other from compensation Nonresident alien individuals not engaged in trade or
income are allowed to deduct these expenses. Domestic business in the Philippines are not allowed to deduct this
corporations, estates and trusts may also deduct this expense. expense.
Nonresident citizens and foreign corporations on their gross  h. Charitable and other contributions. Resident
incomes from within may also deduct this expense. citizens, resident alien individuals and nonresident alien
Nonresident alien individuals not engaged in trade or individuals who are engaged in trade and business, on their
business in the Philippines are not allowed to deduct this gross incomes other from compensation income are allowed to
expense. deduct these expenses. Domestic corporations, estates and
c. Taxes paid or incurred within the taxable year in trusts may also deduct this expense. Nonresident citizens and
connection with the taxpayer’s profession. foreign corporations on their gross incomes from within may also
Resident citizens, resident alien individuals and deduct this expense.
nonresident alien individuals who are engaged in trade and Nonresident alien individuals not engaged in trade or
business, on their gross incomes other from compensation business in the Philippines are not allowed to deduct this
income are allowed to deduct these expenses. Domestic expense.
corporations, estates and trusts may also deduct this expense. i. Research and development expenditures treated
Nonresident citizens and foreign corporations on their gross as deferred expenses paid or incurred by the taxpayer in
incomes from within may also deduct this expense. connection with his trade, business or profession, not deducted
Nonresident alien individuals not engaged in trade or as expenses and chargeable to capital account but not
business in the Philippines are not allowed to deduct this chargeable to property of a character which is subject to
expense. depreciation or depletion.
 d. Ordinary losses, losses from casualty, theft or Resident citizens, resident alien individuals and
embezzlement; and net operating losses. nonresident alien individuals who are engaged in trade and
Resident citizens, resident alien individuals and business, on their gross incomes other from compensation
nonresident alien individuals who are engaged in trade and income are allowed to deduct these expenses. Domestic
business, on their gross incomes other from compensation corporations, estates and trusts may also deduct this expense.
income are allowed to deduct these expenses. Domestic Nonresident citizens and foreign corporations on their gross
corporations, estates and trusts may also deduct this expense. incomes from within may also deduct this expense.
Nonresident citizens and foreign corporations on their gross Nonresident alien individuals not engaged in trade or
incomes from within may also deduct this expense. business in the Philippines are not allowed to deduct this
Nonresident alien individuals not engaged in trade or expense.
business in the Philippines are not allowed to deduct this j. Contributions to pension trusts. Resident citizens,
expense. resident alien individuals and nonresident alien individuals who
 e. Bad debts due to the taxpayer, actually are engaged in trade and business, on their gross incomes
ascertained to be worthless and charged off within the taxable other from compensation income are allowed to deduct these
year, connected with profession, trade or business, not sustained expenses. Domestic corporations, estates and trusts may also
between related parties. deduct this expense. Nonresident citizens and foreign
Resident citizens, resident alien individuals and corporations on their gross incomes from within may also deduct
nonresident alien individuals who are engaged in trade and this expense.
business, on their gross incomes other from compensation Nonresident alien individuals not engaged in trade or
income are allowed to deduct these expenses. Domestic business in the Philippines are not allowed to deduct this
corporations, estates and trusts may also deduct this expense. expense.
Nonresident citizens and foreign corporations on their gross k. Insurance premiums for health and hospitalization.
incomes from within may also deduct this expense. Resident citizens, resident alien individuals and nonresident alien
Nonresident alien individuals not engaged in trade or individuals who are engaged in trade and business, on their
business in the Philippines are not allowed to deduct this gross incomes other from compensation income are allowed to
expense. deduct these expenses. Nonresident citizens and nonresident
f. Depreciation or a reasonable allowance for the alien individual engaged in trade or business in the Philippine on
exhaustion, wear and tear (including reasonable allowance for their gross incomes from within may also deduct these
obsolescence) of property used in trade or business. premiums.
Resident citizens, resident alien individuals and Nonresident alien individuals not engaged in trade or
nonresident alien individuals who are engaged in trade and business in the Philippines are not allowed to deduct these
business, on their gross incomes other from compensation premiums.
Page63

income are allowed to deduct these expenses. Domestic l. Personal and additional exemptions. Resident
corporations, estates and trusts may also deduct this expense. citizens, and resident alien on their gross incomes and from
compensation income are allowed to deduct these premiums.
 18
Nonresident citizens on their gross incomes from within may b. Recognition of income and expenses under
also deduct this expense. Nonresident alien individuals engaged the accrual method of accounting. Amounts of income
in trade or business in the Philippines are allowed to deduct accrue where the right to receive them becomes fixed, where
these exemptions under reciprocity. there is created an enforceable liability. Liabilities, are incurred
Nonresident alien individuals not engaged in trade or when fixed and determinable in nature without regard to
business in the Philippines are not allowed to deduct this indeterminacy merely of time of payment.. (Commissioner of
expense. Internal Revenue v, Isabela cultural Corporation, G. R. No.
172231, February 12, 2007)
 29. Distinguish ordinary expenses from capital The accrual of income and expense is permitted when the
expenditures. all-events test has been met. (Ibid.)
SUGGESTED ANSWER: Ordinary expenses are those c. All-events test. This test requires:
which are common to incur in the trade or business of the 1) fixing of a right to income or liability to pay;
taxpayer WHILE capital expenditures are those incurred to and
improve assets and benefits for more than one taxable year. 2) the availability of the reasonable accurate
Ordinary expenses are usually incurred during a taxable year determination of such income or liability.
and benefits such taxable year. Necessary expenses are those The test does not demand that the amount of such
which are appropriate or helpful to the business. income or liability be known absolutely, only that a taxpayer has
at his disposal the information necessary to compute the amount
 30. What are the requisites for the deductibility of with reasonable accuracy.
business expenses ? The all-events test is satisfied where computation
SUGGESTED ANSWER: The following are the requisites remains uncertain; if its basis is unchangeable, the test is
for deductibility of business expenses: satisfied where a computation may be unknown, but is not as
a. Compliance with the business test: much as unknowable, within the taxable year. The amount of
1) Must be ordinary and necessary; liability does not have to be determined exactly,; it must be
2) Must be paid or incurred within the taxable determined with “reasonable accuracy” implies something less
year; than an exact or completely accurate amount.
3) Must be paid or incurred in carrying on a The propriety of an accrual must be judged by the fact
trade or business. that a taxpayer knew, or could reasonably be expected to have
4) Must not be bribes, kickbacks or other known, at the closing of its books for the taxable year. Accrual
illegal expenditures method of accounting presents largely a question of fact; such
b. Compliance with the substantiation test. Proof by that the taxpayer bears the burden of proof of establishing the
evidence or records of the deductions allowed by law including accrual of an item of income or deduction. (Commissioner of
compliance with the business test. Internal Revenue v, Isabela cultural Corporation, G. R. No.
172231, February 12, 2007)
 31. What are the requisites for the deductibility of d. Under the cash method income is to be
ordinary and necessary trade, business, or professional construed as income for tax purposes only upon actual receipt of
expenses, like expenses paid for legal and auditing services the cash payment. It is also referred to as the “cash receipts and
? disbursements method” because both the receipt and
SUGGESTED ANSWER: disbursements are considered. Thus, income is recognized only
a. the expense must be ordinary and necessary; upon actual receipt of the cash payment but no deductions are
b. it must have been paid or incurred during the allowed from the cash income unless actually disbursed through
taxable year dependent upon the method of accounting upon the an actual payment in cash.
basis of which the net income is computed.
c. it must be supported by receipts, records or other 33. The fringe benefits tax is a final withholding tax
pertinent papers. (Commissioner of Internal Revenue v, Isabela imposed on the grossed-up monetary value of fringe benefits
cultural Corporation, G. R. No. 172231, February 12, 2007) furnished, granted or paid by the employer to the employee,
except rank and file employees. [1 st par., Sec. 2.33 (A), Rev.
 32. TMG Corporation is issuing the accrual Regs. No. 3-98]
method of accounting. In 2005 XYZ Law Firm and ABC
Auditing Firm rendered various services which were billed  34. What is meant by “fringe benefit” for purposes
by these firms only during the following year 2006. Since of taxation ?
the bills for legal and auditing services were received only SUGGESTED ANSWER: For purposes of taxation,
in 2006 and paid in the same year, TMG deducted the same fringe benefit means any good, service, or other benefit furnished
from its 2006 gross income. The BIR disallowed the or granted in cash or in kind by an employer to an individual
deduction ? employee (except rank and file employees), such as but not
Who is correct, TMG or BIR ? Explain. limited to:
SUGGESTED ANSWER: The BIR is correct. TMG a. Housing;
should have deducted the professional and legal fees in the year b. Expense account;
they were incurred in 2005 and not in 2006 because at the time c. Vehicle of any kind;
the services were rendered in 2005, there was already an d. Household personnel, such as maid, driver and
obligation to pay them. (Commissioner of Internal Revenue v, others;
Isabela Cultural Corporation, G. R. No. 172231, February 12, e. Interest on loan at less than market rate to the
2007) extent of the difference between the market rate and actual rate
NOTES AND COMMENTS: granted;
a. Accounting methods for tax purposes comprise f. Membership fees, dues and other expenses borne
a set of rules for determining when and how to report income by the employer for the employee in social and athletic clubs or
and deductions. (Commissioner of Internal Revenue v, Isabela other similar organizations;
Page63

cultural Corporation, G. R. No. 172231, February 12, 2007) g. Expenses for foreign travel;
The two (2) principal accounting methods for recognition h. Holiday and vacation expenses;
of income are the (a) accrual method; and the (b) cash method.
 19
i. Educational assistance to the employee or his  40. What are the requisites for valid deduction of
dependents; and bad debts from gross income ?
j. Life or health insurance and other non-life SUGGESTED ANSWER:
insurance premiums or similar amounts in excess of what the a. There must be an existing indebtedness due to the
law allows. [Sec. 33 (B), NIRC of 1997; 1 st par., Sec. 2.33 (B), taxpayer which must be valid and legally demandable;
Rev. Regs. No. 3-98] b. The same must be connected with the taxpayer’s
35. Fringe benefits that are not subject to the trade, business or practice of profession;
fringe benefits tax: c. The same must not be sustained in a transaction
a. When the fringe benefit is required by the nature entered into between related parties;
of, or necessary to the trade, business or profession of the d. The same must be actually charged off the books of
employer; or accounts of the taxpayer as of the end of the taxable year; and
b. When the fringe benefit is for the convenience or e. The debt must be actually ascertained to be
advantage of the employer. [Sec. 32(A), NIRC of 1997; 1 st par., worthless and uncollectible during the taxable year;
Sec. 2.33 (A), Rev. Regs. No. 3-98] f. The debts are uncollectible despite diligent effort
c. Fringe benefits which are authorized and exerted by the taxpayer. [Sec. 34 (E) (1), NIRC of 1997; Sec. 3,
exempted from income tax under the Tax Code or under any Rev. Regs. No. 5-99 reiterated in Rev. Regs. No. 25-2002;
special law; Philippine Refining Corporation v. Court of Appeals, et al., 256
d. Contributions of the employer for the benefit of the SCRA 667]
employee to retirement, insurance and hospitalization benefit g. Must have been reported as receivables in the income
plans; tax return of the current or prior years. (Sec. 103, Rev. Regs.
e. Benefits given to the rank and file employees, No. 2)
whether granted under a collective bargaining agreement or not; :
and  41. What is the “tax benefit” rule ?
f. De minimis benefits as defined in the rules and SUGGESTED ANSWER: The “tax benefit rule” posits
regulations to be promulgated by the Secretary of Finance upon that the recovery of bad debts previously allowed as deduction in
recommendation of the Commissioner of Internal Revenue. [1 st the preceding year or years shall be included as part of the
par., Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs. No. 3- taxpayer’s gross income in the year of such recovery to the
98] extent of the income tax benefit of said deduction.

36. De minimis benefits are facilities and privileges 42. If in the year the taxpayer claimed deduction of
(such as entertainment, medical services, or so-called “courtesy bad debts written-off, he realized a reduction of the income tax
discounts” on purchases), furnished or offered by an employer to due from him on account of the said deduction, his subsequent
his employees. They are not considered as compensation recovery thereof from his debtor shall be treated as a receipt of
subject to income tax and consequently to withholding tax, if realized taxable income. (Sec. 4, Rev. Regs. 5-99)
such facilities are offered or furnished by the employer merely as
a means of promoting the health, goodwill, contentment, or 43. If the said taxpayer did not benefit from the
efficiency of his employees. [Sec. 2.78,1 (A) (3), Rev. Regs. 2- deduction of the said bad debt written-off because it did not
98 as amended by Rev. Regs. No. 8-2000] result to any reduction of his income tax in the year of such
deduction (i.e. where the result of his business operation was a
 37. Preferred shares are considered capital net loss even without deduction of the bad debts written-off),
regardless of the conditions under which such shares are then his subsequent recovery thereof shall be treated as a mere
issued and dividends or “interests” paid thereon are not recovery or a return of capital, hence, not treated as receipt of
allowed as deductions from the gross income of realized taxable income. (Sec. 4, Rev. Regs. 5-99)
corporations. (Revenue Memorandum Circular No. 17-71)
44. Depreciation is the gradual diminution in the
38. Bad debts are those which result from the useful value of tangible property resulting from ordinary wear
worthlessness or uncollectibility, in whole or in part, of amounts and tear and from normal obsolescence. The term is also
due the taxpayer by others, arising from money lent or from applied to amortization of the value of intangible assets the use
uncollectible amounts of income from goods sold or services of which in the trade or business is definitely limited in duration.
rendered. (Sec. 2.a, Rev. Regs. 5-99)
45. The methods of depreciation are the
 39. Who are related parties ? following:
SUGGESTED ANSWER: The following are related a. Straight line method;
parties: b. Declining balance method;
a. Members of the same family. The family of an c. Sum of years digits method; and
individual shall include only his brothers and sisters (whether by d. Any other method prescribed by the Secretary of
the whole or half-blood), spouse, ancestors, and lineal Finance upon the recommendation of the Commissioner of
descendants; Internal Revenue:
b. An individual and a corporation more than fifty 1) Apportionment to units of production;
percent (50%) in value of the outstanding stock of which is 2) Hours of productive use;
owned, directly or indirectly, by or for such individual; 3) Revaluation method; and
c. Two corporations more than fifty percent (50%) in 4) Sinking fund method.
value of the outstanding stock of which is owned, directly or
indirectly, by or for the same individual; 46. What are personal and additional
d. A grantor and a fiduciary of any trust; or exemptions ?
e. The fiduciary of a trust and the fiduciary of SUGGESTED ANSWER: These are the theoretical
another trust if the same person is a grantor with respect to each persona, living and family expenses of an individual allowed to
Page63

trust; or be deducted from the gross or net income of an individual

f. A fiduciary of a trust and a beneficiary of such. taxpayer.
[Sec. 36 (B), NIRC of 1997]
 20
These are arbitrary amounts which have been calculated d. Real property used in trade or business of the
by our lawmakers to be roughly equivalent to the minimum of taxpayer. (Sec. 2. b, Rev. Regs. No. 7-2003)
subsistence, taking into account the personal status and
additional qualified dependents of the taxpayer. They are fixed  50.. Examples of ordinary assets hence not capital
amounts in the sense that the amounts have been assets:
predetermined by our lawmakers and until our lawmakers make a. The machinery and equipment of a manufacturing
new adjustments on these personal exemptions, the amounts concern subject to depreciation;
allowed to be deducted by a taxpayer are fixed as predetermined b. The tractors, trailers and trucks of a hauling company;
by Congress. [Pansacola v. Commissioner of Internal Revenue, c. The condominium building owned by a realty
G. R. No. 159991, November 16, 2006 citing Madrigal and company the units of which are for rent or for sale;
Paterno v. Rafferty and Concepcion, 38 Phil. 414, 418 (1918)] d. The wood, paint, varnish, nails, glue, etc. which
are the raw materials of a furniture factory;
47. Capital assets shall refer to all real properties held e. Inherited parcels of land of substantial areas
by a taxpayer, whether or not connected with his trade or located in the heart of Metro Manila, which were subdivided into
business, and which are not included among the real properties smaller lots then sold on installment basis after introducing
considered as ordinary assets. (Sec. 2.a, Rev. Regs. No. 7- comparatively valuable improvements not for the purpose of
2003) simply liquidating the estate but to make them more saleable ;
The term “capital assets” means property held by the the employment of an attorney-in-fact for the purpose of
taxpayer (whether or not connected with his trade or business), developing, managing, administering and selling the lots; sales
BUT DOES NOT INCLUDE: made with frequency and continuity; annual sales income from
a. Stock in trade of the taxpayer, or the sales was considerable; and the heir was not a stranger to
b. Other property of a kind which would properly be the real estate business. (Tuazon, Jr. v. Lingad, 58 SCRA 170)
included in the inventory of the taxpayer if on hand at the close f. Inherited agricultural property improved by
of the taxable year, or introduction of good roads, concrete gutters, drainage and
c. Property held by the taxpayer primarily for sale to lighting systems converts the property to an ordinary asset. The
customers in the ordinary course of his trade or business, or property forms part of the stock in trade of the owner, hence an
d. Property used in the trade or business, of a character which ordinary asset. This is so, as the owner is now engaged in the
is subject to the allowance for depreciation; or real property used business of subdividing real estate. (Calasanz v. Commissioner
in the trade or business of the taxpayer. [Sec. 39 (A) (1), NIRC of of Internal Revenue, 144 SCRA at p. 672)
1997, capitalized words, numbering and arrangement supplied;
Sec. 2.a, Rev. Regs. No. 7-2003] 51. Tax treatment of real properties that have been
transferred. Real properties classified as capital or ordinary
48. Examples of capital assets: asset in the hands of the seller/transferor may change their
a. Stock and securities held by taxpayers other than character in the hands of the buyer/transferee. The classification
dealers in securities; of such property in the hands of the buyer/transferee shall be
b. Jewelry not used for trade and business; determined in accordance with the following rules:
c. Residential houses and lands owned and used as a. Real property transferred through succession or
such; donation to the heir or donee who is not engaged in the real
d. Automobiles not used in trade and business; estate business with respect to the real property inherited or
e. Paintings, sculptures, stamp collections, objects donated, and who does not subsequently use such property in
of arts which are not used in trade or business; trade or business, shall be considered as a capital asset in the
f. Inherited large tracts of agricultural land which hands of the heir or donee.
were subdivided pursuant to the government mandate under b. Real property received as dividend by stockholders
land reform, then sold to tenants. (Roxas v. Court of Tax who are not engaged in the real estate business and who not
Appeals, etc. L-25043, April 26, 1968) subsequently use such real property in trade or business shall be
g. “Real property used by an exempt corporation in treated as capital assets in the hands of the recipient even if the
its exempt operations, such as a corporation included in the corporation which declared the real property dividend is engaged
enumeration of Section 30 of the Code, shall not be considered in real estate business.
used for business purposes, and therefore considered as capital c. The real property received in an exchange shall be
asset.” (last sentence, 3rd par., Sec. 3.b, Rev. Regs. No. 7-2003) treated as ordinary asset in the hands of the transferee in the
h. “Real property, whether single detached, case of a tax-free exchange by taxpayer not engaged in real
townhouse, or condominium unit, not used in trade or business estate business to a taxpayer who is engaged in real estate
as evidenced by a certification from the Barangay Chairman or business, or to a taxpayer who, even if not engaged in real estate
from the head of administration, in case of condominium unit, business, will use in business the property received in the
townhouse or apartment, and as validated from the existing exchange. (Sec. 3.f., Rev. Regs. No. 7-2003)
available records of the Bureau of Internal Revenue, owned by
an individual engaged in business, shall be treated as capital  52. The tax is “imposed upon capital gains
asset.” (last par., Sec. 3.b., Rev. Regs. No. 7-2003) presumed to have been realized from the sale, exchange, or
other disposition of real property located in the Philippines,
49. Ordinary assets shall refer to all real properties classified as capital assets.” [Sec. 24 (D) (1`), NIRC of 1997]
specifically excluded from the definition of capital assets, Revenue Regulations No. 7-2003 has defined real property as
namely: having “the same meaning attributed to that term under Article
a. Stock in trade of a taxpayer or other real property of a 415 of Republic Act No. 386, otherwise known as the ‘Civil Code
kind which would properly be included in the inventory of a of the Philippines.’ (Sec. 2.c, Rev. Regs. No. 7-2003)
taxpayer if on hand at the close of the taxable year; or
b. Real property held by the taxpayer primarily for sale to  53. Transactions covered by the presumed capital
customers in the ordinary course of his trade or business; or gains tax on real property:
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c. Real property used in trade or business (i.e. buildings a. sale,

