Up Taxation Law Reviewer 2017 PDF

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TABLE OF CONTENTS O.6. EXEMPTION FROM TAXATION .............................. 25
O.7. DOCTRINE OF EQUITABLE RECOUPMENT............. 27
TAXATION 1 O.8. COMPENSATION AND SET-OFF............................ 27
I. GENERAL PRINCIPLES OF TAXATION .......2 O.9. COMPROMISE AND TAX AMNESTY ...................... 27
A. DEFINITION, CONCEPT AND PURPOSE OF TAXATION O.10. TAXPAYER‘S SUIT ............................................. 28

............................................................................... 2 II. NATIONAL TAXATION ........................... 29
A.1. TAXATION .............................................................. 2
A. ORGANIZATION AND FUNCTIONS OF THE BUREAU
A.2. PURPOSE ............................................................. 2 OF INTERNAL REVENUE .......................................... 29
B. NATURE AND CHARACTERISTICS OF TAXATION ..... 2 A.1. RULE-MAKING AUTHORITY OF THE SECRETARY OF
B.1 NATURE ................................................................. 2 FINANCE ................................................................... 29
B.2 CHARACTERISTICS................................................. 3 A.2. JURISDICTION, POWER AND FUNCTIONS OF THE

COMMISSIONER OF INTERNAL REVENUE ................... 30
C. POWER OF TAXATION AS DISTINGUISHED FROM
B. NATIONAL INTERNAL REVENUE CODE (NIRC) OF
POLICE POWER AND EMINENT DOMAIN ................... 3
1997, AS AMENDED .............................................. 31
E. PRINCIPLES OF A SOUND TAX SYSTEM ................. 5
B.1. INCOME TAXATION.............................................. 31
F. SCOPE AND LIMITATIONS OF TAXATION ................ 5
B.2. INCOME ............................................................. 37
F.1. INHERENT LIMITATIONS ......................................... 5
B.3. GROSS INCOME ................................................. 41
F.2. CONSTITUTIONAL LIMITATIONS .............................. 8
B.4. DEDUCTIONS FROM GROSS INCOME .................. 62
G. STAGES OR ASPECTS OF TAXATION .................... 13
C. INCOME TAX ON INDIVIDUALS ............................ 79
H. DEFINITION, NATURE AND CHARACTERISTICS OF C.1. INCOME TAX ON RESIDENT CITIZENS, NON-
TAXES ................................................................... 14 RESIDENT CITIZENS AND RESIDENT ALIENS ............... 79
H.1 TAXES .................................................................. 14 C.2. INCOME TAX ON NON-RESIDENT ALIENS ENGAGED
I. REQUISITES OF A VALID TAX ................................ 14 IN TRADE OR BUSINESS............................................. 85
C.3. INCOME TAX ON NON-RESIDENT ALIENS NOT
J. TAX AS DISTINGUISHED FROM OTHER FORMS OF
ENGAGED IN TRADE OR BUSINESS............................. 86
EXACTIONS............................................................ 14
C.4. INDIVIDUAL TAXPAYERS EXEMPT FROM INCOME TAX
K. KINDS OF TAXES ................................................ 16 ................................................................................. 86
L. SITUS OF TAXATION ............................................ 18 D. INCOME TAX ON CORPORATIONS ....................... 90
M. CONSTRUCTION AND INTERPRETATION OF ........ 19 D.1. INCOME TAX ON DOMESTIC CORPORATIONS AND
M.1. TAX LAWS .......................................................... 19 RESIDENT FOREIGN CORPORATIONS ......................... 90
M.2. TAX EXEMPTION AND EXCLUSION ....................... 19 D.2. INCOME TAX ON NON-RESIDENT FOREIGN
CORPORATIONS ........................................................ 96
M.3. TAX RULES AND REGULATIONS ........................... 20
D.3. INCOME TAX ON SPECIAL CORPORATIONS .......... 97
M.4. PENAL PROVISIONS OF TAX LAWS ...................... 21
D.4. IMPROPERLY ACCUMULATED EARNINGS TAX .... 100
M.5. NON-RETROACTIVE APPLICATION OF TAX LAWS TO
TAXPAYERS ................................................................ 21 D.5 EXEMPTION FROM TAX ON CORPORATIONS ....... 102
N. SOURCES OF TAX LAWS ..................................... 21 D.6. TAX ON GENERAL PARTNERSHIPS, GENERAL

PROFESSIONAL PARTNERSHIPS, CO-OWNERSHIPS,
O. DOCTRINES IN TAXATION ................................... 22 JOINT VENTURES AND CONSORTIUMS ...................... 103
O.1. PROSPECTIVITY OF TAX LAWS .............................. 22 E. FILING OF RETURNS AND PAYMENT OF INCOME TAX
O.2. IMPRESCRIPTIBILITY OF TAXES ........................... 22 ........................................................................... 104
O.3. DOUBLE TAXATION .............................................. 23 E.1. DEFINITION OF A TAX RETURN AND INFORMATION
RETURN................................................................... 104
O.4. POWER TO TAX INVOLVES POWER TO DESTROY .... 24
O.5. ESCAPE FROM TAXATION .................................... 24
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E.2. PERIOD TO FILE INCOME TAX RETURN OF F. TRANSFERS WHICH MAY BE CONSTITUTED AS
INDIVIDUALS AND CORPORATIONS .......................... 105 DONATION ........................................................... 131
E.3. PERSONS LIABLE TO FILE INCOME TAX RETURNS105 G. TRANSFER FOR LESS THAN ADEQUATE AND FULL
E.4. WHERE TO FILE INCOME TAX RETURNS .............. 106 CONSIDERATION ................................................. 132
E.5. PENALTIES FOR NON-FILING OF RETURNS ......... 107 H. CLASSIFICATION OF DONOR ............................ 132
F. WITHHOLDING OF TAXES .................................. 107 I. DETERMINATION OF GROSS GIFT (INCLUDING
F.1. CONCEPT OF WITHHOLDING TAXES .................... 107 COMPOSITION OF GROSS GIFT)............................ 133
F.2. KINDS OF WITHHOLDING TAXES ......................... 107 J. VALUATION OF GIFTS MADE IN PROPERTY ......... 134
K. TAX CREDIT FOR DONOR‘S TAXES PAID IN A
FOREIGN COUNTRY .............................................. 135
TAXATION 2 L. EXEMPTIONS OF GIFTS FROM DONOR‘S TAX ..... 136
I. ESTATE TAX ........................................... 109 M. PERSON LIABLE .............................................. 136
A. BASIC PRINCIPLES .......................................... 109 N. TAX BASIS ....................................................... 136
B. DEFINITION..................................................... 109 III. VALUE-ADDED TAX (VAT) ................... 143

C. NATURE ........................................................... 109 A. CONCEPT ......................................................... 143
D. PURPOSE OR OBJECT ...................................... 109 B. CONSTITUTIONALITY OF VAT ............................. 143
E. TIME AND TRANSFER OF PROPERTIES .............. 109 C. CHARACTERISTICS/ELEMENTS OF A VAT-TAXABLE
F. CLASSIFICATION OF DECEDENT ........................ 110 TRANSACTION ..................................................... 143
F.1. CONCEPT OF RESIDENCE .................................. 110 D. IMPACT OF TAX V. INCIDENT OF TAX .................. 144
F.2. RULE OF RECIPROCITY....................................... 111 E. TAX CREDIT METHOD ........................................ 144
G. GROSS ESTATE VIS-À-VIS NET ESTATE .............. 112 F. DESTINATION PRINCIPLE .................................. 144
H. DETERMINATION OF GROSS ESTATE AND NET G. PERSONS LIABLE............................................. 145

ESTATE (AND COMPOSITION) ............................... 112 H. VAT ON SALE OF GOODS OR PROPERTIES ......... 145
VALUATION OF GROSS ESTATE (SEC 88) ............... 114 I. ZERO-RATED SALES OF GOODS OR PROPERTIES,
J. ITEMS TO BE INCLUDED IN GROSS ESTATE ........ 114 AND EFFECTIVELY ZERO-RATED SALES OF GOODS OR
PROPERTIES ........................................................ 148
K. DEDUCTIONS FROM ESTATE............................. 117
J. TRANSACTIONS DEEMED SALE (SEC. 106 (B) .... 150
K.1. ORDINARY DEDUCTIONS ................................... 117
K. CHANGE OR CESSATION OF STATUS AS VAT-
L. EXCLUSIONS FROM ESTATE.............................. 123
REGISTERED PERSON (SEC 106[C]) ..................... 150
M. TAX CREDIT FOR ESTATE TAXES PAID IN A FOREIGN
L. VAT ON IMPORTATION OF GOODS ..................... 151
COUNTRY ............................................................ 124
M. VAT ON SALE OF SERVICE AND USE OR LEASE OF
N. FILING OF NOTICE OF DEATH ............................ 128
PROPERTIES ........................................................ 152
O. ESTATE TAX RETURN ........................................ 128
N. ZERO-RATED SALE OF SERVICES ...................... 154
II. DONOR’S TAX ....................................... 131 O. VAT EXEMPT TRANSACTIONS ............................ 154
A. BASIC PRINCIPLES .......................................... 131 Q. SOURCES OF INPUT TAX ................................... 161
B. DEFINITION ..................................................... 131 R. PERSONS WHO CAN AVAIL OF INPUT TAX CREDIT
C. NATURE ........................................................... 131 ........................................................................... 161
D. PURPOSE OR OBJECT ...................................... 131 S. DETERMINATION OF OUTPUT/INPUT TAX; VAT
PAYABLE; EXCESS INPUT TAX CREDITS ................. 162
E. REQUISITES OF VALID DONATION ..................... 131
S.1. DETERMINATION OF OUTPUT TAX ...................... 162
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S.2. DETERMINATION OF INPUT TAX CREDITABLE ...... 162 G.1. PERIODS OF ASSESSMENT AND COLLECTION OF
LOCAL TAXES, FEES OR CHARGES ............................ 221
S.3. ALLOCATION OF INPUT TAX ON MIXED
TRANSACTIONS ....................................................... 162 G.2. PROTEST OF ASSESSMENT ............................... 221
T. SUBSTANTIATION OF INPUT TAX CREDITS .......... 162 G.3. CLAIM FOR REFUND OF TAX CREDIT FOR
ERRONEOUSLY OR ILLEGALLY COLLECTED TAX, FEE OR
U. REFUND OR TAX CREDIT OF EXCESS INPUT TAX (CF CHARGE .................................................................. 221
REFUND OF ERRONEOUSLY PAID TAXES) .............. 167
H. CIVIL REMEDIES BY THE LGU FOR COLLECTION OF
V. INVOICING REQUIREMENTS ............................. 168 REVENUES ........................................................... 221
W. FILING OF RETURN AND PAYMENT ................... 171 H.1. LOCAL GOVERNMENT‘S LIEN FOR DELINQUENT
X. WITHHOLDING OF FINAL VAT ON SALES TO TAXES, FEES OR CHARGES ....................................... 221
GOVERNMENT ..................................................... 171 H.2. CIVIL REMEDIES, IN GENERAL........................... 221
IV. TAX REMEDIES UNDER THE NIRC ....... 182 I. REAL PROPERTY TAXATION ................................ 222
A. TAXPAYER‘S REMEDIES ................................... 182 I.1. FUNDAMENTAL PRINCIPLES (CAPUE) ................. 222
B. GOVERNMENT‘S REMEDIES ............................. 190 I.2. NATURE OF REAL PROPERTY TAX ........................ 223
I.3. IMPOSITION OF REAL PROPERTY TAX .................. 223
V. ORGANIZATION AND FUNCTION OF THE
I.4. APPRAISAL AND ASSESSMENT OF REAL PROPERTY
BUREAU OF INTERNAL REVENUE............ 199 TAX.......................................................................... 225
A. POWERS OF THE CIR ........................................ 199 I.5. DECLARATION OF REAL PROPERTY ..................... 225
B. ORGANIZATION AND FUNCTION OF THE BIR ...... 200 I.6. LISTING OF REAL PROPERTY IN THE ASSESSMENT
ROLLS ..................................................................... 225
VI. LOCAL GOVERNMENT CODE OF 1991, AS
I.7. APPRAISAL AND VALUATION OF REAL PROPERTY 225
AMENDED ................................................ 209
I.8. ASSESSMENT OF REAL PROPERTY ..................... 226
A. LOCAL GOVERNMENT TAXATION ....................... 209
I.9. COLLECTION OF REAL PROPERTY TAX ................. 227
C. TAXING POWERS OF MUNICIPALITIES ............... 214
I.10. SPECIAL RULES ON PAYMENT .......................... 227
C.1. TAX ON VARIOUS TYPES OF BUSINESSES........... 214
J. TAXPAYER‘S REMEDIES..................................... 228
C.2 CEILING ON BUSINESS TAX IMPOSSIBLE ON
MUNICIPALITIES WITHIN METRO MANILA.................. 216 J.1. ADMINISTRATIVE ............................................... 228
C.3. TAX ON RETIREMENT ON BUSINESS................... 216 J.2. JUDICIAL ........................................................... 229
C.4 RULES ON PAYMENT OF BUSINESS TAX .............. 216 VII. TARIFF AND CUSTOMS CODE OF 1978,
C.5. FEES AND CHARGES FOR REGULATION & AS AMENDED ........................................... 233
LICENSING .............................................................. 216
A. TARIFF AND DUTIES, DEFINED .......................... 233
C.6. SITUS OF TAX COLLECTED ................................. 216
B. GENERAL RULE: ALL IMPORTED ARTICLES ARE
D. TAXING POWERS OF BARANGAYS .................... 217 SUBJECT TO DUTY [SEC. 101, TCC; SEC. 104, CMTA]
E. COMMON REVENUE RAISING POWERS ............. 217 ........................................................................... 233
F. COMMUNITY TAX .............................................. 219 C. PURPOSE FOR IMPOSITION .............................. 233
F.1. TAX PERIOD AND MANNER OF PAYMENT ............ 220 D. FLEXIBLE TARIFF CLAUSE ................................. 233
F.2. ACCRUAL OF TAX ............................................... 220 E. REQUIREMENTS OF IMPORTATION .................... 234
F.3. TIME OF PAYMENT ............................................. 221 E.1. BEGINNING AND ENDING OF IMPORTATION....... 234
F.4. PENALTIES ON UNPAID TAXES, FEES OR CHARGES E.2. OBLIGATIONS OF IMPORTER ............................. 234
............................................................................... 221
F. IMPORTATION IN VIOLATION OF TCC ................. 238
F.5. AUTHORITY OF TREASURER IN COLLECTION AND
F.1. SMUGGLING ..................................................... 238
INSPECTION OF BOOKS............................................ 221
F.2. OTHER FRAUDULENT PRACTICES ....................... 238
G. TAXPAYER‘S REMEDIES ................................... 221
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G. CLASSIFICATION OF GOODS ............................ 239 B. JUDICIAL PROCEDURES ................................... 255
G.1. TAXABLE IMPORTATION .................................... 239 B.1. JUDICIAL ACTION FOR COLLECTION OF TAXES ... 255
G.2. PROHIBITED IMPORTATION ............................... 239 B.2. CIVIL CASES ..................................................... 256
G.3. CONDITIONALLY-FREE IMPORTATION ................ 239 B.3. CRIMINAL CASES ............................................. 258
H. CLASSIFICATION OF DUTIES............................. 244 C. TAXPAYER‘S SUIT IMPUGNING THE VALIDITY OF TAX
H.1. ORDINARY/REGULAR DUTIES ........................... 244 MEASURES OR ACTS OF TAXING AUTHORITIES ...... 258
H.2. SPECIAL DUTIES ............................................... 247 C.1. TAXPAYER‘S SUIT, DEFINED .............................. 258
C.2. DISTINGUISHED FROM CITIZEN‘S SUIT .............. 259
I. REMEDIES ........................................................ 247
C.3. REQUISITES FOR CHALLENGING THE
I.1. GOVERNMENT.................................................... 247
CONSTITUTIONALITY OF A TAX MEASURE OR ACT OF
I.2. TAXPAYER .......................................................... 248 TAXING AUTHORITY .................................................. 259
VIII. JUDICIAL REMEDIES .......................... 254

A. JURISDICTION OF THE COURT OF TAX APPEALS . 254
A.1. CIVIL TAX CASES ............................................... 254
A.2. CRIMINAL CASES .............................................. 254
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UP LAW BOC TAXATION 1 TAXATION LAW
TAXATION LAW
TAXATION 1
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police power of the state. These regulatory purposes are