and/or improvements), of a character which is subject to the b. exchange,
allowance for depreciation; or
 21
c. or other disposition, including pacto de retro sales b. an estate or trust (Ibid.);
and other forms of conditional sales. [Sec. 24 (D) (1), NIRC c. a domestic corporation. [Sec. 27 (D) (5), NIRC of
of 1997, numbering and arrangement supplied] 1997]
d. “ Sale, exchange, or other disposition” includes
taking by the government through condemnation proceedings.  59. Excepted from the payment of the presumed
(Gutierrez v. Court of Tax Appeals, et al., 101 Phil. 713; capital gains tax are those presumed to have been realized
Gonzales v. Court of Tax Appeals, et al., 121 Phil. 861) from the disposition by natural persons of their principal
place of residence
54. In case the mortgagor exercises his right of a. the proceeds of which is fully utilized in acquiring
redemption within one (1) year from the issuance of the or constructing a new principal residence;
certificate of sale, in a foreclosure of mortgage sale of real b. within eighteen (18) calendar months from the
property, no capital gains tax shall be imposed because no date of sale or disposition
capital gains has been derived by the mortgagor and no sale or c. the BIR Commissioner shall have been duly
transfer of real property was realized. [Sec. 3 (1), Rev. Regs. No. notified by the taxpayer within thirty (30) days from the date of
4-99] sale or disposition through a prescribed return of his intention to
avail of the tax exemption; and
55. In case of non-redemption of the property sold d. the said tax exemption can only be availed of
upon a foreclosure of mortgage sale, the presumed capital gains once every ten (10) years. [Sec. 24 (D) (2), NIRC of 1997]
tax shall be imposed, based on the bid price of the highest
bidder but only upon the expiration of the one year period of 60. A final withholding tax (FWT) of 20% on
redemption provided for under Sec. 6 of Act No. 3135, as passive income is collected from the interest income of
amended by Act No. 4118, and shall be paid within thirty (30) banks. It likewise has to pay a 5% gross receipts tax (GRT)
days from the expiration of the said one-year redemption period. on gross receipts which includes their passive income.
[Sec. 3 (2), Rev. Regs. No. 4-99] XYZ Bank now claims that the GRT should be computed
after deducting the 20% passive income tax on the ground
 56. The basis for the final presumed capital gains that the monies or receipts that do not redound to the
tax of six per cent (6%) is whichever is the higher of the benefit of the taxpayer are not part of its gross receipts. To
a. gross selling price, or impose the GRT without deducting the 20% would be
b. the current fair market value as determined below: double taxation. It also contends that since the 20% was
1) the fair market value or real properties withheld at source and is paid directly to the government,
located in each zone or area as determined by the then the bank has not received the same. Thus, it should
Commissioner of Internal Revenue after consultation not be included in the gross receipts subject to tax.
with competent appraisers both from the private and Resolve the issue of whether the 20% FWT on the
public sectors; or bank’s passive income form part of the taxable gross
2) the fair market value as shown in the receipts for the purpose of computing the 5% GRT.
schedule of values of the Provincial and City Assessors. SUGGESTED ANSWER: No. The word “gross” must be
[Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the used in its plain and ordinary meaning. It is defined as “whole,
NIRC of 1997] entire, total, without deduction.” Thus, the 20% should not be
It does not matter whether there was an actual gain or deducted for purposes of computing the 5% gross receipts tax.
loss because the tax is a “presumed” capital gains tax. It is the Receipt may either be actual or constructive. There is
transaction that is taxed not the gain. prior to the withholding a constructive receipt of the interest,
otherwise there would be no interest from where the 20% tax
56. Holding period not applied to the taxation of the may be withheld from.
presumed capital gains derived from the sale of real property There is no double taxation because there are two kinds
considered as capital assets. of taxes, the 20% FWT which is an income tax and the 5% GRT
which is a percentage tax. (Commissioner of Internal Revenue v.
 57. The tax liability, of individual taxpayers (not Citytrust Investment Phils., Inc., G. R. No. 139786, September
corporate), if any, on gains from sales or other dispositions 27, 2006 and companion case)
of real property, classified as capital assets, to the NOTES AND COMMENTS:
government or any of its political subdivisions or agencies or to a. Commissioner of Internal Revenue v. Manila
government owned or controlled corporations shall be Jockey Club, 108 Phil. 821 (1960) is different from
determined, at the option of the taxpayer, by including the Commissioner of Internal Revenue v. Citytrust Investment
proceeds as part of gross income to be subjected to the Phils., Inc., G. R. No. 139786, September 27, 2006 and
allowable deductions and/or personal and additional exemptions, companion case. Manila Jockey Club paid amusement taxes
then to the schedular tax [Sec. 24 (D) (1), in relation to Sec. 24 on its commission in the total amount of bets called wager funds
(A) (1), both of the NIRC of 1997] or the final presumed capital and did not include the 5½% of the fund which went to the Board
gains tax of six percent (6%). [Sec. 24 (D) (1) in relation to Sec. on Races and to the owners of horses and jockeys. The
6 (E), both of the NIRC of 1997] Supreme Court rules that the gross receipts of Manila Jockey
Club should not include the 5½% because although delivered to
58. The seller of the real property, classified as a the Club, such money has been especially earmarked by law or
capital asset, pays the presumed capital gains tax whether: regulation for other persons.
a. an individual [Sec. 24 (D) (1), NIRC of 1997]; Manila Jockey does not apply because what happened
1) Citizen, whether resident or not [Ibid.]; there was earmarking and not withholding. Earmarking is not
2) Resident alien [Ibid.]; the same as withholding. Amounts earmarked do not form part
3) Nonresident alien engaged in trade or business of gross receipts because these are by law or regulation
in the Philippines [Sec. 25 (A) (3) in relation to Sec. 24 reserved for some person other than the taxpayer, although
(D) (1), both of the NIRC of 1997]; delivered or received. On the contrary, amounts withheld form
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4) Nonresident alien not engaged in trade or part of gross receipts because there are in constructive
business in the Philippines [Sec. 25 (B) in relation to possession and not subject to any reservation, the withholding
Sec. 24 (D) (1), both of the NIRC of 1997]; agent being merely a conduit in the collection process.
 22
(Commissioner of Internal Revenue v. Citytrust Investment Phils., minimum corporate income tax is greater than the tax computed
Inc., G. R. No. 139786, September 27, 2006 and companion under Subsection (A) of this section for the taxable year.” [Sec.
case) 27 (E) (1), NIRC of 1997]
b. There are distinctions between the 20% FWT b. Period when a corporation becomes subject to
on interest income and the 5% GRT on banks. Since the the MCIT. “(5) Specific rules for determining the period when a
two are different there is no double taxation. corporation becomes subject to the MCIT (minimum corporate
1) FWT is an income tax under Title II of the income tax) -
Code (Tax on Income) while GRT is a percentage tax For purposes of the MCIT, the taxable year in which
under Title V of the Tax Code. business operations commenced shall be the year in which the
2) Percentage tax is a national tax measured domestic corporation registered with the Bureau of Internal
by a certain percentage of the gross selling price or gross Revenue (BIR).
value in money of goods sold, bartered or imported; or of Firms which were registered with BIR in 1994 and earlier
the gross receipts or earnings derived by any person years shall be covered by the MCIT beginning January 1, 1998. x
engaged in the sale of services while an income tax is a x x” (Rev. Regs. No. 9-98)
national tax imposed on the net or gross income realized Manila Banking Corporation v. Commissioner of Internal
in a taxable year. Revenue, G. R. No. 168118, August 26, 2006 did not apply Rev.
3) Income tax is subject to withholding while Regs. No. 9-98 because Rev. Regs. No. 4-95 specifically refers
percentage is not. (Commissioner of Internal Revenue v. to thrift banks.)
Citytrust Investment Phils., Inc., G. R. No. 139786, c. Purpose of the four (4) year grace period. The
September 27, 2006 and companion case) intent of Congress relative to the MCIT is to grant a four (43) –
year suspension of tax payment to newly organized corporations.
61. MBC was incorporated in 1961 and engaged in Corporations still starting their business operations have to
commercial banking operations since 1987. On May 22, stabilize their venture in order to obtain a stronghold in the
1987, it ceased operations that year by reason of insolvency industry. It does not come as a surprise then when many
and its assets and liabilities were placed under the charge companies reported losses in their initial years of operations.
of a government-appointed receiver. On June 23, 1999, the Thus, in order to allow new corporations to grow and
BSP authorized MBC to operate as a thrift bank. develop at the initial stages of their operations, the lawmaking
In 2000, It filed its tax return for the year 1999 paying body saw the need to provide a grace period of four years from
the amount of P33 million computed in accordance with the their registration before they pay their minimum corporate
minimum corporate income tax (MCIT). It sought the BIR’s income tax. (Manila Banking Corporation v. Commissioner of
ruling on whether it is entitled to the four (4) year grace Internal Revenue, G. R. No. 168118, August 26, 2006)
period for paying on the basis of MCIT reckoned from 1999.
BIR then ruled that cessation of business activities as a ESTATE TAXES
result of being placed under involuntary receivership may
be an economic reason for suspending the imposition of  1. The gross estate for purposes of estate
the MCIT. taxation of Filipino citizens, whether residents or
As a result of the ruling MBC filed an application for nonresidents and resident alien includes the value at the time
refund of the P33 million. Due to the BIR’s inaction, MBC of his death of all his real property, wherever situated, personal
filed a petition for review with the CTA. property, whether tangible, intangible or mixed, wherever
The CTA denied the petition on the ground that MBC situated, to the extent of the interest existing therein of the
is not a newly organized corporation. In a volte facie the decedent at the time of his death.
BIR now maintains that MBC should pay the MCIT
beginning January 1, 1998 as it did not close its business  2. The gross estate for purposes of estate
operations in 1987 but merely suspended the same. Even if taxation of non-resident aliens includes the value at the time
placed under receivership, the corporate existence was of his death of all the real property situated in the Philippines,
never affected. Thus, it falls under the category of an personal property whether tangible, intangible or mixed, situated
existing corporation recommencing its banking operations. in the Philippines, to the extent of the interest therein of the
Should the refund be granted ? decedent at the time of his death.
SUGGESTED ANSWER: Yes. The MCIT shall be
imposed beginning in the fourth taxable year immediately 3. Items deductible from the gross estate of a
following the year in which the corporation commenced its resident or nonresident Filipino decedent or resident alien
business operations. [Sec. 27 (E) (1), NIRC of 1997] decedent:
The date of commencement of operations of a thrift bank a. Expenses, losses, claims, indebtedness and
is the date it was registered with the SEC or the date when the taxes;
Certificate of Authority to Operate was issued to it by the b. Property previously taxed;
Monetary Board, whichever comes later. (Sec. 6, Rev. Regs. No. c. Transfers for public use;
4-95) d. The Family Home up to a value not exceeding P1
Clearly then. MBC is entitled to the grace period of four million;
years from June 23, 1999 when it was authorized by the BSP to e. Standard deduction of P1 million;
operate as a thrift bank before the MCIT should be applied to it. f. Medical expenses not exceeding P500,000.00;
(Manila Banking Corporation v. Commissioner of Internal g. Amount of exempt retirement received by the
Revenue, G. R. No. 168118, August 26, 2006) heirs under Rep. Act Mo. 4917;
NOTES AND COMMENTS: h. Net share of the surviving spouse in the conjugal
a. The MCIT and when should be imposed and partnership.
the four (4) year grace period. “A minimum corporate income
tax of two percent (2%) of the gross income as of the end of the 4. Not every inter-vivos transfer in anticipation of
taxable year, as defined herein, is hereby imposed on a death is considered “transfer in contemplation of death” for
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corporation taxable under this Title, beginning on the fourth purposes of determining the property to be included in the gross
taxable year immediately following the year in which such estate of a decedent.
corporation commenced its business operations, when the
 23
5. To be considered a “transfer in contemplation
of death” “the decedent has at any time made a transfer, by 6. What is the valuation of donated real property
trust or otherwise, in contemplation of or intended to take effect for donor’s tax purposes ?
in possession or enjoyment at or after death” [Sec. 85 (B), NIRC SUGGESTED ANSWER: The real property shall be
of 1997]. It is clear that the properties are not transferred in appraised at its fair market value as of the time of the gift.
contemplation of or intended to take effect in possession or However, the appraised value of the real property at the
enjoyment at or after death. time of the gift shall be whichever is the higher of:
a. the fair market value as determined by the
6. There is no transfer in contemplation of death if Commissioner of Internal Revenue (zonal valuation) or
there is no showing the transferor “retained for his life or for any b. the fair market value as shown in the schedule of
period which does not in fact end before his death: (1) the values fixed by the Provincial and City Assessors. [Sec. 102, in
possession or enjoyment of, or the right to the income from the relation to Sec. 88 (B) both of the NIRC of 1997]
property, or (2) the right, either alone or in conjunction with any
person, to designate the person who shall possess or enjoy the  7. A died leaving as his only heirs, his surviving
property or the income therefrom.” [Sec. 85 (B), NIRC of 1997] spouse B, and three minor children, X, Y and Z. Since B
does not want to participate in the distribution of the estate,
 7. The approval of the court sitting in probate, or she renounced her hereditary share in the estate.
as a settlement tribunal over the estate of the deceased is a. Is the renunciation subject to donor’s tax ?
not a mandatory requirement for the collection of the Explain.
estate. The probate court is determining issues which are not SUGGESTED ANSWER: No. The general renunciation
against the property of the decedent, or a claim against the by an heir, including the surviving spouse, as in the case B, of
estate as such, but is against the interest or property right which her share in the hereditary estate left by the decedent is not
the heir, legatee, devisee, etc. has in the property formerly held subject to donor’s tax. (4th par., Sec. 11, Rev. Regs. No. 2-2003)
by the decedent. This is so because the general renunciation by B was
The notices of levy were regularly issued within the not specifically and categorically done in favor of identified
prescriptive period. heir/s to the exclusion or disadvantage of the other co-heirs in
The tax assessment having become final, executory and the hereditary estate.
enforceable, the same can no longer be contested by means of a b. Supposing that instead of a general
disguised protest. (Marcos, II v. Court of Appeals, et al., 273 renunciation, B renounced her hereditary share in A’s
SCRA 47) estate to X who is a special child, would your answer be
the same ? Explain.
DONOR’S TAXES SUGGESTED ANSWER: My answer would be different.
The renunciation in favor of X would be subject to donor’s tax.
 1. What is the donor’s tax rate if the donee is a This is so because the renunciation was specifically and
stranger ? categorically done in favor of X and identified heir to the
SUGGESTED ANSWER: When the donee or exclusion or disadvantage of Y and Z, the other co-heirs in the
beneficiary is a stranger, the tax payable by the donor shall be hereditary estate. (4th par., Sec. 11, Rev. Regs. No. 2-2003)
30% of the net gifts.
 8. Give some donations that are exempt from
 2. For purposes of the donor’s tax who is a donor’s tax.
stranger ? SUGGESTED ANSWER:
SUGGESTED ANSWER: A stranger is a is person who a. The first P100,000.00 net donation during a
is not a: calendar year is exempt from donor’s tax [Sec. 99 (A), NIRC of
a. Brother, sister (whether by whole or half-blood), 1997] made by a resident or non resident;
spouse, ancestor and lineal descendant; or b. The donation by a resident or non-resident of a
b. Relative by consanguinity in the collateral line prize to an athlete in an international sports tournament held
within the fourth degree of relationship.” [Sec. 99 (B), NIRC of abroad and sanctioned by the national sports association is
1997] exempt from donor’s tax (Sec. 1, Rep. Act No. 7549)
NOTES AND COMMENTS: All relatives by affinity, c. Political contributions made by a resident or non-
irrespective of the degree, are considered as strangers. resident individual if registered with the COMELEC irrespective
of whether donated to a political party or individual.
3. What is the tax base for donations ? However, the Corporation Code prohibits corporations
SUGGESTED ANSWER: The net gifts made during the from making political contributions. (Corp. Code, Title IV, Sec.
calendar year. [Sec. 99 (A), NIRC of 1997] 36.9)
d. Dowries or gifts made on account of marriage
4. For purposes of the donor’s tax, what is meant and before its celebration or within one year thereafter by
by “net gifts ?” residents who are parents to each of their legitimate,
SUGGESTED ANSWER: The net economic benefit recognized natural, or adopted children to the extent of the first
from the transfer that accrues to the donee. Accordingly, if a ten thousand pesos (P10,000.00);
mortgaged property is transferred as a gift, but imposing upon e. Gifts made by residents or non-residents to or
the donee the obligation to pay the mortgage liability, then the for the use of the National Government or any entity created
net gift is measured by deducting from the fair market value of by any of its agencies which is not conducted for profit, or to
the property the amount of the mortgage assumed. (last par., any political subdivisions of the said Government;
Sec. 11, Rev. Regs.No.2-2003) f. Gifts made by residents or non residents in favor
of an educational and/or charitable, religious, cultural or social
5. How are gifts of personal property to be welfare corporation, institution, foundation, trust or
valued for donor’s tax purposes ? philanthropic organization or research institution or
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SUGGESTED ANSWER: The market value of the organization: Provided, however, That not more than thirty
personal property at the time of the gift shall be considered the percent (30%) of said gifts shall be used by such donee for
amount of the gift. (Sec. 102, NIRC of 1997)
 24
administration purposes. [Sec. 101 (A), NIRC of 1997, R. No. 152609, June 29, 2005 citing various cases and
numbering and arrangement supplied] authorities)
g. Gifts made by non-resident aliens outside of the VAT is a percentage tax imposed on any person
Philippines to Philippine residents are exempt from donor’s taxes whether or not a franchise grantee, who in the course of trade
because taxation is basically territorial. The transaction, which or business, sells, barters, exchanges, leases, goods or
should have been subject to tax was made by non-resident properties, renders services. It is also levied on every
aliens and took place outside of the Philippines. importation of goods whether or not in the course of trade or
business. The tax base of the VAT is limited only to the value
 9. What is the concept of donation or gift added to such goods, properties, or services by the seller,
splitting ? Illustrate. transferor or lessor. Further, the VAT is an indirect tax and can
SUGGESTED ANSWER: Donation or gift splitting is be passed on to the buyer. (Quezon City, et al., v. ABS-CBN
spreading the gift over numerous calendar years in order to Broadcasting Corporation, G. R. No. 166408, October 6, 2008)
avail of lower donor’s taxes.
In 2008 Leon was thinking of donating a P200,000.00 to 3. What is the effect on exemptions of VAT
Miklos, his first cousin. The P200,000.00 is the totality of the being an indirect tax ? Reason out and illustrate your
net gifts for 2008. If he donated the P200,000.00 in 2008 answer.
the first P100,000 would be exempt and the remaining SUGGESTED ANSWER: If a special law merely
P50,000.00 would be subject to donor’s tax exempts a party as a seller from its direct liability for payment
If Leon spreads the P200,000 donation over two (2) of the VAT, but does not relieve the same party as a purchaser
calendar years, donating P100,000.00 on December 30, 2008 from its indirect burden of the VAT shifted to it by its VAT-
and the remaining P100,000.00 on January 1, 2009 the registered suppliers, the purchase transaction is not exempt.
transaction would be exempt from donor’s tax. This is so even REASON: The VAT is a tax on consumption, the
if the donation is separated only by two days because the basis amount of which may be shifted or passed on by the seller to
is the calendar year. Leon would be enjoying the exemption for the purchaser of the goods, properties or services.
the first P100,000.00 net gifts for each calendar year. [Commissioner of Internal Revenue v. Seagate Technology
(Philippines), G. R. No. 153866, February 11, 2005)
10. A sold to B and P7 million Jaguar for only Illustration: A VAT exempt seller sells to a non-VAT
P4 million. The proper VAT on the sale was paid. If you are exempt purchaser. The purchaser is subject to VAT because
the BIR examiner assigned to review the sale, would you the VAT is merely added as part of the purchase price and not
issue a tax assessment on the transaction ? Explain your as a tax because the burden is merely shifted. The seller is still
answer briefly. exempt because it could pass on the burden of paying the tax
SUGGESTED ANSWER: Donor’s taxes would be due on to the purchaser.
the insufficiency of consideration.
Where property, other than real property that has been 4. The VAT is a tax on consumption. Explain
subjected to the final capital gains tax, is transferred for less the meaning of consumption as used under the VAT
than an adequate and full consideration in money or money’s system. Give an example.
worth, then the amount by which the fair market value of the SUGGESTED ANSWER: Consumption is "the use of a
property at the time of the execution of the Contract to Sell or thing in a way that thereby exhausts it."
execution of the Deed of Sale which is not preceded by a Applied to services, the term means the performance or
Contract to Sell exceeded the value of the agreed or actual "successful completion of a contractual duty, usually resulting
consideration or selling price shall be deemed a gift, and shall in the performer's release from any past or future liability x x x"
be included in computing the amount of gifts made during the Unlike goods, services cannot be physically used in or bound
calendar year. (5th par., Sec. 11, Rev. Regs. No. 2-2003) for a specific place when their destination is determined.
Instead, there can only be a "predetermined end of a course"
VALUE-ADDED TAXES (VAT) when determining the service "location or position x x x for
legal purposes."
1. Define value-added tax (VAT). For example the services rendered by a local firm to its
SUGGESTED ANSWER: A tax which is imposed only foreign client are performed or successfully completed upon its
on the increase in the worth, merit or importance of goods, sending to a foreign client the drafts and bills it has gathered
properties or services, and not on the total value of the goods from service establishments here. Its services, having been
or services being sold or rendered. performed in the Philippines, are therefore also consumed in
the Philippines. Such facilitation service has no physical
2. What is the nature of VAT ? existence, yet takes place upon rendition, and therefore upon
SUGGESTED ANSWSER: VAT is an indirect tax that consumption, in the Philippines. [Commissioner of Internal
may be shifted or passed on to the buyer, transferee or lessee Revenue v. American Express G.R. No. 152609, 29 June
of the goods, properties or services. As such, it should be 2005, 462 SCRA 197 cited in Commissioner of Internal
understood not in the context of the person or entity that is Revenue v. Placer Dome Technical Services (Phils.), Inc. G. R.
primarily, directly liable for its payment, but in terms of its No. 164365, June 8, 2007]
nature as a tax on consumption. [Commissioner of Internal
Revenue v. Seagate Technology (Philippines), G. R. No. 5. Who are liable for the value-added tax ?
153866, February 11, 2005 citing various authorities} SUGGESTED ANSWER:
As an indirect tax on services, its main object is the a. Any person who, in the course of his trade or
transaction itself or, more concretely, the performance of all business,
kinds of services conducted in the course of trade or business 1) Sells, barters, exchanges or leases
in the Philippines. These services must be regularly conducted goods or properties, or
in this country, undertaken in “pursuit of a commercial or an 2) renders services, and
economic activity,” for a valuable consideration, and not b. any person who imports goods xxx
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exempt under the Tax Code, other special laws, or any However, in the case of importation of taxable goods, the
international agreement. (Commissioner, of Internal Revenue importer, whether an individual or corporation and whether or
v. American Express International, Inc. (Philipppine Branch), G. not made in the course of his trade or business, shall be liable
 25
to VAT xxx. (Rev. Regs. No. 16-2005,Sec. 4.105-1, SUGGESTED ANSWER: Yes because it is a mere
paraphrasing supplied) creation of law. Prior to the enactment of multi-stage sales
taxation, the sales taxes paid at every level of distribution are
6. What are the various VAT methods and not recoverable from the taxes payable. With the advent of
systems ? Executive Order No. 273 imposing a 10% multi-stage tax on all
SUGGESTED ANSWER: sales, it was only then that the crediting of the input tax paid on
a. Cost deduction method. This is a single-stage purchase or importation of goods and services by VAT-
tax which is payable only by the original sellers. [Abakada registered persons against the output tax was established.
Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, This continued with the Expanded VAT Law (R.A. No. 7716),
September 1, 2005 and companion cases citing Deoferio, Jr. V. and The Tax Reform Act of 1997 (R.A. No. 8424). The right to
A. and Mamalateo, V.C., The Value Added Tax in the credit input tax as against the output tax is clearly a privilege
Philippines (First Edition 2000)] This was subsequently created by law, a privilege that also the law can limit. It should
modified and a mixture of “cost deduction method” and “tax be stressed that a person has no vested right in statutory
credit method” was used to determine the value-added tax privileges. (ABAKADA Guro Party List, etc. et al. vs. Ermita,
payable. (Ibid.) G.R. No. 168207, October 15, 2005, and companion cases, on
b. Tax credit method. This method relies on the motion for reconsideration)
invoices, an entity can credit against or subtract from the VAT
charged on its sales or outputs the VAT paid on its purchases, 12. What is the concept of transitional input tax
inputs and imports. [Commissioner of Internal Revenue v. credits on beginning inventories ?
Seagate Technology (Philippines), G. R. No. 153866, February SUGGESTED ANSWER: Taxpayers who become VAT-
11, 2005 citing various cases and authorities; Abakada Guro registered persons upon exceeding the minimum turnover of
Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, P1,500,000.00 in any 12-month period, or who voluntarily
September 1, 2005 and companion cases) register even if their turnover does not exceed P1,500,000.00
If at the end of a taxable period, the output taxes (except franchise grantees of radio and television broadcasting
charged by a seller are equal to the input taxes passed on by whose threshold is P10,000,000.00) shall be entitled to a
the suppliers, no payment is required. It is when the output transitional input tax on the inventory on hand as of the
taxes exceed the input taxes that the excess has to be paid. If effectivity of their VAT registration, on the following:
however, the input taxes exceed the output taxes, the excess a. goods purchased for resale in their present
shall be carried over to the succeeding quarter or quarters. condition;
Should the input taxes result from zero-rated or effectively zero- b. materials purchased for further processing, but
rated transactions or from acquisition of capital goods, any which have not yet undergone processing;
excess over the output taxes shall instead be refunded to the c. goods which have been manufactured by the
taxpayer or credited against other internal revenue taxes. taxpayer;
[Commissioner of Internal Revenue v. Seagate Technology d. goods in process for sale; or
(Philippines), G. R. No. 153866, February 11, 2005 citing e. goods and supplies for use in the course of the
various cases and authorities] taxpayer’s trade or business as a VAT-registered person. [Rev.
Regs. No. 16-2005, Sec.4.111-1, (a), 1st par., arrangement and
7. The VAT being imposed on the increase in numbering supplied]
worth merit or improvement of the goods or services.
How is this done ? 13. What is the concept of presumptive input tax
SUGGESTED ANSWER: The VAT utilizes the concept credits ?
of the output and input taxes. SUGGESTED ANSWER: Persons or firms engaged in
the processing of sardines, mackerel, and milk, and in
8. Define output tax. manufacturing refined sugar, cooking oil and packed noodle-
SUGGESTED ANSWER: The value-added tax due on based instant meals, shall be allowed a presumptive input tax,
the sale or lease or taxable goods, properties or services by creditable against the output tax, equivalent to four percent
any VAT-registered person. (4%) of the gross value in money of their purchases of primary
agricultural products which are used as inputs to their
9. Define input tax. production.
SUGGESTED ANSWER: The VAT due on or paid by a As used in this paragraph, the term processing shall
VAT-registered person on importation of good or local mean pasteurization, canning and activities which through
purchases of goods or services, including lease or use of physical or chemical process alter the exterior texture or form
properties, in the course of his trade or business. (Rev. Regs. or inner substance of a product in such a manner as to prepare
No. 4.110-1, 1st par.) it for special use to which it could not have been put in its
original form or condition. [Rev. Regs. No. 16-2005, Sec.4.111-
10. What are included in the input tax. 1, (b)]
SUGGESTED ANSWER: It shall also include:
a. the transitional input tax and 14. Does the VAT registration fee violate religious
b. the presumptive input tax xxx. freedom ?
It includes SUGGESTED ANSWSER: The VAT registration fee
c. input taxes which can be directly attributed to imposed on non-VAT enterprises which includes among others,
transactions subject to the VAT plus a ratable portion of any religious sects which sells and distributes religious literature is
input tax which cannot be directly attributed to either the not violative of religious freedom, although a fixed amount is
taxable or exempt activity. (Rev. Regs. No. 4.110-1, 1 st par., 2nd not imposed for the exercise of a privilege but only for the
sentence,. And 2nd par., paraphrasing, arrangement and purpose of defraying part of the cost of registration.
numbering supplied ) The registration fee is thus more of an administrative
fee, one not imposed on the exercise of a privilege, much less
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11. May the right to credit the input tax be a constitutional right. (Tolentino v. Secretary of Finance, et al.,
limited by legislation ? and companion cases, 235 SCRA 630)
 26
15. Explain the proper interpretation of the term 17. Under the Value Added Tax (VAT), the tax is
“In the Course of Trade or Business. imposed on sales, barter, or exchange or goods and
SUGGESTED ANSWSER: VAT is not a singular- services. The VAT is also imposed on certain transactions
minded tax on every transactional level. Its assessment bears “deemed sales.” What are these so-called transactions
direct relevance to the taxpayer’s role or link in the production “deemed sales “ ?
chain. Hence, as affirmed by Section 99 of the Tax Code and its SUGGESTED ANSWER:
subsequent incarnations, the tax is levied only on the sale, a. Transfer, use or consumption not in
barter or exchange of goods or services by persons who the course of business or properties originally intended for sale
engage in such activities, in the course of trade or business. or for use in the course of business. xxx
These transactions outside the course of trade or business b. Distribution or transfer to:
may invariably contribute to the production chain, but they do 1) Shareholders or investors as share in the
so only as a matter of accident or incident. As the sales of profits of the VAT- registered person; xxx or
goods or services do not occur within the course of trade or 2) Creditors in payment of debt or obligation
business, the providers of such goods or services would hardly, c. Consignment of goods if actual sale is not
if at all, have the opportunity to appropriately credit any VAT made within sixty (60) days following the date such goods were
liability as against their own accumulated VAT collections since consigned. Consigned goods returned by the consignee within
the accumulation of output VAT arises in the first place only the 60-day period are not deemed sold.
through the ordinary course of trade or business. d. Retirement from or cessation of business,
(Commissioner of Internal Revenue v. Magsaysay Lines, Inc., with respect to all goods on hand,
et al., G. R. No. 146984, July 28, 2006) 1) whether capital goods, stock-in-trade,
16. Pursuant to a government program of supplies or materials as of the date of such
privatization, NDC, a VAT-registered entity created for the retirement, or cessation,
purpose of selling real property, decided to sell to private 2) whether or not the business is continued
enterprise all of its shares in its wholly-owned subsidiary by the new owner or successor. xxx [Rev. Regs. No.
the National Marine Corporation (NMC). The NDC decided 16-2005, Sec. 4.106-7, paraphrasing, arrangement
to sell in one lot its NMC shares and five (5) of its ships, and numbering supplied]
which are 3,700 DWT Tween-Decker, "Kloeckner" type
vessels. The vessels were constructed for the NDC 18. What transactions considered retirement or
between 1981 and 1984, then initially leased to Luzon cessation of business “deemed sale” subject to VAT ?
Stevedoring Company, also its wholly-owned subsidiary. SUGGESTED ANSWER:
Subsequently, the vessels were transferred and leased, on a. Change of ownership of the business. There is
a bareboat basis, to the NMC. The NMC shares and the change in the ownership of the business where a single
vessels were offered for public bidding. Among the proprietorship incorporates; or
stipulated terms and conditions for the public auction was 1) the proprietor of a single proprietorship
that the winning bidder was to pay "a value added tax of sells his entire business.
10% on the value of the vessels." Magsaysay Lines, Inc., b. Dissolution of a partnership and creation of a
offered to buy the shares and the vessels for new partnership which takes over the business. [Rev. Regs.
P168,000,000.00. The bid was made by Magsaysay Lines, No. 16-2005, Sec. 4.106-7 (a), (4) paraphrasing, arrangement
purportedly for a new company still to be formed and numbering supplied]
composed of itself, Baliwag Navigation, Inc., and FIM
Limited of the Marden Group based in Hongkong . The bid 19. What sale of or lease of real properties
was approved by the Committee on Privatization, and a subject to VAT ?
Notice of Award was issued to Magsaysay Lines. SUGGESTED ANSWER: Sale of real properties
Is the sale subject to VAT ? primarily for sale to customers or held for lease in the ordinary
SUGGESTED ANSWER: No. The sale is not subject to course of trade or business of the seller shall be subject to VAT.
VAT. In Imperial v. Collector of Internal Revenue, G.R. No. L- (Rev. Regs. No. 16-2005, Sec. 4.106-3, 1st par.)
7924, September 30, 1955 (97 Phil. 992), the term "carrying on Thus, capital transactions of individuals are not
business" does not mean the performance of a single subject to VAT. Only real estate dealers are subject to VAT.
disconnected act, but means conducting, prosecuting and
continuing business by performing progressively all the acts 20. On Jan. 10,
normally incident thereof; while "doing business" conveys the 2008, X, a domestic corporation engaged in the real estate
idea of business being done, not from time to time, but all the business, sold a building for P10,000,000.00. Is the sale
time. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE subject to the value-added tax (VAT)? If so, how much?
CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. "Course of Explain.
business" is what is usually done in the management of trade SUGGESTED ANSWER: Yes. 12% on the gross
or business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 selling price because the sale was made in the ordinary course
Miss. 65, cited in Words & Phrases, Vol. 10, (1984)]. What of trade of business of X, a domestic corporation engaged in
is clear therefore, based on the aforecited jurisprudence, is that the real estate business.
"course of business" or "doing business" connotes regularity of
activity. In the instant case, the sale was an isolated 21. What sale of real property exempt from VAT ?
transaction. The sale which was involuntary and made SUGGESTED ANSWER: The following sales of real
pursuant to the declared policy of Government for privatization properties are exempt from VAT, namely:
could no longer be repeated or carried on with regularity. It a. Sale of real properties not primarily held for
should be emphasized that the normal VAT-registered activity sale to customers or held for lease in the ordinary course of
of NDC is leasing personal property. This finding is trade or business;
confirmed by the Revised Charter of the NDC which bears no b. Sale of real properties utilized for low-cost
indication that the NDC was created for the primary purpose of housing as defined by RA No. 7279, otherwise known as the
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selling real property. (Commissioner of Internal Revenue v. “Urban and Development Housing Act of 1992” and other
Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006) related laws, such as RA No. 7835 and RA No. 8763.
xxx xxx xxx
 27
c. Sale of real properties utilized for socialized parlors, cafes and other eating places, including clubs and
housing as defined under RA No. 7279, and other related laws caterers; i. dealers in securities;
wherein the price ceiling per unit is P225,000.00 or as may j. lending investors;
from time to time be determined by the HUDCC and the NEDA k. transportation
and other related laws. contractors on their transport of goods or cargoes, including
xxx xxx xxx persons who transport goods or cargoes for hire and other
d. Sale of residential lot valued at One Million Five domestic common carriers by land relative to their transport of
Hundred Thousand Pesos (P1,500,000.00) and below, or goods or cargoes;
house & lot and other residential dwellings valued at Two l. common carriers by air and sea relative to their
Million Give Hundred Thousand Pesos (P2,500,000.00) and transport of passengers, goods or cargoes from one place in
below where the instrument of sale/transfer/disposition was the Philippines to another place in the Philippines;
executed on or after November 1, 2005, provided, That not m. sales of electricity by generation
later than January 31, 2009 and every three (3) years companies, transmission, and/or distribution companies;
thereafter, the amounts stated herein shall be adjusted to its n. franchise grantees
present value using the Consumer Price Index, as published by of electric utilities, telephone and telegraph, radio and
the National Statistics Office (NSO); provided, further, that television broadcasting and all other franchise grantees except
such adjustment shall be published through revenue franchise grantees of radio and/or television broadcasting
regulations to be issued not later than March 31 of each year. whose annual gross receipts of the preceding year do not
If two or more adjacent residential lots are sold or exceed Ten Million Pesos (P10,000,000.00), and franchise
disposed in favor of one buyer, for the purpose of utilizing the grantees of gas and water utilities;
lots as one residential lot, the sale shall be exempt from VAT o. non-life insurance companies (except
only if the aggregate value of the lots do not exceed their crop insurances), including surety, fidelity, indemnity and
P1,500,000.00. Adjacent residential lots, although covered by bonding companies; and
separate titles and/or separate tax declarations, when sold or p. similar services regardless
disposed of to one and the same buyer, whether covered by of whether or not the performance thereof calls for the exercise
one or separate Deed of Conveyance, shall be presumed as a or use of the physical or mental faculties. [NIRC of 1997, Sec.
sale of one residential lot. [Rev. Regs. No. 4.109-1 (B), (p), 108 (A), as amended by R.A. No. 9337; Rev. Regs. No. 16-
paraphrasing and numbering supplied] 2005, Sec. 4,108-2, 1st par., arrangement and numbering
supplied]
22. What is the VAT on services and lease of
properties ? 24. X Corporation rendered technical
SUGGESTED ANSWER: services through its “work engineers” to PNB and SSS in
a. There shall be levied, assessed, and collected, the construction of their buildings. The “work engineers”
b. a value-added tax equivalent to ten percent acted as overseers of X Corporation, rendering their
(10%) of gross receipts professional services as employees of X corporation.
c. derived from the sale or exchange of services, Should X Corporation be subjected to VAT or should it be
1) including the use or lease of properties. subjected to tax on the professional services of those
d. Provided, That the President, upon the employees themselves? Decide the case with reason.
recommendation of the Secretary of Finance, shall, effective SUGGESTED ANSWER: X Corporation is subject to
January 1, 2006, raise the rate of value-added tax to twelve VAT.
percent (12%), after any of the following conditions has been
satisfied: 25. Also included in the phrase “sale or
1) Value-added tax collection as a exchange of services.
percentage of Gross Domestic product (GDP) of the a. The lease or the use of or the right or privilege
previous year exceeds two and four-fifth percent (2 to use any copyright, patent, design or model, plan, secret
4/5%); or formula or process, goodwill, trademark, trade brand or other
2) National government deficit as a like property or right;
percentage of GDP of the previous year exceeds one b. The lease or the use of, or the right to use
and one-half percent (1 1/2%). [NIRC of 1997, Sec. any industrial, commercial or scientific equipment;
108 (A), as amended by R.A. No. 9337, arrangement c. The supply of scientific, technical, industrial or
and numbering supplied] commercial knowledge or information;
d. The supply of any assistance that is ancillary
23. “Sale or exchange of services”, defined. The and subsidiary to and is furnished as a means of enabling the
term “sale or exchange of services” means the performance of application or enjoyment of any such property, or right as is
all kinds of services in the Philippines for others for a fee, mentioned in subparagraph (2) hereof or any such knowledge
remuneration or consideration, whether in kind or in cash, or information as is mentioned in subparagraph (3) hereof; or
including those performed or rendered by the following: e. The supply of services by a non-resident person
a. construction and service or his employee in connection with the use of property or rights
contractors; b. stock, real estate, belonging to, or the installation or operation of any brand,
commercial, customs and immigration brokers; machinery or other apparatus purchased from such non-
c. lessors of resident person;
property, whether personal or real; d. f. The supply of technical advice, assistance or
persons engaged in warehousing services services rendered in connection with technical management or
e. lessors or distributors of cinematographic films; administration of any scientific, industrial or commercial
f. persons engaged in milling, processing, undertaking, venture, project of scheme;
manufacturing or repacking goods for others; g. The lease of motion picture films, film tapes
g. proprietors, and discs;
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operators or keepers of hotels, motels, rest-houses, pension h. The lease or the use of or the right to use
houses, inns, resorts; theaters, and movie houses; h. radio, television, satellite transmission and cable television
proprietors or operators of restaurants, refreshment time. (Rev. Regs. No. 16-2005, Sec. 4.108-2, 2 nd par.)
 28
the Philippines, "paid for in acceptable foreign currency and
26. Zero-rated Sales of Goods or Properties. A accounted for in accordance with the rules and regulations of
zero-rated sale of goods or properties by a sale by a VAT- the [BSP]."
registered person is a taxable transaction for VAT purposes but
the sale does not result in any output tax. 31. Rationale for zero-rating of exports. The
However, the input tax on the purchases of goods, Philippine VAT system adheres to the Cross Border Doctrine,
properties or services related to such zero-rated sale shall be according to which, no VAT shall be imposed to form part of the
available as tax credit or refund in accordance with Rev. cost of goods destined for consumption outside of the territorial
Regulations No. 16-2005. (Rev. Regs. No. 16-2005, 1st par.) border of the taxing authority. [Commissioner of Internal
Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R..
27. Concept of VAT zero-rating. The tax rate is set No. 150154, August 9, 2005]
at zero. When applied to the tax base, such rate obviously The “Cross Border Doctrine” is also known as the
results in no tax chargeable against the purchaser. The seller destination principle.
of such transactions charges no output tax, but can claim a Hence, actual or constructive export of
refund or a tax credit certificate for the VAT previously charged goods and services from the Philippines to a foreign country
by suppliers. [Commissioner of Internal Revenue v. Seagate must be zero-rated for VAT; while, those destined for use or
Technology (Philippines), G. R. No. 153866, February 11, 2005] consumption within the Philippines shall be imposed the twelve
Under a zero-rating scheme, the sale or exchange of a percent (12%) VAT.
particular service is completely freed from the VAT, because the
seller is entitled to recover, by way of a refund or as an input 32. Zero-rated sale distinguished from exempt
tax credit, the tax that is included in the cost of purchases transactions:
attributable to the sale or exchange. The tax paid or withheld is a. A zero-rated sale is a taxable transaction but
not deducted from the tax base. (Commissioner, of Internal does not result in an output tax WHILE an exempt transaction
Revenue v. American Express International, Inc. (Philippine is not subject to the output tax.
Branch), G. R. No. 152609, June 29, 2005 citing various b. The input tax on the purchases of a VAT
cases) registered person who has zero-rated sales may be allowed as
tax credits or refunded WHILE the seller in an exempt
28. Situs of taxation of zero-rated VAT services transaction is not entitled to any input tax on his purchases
such as facilitating the collection of receivables from despite the issuance of a VAT invoice or receipt.
credit card members situated in the Philippines and c. Persons engaged in transactions which are zero
payment to service establishments in the Philippines. The rated being subject to VAT are required to register WHILE
place where the service is rendered determines the jurisdiction registration is optional for VAT-exempt persons.
(Commissioner of Internal Revenue v. American Express
International, Inc. (Philipppine Branch), G. R. No. 152609, June 33. Zero-rated sales by VAT-registered persons.
29, 2005 citing “[N]o state may tax anything not within its The following sales by VAT-registered persons shall be subject
jurisdiction without violating the due process clause of the to zero percent (0%) rate:
[C]constitution.” Manila Gas Corp. v. Collector of Internal a. Export sales;
Revenue, 62 Phil. 895, 900, January 17, 1936, per Malcolm, b. Considered export sales under Executive Order
J.) to impose the VAT [Commissioner, supra citing Deoferio, Jr. No. 224;
and Mamalateo, The Value Added Tax in the Philippines (2000), c. Foreign currency denominated sale; and
p. 93] d. Sales to persons or entities demed tax-exempt
Performed in the Philippines, the service is necessarily under special law or international agreement. (Rev. Regs. No.
subject to its jurisdiction [Commissioner, supra citing Alejandro, 16-2005, Sec. 4.106-5, 2nd par., paraphrasing supplied)
The Law on Taxation (1966 rev. ed.) p. 33], for the State
necessarily has to have a “substantial connection” 34. Sale of gold to the Central Bank considered
[Commissioner, supra citing Garner (ed. in chief), Black’s Law as export sales. As export sales, the sale of gold to the
Dictionary (8th ed., 1999), p. 1503] to it in order to enforce a Central Bank is zero-rated, hence, no tax is chargeable to it as
zero rate. [Commissioner, supra citing De Leon, The purchaser. Zero rating is primarily intended to be enjoyed by
Fundamentals of Taxation (12th ed., 1998), p. 3] The place of the seller, which charges no output VAT but can claim a refund
payment is immaterial [Commissioner, supra citing Deoferio, Jr. of or a tax credit certificate for the input VAT previously
and Mamalateo, The Value Added Tax in the Philippines (2000), charged to it by suppliers. (Commissioner of Internal Revenue
p. 93], much less is the place where the output of the service v. Manila Mining Corporation, G.R. No. 153204, August 31,
will be further or ultimately used. 2005)
This is so because the law neither makes a qualification 35. Sales to ecozone, such as PEZA, considered
nor adds a condition in determining the tax situs of a zero-rated export-sale. Notably, while an ecozone is geographically
service. (Commissioner, supra) within the Philippines, it is deemed a separate customs territory
and is regarded in law as foreign soil. Sales by suppliers from
29. What is the destination principle the VAT ? outside the borders of the ecozone to this separate customs
SUGGESTED ANSWER: As a general rule, the VAT territory are deemed as exports and treated as export sales.
system uses the destination principle as a basis for the These sales are zero-rated or subject to a tax rate of zero
jurisdictional reach of the tax. percent. (Commissioner of Internal Revenue v. Sekisui Jushi
Goods and services are taxed only in the country Philippines, Inc., G. R. No. 149671, July 21, 2006 citing various
where they are consumed. Thus, exports are zero-rated, while authorities)
imports are taxed.
36. “Ecozone”, defined. An ECOZONE or a
30. Is there any exception to the destination Special Economic Zone has been described as – [S]elected
principle ? areas with highly developed or which have the potential to be
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SUGGESTED ANSWER: Yes. The law clearly developed into agro-industrial, industrial, tourist, recreational,
provides for an exception to the destination principle; that is, commercial, banking, investment and financial centers whose
for a zero percent VAT rate for services that are performed in metes and bounds are fixed or delimited by Presidential
 29
Proclamations. An ECOZONE may contain any or all of the Misui and Co., Ltd., which entered into a contract with
following: industrial estates (IEs), export processing zones NAPOCOR for the operation and maintenance of two
(EPZs), free trade zones and tourist/recreational centers. power barges appointed BWSC-Denmark as its
The national territory of the Philippines outside of coordination manager. BWSCMI was established as the
the proclaimed borders of the ECOZONE shall be referred to subcontractor to perform the actual work in the
as the Customs Territory. [Commissioner of Internal Revenue v. Philippines. The Consortium paid BWSCMI in acceptable
Toshiba Information Equipment (Phils.), Inc., G. R.. No. foreign exchange and accounted for in accordance with
150154, August 9, 2005] the rules and regulations of the BSP.
Through a February 14, 1995 ruling the BIR declared
37. Zero-rated sale of service, defined. A zero- that BWSCMI may choose to register as a VAT persons
rated sale of service (by a VAT-registered person) is a taxable subject to VAT at zero rate. For 1996, it filed the proper
transaction for VAT purposes, but shall not result in any output VAT returns showing zero rating. On December 29, 1997,
tax. However, the input tax on purchases of goods, properties believing that it is covered by Rev. Regs. 5-96, dated
or services related to such zero-rated sale shall be available as February 20, 1996, BWSCMI paid 10% output VAT for the
tax credit or refund in accordance with Rev. Regs. No. 16- period April-December 1996, through the Voluntary
2005. [Rev. Regs. No. 16-2005, Sec. Sec. 4.108-5 (a), words Assessment Program (VAP).
in italics supplied) On January 7, 1999, BWSCMI was able to obtain a
Ruling from the BIR reconfirming that it is subject to VAT
38. Service performed by American Express in at zero-rating. On this basis, BWSCMI applied for a refund
facilitating the collection of receivables from credit card of the output VAT it paid.
members situated in the Philippines and payment to a. Is BWSCMI subject to the 10% VAT or is it
service establishments in the Philippines in behalf of its zero rated ?
Hong-Kong based client is subject to VAT but zero-rated. SUGGESTED ANSWER: Yes. BWSCMI is not zero
This is so because it meets all the requirements for VAT rated and is subject to the 10% VAT. It is rendering service for
imposition, as follows: the Consortium which is not doing business in the Philippines.
a. It regularly renders in the Philippines the service Zero-rating finds application only where the recipient of the
of facilitating the collection and payment of receivables services are other persons doing business outside of the
belonging to a foreign company that is a clearly separate and Philippines. BWSCMI provides services to the Consortium
distinct entity. which by virtue of its contract with NAPOCOR is doing
b. Such service is commercial in nature; carried on business within the Philippines. (Commissioner of Internal
over a sustained period of time; on a significant scale with a Revenue v. Burmeister and Wain Scandinavian Contractor
reasonable degree of frequency; and not at random, fortuitous, Mindanao, Inc., G. R. No. 153205, January 22, 2007)
or attenuated. b. Could it obtain a refund of the VAT it paid
c. For this service, it definitely receives through the VAP ? Explain.
consideration in foreign currency that is accounted for in SUGGESTED ANSWER: Yes. BWSCMI is entitled to
conformity with law. refund of the 10% output VAT it paid the based on the non-
d. It is not an entity exempt under any of our laws retroactivity of the prejudicial revocation of the BIR Rulings
or international agreements. (Commissioner, of Internal which held that it’s services are subject to 0% VAT and which
Revenue v. American Express International, Inc. (Philipppine BWSCMI invoked in applying for refund of the output VAT.
Branch), G. R. No. 152609, June 29, 2005) (Commissioner of Internal Revenue v. Burmeister and Wain
Scandinavian Contractor Mindanao, Inc., supra)
39. While the service performed by American NOTES AND COMMENTS:
Express is subject to VAT it is zero-rated, and BIR Revenue a. Do not confuse the BWSCMI case with the
Regulations that alter the legal requirements for zero- American Express case. American Express International,
rating are ultra vires and invalid. The VAT system uses the Inc. (Philippine Branch)] is a VAT-registered person that
destination principle which posits that the goods and services facilitates the collection and payment of receivables belonging
are taxed only in the country where they are consumed, to its non-resident foreign client [American Express
However, the law itself provides for clear exceptions International, Inc. (Hongkong Branch)], for which it gets paid in
under which the supply of services shall be zero-rated, among acceptable foreign currency inwardly remitted and accounted
which are the following: for in accordance with BSP rules and regulations.
a. The service is performed in the Philippines; (Commissioner of Internal Revenue v. Burmeister and Wain
b. The services are within the categories provided Scandinavian Contractor Mindanao, Inc., G. R. No. 153205,
for under the Tax Code; and January 22, 2007)
c. It is paid for in acceptable foreign currency of the
Bangko Sentral ng Pilipinas. 41. VAT-Exempt transactions, defined.
American Express renders assistance to its foreign a. The sale of goods or properties and/or services
clients by receiving the bills of service establishments located and the use or lease of properties that is
in the country and forwarding them to their clients abroad. The b. not subject to VAT (output tax) and
services are performed or successfully completed upon send to c. the seller is not allowed any tax credit on VAT
its foreign clients the drafts and bills it has gathered from (input tax) purchases.
service establishments here, Its services, having been The person making the exempt sale of goods,
performed in the Philippines are therefore also consumed in properties or services shall not bill any output tax to his
the Philippines. Thus, its services are exempt from the customers because the said transaction is not subject to VAT.
destination principle and are zero-rated. [Rev. Regs. No. 16-2005, Sec. 4.109-1 (A), arrangement and
The BIR could not change the law. (Commissioner, of numbering supplied]
Internal Revenue v. American Express International, Inc.
(Philipppine Branch), G. R. No. 152609, June 29, 2005) 42. VAT-exempt transactions distinguished from
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VAT-exempt entities.
40. A foreign Consortium composed of BWSC- a. An exempt transaction, on the one hand,
Denmark, Mitsui Engineering and Shipbuilding Ltd., and involves goods or services which, by their nature, are
 30
specifically listed in and expressly exempted from the VAT Philippines: Provided, That such goods are exempt from
under the Tax Code, without regard to the tax status – VAT- customs duties under the Tariff and Customs Code of the
exempt or not – of the party to the transaction. Philippines;
An exempt party, on the other hand, is a person or entity (D) Importation of professional instruments and
granted VAT exemption under the Tax Code, a special law or an implements, wearing apparel, domestic animals, and personal
international agreement to which the Philippines is a signatory, household effects (except any vehicle, vessel, aircraft,
and by virtue of which its taxable transactions become exempt machinery, other goods for use in the manufacture and
from VAT. [Commissioner of Internal Revenue v. Toshiba merchandise of any kind in commercial quantity) belonging to
Information Equipment (Phils.), Inc., G. R. No. 150154, August persons coming to settle in the Philippines, for their own use
9, 2005] and not for sale, barter or exchange, accompanying such
b. An exempt transaction shall not be the subject of persons, or arriving within ninety (90) days before or after their
any billing for output VAT but it shall not also be allowed any arrival, upon the production of evidence satisfactory to the
input tax credits WHILE an exempt party being zero-rated is Commissioner of Internal Revenue, that such persons are
allowed to claim input tax credits. actually coming to settle in the Philippines and that the change
of residence is bona fide;
43. What transactions are exempt from VAT ? (E) Services subject to percentage tax under Title V of
SUGGESTED ANSWER: (Subject to the election by a the Tax Code, as enumerated below:
VAT-registered person not to be subject to the value-added (1) Sale or lease of goods or properties or
tax), the following shall be exempt from VAT: the performance of services of non-VAT-registered
(A) Sale or importation of agricultural and marine food persons, other than the transactions mentioned in
products in their original state, livestock and poultry of a kind paragraphs (A) to (U) of Sec. 109 (1) of the Tax Code,
generally used as, or yielding or producing foods for human the annual sales and/or receipts of which does not
consumption; and breeding stock and genetic materials exceed the amount of One Million Five Hundred
therefor. thousand Pesos (P1,500,000.00), Provided, That not
Livestock shall include cows, bulls and calves, pigs, later than January 31, 2009 and every three (3) years
sheep, goats and rabbits. Poultry shall include fowls, ducks, thereafter, the amount herein stated shall be adjusted
geese and turkey, Livestock or poultry does not include fighting to its present value using the Consumer Price Index,
cocks, race horses, zoo animals and other animals generally as published by the National Statistics Office (NSO).
considered as pets. (Sec. 116, Tax Code)
Marine food products shall include fish and (2) Services rendered by domestic common
crustaceans, such as, but not limited to, eels, trout, lobster, carriers by land for the transport of passengers and
shrimps, prawns, oysters, mussels and clams. keepers of garages. (Sec. 117)
Meat, fruit, fish, vegetables and other agricultural and (3) Services rendered by international
marine food Products classified under this paragraph shall be air/shipping carriers. (Sec. 118)
considered in their original state even if they have undergone (4) Service rendered by franchise grantees of
the simple processes of preparation or preservation for the radio and/or television broadcasting whose annual
market, such as freezing, drying, salting, broiling, roasting, gross receipts of the preceding year do not exceed Ten
smoking or stripping, including those using advanced Million Pesos (P10,000,000.00) and by franchises of
technological means of packaging, such as shrink wrapping in gas and water utilities. (Sec. 119)
plastics, vacuum packing, tetra-pack, and other similar (5) Service rendered for overseas dispatch
packaging methods. Polished and/or husked rice, corn grits, message or conversation originating from the
raw cane sugar and molasses, ordinary salt, and copra shall Philippines. (Sc. 120)
be considered in their original state. (6) Services rendered by any person,
Sugar whose content of sucrose by weight, in the dry company or corporation (except purely cooperative
state, has a polarimeter reading of 99.5o and above are companies or associations ) doing life insurance
presumed to be refined sugar. business of any sort in the Philippines. (Sec. 123)
Cane sugar produced from the following shall be (7) Services rendered by fire, marine or
presumed, for internal revenue purposes, to be refined sugar: miscellaneous insurance agents of foreign insurance
(1) product of a refining process, companies. (Sec. 124)
(2) products of a sugar refinery, or (8) Services of proprietors, lessees or
(3) product of a production line of a sugar mill operators of cockpits, cabarets, night or day clubs,
accredited by the BIR to be producing sugar with polarimeter boxing exhibitions professional basketball games, jai-
reading of 99.5o and above, and for which the quedanissued Alai and race tracks. (Sec. 125). and
therefor, and verified by the Sugar Regulatory Administration, (9) Receipts on sale, barter or exchange of
identifies the same to be of a polarimeter reading of 99.5o and shares of stock listed and traded through the local
above. stock exchange or through initial public offering. (Sec.
Bagasse is not included in the exemption provided for 127)
under this section. (F) Services by agricultural contract growers and
(B) Sale or importation of fertilizers; seeds, milling for others of palay into rice, corn into grits and sugar
seedlings and fingerlings; fish, prawn, livestock and poultry cane into raw sugar;
feeds, including ingredients, whether locally produced or “Agricultural contract growers” refers to those persons
imported, used in the manufacture of finished feeds (except producing for others poultry, livestock or other agricultural and
specialty feeds for race horses, fighting cocks, aquarium fish, marine food products in their original state.
zoo animals and other animals generally considered as pets); (G) Medical, dental, hospital and veterinary services
“Specialty feeds” refers to non-agricultural feeds or food except those rendered by professionals;
for race horses, fighting cocks, aquarium fish, zoo animals and Laboratory services are exempted. If the hospital or
other animals generally considered as pets. clinic operates a pharmacy or drug store, the sale of drugs and
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(C) Importation of personal and household effects medicine is subject to VAT.

belonging to the residents of the Philippines returning from (H) Educational services rendered by private
abroad and nonresident citizens coming to resettle in the educational institutions, duly accredited by the Department of
 31
Education (DEPED), the Commission on Higher Education and sale and which is not devoted principally to the publication
(CHED), the Technical Education And Skills Development of paid advertisements;
Authority (TESDA) and those rendered by government (S) Sale, importation or lease of passenger or cargo
educational institutions; vessels and aircraft, including engine, equipment and spare
“Educational services” shall refer to academic, technical parts thereof for domestic or international transport operations;
or vocational education provided by private educational Provided, that the exemption from VAT on the importation and
institutions duly accredited by the DepED, the CHED and local purchase of passenger and/or cargo vessels shall be
TESDA and those rendered by government educational limited to those of one hundred fifty (150) tons and above,
institutions and it does not include seminars, in-service including engine and spare parts of said vessels; Provided,
training, review classes and other similar services rendered by further, that the vessels be imported shall comply with the age
persons who are not accredited by the DepED, the CHED limit requirement, at the time of acquisition counted from the
and/or the TESDA. date of the vessel’s original commissioning, as follows: (i) for
(I) Services rendered by individuals pursuant to an passenger and/or cargo vessels, the age limit is fifteen years
employer-employee relationship; (15) years old, (ii) for tankers, the age limit is ten (10) years
(J) Services rendered by regional or area old, and (iii) For high-speed passenger cars, the age limit is
headquarters established in the Philippines by multinational five (5) years old, Provided, finally, that exemption shall be
corporations which act as supervisory, communications and subject to the provisions of section 4 of Republic Act No. 9295,
coordinating centers for their affiliates, subsidiaries or branches otherwise known as “The Domestic Shipping Development Act
in the Asia-Pacific Region and do not earn or derive income of 2004.”
from the Philippines; (T) Importation of fuel, goods and supplies by
(K) Transactions which are exempt under persons engaged in international shipping or air transport
international agreements to which the Philippines is a signatory operations; Provided, that the said fuel, goods and supplies
or under special laws, except those under Presidential Decree shall be used exclusively or shall pertain to the transport of
No. 529 – Petroleum Exploration Concessionaires under the goods and/or passenger from a port in the Philippines directly
Petroleum Act of 1949; and; to a foreign port without stopping at any other port in the
(L) Sales by agricultural cooperatives duly registered Philippines; provided, further, that if any portion of such fuel,
with the Cooperative Development Authority (CDA) to their goods or supplies is used for purposes other than that
members as well as sale of their produce, whether in its mentioned in this paragraph, such portion of fuel, goods and
original state or processed form, to non-members; their supplies shall be subject to 10% VAT (now 12%);
importation of direct farm inputs, machineries and equipment, (U) Services of banks, non-bank financial intermediaries
including spare parts thereof, to be used directly and performing quasi-banking functions, and other non-bank
exclusively in the production and/or processing of their financial intermediaries; and
produce; (V) Sale or lease of goods or properties or the
(M) Gross receipts from lending activities by credit or performance of services other than the transactions mentioned
multi-purpose cooperatives duly registered and in good in the preceding paragraphs, the gross annual sales and/or
standing with the Cooperative Development Authority; receipts do not exceed the amount of One million five hundred
(N) Sales by non-agricultural, non-electric and non- thousand pesos (P1,500,000): Provided, That not later than
credit cooperatives duly registered with the Cooperative January 31, 2009 and every three (3) years thereafter, the
Development Authority: Provided, That the share capital amount herein stated shall be adjusted to its present value
contribution of each member does not exceed Fifteen thousand using the Consumer Price Index as published by the National
pesos (P15,000) and regardless of the aggregate capital and Statistics Office (NSO).
net surplus ratably distributed among the members; For purposes of the threshold of P1,500,000.00, the
Importation by non-agricultural, non-electric and non- husband and wife shall be cnsidered separate taxpayers.
credit cooperatives of machineries and equipment, including However, the aggregation rule for each taxpayer shall apply.
spare parts thereof, to be used by them are subject to VAT. For instance, if a profesional, aside from the practice ofhis
(O) Export sales by persons who are not VAT- profession, also derives revenue from other lines of business
registered; which are otherwise subject to VAT, the same shall be
(P) Sale of real properties not primarily held for sale combined for purposes of determining whether the threshold
to customers or held for lease in the ordinary course of trade or has been exceeded. Thus, the VAT-exempt sales shall to be
business, or real property utilized for low-cost and socialized icluded in determining the threshold. [NIRC of 1997, Sec. 109
housing as defined by Republic Act No. 7279, otherwise known (1), as amended by R. A. No. 9337; words in italics from Rev.
as the Urban Development and Housing Act of 1992, and other Regs. No. 16-2005, Sec. 4.109-1 (B), words in parentheses
related laws, such as RA No. 7835 and RA No. 8765, supplied]
residential lot valued at One million five hundred thousand
pesos (P 1,500,000) and below, house and lot, and other 44. X is engaged in the importation and sale of
residential dwellings valued at Two million five hundred books and magazines. Is the importation of books and
thousand pesos (P 2,500,000) and below: Provided, That not magazines subject to the 10% VAT? Explain.
later than January 31, 2009 and every three (3) years SUGGESTED ANSWER: No. Sale, importation,
thereafter, the amounts herein stated shall be adjusted to their printing or publication of books and any newspaper, magazine,
present values using the Consumer Price Index, as published review or bulletin which appears at regular intervals with fixed
by the National Statistics Office (NSO); prices for subscription and sale and which is not devoted
(Q) Lease of a residential unit with a monthly rental principally to the publication of paid advertisements;
not exceeding Ten thousand pesos (P 10,000) Provided, That
not later than January 31, 2009 and every three (3) years 45. Is there any tax to be paid by persons exempt
thereafter, the amount herein stated shall be adjusted to its from VAT ?
present value using the Consumer Price Index as published by SUGGESTED ANSWER: Yes.
the National Statistics Office (NSO); a. Any person, whose sales or receipts are exempt
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(R) Sale, importation, printing or publication of under Sec. 109 (1) (V) of the Tax Code,
books and any newspaper, magazine, review or bulletin which (V) Sale or lease of goods or properties or the
appears at regular intervals with fixed prices for subscription performance of services other than the transactions
 32
mentioned in the preceding paragraphs, the gross b. An individual with respect to pure compensation
annual sales and/or receipts do not exceed the income, derived from such sources within the Philippines, the
amount of One million five hundred thousand pesos income tax on which has been correctly withheld: Provided,
(P1,500,000): Provided, That not later than January That an individual deriving compensation concurrently from
31, 2009 and every three (3) years thereafter, the two or more employers at any time during the taxable year
amount herein stated shall be adjusted to its present shall file an income tax return [Sec. 51 (A) (2), NIRC of 1997, as
value using the Consumer Price Index as published by amended by Rep. Act No. 9504, paraphrasing supplied]
the National Statistics Office (NSO), from the payment c. An individual whose sole income has been subject
of VAT and to final withholding tax;
b. who is not a VAT-registered person d. A minimum wage earner (is a worker in the
c. shall pay a tax equivalent to three percent (3%) private sector paid the statutory minimum wage, or is an
of his gross monthly sales or receipts; employee in the public sector with compensation income of not
Provided, that cooperatives shall be exempt from the more than the statutory minimum wage in the non-agricultural
three (3%) gross receipts tax herein imposed. (Rev. Regs. No. sector where he/she is assigned), an individual who is exempt
16-2005, Sec. 4.116-1, arrangement, numbering and words in from income tax pursuant to the provisions of the Tax Code and
italics supplied) other laws, general or special. [Sec. 51 (A) (2), NIRC of 1997 in
relation to Sec. 22 (HH), both as amended by Rep. Act. 9504]
RETURNS AND WITHHOLDING
7. Minimum wage earners are exempt from
1. Income tax returns being public documents, income taxation. That minimum wage earners (is a worker in
until controverted by competent evidence, are competent the private sector paid the statutory minimum wage, or is an
evidence, are prima facie correct with respect to the entries employee in the public sector with compensation income of not
therein. (Ropali Trading v. NLRC, et al., 296 SCRA 309, 317) more than the statutory minimum wage in the non-agricultural
sector where he/she is assigned) shall be exempt from the
2. Individuals required to file an income tax payment of income tax on their taxable income: Provided,
return. further, That the holiday pay, overtime pay, night shift
a. Every Filipino citizen residing in the Philippines; differential pay and hazard pay received by such minimum
b. Every Filipino citizen residing outside the wage earners shall likewise be exempt from income tax. [Sec.
Philippines on his income from sources within the Philippines; 51 (A) (2), NIRC of 1997 in relation to Sec. 22 (HH), both as
c. Every alien residing in the Philippines on income amended by Rep. Act. 9504]
derived from sources within the Philippines; and
d. Every nonresident alien engaged in trade or 8. An individual who is not required to file an
business or in the exercise of profession in the Philippines. [Sec. income tax return may nevertheless be required to file an
51 (A) (1), NIRC of 1997] information return. [Sec. 51 (A) (3), NIRC of 1997]

3. Married individuals who are earning purely 9. A corporation files its income tax return and
compensation income allowed to file separate returns. pays its income tax four (4) times during a single taxable
year. Quarterly returns are required to be filed for the first three
4. Married individuals, whether citizens, resident quarters, then a final adjustment return is filed covering the total
or non-resident aliens, who do not derive income purely taxable income for the whole taxable year, be it calendar or
from compensation shall file a consolidated return for the fiscal.
taxable year to include the income of both spouses, but
where it is impracticable for the spouses to file one return, each 10. An individual earning from the practice of his
spouse may file a separate return of income but the returns so profession or who engages in trade or business files his
filed shall be consolidated by the Bureau for purposes of income tax return and pays his income tax four (4) times
verification.” [Section 51 (D) of the NIRC of 1997] during a single taxable year. Quarterly returns are required to
be filed for the first three quarters, then an annual income tax
5. Computation of income tax for married return is filed covering the total taxable income for the whole of
individuals whether citizens, resident or non-resident the previous calendar year.
aliens, who do not derive income purely from compensation
required file a consolidated return for the taxable year but 11. The purpose of the above four (4) times a year
could not do so. For married individuals, the husband and requirement is to make available sufficient funds to meet
wife, subject to no. 2, supra,, shall compute separately their the budgetary requirements, on a quarterly basis thereby
individual income tax based on their respective total taxable increasing government liquidity. It also eases hardships on the
income: Provided, that if any income cannot be definitely part of individuals who are required to make this four time return.
attributed to or identified as income exclusively earned or Thus, the taxpayer does not have to raise large sums of money
realized by either of the spouses, the same shall be divided in order to pay the tax.
equally between the spouses for the purpose of determining
their respective taxable income. [2 nd to the last par., Sec. 24 12. An individual earning purely compensation
(A) (2), NIRC of 1997 as amended by Rep. Act No. 9504] income files only one annual income tax return covering the
total taxable compensation income for the whole of the previous
6. Individuals who are not required to file an calendar year.
income tax return.
a. An individual whose gross income does not 13. Under the withholding tax system, taxes
exceed his total personal and additional exemptions for imposed or prescribed by the NIRC of 1997 are to be
dependents, Provided, That a citizen of the Philippines and any deducted and withheld by the payors from payments made
alien individual engaged in business or practice of profession to payees for the former to pay directly to the Bureau of
Page63

within the Philippines shall file an income tax return regardless of Internal Revenue. It is also known as collection of the tax at
the amount of gross income [Sec. 51 (A) (2), NIRC of 1997] source.
 33
14. A withholding agent is explicitly made withholding of 5%. May “A” properly apply for the refund ?
personally liable under the Tax Code for the payment of the Explain.
tax required to be withheld, in order to compel the withholding SUGGESTED ANSWER: Yes. In applications for refund,
agent to withhold the tax under any and all circumstances. In the withholding agent is a taxpayer because if he does not pay
effect, the responsibility for the collection of the tax as well as the the tax shall be collected from him. (Commissioner of Internal
payment thereof is concentrated upon the person over whom the Revenue v. Procter & Gamble Philippine Manufacturing
Government has jurisdiction. (Filipinas Synthetic Fiber Corporation, 204 SCRA 377, 383-386),
Corporation v. Court of Appeals, et al., G.R. Nos. 118498 & NOTES AND COMMENTS:
124377, October 12, 1999) The system facilitates tax collection. a. For tax amnesty purposes, the withholding
agent is not a taxpayer because he is made to pay the tax
15. The two (2) types of withholding at source are where he fails to withhold as a penalty and not that the tax is due
the 1) final withholding tax; and 2) creditable withholding from him. (Commissioner of Internal Revenue v. Court of
tax. Appeals, et al., G.R. No. 108576, January 20, 1999, the Anscor
case)
16. Under the final withholding tax system the
amount of income tax withheld by the withholding agent is PENALTIES, INTERESTS AND SURCHARGES
constituted as a full and final payment of the income due
from the payee on the said income. [1st sentence, 1st par., 1. What are surtaxes or surcharges ?
Sec. 2.57 (A), Rev. Regs. No. 2-98] SUGGESTED ANSWER: Surtaxes or surcharges, also
The liability for payment of the tax rests primarily on the known as the civil penalties, are the amounts imposed in
payor or the withholding agent.. Thus, in case of his failure to addition to the tax required.
withhold the tax or in case of under withholding, the deficiency They are in the nature of penalties and shall be collected
tax shall be collected from the payor withholding agent. The at the same time, in the same manner, and as part of the tax.
payee is not required to file an income tax return for the [Sec.248 (A), NIRC of 1997]
particular income.
2. What are the two (2) kinds of civil penalties ?
17. Under the creditable withholding tax system, SUGGESTED ANSWER:
taxes withheld on certain income payments are intended to a. the 25% surcharge for late filing or late payment
equal or at least approximate the tax due from the payee on [Sec. 248 (A), NIRC of 1997] (also known as the delinquency
the said income. The income recipient is still required to file an surcharge), and
income tax return and/or pay the difference between the tax b. the 50% willful neglect or fraud surcharge. [Sec.
withheld and the tax due on the income. [1 st and 2nd sentences, 248 (B), Ibid.]
Sec. 257(B), Rev. Regs. No. 2-98]
3. Define deficiency income tax.
18. The two kinds of creditable withholding taxes SUGGESTED ANSWER: Deficiency income tax is the
are (a) taxes withheld on income payments covered by the amount by which the tax imposed under the NIRC of 1997
expanded withholding tax; and (b) taxes withheld on exceeds the amount shown as the tax due by the taxpayer upon
compensation income. his return. [Sec. 56 (B) (1), NIRC of 1997]