I. General Principles of also known as Sumptuary. Thus, taxation can:
Taxation (1) Strengthen anemic enterprises or provide incentive
to greater production through grant of tax
exemptions or the creation of conditions conducive
A. DEFINITION, CONCEPT AND PURPOSE to their growth.
OF TAXATION
(2) Protect local industries against foreign competition
A.1. TAXATION by imposing additional taxes on imported goods, or
encourage foreign trade by providing tax incentives
(1) Is a mode of raising revenue for public purpose; the on imported goods.
exercise of sovereign power to raise revenue for the
expense of the government. (3) Be a bargaining tool by setting tariff rates first at a
relatively high level before trade negotiations are
(2) The process or means by which the sovereign, entered into with another country.
through its law-making body, raises income to defray
the necessary expenses of government; a method of (4) Halt inflation in periods of prosperity to curb
apportioning the cost of government among those who spending power; ward off depression in periods of
in some measure are privileged to enjoy its benefits and slump to expand business.
must, therefore, bear its burdens [51 Am. Jur. 34; 1 (5) Reduce inequalities in wealth and incomes, as for
Cooley 72-93]. instance, the estate, donor's and income taxes,
(3) As a power, it refers to the inherent power of the their payers being the recipients of unearned wealth
state to demand enforced contributions for public or mostly in the higher income brackets. Progressive
purpose or purposes. system of taxation prevents the undue concentration
of wealth in the hands of a few individuals.
(4) Is described as a destructive power which interferes Progressivity is keystoned on the principle that those
with the personal and property rights of the people and who are able to pay shoulder the bigger portion of
takes from them a portion of their property for the the tax burden. [Mamalateo]
support of the government. [Paseo Realty &
Development Corporation v. CA, G.R. No. 119286 (6) Taxes may be levied to promote science and
(2004)] invention (see RA. No. 5448) or to finance
educational activities (see RA. No. 5447) or to
improve the efficiency of local police forces in the
A.2. PURPOSE maintenance of peace and order through grant of
1) Revenue-raising subsidy (see RA.No. 6141).
Primary purpose of taxation is to provide funds or (7) Be an implement of the police power to promote the
property with which to promote the general welfare and general welfare.
protection of its citizens.
(8) Protect local industries from foreign competition.
Fees may be properly regarded as taxes even though
Taxation is no longer envisioned as a measure
they also serve as an instrument of regulation. If the
merely to raise revenue to support the existence of
purpose is primarily revenue, or if revenue is, at least,
the government; taxes may be levied with a
one of the real and substantial purposes, then the
regulatory purpose to provide means for the
exaction is properly called a tax. [PAL v. Edu, G.R. No. L-
rehabilitation and stabilization of a threatened
41383 (1988)]
industry which is affected with public interest as to
be within the police power of the state. [Caltex v.
2) Non-revenue/special or regulatory COA, G.R. No. 92585 (1992)]
Taxation is often employed as a device for regulation by
means of which certain effects or conditions envisioned
by governments may be achieved. Taxes may be levied B. NATURE AND CHARACTERISTICS OF
with a regulatory purpose to provide means for the TAXATION
rehabilitation and stabilization of a threatened industry
which is affected with public interest as to be within the
B.1 NATURE
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1) Inherent in sovereignty – The power to tax is an (1) It is an enforced contribution for its imposition is in
attribute of sovereignty. It is a power emanating from no way dependent upon the will or assent of the
necessity. It is a necessary burden to preserve the person taxed. It is not contractual, either express or
State's sovereignty and a means to give the citizenry an implied, but positive acts of government.
army to resist an aggression, a navy to defend its shores
(2) It is generally payable in the form of money,
from invasion, a corps of civil servants to serve, public
although the law may provide payment in kind (e.g.
improvement designed for the enjoyment of the
backpay certificates under Sec. 2, R.A. No. 304, as
citizenry and those which come within the State's
amended);
territory, and facilities and protection which a
government is supposed to provide [Phil. Guaranty Co., (3) It is proportionate in character or is laid by some
Inc. v. Commissioner, G.R. No. L-22074 (1965)]. rule of apportionment which is usually based on
ability to pay.
―The rule of taxation shall be uniform and equitable.
2) Essentially a legislative function – The power to tax is
The Congress shall evolve a progressive system of
peculiarly and exclusively legislative and cannot be
taxation.‖ [Sec. 28 (1), Art. VI, 1987 Constitution]
exercised by the executive or judicial branch of the
government [1 Cooley 160-161]. Hence, only Congress, (4) It is levied on persons, property, rights, acts,
our national legislative body, can impose taxes. The privileges, or transactions.
levy of a tax, however, may also be made by a local
(5) It is levied by the State which has jurisdiction or
legislative body subject to such limitations as may be control over the subject to be taxed.
provided by law. It includes the authority to:
(6) It is personal to the taxpayer.
(a) Determine the nature, purpose, extent, coverage,
apportionment, situs, and method of collection of (7) It is levied by the law-making body of the State. The
the tax; power to tax is a legislative power but is also
granted to local governments, subject to such
(b) Grant tax exemptions or condonations; and
guidelines and limitations as law may be provided
(c) Specify or provide for the administrative as well as by law.
judicial remedies that either the government or the ―Each local government unit shall have the power to
taxpayers may avail themselves in the proper create its own sources of revenues and to levy taxes,
implementation of the tax measure. fees, and charges subject to such guidelines and
limitations as the Congress may provide, consistent
with the basic policy of local autnomy. Such taxes,
3) Subject to constitutional and inherent limitations –
fees, and charges shal accrue exclusively to the
The power to tax is said to be the strongest of all the
local governments.‖ [Sec. 5, Art. X, 1987
powers of government. It is unlimited, plenary,
Constitution];
comprehensive and supreme, in the absence of
constitutional restrictions, the principal check on its (8) It is levied for public purpose. Revenues derived
abuse resting in the responsibility of members of from taxes cannot be used for purely private
Congress to their constituents. However, the power of purposes or for the exclusive benefit of private
taxation is subject to constitutional and inherent persons. [Gaston v. Republic Planters Bank, G.R. No.
limitations [Mamalateo]. These limitations are those 77194 (1988)]. The ―public purpose or purposes‖
provided in the fundamental law or implied therefrom, of the imposition is implied in the levy of tax.
while the rest spring from the nature of the taxing power [Mendoza v. Municipality, G.R. No. L-7373 (1954)].
itself although they may or may not be provided in the A tax levied for a private purpose constitutes a
Constitution. taking of property without due process of law; and
(9) It is also an important characteristic of most taxes
that they are commonly required to be paid at
B.2 CHARACTERISTICS regular periods or intervals (see 1 Cooley 64) every
year.
C. POWER OF TAXATION AS DISTINGUISHED FROM POLICE POWER AND EMINENT DOMAIN

([Mamalateo, Reviewer on Taxation 2nd Edition (2008), Rex Bookstore, Inc., pp. 11-12)
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TAXATION EMINENT DOMAIN POLICE POWER

Authority (who May be exercised only by the May be exercised by the
exercises the Power) government or its political government or its political
May be exercised only by the
subdivisions. subdivisions or may be
government or its political
granted to public service
subdivisions.
companies or public utilities.
Purpose The property (generally in the The use of the property is

form of money) is taken for the ―regulated‖ for the purpose of
Merely a power to take private
support of the government. promoting the general
property for public use.
welfare; it is not
compensable.
Persons Affected Operates upon a community Operates on an individual as Operates upon a community
or class of individuals. the owner of a particular or a class of individuals.
property.
Effect The money contributed There is no transfer of title. At
becomes part of the public most, there is restraint on the
There is a transfer of the right
funds. injurious use of property.
to property.
Benefits Received It is assumed that the He receives the market value The person affected receives
individual receives the of the property taken from indirect benefits as may arise
equivalent of the tax in the him. from the maintenance of a
form of protection and healthy economic standard of
benefits he receives from the society.
government.
Amount of Generally, there is no limit on No amount imposed but Amount imposed should not
Imposition the amount of tax that may be rather the owner is paid the be more than sufficient to
imposed. market value of property cover the cost of the license
taken. and necessary expenses.
Relationship to Subject to constitutional Inferior to the impairment Relatively free from
Constitution limitations, including the prohibition; government constitutional limitations and
prohibition against cannot expropriate private is superior to the impairment
impairment of the obligation property, which under a of contract provision.
of contracts. contract had previously bound
itself to purchase from the
other contracting party.
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D. THEORY AND BASIS OF TAXATION (4) Jurisdiction over subject and objects
The limited powers of sovereignty are confined to
objects within the respective spheres of
(1) Lifeblood theory
governmental control. These objects are the proper
Taxes are the lifeblood of the government and their
subjects or objects of taxation and none else.
prompt and certain availability is an imperious need.
[CIR v. Pineda, G.R. No. L-22734 (1967)]
Taxes are the lifeblood of the government and so E. PRINCIPLES OF A SOUND TAX
should be collected without unnecessary hindrance. SYSTEM
It is said that taxes are what we pay for civilized (1) Fiscal adequacy
society. Without taxes, the government would be The sources of tax revenue should coincide with, and
paralyzed for lack of the motive power to activate approximate the needs of, government expenditures.
and operate it [CIR v. Algue, G.R. No. L-28896 The revenue should be elastic or capable of
(1988)]. expanding or contracting annually in response to
variations in public expenditures.
(2) Necessity theory
The power of taxation proceeds upon theory that the (2) Administrative feasibility
existence of government is a necessity; that is Tax laws should be capable of convenient, just and
cannot continue without means to pay its expenses; effective administration. Each tax should be capable
and that for those means it has the right to compel of uniform enforcement by government officials,
all citizens and property within its limits to convenient as to the time, place, and manner of
contribute. payment, and not unduly burdensome upon, or
The power to tax, an inherent prerogative, has to be discouraging to business activity.
availed of to assure the performance of vital state
functions. It is the source of the bulk of public funds.
[Sison v. Ancheta, G.R. No. L-59431 (1984)] (3) Theoretical justice or equality
The tax burden should be in proportion to the
The obligation to pay taxes rests upon the necessity taxpayer‘s ability to pay. This is the so-called ability
of money for the support of the state. For this reason, to pay principle. Taxation should be uniform as well
no one is allowed to object to or resist the payment as equitable
of taxes solely because no personal benefit to him
can be pointed out. [Lorenzo v. Posadas, G.R. No. L- Note: The non-observance of the above principles
43082 (1937)] will not necessarily render the tax imposed invalid
except to the extent those specific constitutional
limitations are violated. (De Leon)
(3) Benefits-protection Theory (Symbiotic
Relationship)
This principle serves as the basis of taxation and is
F. SCOPE AND LIMITATIONS OF
founded on the reciprocal duties of protection and
support between the State and its inhabitants. TAXATION
Despite the natural reluctance to surrender part of F.1. INHERENT LIMITATIONS
one's hard earned income to the taxing authorities, (a) Public Purpose
every person who is able to must contribute his The proceeds of the tax must be used (a) for the
share in the running of the government. The support of the State or (b) for some recognized
government for its part is expected to respond in the objects of government or directly to promote the
form of tangible and intangible benefits intended to welfare of the community.
improve the lives of the people and enhance their
moral and material values. This symbiotic Test: Whether the statute is designed to promote the
relationship is the rationale of taxation and should public interest, as opposed to the furtherance of the
dispel the erroneous notion that it is an arbitrary advantage of individuals, although each advantage
method of exaction by those in the seat of power. to individuals might incidentally serve the public.
[CIR v. Algue, supra] [Pascual v. Sec. of Public Works, G.R. No. L-10405
(1960)]
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The protection and promotion of the sugar industry (i) General Rule: Delegata potestas non potest
is a matter of public concern; the legislature may delegari. The power to tax is exclusively vested in the
determine within reasonable bounds what is legislative body and it may not be re-delegated.
necessary for its protection and expedient for its
Judge Cooley enunciates the doctrine in the
promotion. [Lutz v. Araneta, G.R. No. L-7859
following oft-quoted language: "One of the settled
(1955)]
maxims in constitutional law is that the power
The public purpose of a tax may legally exist even if conferred upon the legislature to make laws cannot
the motive which impelled the legislature to impose be delegated by that department to any other body
the tax was to favor one industry over another. [Tio v. or authority. Where the sovereign power of the state
Videogram, G.R. No. L-75697 (1987)] has located the authority, there it must remain; and
by the constitutional agency alone the laws must be
made until the Constitution itself is charged.‖
Tests in Determining Public Purpose:
[People v. Vera, G.R. No. L-45685, November 16,
(1) Duty Test - Whether the thing to be furthered by
1937]
the appropriation of public revenue is something
which is the duty of the State as a government to Legislature has the power to determine the:
provide.
(1) nature (kind),
(2) Promotion of General Welfare Test - Whether the
(2) object (purpose),
proceeds of the tax will directly promote the
welfare of the community in equal measure. (3) extent (rate),
(3) Character of the Direct Object of the Expenditure (4) coverage (subjects) and
– It is the essential character of the direct object (5) situs (place) of taxation.
of the expenditure which must determine its
validity as justifying a tax and not the magnitude
of the interests to be affected nor the degree to (ii) Exceptions
which the general advantage of the community,
and thus the public welfare, may be ultimately (a) Delegation to local governments – This
benefited by their promotion. Incidental exception is in line with the general principle
advantage to the public or to the State, which that the power to create municipal corporations
results from the promotion of private enterprises for purposes of local self-government carries
or business, does not justify their aid with public with it, by necessary implication, the power to
money. [Pascual v. Sec. of Public Works, supra] confer the power to tax on such local
governments. (1 Cooley 190). This is logical for
after all, municipal corporations are merely
(b) Inherently Legislative instrumentalities of the state for the better
Stated in another way, taxation may exceptionally administration of the government in respect to
be delegated, subject to such well-settled matters of local concern. [Pepsi-Cola Bottling Co.
limitations as: of the Phil. Inc. v. Mun. of Tanauan, G.R. No. L-
31156 (1976)]. Under the new Constitution,
(1) The delegation shall not contravene any however, LGUs are now expressly given the
constitutional provision or the inherent
power to create its own sources of revenue and
limitations of taxation; to levy taxes, fees and charges, subject to such
(2) The delegation is effected either by the guidelines and limitations as the Congress may
Constitution or by validly enacted legislative provide which must be consistent with the basic
measures or statute; and policy of local autonomy. [Art. X, Sec 5, 1987
Constitution]
(3) The delegated levy power, except when the
delegation is by an express provision of the (b) Delegation to the President
Constitution itself, should only be in favor of the
(1) to enter into Executive agreements; and
local legislative body of the local or municipal
government concerned. [Vitug and Acosta] (2) to ratify treaties which grant tax
exemption subject to Senate
concurrence.
PAGE 6 OF 275
The Congress may, by law, authorize the the protection for which a tax is supposed to be a
President to fix within specified limits, and compensation.
subject to such limitations and restrictions as it
may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other Note: Where privity of relationship exists. It does not
duties or imposts within the framework of the mean, however, that a person outside of state is no
national development program of the longer subject to its taxing powers. The fundamental
Government. [Art. 6, Sec. 28(2), 1987 basis of the right to tax is the capacity of the
Constitution] government to provide benefits and protection to
the object of the tax. A person may be taxed where
(c) Delegation to administrative agencies –
there is between him and the taxing state, a privity
Limited to the administrative implementation
of the relationship justifying the levy. Thus, the
that calls for some degree of discretionary
citizen‘s income may be taxed even if he resides
powers under sufficient standards expressed
abroad as the personal (as distinguished from
by law or implied from the policy and purposes
territorial) jurisdiction of his government over him
of the Act.
remains. In this case, the basis of the power to tax is
(1) There are certain aspects of the taxing not dependent on the source of the income nor upon
process that are not legislative and they the location of the property nor upon the residence
may, therefore, be vested in an of the taxpayer but upon his relation as a citizen to
administrative body. The powers which the state. As such citizen, he is entitled, wherever he
are not legislative include: (1) the power may be, inside or outside of his country, to the
to value property for purposes of protection of his government.
taxation pursuant to fixed rules; (2) the
power to assess and collect the taxes;
and (3) the power to perform any of the (d) International Comity
innumerable details of computation, Comity – respect accorded by nations to each other
appraisement, and adjustment, and the because they are sovereign equals. Thus, the
delegation of such details. property or income of a foreign state or government
(2) The exercise of the above powers is may not be the subject of taxation by another state.
really not an exception to the rule as no Reasons:
delegation of the strictly legislative
(1) In par in parem non habet imperium. As
power to tax is involved. between equals there is no sovereign (Doctrine
(3) The powers which cannot be delegated of Sovereign Equality among states under
include the determination of the international law). One state cannot exercise its
subjects to be taxed, the purpose of the sovereign powers over another.)
tax, the amount or rate of the tax, the (2) In international law, a foreign government may
manner, means, and agencies of
not be sued without its consent → useless to
collection, and the prescribing of the
impose a tax which could not be collected.
necessary rules with respect thereto.
(3) Usage among states that when a foreign
sovereign enters the territorial jurisdiction of
(c) Territorial another, there is an implied understanding that
Rule: A state may not tax property lying outside its the former does not intend to degrade its dignity
borders or lay an excise or privilege tax upon the by placing itself under the jurisdiction of the
exercise or enjoyment of a right or privilege derived other.
from the laws of another state and therein exercise
and enjoyed. (51 Am.Jur. 87-88).
(e) Exemption of Government Entities, Agencies, and
Reasons: Instrumentalities
(1) Tax laws (and this is true of all laws) do not
operate beyond a country‘s territorial limits. If the taxing authority is the National Government:
General Rule: Agencies and instrumentalities of the
(2) Property which is wholly and exclusively within
government are exempt from tax.
the jurisdiction of another state receives none of
PAGE 7 OF 275
Note: Unless otherwise provided by law, the The rule of taxation shall be uniform and equitable.
exemption applies only to government entities Congress shall evolve a progressive system of
through which the government immediately and taxation. [Art. VI, Sec. 28(1), 1987 Constitution]
directly exercises its sovereign powers. With respect
(1) Uniformity – All taxable articles or properties of
to government-owned or controlled corporations
the same class shall be taxed at the same rate.
performing proprietary (not governmental) functions,
[City of Baguio v. de Leon, G.R. No. L-24756
they are generally subject to tax in the absence of
(1968)].
tax exemption provisions in their charters or the law
creating them. (a) Uniformity of operation throughout tax unit -
The rule requires the uniform application and
Reasons for the exemption:
operation, without discrimination, of the tax
(a) To levy a tax upon public property would render in every place where the subject of it is found.
necessary new taxes on other public property for the This means, for example, that a tax for a
payment of the tax so laid and thus, the government national purpose must be uniform and equal
would be taxing itself to raise money to pay over for throughout the country and a tax for a
itself. province, city, municipality, or barangay must
be uniform and equal throughout the
(b) This immunity also rests upon fundamental
province, city, municipality or barangay.
principles of government, being necessary in order
that the functions of government shall not be unduly (b) Equality in burden – Uniformity implies
impeded. (1 Cooley 263). equality in burden, not equality in amount or
(c) The practical effect of an exemption running to equality in its strict and literal meaning. The
the benefit of the government is merely to reduce reason is simple enough. If legislation
imposes a single tax upon all persons,
the amount of money that has to be handled by the
properties, or transactions, an inequality
government in the course of its operations: For
these reasons, provisions granting exemptions to would obviously result considering that not
government agencies may be construed liberally in all persons, properties, and transactions are
favor of non-tax liability of such agencies. [Maceda v. identical or similarly situated. Neither does
Macaraig, Jr., G.R. No. 88291 (1991)]. uniformity demand that taxes shall be
proportional to the relative value or amount
Exception: There is no constitutional prohibition of the subject thereof. Taxes may be
against the government taxing itself. [Coll. v. Bisaya progressive.
Land Transportation, 105 Phil. 338 (1959)].
(2) Equity
If the taxing authority is a local government unit: RA
7160 expressly prohibits LGUs from levying tax on (a) Uniformity in taxation is effected through the
the National Government, its agencies and apportionment of the tax burden among the
instrumentalities and other LGUs. [Sec. 133 (o), taxpayers which under the Constitution must be
equitable. ―Equitable‖ means fair, just, reasonable
Local Government Code]
and proportionate to the taxpayer‘s ability to pay.
Taxation may be uniform but inequitable where the
amount of the tax imposed is excessive or
F.2. CONSTITUTIONAL LIMITATIONS
unreasonable.
(b) The constitutional requirement of equity in
(a) Provisions Directly Affecting Taxation taxation also implies an approach which employees
(i) Prohibition against imprisonment for non- a reasonable classification of the entities or
payment of poll tax individuals who are to be affected by a tax. Where
No person shall be imprisoned for debt or non- the ―tax differentiation is not based on material or
payment of a poll tax. [Art. III, Sec. 20, 1987 substantial differences,‖ the guarantee of equal
Constitution] protection of the laws and the uniformity rule will
likewise be infringed.
(ii) Uniformity and equality of taxation
PAGE 8 OF 275
Taxation does not require identity or equality under shall be exempt from taxation.
all circumstances, or negate the authority to classify
(c) The tax exemption under this constitutional
the objects of taxation.
provision covers property taxes only and not
Classification, to be valid, must be reasonable and
other taxes [Lladoc v. Commissioner, G.R. No. L-
this requirement is not deemed satisfied unless:
19201 (1965)].
(1) It is based upon substantial distinctions which
make real differences;
In general, special assessments are not covered by
(2) These are germane to the purpose of the
the exemption because by nature they are not
legislation or ordinance;
classified as taxes. [Apostolic Prefect v. City
(3) The classification applies not only to present Treasurer of Baguio, G.R. No. L-47252 (1941)]
conditions but also to future conditions
substantially identical to those of the present;
and To be entitled to the exemption, the petitioner must
(4) The classification applies equally to all those prove that:
who belong to the same class. [Pepsi-Cola v. (1) It is a charitable institution
Butuan City, G.R. No. L-22814 (1968)]
(2) Its real properties are actually, directly and
The progressive system of taxation would place exclusively used for charitable purposes.
stress on direct rather than indirect taxes, on non-
essentiality rather than essentiality to the taxpayer
of the object of taxation, or on the taxpayer‘s ability Revenue or income from trade, business or other
to pay. Example is that individual income tax system activity, the conduct of which is not related to the
that imposes rates progressing upwards as the tax exercise or performance of religious, educational
base (taxpayer‘s taxable income) increases. A and charitable purposes or functions shall be
progressive tax, however, must not be confused with subject to internal revenue taxes when the same is
a progressive system of taxation. not actually, directly or exclusively used for the
intended purposes. [BIR Ruling 046-2000]
While equal protection refers more to like treatment
of persons in like circumstances, uniformity and
equity refer to the proper relative treatment for tax
Test of Use of the property, and not the
purposes of persons in unlike circumstances.
Exemption ownership
Actual, direct and exclusive use
(iii) Grant by Congress of authority to the President Nature of Use for religious, charitable or
to impose tariff rates educational purposes.
Delegation of Tariff powers to the President under
the flexible tariff clause [Sec. 28(2), Art. VI, 1987 Real property taxes on facilities
Constitution], which authorizes the President to which are
modify import duties. [Sec. 1608, Customs (1) actual,
Modernization and Tariff Act; previously, Sec. 401,
(2) incidental to, or
TCC]
(3) reasonably necessary for the
accomplishment of said
(iv) Prohibition against taxation of religious, Scope of purposes such as in the case
charitable entities, and educational entities Exemption of hospitals, a school for
Art. VI, Sec. 28(3), 1987 Constitution: training nurses, a nurses‘
home, property to provide
(a) Charitable institutions, churches and
housing facilities for interns,
personages or convents appurtenant thereto,
resident doctors and other
mosques, non-profit cemeteries, and all lands,
members of the hospital staff,
buildings, and improvements,
and recreational facilities for
(b) Actually, directly, and exclusively used for student nurses, interns and
religious, charitable, or educational purposes residents, such as athletic
PAGE 9 OF 275
fields. [Abra Valley College v. Art. XIV, Sec. 4, 1987 Constitution

Aquino, G.R. No. L-39086
(3) All revenues and assets of non-stock, non-profit
(1988)]
educational institutions used actually, directly, and
exclusively for educational purposes shall be
exempt from taxes and duties.
TEST: Whether an enterprise is charitable or not:
whether it exists to carry out a purpose recognized in Proprietary educational institutions, including those
law as charitable or whether it is maintained for gain, cooperatively owned, may likewise be entitled to
profit, or private advantage. such exemptions subject to the limitations provided
by law, including restrictions on dividends and
A charitable institution does not lose its character
provisions for reinvestment.
as such and its exemption from taxes simply
because it derives income from paying patients, (4) Subject to conditions prescribed by law, all
whether out-patient, or confined in the hospital, or grants, endowments, donations, or contributions
receives subsidies from the government, so long as used actually, directly, and exclusively for
the money received is devoted or used altogether to educational purposes shall be exempt from tax.
the charitable object which it is intended to achieve;
and no money inures to the private benefit of the
persons managing or operating the institution. This provision covers only non-stock, non-profit
educational institutions.
―Exclusive" - possessed and enjoyed to the
exclusion of others; debarred from participation or The exemption covers income, property, and donor‘s
enjoyment; "Exclusively" - "in a manner to exclude; taxes, custom duties, and other taxes imposed by
as enjoying a privilege exclusively.‖ either or both the national government or political
subdivisions on all revenues, assets, property or
If real property is used for one or more commercial
donations, used actually, directly and exclusively for
purposes, it is not exclusively used for the exempted
educational purposes. (In the case of religious and
purposes but is subject to taxation. The words
charitable entities and non-profit cemeteries, the
"dominant use" or "principal use" cannot be
exemption is limited to property tax.)
substituted for the words "used exclusively" without
doing violence to the Constitution and the law. The exemption does not cover revenues derived from,
Solely is synonymous with exclusively. [Lung Center or assets used in, unrelated activities or enterprise.
of the Philippines v. Quezon City, G.R. No. 144104
Similar tax exemptions may be extended to
(2004)]
proprietary (for profit) educational institutions by
Note: Lung Center did not necessarily overturn the law subject to such limitations as it may provide,
case of Abra Valley College v. Aquino. Lung Center including restrictions on dividends and provisions
just provided a stricter interpretation. In Abra Valley, for reinvestment. The restrictions are designed to
the Court held: The primary use of the school lot and insure that the tax-exemption benefits are used for
building is the basic and controlling guide, norm educational purposes.
and standard to determine tax exemption, and not
Lands, buildings, and improvements actually,
the mere incidental use thereof. Under the 1935
directly and exclusively used for educational
Constitution, the trial court correctly held that the
purposes are exempt from property tax [Sec. 28(3),
school building as well as the lot where it is built,
Art. VI, 1987 Constitution], whether the educational
should be taxed, not because the second floor of the
institution is proprietary or non-profit.
same is being used by the Director and his family for
residential purposes (incidental to its educational
purpose), but because the first floor thereof is being
Art. VI, Sec. 28, par. 3 Art. XIV, Sec. 4, par. 3
used for commercial purposes. However, since only
a portion is used for purposes of commerce, it is Charitable institutions, Non-stock, non-profit
only fair that half of the assessed tax be returned to churches and parsonages educational
the school involved. or convents appurtenant institutions.
thereto, mosques, non-
profit cemeteries, and all
(v) Prohibition against taxation of non-stock, non- lands, buildings, and
profit educational institutions improvements, actually,
PAGE 10 OF 275
Art. VI, Sec. 28, par. 3 Art. XIV, Sec. 4, par. 3 conditions as they may deem necessary. [Sec.
192, LGC]
directly, and exclusively
used for religious, (2) The President of the Philippines may, when
charitable, or public interest so requires, condone or reduce
educational purposes. the real property tax and interest for any year in
any province or city or a municipality within the
Property taxes Income, property, and Metropolitan Manila Area. [Sec. 277, LGC]
donor‘s taxes and
custom duties.
(vii) Prohibition on use of tax levied for special
purpose
(vi) Majority vote of Congress for grant of tax All money collected on any tax levied for a special
exemption purpose shall be treated as a special fund and paid
Art. VI, Sec. 28, 1987 Constitution. No law granting out for such purpose only.
any tax exemption shall be passed without the
concurrence of a majority of all the Members of the If the purpose for which a special fund was created
Congress. has been fulfilled or abandoned, the balance, if any,
shall be transferred to the general funds of the
Government. [Gaston v. Republic Planters Bank,
Basis: The inherent power of the state to impose G.R. No. L-77194 (1988)].
taxes carries with it the power to grant tax
exemptions.
(viii) President‘s veto power on appropriation,
revenue, tariff bills
Exemptions may be created by: Art. VI, Sec. 27(2), 1987 Constitution. The President
shall have the power to veto any particular item or
(1) The Constitution, or items in an appropriation, revenue, or tariff bill, but
(2) Statutes, subject to constitutional limitations the veto shall not affect the item or times to which
he does not object.
Vote required for the grant of exemption: Absolute
majority of the members of Congress (at least ½ + 1
of ALL the members voting SEPARATELY)
(ix) Non-impairment of jurisdiction of the Supreme
Vote required for withdrawal of such grant of Court
exemption: Relative majority is sufficient (majority Art VIII, Sec. 2, 1987 Constitution. The Congress
of the quorum). shall have the power to define, prescribe, and
apportion the jurisdiction of the various courts but
The provision guaranteeing equal protection of the
may not deprive the Supreme Court of its
laws and that mandating the rule of taxation shall
jurisdiction over cases enumerated in Section 5
be uniform and equitable likewise limit, although
not expressly, the legislative power to grant tax hereof.
exemption.
Grants in the nature of tax exemptions: Art. VIII, Sec. 5(2(b)), 1987 Constitution. The
Supreme Court shall have the following powers:
(1) Tax amnesties
(2) Review, revise, modify or affirm on appeal or
(2) Tax condonations certiorari, as the laws or the Rules of Court may
(3) Tax refunds provide, final judgments and orders of lower courts
in
(b) all cases involving the legality of any tax,
Note: impost, assessment or toll or any penalty
(1) Local government units may, through imposed in relation thereto.
ordinances duly approved, grant tax exemptions,
incentives or reliefs under such terms and
Even the legislative body cannot deprive the SC of
its appellate jurisdiction over all cases coming from
PAGE 11 OF 275
inferior courts where the constitutionality or validity Art. VI, Sec. 29, 1987 Constitution
of an ordinance or the legality of any tax, impost,
(1) No money shall be paid out of the Treasury
assessment, or toll is in question. [San Miguel Corp
except in pursuance of an appropriation made
v. Avelino, G.R. No. L-39699 (1979)]
by law.
(2) No public money or property shall be
Art. VI, Sec. 30, 1987 Constitution. No law shall be appropriated, applied, paid, or employed,
passed increasing the appellate jurisdiction of the directly or indirectly, for the use, benefit, or
Supreme Court without its advice and concurrence. support of any sect, church, denomination,
sectarian institution, or system of religion, or of
any priest, preacher, minister, other religious
Scope of Judicial Review in taxation: limited only to teacher, or dignitary as such, except when such
the interpretation and application of tax laws. Its priest, preacher, minister, or dignitary is
power does not include inquiry into the policy of assigned to the armed forces, or to any penal
legislation. Neither can it legitimately question or institution, or government orphanage or
refuse to sanction the provisions of any law leprosarium.
consistent with the Constitution. [Coll. v. Bisaya
(3) All money collected on any tax levied for a
Land Transportation, 105 Phil. 338 (1959)].
special purpose shall be treated as a special
fund and paid out for such purpose only. If the
purpose for which a special fund was created
(x) Grant of power to the local government units to
has been fulfilled or abandoned, the balance, if
create its own sources of revenue
any, shall be transferred to the general funds of
LGUs have power to create its own sources of
the Government
revenue and to levy taxes, fees and charges, subject
to such guidelines and limitations as the Congress
may provide which must be consistent with the basic
(b) Provisions Indirectly Affecting Taxation
policy of local autonomy. [Art. X, Sec. 5, 1987
(i) Due process
Constitution]
Art. III, Sec. 1, 1987 Constitution. No person shall
be deprived of life, liberty, or property without due
(xi) Flexible tariff clause process of law, nor shall any person be denied the
Delegation of tariff powers to the President under equal protection of the laws.
the flexible tariff clause [Art. VI, Sec. 28(2), 1987
Constitution]
(1) Substantive Due Process – An act is done under
Flexible tariff clause: the authority given to the the authority of a valid law or the Constitution
President, upon the recommendation of NEDA, to itself.
adjust the tariff rates under Sec. 1608 of the CMTA
(previously, Sec. 401, CMTA) in the interest of (2) Procedural Due Process – An act is done after
national economy, general welfare and/or national compliance with fair and reasonable methods or
security. procedure prescribed by law.
Due Process in Taxation requirements:
(xii) Exemption from real property taxes (1) Public purpose

Art. VI, Sec. 28(3), 1987 Constitution (2) Imposed within taxing authority‘s territorial
Charitable institutions, churches and personages or jurisdiction
convents appurtenant thereto, mosques, non-profit (3) Assessment or collection is not arbitrary or
cemeteries, and all lands, buildings, and oppressive
improvements, actually, directly, and exclusively
The due process clause may be invoked where a
used for religious, charitable, or educational
taxing statute is so arbitrary that it finds no support
purposes shall be exempt from taxation.
in the Constitution, as where it can be shown to
amount to the confiscation of property. [Sison v.
(xiii) No appropriation or use of public money for Ancheta, G.R. No. L-59431(1984)]
religious purposes
PAGE 12 OF 275
Instances of violations of the due process clause: civil and political rights.
(1) If the tax amounts to confiscation of property;
(2) If the subject of confiscation is outside the The free exercise clause is the basis of tax
jurisdiction of the taxing authority; exemptions.
(3) If the tax is imposed for a purpose other than a The imposition of license fees on the distribution
public purpose; and sale of bibles and other religious literature by a
(4) If the law which is applied retroactively imposes non-stock, non-profit missionary organization not
just and oppressive taxes. for purposes of profit amounts to a condition or
permit for the exercise of their right, thus violating
(5) If the law violates the inherent limitations on the constitutional guarantee of the free exercise and
taxation. enjoyment of religious profession and worship which
carries with it the right to disseminate religious
beliefs and information. [American Bible Society v.
(ii) Equal protection City of Manila, G.R. No. L-9637 (1957)] It is actually
Art. III, Sec. 1, 1987 Constitution. No person shall be in the nature of a condition or permit for the exercise
deprived of life, liberty, or property without due of the right. This is different from a tax in the income
process of law, nor shall any person be denied the of one who engages in religious activities or a tax on
equal protection of the laws. property used or employed in connection with those
activities. It is one thing to impose a tax on the
All persons subject to legislation shall be treated income or property of a preacher. It is quite another
alike under similar circumstances and conditions thing to exact a tax for the privilege of delivering a
both in the privileges conferred and liabilities sermon.
imposed. (1 Cooley 824-825; See Sison v. Ancheta, The Constitution, however, does not prohibit
supra). imposing a generally applicable tax on the sale of
The doctrine does not require that persons or religious materials by a religious organization.
properties different in fact be treated in laws as [Tolentino v. Secretary of Finance, G.R. No. 115455
though they were the same. Indeed, to treat them (1994)]
the same or alike may offend the Constitution. What
the Constitution prohibits is class legislation which
discriminates against some and favors others. As (iv) Non-impairment of obligations of contracts
long as there are rational or reasonable grounds for Art. III, Sec. 10, 1987 Constitution. No law
so doing, Congress may, therefore, group the impairing the obligation of contracts shall be
persons or properties to be taxed and it is sufficient passed.
―if all of the same class are subject to the same rate
and the tax is administered impartially upon them.‖
(1 Cooley 608). The Contract Clause has never been thought as a
limitation on the exercise of the State's power of
The equal protection clause is subject to reasonable taxation save only where a tax exemption has been
classification (See requisites for valid classification, granted for a valid consideration. [Tolentino v.
supra). Secretary of Finance, supra]
(iii) Religious freedom

Art. III, Sec. 5, 1987 Constitution. No law shall be G. STAGES OR ASPECTS OF TAXATION
made respecting an establishment of religion, or The exercise of taxation involves the following
prohibiting the free exercise thereof. (Non- stages:
establishment clause)
(1) Levy or imposition – This process involves the
The free exercise and enjoyment of religious passage of tax laws or ordinances through the
profession and worship, without discrimination or legislature. The tax laws to be passed shall
preference, shall forever be allowed. (Free exercise determine those to be taxed (person, property or
clause) rights), how much is to be collected (the rate and
No religious test shall be required for the exercise of the base of tax), and how taxes are to be
PAGE 13 OF 275
implemented (the manner of imposing and (b) It is assessed in accordance with some
collecting tax). It also involves the granting of tax reasonable rule of apportionment which
exemptions, tax amnesties or tax condonation. means that conformably with the
constitutional mandate for Congress to evolve
(2) Assessment and collection – This process
a progressive tax system, taxes must be based
involves the act of administration and
on taxpayer‘s ability to pay [Art VI, Sec 28[a],
implementation of tax laws by the executive
1987 Constitution]
through its administrative agencies such as the
Bureau of Internal Revenue or Bureau of (c) It is a pecuniary burden payable in money.
Customs.
(d) It is imposed by the State on persons, property,
(3) Payment – this process involves the act of or exercise within its jurisdiction, in
compliance by the taxpayer in contributing his accordance with the principle of territoriality.
share to pay the expenses of the government.
(e) It is levied by the legislative body of the State.
Payment of tax also includes the options,
schemes or remedies as may be legally open or (f) It is levied for a public purpose.
available to the taxpayer. (g) It is personal to the taxpayer.
(4) Refund – A claim for refund must first be filed
with the Commissioner of Internal Revenue. A
suit or proceeding may be filed within two years I. REQUISITES OF A VALID TAX
from the date of payment of the tax or penalty
regardless of any supervening cause that may (1) For a public purpose;
arise after payment. The Commissioner may, (2) Rule of taxation should be uniform;
even without a written claim therefor, refund or
(3) The person or property taxed is within the
credit any tax, where on the face of the return,
jurisdiction of the taxing authority;
such payment appears clearly to have been
erroneously paid. [Sec. 229, NIRC] (4) Assessment and collection is in consonance
with the due process clause; AND
(5) The tax must not infringe on the inherent and
H. DEFINITION, NATURE AND constitutional limitations of the power of
CHARACTERISTICS OF TAXES taxation.
H.1 TAXES
J. TAX AS DISTINGUISHED FROM OTHER
(a) Are enforced proportional contributions from
FORMS OF EXACTIONS
persons and property levied by the law-making body
of the State by virtue of its sovereignty for the (1) Tariff
support of the government and all public needs. Taxes Tariff
(b) Are the enforced proportional and pecuniary All embracing term to A kind of tax imposed on
contributions from persons and property levied by include various kinds of articles which are traded
the law-making body of the state having jurisdiction enforced contributions internationally
over the subject of the burden for the support of the upon persons for the
government and public needs. attainment of public
purposes
(c) Are what we pay for civilized society. Without
taxes, the government would be paralyzed for lack of
the motive power to activate and operate it. [CIR v.
(2) Toll
Algue, supra]
Taxes Toll
Paid for the support of Paid for the use of
Essential Characteristics the government another‘s property.
(a) It is a forced charge, imposition or contribution. Demand of sovereignty Demand of
As such, it operates ad infinitum. proprietorship
PAGE 14 OF 275
Taxes Toll License is in the nature of a special privilege, of a