19. Payments to the following are exempt from 4. Deficiency interest, defined. The interest
the requirement of withholding or when no withholding assessed and collected on any unpaid amount of tax at the rate
taxes required: of 20% per annum or such higher rate as may be prescribed by
a. National Government and its instrumentalities regulations, from the date prescribed for payment until the
including provincial, city, or municipal governments; amount is fully paid. [Sec. 249 (A) (B), NIRC of 1997]
b. Persons enjoying exemption from payment of
income taxes pursuant to the provisions of any law, general or 5. Delinquency interest, defined. The interest
special, such as but not limited to the following: assessed and collected on the unpaid amount until fully paid
1) Sales of real property by a corporation which is where there is failure on the part of the taxpayer to pay the
registered with and certified by the HLURB or HUDCC as amount die on any return required to be filed; or the amount of
engaged in socialized housing project where the selling the tax due for which no return is required; or a deficiency tax, or
price of the house and lot or only the lot does not exceed any surcharge or interest thereon, on the date appearing in the
P180,000.00 in Metro Manila and other highly urbanized notice and demand by the Commissioner of Internal Revenue.
areas and P150,000.00 in other areas or such adjusted [Sec.249 (c), NIRC of 1997]
amount of selling price for socialized housing as may
later be determined and adopted by the HLURB; 6. After resolving the issues the BIR
2) Corporations registered with the Board of Commissioner reduced the assessment. Was it proper to
Investments and enjoying exemptions from income under impose delinquency interest despite the reduction of the
the Omnibus Investment Code of 1997; assessment ? Why ?
3) Corporations exempt from income tax SUGGESTED ANSWER: Yes. The intention of the law is
under Sec. 30, of the Tax Code, like the SSS, GSIS, the to discourage delay in the payment of taxes due to the State and
PCSO, etc. However, income payments arising from any in this sense the surcharge and interest charged are not penal
activity which is conducted for profit or income derived but compensatory in nature – they are compensation to the State
from real or personal property shall be subject to a for the delay in payment, or for the concomitant tuse of the funds
withholding tax. (Sec. 57.5, Rev. Regs. No. 2-98) by the taxpayer beyond the date he is supposed to have paid
them to the State. (Bank of the Philippine Islands v.
20. “A’ erroneously withheld the amount of 15% Commissioner of Internal Revenue, G. R. No. 137002, July 27,
from the selling price of books authored by “W” when the 2006)
Page63

correct rate should have been 10% only. Since “W” is out of
the country, “A” applied for a refund of the excess
 34
7. Compromise penalty, defined. The amount  5. The legal remedies under the NIRC of 1997
agreed upon between the taxpayer and the Government to be available to an aggrieved taxpayer at the judicial level with
paid as a penalty in cases of a compromise. respect to assessment of internal revenue taxes:
a. If the protest is denied in whole or in part, or
8. As a result of divergent rulings on whether it b. is not acted upon within one hundred eighty (180)
is subject to tax or not, the taxpayer was not able to pay his days from submission of documents,
taxes on time. Imposed surcharges and interests for such c. the taxpayer adversely affected by the decision or
delay, the taxpayer not invokes good faith with the BIR inaction may appeal to the Court of Tax Appeals within thirty (30)
countering by saying that good faith is not a valid defense days from receipt of the said decision, or from the lapse of the
for violation of a special law. Furthermore, the BIR further one hundred eighty (180) – day period; otherwise, the decision
raises the defense that the government is not bound by the shall become final, executory and demandable. [last par., Sec.
errors of its agents. Who is correct ? 228 (e), NIRC of 1997]
SUGGESTED ANSWER: The taxpayer is correct. The d. On appeal, the taxpayer should apply for the
settled rule is that good faith and honest belief that one is not issuance of a writ of preliminary injunction to enjoin the BIR from
subject to tax on the basis of previous interpretation of collecting the tax subject of the appeal.
government agencies tasked to implement the tax, are sufficient e. A decision of a division of the Court of Tax
justification to delete the imposition of surcharges. (Michel J. Appeals adverse to the taxpayer or the government may be the
Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, G. subject of a motion for reconsideration or new trial, a denial of
R. No. 166786, September 11, 2006) which is appealable to the Court of Tax Appeals en banc by
means of a petition for review.
REPUBLIC ACT NO. 1125, CREATING THE COURT OF TAX f. A decision of the Court of Tax Appeals en banc
APPEALS INCLUDING JURISDICTION OF THE CTA, AS adverse to the taxpayer or the government may be appealed to
AMENDED the Supreme Court through a petition for review on certiorari filed
with fifteen (15) days from notice, and extendible for justifiable
1. The Court of Tax Appeals is the special tax reasons for thirty (30) days only.
court created under Republic Act No. 1125, as amended, and
is composed of a Presiding Justice and eight (8) Associate 6. The legal remedy under the NIRC of 1997
Justices, organized into three (3) divisions. available to an aggrieved taxpayer at the administrative
level with respect to refund or recovery of tax erroneously or
2. Why was the Court of Tax Appeals created ? illegally collected, is to file a claim for refund or credit with the
SUGGESTED ANSWER: Commissioner of Internal Revenue. (1 st par., Sec. 229, NIRC of
a. To prevent delay in the disposition of tax cases by 1997)
the then Courts of First Instance (now RTCs), in view of the
backlog of civil, criminal, and cadastral cases accumulating in  7. What is the legal remedy under the NIRC of
the dockets of such courts; and 1997 at the judicial level with respect to refund or recovery
b. To have a body with special knowledge which of tax erroneously or illegally collected ?
ordinary Judges of the then Courts of First Instance (now RTCs), SUGGESTED ANSWER. The legal remedy under the
are not likely to possess, thus providing for an adequate remedy NIRC of 1997 at the judicial level with respect to refund or
for a speedy determination of tax cases. (Ursal v. Court of Tax recovery of tax erroneously or illegally collected, is the filing of a
Appeals, et al., 101 Phil. 209; Lacsamana, et al., etc., v. CTA, et suit or proceeding with the Court of Tax Appeals
al., 102 Phil. 931) a. before the expiration of two (2) years from the date
of payment of the tax regardless of any supervening cause that
3. The legal remedies under the NIRC of 1997 may arise after payment (2 nd par., Sec. 229, NIRC of 1997), or
and other laws available to an aggrieved taxpayer may be b. within thirty (30) days from receipt of the denial by
classified into the tax remedies with respect to: the Commissioner of the application for refund or credit. (Sec.
a. assessment; 11, R.A. No. 1125)
b. collection, and
c. refund of internal revenue taxes.  8. The two (2) year period and the thirty (30) day
The remedies may also be classified into the period should be applied on a whichever comes first basis.
administrative or the judicial remedies. Thus, if the 30 days is within the 2 years, the 30 days applies, if
the 2 year period is about to lapse but there is no decision yet by
 4. The legal remedies under the NIRC of 1997 the Commissioner which would trigger the 30-day period, the
available to an aggrieved taxpayer at the administrative taxpayer should file an appeal, despite the absence of a
level with respect to assessment of internal revenue taxes are decision. (Commissioners, etc. v. Court of Tax Appeals, et al.,
the following: G. R. No. 82618, March 16, 1989, unrep.)
a. Upon receipt of a pre-assessment notice, the
taxpayer shall respond to the same within fifteen (15) days from  9. Where the taxpayer is a corporation the two
receipt which is the period provided for by implementing rules year prescriptive period from “date of payment” for refund
and regulations. [3rd par., Sec. 228 (e), NIRC of 1997] of income taxes should be the date when the corporation
b. Upon the issuance of an assessment notice, the filed its final adjustment return not on the date when the taxes
taxpayer shall protest administratively by filing a request for were paid on a quarterly basis. (Philippine Bank of
reconsideration or reinvestigation within thirty (30) days from Communications v. Commissioner of Internal Revenue, et al.,
receipt of the assessment in such form and manner as may be G.R. No. 112024, January 28, 1999)
prescribed by implementing rules and regulations. Generally speaking it is the Final Adjustment Return, in
c. Within sixty (60) days from the filing of the which amounts of the gross receipts and deductions have been
protest, all relevant supporting documents shall be submitted; audited and adjusted, which is reflective of the results of the
otherwise the assessment shall become final. (4 th par., Ibid.) operations of a business enterprise. It is only when the return,
Page63

covering the whole year, is filed that the taxpayer will be able to
ascertain whether a tax is still due or refund can be claimed
based on the adjusted and audited figures. (Bank of the
 35
Philippine Islands v. Commissioner of Internal Revenue, G.R. No. the taxpayer could not pay the tax, then apply for a refund, and if
144653, August 28, 2001) denied appeal the same to the Court of Tax Appeals.
h. If the protest is denied in whole or in part, or is not
 10. Outline of tax remedies of a taxpayer and the acted upon within one hundred eighty (180) days from the
government relative to ASSESSMENT of internal revenue submission of documents, the taxpayer adversely affected by the
taxes. decision or inaction may appeal to the Court of Tax Appeals
a. The taxpayer files his tax return. within thirty (30) days from receipt of the adverse decision, or
b. A Letter of Authority is issued authorizing BIR from the lapse of the one hundred eighty (180-) day period, with
examiner to audit or examine the tax return and determines an application for the issuance of a writ of preliminary injunction
whether the full and complete taxes have been paid. to enjoin the BIR from collecting the tax subject of the appeal.
c. If the examiner is satisfied that the tax return is truly If the taxpayer fails to so appeal, the denial of the
reflective of the taxable transaction and all taxes have been paid, Commissioner or the inaction of the Commissioner would result
the process ends. However, if the examiner is not satisfied that to the notice of assessment becoming final and collectible and
the tax return is truly reflective of the taxable transaction and that the BIR could then utilize its administrative and judicial remedies
the taxes have not been fully paid, a Notice of Informal to collect the tax.
Conference is issued inviting the taxpayer to explain why he i. A decision of a division of the Court of Tax
should not be subject to additional taxes. Appeals adverse to the taxpayer or the government may be the
d. If the taxpayer attends the informal conference subject of a motion for reconsideration or new trial, a denial of
and the examiner is satisfied with the explanation of the which is appealable to the Court of Tax Appeals en banc by
taxpayer, the process is again ended. means of a petition for review.
If the taxpayer ignores the invitation to the informal The Court of Tax Appeals, has a period of twelve (12)
conference, or if the examiner is not satisfied with taxpayer’s months from submission of the case for decision within which to
explanation,, and he believes that proper taxes should be decide.
assessed, the Commissioner of Internal Revenue or his duly j. If the decision of the Court of Tax Appeals en
authorized representative shall then notify the taxpayer of the banc affirms the denial of the protest by the Commissioner or the
findings in the form of a pre-assessment notice. The pre- assessment in case of failure by the Commissioner to decide the
assessment notice requires the taxpayer to explain within fifteen taxpayer must file a petition for review on certiorari with the
(15) days from receipt why no notice of assessment and letter of Supreme Court within fifteen (15) days from notice of the
demand for additional taxes should be directed to him. judgment on questions of law. An extension of thirty (30) days
e. If the Commissioner is satisfied with the may for justifiable reasons be granted. If the taxpayer does not
explanation of the taxpayer, then the process is again ended. so appeal, the decision of the Court of Tax Appeals would
If the taxpayer ignores the pre-assessment notice by become final and this has the effect of making the assessment
not responding or his explanations are not accepted by the also final and collectible. The BIR could then use its
Commissioner, then a notice of assessment and a letter of administrative and judicial remedies to collect the tax.
demand is issued.
The notice of assessment must be issued by the  11.Requisites for Formal Letter of Demand and
Commissioner to the taxpayer within a period of three (3) years Assessment Notice. The formal letter of demand and
from the time the tax return was filed or should have been filed assessment notice shall be issued by the Commissioner or his
whichever is the later of the two events. Where the taxpayer did duly authorized representative. The letter of demand calling for
not file a tax return or where the tax return filed is false or payment of the taxpayer’s deficiency tax or taxes shall state the
fraudulent, then the Commissioner has a period of ten (10) years facts, the law, rules and regulations, or jurisprudence on which
from discovery of the failure to file a tax return or from discovery the assessment is based, otherwise, the formal letter of
of the fraud within which to issue an assessment notice. The demand and assessment notice shall be void. The same shall
running of the above prescriptive periods may however be be sent to the taxpayer only by registered mail or by personal
suspended under certain instances. delivery.
The notice of assessment must be issued within the 12. What is the burden of taxpayers seeking tax
prescriptive period and must contain the facts, law and refunds or credits ?
jurisprudence relied upon by the Commissioner. Otherwise it SUGGESTED ANSWER: It has always been the rule
would not be valid. that those seeking tax refunds or credits bear the burden of
f. The taxpayer should then file an administrative proving the factual basis of their claims and of showing, by
protest by filing a request for reconsideration or reinvestigation words too plain to be mistaken, that the legislature intended to
within thirty (30) days from receipt of the assessment notice. entitle them to such claims. (Atlas Consolidated Mining and
The taxpayer could not immediately interpose an Development Corporation v. Commissioner of Internal Revenue,
appeal to the Court of Tax Appeals because there is no decision G. R. No. 145526, March 16, 2007, See Commissioner of
yet of the Commissioner that could be the subject of a review. Internal Revenue v. Seagate Technology (Philippines) G. R. No.
To be valid the administrative protest must be filed 153866, 11 February 2005, 451 SCRA 132)
within the prescriptive period, must show the error of the Bureau
of Internal Revenue and the correct computations supported by a 13. What is the nature of proceedings before the
statement of facts, and the law and jurisprudence relied upon by Court of Tax Appeals ?
the taxpayer. There is no need to pay under protest. If the SUGGESTED ANSWER:
protest was not seasonably filed the assessment becomes final First, a judicial claim for refund or tax credit in the CTA is
and collectible and the Bureau of Internal Revenue could use its by no means an original action, but rather an appeal by way of
administrative and judicial remedies in collecting the tax. petition for review of a previous, unsuccessful administrative
g. Within sixty (60) days from filing of the protest, all claim.
relevant supporting documents shall be submitted, otherwise the Therefore, as in every appeal or petition for review, a
assessment shall become final and collectible and the BIR could petitioner has to convince the appellate court that the quasi-
use its administrative and judicial remedies to collect the tax. judicial agency a quo did not have any reason to deny its claims.
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Once an assessment has become final and collectible, Second, cases filed in the CTA are litigated de novo.
not even the BIR Commissioner could change the same. Thus, Thus, a petitioner should prove every minute aspect of its case
 36
by presenting, formally offering and submitting its evidence to 1. Exclusive original jurisdiction over all
the CTA. criminal cases arising from violations of the National
Since it is crucial for a petitioner in a judicial claim for Internal Revenue Code or Tariff and Customs Code and
refund or tax credit to show that its administrative claim should other laws administered by the Bureau of Internal Revenue
have been granted in the first place, part of the evidence to be or the Bureau of Customs: Provided, however, That
submitted to the CTA must necessarily include whatever is offenses or felonies mentioned in this paragraph where the
required for the successful prosecution of an administrative principal amount of taxes and fees, exclusive of charges
claim. (Atlas Consolidated Mining and Development Corporation and penalties claimed, is less than One million pesos
v. Commissioner of Internal Revenue, G. R. No. 145526, March (P1,000,000.00) or where there is no specified amount
116, 2007) claimed shall be tried by the regular Courts and the
jurisdiction of the CTA shall be appellate. Any provision of
14. What is the jurisdiction of the Court of Tax law or the Rules of Court to the contrary notwithstanding,
Appeals ? the criminal action and the corresponding civil action for
SUGGESTED ANSWER: the recovery of civil liability for taxes and penalties shall at
“a. Exclusive appellate jurisdiction to review by all times be simultaneously instituted with, and jointly
appeal, as herein provided: determined in the same proceeding by the CTA, the filing of
1. Decisions of the Commissioner of Internal the criminal action being deemed to necessarily carry with
Revenue in cases involving disputed assessments, refunds it the filing of the civil action, and no right to reserve the
of internal revenue taxes, fees or other charges, penalties, filing of such civil action separately from the civil action will
in relation thereto, or other matters arising under the be recognized.
National Internal Revenue Code or other laws administered 2. Exclusive appellate jurisdiction in
by the Bureau of Internal Revenue’; (DIVISION) criminal offenses:
2. Inaction by the Commissioner of Internal a) Over appeals from the judgments,
Revenue in cases involving disputed assessments, refunds resolutions or orders of the Regional Trial Courts
or internal revenue taxes, fees or other charges, penalties in tax cases originally decided by them, in their
in relation thereto, or other matter arising under the respective territorial jurisdiction.
National Internal Revenue Code or other laws administered b) Over petitions for review of the
by the Bureau of Internal Revenue, where the National judgments, resolutions or orders of the Regional
Internal Revenue Code provides a specific period of action, Trial Courts in the exercise of their appellate
in which case the inaction shall be deemed a denial; (The jurisdiction over tax cases originally decided by
inaction on refunds in two years from the time tax was the Metropolitan Trial Courts, Municipal Trial
paid. Thus, if the prescriptive period of two years is about Courts and Municipal Circuit Trial Courts in their
to expire, the taxpayer should interpose a petition for review respective jurisdiction.
with the CTA – DIVISION) c. Jurisdiction over tax collection cases:
3. Decisions, orders or resolutions of the 1. Exclusive original jurisdiction in tax
Regional Trial Courts in local tax cases originally decided collection cases involving final and executory
or resolved by them in the exercise of their original or assessments for taxes, fees, charges and penalties:
appellate jurisdiction; (If original DIVISION; if appellate EN Provided, however, That collection cases where the
BANC) principal amount of taxes and fees, exclusive of charges
4. Decisions of the Commissioner of and penalties, claimed is less than One million pesos
Customs in cases involving liability for customs duties, fees (P1,000,000) shall be tried by the proper Municipal Trial
or other money charges, seizure, detention or release of Court, Metropolitan Trial Court and Regional Trial Court.
property affected, fines, forfeitures or other penalties in 2. Exclusive appellate jurisdiction in tax
relation thereto, or other matters arising under the Customs collection cases:
Law or other laws administered by the Bureau of Customs; a. Over appeals from judgments,
(DIVISION) resolutions, or orders of the Regional Trial Courts
5. Decisions of the Central Board of in tax collection cases originally decided by them,
Assessment Appeals in the exercise of its appellate in their respective territorial jurisdiction.
jurisdiction over cases involving the assessment and b. Over petitions for review of the
taxation of real property originally decided by the provincial judgments, resolutions or orders of the Regional
or city board of assessment appeals; (EN BANC) Trial Courts in the exercise of their appellate
6. Decisions of the Secretary of Finance on jurisdiction over tax collection cases originally
customs cases elevated to him automatically for review decided by the Metropolitan Trial Courts,
from decisions of the Commissioner of Customs which are Municipal Trial Courts and Municipal Circuit Trial
adverse to the Government under Section 2315 of the Tariff Courts, in their respective jurisdiction.” (Sec. 7, R.
and Customs Code; (This has reference to forfeiture cases A. No. 1125, as amended by R. A. No. 9282,
where the decision is to release the seized articles – emphasis and words in parentheses supplied)
DIVISION) The petition for review to be filed with
7. Decisions of the Secretary of Trade and the CTA en banc as the mode for appealing a
Industry, in case of nonagricultural product, commodity or decision, resolution, or order of the CTA
article, and the Secretary of Agriculture in the case of Division, under Section 18 of Republic Act
agricultural product, commodity or article, involving No. 1125, as amended, is not a totally new
dumping and countervailing duties under Section 301 and remedy, unique to the CTA, with a special
302, respectively, of the Tariff and Customs Code, and application or use therein. To the contrary, the
safeguard measures under Republic Act No. 8800, where CTA merely adopts the procedure for petitions for
either party may appeal the decision to impose or not to review and appeals long established and
impose said duties. (DIVISION) practiced in other Philippine courts. Accordingly,
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b. Jurisdiction over cases involving criminal offenses doctrines, principles, rules, and precedents laid
as herein provided: down in jurisprudence by this Court as regards
petitions for review and appeals in courts of
 37
general jurisdiction should likewise bind the CTA, or not there has been a grave abuse of discretion amounting to
and it cannot depart therefrom. (Santos v. lack or excess of jurisdiction on the part of any branch or
People, et al, G. R. No. 173176, August 26, instrumentality of the Government. (British American Tobacco
2008) v. Camacho et al., G. R. No. 163583, August 20, 2008 with an
intervenor citing Smart Communications, Inc. v. National
15. General rule: The denial of a motion to quash Telecommunications Commission, G.R. No. 151908, August 12,
is a 2003, 408 SCRA 678, 689.)
an interlocutory order which is not the proper subject of an NOTES AND COMMENTS: The above doctrine
appeal or a petition for certiorari. According to Section 1, Rule supersedes Asia International Auctioneers, Inc., etc et al., .v.
41 of the Revised Rules of Court, governing appeals from the Parayno, Jr., etc.,, et al., G. R. No. 103445, December 18, 2007
Regional Trial Courts (RTCs) to the Court of Appeals, an which ruled that it is the Court of Tax Appeals that has
appeal jurisdiction relative to matters involving the constitutionality of
may be taken only from a judgment or final order that regulations issued by the BIR. The reason was that this falls
completely disposes of the case or of a matter therein when under the concept of decisions of the BIR Commissioner on
declared by the Rules to be appealable. Said provision, thus, “other matter” arising under the provisions of laws administered
explicitly states that no appeal may be taken from an by the Commission. Issuance of revenue regulations are
interlocutory order. (Santos v. People, et al, G. R. No. 173176, authorized under the NIRC.
August 26, 2008) The author disputed this doctrine because the decisions
of the Commission under “other matter” refers to the quasi-
16. Applicability of Proton Pilipinas Corporation judicial decisions and not to the quasi-legislative powers of the
vs. Republic, etc., G. R. No. 165027, October 16, 2006. The Commissioner.
case was decided on factual antecedents before R. A. No. 9282 British American Tobacco reversed Asia International
which grants criminal jurisdiction to the Court of Tax Appeals if Auctioneers upon the concept of the judiciary’s “expanded
the value of the tax is P1 million or more. power.”
Interpreting the provisions of Republic Act No. 8249,
which provides that the civil action for recovery of civil liability 18. What is the characteristic of a BIR denial of a
should be jointly determined in the criminal proceeding by the protest such as would enable the taxpayer to appeal the
Sandiganbayan or appropriate courts, the prohibition of same to the Court of Tax Appeals ?
reservation of the criminal aspect, the Supreme Court said that SUGGESTED ANSWER: The Commissioner of Internal
tax collection cases may be tried separately, and not before the Revenue should always indicate to the taxpayer in clear and
Sandiganbayan in Rep. Act No. 3019 cases. This is so because, unequivocal language whenever his action on an assessment
Rep. Act No. 3019 is silent on the definition of civil liability and questioned by a taxpayer constitutes his final determination on
the application of Art. 104 of the Revised Penal Code does not the disputed assessment.
cover taxes. Consequently, the Supreme Court ruled that on the On the basis of his statement indubitably showing that
tax collection case the RTC would have jurisdiction. the Commissioner’s communicated action is his final decision on
Interpretation by the author in the light of Rep. Act. the contested assessment, the aggrieved taxpayer would then be
9282. If it is a criminal case cognizable by the Sandiganbayan, able to take recourse to the tax court at the opportune time.
then this court retains jurisdiction, with the civil jurisdiction being Without needless difficulty, the taxpayer would be able to
cognizable by the CTA or the lower courts depending on the determine when his right to appeal to the tax court accrues.
amount. (Commissioner of Internal Revenue v. Bank of the Philippines
If the issue is a purely tax case, even if it involves cases Islands, G. R. No. 134062, April 17, 2007 citing Oceanic
cognizable by the Sandiganbayan, then jurisdiction vests upon Wireless Network, Inc. v. Commissioner of Internal Revenue, G.
the CTA or the lower courts depending on the amount of the tax. R. No. 148380, 9 December 2005, 477 SCRA 205, 211-212,
citing Surigao Electric Co., Inc. v. Court of Tax Appeals, G. R.
 17. Which court has jurisdiction to rule upon the No. L-254289, 28 June 1974, 57 SCRA 523)
constitutionality of a tax law or a regulation issued by the NOTES AND COMMENTS:
taxing authorities ? Is it the Court of Tax Appeals or the a. Reasons for the rule requiring CIR’s
Regional Trial Court ? unequivocal language on his action on the protest.
SUGGESTED ANSWER: It is the Regional Trial Court. 1) It would obviate all desire and opportunity
While Rep. Act No. 1125, as amended by Rep. Act No. on the part of the taxpayer to continually delay the finality
9282 statute confers on the CTA jurisdiction to resolve tax of the assessment – and, consequently, the collection of
disputes in general, this does not include cases where the the amount demanded as taxes – by repeated requests
constitutionality of a law or rule is challenged. for recomputation and reconsideration.
Where what is assailed is the validity or constitutionality 2) On the part of the Commissioner of
of a law, or a rule or regulation issued by the administrative Internal Revenue, this would encourage his office to
agency in the performance of its quasi-legislative function, the conduct a careful and thorough study of every questioned
regular courts have jurisdiction to pass upon the same. The assessment and render a correct and define decision
determination of whether a specific rule or set of rules issued thereon in the first instance.
by an administrative agency contravenes the law or the 3) This would also deter the Commissioner of
constitution is within the jurisdiction of the regular courts. Internal Revenue from unfairly making the taxpayer grope
Indeed, the Constitution vests the power of judicial in the dark and speculate as to which action constitutes
review or the power to declare a law, treaty, international or the decision appealable to the tax court.
executive agreement, presidential decree, order, instruction, 4) Of greater import, this rule of conduct
ordinance, or regulation in the courts, including the regional would meet a pressing need for fair play, regularity, and
trial courts. This is within the scope of judicial power, which orderliness in administrative action. . (Commissioner of
includes the authority of the courts to determine in an Internal Revenue v. Bank of the Philippines Islands, G. R.
appropriate action the validity of the acts of the political No. 134062, April 17, 2007 citing Oceanic Wireless
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departments. Judicial power includes the duty of the courts of Network, Inc. v. Commissioner of Internal Revenue, G. R.
justice to settle actual controversies involving rights which are No. 148380, 9 December 2005, 477 SCRA 205, 211-212,
legally demandable and enforceable, and to determine whether
 38
citing Surigao Electric Co., Inc. v. Court of Tax Appeals, 21. As a general rule, there must always be a
G. R. No. L-254289, 28 June 1974, 57 SCRA 523) decision of the Commissioner of Internal Revenue or
Commissioner of Customs before the Court of Tax Appeals,
 19. Cite acts of BIR Commissioner that may be would have jurisdiction. If there is no such decision, the
considered as denial of a protest which serve as basis for petition would be dismissed for lack of jurisdiction unless the
appeal to the Court of Tax Appeals. case falls under any of the following exceptions.
SUGGESTED ANSWER:
a. Filing by the BIR of a civil suit for collection of the 22. Instances where the Court of Tax Appeals
deficiency tax is considered a denial of the request for would have jurisdiction even if there is no decision yet by
reconsideration. (Commissioner of Internal Revenue v. Union the Commissioner of Internal Revenue:
Shipping Corporation, 185 SCRA 547) a. Where the Commissioner has not acted on the
b. An indication to the taxpayer by the disputed assessment after a period of 180 days from submission
Commissioner “in clear and unequivocal language” of his final of complete supporting documents, the taxpayer has a period of
denial not the issuance of the warrant of distraint and levy. What 30 days from the expiration of the 180 day period within which to
is the subject of the appeal is the final decision not the warrant of appeal to the Court of Tax Appeals. (last par., Sec. 228 (e), NIRC
distraint. (Commissioner of Internal Revenue v. Union Shipping of 1997; Commissioner of Internal Revenue v. Isabela Cultural
Corporation, 185 SCRA 547) Corporation, G.R. No. 135210, July 11, 2001)
c. A BIR demand letter sent to the taxpayer after his b. Where the Commissioner has not acted on an
protest of the assessment notice is considered as the final application for refund or credit and the two year period from the
decision of the Commissioner on the protest. (Surigao Electric time of payment is about to expire, the taxpayer has to file his
Co., Inc. v. Court of Tax Appeals, et al., 57 SCRA 523) appeal with the Court of Tax Appeals before the expiration of two
d. A letter of the BIR Commissioner reiterating to a years from the time the tax was paid.
taxpayer his previous demand to pay an assessment is It is disheartening enough to a taxpayer to be kept
considered a denial of the request for reconsideration or protest waiting for an indefinite period for the ruling,. It would make
and is appealable to the Court of Tax Appeals. (Commissioner v. matters more exasperating for the taxpayer if the doors of justice
Ayala Securities Corporation, 70 SCRA 204) would be closed for such a relief until after the Commissioner,
e. Final notice before seizure considered as would have, at his personal convenience, given his go signal.
commissioner’s decision of taxpayer’s request for (Commissioner of Customs, et al, v. Court of Tax Appeals, et al.,
reconsideration who received no other response. Commissioner G.R. No. 82618, March 16, 1989, unrep.)
of Internal Revenue v. Isabela Cultural Corporation, G.R. No.
135210, July 11, 2001 held that not only is the Notice the only  23. Instances where the Court of Tax Appeals
response received: its content and tenor supports the theory that would have jurisdiction even if there is no decision of the
it was the CIR’s final act regarding the request for Commissioner of Customs:
reconsideration. The very title expressly indicated that it was a a. Decisions of the Secretary of Trade and Industry
final notice prior to seizure of property. The letter itself clearly or the Secretary of Agriculture in anti-dumping and
stated that the taxpayer was being given “this LAST countervailing duty cases are appealable to the Court of Tax
OPPORTUNITY” to pay; otherwise, its properties would be Appeals within thirty (30) days from receipt of such decisions.
subjected to distraint and levy. b. In case of automatic review by the Secretary of
Finance in seizure or forfeiture cases where the value of the
 20. The taxpayer seasonably protested the importation exceeds P5 million or where the decision of the
assessment issued by the Commissioner of Internal Collector of Customs which fully or partially releases the
Revenue. During the pendency of the protest the CIR shipment seized is affirmed by the Commissioner of Customs.
issued a warrant of distraint and levy to collect the taxes c. In case of automatic review by the Secretary of
subject of the protest. Finance of a decision of a Collector of Customs acting favorably
As counsel what advice shall you give the taxpayer. upon a customs protest.
Explain briefly your answer.
SUGGESTED ANSWER: The taxpayer should appeal,  24. As a general rule, “No court shall have the
by way of a petition for review, to the Court of Tax Appeals not authority to grant an injunction to restrain the collection of
on the ground of the denial of the protest but on other matter any national internal revenue tax, fee or charge.” (Sec. 218,
arising under the provisions of the National Internal Revenue NIRC)
Code. The actual issuance of a warrant of distraint and levy in “No appeal taken to the CTA from the decision of the
certain cases cannot be considered a final decision on a Commissioner of Internal Revenue or the Commissioner of
disputed assessment. Customs or the Regional Trial Court, provincial, city or municipal
To be a valid decision on a disputed assessment, the treasurer or the Secretary of Finance, the Secretary of Trade and
decision of the Commissioner or his duly authorized Industry and Secretary of Agriculture, as the case may be shall
representative shall (a) state the facts, the applicable law, rules suspend the payment, levy, distraint, and/or sale of any property
and regulations, or jurisprudence on which such decision is of the taxpayer for the satisfaction of his tax liability as provided
based, otherwise, the decision shall be void, in which case the by existing law: Provided, however, That when in the opinion of
same shall not be considered a decision on the disputed the Court the collection by the aforementioned government
assessment; and (b) that the same is his final decision. (Sec. agencies may jeopardize the interest of the Government and/or
3.1.6, Rev. Regs. 12-99) These conditions are not complied with the taxpayer the Court at any stage of the proceeding may
by the mere issuance of a warrant of distraint and levy. suspend the said collection and require the taxpayer either to
(Commissioner of Internal Revenue v. Union Shipping Corp., 185 deposit the amount claimed or to file a surety bond for not more
SCRA 547) than double the amount with the Court.” (Sec. 11, Rep. Act No.
Furthermore, a motion for the suspension of the 1125, as amended by Sec.9, Rep. Act No. 9282 )
collection of the tax may be filed together with the petition for The Supreme Court may enjoin the collection of taxes
review (Sec. 3, Rule 10, RRCTA effective December 15, 2005) under its general judicial power but it should be apparent that the
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because the collection of the tax may jeopardize the interest of source of the power is not statutory but constitutional.
the taxpayer. The Supreme Court did not grant the provisional remedy
prayed for in Southern Cross Cement Corporation v. The
 39
Philippine Cement Manufacturers Corp., et al., G. R. No. 158540, circumstance which led him to believe that the taxpayer had
July 8, 2004 for it would be tantamount to enjoining the taxable income larger than that reported. Necessarily, this inquiry
collection of taxes, a peremptory judicial act which is traditionally would have to be outside of the books because they supported
frowned upon unless there is a clear statutory basis for it. the return as filed. He may take the sworn testimony of the
Evident is the clear legislative intent that the imposition of taxpayer, he may take the testimony of third parties; he may
safeguard measures, despite the availability of judicial review, examine and subpoena, if necessary, traders’ and brokers’
should not be enjoined notwithstanding any timely appeal of the accounts and books and the taxpayer’s books of accounts. The
imposition. This so because the Safeguard Measures Act states Commissioner is not bound to follow any set of patterns. The
that the filing of a petition for review before the CTA does not existence of unreported income may be shown by any particular
stop, suspend, or otherwise toll the imposition or collection of the proof that is available in the circumstances of the particular
appropriate tariff duties or the adoption of other appropriate situation. [Commissioner of Internal Revenue v. Hantex Trading
safeguard measures. Co., Inc. citing Campbell, Jr., v. Guetersloh, 287 F.2d 878 (1961)]
Citing its ruling in a previous case, a “U.S. appellate court
25. General rule: “The rule is that in the absence of declared that where the records of the taxpayer are manifestly
accounting records of a taxpayer, his tax liability may be inaccurate and incomplete, the Commissioner may look to other
determined by estimation. The petitioner (Commissioner of sources of information to establish income made by the taxpayer
Internal Revenue) is not required to compute such tax liabilities during the years in question. (Ibid., in turn citing Kenney v.
with mathematical exactness. Approximation in the calculation Commissioner, 111 F.2d 374)
of taxes due is justified. To hold otherwise would be tantamount
to holding that skillful concealment is an invincible barrier to 28. The following are the general methods developed by
proof.” [Commissioner of Internal Revenue v. Hantex Trading the Bureau of Internal Revenue for reconstructing a
Co., Inc. G. R. No. 136975, March 31, 2005 citing United States taxpayer’s income where the records do not show the true
v. Johnson, 319 U.S. 1233 (1943)] “However, the rule does not income or where no return was filed or what was filed was a
apply where the estimation is arrived at arbitrarily and false and fraudulent return
capriciously.” [Commissioner of Internal Revenue v. Hantex (a) Percentage method;
Trading Co., Inc., citing United States v. Rindskopf, 105 U.S.418 (b) Net worth method.;
(1881)] (c) Bank deposit method;
(d) Cash expenditure method;
26. Meaning of "best evidence obtainable" under (e) Unit and value method;
Sec. 6 (B), NIRC of 1997. This means that the original (f) Third party information or access to records method;
documents must be produced. If it could not be produced, (g) Surveillance and assessment method. (Chapter
secondary evidence must be adduced. (Hantex Trading Co., Inc. XIII. Indirect Approach to Investigation, Handbook on Audit
v. Commissioner of Internal Revenue, CA - G.R. SP No. 47172, Procedures and Techniques – Volume I, pp. 68-74)
September 30, 1998)
NOTES AND COMMENTS: 29. Third party information or access to records
a. The secondary evidence referred to are those method. The BIR may require third parties, public or private to
that may be adduced using the general methods for supply information to the BIR, and thus, “obtain on a regular
reconstructing a taxpayer’s income or the indirect approach to basis from any person other than the person whose internal
tax investigation. revenue tax liability is subject to audit or investigation, or from
The “best evidence” envisaged in Section 16 of the 1977 any office or officer of the national and local governments,
NIRC [now Sec. 6 (B),NIRC of 1997] “includes the corporate and government agencies and instrumentalities including the Bangko
accounting records of the taxpayer who is the subject of the Sentral ng Pilipinas and government-owned or –controlled
assessment process, the accounting records of other taxpayers corporations, any information such as, but not limited to, costs
engaged in the same line of business, including their gross profit and volume of production, receipts or sales and gross incomes
and net profit sales.” (Commissioner of Internal Revenue v. of taxpayers, and the names , addresses, and financial
Hantex Trading Co., Inc. G. R. No. 136975, March 31, 2005 statements of corporations, mutual fund companies, insurance
citing De Leon, The National Internal Revenue Code Annotated, companies, regional operating headquarters or multinational
p. 37) companies, joint accounts, associations, joint ventures or
“Such evidence also includes data, record, paper, consortia and registered partnerships, and their members; xxx”
document or any evidence gathered by internal revenue officers [Sec. 5 (B), NIRC of 1997)
from other taxpayers who had personal transactions or from
whom the subject taxpayer received any income; and record, 30. A pre-assessment notice is a letter sent by the
data, document and information secured from government Bureau of Internal Revenue to a taxpayer asking him to explain
offices or agencies, such as the SEC, the Central Bank of the within a period of fifteen (15) days from receipt why he should
Philippines, the Bureau of Customs, and the “Tariff and Customs not be the subject of an assessment notice. It is part of the due
Commission.” (sic, Commissioner v. Hantex Trading Co., Inc., process rights of a taxpayer.
supra) “The As a general rule, the BIR could not issue an assessment
law allows the BIR access to all relevant or material records or notice without first issuing a pre-assessment notice because it is
data in the person of the taxpayer. It places no limit or condition part of the due process rights of a taxpayer to be given notice in
on the type or form of the medium by which the record subject of the form of a pre-assessment notice, and for him to explain why
the order of the BIR is kept.” (Ibid.) he should not be the subject of an assessment notice.
Purpose of the “best evidence obtainable” rule under Sec,
6 (B), NIRC of 1997. “The purpose of the law is to enable the  31. Instances where a pre-assessment notice is
BIR to get at the taxpayer’s records in whatever form they may not required before a notice of assessment is sent to the
be kept.” (Commissioner of Internal Revenue v. Hantex Trading taxpayer.
Co., Inc. G. R. No. 136975, March 31, 2005) a. When the finding for any deficiency tax is the result of
27. Sec. 6 (B) of the NIRC of 1997 allows the BIR mathematical error in the computation of the tax as appearing on
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to make or amend a tax return from his own knowledge or the face of the return; or
obtained through testimony or otherwise. Thus, the
Commissioner of Internal Revenue investigates ”any
 40
b. When a discrepancy has been determined between Company v. Court of Appeals, et al., G. R. No. 109976, April 26,
the tax withheld and the amount actually remitted by the 2005 and companion case)
withholding agent; or
c. When a taxpayer opted to claim a refund or tax credit 35. On October 28, 1988 taxpayer bank received a
of excess creditable withholding tax for a taxable period was notice of assessment from the BIR informing it that
determined to have carried over and automatically applied the deficiency taxes are due from the said taxpayer bank
same amount claimed against the estimated tax liabilities for the without any findings of law or fact but supported only with a
taxable quarter or quarters of the succeeding table year; or computation. On December 10, 1988, the taxpayer bank
d. When the excess tax due on excisable articles has not counsel filed a letter that “as soon as this is explained and
been paid; or clarified in a proper notice of assessment, we shall inform
e. When an article locally purchased or imported by an you of the taxpayer’s decision on whether to pay or protest
exempt person, such as, but not limited to vehicles, capital the assessment.” The taxpayer bank insists that the
equipment, machineries and spare parts, has been sold, trade or assessment was not valid. Of course, BIR took the
transferred to non-exempt persons. (Sec. 228, NIRC of 1997) opposite view contending further that there was no
seasonable protest, hence the tax is sue and collectible.
32. The word assessment when used in Who is correct ?
connection with taxation, may have more than one SUGGESTED ANSWER: The BIR is correct. Under the
meaning. More commonly the word “assessment” means old law Sec. 270, it is enough merely that the BIR Commissioner
the official valuation of a taxpayer’s property for purpose of shall “notify the taxpayer of his findings
taxation. The above definition of assessment finds The taxpayer bank counsel’s December 10, 1988 letter is
application under tariff and customs taxation as well as not a seasonable protest because it was filed thirty (30) days
local government taxation. after receipt of the assessment on October 28, 1988.
For real property taxation, there may be a special (Commissioner of Internal Revenue v. Bank of Philippine Islands,
meaning to the burdens that are imposed upon real G. R. No. 134062, April 17, 2007)
properties that have been benefited by a public works NOTES AND COMMENTS: The statement, “The taxpayer
expenditure of a local government. It is sometimes called a shall be informed in writing of the law and the facts on which the
special assessment or a special levy. (Commissioner of Internal assessment is made; otherwise the assessment shall be void” is
Revenue v. Pascor Realty and Development Corporation, et al., an amendment to Sec. 270 (now renumbered to Sec. 228) which
G.R. No. 128315, June 29, 1999) took effect only on January 1, 1998 upon the effectivity of the Tax
For internal revenue taxation assessment as laying a Reform Act of 1997.
tax. The ultimate purpose of an assessment to such a
connection is to ascertain the amount that each taxpayer is to 36. What are the prescriptive periods for making
pay. (Commissioner of Internal Revenue v. Pascor Realty and assessments of internal revenue taxes ?
Development Corporation, et al., G.R. No. 128315, June 29, SUGGESTED ANSWER:
1999) a. Three (3) years from the last day within which to file
a return or when the return was actually filed, whichever is later
 33. An assessment is a notice duly sent to the (Sec. 203, NIRC of 1997). The CIR has three (3) years from
taxpayer which is deemed made only when the BIR the date of actual filing of the tax return to assess a national
releases, mails or sends such notice to the taxpayer. internal revenue tax or to commence court proceedings for the
(Commissioner of Internal Revenue v. Pascor Realty and collection thereof without an assessment. [Bank of Philippine
Development Corporation, et al., G.R. No. 128315, June 29, Islands (Formerly Far East Bank and Trust Company) v.
1999) Commissioner of Internal Revenue, G. R. No. 174942, March 7,
2008]
34. What is a self-assessed tax ? b. ten years from discovery of the failure to file the tax
SUGGESTED ANSWER: A tax that the taxpayer himself return or discovery of falsity or fraud in the return [Sec. 222 (a),
assesses or computes and pays to the taxing authority. It is a NIRC of 1997) ; or
tax that self-assessed by the taxpayer without the intervention of c. within the period agreed upon between the
an assessment by the tax authority to create the tax liability. government and the taxpayer where there is a waiver of the
The Tax Code follows the pay-as-you-file system of prescriptive period for assessment (Sec. 222 (b), NIRC of 1997).
taxation under which the taxpayer computes his own tax liability,
prepares the return, and pays the tax as he files the return. The  37. Purpose of period of limitations in taxation.
pay-as-you-file system is a self-assessing tax return. For the purpose of safeguarding taxpayers from any
Internal revenue taxes are self-assessing. [Dissent of J. unreasonable examination, investigation or assessment, our tax
Carpio in Philippine National Oil Company v. Court of Appeals, et law provides a statute of limitations in the collection of taxes.
al., G. R. No. 109976, April 26, 2005 and companion case citing [Commissioner of Internal Revenue v. B.F. Goodrich Phils, Inc.,
Tupaz v. Ulep, 316 SCRA 118 (1999) in turn citing Vitug and (now Sime Darby International Tire Co., Inc.), et al., G.R. No.
Acosta, Tax Law and Jurisprudence, 1st edition, 1997, p. 267] 104171, February 24, 1999, 303 SCRA 546; Philippine
A clear example of a self-assessed tax is the annual Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No.
income tax, which the taxpayer himself computes and pays 162852, December 16, 2004;], as well as their assessments.
without the intervention of any assessment by the BIR. The The law prescribing a limitation of actions for the
annual income tax becomes due and payable without need of collection of the income tax is beneficial both to the Government
any prior assessment by the BIR. The BIR may or may not and to its citizens; to the Government because tax officers would
investigate or audit the annual income tax return filed by the be obliged to act promptly in the making of assessment, and to
taxpayer. The taxpayer’s liability for the income tax does not citizens because after the lapse of the period of prescription
depend on whether or not the BIR conducts such subsequent citizens would have a feeling of security against unscrupulous
investigation or audit. tax agents who will always find an excuse to inspect the books
However, if the taxing authority is first required to of taxpayers, not to determine the latter’s real liability, but to take
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investigate, and after such investigation to issue the tax advantage of every opportunity to molest peaceful, law-abiding
assessment that creates the tax liability, then the tax is no longer citizens. Without such a legal defense taxpayers would
self-assessed. (Dissent of J. Carpio in Philippine National Oil furthermore be under obligation to always keep their books and
 41
keep them open for inspection subject to harassment by estate court a motion for allowance of claim. The heir
unscrupulous tax agents. The law on prescription being a claimed that there was no proper service of the notice of
remedial measure should be interpreted in a way conducive to assessment and that the filing of the motion was time-
bringing about the beneficent purpose of affording protection to barred. On the other hand the BIR made the submission
the taxpayer within the contemplation of the Commission which that both the issuance of the assessment notice and the
recommend the approval of the law. [Republic of the Philippines motion were all properly made on Philtrust. Furthermore
v. Ablaza, 108 Phil. 1105, 1108, cited in Bank of Philippine the lapse of the 30-day period within which to protest made
Islands (Formerly Far East Bank and Trust Company) v. the assessment final, executory and uncontestable and not
Commissioner of Internal Revenue, G. R. No. 174942, March 7, time barred.
2008] Rule on the conflicting claims of the parties.
SUGGESTED ANSWER: I would rule in favor of the heir.
38. Unreasonable investigation contemplates There was no proper service of the notice of assessment
cases where the period for assessment extends indefinitely because the death of Juliana automatically severed the legal
because this deprives the taxpayer of the assurance that it will relationship of principal and agent between her and Philtrust.
not longer be subjected to further investigation for taxes after the The severed relationship could not be revived on the mere fact
expiration of a reasonable period of time. (Philippine Journalists, that Philtrust filed her Tax Return two days after her death.
Inc. v. Commissioner of Internal Revenue, G. R. No. 162852, Philtrust’s failure to file a notice of death subjects it to
December 16, 2004 with note to see Republic v. Ablaza, 108 penal sanctions which do not include the indefinite tolling of the
Phil. 1105. 1108) prescriptive period for making deficiency tax assessments, or the
Laws on prescription should be liberally construed in waiver of the notice requirement for such assessments. (Estate
favor of the taxpayer. Reason: for the purpose of safeguarding of the late Juliana Diez Vda. de Gabriel v. Commissioner of
taxpayers from an unreasonable examination, investigation or Internal Revenue, G.R. No. 155541, January 27, 2004)
assessment, our tax laws provide a statute of limitation on the
collection of taxes. Thus, the law on prescription, being a  41. What are the requirements for the validity of a
remedial measure, should be liberally construed in order to formal letter of demand and assessment notice ?
afford such protection, As a corollary, the exceptions to the law SUGGESTED ANSWER:
on prescription should perforce be strictly construed. [Philippine a. There must have been previously issued a pre-
Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No. assessment notice until excepted;
162852, December 16, 2004 citing Commissioner of Internal b. It must have been issued prior to the prescriptive
Revenue v. B.F. Goodrich Phils, Inc (now Sime Darby period; and
International Tire Co., Inc.),., et al., G.R. No. 104171, February c. The letter of demand calling for payment of the
24, 1999, 303 SCRA 546] taxpayer’s deficiency tax or taxes shall state the facts, the law,
The prescriptive period was precisely intended to give rules and regulations, or jurisprudence on which the assessment
the taxpayers peace of mind. (Commissioner of Internal Revenue is based, otherwise, the formal letter of demand and assessment
v. B.F. Goodrich Phils., Inc., et al., G.R. No. 104171, February notice shall be void. (Sec. 3.1.4, Rev. Regs. No. 12-99)
24, 1999)
42. What is the presumption that flows from a
39. A “jeopardy assessment” is a delinquency tax taxpayer’s failure to protest an assessment ?
assessment which was assessed without the benefit of complete SUGGESTED ANSWER: “Tax assessments by tax
or partial audit by an authorized revenue officer, who has reason examiners are presumed correct and made in good faith. The
to believe that the assessment and collection of a deficiency tax taxpayer has the duty to prove otherwise. In the absence of
will be jeopardized by delay because of the taxpayer’s failure to proof of any irregularities in the performance of duties, an
comply with the audit and investigation requirements to present assessment duly made by a Bureau of Internal Revenue
his books of accounts and/or pertinent records, or to substantiate examiner and approved by his superior officers will not be
all or any of the deductions, exemptions, or credits claimed in his disturbed. All presumptions are in favor of the correctness of tax
return. [Sec. 3.1 (a), Rev. Regs. No. 6-2000) assessments.” (Commissioner of Internal Revenue v. Bank of
Jeopardy assessment is an indication of the doubtful Philippine Islands., G, R. No. 134062, April 17, 2007 citing Sy Po
validity of the assessment, hence it may be subject to a v. Court of Appeals, G. R. No. L-81446, 18 August 1988, 164
compromise. [Sec. 3.1 (a), Rev. Regs. No. 6-2000] SCRA 524, 530, citations omitted)