permission or authority to do what is within its terms.
Generally, no limit on the Amount paid depends
It makes lawful an act which would otherwise be
amount collected as long upon the cost of
unlawful. A license granted by the State is always
as it is not excessive, construction or
revocable. [Gonzalo Sy Trading vs. Central Bank of
unreasonable or maintenance of the
the Phil.,G.R. No. L-41480 (1976)]
confiscatory public improvement
used.
Importance of the distinctions
Imposed only by the Imposed by the (1) It is necessary to determine whether a particular
government government or by private imposition is a tax or a license fee because some
individuals or entities. limitations apply only to one and not to the other,
A toll is a sum of money for the use of something, and for the reason that exemption from taxes
generally applied to the consideration which is paid may not include exemption from license fee.
for the use of a road, bridge or the like, of a public (2) The power to regulate as an exercise of police
nature. (1 Cooley 77.)
power does not include the power to impose fees
The view has been expressed, however, that the for revenue purposes. The amount of tax bears
taking of tolls is only another method of taxing the no relation at all to the probable cost of
public for the cost of the construction and repair of regulating the activity, occupation, or property
the improvement for the use of which the toll is being taxed. [Progressive Development Corp. vs.
charged. (71 Am. Jur. 2d 351.) Quezon City, G.R. No. L-36081 (1989)]
(3) An exaction, however, may be considered both a
tax and a license fee. This is true in the case of
(3) License fee
car registration fees which may be regarded as
Taxes License and Regulatory
taxes even as they also serve as an instrument of
Fee
regulation. If the purpose is primarily revenue, or
Imposed under the Levied under the police if revenue, is, at least, one of the real and
taxing power of the state power of the state. substantial purposes, then the exaction is
for purposes of revenue. properly called a tax. [Phil. Airlines, Inc. vs. Edu,
G.R. No. L- 41383 (1988)]
Forced contributions for Exacted primarily to
the purpose of regulate certain (4) But a tax may have only a regulatory purpose.
maintaining government businesses or The general rule, however, is that the imposition
functions. occupations. is a tax if its primary purpose is to generate
revenue, and regulation is merely incidental; but
Generally unlimited as to Should not unreasonably if regulation is the primary purpose, the fact that
amount exceed the expenses of incidentally revenue is also obtained does not
issuing the license and make the imposition a tax. [Progressive
of supervision. Development Corp. vs. Quezon City, supra]
Imposed on persons, Imposed only on the
property and the right to right to exercise a
exercise a privilege. privilege Primary purpose test (as seen in Progressive
Development Corp v. QC):
Failure to pay does not Failure to pay makes the
necessarily make the act act or business illegal. (1) Imposition must relate to an occupation or
or business illegal. activity that so engages the public interest in
health, morals, safety and development as to
Penalty for non-payment: require regulation for the protection and
surcharges or promotion of such public interest;
imprisonment (except
poll tax). (2) Imposition must bear a reasonable relation to
the probable expenses of regulation, taking into
account not only the costs of direct regulation
License or permit fee is a charge imposed under the but also its incidental consequences as well.
police power for purposes of regulation.
PAGE 15 OF 275
Note: Taxes may also be imposed for regulatory Taxes Debt

purposes. It is called regulatory tax.
assigned
Fees may be properly regarded as taxes even though
they also served as an instrument of regulation. If Generally paid in money May be paid in kind
the purpose is primarily revenue, or if revenue is, at Cannot be a subject of Can be a subject of set
least, one of the real and substantial purposes, then set off or compensation off or compensation (see
the exaction is properly called a tax. [PAL v. Edu, Art. 1279, Civil Code)
supra]
Imprisonment is a A person cannot be
sanction for non- imprisoned for non-
(4) Special assessment payment of tax, except payment of debt (except
Taxes Special Assessment poll tax when it arises from a
Levied not only on land Levied only on land crime)
Imposed regardless of Imposed because of an Governed by the special Governed by the ordinary
public improvements increase in value of land prescriptive periods periods of prescription
benefited by public provided for in the NIRC
improvement Does not draw interest Draws interest when it is
Contribution of a Contribution of a person except only when so stipulated or where
taxpayer for the support for the construction of a delinquent there is default
of the government public improvement Imposed only by public Can be imposed by
It has general Exceptional both as to authority private individual
application both as to time and locality
time and place
A tax is not a debt in the ordinary sense of the word.
A special assessment is not a personal liability of (6) Penalty

the person assessed, i.e., his liability is limited only Taxes Penalty
to the land involved. It is based wholly on benefits
(not necessity). Violation of tax laws may Any sanction imposed as
give rise to imposition of a punishment for
A charge imposed only on property owners benefited penalty violation of law or acts
is a special assessment rather than a tax deemed injurious
notwithstanding that the statute calls it a tax. The
rule is that an exemption from taxation does not Generally intended to Designed to regulate
include exemption from special assessment. But the raise revenue conduct
power to tax carries with it the power to levy a May be imposed only by May be imposed by the
special assessment. the government government or private
Note: The term "special levy" is the name used in individuals or entities
the present Local Government Code (RA. No. 7160). Cannot be a subject of Can be a subject of set
A province, city, or municipality, or the National set off or compensation off or compensation (see
Government, may impose a special levy on lands Art. 1279, Civil Code)
especially benefited by public works or
improvements financed by it. [Sec. 240, RA 7160]
K. KINDS OF TAXES
(5) Debt (1) As to object
Taxes Debt (a) Personal, Poll or Capitation Tax – tax of a
fixed amount imposed on persons residing
Based on laws Generally based on within a specified territory, whether citizens
contract, express or or not, without regard to their property or the
implied. occupation or business in which they may be
Generally cannot be Assignable engaged (e.g. community (formerly
residence) tax). Taxes of a specified amount
PAGE 16 OF 275
imposed upon each person performing a (a) Specific Tax – a tax of a fixed amount
certain act or engaging in a certain business imposed by the head or number or by some
or profession are not, however, poll taxes. other standard of weight or measurement. It
(71 Am. Jur. 2d 357). requires no assessment (valuation) other
than the listing or classification of the
(b) Property Tax – tax imposed on property, real
objects to be taxed (e.g., taxes on distilled
or personal, in proportion to its value or in
spirits, wines, and fermented liquors; cigars
accordance with some other reasonable
and cigarettes)
method of apportionment (e.g., real estate
tax). The obligation to pay the tax is absolute (b) Ad Valorem Tax – a tax of a fixed proportion
and unavoidable and is not based upon the of the value of the property with respect to
voluntary action of the person assessed. which the tax is assessed. It requires the
intervention of assessors or appraisers to
(c) Privilege/Excise Tax – any tax which does not
estimate the value of such property before
fall within the classification of a poll tax or a
the amount due from each taxpayer can be
property tax. Thus, it is said that an excise
determined. The phrase ―ad valorem‖ means
tax is a charge imposed upon the
literally, ―according to value.‖ (e.g., real
performance of an act, the enjoyment of a
estate tax, excise tax on automobiles, non-
privilege, or the engaging in an occupation,
essential goods such as jewelry and
profession, or business. The obligation to pay
perfumes, customs duties (except on
the tax is based on the voluntary action of the
cinematographic films)).
person taxed in performing the act or
engaging in the activity which is subject to (c) Mixed
the excise. The term ―excise tax‖ is
synonymous with ―privilege tax‖ and the two
are often used interchangeably (e.g., income (4) As to purpose
tax, value added tax, estate tax, donor‘s tax). (a) General or Fiscal Tax – levied for the general
or ordinary purposes of the Government, i.e.,
to raise revenue for governmental needs (e.g.,
(2) As to burden or incidence income tax, VAT, and almost all taxes).
(a) Direct Taxes – taxes which are demanded
(b) Special/Regulatory/Sumptuary Tax – levied
from persons who also shoulder them; taxes
for special purposes, i.e., to achieve some
for which the taxpayer is directly or primarily
social or economic ends irrespective of
liable, or which he cannot shift to another
whether revenue is actually raised or not (e.g.,
(e.g., income tax, estate tax, donor‘s tax,
protective tariffs or customs duties on
community tax)
imported goods to enable similar products
(b) Indirect Taxes – taxes which are demanded manufactured locally to compete with such
from one person in the expectation and imports in the domestic market).
intention that he shall indemnify himself at
Tariff duties intended mainly as a source of
the expense of another, falling finally upon
revenue are relatively low so as not to
the ultimate purchaser or consumer; taxes
discourage imports.
levied upon transactions or activities before
the articles subject matter thereof, reach the
consumers who ultimately pay for them not (5) As to scope (or authority imposing the tax)
as taxes but as part of the purchase price. (a) National – taxes imposed by the national
Thus, the person who absorbs or bears the government (e.g., national internal revenue
burden of the tax is other than the one on
taxes, customs duties, and national taxes
whom it is imposed and required by law to imposed by laws).
pay the tax. Practically all business taxes are
indirect (e.g., VAT, percentage tax, excise (b) Municipal or Local – taxes imposed by local
taxes on specified goods, customs duties). governments (e.g., business taxes that may
be imposed under the Local Government
Code, professional tax).
(3) As to tax rates
PAGE 17 OF 275
(6) As to graduation (4) Citizenship of the taxpayer;

(a) Progressive – The rate of tax increases as the tax
(5) Residence of the taxpayer;
base or bracket increases, e.g., income tax,
estate tax, donor‘s tax. (6) Source of income.
(b) Regressive – The rate of tax decreases as the tax
base or bracket increases. There is no regressive
(b) Situs of Income Tax
tax in the Philippines.
Taxpayer Source of Income
(c) Proportionate – The rate of tax is based on a
fixed percentage of the amount of the property, Citizen-ship Residency Within Without
receipts or other basis to be taxed, e.g., real Phils. Phils.
estate tax, VAT, and other percentage taxes.
Filipino Resident Taxable Taxable
(d) Digressive – A fixed rate is imposed on a certain
amount and diminishes gradually on sums below Filipino Non- Taxable Non-
it. The tax rate in this case is arbitrary because Resident Taxable
the increase in tax rate is not proportionate to Alien Resident Taxable Non-
the increase of tax base. Taxable
Alien Non- Taxable Non-
Regressive/Progressive system of taxation Resident Taxable
A regressive tax must not be confused with the
regressive system of taxation.
(c) Situs of Property Tax
In a society where the majority of the people have
low incomes, regressive taxation system exists when Kind of Property Situs
there are more indirect taxes imposed than direct Real property Where it is located (lex
taxes. Since the low-income sector of the population rei sitae)
as a whole buys more consumption goods on which
the indirect taxes are collected, the burden of Tangible Personal Where property is
indirect taxes rests more on them than on the more property physically located
affluent groups. although the owner
resides in another
A progressive tax is, therefore, also different from a jurisdiction.
progressive system of taxation.
Intangible personal Gen Rule: Domicile of
property (e.g., credits, the owner. Mobilia
L. SITUS OF TAXATION bills receivables, bank sequuntur personam
deposits, bonds, (movables follow the
(a) Meaning: Situs of taxation literally means the promissory notes, person)
place of taxation. The basic rule is that the state mortgage loans,
where the subject to be taxed has a situs may judgments and
rightfully levy and collect the tax; and the situs is corporate stocks) Exceptions:
necessarily in the state which has jurisdiction or
which exercises dominion over the subject in (1) When property has
question. Within the territorial jurisdiction, the acquired a business
taxing authority may determine the situs. situs in another
jurisdiction; or
(2) When the law
Factors that Determine Situs: provides for the situs
(1) Nature of the tax; of the subject of tax
(2) Subject matter of the tax (person, property, act (e.g., Sec 104, NIRC)
or activity);
(3) Possible protection and benefit that may accrue (d) Situs of Excise Tax
both to the government and the taxpayer;
PAGE 18 OF 275
Kind of Excise Tax Situs doubt as to the legislative intent. (see 51

Am.Jur.368). In such case, the words employed
Income Tax Source of the income, are to be given their ordinary meaning. E.g. Word
nationality or residence ―individual‖ was changed by the law to ―person‖.
of taxpayer (Sec. 23,
This clearly indicates that the tax applies to both
NIRC) natural and juridical persons, unless otherwise
Donor‘s Tax Location of property; expressly provided.
nationality or residence (2) The rule does not apply where the taxpayer
of taxpayer claims exemption from the tax.
Estate Tax Location of property; Tax statutes are to receive a reasonable
nationality or residence construction or interpretation with a view to carrying
of taxpayer out their purpose and intent. They should not be
construed as to permit the taxpayer easily to evade
the payment of tax. (Carbon Steel Co. v. Lewellyn,
(e) Situs of Business Tax 251 U.S. 201). Thus, the good faith of the taxpayer
Kind of Business Tax Situs is not a sufficient justification for exemption from
the payment of surcharges imposed by the law for
VAT Where transaction is failing to pay tax within the period required by law.
made
Sale of Real Property Where the real property
is located M.2. TAX EXEMPTION AND EXCLUSION
Sale of Personal Where the personal Tax exemptions must be shown to exist clearly and
Property property was sold categorically, and supported by clear legal
provisions. [NPC v. Albay, G.R. No. 87479 (1990)]
General Rule: In the construction of tax statutes,
exemptions are not favored and are construed
M. CONSTRUCTION AND strictissimi juris against the taxpayer. [Republic
INTERPRETATION OF Flour Mills v. Comm. & CTA, G.R. No. L-25602
(1970)].
M.1. TAX LAWS
(a) NPC v. Albay [supra]: Tax exemptions must be
General Rule: Tax laws are construed strictly against shown to exist clearly and categorically, and
the government and liberally in favor of the taxpayer. supported by clear legal provisions.
[Manila Railroad Co. v. Coll. of Customs, G.R. No. L-
30264 (1929)]. (b) Floro Cement v. Gorospe [supra]: Claims for an
exemption must be able to point out some
No person or property is subject to taxation unless provision of law creating the right, and cannot be
within the terms or plain import of a taxing statute. allowed to exist upon a mere vague implication
(see72 Am.Jur. 2d 44). or inference.
Taxes, being burdens, they are not to be presumed (c) CIR v. CA [supra]: Refunds are in the nature of
beyond what the statute expressly and clearly exemption, and must be construed strictly
declares. [Coll. v. La Tondena, G.R. No. L-10431 against the grantee/taxpayer.
(1962)]. Thus, a tax payable by ―individuals‖ does
not apply to ―corporations.‖ (d) Comm. v. Kiener Co. Ltd. [G.R. No. L-24754
(1975)]: Taxation is the rule and exemption the
Tax statutes offering rewards are liberally construed exception, and therefore, he who claims
in favor of informers. [Penid v. Virata, G.R. No. L- exemption must be able to justify his claim or
44004 (1983)]. right thereto, by a grant expressed in terms ―too
plain to be mistaken and too categorical to be
misinterpreted.‖
Exceptions:
(1) The rule of strict construction as against the
government is not applicable where the Exceptions:
language of the statute is plain and there is no
PAGE 19 OF 275
(a) When the law itself expressly provides for a void. As a matter of policy, however, courts will
liberal construction, that is, in case of doubt, it declare a regulation or provision thereof invalid only
shall be resolved in favor of exemption; and when the conflict with the law is clear and
unequivocal.
(b) When the exemption is in favor of the
government itself or its agencies, or of religious,
charitable, and educational institutions because Administrative interpretations and opinions
the general rule is that they are exempt from tax. The power to interpret the provisions of the Tax Code
and other tax laws is under the exclusive and
(c) When the exemption is granted under special
original jurisdiction of the Commissioner of Internal
circumstances to special classes of persons.
Revenue subject to review by the Secretary of
(d) If there is an express mention or if the taxpayer Finance [Sec. 4, par.1, NIRC].
falls within the purview of the exemption by clear
Revenue regulations are the formal interpretation of
legislative intent, the rule on strict construction
the provisions of the NIRC and other laws by the
does not apply. [Comm. v. Arnoldus Carpentry
Secretary of Finance upon the recommendation of
Shop, Inc., G.R. No. 71122 (1988)].
the Commissioner of Internal Revenue.
General rule: The Commissioner has the sole
M.3. TAX RULES AND REGULATIONS authority to issue rulings but he also has the power
to delegate said authority to his subordinates with
General Rule: The Secretary of Finance, upon
the rank equivalent to a division chief or higher.
recommendation of the CIR, shall promulgate all
needful rules and regulations for the effective Exceptions: The Commissioner may not delegate the
enforcement of the provisions of the NIRC. [Sec. following:
244, NIRC] (a) The power to recommend the promulgation of
It is an elementary rule in administrative law that rules and regulations by the Secretary of
administrative regulations and policies enacted by Finance;
administrative bodies to interpret the law which they (b) The power to issue rulings of first impression or
are entrusted to enforce have the force of law and to reverse, revoke, or modify any existing ruling
entitled to great respect. They have in their favor a of the Bureau;
presumption of legality [Gonzales v. Land Bank, G.R.
No. 76759 (1990)] (c) The power to compromise or abate any tax
liability as provided by Sec. 204 and 205 of the
Requisites for validity and effectivity of regulations NIRC
(1) Reasonable
Exception to the exception: BUT assessments issued
(2) Within the authority conferred
by RDOs involving (a) Php500,000 or less, and (b)
(3) Not contrary to law and the Constitution [Art. 7, minor criminal violations as determined by the
NCC] Secretary of Finance as recommended by the
Commissioner, may be compromised by a Regional
(4) Must be published
Evaluation Board (CHAIRMAN: Regional Director;
Tax regulations whose purpose is to enforce of MEMBERS: Assistant Regional Director, heads of
implement existing law must comply with the the Legal, Assessment and Collection Divisions, and
following requisites to be effective [RP v. Pilipinas the Revenue District Officer having jurisdiction over
Shell Petroleum Corp., G.R. No. 173918 (2008)]: the taxpayer.) [Sec. 7, NIRC].
(1) Be published in a newspaper of general Decisions of the Supreme Court applying or
circulation [Art. 2, NCC]; AND interpreting existing tax laws are binding on all
subordinate courts and have the force and effect of
(2) Filed with the UP Law Center Office of the
law. As provided for in Article 8 of the Civil Code,
National Administrative Register (ONAR) [Ch 2,
they ―form part of the law of the land‖.
Book VII, EO 292]
The same is also true with respect to decisions of
Note: Administrative rules and regulations must
the Court of Tax Appeals. However, by the nature of
always be in harmony with the provisions of the law.
its jurisdiction, the decisions of this court are still
In case of conflict with the law or the Constitution,
the administrative rules and regulations are null and
PAGE 20 OF 275
appealable to the Supreme Court by a petition for