40. During Juliana’s lifetime, her business affairs 43. What are the reasons for presumption of
were managed by the Philippine Trust Company (Philtrust). correctness of assessments ?
She died on April 3, 2001.Two days after her death, Philtrust, SUGGESTED ANSWER:
through its Trust Officer, filed her Income Tax Return for a. Lifeblood theory
2000, without indicating that Juliana died. b. Presumption of regularity (Commissioner of
On May 22, 2001, Philtrust filed a verified petition Internal Revenue v. Hantex Trading Co., Inc., G, R. No. 136975,
with the RTC for appointment as Special Administrator. March 31, 2005) in the performance of public functions.
This was denied by the court who appointed one of the (Commissioner of Internal Revenue v. Tuazon, Inc., 173 SCRA
heirs as Special Administrator. Philtrust’s motion for 397)
reconsideration was denied. c. The likelihood that the taxpayer will have access
After an investigation by the BIR of the decedent’s to the relevant information [Commissioner of Internal Revenue,
income tax liability, it sent, on November 18, 2003, a supra citing United States v. Rexach, 482 F.2d 10 (1973). The
demand letter and a Notice of Assessment to Juliana c/o certiorari was denied by the United States Supreme Court on
Philtrust at the latter’s address which was stated in the 1998 November 19, 1973)
Income Tax Return. No response was made neither was the d. The desirability of bolstering the record-keeping
BIR advised that Juliana already died. requirements of the NIRC. (Ibid.)
On June 18, 2005, the BIR Commissioner issued
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warrants of distraint and levy to enforce collection of the  44. Give instances where prima facie correctness
deficiency income tax liability which was served on of a tax assessment does not apply.
Juliana’s heir. On November 22, 2005, the BIR filed with the
 42
SUGGESTED ANSWER: The “prima facie correctness of PJI’s books of account and other accounting records for the
a tax assessment does not apply upon proof that an assessment period January 1, 1994 to December 31, 1994 showed
is utterly without foundation, meaning it is arbitrary and deficiency VAT, Income Tax and Withholding Tax in the total
capricious. Where the BIR has come out with a “naked amount of P1`27 million. During the September 22, 1997
assessment” i.e., without any foundation character, the informal conference with the Revenue District Officer, PJI’s
determination of the tax due is without rational basis.” Comptroller executed a waiver of statute of limitations
[Commissioner of Internal Revenue v. Hantex Trading Co., Inc., provided for under sections 223 and 224 of the NIRC. On
G, R. No. 136975, March 31, 2005 citing United States v. Janis, October 5, 1998, the BIR issued a Pre-Assessment Notice
49 L. Ed. 2d 1046 (1976); 428 US 433 (1976)] In such a which was followed by Assessment/Demand No.33-1-
situation, “the determination of the Commissioner contained in a 000757-94 stating a total deficiency taxes in the amount of
deficiency notice disappears.” [Commissioner of Internal P111 million for income tax, VAT and expanded withholding
Revenue, supra citing a U.S. Court of Appeals ruling, in Clark taxes, inclusive of interest and compromise penalty.
and Clark v. Commissioner of Internal Revenue, 266 F. 2d 698 On March 16, 1999, the BIR sent to PJI a Preliminary
(1959)] “Hence, the determination by the CTA must rest on all Collection Letter to pay the assessment within 10 days from
the evidence introduced and its ultimate determination must find receipt. On November 10,1999, a Final Notice Before
support in credible evidence.” [Commissioner of Internal Seizure was issued giving PJI 10 days from receipt within
Revenue, supra] which to pay. PJI received the final notice on November 24,
1999 and on November 26, 1999 PJI asked that it be clarified
 45. What are the instances that suspends on how the tax liability of P111 million was arrived at and
the running of the prescriptive periods (Statute of requested for an extension of 30 days from receipt of the
Limitations) within which to make an assessment and the clarification within which to reply. PJI, through a follow-up
beginning of distraint or levy or of a proceeding in court for letter, asserted it never received Assessment/Demand No.
the collection, in respect of any tax deficiencies? 33-1-000757-94. On March 28, 2000 PJI received a Warrant of
SUGGESTED ANSWER: Distraint and/or Levy. PJI then appealed to the CTA.
a. When the Commissioner is prohibited from making The following issues are for resolution in the appeal:
the assessment, or beginning distraint, or levy or proceeding in a. Does the CTA have jurisdiction over the appeal
court and for sixty (60) days thereafter; ?
b. When the taxpayer requests for and is granted a b. Was the Waiver of the Statute of Limitations
reinvestigation by the commissioner; valid ?
c. When the taxpayer could not be located in the address c. Were the Assessment/Demand and the
given by him in the return filed upon which the tax is being Warrant of Distraint and/or Levy valid ?
assessed or collected; Will the appeal prosper? Explain briefly your answer.
d. When the warrant of distraint and levy is duly served SUGGESTED ANSWER: Yes, it will prosper.
upon the taxpayer, his authorized representative, or a member of a. The CTA has jurisdiction to determine if the
his household with sufficient discretion, and no property could be warrant of distraint and levy issued by the BIR is valid and to rule
located; and if the Waiver of the Statute of Limitations was validly effected.
e. When the taxpayer is out of the Philippines. This is so because the CTA has exclusive appellate jurisdiction to
NOTES AND COMMENTS: review by appeal decisions of the Commissioner of Internal
The holding in Commissioner of Internal Revenue v. Revenue in cases involving “other matters arising under the
Court of Appeals, et al., G.R. No. 115712, February 25, 1999 National Internal Revenue Code or other laws administered by
(Carnation case) that the waiver of the period for assessment the Bureau of Internal Revenue.” [Sec. 7 (a) (1). R. A. No. 1125,
must be in writing and have the written consent of the BIR as amended by R. A. No. 9282) Thus it was previously ruled
Commissioner is still doctrinal because of the provisions of Sec. that the CTA had jurisdiction to act on a petition to invalidate and
223, NIRC of 1997 which provides for the suspension of the annul the distraint orders of the Commissioner. [Ynares-
prescriptive period: Santiago, J. Philippine Journalists, Inc. v. Commissioner of
Internal Revenue, G. R. No. 162852, December 16, 2004 citing
 46. The signatures of both the Commissioner and Panrtoja v. David, 111 Phil. 197; 1 SCRA 608 (1961)] Likewise
the taxpayer, are required for a waiver of the prescriptive upheld by the Supreme Court was the decision of the CTA
period, thus a unilateral waiver on the part of the taxpayer does declaring several waivers executed by the taxpayer as null and
not suspend the prescriptive period. [Commissioner of Internal void, thus invalidating the assessments issued by the BIR. (Ibid.,
Revenue v. Court of Appeals, et al., G.R. No. 115712, February citing Commissioner of Internal Revenue v. Court of Appeals, G.
25, 1999 (Carnation case)] R. No. 115712, 25 February 1999, 303 SCRA 614)
b. The Waiver of the Statute of Limitations is not
47. The act of requesting a reinvestigation alone valid because it did not specify a definite agreed date between
does not suspend the running of the prescriptive period. the BIR and PJI, within which the former may assess and collect
The request for reinvestigation must be granted by the revenue taxes.Furthermore, the waiver is also defective from the
CIR. The Supreme Court declared that the burden of proof government side because it was signed only by a revenue district
that the request for reinvestigation had been actually granted officer, and not the Commissioner, as so required. Finally, PJI
shall be on the Commissioner of Internal Revenue. Such grant was not furnished a copy of the waiver.
may be expressed in its communications with the taxpayer or c. The waiver document is incomplete and defective
implied from the action of the Commissioner or his authorized and thus the three-year prescriptive period within which to
representative in response to the request for reinvestigation. assess was not tolled or extended and continued to run until April
[Bank of Philippine Islands (Formerly Far East Bank and Trust 17, 1998. Consequently, Assessment/Demand No. 33-1-
Company) v. Commissioner of Internal Revenue, G. R. No. 000757-94 issued on December 9, 1998 was invalid because it
174942, March 7, 2008] was issued beyond the three (3) year period. In the same
manner, the Warrant of Distraint and/or Levy which PJI received
48. Philippine Journalists, Inc. (PJI) filed its on March 28, 2000 is also null and void for having been issued
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Annual Income Tax Return for the calendar year ended pursuant to an invalid assessment. (Philippine Journalists, Inc. v.
December 31, 1994 which showed a net income of P30 Commissioner of Internal Revenue, G. R. No. 162852, December
million and the tax due as P10 million. An examination of 16, 2004)
 43
SUGGESTED ANSWER: Where the collection of the
 50. What are the two ways of protesting an amount of the taxpayer’s liability, sought by means of a
assessment notice for an internal revenue tax ? demand for payment, by levy, distraint or sale of property of the
Alternatively, what are the two types of protests ? Explain taxpayer, or by whatever means, as provided under existing
briefly. laws, may jeopardize the interest of the government or the
SUGGESTED ANSWER: taxpayer, an interested party may file a motion for the
a. Request for reconsideration which refers to a plea suspension of the collection of the tax liability (Sec. 1, Rule 10,
for re-evaluation of an assessment on the basis of existing RRCTA effective December 15, 2005) with the Court of Tax
records without need of additional evidence. It may involve both Appeals.
a question of fact or of law or both. The motion for suspension of the collection of the tax
b. Request for reinvestigation which refers to a plea may be filed together with the petition for review or with the
for re-evaluation of an assessment on the basis of newly- answer, or in a separate motion filed by the interested party at
discovered evidence or additional evidence that a taxpayer any stage of the proceedings. (Sec. 3, Rule 10, RRCTA
intends to present in the investigation. It may also involve a effective December 15, 2005)
question of fact or law or both. (Commissioner of Internal
Revenue v. Philippine Global Communication, Inc., G. R. No.  54. A compromise is a contract whereby the parties,
167146, October 31, 2006 citing Rev. Regs. No. 12-85) by making reciprocal concessions, avoid a litigation or put an
end to one already commenced. (Art. 2028, Civil Code)
 51. What is that type of protest that suspends the A compromise penalty could not be imposed by the
running of the statute of limitations for the beginning of BIR, if the taxpayer did not agree. A compromise being, by its
distraint or levy or a proceeding in court for collection ? nature, mutual in essence requires agreement. The payment
Why ? made under protest could only signify that there was no
SUGGESTED ANSWER: It is that type of protest “when agreement that had effectively been reached between the parties.
the taxpayer requests for a reinvestigation which is granted by (Vda. de San Agustin, et al., v. Commissioner of Internal
the Commissioner” (Sec. 223, NIRC of 1997), that suspends the Revenue, G. R. No. 138485, September 10, 2001)
running of the statute of limitations for collection of the tax.
(Commissioner of Internal Revenue v. Philippine Global  55. What tax cases may be the subject of a
Communication, Inc., G. R. No. 167146, October 31, 2006 citing compromise ?
Sec. 271, now Sec. 223, NIRC of 1997) When a taxpayer SUGGESTED ANSWER: The following cases may,
demands a reinvestigation, the time employed in reinvestigation upon taxpayer’s compliance with the basis for compromise, be
should be deducted from the total period of limitation. the subject matter of compromise settlement:
[Commissioner of Internal Revenue, supra citing Republic v. a. Delinquent accounts;
Lopez, 117 Phil. 575, 578; 7 SCRA 566, 568-569 (1963)] b. Cases under administrative protest after issuance
Undoubtedly, a reinvestigation, which entails the of the Final Assessment Notice to the taxpayer which are still
reception and evaluation of additional evidence, will take more pending in the Regional Offices, Revenue District Offices, Legal
time than a reconsideration of a tax assessment which will be Service, Large Taxpayer Service (LTS), Collection Service,
limited to the evidence already at hand; this justifies why the Enforcement Service and other offices in the National Office;
former can suspend the running of the statute of limitations on c. Civil tax cases being disputed before the courts;
collection of the assessed tax, while the latter cannot. d. Collection cases filed in courts;
(Commissioner of Internal Revenue v. Philippine Global e. Criminal violations, other than those already filed in
Communication, Inc., G. R. No. 167146, October 31, 2006 citing court, or those involving criminal tax fraud. (Sec. 2, Rev. Regs.
Bank of Philippine Islands v. Commissioner of Internal Revenue, No. 30-2002)
G. R. No. 139736, 17 October 2005, 473 SCRA 205, 230-231)
 56. What tax cases could not be the subject of
 52. What are the requirements for the validity of a compromise ?
taxpayer’s protest ? SUGGESTED ANSWER:
SUGGESTED ANSWER: a. Withholding tax cases unless the applicant-taxpayer
a. It must be filed within the reglementary period of invokes provisions of law that cast doubt on the taxpayer’s
thirty (30) days from receipt of the notice of assessment. obligation to withhold.;
b. The taxpayer must not only show the errors of the b. Criminal tax fraud cases, confirmed as such by the
Bureau of Internal Revenue but also the correct computation Commissioner of Internal Revenue or his duly authorized
through representative;
1) A statement of the facts, the applicable c. Criminal violations already filed in court;
law, rules and regulations, or jurisprudence on which the d. Delinquent accounts with duly approved schedule of
taxpayer’s protest is based, installment payments;
2) If there are several issues involved in the e. Cases where final reports of reinvestigation or
disputed assessment and the taxpayer fails to state the reconsideration have been issued resulting to reduction in the
facts, the applicable law, rules and regulations, or original assessment and the taxpayer is agreeable to such
jurisprudence in support of his protest against some of decision by signing the required agreement form for the purpose.
the several issues on which the assessment is based, the On the other hand, other protested cases shall be handled by the
same shall be considered undisputed issue or issues, in Regional Evaluation Board (REB) or the National Evaluation
which case, the taxpayer shall be required to pay the Board (NEB) on a case to case basis;
corresponding deficiency tax or taxes attributable thereto. f. Cases which become final and executory after final
(Sec. 3.1.5, Rev. Regs. 12-99) judgment of a court where compromise is requested on the
c. Within sixty (60) days from filing of the protest, ground of doubtful validity of the assessment; and
the taxpayer shall submit all relevant supporting documents. [4 th g. Estate tax cases where compromise is requested on
par., Sec. 228 (e), NIRC of 1997] the ground of financial incapacity of the taxpayer. (Sec. 2, Rev.
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Regs. No. 30-2002)