review on certiorari (Rule 45). [Sec. 11, RA 9282] (c) Judicial Decisions
These refer to the decisions for application made
concerning tax issues by the proper courts
M.4. PENAL PROVISIONS OF TAX LAWS exercising judicial authority of competent
Penal provisions of tax laws must be strictly jurisdiction. These courts may be the Supreme Court
construed. It is not legitimate to stretch the and the Court of Tax Appeals. Their decisions on tax
language of a rule, however beneficent its intention, laws comprise the greater portion of tax
beyond the fair and ordinary meaning of its jurisprudence. They form part of the legal system of
language. the Philippines.
A penal statute should be construed strictly against
By the nature of its jurisdiction, the decisions of the
the State and in favor of the accused. The reason for
Court of Tax Appeals are still appealable to the
this principle is the tenderness of the law for the
Supreme Court. The decision of the Supreme Court
rights of individuals and the object is to establish a
on any matter is fuanl and executory.
certain rule by conformity to which mankind would
be safe, and the discretion of the court limited.
(d) Executive Orders
[People v. Purisima, G.R. No. L-42050-66 (1978)].
Executive Orders are regulations issued by the
President or some administrative authority under his
direction for the purpose of interpreting,
M.5. NON-RETROACTIVE APPLICATION OF implementing, or giving administrative effect to a
TAX LAWS TO TAXPAYERS provision of the Constitution or of some law or treaty.
General rule: Tax laws are prospective in operation.
The reason is that the nature and amount of the tax (e) Tax Treaties and Conventions
could not be foreseen and understood by the These refer to the treaties or international
taxpayer at the time the transaction which the law agreements with foreign countries regarding tax
seeks to tax was completed. enforcement and exemptions. They have the force
and effect of alw.
Exception: Tax laws may be applied retroactively
provided it is expressly declared or clearly the (f) Revenue Regulations by the Department of
legislative intent. [Lorenzo v. Posadas, supra]. Finance
Exception to the exception: a tax law should not be Revenue Regulations are rules or orders having
given retroactive application when it would be so force of law issued by executive authority of the
harsh and oppressive for in such case, the government to ensure uniform application of the tax
constitutional limitation of due process would be law.
violated [Republic v. Fernandez, supra].
In order that administrative regulations may be
considered valid, all of the following requisites must
N. SOURCES OF TAX LAWS be complied with:
(1) The regulations must be useful, practical and
necessary for the enforcement of the law;
(a) Constitution of the Philippines (2) They must be reasonable in their provisions;
A constitutional provision regarding taxation is (3) They must not be contrary to law; and
primarily intended to limit and regulate the exercise (4) They must be duly published in the Official
of taxation power. The State can exercise the power Gazette. [Inter-provincial Auto Bus Co. v.
to tax even if the Constitution is completely silent Collector, 52 O.G. No. 2, p. 791; Lim Hoa Ting
about taxation. v. Central Bank, L-10666, (1958)]
(b) Statutes Note: Ruling of the Secretary of Finance are not
The present tax statutes of the Philippines are binding on the courts because the duty or power of
embodied in R.A. 8424, which is not the prevailing interpreting laws is primarily a function of the
National Internal Revenue Code (NIRC) effective judicialry.
January 1, 1998, which was amended per R.A. 9337
(The VAT Reform Law).
PAGE 21 OF 275
The Secretary of Finance is vested with authority to been foreseen and understood by the taxpayer at
revoke, repeal or abrogate acts or previous rulings of the time of the transaction.
his predecessors in office because these are not
Exception: Tax laws may be applied retroactively
binding on their successors. [Hilado v. Collector of
provided it is expressly declared or it is clearly the
Internal Revenue, et al., 100 Phil 295]
legislative intent (e.g., increase taxes on income
already earned) except when retroactive application
(g) BIR Revenue Memorandu Circulars and Bureau
would be so harsh and oppressive. [Republic v.
of Customs Memorandum Orders
Fernandez, G.R. No. L-9141 (1956)]
These are administrative rulings or opinions which
are less general interpretations of tax laws being It is a cardinal rule that laws shall have no
issued form time to time by the Commissioner of the retroactive effect, unless the contrary is provided
Internal Revenue or Commissioner of the Bureau of (Art. 4, Civil Code). [Hydro Resources v. CA, G.R. No.
Customs, as the case may be. They are primarily 80276 (1990)]
intended to maintain uniform application of tax laws The language of the statute must clearly demand or
within the department or area of authority. press that it shall have a retroactive effect. [Lorenzo
v. Posadas, supra]
Memoranda have the status of advisory or sort of
information service. For this reason, they can be Exception to the exception:
reversed anytime. Collection of interest in tax cases is not penal in
nature; it is but a just compensation to the State.
Note: The Courts generally respect the The constitutional prohibition against ex post facto
interpretations made by the executive officer whose laws is not applicable to the collection of interest on
duty is to enforce the law. However, such back taxes. [Central Azucarera v. CTA, G.R. No. L-
interpretations are not conclusive and shall be 23236 (1967)]
disregarded if found erroneous by the Court. [Molina
v. Rafferty, 37 Phil 545]
Non-retroactivity of rulings [Sec. 246, NIRC]
(h) BIR Rulings General rule: Rulings do not have retroactive
BIR Rulings are expressed official interpretations of application if the revocation, modification, or
the tax laws as applied to specific transactions. reversal will be prejudicial to the taxpayer.
Unlike a Revenue Regulation, it is more limited in
application. Exceptions:
(1) Taxpayer‘s deliberate misstatement or omission
BIR Rulings are not the final interpreations of the tax of facts
laws. They are considered the best opinion or
advisory at the moment and are considered sound (2) BIR‘s gathered facts is materially different from
law until chagned by the court. [CIR v. Ledesma, the facts from which the ruling was based on
(1970)] (3) Taxpayer acted in bad faith
(i) Local Tax Ordinances Note: The rule on non-retroactivity of rulings may be
These are tax ordinances issued by the province, city, applied only if the parties in the ruling involve the
municipality and baranggay subjct to such taxpayer himself/itself. The taxpayer cannot invoke
limitations as provided by the Local Government the rulings granted in favor of the other taxpayers.
Code. [Valencia and Roxas]
O.2. IMPRESCRIPTIBILITY OF TAXES

Unless otherwise provided by law, taxes are
O. DOCTRINES IN TAXATION imprescriptible. [CIR v. Ayala Securities Corporation
G.R. No. L-29485 (1980)]
O.1. PROSPECTIVITY OF TAX LAWS
The law on prescription, being a remedial measure,
General rule: Tax laws are prospective in operation.
should be liberally construed in order to afford such
Reason: Nature and amount of the tax under tax protection. As a corollary, the exceptions to the law
laws enacted after the transaction could not have
PAGE 22 OF 275
on prescription should perforce be strictly construed. payment or duties, or upon completion of the post-
[Commissioner v. CA, G.R. No. 104171 (1999)] clearance audit. (Note: The same rule was provided
under Sec. 1603 of the TCC, but it was worded
differently).
Prescriptions found in statutes
(1) National Internal Revenue Code - statute of
(3) Local Government Code – prescribes
limitations in the assessment and collection of
prescriptive periods for the assessment from the
taxes therein imposed.
date they became due (5 years) and collection (5
Summary of prescription on assessment and years) of taxes (including Real Property Taxes) from
collection: the date of assessment by administrative or judicial
action. The prescriptive period is 3 years if the tax
Prescription of assessment AND
accrued before the effectivity of the Local
collection from the:
Government Code. [Sec. 194 and 270, RA 7160 or
a. prescribed last day of filing of the LGC]. In case of fraud or intent to evade the
returns (even if return was filed payment of taxes, fees, or charges, the same may be
3 YEARS
earlier than the deadline); OR assessed from discovery of the fraud or intent to
b. the day when the return was evade payment (10 years).
actually filed if filed later than the
last day of filing [Sec. 203, NIRC]
The prescriptive period is tolled when:
Prescription of assessment in cases
(a) The treasurer is legally prevented from
of:
making the assessment or collection
a. false or fraudulent return with
(b) The taxpayer requests for a reinvestigation
10 intent to evade tax; OR
and executes a waiver in writing before
YEARS b. failure to file a return [Sec. 222, expiration of the period within which to
NIRC] assess or collect; and
From the discovery of the fraud, (c) The taxpayer is out of the country or
falsity, or omission. otherwise cannot be located.
Prescription of collection of tax if:
a. assessed within the 3-year and O.3. DOUBLE TAXATION
10-year prescriptive periods
Means taxing twice the same taxpayer for the same
b. assessed within the extended tax period upon the same thing or activity, when it
5 YEARS period agreed upon by the should be taxed once, for the same purpose and
Commissioner and taxpayer (waiver with the same kind of character of tax.
of the prescriptive period)
(a) Strict sense (Direct Duplicate Taxation)
Collected by distraint, levy or by a (1) The same property must be taxed twice when it
proceeding in court. [Sec. 222, NIRC] should be taxed once;
Note: The prescriptive period from final liquidation is (2) Both taxes must be imposed on the same
three (3) years, except in cases of: (1) tentative property or subject matter;
liquidation; (2) payment under protest; (3) fraud;
(3) For the same purpose;
and (4) compliance audit.
(4) By the same State, Government, or taxing
authority;
(2) Customs Modernization and Tariffs Act (CMTA) –
(5) Within the same territory, jurisdiction or taxing
repealed the Tariff and Customs Code (TCC). Under
district;
Sec. 430, it provides that ―[i]n the absence of fraud
and when the goods have been finally assessed and (6) During the same taxing period; and
released, the assessment shall be conclusive upon (7) Of the same kind or character of tax.
all parties three (3) years from the date of final
PAGE 23 OF 275
According to Chief Justice John Marshall, "the

power to tax involves the power to destroy."
(b) Broad sense (Indirect Duplicate Taxation)
[McCulloch vs. Maryland, 17 U.S. [4 Wheat.] 316-
There is double taxation in the broad sense or there
428, 4L. ed. 579.] To say, however, that the power
is indirect duplicate taxation if any of the elements
to tax is the power to destroy is to describe not the
for direct duplicate taxation is absent.
purposes for which the taxing power may be used
It extends to all cases in which there is a burden of but the extent to which it may be employed in order
two or more pecuniary impositions. For example, a to raise revenues. (see1 Cooley 178.) Thus, even if a
tax upon the same property imposed by two different tax should destroy a business, such fact alone could
states. not invalidate the tax. (84 C.J.S. 46.)
Double taxation, standing alone and not being Incidentally, our Constitution mandates that "the
forbidden by our fundamental law, is not a valid rule of taxation shall be uniform and equitable." In a
defense against the legality of a tax measure [Pepsi case, our Supreme Court said: "The power of
Cola v. Mun. of Tanauan, G.R. No. L-31156 (1976)]. taxation is sometimes called also the power to
But from it might emanate such defenses against destroy. Therefore, it should be exercised with
caution to minimize injury to the proprietary rights of
taxation as oppressiveness and inequality of the tax.
the taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kills the 'hen that
Constitutionality of double taxation lays the golden eggs.' And in order to maintain the
There is no constitutional prohibition against double general public's trust and confidence in the
taxation in the Philippines. It is something not government, this power must be used justly and not
favored, but is permissible, provided some other treacherously." [Roxas v. Court of Tax Appeals, 23
constitutional requirement is not thereby violated. SCRA 276, App120, 1968; Philex Mining Corp. vs.
[Villanueva v. City of Iloilo, G.R. No. L-26521 Comm. of Internal Revenue, 97 SCAD 777,294
(1968)] SCRA 687 (Aug. 28, 1998)].
If the tax law follows the constitutional rule on
uniformity, there can be no valid objection to taxing Note: Justice Holmes once said: ―The power to ta is
the same income, business or property twice. [China not the power to destroy while this Court (the
Banking Corp. v. CA, G.R. No. 146749 (2003)] Supreme Court) sits.‖ The two limitations on the
power of taxation are the inherent and constitutional
Double taxation in its narrow sense is undoubtedly limitations which are intended to prevent abuse on
unconstitutional but that in the broader sense is not the exercise of the otherwise plenary and unlimited
necessarily so. (De Leon, citing 26 R.C.L 264-265). power. It is the Court‘s role to see to it that the
Where double taxation (in its narrow sense) occurs, exercise of the power does not transgress these
the taxpayer may seek relief under the uniformity limitations.
rule or the equal protection guarantee. (De Leon,
citing 84 C.J.S.138).
O.5. ESCAPE FROM TAXATION
a. Shifting of tax burden
Modes of eliminating double taxation Shifting - the transfer of the burden of a tax by the
(a) Allowing reciprocal exemption either by law or original payer or the one on whom the tax was
by treaty; assessed or imposed to someone else. What is
(b) Allowance of tax credit for foreign taxes paid; transferred is not the payment of the tax but the
burden of the tax. All indirect taxes may be shifted;
(c) Allowance of deductions such as for foreign direct taxes cannot be shifted.
taxes paid, and vanishing deductions in estate
tax; OR (i) Ways of shifting the tax burden
(1) Forward shifting - When the burden of the tax
(d) Reduction of Philippine tax rate. is transferred from a factor of production
through the factors of distribution until it
finally settles on the ultimate purchaser or
O.4. POWER TO TAX INVOLVES POWER TO consumer. Examples: VAT, percentage tax.
DESTROY
(2) Backward shifting - When the burden of the
tax is transferred from the consumer or
PAGE 24 OF 275
purchaser through the factors of distribution a tax. It is also known as ―tax dodging.‖ It is
to the factor of production. Example: punishable by law.
Consumer or purchaser may shift tax imposed
Example: Deliberate failure to report a taxable
on him to retailer by purchasing only after the
income or property; deliberate reduction of income
price is reduced, and from the latter to the
that has been received; overstatement of expenses.
wholesaler, and finally to the manufacturer or
producer.
(3) Onward shifting - When the tax is shifted two Elements of Tax Evasion
or more times either forward or backward. (1) The end to be achieved. Example: the payment
of less than that known by the taxpayer to be
legally due, or in paying no tax when such is due.
(ii) Taxes that can be shifted
(2) An accompanying state of mind described as
being ―evil,‖ ―in bad faith,‖ ―willful‖ or
(a) Value-added Tax
―deliberate and not accidental.‖
(b) Percentage Tax
(c) Excise Tax (3) A course of action (or failure of action) which is
unlawful.
(iii) Meaning of impact and incidence of taxation Since fraud is a state of mind, it need not be proved
Impact of taxation is the point on which a tax is by direct evidence but may be inferred from the
originally imposed. In so far as the law is concerned, circumstances of the case. Thus:
the taxpayer, the subject of tax, is the person who
(1) The failure of the taxpayer to declare for taxation
must pay the tax to the government. purposes his true and actual income derived
Incidence of taxation is that point on which the tax from his business for two consecutive years has
burden finally rests or settles down. It takes place been held as an indication of his fraudulent
when shifting has been effected from the statutory intent to cheat the government of its due taxes.
taxpayer to another. [Republic v. Gonzales, G.R. No. L-17962 (1965)]
Relationship between Impact, Shifting, and (2) The substantial underdeclaration of income in
Incidence of a Tax the income tax returns of the taxpayer for four (4)
The impact is the initial phenomenon, the shifting is consecutive years coupled with his intentional
the intermediate process, and the incidence is the overstatement of deductions justifies the finding
result. Impact is the imposition of the tax; shifting is of fraud. [Perez v. CTA and Collector, G.R. No. L-
the transfer of the tax; while incidence is the setting 10507 (1958)].
or coming to rest of the tax. (e.g. impact in VAT is on
the producer who shifts the burden to the customer
who finally bears the incidence of the tax) Other matter(s):
Transformation – method of escape in taxation
whereby the manufacturer or producer upon whom
b. Tax avoidance (Tax Minimization) the tax has been imposed pays the tax and
The exploitation by the taxpayer of legally endeavors to recoup himself by improving his
permissible alternative tax rates or methods of
process of production thereby turning out his units
assessing taxable property or income in order to of products at a lower cost. The taxpayer escapes by
avoid or reduce tax liability. It is politely called ―tax a transformation of the tax into a gain through the
minimization‖ and is NOT punishable by law. medium of production.
Example: A person refrains from engaging in some
activity or enjoying some privilege in order to avoid
the incidental taxation or to lower his tax bracket for O.6. EXEMPTION FROM TAXATION
a taxable year.
(a) Meaning of exemption from taxation
The grant of immunity to particular persons or
c. Tax evasion (Tax Dodging)
corporations or to person or corporations of a
Tax Evasion - is the use by the taxpayer of illegal or
particular class from a tax which persons and
fraudulent means to defeat or lessen the payment of
corporations generally within the same state or
PAGE 25 OF 275
taxing district are obliged to pay. It is an immunity or exemption may be challenged as violative of the
privilege; it is freedom from a financial charge or equal protection guarantee or the uniformity rule.
burden to which others are subjected. It is strictly
construed against the taxpayer.
(c) Kinds of tax exemption
Taxation is the rule; exemption is the exception. He (i) Express or Affirmative - either entirely or in part,
who claims exemption must be able to justify his may be made by provisions of the Constitution,
claim or right thereto, by a grant expressed in terms statutes, treaties, ordinances, franchises, or
―too plain to be mistaken and too categorical to be contracts.
misinterpreted.‖ If not expressly mentioned in the
(ii) Implied or Exemption by Omission - when a tax is
law, it must at least be within its purview by clear
levied on certain classes without mentioning the
legislative intent.
other classes. Every tax statute, in a very real
sense, makes exemptions since all those not
Grounds for Tax Exemption mentioned are deemed exempted. The omission
(1) It may be based on contract. may be either accidental or intentional.
(2) It may be based on some ground of public policy. Exemptions are not presumed, but when public
property is involved, exemption is the rule, and
(3) It may be created in a treaty on grounds of
taxation is the exception.
reciprocity or to lessen the rigors of international
or multiple taxation. (iii) Contractual - The legislature of a State may, in
the absence of special restrictions in its
But equity is NOT a ground for tax exemption.
constitution, make a valid contract with a
Exemption from tax is allowable only if there is a
corporation in respect to taxation, and that such
clear provision. While equity cannot be used as a
contract can be enforced against the State at the
basis or justification for tax exemption, a law may
instance of the corporation [Casanovas v. Hord,
validly authorize the condonation of taxes on
G.R. No. 3473 (1907)]. In the real sense of the
equitable considerations.
term and where the non-impairment clause of
the Constitution can rightly be invoked, this
(b) Nature of tax exemption includes those agreed to by the taxing authority
(1) Mere personal privilege - cannot be assigned or in contracts, such as those contained in
transferred without the consent of the government bonds or debentures, lawfully
entered into by them under enabling laws in
legislature. The legislative consent to the transfer
may be given either in the original act granting which the government, acting in its private
the exemption or in a subsequent law capacity, sheds its cloak of authority and waives
its governmental immunity.
(2) General rule: revocable by the government.
These contractual tax exemptions, however, are
Exception: if founded on a contract which is not to be confused with tax exemptions granted
protected from impairment. But the contract under franchises. A franchise partakes the
must contain the essential elements of other nature of a grant which is beyond the purview of
contracts. An exemption provided for in a the non-impairment clause of the Constitution.
franchise, however, may be repealed or [Manila Electric Company v. Province of Laguna,
amended pursuant to the Constitution [Art. XII, G.R. No. 131359 (1999)]
Sec. 11, 1987 Constitution]. A legislative
franchise is a mere privilege.
(3) Implies a waiver on the part of the government (d) Rationale of Tax Exemption
of its right to collect taxes due to it, and, in this Such exemption will benefit the body of the people
and not particular individuals or private interest and
sense, is prejudicial thereto. Hence, it exists only
that the public benefit is sufficient to offset the
by virtue of an express grant and must be strictly
construed. monetary loss entailed in the grant of the
exemption.
(4) Not necessarily discriminatory, provided it has
reasonable foundation or rational basis. Where, Principles of Tax Exemption:
(1) As the power of taxation is a high prerogative of
however, no valid distinction exists, the
sovereignty, the relinquishment is never presumed
PAGE 26 OF 275
and any reduction or diminution thereof with respect the NCC, and both debts are extinguished to the
to its mode or its rate, must be strictly construed, concurrent amount. [Domingo v. Garlitos, G.R. No.
and the same must be couched in clear and L-18994 (1963)]
unmistakable terms in order that it may be applied.
[Floro Cement v. Gorospe, G.R. No. L-46787 (1991)]
O.9. COMPROMISE AND TAX AMNESTY
(2) When granted, they are strictly construed against
the taxpayer [Luzon Stevedoring Co. v. CTA, G.R. No. COMPROMISE
L-30232 (1988)] (a) A contract whereby the parties, by making
reciprocal concessions avoid litigation or put an
(3) Tax exemptions are strictly construed against the
taxpayer, they being highly disfavored and may end to one already commenced. (Art. 2028, Civil
almost be said ―to be odious to the law.‖ [Manila Code). It involves a reduction of the taxpayer‘s
Electric Company v. Vera, G.R. No. L-29987 (1975)] liability.
(b) Requisites of a tax compromise:
(e) Revocation of Tax Exemption (1) The taxpayer must have a tax liability.
(2) There must be an offer (by the taxpayer or
General Rule: revocable by the government.
Commissioner) of an amount to be paid by
Exception: Contractual tax exemptions may not be the taxpayer.
unilaterally so revoked by the taxing authority
without thereby violating the non-impairment clause (3) There must be acceptance (by the
Commissioner or the taxpayer, as the case
of the Constitution.
may be) of the offer in settlement of the
original claim.
O.7. DOCTRINE OF EQUITABLE
RECOUPMENT TAX AMNESTY
A claim for refund barred by prescription may be (a) Definition
allowed to offset unsettled tax liabilities. The A tax amnesty partakes of an absolute forgiveness
doctrine finds NO application in this jurisdiction. or waiver by the Government of its right to collect
what otherwise would be due it, and in this sense,
prejudicial thereto, particularly to give tax evaders,
O.8. COMPENSATION AND SET-OFF who wish to relent and are willing to reform a chance
General rule: Internal revenue taxes cannot be the to do so and become a part of the new society with a
subject of set-off or compensation [Republic v. clean slate. [Republic v. IAC, G.R. No. L-69344
Mambulao Lumber, G.R. No. L-17725 (1962)] (1991)]
Reasons: A tax amnesty, much like a tax exemption, is never
favored nor presumed in law. If granted, the terms of
(1) This would adversely affect the government the amnesty, like that of a tax exemption, must be
revenue system [Philex Mining v. CA, G.R. No.
construed strictly against the taxpayer and liberally
125704 (1998)]. in favor of the taxing authority. The State cannot
(2) Government and the taxpayer are not creditors strip itself of the most essential power of taxation by
and debtors of each other. The payment of taxes doubtful words. He who claims an exemption (or an
is not a contractual obligation but arises out of a amnesty) from the common burden must justify his
duty to pay. [Republic v. Mambulao Lumber, claim by the clearest grant of organic or state law. It
supra] cannot be allowed to exist upon a vague implication.
If a doubt arises as to the intent of the legislature,
Exception: If the claims against the government
that doubt must be resolved in favor of the state.
have been recognized and an amount has already
[CIR v. Marubeni Corp., G.R. No. 137377 (2001)].
been appropriated for that purpose. Where both
claims have already become (1) due and (2)
demandable as well as (3) fully liquidated, (b) Amnesty distinguished from tax exemption
compensation takes place by operation of law under
Tax amnesty is immunity from all criminal and civil
Art. 1200 in relation to Articles 1279 and 1290 of obligations arising from non-payment of taxes. It is a
PAGE 27 OF 275
general pardon given to all taxpayers. It applies to The Court has adopted the "direct injury test" to
past tax periods, hence of retroactive application. determine locus standi in public suits. In People v.
[People v. Castañeda, G.R. No. L-46881 (1988)] Vera, it was held that a person who impugns the
validity of a statute must have "a personal and
Tax exemption is immunity from all civil liability only.
substantial interest in the case such that he has
It is an immunity or privilege, a freedom from a
sustained, or will sustain direct injury as a result."
charge or burden of which others are subjected.
the "direct injury test" in public suits is similar to
[Greenfield v. Meer, C.A. No.-156 (1946)]. It is
the "real party in interest" rule for private suits
generally prospective in application (Dimaampao,
under section 2, Rule 3 of the 1997 Rules of Civil
2005, p. 111).
Procedure. [Planter‘s Products, Inc. v. Fertiphil
Corporation, G.R. no. 166006, (March 14, 2008)]
O.10. TAXPAYER’S SUIT As applied to taxation:
It is well-stated that the validity of a statute may be
a. Nature and Concept
contested only by one who will sustain a direct injury
Taxpayer‘s suit – refers to a case where the act
in consequence of its enforcement. Yet, there are
complained of directly involves the illegal
many decisions nullifying, at the instance of
disbursement of public funds derived from taxation.
taxpayers, laws providing for the disbursement of
[Kilosbayan v. Guingona, Jr. (1994)]
public funds, upon the theory that "the expenditure
of public funds by an officer of the state for the
b. As distinguished from a citizen‘s suit
purpose of administering an unconstitutional act
The plaintiff in a taxpayer's suit is in a different
constitutes a misapplication of such funds," which
category from the plaintiff in a citizen's suit. In the
may be enjoined at the request of a taxpayer.
former, the plaintiff is affected by the expenditure of
[Pascual v. Secretary of Public Works (1960)]
public funds, while in the latter, he is but the mere
instrument of the public concern. [De Castro v. A taxpayer is allowed to sue where there is a claim
Judicial and Bar Council (2010)] that public funds are illegally disbursed, or that the
public money is being deflected to any improper
c. Requisites of a taxpayer‘s suit challenging the purpose, or that there is wastage of public funds
constitutionality of a tax measure or act of a taxing through the enforcement of an invalid or
authority; concept of locus standi, doctrine of unconstitutional law. A person suing as a taxpayer,
transcendental importance and ripeness for judicial however, must show that the act complained of
determination directly involves the illegal disbursement of public
(1) Concept of locus standi as applied in taxation funds derived from taxation. He must also prove that
The doctrine of locus standi is the right of he has sufficient interest in preventing the illegal
appearance in a court of justice. The doctrine expenditure of money raised by taxation and that he
requires a litigant to have a material interest in the will sustain a direct injury because of the
outcome of a case. In private suits, locus standi enforcement of the questioned statute or contract.
requires a litigant to be a "real party in interest," In other words, for a taxpayer‘s suit to prosper, two
which is defined as "the party who stands to be requisites must be met:
benefited or injured by the judgment in the suit or
(1) public funds derived from taxation are disbursed
the party entitled to the avails of the suit." by a political subdivision or instrumentality and in
In public suits, this Court recognizes the difficulty of doing so, a law is violated or some irregularity is
applying the doctrine especially when plaintiff committed and
asserts a public right on behalf of the general public
(2) the petitioner is directly affected by the alleged
because of conflicting public policy issues. On one act. [Mamba v. Lara, G.R. no. 165109, (Dec. 14,
end, there is the right of the ordinary citizen to 2009)]
petition the courts to be freed from unlawful
government intrusion and illegal official action. At
the other end, there is the public policy precluding (2) Doctrine of transcendental importance
excessive judicial interference in official acts, which
may unnecessarily hinder the delivery of basic Recognizing that a strict application of the "direct
public services. injury" test may hamper public interest, this court
relaxed the requirement in cases of "transcendental
importance" or with "far reaching implications."
PAGE 28 OF 275
being a mere procedural technicality, it has also