53. What is the procedure for suspension of
collection of taxes ?
 44
 57. The Commissioner may compromise the computed from the day the return was filed. For purposes of this
payment of any internal revenue tax when: Section, a return filed before the last day prescribed by law for
a. A reasonable doubt as to the validity of the claim the filing thereof shall be considered filed on such last day.”
against the taxpayer exists provided that the minimum (Sec. 203, NIRC of 1997, emphasis supplied)
compromise entered into is equivalent to forty percent (40%) of When the BIR validly issues an assessment within the
the basic tax; or three (3)-year period, it has another three (3) years within
b. The financial position of the taxpayer demonstrates which to collect the tax due by distraint, levy, or court
a clear inability to pay the assessed tax provided that the proceeding. The assessment of the tax is deemed made and
minimum compromise entered into is equivalent to ten percent the three (3)-year period for collection of the assessed tax
(10%) of the basic assessed tax begins to run on the date the assessment notice had been
In the above instances the Commissioner is allowed to released, mailed or sent to the taxpayer. [Bank of Philippine
enter into a compromise only if the basic tax involved does not Islands (Formerly Far East Bank and Trust Company) v.
exceed One million pesos (P1,000,000.00), and the settlement Commissioner of Internal Revenue, G. R. No. 174942, March
offered is not less than the prescribed percentages. [Sec. 204 7, 2008 citing BPI v. Commissioner of Internal Revenue, G.R.
(A), NIRC of 1997] No. 139736, 17 October 2005, 473 SCRA 205, 222-223)
In instances where the Commissioner is not authorized, NOTES AND COMMENTS:
the compromise shall be subject to the approval of the a. Both the former Sec. 269, NIRC of 1977 and
Evaluation Board composed of the Commissioner and the four Sec.222 of NIRC of 1997 do not refer to a “regular return.”
(4) Deputy Commissioners. It is clear that in enacting Sec. 222, entitled “Exceptions as to the
period of limitation of assessment and collection of taxes,” the
 58. The Commissioner of Internal Revenue is NIRC of 1997 has eliminated sub-paragraph c of the former Sec.
authorized to abate or cancel a tax liability, when: 269 of the NIRC, also entitled “Exceptions as to the period of
a. The tax or any portion thereof appears to be unjustly limitation of assessment and collection of taxes.” Said Sec. 269
or excessively assessed; or (c), reads “Any internal revenue tax which has been assessed
b. The administration and collection costs involved do within the period of limitation above-prescribed may be collected
not justify the collection of the amount due. [Sec. 204 (B), NIRC by distraint or levy or by a proceeding in court within three years
of 1997] following the assessment of the tax.”
A perusal of Sec. 222 of the NIRC is clear that it covers
59. What is the prescriptive period for collecting only three scenarios only. 1) No assessment was made upon a
internal revenue taxes ? false or fraudulent return or omission to file a return; 2) an
SUGGESTED ANSWER: There are four (4) prescriptive assessment was made upon a false or fraudulent return or
periods for the collection of an internal revenue tax: omission to file a return; and 3) an extended assessment issued
a. Collection upon a false or fraudulent return or no within a period agreed upon by the Commissioner and the
return without assessment. In case of a false or fraudulent taxpayer. The same scenarios are those referred to in the
return with the intent to evade tax or of failure to file a return, “a former Sec. 269 which provided for a prescriptive period for
proceeding in court for the collection of such tax may be filed collection of three (3) years.
without assessment, at any time within ten (10) years after the It is clear therefore that neither Sec. 222 nor the former
discovery of the falsity, fraud or omission.” [Sec. 222 (a), NIRC Sec. 269 provide for an instance where the assessment was
of 1997) made upon a “regular return” or one that is not false or
b. Collection upon a false or fraudulent return or no fraudulent, or that there was an agreement to extend the period
return with assessment. Any internal revenue tax which has for assessment.
been assessed (because the return is false or fraudulent with Resort should therefore be made to the three (3) year
intent to evade tax or of failure to fail a return), within a period of period referred to in Sec. 203 of the NIRC of 1997 which reads,
ten (10) years from discovery of the falsity, fraud or omission “Except as provided in Section 222, internal revenue taxes shall
“may be collected by distraint or levy or by a proceeding in be assessed within three (3) years after the last day prescribed
court within five (5) years following the assessment of the by law for the filing of the return, and no proceeding in court
tax.” [Sec. 222 (c), in relation to Sec. 222 (a) NIRC of 1997, without assessment for the collection of such taxes x x x “
emphasis supplied) (paraphrasing and emphasis supplied)
c. Collection upon an extended assessment. Where
a tax has been assessed with the period agreed upon between  60. What is solutio indebeti as applied to tax
the Commissioner and the taxpayer in writing (which should cases ?
initially be within three (3) years from the time the return was SUGGESTED ANSWER: This is erroneous payment of
filed or should have been filed), or any extensions before the taxes and occurs when the taxpayer pays under a mistake of
expiration of the period agreed upon, the tax “may be collected fact, as for the instance in a case where he is not aware of an
by distraint or levy or by a proceeding in court within the existing exemption in his favor at the time the payment was
period agreed upon in writing before the expiration of the made. Such payment is held to be not voluntary and therefore,
five (5) year period. The period so agreed upon may be can be recovered or refunded. (Commissioner of Internal
extended by subsequent written agreements made before the Revenue v. Acesite (Philippines) Hotel Corporation, G. R. No.
expiration of the period previously agreed upon.” [Sec. 222 (d), 147295, February 16, 2007)
in relation to Secs. 222 (b) and 203, NIRC of 1997, emphasis NOTES AND COMMENTS: Technicalities and
supplied) legalisms, however exalted, should not be misused by the
d. Collection upon a return that is not false or government to keep money not belonging to it, thereby
fraudulent, or where the assessment is not an extended enriching itself at the expense of its law-abiding citizens. State
assessment. “Except as provided in Section 222, internal Land Investment Corporation v. Commissioner of Internal
revenue taxes shall be assessed within three (3) years after the Revenue, G. R. No. 171956, January 18, 2008 citing BPI-
last day prescribed by law for the filing of the return, and no Family Savings Bank, Inc. v. Court of Appeals, G.R. No.
proceeding in court without assessment for the collection 122480, April 12, 2000, 330 SCRA 507.
Page63

of such taxes shall be begun after the expiration of such Under the principle of solutio indebiti provided in Art.
period; Provided, That in case where a return is filed beyond the 2154, Civil Code, “If something is received when there is no
period prescribed by law, the three (3) year period shall be right to demand it, and it was unduly delivered through
 45
mistake, the obligation to return it arises.” The BIR received the quarters of the succeeding taxable year. To ease the
something “when there [was] no right to demand it,” and thus, administration of tax collection, these remedies are in the
it has the obligation to return it. State Land Investment alternative and the choice of one precludes the other. Since the
Corporation v. Commissioner of Internal Revenue supra citing Bank has chosen the tax credit approach it cannot anymore avail
Citibank, N. A. v. Court of Appeals and Commissioner of of the tax refund. (Philippine Bank of Communications v.
Internal Revenue, G.R. No. 107434, October 10, 1997, 280 Commissioner of Internal Revenue, et al., G.R. No. 112024,
SCRA 459, in turn citing Ramie Textiles, Inc. v. Mathay, Sr., 89 January 28, 1999)
SCRA 586 (1979). It is an ancient principle that no one, not NOTES AND COMMENTS:
even the state, shall enrich oneself at the expense of another. a. The choice, is given to the taxpayer, whether
Indeed, simple justice requires the speedy refund of the to claim for refund under Sec. 76 or have its excess taxes
wrongly held taxes. (Ibid.) applied as tax credit for the succeeding taxable year, such
election is not final. Prior verification and approval by the
Commissioner of Internal Revenue is required. The availment of
the remedy of tax credit is not absolute and mandatory. It does
not confer an absolute right on the part of the taxpayer to avail of
the tax credit scheme if it so chooses. Neither does it impose a
duty on the part of the government to sit back and allow an
important facet of tax collection to be at the sole control and
56. What are the reasons for requiring the filing of discretion of the taxpayer. (Paseo Realty & Development
an administrative application for refund or credit with the Corporation v. Court of Appeals, et al., G. R. No. 119286,
BSUGGESTED October 13, 2004)
 61. The filing of an administrative claim for
refund with the BIR, before filing a case with the Court of 64. What is the “irrevocability rule” in claims for
Tax Appeals, is necessary for the following reasons: refund and what is the rationale behind this ?
a. To afford the Commissioner an opportunity to correct SUGGESTED ANSWER: A corporation entitled to a tax
his errors or that of subordinate officers. (Gonzales v. Court of credit or refund of the excess estimated quarterly income taxes
Tax Appeals, et al., 14 SCRA 79) paid has two options: (1) to carry over the excess credit or (2)
b. To notify the Government that such taxes have been to apply for the issuance of a tax credit certificate or to claim a
questioned and the notice should be borne in mind in estimating cash refund. If the option to carry over the excess credit is
the revenue available for expenditures. (Bermejo v. Collector, exercised, the same shall be irrevocable for that taxable period.
G.R. No. L-3028, July 28, 1950) In exercising its option, the corporation must signify in
its annual corporate adjustment return (by marking the option
 62. As a general rule the filing of an application box provided in the BIR form) its intention either to carry over
for refund or credit with the Bureau of Internal Revenue is the excess credit or to claim a refund. To facilitate tax
an administrative precondition before a suit may be filed collection, these remedies are in the alternative and the choice
with the Court of Tax Appeals. Is there any exception ? of one precludes the other. [Systra Philippines, Inc., v.
SUGGESTED ANSWER: Yes. The failure to first file a Commissioner of Internal Revenue, G. R. No. 176290,
written claim for refund or credit is not fatal to a petition for September 21, 2007 citing Philippine Bank of Communications
review involving a disputed assessment where an assessment v. Commissioner of Internal Revenue, 361 Phil. 916 (1999)]
was disputed but the protest was denied by the Bureau of This is known as the irrevocability rule and is
Internal Revenue. embodied in the last sentence of Section 76 of the Tax Code.
To hold that the taxpayer has now lost the right to The phrase “such option shall be considered irrevocable for
appeal from the ruling on the disputed assessment and require that taxable period” means that the option to carry over the
him to file a claim for a refund of the taxes paid as a condition excess tax credits of a particular taxable year can no longer be
precedent to his right to appeal, would in effect require of him to revoked.
go through a useless and needless ceremony that would only The rule prevents a taxpayer from claiming twice the
delay the disposition of the case, for the Commissioner would excess quarterly taxes paid: (1) as automatic credit against
certainly disallow the claim for refund in the same way as he taxes for the taxable quarters of the succeeding years for which
disallowed the protest against the assessment. The law, should no tax credit certificate has been issued and (2) as a tax credit
not be interpreted as to result in absurdities. (vda. de San either for which a tax credit certificate will be issued or which
Agustin., etc., v. Commissioner of Internal Revenue, G.R. No. will be claimed for cash refund. (Systra Philippines, Inc., supra
138485, September 10, 2001 citing Roman Catholic Archbishop citing De Leon, Hector, THE NATIONAL INTERNAL REVENUE
of Cebu v. Collector of Internal Revenue, 4 SCRA 279) CODE, Seventh Edition, 2000, p. 430)
NOTE: Reconciliation between above two numbers
(56 and 57). An application for refund or credit under Sec. 229 65. In the year 2000 Systra derived excess tax
of the NIRC of 1997 is required where the case filed before the credits and exercised the option to carry them over as tax
CTA is a refund case, which is not premised upon a disputed credits for the next taxable year. However, the tax due for
assessment. There is no need for a prior application for refund the next taxable year is lower than excess tax credits. It
or credit, if the refund is merely a consequence of the resolution now applies for a refund of the unapplied tax credits. May
of the BIR’s denial of a protested assessment. its refund be granted ? If the refund is denied, does Systra
lose the unapplied tax credits ? Explain briefly your
63. What is the nature of the taxpayer’s remedy of answer.
either to ask for a refund of excess tax payments or to apply SUGGESTED ANSWER: Systra’s claim for refund
the same in payment of succeeding taxable periods’ taxes ? should be denied. Once the carry over option was made,
SUGGESTED ANSWER: Sec. 69 of the 1977 NIRC actually or constructively, it became forever irrevocable
(now Sec. 76 of the NIRC of 1997) provides that any excess of regardless of whether the excess tax credits were actually or
the total quarterly payments over the actual income tax fully utilized Under Section 76 of the Tax Code, a claim for
computed in the adjustment or final corporate income tax return,
Page63

refund of such excess credits can no longer be made. The

shall either (a) be refunded to the corporation, or (b) may be excess credits will only be applied “against income tax due for
credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years.”
 46
Despite the denial of its claim for refund, Systra does any specific provision in the Tax Code or special laws, that
not lose the unapplied tax credits. The amount will not be period would be ten (10) years under Article 1144 of the Civil
forfeited in favor of the government but will remain in the Code. (Commissioner of Internal Revenue v. Philippine National
taxpayer’s account. Petitioner may claim and carry it over in Bank, supra)
the succeeding taxable years, creditable against future income
tax liabilities until fully utilized. (Systra Philippines, Inc., v. 67. ABC Bank filed with the BIR an application for
Commissioner of Internal Revenue, G. R. No. 176290, a tax credit/refund for alleged excess payments of its gross
September 21, 2007 citing Philam Asset Management, Inc. v. receipts tax (GRT) for the 3rd and 4th quarters of 2003 and
Commissioner of Internal Revenue, G.R. Nos. 156637/162004, the entire 2004 amounting to P14 million. Since no action
14 December 2005, 477 SCRA 761) was taken by the Commissioner on its claim, ABC filed a
Supposing in the above problem that Systra case with the CTA on October 18, 2005 to comply with the
permanent ceased operations, what happens to the two-year reglementary period and avoid the prescription of
unapplied credits ? its action. Only July 30, 2007, the CTA rendered a decision
SUGGESTED ANSWER: Where, the corporation denying the claim for ABC’s failure to file its formal offer of
permanently ceases its operations before full utilization of the evidence in the CTA.
tax credits it opted to carry over, it may then be allowed to ABC Bank now seeks refuge in Onate v. Court of
claim the refund of the remaining tax credits. In such a case, Appeals, 320 Phil. 344; 250 SCRA 283 (1995) where the
the remaining tax credits can no longer be carried over and the Supreme Court allowed evidence, not formally offered, to be
irrevocability rule ceases to apply. Cessante ratione legis, considered on condition that: (1) evidence must have been
cessat ipse lex. (Footnote no. 23, Systra Philippines, Inc., v. identified by testimony duly recorded and (2) it must have
Commissioner of Internal Revenue, G. R. No. 176290, been incorporated in the records of the case.
September 21, 2007) Is ABC correct ?
NOTES AND COMMENTS: The holding in State Land SUGGESTED ANSWER: No. A tax refund s in the
Investment Corporation v. Commissioner of Internal Revenue, nature of a tax exemption which must be construed strictissimi
G. R. No. 171956, January 18, 2008 that the taxpayer is juris against the taxpayer. The taxpayer must present convincing
entitled to a refund because during the succeeding year there evidence to substantiate a claim for refund. Without any
was no tax due against which the excess tax credits may be documentary evidenced on record, ABC failed to discharge the
applied is not doctrinal. This is so because it interpreted the burden of proving its right to a tax credit/tax refund. (Far East
provisions of then Sec. 69 of the NIRC, which did not provide Bank & Trust Company v. Commissioner of Internal Revenue, G.
for the “irrevocability rule” now contained in Sec. 76 of the R. No. 149589, September 15, 2006)
NIRC of 1997.
68. A simultaneous filing of the application with the
66. In early April 1999 XYZ Bank advanced the BIR for refund/credit and the institution of the court suit
amount of P180 million to the BIR its income tax payment with the CTA is allowed. There is no need to wait for a BIR
for the bank’s 1999 operations in response for the denial. REASONS:
government’s call to generate more revenues for national a. The positive requirement of Section 230 NIRC (now
development. In separate letters dated April 19 and 29, 1999 Sec. 229, NIRC of 1997);
and May 14, 1999 XYZ requested for the issuance of a Tax b. The doctrine that delay of the Commissioner in
Credit Certificate (TCC) to be utilized against future tax rendering decision does not extend the peremptory period fixed
obligations of the bank. by the statute;
By the end of 1999, a credit balance in the amount of c. The law fixed the same period two years for filing a
P73 million remain which was carried over for the years claim for refund with the Commissioner under Sec. 204, par. 3,
2000 to 2004 but was not availed of because XYZ incurred NIRC (now Sec. 204 [C], NIRC of 1997), and for filing suit in
losses during the period. On July 28, 2005 PNB reiterated court under Sec. 230, NIRC (now Sec. 229, NIRC of 1997),
its request for the issuance of a TCC for the P73 million unlike in protests of assessments under Sec. 229 (now Sec.
balance. The BIR rejected the request on the ground of 228, NIRC of 1997), which fixed the period (thirty days from
among others prescription having been applied for beyond receipt of decision) for appealing to the court, thus clearly
the two-year reglementary period for filing claims for refund implying that the prior decision of the Commissioner is
as set forth in Sec. 229 of the NIRC of 1997. necessary to take cognizance of the case. (Commissioner of
Has the claim prescribed ? Explain briefly your Internal Revenue v. Bank of Philippine Islands, etc. et al., CA-
answer. G.R. SP No. 34102, September 9, 1994; Gibbs v. Collector of
SUGGESTED ANSWER: The claim has not prescribed. Internal Revenue, et al., 107 Phil, 232; Johnston Lumber Co. v.
Sec. 229 of the Tax Code, as couched, particularly its statute of CTA, 101 Phil. 151)
limitations component, is in context intended to apply to suits for
any national internal revenue tax “alleged to have been 69. The grant of a refund is founded on the
erroneously or illegally assessed or collected, or of any penalty assumption that the tax return is valid, i.e. that the facts
claimed to have been collected without authority, or of any sum stated therein are true and correct. (Commissioner of Internal
alleged to have excessively or in any manner wrongfully Revenue v. Court of Tax Appeals, G. R. No. 106611, July 21,
collected.” 1994, 234 SCRA 348) Without the tax return it would be virtually
Analyzing the underlying reason behind the advance impossible to determine whether the proper taxes have been
payment (to help the government) made by XYZ it would be assessed and paid. After all, it is axiomatic that a claimant has
improper to treat the same as erroneous, wrongful or illegal the burden of proof to establish the factual basis of his or her
payment of tax within the meaning of Sec. 229 of the NIRC of claim for tax credit or refund. Tax refunds, like tax exemptions,
1997. are construed strictly against the taxpayer. (Paseo Realty &
An availment of tax credit due for reasons other than the Development Corporation v. Court of Appeals, et al., G. R. No.
erroneous or wrongful collection of taxes may have a different 119286, October 13, 2004)
prescriptive period. (Commissioner of Internal Revenue v. However, in BPI-Family Savings Bank v. Court of Appeals,
Page63

Philippine National Bank, G.R. No. 161997, October 25, 2005 386 Phil. 719; 326 SCRA 641 (2000), refund was granted,
citing Commissioner of Internal Revenue v. The Philippine Life despite the failure to present the tax return, because other
Insurance Co., et al. G.R. No. 105208, May 29, 1995) Absent
 47
evidence was presented to prove that the overpaid taxes were
not applied. (Ibid.)  73. What are the requisites for the refund of
illegally deducted taxes from the income of an employees’
 70. Discuss the difference between tax refund and trust fund ?
tax credit. SUGGESTED ANSWER: What has to be established, as
SUGGESTED ANSWER: There are unmistakable formal a matter of evidence, is that the amount sought to be refunded to
and practical differences between the two modes. Formally, a the bank-trustee corresponds to the tax withheld on the interest
tax refund requires a physical return of the sum erroneously paid income earned from the exempt employees’ trust. The need to
by the taxpayer, while a tax credit involves the application of the be determinate is important, specially if the bank trustee, in the
reimbursable amount against any sum that may be due and ordinary course of its banking business, earns interest income
collectible from the taxpayer. not only from its investments of employees’ trusts, but on a
On the practical side, the taxpayer to whom the tax is whole range of accounts which do not enjoy the same broad
refunded would have the option, among others, to invest for exemption as employees’ trusts. (Far East Bank Trust and
profit the returned sum, an option not proximately available if the Company, etc., v. Commissioner of Internal Revenue, et al., G.
taxpayer chooses instead to receive a tax credit. (Commissioner R. No. 138919, May 2, 2006)
of Customs v. Philippine Phosphate Fertilizer Corporation, G. R. NOTES AND COMMENTS:
No. 144440, September 1, 2004) a. Employees’ trust fund, defined. An employees’
NOTES AND COMMENTS: It may be that there is no trust fund is a trust established by an employer to provide
essential difference between a tax refund and a tax credit since retirement, pension, or other benefits to employees - it is a
both are moves of recovering taxes erroneously or illegally paid separate taxable entity established for the exclusive benefit of the
to the government. (Commissioner of Customs v. Philippine employees. (Development Bank of the Philippines v.
Phosphate Fertilizer Corporation, G. R. No. 144440, September Commission on Audit, 422 SCRA 459)
1, 2004) b. Income of employees’ trust is tax exempt.
“Any provision of law to the contrary notwithstanding, the
 71. What are the three (3) conditions for the grant retirement benefits received by official and employees of private
of a claim for refund of creditable withholding tax ? firms, whether individual or corporate, in accordance with a
SUGGESTED ANSWER: reasonable private benefit plan maintained by the employer shall
a. The claim is filed with the Commissioner of be exempt from all taxes and shall not be liable to amendment,
Internal Revenue within the two-year period from the date of the levy or seizure by or under any legal or equitable process
payment of the tax. whatsoever except to pay a debt of the official or employee
b. It is shown on the return of the recipient that the concerned to the private benefit plan or that arising from liability
income payment received was declared as part of the gross imposed in a criminal action’ x x x “ (Sec. 1, Rep. Act 4917)
income; and A tax-exempt employees’ trust fund is referred to under
c. The fact of withholding is established by a copy of the NIRC of 1997 as a “reasonable private retirement plan, which
a statement duly issued by the payee showing the amount paid means “a pension, gratuity, stock bonus or profit-sharing plan
and the amount of tax withheld therefrom. (Banco Filipino maintained by an employer for the benefit of some or all of his
Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No. officials or employees, wherein contributions are made by such
155682, March 27, 2007) employer for the officials or employees, or both, for the purpose
NOTES AND COMMENTS: of distributing to such officials and employees the earnings and
a. Proof of fact of withholding. “Sec. 10. Claim principal of the fund thus accumulated, and wherein it is
for tax credit or refund. – (a) Claims for Tax Credit or Refund of provided in said plan that at no time shall any part of the corpus
Income tax deducted and withheld on income payments shall be or income of the fund be used for, or be diverted to, any purpose
given due course only when it is shown on the return that the other than for the exclusive benefit of the said officials or
income payment received has been declared as part of the gross employees.” [Sec. 32 (B) (6 ) (a), NIRC of 1997]
income and the fact of withholding is established by a copy of c. Extent of exemption. The tax exemption
the Withholding Tax Statement duly issued by the payor to the enjoyed by employees’ trust is absolute irrespective of the
payee showing the amount paid and the amount of the tax nature of the tax. It does not apply only to the tax on interest
withheld therefrom xxx” (Rev. Regs. No. 6-85, as amended) income from money market placements, bank deposits, other
The document which may be accepted as evidence of the deposit substitute instruments and government security, because
third condition, that is, the fact of withholding, must emanate the source of the interest income does not have any effect on the
from the payor itself, and not merely from the payee, and must exemption enjoyed by employee’s trusts. (Far East Bank Trust
indicate the name of the payor, the income payment basis of the and Company, etc., v. Commissioner of Internal Revenue, et al.,
tax withheld, the amount of the tax withheld and the nature of the G. R. No. 138919, May 2, 2006)
tax paid. . (Banco Filipino Savings and Mortgage Bank v. Court
of Appeals, et al., G. R. No. 155682, March 27, 2007) 74. A bank-trustee of employee trusts filed an
application for the refund of taxes withheld on the interest
72. What should be established by a taxpayer for incomes of the investments made of the funds of the
the grant of a tax refund ? Why ? employees’ trusts. Instead of presenting separate
SUGGESTED ANSWER: A taxpayer needs to establish accounts for interest incomes made of these investments,
not only that the refund is justified under the law, but also the the bank-trustee instead presented witness to establish
correct amount that should be refunded. that it would next to impossible to single out the specific
If the latter requisite cannot be ascertained with transactions involving the employees’ trust funds from the
particularity, there is cause to deny the refund, or allow it only to totality of all interest income from its total investments.
the extent of the sum that is actually proven as due. On the above basis will the application for refund
Tax refunds partake of the nature of tax exemptions and prosper ?
are thus construed strictissimi juris against the person claiming SUGGESTED ANSWER: No. The application for
the exemption. The burden in proving the claim for refund refund will not prosper.
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necessarily falls on the taxpayer. (Far East Bank Trust and The bank-trustee needs to establish not only that the
Company, etc., v. Commissioner of Internal Revenue, et al., G. refund is justified under the law (which is so because incomes
R. No. 138919, May 2, 2006)
 48
of employees’ trusts are tax exempt), but also the correct Revenue Officer Frederick Capitan which showed that
amount that should be refunded. respondent was liable for “1. deficiency income tax in the
Tax refunds partake of the nature of tax exemptions and amount of P2,340,902.52; and 2. deficiency franchise tax in
are thus construed strictissimi juris against the person or entity the amount of P2,838,335.84.”
claiming the exemption. The burden in proving the amount to On April 17, 1989, respondent filed an amended
be refunded necessarily falls on the bank-trustee, and there is final corporate Income Tax Return ending December 31,
an apparent failure to do so. 1988 reflecting a refundable amount of P107,649,729.
A necessary consequence of the special exemption Respondent thus filed on March 30, 1990 a letter-
enjoyed alone by employees’ trusts would be a necessary claim for refund or credit in the amount of P107,649,729
segregation in the accounting of such income, interest or representing overpaid income taxes for the years 1987 and
otherwise, earned from those trusts from that earned by the 1988.
other clients of the bank-trustee. (Far East Bank and Trust Petitioner not having acted on its request,
Company, etc., v. Commissioner, etc., et al., G.R. No. 138919, respondent filed on April 6, 1990 a judicial claim for refund
May 2, 2006) The amounts that are the exempt earnings of the or credit with the Court of Tax Appeals.
employee’s trust has not been shown as they have been It is gathered that respondent paid the deficiency
commingled with the interest income of the other clients of the franchise tax in the amount of P2,838,335.84. It protested
bank-trustee. the payment of the alleged deficiency income tax and
claimed as an alternative remedy the deduction thereof
75. CTA Circular No. 1-95 clearly requires that from its claim for refund or credit.
photocopies of the receipts or invoices must be pre- The Court of Tax Appeals granted the P107,649,729
marked and submitted to the CTA to verify the correctness claim for refund, or in the alternative for the BIR to issue a
of the summary listing and the CPA certification. CTA tax credit. Is the Court of Tax Appeals correct ?
Circular No. 1-95, issued on 25 January 1995, reads: SUGGESTED ANSWER: Yes. Section 69 of the
“1. The party who desires to introduce as evidence National Internal Revenue Code of 1986, now Sec. 76
such voluminous documents must present: (a) Summary provides, if the sum of the quarterly tax payments made during
containing the total amount/s of the tax account or tax paid for a taxable year is not equal to the total tax due on the entire
the period involved and a chronological or numerical list of the taxable income of that year as shown in its final adjustment
numbers, dates and amounts covered by the invoices or return, the corporation has the option to either: (a) pay the
receipts; and (b) a Certification of an independent Certified excess tax still due, or (b) be refunded the excess amount paid.
Public Accountant attesting to the correctness of the contents The returns submitted are “merely pre-audited which consist
of the summary after making an examination and evaluation of mainly of checking mathematical accuracy of the figures in the
the voluminous receipts and invoices. Such summary and return.” After such checking, the purpose of which being to
certification must properly be identified by a competent witness “insure prompt action on corporate annual income tax returns
from the accounting firm. showing refundable amounts arising from overpaid quarterly
2. The method of individual presentation of each and income taxes,” (Revenue Memorandum Order No. 32-76 dated
every receipt or invoice or other documents for marking, June 11, 1976) the refund or tax credit is granted.
identification and comparison with the originals thereof need (Commissioner of Internal Revenue v. Manila Electric Company,
not be done before the Court or the Commissioner anymore G. R. No. 121666, October 10, 2007)
after the introduction of the summary and CPA certification. It is
enough that the receipts, invoices and other documents TARIFF AND CUSTOMS LAWS
covering the said accounts or payments must be pre-
marked by the party concerned and submitted to the Court ORGANIZATION AND FUNCTIONS OF THE BUREAU OF
in order to be made accessible to the adverse party INTERNAL REVENUE
whenever he/she desires to check and verify the
correctness of the summary and CPA certification. TARIFF AND CUSTOMS CODE
However, the originals of the said receipts, invoices or
documents should be ready for verification and comparison in  1. When does importation begin, and why is it
case doubt on the authenticity of the particular documents important to know whether importation has already begun
presented is raised during the hearing of the case.” (Emphasis or not ?
supplied) SUGGESTED ANSWER: Importation begins when the
conveying vessel or aircraft enters the jurisdiction of the
76. Manila Electric Company a grantee of a Philippines with intention to unlade therein. (Sec. 1202, TCCP)
legislative franchise under Act No. 484, as amended by The jurisdiction of the Bureau of Customs to enforce the
Republic Act No. 4159 and Presidential Decree No. 551, 2[3] provisions of the TCCP including seizure and forfeiture also
had been paying a 2% franchise tax based on its gross begins from the beginning of importation. Thus, the Bureau of
receipts, in lieu of all other taxes and assessments of Customs obtains jurisdiction over imported articles only after
whatever nature. Upon the effectivity of Executive Order importation has begun.
No. 72 on February 10, 1987, however, respondent became
subject to the payment of regular corporate income tax.  2. When is importation deemed terminated and
For the last quarter ending December 31, 1987, why is it important to know whether importation has already
respondent filed on April 15, 1988 its tentative income tax ended?
reflecting a refundable amount of P101,897,741, but only SUGGESTED ANSWER: Importation is deemed
P77,931,812 was applied as tax credit for the succeeding terminated upon payment of the duties, taxes and other charges
taxable year 1988. due upon the agencies, or secured to be paid, at the port of entry
Acting on a yearly routinary Letter of Authority No. and the legal permit for withdrawal shall have been granted.
0018064 NA dated June 27, 1988 issued by petitioner, In case the articles are free of duties, taxes and other
directing the investigation of tax liabilities of respondent charges, until they have legally left the jurisdiction of the
Page63