been held that locus standi may be waived in the II. National Taxation
public interest. [Ibid]
Planters Products, Inc. v. Fertiphil Corp.: even A. ORGANIZATION AND FUNCTIONS OF
assuming arguendo that there is no direct injury, We THE BUREAU OF INTERNAL REVENUE
find that the liberal policy consistently adopted by
this court on locus standi must apply. The issues A.1. RULE-MAKING AUTHORITY OF THE
raised by Fertiphil are of paramount public
SECRETARY OF FINANCE
importance. It involves not only the constitutionality
of a tax law but, more importantly, the use of taxes a. Authority of the Secretary of Finance to
for public purpose. Former President Marcos issued promulgate rules and regulations (Sec. 244, NIRC)
LOI no. 1465 with the intention of rehabilitating an The Secretary of Finance, upon recommendation of
ailing private company. This is clear from the text of the CIR, shall promulgate all needful rules and
the LOI. PPI is expressly named in the LOI as the regulations for effective enforcement of the
direct beneficiary of the levy. Worse, the levy was provisions of the Code.
made dependent and conditional upon ppi
becoming financially viable. The LOI provided that
"the capital contribution shall be collected until b. Specific provisions to be contained in rules and
adequate capital is raised to make PPI viable." regulations (Sec. 245, NIRC)
(a) The time and manner in which Revenue
The constitutionality of the levy is already in doubt  Regional Director shall canvass their respective
on a plain reading of the statute. It is our Revenue Regions for the purpose of discovering
constitutional duty to squarely resolve the issue as persons and property liable to national internal
the final arbiter of all justiciable controversies. The revenue taxes, and the manner in which their lists
doctrine of standing, being a mere procedural and records of taxable persons and taxable objects
technicality, should be waived, if at all, to shall be made and kept;  
adequately thresh out an important constitutional (b) The forms of labels, brands or marks to be
issue. required on goods subject to an excise tax, and the
manner in which the labelling, branding or marking
shall be effected;  
(3) Ripeness for judicial determination
(c) The conditions under which and the manner in
―Ripeness for judicial determination‖ means that which goods intended for export, which if not
litigation is inevitable or there is no adequate relief exported would be subject to an excise tax, shall be
available in any other form or proceeding. labelled, branded or marked;
(d) The conditions to be observed by revenue
CJH Development Corp. V. BIR (2008): However, CJH officers respecting the institutions and conduct of
is not left without recourse. The tariff and customs legal actions and proceedings;  
code provides for the administrative and judicial (e) The conditions under which goods intended for
remedies available to a taxpayer who is minded to storage in bonded warehouses shall be conveyed
contest an assessment, subject of course to certain thither, their manner of storage and the method of
reglementary periods. The TCC provides that a keeping the entries and records in connection
protest can be raised provided that payment first be therewith, also the books to be kept by Revenue
made of the amount due. The decision of the Inspectors and the reports to be made by them in
Collector can be reviewed by the Commissioner of connection with their supervision of such houses;  
Customs who can approve, modify or reverse the
decision or action of the Collector. If the party is not (f) The conditions under which denatured alcohol
satisfied with the ruling of the Commissioner, he may be removed and dealt in, the character and
may file the necessary appeal to the Court of Tax quantity of the denaturing material to be used, the
Appeals. Afterwards, the decision of the Court of Tax manner in which the process of denaturing shall be
Appeals can be appealed to this Court. effected, so as to render the alcohol suitably
denatured and unfit for oral intake, the bonds to be
PAGE 29 OF 275
given, the books and records to be kept, the entries Provided, further, That the CIR can exercise this
to be made therein, the reports to be made to the power within six (6) years from the approval of
CIR, and the signs to be displayed in the business Republic Act No. 7646 or the completion of its
ort by the person for whom such denaturing is done comprehensive computerization program, whichever
or by whom, such alcohol is dealt in;   comes earlier:
(g) The manner in which revenue shall be collected Provided, finally, That separate venues for the
and paid, the instrument, document or object to Luzon, Visayas and Mindanao areas may be
which revenue stamps shall be affixed, the mode of designated for the filing of tax returns and payment
cancellation of the same, the manner in which the of taxes by said large taxpayers.
proper books, records, invoices and other papers
For the purpose of this Section, 'large taxpayer'
shall be kept and entries therein made by the person
means a taxpayer who satisfies any of the following
subject to the tax, as well as the manner in which
criteria:
licenses and stamps shall be gathered up and
returned after serving their purposes; (1) Value-Added Tax (VAT) - Business establishment
with VAT paid or payable of at least P100,000 for
(h) The conditions to be observed by revenue
any quarter of the preceding taxable year;
officers respecting the enforcement of Title III
imposing a tax on estate of a decedent, and other (2) Excise tax - Business establishment  with
transfers mortis causa, as well as on gifts and such excise tax paid or payable of at least P1,000,000
other rules and regulations which the CIR may for the preceding taxable year;  
consider suitable for the enforcement of the said
(3) Corporate Income Tax - Business establishment
Title III;   with annual income tax paid or payable of at least
(i) The manner in which tax returns, information and P1,000,000 for the preceding taxable year; and  
reports shall be prepared and reported and the tax
(4) Withholding tax - Business establishment with
collected and paid, as well as the conditions under
withholding tax payment or remittance of at least
which evidence of payment shall be furnished the P1,000,000 for the preceding taxable year.  
taxpayer, and the preparation and publication of tax
statistics; Provided, however, That the Secretary of Finance,
upon recommendation of the CIR, may modify or
(j) The manner in which internal revenue taxes, such add to the above criteria for determining a large
as income tax, including withholding tax, estate and taxpayer after considering such factors as inflation,
donor's taxes, value-added tax, other percentage
volume of business, wage and employment levels,
taxes, excise taxes and documentary stamp taxes and similar economic factors.
shall be paid through the collection officers of the
Bureau of Internal Revenue or through duly The penalties prescribed under Section 248 shall be
authorized agent banks which are hereby deputized imposed on any violation of the rules and
to receive payments of such taxes and the returns, regulations issued by the Secretary of Finance, upon
papers and statements that may be filed by the recommendation of the CIR, prescribing the place of
taxpayers in connection with the payment of the tax: filing of returns and payments of taxes by large
taxpayers.
Provided, however, That notwithstanding the other
provisions of this Code prescribing the place of filing
of returns and payment of taxes, the CIR may, by
A.2. JURISDICTION, POWER AND
rules and regulations, require that the tax returns,
papers and statements that may be filed by the FUNCTIONS OF THE COMMISSIONER OF
taxpayers in connection with the payment of the tax. INTERNAL REVENUE
Provided, however, That notwithstanding the other

provisions of this Code prescribing the place of filing a. Powers and duties of the Bureau of Internal
of returns and payment of taxes, the CIR may, by Revenue (Sec. 2, NIRC)
rules and regulations require that the tax returns,
papers and statements and taxes of large taxpayers (1) To assess and collect national internal taxes,
be filed and paid, respectively, through collection fees, and charges;
officers or through duly authorized agent banks: (2) To enforce all forfeitures, penalties and fines
connected therewith;
PAGE 30 OF 275
(3) To execute judgment in all cases decided in its a. DEFINITION, NATURE AND GENERAL PRINCIPLES
favor by the CTA and the ordinary courts; and
(4) To effect and administer the supervisory and
Definition
police powers conferred upon it by the Tax Code or
other special laws. Income Tax is defined as a tax on all yearly profits
arising from property, professions, trades, or offices,
or as a tax on the person‘s income, emoluments,
b. Power of the Commissioner to interpret tax laws profits and the like [Fisher v. Trinidad, G.R. No. L-
and to decide tax cases 2118643 (1924)].
(1) Shall be under the exclusive and original It may be succinctly defined as a tax on income,
jurisdiction of the CIR, subject to review by the whether gross or net, realized in one taxable year.
Secretary of Finance. (Sec. 4, NIRC)
(2) A ruling by the BIR Commissioner shall be
Nature
presumed valid unless modified, reversed or
superseded by the Secretary of Finance.   Income tax is generally classified as an excise tax. It
is not levied upon persons, property, funds or profits
(3) A taxpayer who receives an adverse ruling from
but upon the right of a person to receive income or
the CIR may, within thirty (30) days from the date of
profits.
receipt of such ruling, seek its review by the
Secretary of Finance, either by himself/itself or
though his/its duly authorized representative.   General Principles
(4) A reversal or modification of the BIR ruling shall
In the Philippines, income tax is imposed on the net
terminate its effectivity upon  the receipt by the income of citizens, resident aliens, domestic
taxpayer or the BIR of written notice of reversal or corporations, and nonresident aliens and foreign
modification, whichever came earlier.
corporations engaged in trade or business within the
**The Secretary of Finance may now also review the Philippines [Sec. 24 (A), Sec. 25 (A), Sec. 27 (A),
rulings MOTU PROPRIO. (DOF ORDER 7-02) Sec. 28 (A), NIRC]. It is also imposed on the gross
income of nonresident aliens and foreign
corporations not doing business in the Philippines
c. Non-retroactivity of rulings (Sec. 246, NIRC) [Sec. 25 (B), (C), (D), Sec. 28 (B), NIRC]. It is further
imposed as a final tax on certain passive income
General Rule: No retroactive application if the
(interests, royalties, prizes, and other winnings),
revocation, modification or reversal of rules and
cash and property dividends, capital gains from the
regulations, rulings or circulars will be prejudicial to
sale of domestic shares of stock and real property
the taxpayers.
classified as capital assets located in the
Exceptions: Philippines (Sec. 24 (B), Sec. 25 (A) (2), (3), Sec. 27
(a) Where the taxpayer deliberately misstates or (D), Sec. 28 (A), NIRC).
omits material facts from his return or any document Income Tax Law aims to mitigate the evils arising
required of him by the BIR; from the inequalities of wealth by a progressive
(b) Where the facts subsequently gathered  by the scheme of taxation which places the burden of
taxation on those best able to pay [Madrigal v.
BIR are materially different from  the facts on
which the ruling is based; or   Rafferty & Concepcion, G.R. No. L-12287 (1918)].
(c) Where the taxpayer acted in bad faith.  