for taxable year 1987, an investigation was conducted by customs. (Sec. 1202, TCCP) The Bureau of Customs loses
jurisdiction to enforce the TCCP and to make seizures and
2 forfeitures after importation is deemed terminated.
 49
finding of the Tariff Commission. [Sec. 301 (a), TCC, as
 3. The flexible tariff clause is a provision in the amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”]
Tariff and Customs Code, which implements the
constitutionally delegated power to the Congress to further 11. Even when all the requirements for the
delegate to the President of the Philippines, in the interest of imposition have been fulfilled, the decision on whether or
national economy, general welfare and/or national security upon not to impose a definitive anti-dumping duty remains the
recommendation of the NEDA (a) to increase, reduce or remove prerogative of the Tariff Commission. [Sec. 301 (a), TCC, as
existing protective rates of import duty, provided that, the amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”]
increase should not be higher than 100% ad valorem; (b) to Thus, the cabinet secretaries could not contravene the
establish import quota or to ban imports of any commodity, and recommendation of the Tariff Commission. They could not
(c) to impose additional duty on all imports not exceeding 10% impose the anti-dumping duty or any special customs duty
ad valorem, among others. without the favorable recommendation of the Tariff Commission.

4. Customs duties defined. Customs duties is the 12. In the determination of whether to impose the
name given to taxes on the importation and exportation of anti-dumping duty, the Tariff Commission, may consider
commodities, the tariff or tax assessed upon merchandise among others, the effect of imposing an anti-dumping duty
imported from, or exported to, a foreign country. (Nestle Phils. v. on the welfare of the consumers and/or the general public,
Court of Appeals, et al., G.R. No. 134114, July 6, 2001) and other related local industries. (Sec. 301 (a), TCC, as
amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”)
5. Special customs duties are additional import
duties imposed on specific kinds of imported articles 13. The amount of anti-dumping duty that may be
under certain conditions. The special customs duties under imposed is the difference between the export price and the
the Tariff and Customs Code (TCCP) are the anti-dumping duty, normal value of such product, commodity or article. (Sec.
the countervailing duty, the discriminatory duty, and the marking 301 (s) (1), TCC, as amended by Rep. Act No. 8752, “Anti-
duty, and under the Safeguard Measures Act (SMA) additional Dumping Act of 1999”)
tariffs as safeguard measures. The anti-dumping duty shall be equal to the margin of
dumping on such product, commodity or article thereafter
6. The special customs duties are imposed for the imported to the Philippines under similar circumstances, in
protection of consumers and manufacturers, as well as addition to ordinary duties, taxes and charges imposed by law on
Philippine products. the imported product, commodity or article.

 7. Dumping duty is an additional special duty 14. What are countervailing duties and when are
amounting to the difference between the export price and they imposed ?
the normal value of such product, commodity or article SUGGESTED ANSWER: Countervailing duties are
(Sec. 301 (s) (1), TCC, as amended by Rep. Act No. 8752, additional customs duties imposed on any product, commodity
“Anti-Dumping Act of 1999.”) imposed on the importation of a or article of commerce which is granted directly or indirectly by
product, commodity or article of commerce into the Philippines the government in the country of origin or exportation, any kind
at less than its normal value when destined for domestic or form of specific subsidy upon the production, manufacture or
consumption in the exporting country which is causing or is exportation of such product commodity or article, and the
threatening to cause material injury to a domestic industry, or importation of such subsidized product, commodity, or article
materially retarding the establishment of a domestic industry has caused or threatens to cause material injury to a domestic
producing the like product. [Sec. 301 (s) (5), TCC, as amended industry or has materially retarded the growth or prevents the
by Rep. Act No. 8752, “Anti-Dumping Act of 1999”] establishment of a domestic industry. (Sec. 302, TCCP as
amended by Section 1, R.A. No. 8751)
 8. When is the anti-dumping duty imposed ?
SUGGESTED ANSWER: The anti-dumping duty is 15. The imposing authority for the countervailing
imposed duties is the Secretary of Trade and Industry in the case of
a. Where a product, commodity or article of commerce non-agricultural product, commodity, or article or the
is exported into the Philippines at a price less than its normal Secretary of Agriculture, in the case of agricultural product,
value when destined for domestic consumption in the exporting commodity or article, after formal investigation and affirmative
country, finding of the Tariff Commission.
b. and such exportation is causing or is threatening to Even when all the requirements for the imposition have
cause material injury to a domestic industry, or materially retards been fulfilled, the decision on whether or not to impose a
the establishment of a domestic industry producing the like definitive anti-dumping duty remains the prerogative of the Tariff
product. [Sec. 301 (a), TCC, as amended by Rep. Act No. Commission. (Sec. 301 (a), TCC, as amended by Rep. Act No.
8752, “Anti-Dumping Act of 1999”] 8752, “Anti-Dumping Act of 1999”)

9. Normal value for purposes of imposing the 16. The countervailing duty is equivalent to the value
anti-dumping duty is the comparable price at the date of sale of of the specific subsidy.
like product, commodity, or article in the ordinary course of trade
when destined for consumption in the country of export. [Sec.  17. Marking duties are the additional customs duties
301 (s) (3 ), TCC, as amended by Rep. Act No. 8752, “Anti- imposed on foreign articles (or its containers if the article itself
Dumping Act of 1999”] cannot be marked), not marked in any official language in the
Philippines, in a conspicuous place as legibly, indelibly and
10. The imposing authority for the anti-dumping permanently in such manner as to indicate to an ultimate
duty is the Secretary of Trade and Industry in the case of purchaser in the Philippines the name of the country of origin.
non-agricultural product, commodity, or article or the
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Secretary of Agriculture, in the case of agricultural product, 18. The Commissioner of Customs imposes the
commodity or article, after formal investigation and affirmative marking duty.
 50
19. The marking duty is equivalent to five percent 27. How and to whom should claims for refund of
(5%) ad valorem. customs duties be made ?
SUGGESTED ANSWER: All claims for refund of duties
 20. A discriminatory duty is a new and additional shall be made in writing and forwarded to the Collector of
customs duty imposed upon articles wholly or in part the growth Customs to whom such duties are paid, who upon receipt of
or product of, or imported in a vessel, of any foreign country such claim, shall verify the same by the records of his Office,
which imposes, directly or indirectly, upon the disposition or and if found to be correct and in accordance with law, shall
transportation in transit through or re-exportation from such certify the same to the Commissioner of Customs with his
country of any article wholly or in part the growth or product of recommendation together with all necessary papers and
the Philippines, any unreasonable charge, exaction, regulation or documents. Upon receipt by the Commissioner of such certified
limitation which is not equally enforced upon like articles of every claim he shall cause the same to be paid if found correct. (Sec.
foreign country, or discriminates against the commerce of the 1708, TCC)
Philippines, directly or indirectly, by law or administrative
regulation or practice, by or in respect to any customs, tonnage, 28. What is mean by the term “entry” in Customs
or port duty, fee, charge, exaction, classification, regulation, Law ?
condition, restriction or prohibition, in such manner as to place SUGGESTED ANSWER: It has a triple meaning.
the commerce of the Philippines at a disadvantage compared a. the documents filed at the Customs house;
with the commerce of any foreign country. b. the submission and acceptance of the
documents; and
21. The President of the Philippines imposes the c. Customs declaration forms or customs entry
discriminatory duties. forms required to be accomplished by passengers of incoming
vessels or passenger planes as envisaged under Sec. 2505 of
 22. Safeguard measures are emergency measures, the TCCP (Failure to declare baggage). (Jardeleza v. People,
including tariffs, to protect domestic industries and producers G.R. No. 165265, February 6, 2006)
from increased imports which inflict or could inflict serious injury
on them. 29. A flight stewardess arrived from Singapore.
The CTA is vested with jurisdiction to review decisions of Upon her arrival she was asked whether she has anything to
the Secretary of Trade and Industry imposing safeguard declare. She answered none, and she submitted her
measures as provided under Rep. Act No. 8800 the Safeguard “Customs Baggage Declaration Form” which she
Measures Act (SMA). (Southern Cross Cement Corporation v. accomplished and signed with nothing or written on the
The Philippine Cement Manufacturers Corp., et al., G. R. No. space for items to be declared. When her hanger bag was
158540, July 8, 2004) examined some pieces of jewelry were found concealed
The DTI Secretary cannot impose the safeguard within the lining of said bag.
measures if the Tariff Commission does not favorably She was then convicted of violating of Sec. 3601 of
recommend its imposition. the Tariff and Customs Code for unlawful importation which
penalizes any person who shall fraudulently import or bring
23. Imposing authority for safeguard measures. into the Philippines any article contrary to law.
The imposing authority for the countervailing duties is the She now appeals claiming that lower court erred n
Secretary of Trade and Industry in the case of non- convicting her under Sec. 3601 when the facts alleged both
agricultural product, commodity, or article or the Secretary in the information and those shown by the prosecution
of Agriculture, in the case of agricultural product, constitute the offense under Sec. 2505 “Failure to Declare
commodity or article, after formal investigation and affirmative Baggage,” of which she was acquitted. Is she correct ?
finding of the Tariff Commission. SUGGESTED ANSWER: No. Sec. 3601 does not define
a crime. It merely provides, inter alia, the administrative
24. Safeguards measures that may be imposed. remedies which can be resorted to by the Bureau of Customs
Additional tariffs, import quotas or banning of imports. when seizing dutiable articles found the baggage of any person
arriving in the Philippines which is not included in the
 25. The basis of dutiable value of merchandise that is accomplished baggage declaration submitted to the customs
subject to ad valorem customs duties the transaction value, authorities, and the administrative penalties that such person
which shall be the price actually paid or payable for the goods must pay for the release of such goods if not imported contrary
when sold for export to the Philippines, adjusted by adding to law.
certain cost elements to the extent that they are incurred by the Such administrative penalties are independent of the
buyer but are not included in the price actually paid or payable criminal liability for smuggling that may be imposed under Sec.
for the imported goods, and may include the following: 3601, and other provisions of the TCC which can only be
a. Cost of containers and packing, determined after the appropriate criminal proceedings,
b. Insurance, and prescinding from the outcome in any administrative case that
c. Freight. (Sec. 201, TCC as amended by Sec. 1, may have been filed and disposed of by the customs authorities.
Rep. Act No. 9135) Indeed the second paragraph of Sec. 2505 provides that
nothing shall prevent the bringing of a criminal action against the
 26. The above transaction value is the primary offender for smuggling under Section 3601. (Jardeleza v.
method of determining dutiable value. If the transaction People, G. R. No. 165265, February 6, 2006)
value of the imported article could not be determined using
the above, the following alternative methods should be 30. Payment is not a defense in smuggling. “When
used one after the other: upon trial for violation of this section, the defendant is shown to
a. Transaction value of identical goods have possession of the article in question, possession shall be
b. Transaction value of similar goods deemed sufficient evidence to authorize conviction, unless the
c. Deductive method defendant shall explain the possession to the satisfaction of the
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d. Computed method court: Provided, however, That payment of the tax due after
e. Fallback method apprehension shall not constitute a valid defense in any
prosecution under this section.” (last par., Sec. 3601, TCC)
 51
the Bureau of Customs from interfering with his property
31. How is smuggling committed ? rights over the vessel. Would the suit prosper?
SUGGESTED ANSWER: Smuggling is committed by SUGGESTED ANSWER: No. His remedy was not with
any person who: the RTC but with the CTA, as issues of ownership of goods in
a. fraudulently imports or brings into the country the custody of customs officials are within the power of the CTA
any article contrary to law; to determine.
b. assists in so doing any article contrary to law; or The Collector of Customs has exclusive jurisdiction over
c. receives, conceals, buys, sells or in any manner seizure and forfeiture proceedings and trial courts are
facilitates the transportation, concealment or sale of such precluded from assuming cognizance over such matters even
goods after importation, knowing the same to have been through petitions for certiorari, prohibition or mandamus.
imported contrary to law. (Jardeleza v. People, G.R. No. (Commissioner of Customs v. Court of Appeals, et al., G. R.
165265, February 6, 2006 citing Rodriguez v. Court of Appeals, Nos. 111202-05, January 31, 2006)
G. R. No. 115218, September 18, 1995, 248 SCRA 288, 296)
NOTES AND COMMENTS: 34. The customs authorities do not have to prove
a. Importation consists of bringing an article into to the satisfaction of the court that the articles on board a
the country from the outside. Importation begins when the vessel were imported from abroad or are intended to be
conveying vessel or aircraft enters the jurisdiction of the shipped abroad before they may exercise the power to
Philippines with intention to unload therein. effect customs searches, seizures, or arrests provided by
b. When unlawful importation is complete. In law and continue with the administrative hearings. (The
the absence of a bona fide intent to make entry and pay duties Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081,
when the prohibited article enters the Philippine territory. March 20, 2000)
Importation is complete when the taxable, dutiable commodity
is brought within the limits of the port of entry. Entry through a 35. The Tariff and Customs Code allows the Bureau of
custom house is not the essence of the act. (Jardeleza v. Customs to resort to the administrative remedy of seizure,
People, G.R. No. 165265, February 6, 2006) such as by enforcing the tax lien on the imported article
when the imported articles could be found and be subject to
 32. The Collector of Customs sitting in seizure seizure and forfeiture.
and forfeiture proceedings has exclusive jurisdiction to
hear and determine all questions touching on the seizure 36. The Tariff and Customs Code allows the Bureau of
and forfeiture of dutiable goods. RTCs are precluded from Customs to resort to the judicial remedy of filing an action in
assuming cognizance over such matters even through court when the imported articles could not anymore be
petitions of certiorari, prohibition or mandamus. (The found.
Bureau of Customs, et al., v. Ogario, et al., G.R. No. 138081,
March 20, 2000) 37. Instances where there is no right of
What is the rationale for this doctrine ? redemption of seized and forfeited articles:
SUGGESTED ANSWER: a. There is fraud;
a. Regional Trial Courts have no jurisdiction to b. The importation is absolutely prohibited, or
replevin a property which is subject to seizure and forfeiture c. The release of the property would be contrary to
proceedings for violation of the Tariff and Customs Code law. (Transglobe International, Inc. v. Court of Appeals, et al.,
otherwise, actions for forfeiture of property for violation of the G.R. No. 126634, January 25, 1999)
Customs laws could easily be undermined by the simple device
of replevin. (De la Fuente v. De Veyra, et al., 120 SCRA 455) 38. In Aznar v. Court of Tax Appeals, 58 SCRA 519,
b. The doctrine of exclusive customs jurisdiction over reiterated in Farolan, Jr. v. Court of Tax appeals, et al., 217
customs cases to the exclusion of the RTCs is anchored upon SCRA 298, the Supreme Court clarified that the fraud
the policy of placing no unnecessary hindrance on the contemplated by law must be actual and not constructive.
government’s drive, not only to prevent smuggling and other It must be intentional, consisting of deception, willfully and
frauds upon Customs, deliberately done or resorted to in order to induce another to give
c. but more importantly, to render effective and up some right.
efficient the collection of import and export duties due the State,
which enables the government to carry out the functions it has  39. Requisites for forfeiture of imported goods:
been instituted to perform. (Jao, et al., v. Court of Appeals, et a. Wrongful making by the owner, importer, exporter
al., and companion case, 249 SCRA 35, 43) or consignee of any declaration or affidavit, or the wrongful
d. The issuance by regular courts of writs of making or delivery by the same person of any invoice, letter or
preliminary injunction in seizure and forfeiture proceedings paper – all touching on the importation or exportation of
before the Bureau of Customs may arouse suspicion that the merchandise.
issuance or grant was for consideration other than the strict b. the falsity of such declaration, affidavit, invoice,
merits of the case. (Zuno v. Cabredo, 402 SCRA 75 [2003]) letter or paper; and
e. Under the doctrine of primary jurisdiction, the Bureau c. an intention on the part of the importer/consignee
of Customs has exclusive administrative jurisdiction to conduct to evade the payment of the duties due. (Republic, etc., v. The
searches, seizures and forfeitures of contraband without Court of Appeals, et al., G.R. No. 139050, October 2, 2001)
interference from the courts. It could conduct searches and
seizures without need of a judicial warrant except if the search is 40. On January 7, 1989, the vessel M/V ”Star Ace,
to be conducted in a dwelling place. ”coming from Singapore laden with cargo, entered the Port
Where an administrative office has obtained a technical of San Fernando, La Union for needed repairs. When the
expertise in a specific subject, even the courts must defer to this Bureau of Customs later became suspicious that the
expertise. vessel’s real purpose in docking was to smuggle cargo into
the country, seizure proceedings were instituted and
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33. “A” claiming to be the owner of a vessel subsequently two Warrants of Seizure and Detention were
which is the subject of customs warrant of seizure and issued for the vessel and its cargo.
detention sought the intercession of the RTC to restrain
 52
Cesar does not own the vessel or any of its cargo but
claimed a preferred maritime lien. Cesar then brought  2. A law which deprives local government units of
several cases in the RTC to enforce his lien. Would these their power to tax would be unconstitutional. The
suits prosper ? constitution has delegated to local governments the power to
SUGGESTED ANSWER: No. The Bureau of Customs levy taxes, fees and other charges. This constitutional
having first obtained possession of the vessel and its goods has delegation may only be removed by a constitutional amendment.
obtained jurisdiction to the exclusion of the trial courts.
When Cesar has impleaded the vessel as a defendant to 3. Under the now prevailing Constitution, where
enforce his alleged maritime lien, in the RTC, he brought an there is neither a grant nor prohibition by statute, the taxing
action in rem under the Code of Commerce under which the power of local governments must be deemed to exist
vessel may be attached and sold. although Congress may provide statutory limitations and
However, the basic operative fact is the actual or guidelines in order to safeguard the viability and self-sufficiency
constructive possession of the res by the tribunal empowered by of local government units by directly granting them general and
law to conduct the proceedings. This means that to acquire broad tax powers. (City Government of San Pablo, Laguna, et
jurisdiction over the vessel, as a defendant, the trial court must al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)
have obtained either actual or constructive possession over it.
Neither was accomplished by the RTC as the vessel was already 4. The Local Government Code explicitly
in the possession of the Bureau of Customs. (Commissioner of authorizes provinces and cities, notwithstanding “any
Customs v. Court of Appeals, et al., G. R. Nos. 111202-05, exemption granted by any law or other special law” to
January 31, 2006) impose a tax on businesses enjoying a franchise. Indicative
NOTES AND COMMENTS: of the legislative intent to carry out the constitutional mandate of
a. Forfeiture of seized goods in the Bureau of vesting broad tax powers to local government units, the Local
Customs is in the nature of a proceeding in rem, i.e. directed Government Code has withdrawn tax exemptions or incentives
against the res or imported goods and entails a determination of theretofore enjoyed by certain entities. (City Government of San
the legality of their importation. In this proceeding, it is in legal Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March
contemplation the property itself which commits the violation and 25, 1999)
is treated as the offender, without reference whatsoever to the
character or conduct of the owner. 5. Philippine Long Distance Telephone Company,
The issue is limited to whether the imported goods should Inc., v. City of Davao, et al., etc., G. R. No. 143867, August
be forfeited and disposed of in accordance with law for violation 22, 2001, upheld the authority of the City of Davao, a local
of the Tariff and Customs Code. .(Transglobe International, Inc. v. government unit, to impose and collect a local franchise tax
Court of Appeals, et al., G.R. No. 126634, January 25, 1999) because the Local Government has withdrawn all tax
Forfeiture of seized goods in the Bureau of Customs is a exemptions previously enjoyed by all persons and authorized
proceeding against the goods and not against the owner. (Asian local government units to impose a tax on business enjoying a
Terminals, Inc. v. Bautista-Ricafort, G .R. No. 166901, October franchise tax notwithstanding the grant of tax exemption to them.
27, 2006 citing Transglobe)
 6. Explain the concept of the “paradigm shift” in
41. The Collector of Customs upon probable cause local government taxation.
that the articles are imported or exported, or are attempted SUGGESTED ANSWER: “Paradigm shift” from
to be imported or exported, in violation of the tariff and exclusive Congressional power to direct grant of taxing power to
customs laws shall issue a warrant of seizure. (Sec. 6, Title local legislative bodies. The power to tax is no longer vested
III, CAO No. 9-93) exclusively on Congress; local legislative bodies are now given
If the search and seizure is to be conducted in a dwelling direct authority to levy taxes, fees and other charges pursuant to
place, then a search warrant should be issued by the regular Article X, section 5 of the 1987 Constitution. (Batangas Power
courts not the Bureau of Customs. Corporation v. Batangas City, et al. G. R. No. 152675, and
There may be instances where no warrants issued by the companion case, April 28, 2004 citing National Power
Bureau of Customs or the regular courts is required, as in search Corporation v. City of Cabanatuan, G. R. No. 149110, April 9,
and seizures of motor vehicles and vessels. 2003)

42. Smuggled goods seized by virtue of a court 7. The fundamental law did not intend the direct
warrant should be surrendered to the court that issued the grant to local government units to be absolute and
warrant and not to the Bureau of Customs because the goods unconditional, the constitutional objective obviously is to ensure
are in custodia legis. that, while local government units are being strengthened and
made more autonomous, the legislature must still see to it that:
LOCAL GOVERNMENT TAXATION a. the taxpayer will not be over-burdened or saddled
with multiple and unreasonable impositions;
LOCAL GOVERNMENT TAXATION, IN GENERAL b. each local government unit will have its fair share
of available resources;
 1. The fundamental principles of local taxation c. the resources of the national government will be
are: unduly disturbed; and
a. Uniformity; d. local taxation will be fair, uniform and just. (Manila
b. Taxes, fees, charges and other impositions shall Electric Company v. Province of Laguna, et al., G.R. No. 131359,
be equitable and based on ability to pay, for public purposes, not May 5, 1999)
unjust, excessive, oppressive or confiscatory, not contrary to law,
public policy, national economic policy or in restraint of trade; 8. Taxing power of the local government is
c. The levy and collection shall not be let to any limited. The taxing power of local governments is limited in
private person; the sense that Congress can enact legislation granting tax
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d. Inures solely to the local government unit levying exemptions.

the tax;
e. The progressivity principle must be observed.
 53
While the system of local government taxation has  11. Professional tax may be imposed by a
changed with the onset of the 1987 Constitution, the power of province or city but not by a municipality or barangay.
local government units to tax is still limited. a. Transaction taxed: Exercise or practice of
While the power to tax by local governments may be profession requiring government licensure examination.
exercised by local legislative bodies, no longer merely be virtue b. Tax rate: In Accordance with a taxing ordinance
of a valid delegation as before, but pursuant to direct authority which should not exceed P300.00.
conferred by Section 5, Article X of the Constitution, the basic c. Tax base: Reasonable classification by the
doctrine on local taxation remains essentially the same, “the sanggunian.
power to tax is [still] primarily vested in the Congress.” d. Exception: Payment to one province or city no
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. longer subject to any other national or local tax, license or fee for
R. No. 166408, October 6, 2008 citing City Government of the practice of such profession in any part of the Philippine
Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. professionals exclusively employed in the government.
No. 162015, March 6, 2006, 484 SCRA 169 in turn referring to e. Date of payment: or on before January 31 or
Mactan Cebu International Airport Authority, v. Marcos, G.R. engaging in the profession.
No. 120082, September 11, 1996, 261 SCRA 667, 680) f. Place of payment: Province or city where the
professional practices his profession or where he maintains his
9. Further amplification by Bernas of the local principal office in case he practices his profession in several
government’s power to tax. “What is the effect of Section 5 places.
on the fiscal position of municipal corporations? Section 5
does not change the doctrine that municipal corporations do  12. Requirements: Any individual or corporation
not possess inherent powers of taxation. What it does is to employing a person subject to professional tax shall require
confer municipal corporations a general power to levy taxes payment by that person of the tax on his profession before
and otherwise create sources of revenue. They no longer have employment and annually thereafter.
to wait for a statutory grant of these powers. The power of the Any person subject to the professional tax shall write in
legislative authority relative to the fiscal powers of local deeds, receipts, prescriptions, reports, books of account, plans
governments has been reduced to the authority to impose and designs, surveys and maps, as the case may be, the
limitations on municipal powers. Moreover, these limitations number of the official receipt issued to him.
must be “consistent with the basic policy of local autonomy.” Exemption: Professionals exclusively employed in the
The important legal effect of Section 5 is thus to reverse the government shall be exempt from payment. (Sec. 139, LGC)
principle that doubts are resolved against municipal NOTE: For the purpose of collecting the tax, the provincial
corporations. Henceforth, in interpreting statutory provisions or city treasurer or his duly authorized representative shall
on municipal fiscal powers, doubts will be resolved in favor of require from such professionals their current annual registration
municipal corporations. It is understood, however, that taxes cards issued by competent authority before accepting payment
imposed by local government must be for a public purpose, of their professional tax for the current year. The PRC shall
uniform within a locality, must not be confiscatory, and must be likewise require the professionals presentation of proof of
within the jurisdiction of the local unit to pass.” (Quezon City, et payment before registration of professionals or renewal of their
al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, licenses. (last par., Art. 228, Rules and Regulations
October 6, 2008 citing City Government of Quezon City, et al. Implementing the Local Government Code of 1991)
v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6,
2006, 484 SCRA 169)  13. Who are the professionals who, if they are in
practice of their profession, are subject to professional
10. Reconciliation of the local government’s tax ?
authority to tax and the Congressional general taxing SUGGESTED ANSWER: The professionals subject to
power. Congress has the inherent power to tax, which the professional tax are only those who have passed the bar
includes the power to grant tax exemptions. On the other examinations, or any board or other examinations conducted by
hand, the power of local governments, such as provinces and the Professional Regulation Commission (PRC). for example, a
cities for example Quezon City, to tax is prescribed by Section lawyer who is also a Certified Public Accountant (CPA) must pay
151 in relation to Section 137 of the LGC which expressly the professional tax imposed on lawyers and that fixed for CPAs,
provides that notwithstanding any exemption granted by any if he is to practice both professions. [Sec. 238 (f), Rule XXX,
law or other special law, the City or a province may impose a Rules and Regulations Implementing the Local Government
franchise tax. It must be noted that Section 137 of the LGC Code of 1991]
does not prohibit grant of future exemptions.
The Supreme Court in a series of cases has sustained  14. X City issued a notice of assessment against
the power of Congress to grant tax exemptions over and above ABC Condominium Corporation for unpaid business taxes.
the power of the local government’s delegated power to tax. The Condominium Corporation is a duly constituted
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. condominium corporation in accordance with the
R. No. 166408, October 6, 2008 citing City Government of Condominium Act which owns and holds title to the
Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. common and limited common areas of the condominium.
No. 162015, March 6, 2006, 484 SCRA 16) Its membership comprises the unit owners and is
“Indeed, the grant of taxing powers to local government authorized under its By-Laws to collect regular
units under the Constitution and the LGC does not affect the assessments from its members for operating expenses,
power of Congress to grant exemptions to certain persons, capital expenditures on the common areas and other
pursuant to a declared national policy. The legal effect of the special assessments as provided for in the Master Deed
constitutional grant to local governments simply means that in with ?Declaration of Restrictions of the Condominium.
interpreting statutory provisions on municipal taxing powers, ABC Condominium Corporation insists that the X
doubts must be resolved in favor of municipal corporations.” City Revenue Code and the Local Government Code do not
[Ibid., referring to Philippine Long Distance Telephone contain provisions upon which the assessment could be
Page63