a.1. Income Tax Systems
B. NATIONAL INTERNAL REVENUE (a) Global Tax System
CODE (NIRC) OF 1997, AS AMENDED Under a global tax system, it did not matter whether
the income received by the taxpayer is classified as
compensation income, business or professional
B.1. INCOME TAXATION income, passive investment income, capital gain, or
other income. All items of gross income, deductions,
PAGE 31 OF 275
and personal and additional exemptions, if any, are global system of income taxation, although certain
reported in one income tax return, and one set of tax passive investment incomes and capital gains from
rates are applied on the tax base. sale of capital assets (namely: (a) shares of stock of
domestic corporations, and (b) real property) are
subject to final taxes at preferential tax rates.
(b) Schedular Tax System
Different types of incomes are subject to different
a.3. Criteria in Imposing Philippine Income Tax
sets of graduated or flat income tax rates. The
applicable tax rate(s) will depend on the (1) Citizenship or Nationality Principle
classification of the taxable income and the basis
A citizen of the Philippines is subject to Philippine
could be gross income or net income. Separate
income tax:
income tax returns (or other types of return
applicable) are filed by the recipient of income for (a) On his worldwide income, if he resides in the
the particular types of income received. Philippines; or
(b) Only on his income from sources within the
Philippines, if he qualifies as a nonresident
(c) Semi-schedular or Semi-global Tax System
citizen.
All compensation income, business or professional
income, capital gain and passive income not subject
to final tax, and other income are added together to (b) Residence Principle
arrive at the gross income, and after deducting the A resident alien is liable to pay Philippine income
sum of allowable deductions, the taxable income is tax on his income from sources within the
subjected to one set of graduated tax rates or Philippines but is exempt from tax on his income
normal corporate income tax. With respect to such from sources outside the Philippines.
income the computation is global.
For those other income not mentioned above, they
(c) Source of Income Principle
remain subject to different sets of tax rates and
An alien is subject to Philippine income tax because
covered by different returns. he derives income from sources within the
Note: The Philippines, under EO 37 (1986) and RA Philippines. Thus, a non-resident alien or non-
8424 (1998), follows a semi-schedular and semi- resident foreign corporation is liable to pay
global tax system. Philippine income tax on income from sources
within the Philippines, such as dividend interest,
rent, or royalty, despite the fact that he has not set
a.2. Features of the Philippine Income Tax Law foot in the Philippines.
(1) Direct Tax – The tax burden is borne by the The income tax law adopts the most comprehensive
income recipient upon whom the tax is imposed. tax situs of nationality and residence of the taxpayer
and of the generally accepted and internationally
(2) Progressive – The tax rate increases as the tax
recognized income tax base [Tan v. De Rosario, G.R.
base increases. It is founded on the ability to pay
No. 109289 (1994)]. Resident citizens and
principle and is consistent with Sec. 28, Art. VI,
domestic corporations are subjected to income tax
1987 Constitution.
liability on their income from all sources within and
(3) Comprehensive – The Philippines has adopted without the Philippines. The law adopts the source
the most comprehensive system of imposing income rule with respect to income received by taxpayers
tax by adopting the citizenship principle, the other than resident citizens and domestic
residence principle, and the source principle. Any of corporations.
the three principles is enough to justify the
imposition of income tax on the income of a resident
citizen and a domestic corporation that are taxed on a.4. Types of Philippine Income Tax
a worldwide income.
(1) Graduated income tax on individuals
(4) Semi-Schedular or Semi-Global Tax System –
(2) Normal corporate income tax on corporations
The Philippines follows the semi-schedular or semi-
PAGE 32 OF 275
(3) Minimum corporate income tax on corporations iv. When the taxpayer dies.
(4) Special income tax on certain corporations "Taxable year" means the calendar year, or the
fiscal year ending during such calendar year, upon
(5) Capital gains tax on sale or exchange of shares
the basis of which the net income is computed
of stock of a domestic corporation classified as
under Title II (Tax on Income).
capital assets
Taxable year includes, in the case of return made for
(6) Capital gains tax on sale or exchange of real
a fractional part of a year under the provisions of
property classified as capital asset
Title II, the period for which such return is made
(7) Final withholding tax on certain passive [Sec. 22 (P), NIRC].
investment income paid to residents
(8) Final withholding tax on income payments
a.6. Kinds of Taxpayers
made to non-residents
(9) Fringe benefits tax on fringe benefits of
Taxpayer – any person subject to tax imposed by
supervisory or managerial employees
Title II of the Tax Code [Sec. 22(N), NIRC].
(10) Branch profit remittance tax
Person – means an individual, a trust, estate or
(11) Tax on improperly accumulated earnings of corporation [Sec. 22(A), NIRC].
corporations
For income tax purposes, taxpayers are classified
generally as follows:
a.5. Taxable Period (1) Individuals;
The accounting periods used in determining the (2) Corporations ;
taxable income of taxpayers are:
(3) Partnerships (Ordinary and General Professional
(1) Calendar Year - Accounting period of 12 months Partnerships);
ending on the last day of December. Instances
(4) Estates and Trusts;
when the Calendar Year is used for the
computation of income: (5) Co-ownerships
i. If the taxpayer's annual accounting period
is other than a fiscal year; or
ii. If the taxpayer has no annual accounting
period; or
iii. If the taxpayer does not keep books of
accounts; or
iv. If the taxpayer is an individual [Sec. 43,
NIRC].
(2) Fiscal Year - Accounting period of 12 months
ending on the last day of any month other than
December [Sec. 22(Q), NIRC].
(3) Short Period - Accounting period which starts
after the first month of the tax year or ends
before the last month of the tax year (less than
12 months). Instances whereby short accounting
period arises:
i. When a corporation is newly organized.
ii. When a corporation is dissolved.
iii. When a corporation changes accounting
period.
PAGE 33 OF 275
Primary
Sub-Classification(s)
Classification
Citizens of the Residents citizens
Philippines Non-resident citizens
Residents
Engaged in Trade or Business in the Philippines
Aliens
Individuals Non-residents Not Engaged in Trade or Business in the
Philippines
Special Classes of
Minimum Wage Earner
Individuals
Domestic Corporations
Corporations Resident Corporations
Foreign Corporations
Non-resident Corporations
Estates and
Trusts
General Business Partnership
Partnerships
General Professional Partnership
Co-ownerships
PAGE 34 OF 275
(a) Individual Taxpayers If the aggregate period of his stay in the Philippines is
more than 180 days during any calendar year.
(i) Citizens
(2) Not engaged in trade or business within the
(a) Resident Citizens (RC)
Philippines - If the aggregate period of his stay in the
(b) Non-resident Citizens (NRC) Philippines does not exceed 180 days.
(a) Citizen of the Philippines who establishes to the
satisfaction of the Commissioner the fact of his
(iii) Special class of individual employees
physical presence abroad with a definite
intention to reside therein. (a) Minimum Wage Earner
(b) Citizen who leaves the Philippines during the a. A worker in the private sector paid the statutory
taxable year to reside abroad, either as an minimum wage;
immigrant or for employment on a permanent
b. An employee in the public sector with
basis.
compensation income of not more than the statutory
(c) Citizen of the Philippines who works and derives minimum wage in the non-agricultural sector where
income from abroad and whose employment he/she is assigned.
thereat requires him to be physically present
abroad most of the time during the taxable year
(183 DAYS). (b) Corporations
(d) Citizen previously considered as non-resident Includes all types of corporations, partnerships (no
citizen and who arrives in the Philippines at any matter how created or organized), joint stock
time during the taxable year to reside companies, joint accounts, associations, or
permanently in the Philippines  Treated as insurance companies, whether or not registered
NRC with respect to his income derived from with the SEC.
sources abroad until the date of his arrival in the
Excludes general professional partnerships (GPP),
Philippines
joint venture or consortium formed for the purpose
of undertaking construction projects, joint venture
or consortium engaging in petroleum, coal,
(ii) Aliens
geothermal and other energy operations pursuant
(a) Resident Alien to an operating or consortium agreement under a
service contract with the government.
An alien actually present in the Philippines who is not a
mere transient or sojourner is a resident for income tax (i) Domestic corporations – A corporation created
purposes. and organized under its laws (the law of
incorporation test).
No/Indefinite Intention = RESIDENT: If he lives in the
Philippines and has no definite intention as to his stay, (ii) Foreign corporations – A corporation which is
he is a resident. A mere floating intention indefinite as not domestic.
to time, to return to another country is not sufficient to
(a) Resident foreign corporations – Foreign
constitute him a transient.
corporation engaged in trade or business within the
Definite Intention = TRANSIENT: One who comes to the Philippines.
Philippines for a definite purpose, which in its nature
Doing business – The term implies a continuity of
may be promptly accomplished, is a transient.
commercial dealings and arrangements, and
Exception: Definite Intention but such cannot be contemplates, to that extent, the performance of
promptly accomplished; If his purpose is of such nature acts or works or the exercise of some of the
that an extended stay may be necessary for its functions normally incident to, and in progressive
accomplishment, and thus the alien makes his home prosecution of commercial gain or for the purpose
temporarily in the Philippines, then he becomes a and object of the business organization (RA 7042,
resident. Foreign Investments Act).
(b) Non-resident Alien In order that a foreign corporation may be regarded
as doing business within a State, there must be
(1) Engaged in trade or business within the Philippines -
continuity of conduct and intention to establish a
PAGE 35 OF 275
continuous business, such as the appointment of a b.1. Definition, Nature and General Principles
local agent, and not one of a temporary character
[CIR v. British Overseas Airways Corporation, G.R.
No. 65773-74 (1987)]. Definition
(b) Non-resident foreign corporations – Foreign Income Tax is defined as a tax on all yearly profits
corporation not engaged in trade or business within arising from property, professions, trades, or offices, or
the Philippines as a tax on the person‘s income, emoluments, profits
and the like [Fisher v. Trinidad, supra]
(iii) Joint venture and consortium – Essential
factors of a joint venture or consortium:
(a) Each party must make a contribution, not Nature
necessarily of capital but by way of services, skill, Income tax is generally classified as an excise tax. It is
knowledge, material or money; not levied upon persons, property, funds or profits but
(b) Profits must be shared among the parties; upon the right of a person to receive income or profits.
(c) There must be a joint proprietary interest and
right of mutual control over the subject matter of General Principles
the enterprise;
(a) A resident citizen of the Philippines is taxable on all
(d) There is a single business transaction. income derived from sources within and without the
Philippines;
(c) Partnerships (b) A nonresident citizen is taxable only on income
derived from sources within the Philippines;
The Tax Code mandates that every other type of
business partnership (Ordinary Partnerships) is subject (c) An individual citizen of the Philippines who is
to income tax in the same manner and at the same rate working and deriving income from abroad as an
as an ordinary corporation. overseas contract worker is taxable only on income
derived from sources within the Philippines:
General Professional Partnerships (GPP)
A general professional partnership is a partnership Provided, That a seaman shall be treated as an
formed by persons for the sole purpose of exercising overseas contract worker if he is a:
their common profession, no part of the income of (1) citizen of the Philippines; and
which is derived from engaging in any trade or business.
(2) receives compensation for services rendered
Not considered as a taxable entity for income tax abroad as a member of the complement of a
purposes. The partners themselves, not the partnership,
vessel engaged exclusively in international trade
are liable for the payment of income tax in their
individual capacities. (d) An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from
sources within the Philippines;
(d) Estates and Trusts
(e) A domestic corporation is taxable on all income
Taxable estates and trusts are taxed in the same derived from sources within and without the
manner and on the same basis as an individual. Philippines; and
(f) A foreign corporation, whether engaged or not in
(e) Co-ownership trade or business in the Philippines, is taxable only
on income derived from sources within the
For income tax purposes, the co-owners in a co-
Philippines. [Sec. 23, NIRC]
ownership report their share of the income from the
property owned in common by them in their individual
tax returns for the year and the co-ownership is not Taxpayer Within Without
considered as a separate taxable entity or a corporation.
Resident Citizen  
INCOME TAX Non-resident Citizen and OCW  X
PAGE 36 OF 275
Taxpayer Within Without Mertens, Sec. 5.06) The increase in the value of
property is also known as appraisal surplus or
Resident and Non-resident Alien  X
revaluation increment.
Domestic Corporation  
Foreign Corporation  X Income v. Capital {Madrigal v. Rafferty, supra]
Income Capital
B.2. INCOME Denotes a flow of wealth Fund or property existing
during a definite period at one distinct point in
b.2.1. Definition and Nature of time. time.
Definition Service of wealth Wealth itself

(a) Income means all wealth which flows to the Subject to tax Return of capital is not
taxpayer other than a mere return of capital. It subject to tax
includes gain derived from the sale or other Fruit Tree
disposition of capital assets. Income is a gain
derived from labor or capital, or both labor and
capital; and includes the gain derived from the sale ii. Realization of Income
or exchange of capital assets. Income is realized when there is a gain or profit derived
(b) It is an amount of money coming to a person within from a closed and completed transaction.
a specified time, whether as payment for services, Actual vis-à-vis Constructive receipt
interest or profit from investment. Unless otherwise
specified. It means cash or its equivalent. Income (1) Actual receipt – Income is actually reduced to
can also be thought of as a flow of the fruits of one's possession. The realization of gain may take the
labor. [Conwi v. CTA , G.R. No. 48532 (1992)] form of actual receipt of cash.
(c) Income may be received in the form of cash, (2) Constructive receipt – An income is considered
property, service, or a combination of the three. constructively received when it is credited to the
account of, or segregated in favor of a person. The
person may withdraw the said account credited in
Nature his favor anytime without any substantial limitations
or conditions upon which payment or enjoyment is
Income includes earnings, lawfully or unlawfully to be made or exercised.
acquired, without consensual recognition, express or
implied, of an obligation to repay and without
restriction as their disposition. [James v. US, 366 US Examples:
213(1961)]
(a) Interest credited on savings bank deposit
(b) Matured interest coupons not yet collected by
b.2.2. When Income is Taxable the taxpayer
i. Existence of Income (c) Dividends applied by the corporation against the
(1) There is INCOME, gain or profit indebtedness of a stockholder
(2) RECEIVED or REALIZED during the taxable year (d) Share in the profit of a partner in a general
(3) NOT EXEMPT from income tax professional partnership, although not yet
distributed, is regarded as constructively
(a) "The fact is that property is a tree, income is the received; or
fruit; labor is a tree, income the fruit; capital is a tree,
income the fruit." A tax on income is not a tax on (e) Intended payment deposited in court
property. "Income," as here used, can be defined (consignation).
as "profits or gains." [Madrigal v. Rafferty, supra] The doctrine of constructive receipt is designed to
(b) A mere increase in the value of property is not prevent the taxpayer using the cash basis from
income, but merely unrealized increase in capital. (1 deferring or postponing the actual receipt of taxable
PAGE 37 OF 275
income. Without the rule, the taxpayer can Accrual method generally reports income when earned
conveniently select the year in which he will report and reports expense when incurred. If earned from sale
the income. (Dimaampao) of goods, income is to be reported in the year of sale,
irrespective of collection.
For a taxpayer using the accrual method, the
determinative question is, when do the facts present
themselves in such a manner that the taxpayer must Methods of accounting in reporting income and
recognize income or expense? The accrual of income expenses
and expense is permitted when the all-events test has [N.B. Not in syllabus; Additional matter]
been met. This test requires: (1) fixing of a right to
income or liability to pay; and (2) the availability of the
reasonable accurate determination of such income or Installment method vis-à-vis Deferred method vis-à-vis
liability [CIR v. Isabela Cultural Corporation, G.R. No. Percentage of completion method (in long- term
135210 (2001) ]. contracts)
The ―As If‖ Theory of Constructive Income is designed to Installment Method is a special method of accounting
prevent a cash basis taxpayer to delay reporting of whereby income on installment sales of property during
income. It also resumes the existence of income on the year is allowed to be reported in installments in
transactions supposedly not subject to tax. [Valencia proportion to the installment payments actually
and Roxas] received in that year, which the gross profit realized or
to be realized when payment is completed, bears to the
total contract price (Sec. 49, NIRC).
iii. Recognition of Income
Income realized pertains to the accrual basis of
accounting. Income may be reported on the installment basis in the
following cases:
Recognition of income in the books is when it is realized
and expenses are recognized when incurred. It is the
right to receive and not the actual receipt that
Sales of personal property by a dealer
determines the inclusion of the amount in gross income
A dealer who regularly sells or otherwise disposes of
Examples:
personal property on the installment plan
(1) Interest or rent income earned but not yet
received
(2) Rent expense accrued but not yet paid Sales of real property (inventory) and casual sales of
personalty
(3) Wages due to workers but remaining unpaid
(1) casual sale or other casual disposition of personal
Generally, trade and manufacturing businesses use property (not of a kind which would be includible in
accrual method while servicing businesses use cash the inventory of the taxpayer if on hand at the close
method. If the service business opted to report on of the taxable year) where the selling price >
accrual basis, such method can only be applied when it P1,000 and the initial payments do not exceed 25%
comes to reporting of expense. To prevent tax evasion, of the selling price, or
individual taxpayers whose business consists of the
sale of inventories cannot use cash method. [Valencia (2) sale or other disposition of real property (inventory),
and Roxas] if the initial payments do not exceed 25% of the
selling price. Note: This sale is subject to creditable
withholding tax and normal tax which is 30% for
iv. Cash Method of Accounting versus Accrual Method corporate taxpayer or 5% to 32% for individual
of Accounting taxpayer.
Cash method generally reports income upon cash
collection and reports expenses upon payment. If
earned from rendering of services, income is to be Sales of real property considered as capital asset by
reported in the year when collected, whether earned or individuals
unearned. An Individual who sells or disposes of real property,
considered as capital asset, if initial payments do not
PAGE 38 OF 275
exceed 25% of the selling price, may pay the capital Personal Property Real Property
gains tax in installments (Sec. 49(C), NIRC). Note: This Dealer
sale is subject to a capital gains tax of 6% based on the Dealer in personal Installment method;
selling price or zonal value, whichever is higher. property who regularly Provided, initial
sells in installment payments do not
Note: Initial payments are the total payments received
plan: Installment exceed 25% of selling
in cash or property (other than evidences of
method price
indebtedness such as promissory notes, mortgages
*held as ordinary asset If exceeds 25%--
given) by the seller upon or before the execution of the
regardless of amount Deferred payment
instrument of sale during the taxable year of the
of percentage of initial method
disposition of the real property. Considered as initial
payments *held as inventory
payments are the downpayment and all other payments
Casual Sale
received by the seller during the year of sale, including
excess mortgage assumed by the buyer over the basis Installment method;
Provided:
or cost of the property sold. It contemplates at least
one other payment in addition to the initial payment. If (1)Selling price
the entire purchase price is to be paid in a lump sum in exceeds php1,000
a later year, there being no payment during the first year, (2)Initial payments do
the income may not be returned on the installment not exceed 25% of
basis. selling price
If either of 2 or both
Selling price is the total amount or price of the sale conditions not met—
including the cash or property received and all notes of Deferred payment
the buyer or mortgages assumed by him. method
Contract price is the amount which the purchaser *personal property not
contracts to pay the seller in cash. It includes the considered inventory
excess of the mortgages assumed over the cost or other Sale by Individuals
basis of the property sold. Installment method;
Provided, initial
payments do not
Change from accrual to installment basis exceed 25% of selling
A taxpayer entitled to the benefits of a dealer in price
personal property may elect for any taxable year to *held as capital asset
report his taxable income on the installment basis. In
computing his income for the year of change or any Percentage of completion (in long-term contracts)
subsequent year, amounts actually received during any
such year on account of sales or other dispositions of Income from long-term construction contracts refers to
property made in any prior year shall not be excluded. the earnings derived from construction of a building,
[see Sec. 49(D), NIRC]. installation or other construction contract usually
covering a period in excess of one year. When income is
derived from long-term construction contracts, it is
Deferred Payment generally reported on the basis of percentage of
completion made every year that will be evidence by the
(a) If the initial payments exceed 25% of the selling certificates of engineers or architects. The reportable
price, the gain realized may be reported on a income is calculated by deducting from the contract
deferred payment method. price the actual cost of construction.
(b) The taxable gain or income returnable during the In recognizing realized revenue for long-term
year of sale is the difference between the selling or construction contracts, accountants usually follow two
contract price and the cost of the property, even methods:
though the entire purchase price has not been
actually received in the year of sale. (a) Completed contract method – requires recognition
of revenue only when the contract is finally
(c) The obligations of the purchaser received by the completed; and
vendor are to be considered as equivalent of cash.
PAGE 39 OF 275
(b) Percentage of completion method – requires v. All Events Test – Under the accrual method of
recognition of income based on the progress of work. accounting, expenses are deductible in the taxable year
in which: (1) all events have occurred which determine
Long-term contracts are no longer allowed to be
the liability; and (2) the amount of liability can be
reported based on the completed contract method
determined with reasonable accuracy.
basis beginning January 1, 1998 pursuant to RA
8424; hence, all long-term contracts must be ―All events test‖ requires:
reported using the percentage of completion
(a) Fixing a right to income or liability to pay; and
method.
(b) The availability of reasonably accurate
determination of such income or liability.
b.2.3. Tests in Determining Whether Income is Earned
All of the above tests are followed in the Philippines for
for Tax Purposes
purposes of determining whether income is received by
i. Realization test – no taxable income until there is a the taxpayer or not during the year (Mamalateo).
separation from capital of something of exchangeable
value, thereby supplying the realization or
transmutation which would result in the receipt of b.2.4. Classification of Income
income [Eisner v. Macomber, 252 U.S. 189, 190 Income may be classified as follows:
(1920)]. Thus, stock dividends are not income subject
to income tax on the part of the stockholder when he
(1) Compensation Income
merely holds more shares representing the same equity The gain derived from labor, especially employment
interest in the corporation that declared stock
(earned form employer-employee relationship) such as
dividends [Fisher v Trinidad, supra]. salaries and commissions,. These earnings are subject
to normal tax.
ii. Claim of right doctrine (or Doctrine of Ownership,
(2) Profession or Business Income
command, or control) – a taxable gain is conditioned
The value derived from an exercise of profession,
upon the presence of a claim of right to the alleged gain
business or utiliation of capital including profit and gain
and the absence of a definite unconditional obligation
derived from sale or converstion of assets.
to return or repay that which would otherwise constitute
a gain. To collect a tax would give the government an
Examples are net income from business and gain from
unjustified preference as to the part of the money that
the sale of assets used in trade or business. These
rightfully and completely belongs to the victim. The
earnings are subject to normal tax.
embezzler‘s title is void.
(3) Passive Income
An income in which the taxpayer merely waits for the
iii. Economic benefit test, Doctrine of Proprietary
amount to come in. Examples are royalty, interest,
Interest – any economic benefit to the employee that
prizes, and winnings. Generally, passive income is
increases his net worth, whatever may have been the
subject to final tax.
mode by which it is effected, is taxable. Thus, in stock
options, the difference between the fair market value of
(4) Capital Gain
the shares at the time the option is exercised and the
An income derived from sale of assets not used in trade
option price constitutes additional compensation
or business. Examples are sale of family home and
income to the employee at the time of exercise (not
other sales of shares of stocks which are subject to final
upon the grant or vesting of the right).
taxes. Other sales of capital assets are subject to
normal tax. [Valencia and Roxas]
iv. Severance Test – under the doctrine of severance
test of income, in order that income may exist, is b.2.5. Situs of Income Taxation
necessary that there be a separation from capital of
something of exchangeable value. The income required
a realization of gain. Income Situs
Interest Residence of the debtor
PAGE 40 OF 275
Income Situs (h) Dividends