Company, Inc. (PLDT) vs. City of Davao] based. Resolve the controversy.
SUGGESTED ANSWER: ABC is correct. Condominium
corporations are generally exempt from local business taxation
 54
under the Local Government Code, irrespective of any local lease two (2) prominent places in the provincial capitol, city,
ordinance that seeks to declare otherwise. municipal or barangay hall for a minimum of three (3)
X City, is authorized under the Local Government Code, consecutive weeks. (Figuerres v. Court of Appeals, et al,. G.R.
to impose a tax on business, which is defined under the Code as No. 119172, March 25, 1999)
”trade or commercial activity regularly engaged in as a means of
livelihood or with a view to profit.” By its very nature a  4. What are the approaches in estimating the fair
condominium corporation is not engaged in business, and any market value of real property for real property tax
profit that it derives is merely incidental, hence it may not be purposes ?
subject to business taxes. (Yamane , etc. v. BA Lepanto SUGGESTED ANSWER:
Condominium Corporation, G. R. No. 154993, October 25, 2005) a. Sales Analysis Approach. The sales price paid in
REAL PROPERTY TAXATION actual market transactions is considered by taking into account
valid sales data accumulated from among the Registrar of
1. What are the fundamental principles of real Deeds, notaries public, appraisers, brokers, dealers, bank
property taxation ? officials, and various sources stated under the Local Government
SUGGESTED ANSWER: The fundamental principles of Code.
real property taxation are: b. Income Capitalization Approach. The value of an
a. Appraisal at current and fair market value; income-producing property is no more than the return derived
b. Classification for assessment on the basis of from it. An analysis of the income produced is necessary in
actual use; order to estimate the sum which might be invested in the
c. Assessment on the basis of uniform classification; purchase of the property.
d. Appraisal, assessment, levy and collection shall c. Reproduction cost approach is a formal approach
not be let to a private person; used exclusively n appraising man-made improvements such as
e. Appraisal and assessment shall be equitable. buildings and other structures, based on such data as materials
NOTES AND COMMENTS: Real properties shall be and labor costs to reproduce a new replica of the improvement.
appraised at the current and fair market value prevailing in the The assessor uses any or all of these approaches in
locality where the property is situated and classified for analyzing the data gathered to arrive at the estimated fair market
assessment purposes on the basis of its actual use. (Allied value to be included in the ordinance containing the schedule of
Banking Corporation, etc., v. Quezon City Government, et al., G. fair market values. (Allied Banking Corporation, etc., v. Quezon
R. No. 154126, October 11, 2005) City Government, et al., G. R. No. 154126, October 11, 2005
citing Local Assessment Regulations No. 1-92)
 2. Who determines the fair market value of
properties ?  5. Quezon City passed an ordinance whereby the
SUGGESTED ANSWER: The reasonable market value “parcels of land sold, ceded. Transferred and conveyed for
is determined by the assessor in the form of a schedule of fair remuneratory consideration after the effectivity of this
market values. The schedule is then enacted by the local revision shall be subject to real estate tax based on the
sanggunian. actual amount reflected in the deed of conveyance or the
current approved zonal valuation of the Bureau of Internal
 3. What is the fair market value of properties ? Revenue prevailing at the time of sale, cession, transfer and
SUGGESTED ANSWER: Fair market value is the price conveyance, whichever is higher, as evidenced by the
at which a property may be sold by a seller who is not compelled certificate of payment of the capital gains tax issued
to sell and bought by a buyer who is not compelled to buy, taking therefore.”
into consideration all uses to which the property is adopted and Is the proviso for the basis in determining the value
might in reason be applied. for real property tax purposes valid ?
The criterion established by the statute contemplates a SUGGESTED ANSWER: No. The proviso being
hypothetical sale. Hence, the buyers need not be actual and contrary to public policy and for restraining trade is not valid for
existing purchasers. (Allied Banking Corporation, etc., v. Quezon the following reasons:
City Government, et al., G. R. No. 154126, October 11, 2005 a. It mandates an exclusive rule in determining the
citing Army and Navy Club, Manila v. Trinidad, 44 Phil. 383 ) fair market value and departs from the established procedures
NOTES AND COMMENTS: In fixing the value of real such as the sales analysis approach, the income capitalization
property, assessors have to consider all the circumstances and approach and the reproduction approach provided under the
elements of value and must exercise prudent discretion in rules implementing the statute. It unduly interferes with the
reaching conclusions. [Allied Banking Corporation, etc., v. duties statutorily placed upon the local assessor by completely
Quezon City Government, et al., G. R. No. 154126, October 11, dispensing with his analysis and discretion which the Local
2005 citing Reyes v. Almanzor, 196 SCRA 322, 327 (1991)]) Government Code and the regulations require to be exercised.
Preparation of fair market values: An ordinance that contravenes any statute is ultra vires and void.
a. The city or municipal assessor shall prepare a b. The “consideration approach” in the ordinance is
schedule of fair market values for the different classes of real illegal since “the appraisal, assessment, levy and collection of
property situated in their respective Local Government Units for real property tax shall not be let to any private person”, it will also
the enactment of an ordinance by the sanggunian concerned; completely destroy the fundamental principle in real property
and taxation – that real property shall be classified, valued and
b. The schedule of fair market values shall be published assessed on the basis of its actual use regardless of where
in a newspaper of general circulation in the province, city or located, whoever owns it, and whoever uses it. Allowing the
municipality concerned or the posting in the provincial capitol or parties to a private sale to dictate the fair market value of the
other places as required by law. (Lopez v. City of Manila, et al., property will dispense with the distinctions of actual use stated in
G.R. No. 127139, February 19, 1999) the Local Government Code and in the regulations.
Proposed fair market values of real property in a c. The invalidity is not cured by the prhase
local government unit as well as the ordinance containing “whichever is higher” because an integral part of that system still
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the schedule must be published in full for three (3) permits valuing real property in disregard of its “actual use.”
consecutive days in a newspaper of local circulation, where d. The ordinance would result to real property
available, within ten (10) days of its approval, and posted in at assessments more than once every three (3) years and that is
 55
not the congressional intent as shown in the provisions of the v. Province of Batangas, G. R. No. 168557, February 16, 2007
Local Government Code and the regulations. Consequently, the and companion case, held that barges on which were mounted
real property tax burden should not be interpreted to include gas turbine power plants designated to generate electrical power,
those beyond what the Code or the regulations expressly clearly the fuel oil barges which supplied fuel oil to the power plant
state. barges, and the accessory equipment mounted on the barges
e. The proviso would provide a chilling effect on real were subject to real property taxes.
property owners or administrators to enter freely into contracts Moreover, Article 415(9) of the Civil Code provides that
reflecting the increasing value of real properties in accordance “[d]ocks and structures which, though floating, are intended by
with prevailing market conditions. their nature and object to remain at a fixed place on a river, lake
While the Local Government Code provides that the or coast” are considered immovable property by destination
assessment of real property shall not be increased once every being intended by the owner for an industry or work which may
three (3) years, the questioned proviso subjects the property to a be carried on in a building or on a piece of land and which tend
higher assessment every time a sales transaction is made. Real directly to meet the needs of said industry or work.
property owners would therefore postpone sales until after the
lapse of the three (3) year period, or if they do so within the said 8. The restriction upon the power of courts to
period they shall be compelled to dispose of the property at a impeach tax assessment without a prior payment, under
price not exceeding the last prior conveyance in order to avoid a protest, of the taxes assessed is consistent with the
higher tax assessment. doctrine that taxes are the lifeblood of the nation, and as
In the above two scenarios real property owners are such their collection cannot be curtailed by injunction or any like
effectively prevented from obtaining the best price possible for action; otherwise, the state or, in this case, the local government
their properties and unduly hampers the equitable distribution of unit, shall be crippled in dispensing the needed services to the
wealth. (Allied Banking Corporation, etc., v. Quezon City people, and its machinery gravely disabled. (Manila Electric
Government, et al., G. R. No. 154126, October 11, 2005) Company v. Barlis, G.R. No. 114231, May 18, 2001)
Thus, the trial court has no jurisdiction to entertain a
6. What is the nature of a tax declaration ? petition for prohibition absent payment under protest of the tax
SUGGESTED ANSWER: As a rule, tax declarations or assessed. (Ibid.)
realty tax payments of property are not conclusive evidence of NOTES AND COMMENTS: While the above May 18,
ownership, nevertheless, they are good indicia of possession in 2001 decision was set aside by the Supreme Court when it
the concept of owner, for no one in his right mind would be granted the petitioner’s second motion for reconsideration on
paying taxes for a property that is not in his actual or June 29, 2004, the author submits that the above doctrine in the
constructive possession. They constitute at least proof that the May 18, 2001 decision is still valid, because what was reversed
holder has a claim of title over the property. in the second motion for reconsideration was the garnishment of
The voluntary declaration of a piece of property for Meralco’s assets. The remand to the lower court was for the
taxation purposes manifests not only one’s sincere and honest resolution of whether or not an assessment was issued to
desire to obtain title to the property and announces his adverse Meralco.
claim against the State and all other interested parties, but also
the intention to contribute needed revenues to the government.  9. Unpaid realty taxes attach to the property and
Such an act strengthens one’s bona fide claim of acquisition of is chargeable against the person who had actual or
ownership. (Buenaventura, et al., v. Republic, G. R. No. beneficial use and possession of it regardless of whether or
166865, March 2, 2007 citing Heirs of Simplicio Santiago v. Heirs not he is the owner. To impose the real property tax on the
of Mariano E. Santiago, G. R. No. 151440, 17 June 2003, 404 subsequent owner which was neither the owner not the beneficial
SCRA 193, 199 – 200) user of the property during the designated periods would not only
be contrary to law but also unjust.
 7. Give examples of personal property under the Consequently, MERALCO the former owner/user of the
civil law that may be considered as real property for property was required to pay the tax instead of the new owner
purposes of taxes. NAPOCOR. (Manila Electric Company v. Barlis, G.R. No.
SUGGESTED ANSWER: Personal property under the 114231, May 18, 2001)
civil law may be considered as real property for purposes of NOTE: The above May 18, 2001 decision was set
taxes where the property is essential to the conduct of the aside by the Supreme Court when it granted the petitioner’s
business. second motion for reconsideration on June 29, 2004. The author
a. Underground tanks are essential to the conduct of submits that the above ruling in the May 18, 2001 decision is still
the business of a gasoline station without which it would not be valid, not on the basis of the May 18, 2001 decision but in the
operational. (Caltex Phils., Inc. v. Central Board of Assessment light of pronouncements of the Supreme Court in other cases.
Appeals, et al., 114 SCRA 296) Thus, do not cite the doctrine as emanating from the May 18,
b. Light Rail Transit (LRT) improvements such as 2001 decision.
buildings, carriageways, passenger terminals stations, and
similar structures do not form part of the public roads since the  10. Secretary of Justice can take cognizance of a
former are constructed over the latter in such a way that the flow case involving the constitutionality or legality of tax
of vehicular traffic would not be impaired. The carriageways and ordinances where there are factual issues involved.
terminals serve a function different from the public roads. (Figuerres v. Court of Appeals, et al., G.R. No. 119172, March
Furthermore, they are not open to use by the general public 25, 1999)
hence not exempt from real property taxes. Even granting that Taxpayer files appeal to the Secretary of Justice,
the national government owns the carriageways and terminal within 30 days from effectivity thereof. In case the Secretary
stations, the property is not exempt because their beneficial use decides the appeal, a period also of 30 days is allowed for an
has been granted to LRTA a taxable entity. (Light Rail Transit aggrieved party to go to court. But if the Secretary does not act
Authority v. Central Board of Assessment Appeals, et al., G. R. thereon, after the lapse of 60 days, a party could already seek
No. 127316, October 12, 2000) relief in court within 30 days from the lapse of the 60 day period.
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c. The Supreme Court of New York in Consolidated These three separate periods are clearly given for
Edison Company of New York, Inc., et al., v. The City of New compliance as a prerequisite before seeking redress in a
York, et al., 80 Misc. 2d 1065 (1975) cited in FELS Energy, Inc., competent court. Such statutory periods are set to prevent
 56
delays as well as enhance the orderly and speedy discharge of from the Provincial Assessor of Batangas. If filed a motion
judicial functions. For this reason the courts construe these for reconsideration with the Provincial Assessor.
provisions of statutes as mandatory. (Reyes, et al., v. Court of a. Upon denial, FELS elevated the matter to the
Appeals, et al., G.R. No. 118233, December 10, 1999) Local Board of Assessment Appeals (LBAA), where it raised
the following issues:
11. Public hearings are mandatory prior to 1) Since NPC is tax-exempt then FEL’s
approval of tax ordinance, but this still requires the taxpayer to should also be tax-exempt because of its contract
adduce evidence to show that no public hearings ever took with NPC.
place. (Reyes, et al., v. Court of Appeals, et al., G.R. No. 2) The power barges are not real property
118233, December 10, 1999) Public hearings are required to be subject to real property taxes.
conducted prior to the enactment of an ordinance imposing real b. Upon the other hand the Local Treasurer
property taxes. (Figuerres v. Court of Appeals, et al., G.R. No. insists that the assessment has attained a state of finality
119172, March 25, 1999) hence the appeal to the LBAA should be dismissed.
Rule on the conflicting contentions.
12. The concurrent and simultaneous remedies SUGGESTED ANSWER:
afforded local government units in enforcing collection of a. All the contentions of FELS are without merit:
real property taxes: 1) NPC is not the owner of the power barges
a. Distraint of personal property; nor the operator of the power barges. The tax exemption
b. Sale of delinquent real property, and privilege granted to NPC cannot be extended to FELS.
c. Collection of real property tax through ordinary the covenant is between NPC and FELs and does not
court action. bind a third person not privy to the contract such as the
Province of Batangas.
13. The remedy of levy can be pursued by putting 2) The Supreme Court of New York in
up for sale the real property subject of tax, i.e., the delinquent Consolidated Edison Company of New York, Inc., et al., v.
property upon which the tax lien attaches, regardless of the The City of New York, et al., 80 Misc. 2d 1065 (1975)
present owner or possessor thereof. However this remedy is cited in FELS Energy, Inc., v. Province of Batangas, G. R.
only one of the other remedies. (Manila Electric Company v. No. 168557, February 16, 2007 and companion case,
Barlis, G.R. No. 114231, May 18, 2001) held that barges on which were mounted gas turbine
NOTE: The above May 18, 2001 decision was set aside power plants designated to generate electrical power, the
by the Supreme Court when it granted the petitioner’s second fuel oil barges which supplied fuel oil to the power plant
motion for reconsideration on June 29, 2004. The author barges, and the accessory equipment mounted on the
submits that the above ruling in the May 18, 2001 decision is still barges were subject to real property taxes.
valid, not on the basis of the May 18, 2001 decision, in the light Moreover, Article 415(9) of the Civil Code provides
of pronouncements of the Supreme Court in other cases. Thus, that “[d]ocks and structures which, though floating, are
do not cite the doctrine as emanating from the May 18, 2001 intended by their nature and object to remain at a fixed
decision. place on a river, lake or coast” are considered immovable
property by destination being intended by the owner for
14. The LGU could also avail of the remedy of an industry or work which may be carried on in a
distraint and levy of personal property subjecting any building or on a piece of land and which tend directly to
personal property of the taxpayer to execution. thus, the meet the needs of said industry or work.
issuance of the warrants of garnishment over MERALCO’s bank b. The Treasurer is correct. The procedure do not
deposits was not improper or irregular. (Manila Electric allow a motion for reconsideration to be filed with the Provincial
Company v. Barlis, et al., G.R. No. 114231, May 18, 2001) Assessor.
NOTE: The above May 18, 2001 decision was set aside To allow the procedure would indeed invite corruption in
by the Supreme Court when it granted the petitioner’s second the system of appraisal and assessment. it conveniently courts
motion for reconsideration on June 29, 2004. The author a graft-prone situation where values of real property ay be
submits that the above ruling in the May 18, 2001 decision is still initially set unreasonably high, and then subsequently reduced
valid, not on the basis of the May 18, 2001 decision, in the light upon the request of a property owner. In the latter instance,
of pronouncements of the Supreme Court in other cases. Thus, allusions of possible cover, illicit trade-off cannot be avoided, and
do not cite the doctrine as emanating from the May 18, 2001 in fact can conveniently take place. Such occasion for mischief
decision. must be prevented and excised from our system. (FELS
Energy, Inc., v. Province of Batangas, G. R. No. 168557,
 15. Notice and publication, as well as the legal February 16, 2007 and companion case, citing Callanta v. Office
requirements for a tax delinquency sale, are mandatory, and of the Ombudsman. G. R. Nos. 115253-74, January 30, 1998,
the failure to comply therewith can invalidate the sale. The 285 SCRA 648)
prescribed notices must be sent to comply with the requirements
of due process. (De Knecht, et al,. v. Court of Appeals; De 18. A special levy or special assessment is an
Knecht, et al., v. Honorable Sayo, 290 SCRA 223,236) imposition by a province, a city, a municipality within the
Metropolitan Manila Area, a municipality or a barangay upon
16. The reason behind the notice requirement is real property specially benefited by a public works expenditure of
that tax sales are administrative proceedings which are in the LGU to recover not more than 60% of such expenditure.
personam in nature. (Puzon v. Abellera, 169 SCRA 789, 795;
De Asis v. I.A.C., 169 SCRA 314) 19. If the ground for the protest is validity of the real
property tax ordinance and not the unreasonableness of the
 17. FELS Energy, Inc., had a contract to supply amount collected the tax must be paid under protest, and the
NPC with the electricity generated by FELS’ power barges. issue of legality may be raised to the proper courts on certiorari
The contract also stated that NPC shall be responsible for without need of exhausting administrative remedies.
Page63

all real estate taxes and assessments. FELS then received

an assessment of real property taxes on its power barges 20. If the ground for the protest is unreasonableness
of the amounts collected there is need to pay under protest
 57
and administrative remedies must be resorted to before recourse local government official. (Yamane , etc. v. BA Lepanto
to the proper courts. Condominium Corporation, G. R. No. 154993, October 25, 2005)
c. The decision of the Regional Trial Court should be
21. Procedure for refund of real property taxes based appealed by means of a petition for review directed to the Court
on unreasonableness or excessiveness of amounts of Tax Appeals (Division).
collected. d. The decision of the Court of Tax Appeals
a. Payment under protest at the time of payment or (Division) may be the subject of a review by the Court of Tax
within thirty (30) days thereafter, protest being lodged to the Appeals (en banc).
provincial, city or in the case of a municipality within the Metro e. The decision of the Court of Tax Appeals (en
Manila Area the municipal treasurer. banc) may be the subject of a petition for review on certiorari on
b. The treasurer has a period of sixty (60) days from pure questions of law directed to the Supreme Court.
receipt of the protest within to decide.
c. Within thirty (30) days from receipt of treasurer’s  24. Charitable institutions, churches and
decision or if the treasurer does not decide, within thirty (30) parsonages or convents appurtenant thereto, mosques,
days from the expiration of the sixty (60) period for the treasurer non-profit cemeteries, and all lands, buildings and
to decide, the taxpayer should file an appeal with the Local improvements that are actually, directly and exclusively
Board of Assessment Appeals. used for religious, charitable or educational purposes are
d. The Local Board of Assessment Appeals has 120 exempt from taxation. [Sec.28 (3) Article VI, 1987
days from receipt of the appeal within which to decide. Constitution]
e. The adverse decision of the Local Board of
Assessment Appeals should be appealed within thirty (30) days  25. The constitutional tax exemptions refer only
from receipt to the Central Board of Assessment Appeals. to real property that are actually, directly and exclusively used
f. The adverse decision of the Central Board of for religious, charitable or educational purposes, and that the
Assessment Appeals shall be appealed to the Court of Tax only constitutionally recognized exemption from taxation of
Appeals (En Banc) by means of a petition for review within thirty revenues are those earned by non-profit, non-stock educational
(30) days from receipt of the adverse decision. institutions which are actually, directly and exclusively used for
g. The decision of the CTA may be the subject of a educational purposes. (Commissioner of Internal Revenue v.
motion for reconsideration or new trial after which an appeal Court of Appeals, et al., 298 SCRA 83)
may be interposed by means of a petition for review on certiorari The constitutional tax exemption covers property taxes
directed to the Supreme Court on pure questions of law within a only. What is exempted is not the institution itself, those
period of fifteen (15) days from receipt extendible for a period of exempted from real estate taxes are lands, buildings and
thirty (30) days. improvements actually, directly and exclusively used for
religious, charitable or educational purposes. (Lung Center of
22. A City Ordinance adopting a method of the Philippines v. Quezon City, et al., etc., G. R. No. 144104,
assessment was nullified by the Supreme Court. A taxpayer June 29, 2004 citing Justice Davide)
who has paid his real property taxes on the basis of the
nullified ordinance now posits that the return of the real 26. The 1935 Constitution stated that the lands,
property tax erroneously collected and paid is a necessary buildings, and improvements are “used exclusively” but the
consequence of the Supreme Court’s nullification of the present Constitution requires that the lands, buildings and
ordinance and there is no need to claim for a refund. Is this improvements are “actually, directly and exclusively used.”
correct ? The change should not be ignored. Reliance on past decisions
SUGGESTED ANSWER: No. The entitlement to a tax would have sufficed were the words “actually” as well as
refund does not necessarily call for the automatic payment of the :directly” are not added. There must be proof therefore of the
sum claimed. The amount of the claim being a factual matter, it actual and direct use to be exempt from taxation. (Lung Center
must still be proven in the normal course and in accordance with of the Philippines v. Quezon City, et al., etc., G. R. No. 144104,
the administrative procedure for obtaining a refund of real June 29, 2004 citing Province of Abra v. Hernando, 107 SCRA
property taxes, as provided under the Local Government Code. 105)
(Allied Banking Corporation, etc., v. Quezon City Government, et
al., G. R. No. 154126, September 15, 2006)  27. The “actual, direct and exclusive use” of the
NOTE: In the above Allied Banking case, the Supreme property for charitable purposes is the direct and immediate
Court provided for the starting date of computing the two-year and actual application of the property itself to the purposes
prescriptive period within which to file the claim with the for which the charitable institution is organized. It is not the use
Treasurer, which is from finality of the Decision. The procedure to of the income from the real property that is determinative of
be followed is that shown below. whether the property is used for tax-exempt purposes.
If real property is used for one or more commercial
23. Procedure for refund of real property taxes purposes, it is not exclusively used for the exempted purpose but
based on validity of the tax measure or solutio indebeti. is subject to taxation,. The words “dominant use” or “principal
a. Payment under protest not required, claim must use” cannot be substituted for the words “used exclusively”
be directed to the local treasurer, within two (2) years from the without doing violence to the Constitution and the law. Solely is
date the taxpayer is entitled to such reduction or readjustment, synonymous with exclusively. (Lung Center of the Philippines v.
who must decide within sixty (60) days from receipt. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)
b. The denial by the local treasurer of the protest
would fall within the Regional Trial Court’s original jurisdiction, 28. Portions of the land of a charitable institution,
the review being the initial judicial cognizance of the matter. such as a hospital, leased to private entities as well as
Despite the language of Section 195 of the Local Government those parts of the hospital leased to private individuals are
Code which states that the remedy of the taxpayer whose protest not exempt from real property taxes. On the other hand, the
is denied by the local treasurer is “to appeal with the court of portion of the land occupied by the hospital and portions of the
Page63

competent jurisdiction,” labeling the said review as an exercise hospital used for its patients, whether paying or non-paying, are
of appellate jurisdiction is inappropriate since the denial of the exempt from real property taxes. (Lung Center of the Philippines
protest is not the judgment or order of a lower court, but of a v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)
 58
32. A telecommunications company was granted
29. As a general principle, a charitable institution by Congress on July 20, 1992, after the effectivity of the
does not lose its character as such and its exemption from Local Government Code on January 1, 1992, a legislative
taxes simply because it derives income from paying franchise with tax exemption privileges which partly reads,
patients, whether out-patient, or confined in the hospital, or “The grantee, its successors or assigns shall be liable to
receives subsidies from the government. So long as the pay the same taxes on their real estate, buildings and
money received is devoted or used altogether to the charitable personal property, exclusive of this franchise, as other
object which it is intended to achieve; and no money inures to persons or corporations are now or hereafter may be
the private benefit of the persons managing or operating the required by law to pay.” This provision existed in the
institution. (Lung Center of the Philippines v. Quezon City, et al., company’s franchise prior to the effectivity of the Local
etc., G. R. No. 144104, June 29, 2004) Government Code. A City then enacted an ordinance in
1993 imposing a real property on all real properties located
 30. What property are exempt from the payment within the city limits, and withdrawing all tax exemptions
of real property tax under the Local Government Code ? previously granted. Among properties covered are those
SUGGESTED ANSWER: owned by the company from which the City is now
a. Real property owned by the Republic of the collecting P43 million. The properties of the company were
Philippines or any of its political subdivisions except when the then scheduled by the City for sale at public auction.
beneficial use thereof has been granted to a taxable person for a The company then filed a petition for the issuance of
consideration or otherwise; a writ of prohibition claiming exemption under its
b. Charitable institutions, churches, parsonages or legislative franchise. The City defended its position raising
convents appurtenant thereto, mosques, non-profit or religious the following:
cemeteries, and all lands, buildings and improvements actually, a. There was no exhaustion of administrative
directly and exclusively used for religious, charitable and remedies because the matter should have first been filed
educational purposes; before the Local Board of Assessment Appeals;
c. Machineries and equipment, actually, directly and b. The company’s properties are exempt from
exclusively used by local water districts; and government owned tax under its franchise.
and controlled corporations engaged in the supply and Resolve the issues raised.
distribution of water and generation and transmission of electric SUGGESTED ANSWERS:
power; a. There is no need to exhaust administrative
d. Real property owned by duly registered remedies as the appeal to the LBAA is not a speedy and
cooperatives; adequate remedy within the law. This is so because the
e. Machinery and equipment used for pollution properties are already scheduled for auction sale.
control and environmental protection. Furthermore one of the recognized exceptions to the
rule on exhaustion is that if the issue is purely legal in
 31. The Manila International Airport character which is so in this case.
Authority (MIAA) was subject to real property taxes by the b. The properties are exempt from taxation. The
municipality of Paranaque on its airport lands, and grant of taxing powers to local governments under the
buildings on the ground that the Local Government Code Constitution and the Local Government Code does not affect
has withdrawn exemptions previously enjoyed by the power of Congress to grant tax exemptions.
government-owned and controlled corporations. MIAA The term “exclusive of this franchise” is interpreted to
contends otherwise as it claims it is not a government mean properties actually, directly and exclusively used in the
owned or controlled corporation. Who is correct. radio or telecommunications business. The subsequent piece
SUGGESTED ANSWER: MIAA is correct because it of legislation which reiterated the phrase “exclusive of this
is not a government owned or controlled corporation but an franchise” found in the previous tax exemption grant to the
instrumentality of the government that is exempt from taxation. company is an express and real intention on the part of
It is not a stock corporation because its capital is not Congress to once against remove from the LGC’s delegated
divided into shares, neither is it a non-stock corporation taxing power, all of the company’s properties that are actually,
because there are no members. It is instead an instrumentality directly and exclusively used in the pursuit of its franchise.
of the government upon which the local governments are not (The City Government of Quezon City, et al., v. Bayan
allowed to levy taxes, fees or other charges. Telecommunications, Inc., G. R. No. 162015, March 6, 2006)
An instrumentality “refers to any agency of the NOTES AND COMMENTS:
National Government, not integrated within the department a. Note the confusion in the decision. It cited
framework vested with special functions or jurisdiction by law, Mactan Cebu which stated that the taxing power of local
endowed with some if not all corporate powers, administering government units is “no longer merely by virtue of a valid
special funds, and enjoying operational autonomy, usually delegation as before, but pursuant to direct authority” but in the
through a charter. This term includes regulatory agencies concluding portion referred to it as “the LGC’s delegated taxing
chartered institutions and government-owned or controlled power.” Which is which, delegated or direct grant ? The
corporations.” [Sec. 2 (10), Introductory Provisions, author submits that the weight of jurisprudence shows that it is
Administrative Code of 1987] It is an instrumentality exercising a direct grant not a delegated power. If a question is asked
not only governmental but also corporate powers. It exercises then state it is a direct grant.
governmental powers of eminent domain, police power
authority, and levying of fees and charges. 33. The owner operator of a BOT and not the
Finally, the airport lands and buildings are property ultimate owner is subject to real property taxes. Consistent
owned by the government that are devoted to public use and with the BOT concept and as implemented, BPPC – the owner-
are properties of the public domain. (Manila International manager-operator of the project – is the actual user of its
Airport Authority v. City of Pasay, et al., G. R. No. 163072, April machineries and equipment. BPPC’s ownership and use of the
2, 2009 citing Manila International Airport Authority v. Court of machineries and equipment are actual, direct, and immediate,
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Appeals, et al., G. R. No. 155650, July 20, 2006) while NAPOCOR’s is contingent and, at this stage of the BOT
Agreement, not sufficient to support its claim for tax exemption.
 59
(National Power Corporation v. Central Board of Assessment
Appeals, et al., G, R. No. 171470, January 30, 2009)

ADVANCE CONGRATULATIONS AND SEE YOU IN COURT

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