Dividends Residence of the corporation (i) Gains derived from dealings in property
Services Place of performance (j) Pensions
Rentals Location of the property (k) Partner‘s distributive share from the net income
of the general professional partnership (GPP)
Royalties Place of exercise [Sec 32A, NIRC]
Sale of Real Location of realty
Property
The list here is NOT exclusive
Sale of (a) Tangible
Personal The term ―gross income‖ whenever used without
Purchase and sale: Location of qualification is comprehensive, as defined above, and
Sale is different from the limited meaning of gross income
Manufactured w/in and sold w/o: for purposes of minimum corporate income tax or the
Partly w/in and partly w/o gross income tax of corporations. Gross income
includes gross profit from ordinary business and other
Manufactured w/o and sold w/in: income not subject to passive income tax or final
Partly w/in and partly w/o withholding tax.
Gross income means income, gain, or profit subject to
(b) Intangible income tax. It includes the compensation for personal
services, business income, profits, and income derived
General rule: Place of Sale from any source whatever (whether legal or illegal),
Exception: Shares of stock of unless it is exempt from income tax under the
domestic corporations: Place of Constitution, tax treaty, or statute or it is subject to final
incorporation withholding income tax in accordance with the semi-
global or semi-schedular tax system adopted by the
Shares of Place of incorporation Philippines.
Stock of
Domestic It is the difference between gross sales/revenue and
Corporation the cost of goods sold/services. The definition of gross
income is broad and comprehensive to include
proceeds from sales of transport documents.
B.3. GROSS INCOME (Mamalateo)
b.3.1. Definition
Gross Income means the pertinent items of income b.3.2. Concept of Income From Whaterver Source
referred to in Section 32(A) of the Tax Code. It includes Derived
all income derived from whatever source (unless
exempt from tax by law), including, but not limited to, ―Income derived from whatever source‖ means
the following items: inclusion of all income not expressly exempted within
the class of taxable income under the laws irrespective
(a) Gross income derived from the conduct of trade of the voluntary or involuntary action of the taxpayer in
or business or the exercise of a profession producing the gains, and whether derived from legal or
(b) Rents illegal sources (i.e. gambling, extortion, smuggling,
etc.)
(c) Interests
(d) Prizes and winnings
b.3.3. Gross Income vis-à-vis Net Income vis-à-vis
(e) Compensation for services in whatever form Taxable Income
paid, including, but not limited to fees, salaries,
wages, commissions, and similar items Gross income – means income, gain or profit subject to
tax.
(f) Annuities
Taxable income – means the pertinent items of gross
(g) Royalties income specified in the Tax Code, less the deductions
PAGE 41 OF 275
and/or personal and additional exemptions, if any, i. Compensation Income

authorized for such types of income by the Tax Code or
Income arising from an employer-employee (ER-EE)
other special laws (Sec. 31, NIRC).
relationship. It means all remuneration for services
performed by an EE for his ER, including the cash value
of all remuneration paid in any medium other than cash
b.3.4. Sources of Income Subject to Tax
[Sec. 78(A)], unless specifically excluded by the Tax
Source is ascribed to the place wherein the income is Code.
earned. It is governed by the situs of taxation. This
It includes, but is not limited to, salaries and wages,
classification of income is necessary to determine
honoraria and emoluments, allowances (e.g.,
whether such income is subject to tax or not. Income
transportation, representation, entertainment),
may be:
commissions, fees (including directors‘ fees, if the
director is, at the same time, an employee of the payor-
(i) Derived entirely from sources within the Philippines corporation), tips, taxable bonuses, fringe benefits
[Sec. 42(A), NIRC]. Examples: compensation for labor except those subject to Fringe Benefit Tax (FBT) under
or service derived from Philippine sources; interest on Section 33 of the Tax Code, and taxable pensions and
retirement pay (e.g., retirement benefits earned without
bonds, notes, deposits and the like earned in the
Philippines; dividends declared by domestic meeting the conditions for exemption thereof, such as
retirement of less than 50 years of age.)
corporations; rentals and royalties from property
located within the Philippines; and gains, profits and
income from sale of real property as well as from
General Rule: every form of compensation income is
personal property in the Philippines. As a rule, incomes
taxable regardless of how it is earned, by whom it is
earned within the Philippines are taxable.
paid, the label by which it is designated, the basis upon
which it is determined, or the form in which it is received.
The basis upon which remuneration is paid is
(ii) Derived entirely from sources without the Philippines
[Sec. 42(C), NIRC]. Examples: compensation for labor immaterial. It may be paid on the basis of piece of work,
or service rendered by overseas contract workers; percentage of profits, hourly, weekly, monthly, or
interest on bonds, notes, deposits and the like earned annually.
abroad; dividends declared by nonresident foreign Exception: The term wages does NOT include
corporation; rental and royalties from property located remuneration paid:
outside the Philippines; and gains, profits and income
a) For agricultural labor paid entirely in products
from sale of real property as well as from personal
of the farm where the labor is performed
property located outside the Philippines. As a rule,
income earned from outside the Philippines are not b) For domestic service in a private home
taxable except for resident citizens and domestic
c) For casual labor not in the course of the
corporations.
employer's trade or business
d) For services by a citizen or resident of the
(iii) Derived from sources partly within or partly without Philippines for a foreign government or an int‘l
the Philippines. Examples: gains, profits and income organization. [Sec. 78(A), NIRC]
from transportation or other services rendered partly
within and partly outside, and dividend received by a
resident citizen from a resident foreign corporation. The term ―remuneration for domestic services‖ refers to
(Sec. 43(E), NIRC). In general, when an income is remuneration paid for services of a household nature
earned partly from within and partly from without, only performed by an employee in or about the private home
income within is taxable in the Philippines, except if the of the person whom he is employed. The services of
taxpayer is a resident citizen or a domestic corporation. household personnel furnished to an employee (except
A Filipino citizen or a domestic corporation whose rank and file employees) by an employer shall be
income is derived from within and without the subject to the fringe benefits tax pursuant to Sec. 33 of
Philippines is generally subject to tax. the Tax Code. A private home is the fixed place of
abode of an individual or family. If the home is utilized
primarily for the purpose of supplying board or lodging
b.3.5. Classification of Income Subject to Tax to the public as a business enterprise, it ceases to be a
PAGE 42 OF 275
private home and remuneration paid for services Forms of compensation and how they are assessed
performed therein is not exempted. Services of the
Cash – If compensation is paid in cash, the full amount
household nature in or about a private home include
received is the measure of the income subject to tax.
services rendered by cooks, maids, butlers, valets,
laundresses, gardeners, chauffeurs of automobiles for Medium other than money – If services are paid for in a
family use. The remuneration paid for the services which medium other than money (e.g., shares of stock, bonds,
are performed in or about rooming or lodging houses, and other forms of property), the fair market value
boarding houses, clubs, hotels, hospitals or (FMV) of the thing taken in payment is the amount to be
commercial officer or establishments is considered as included as compensation subject to tax. If the services
compensation. Remuneration paid for services are rendered at a stipulated price, in the absence of
performed as a private secretary, even if they are evidence to the contrary, such price will be presumed to
performed in the employer‘s home is considered as be the FMV of the remuneration received.
compensation.
The term ―casual labor‖ includes labor which is Living quarters or meals
occasional, incidental or regular. ―Not in the course of
the employer‘s trade or business‖ includes labor that General Rule: The value to the employee of the living
does not promote or advance the trade or business of quarters and meals given by the employer shall be
the employer. added to his compensation subject to withholding.
The term ―remuneration paid for services performed as Exception: If living quarters/meals are furnished to an
an employee of a foreign government or an employee for the convenience of the employer, the
international organization‖ includes not only value need NOT be included as part of compensation
remuneration paid for services performed by income.
ambassadors, ministers and other diplomatic officers Facilities and privileges of a relatively small value -
and employees but also remuneration paid for services Facilities and privileges (such an entertainment,
performed as consular or other officer or employee of a medical services, or so called ―courtesy‖ discounts on
foreign government or as a non-diplomatic purchases), otherwise known as ―de minimis benefits‖
representative of such government. furnished or offered by an employer to his employees
Compensation income including overtime pay, holiday generally, are NOT considered as compensation subject
pay, night shift differential pay, and hazard pay, earned to income tax and therefore withholding tax if such
by MINIMUM WAGE EARNERS (MWE) who has no other facilities are offered or furnished by the employer
returnable income are NOT taxable and not subject to merely as means of promoting the health, goodwill,
withholding tax on wages [RA 9504]; Provided, however, contentment, or efficiency of his employees.
that an employee shall not enjoy the privilege of being a
MWE and, therefore, his/her entire earning are not
exempt from income tax and, consequently, from Convenience of the Employer Rule
withholding tax if he receives/earns additional Allowances in kind furnished to the employee for and as
compensation such as commissions, honoraria, fringe necessary incident to the performance of his duties are
benefits, benefits in excess of the allowable statutory not taxable [Valencia and Roxas].
amount of P82,000 [RA 10653], taxable allowance,
and other taxable income other than the statutory If meals, living quarters, and other facilities and
minimum wage (SMW), holiday pay, overtime pay, privileges are furnished to an employee for the
hazard pay and night shift differential pay. convenience of the employer, and incidental to the
requirement of the employee‘s work or position, the
MWEs receiving other income, such as income from the value of that privilege need not be included as
conduct of trade, business, or practice of profession, compensation [Henderson v. Collector]
except income subject to final tax, in addition to
compensation income are not exempted from income The amount of ―de minimis‖ benefits confirming to the
tax on their income earned during the taxable year. ceiling prescribed shall not be considered in
determining the P82,000 [RA 10653] ceiling of ―other
This rule, notwithstanding, the SMW, Holiday Pay, benefits‖ excluded from gross income under Section 32
overtime pay, night differential pay and hazard pay shall (b)(7)(e) of the Tax Code, Provided, that the excess of
still exempt from withholding tax. the ‗de minimis‘ benefits over their respective ceilings
prescribed by these regulations shall be considered as
PAGE 43 OF 275
part of ―other benefits‖ and the employee receiving it a) It is for ordinary and necessary traveling and
will be subject to tax only on the excess over the representation or entertainment expenses
P82,000 ceiling, Provided, further, that MWEs receiving, paid or incurred by the employee in the pursuit
‗other benefits‘ exceeding the P82,000 limit shall be of the employer‘s trade, business or
taxable on the excess benefits, as well as on his profession; and
salaries, wages, and allowances, just like an employee
b) The employee is required to account or
receiving compensation income beyond the SMW. Any
liquidate for the foregoing expenses.
amount given by the employer as benefits to its
employees, whether classified as ―de minimis‖ benefits The excess of actual expenses over advances made
or fringe benefits, shall constitute as deductible shall constitute taxable income if such amount is not
expense upon such employer. Where compensation is returned to the employer. The employee is required to
paid in property other than money, the employer shall account/liquidate for the expenses in accordance with
make necessary arrangements to ensure that the the specific requirements of substantiation for each
amount of the tax required to be withheld is available category of expenses pursuant to Sec.34 of the Tax
for payment to the BIR. Code.
Note: Reasonable amounts of
reimbursements/advances for traveling and
Classification of Gross Compensation Income
entertainment expenses which are pre-computed on a
Basic salary or wage daily basis and are paid to an employee while he is on
an assignment or duty are NOT subject to withholding
Salary – earnings received periodically for a regular
tax on wages and substantiation requirements.
work other than manual labor, e.g., monthly salary of an
employee
Wages – earnings received usually according to Commission – usually a percentage of total sales or on
specified intervals of work, as by the hour, day, or week, certain quota of sales volume attained as part of
e.g., a carpenter‘s wage. incentive such as sales commission.
Backwages are subject to income tax and withholding
tax on wages [BIR Ruling No. DA-073-2008]
Fees – received by an employee for the services
rendered to the employer including a director‘s fee of
the company, fees paid to the public officials such as
Honoraria – payments given in recognition for services
clerks of court or sheriffs for services rendered in the
performed for which the established practice
performance of their official duty over and above their
discourages charging a fixed fee, e.g., honorarium of a
regular salaries.
guest lecturer
Tips and Gratuities – those paid directly to the

Fixed or variable allowances, i.e. Transportation,
employee (usually by a customer of the employer) which
Representation, and other allowances such as Cost of
are not accounted for by the employee to the employer
Living Allowances (COLA)
(taxable income but not subject to withholding tax) [RR
General Rule: Fixed or variable transportation, NO. 2-98, Sec. 2.78.1]
representation or other allowances that are received by
a public officer or employee of a private entity, in
addition to the regular compensation fixed for his Hazard or Emergency Pay – additional payment
position or office is COMPENSATION subject to received due to the workers‘ exposure to danger or
withholding tax. (Rev. Regs. 2-98) harm while working. It is normally added to the basic
salary together with the overtime pay and night
Exception: Any amount paid specifically, either as
differential to arrive at gross salary.
advances or reimbursements for travelling,
representation and other bona fide ordinary and
necessary expenses incurred or reasonably expected to
Retirement Pay – a lump sum payment received by an
be incurred by the employee in the performance of his
employee who has served a company for a considerable
duties are NOT COMPENSATION subject to withholding
period of time and has decided to withdraw from work
tax, provided the following conditions are satisfied:
into privacy. [RR 6-82, Sec. 2b]
PAGE 44 OF 275
Pension – a stated allowance paid regularly to a person

on his retirement or to his dependents on his death, in
In general, retirement pay is taxable except in the
consideration of past services, meritorious work, age,
following instances:
loss, or injury. Pension is taxable unless the law states
a) SSS or GSIS retirement pays. otherwise, OR unless the BIR approves the pension plan
of a private company.
b) Retirement pay (R.A. 7641) due to old age
provided the following requirements are met:
i. The retirement program is approved by Vacation and sick leave – rules in determining whether
the BIR Commissioner; money received for vacation and sick leave is taxable or
not:
ii. It must be a reasonable benefit plan.
(Its implementation must be fair and If paid or availed of as salary of an employee who is on
equitable for the benefit of all vacation or on sick leave notwithstanding his absence
employees) from work, it constitutes TAXABLE compensation
iii. The retiree should have been employed income. [RR 6-82, 2d]
for 10 years in the said company; Monetized value of unutilized VACATION leave credits of
iv. The retiree should have been 50 years ten (10) days or less which were paid to private
old or above at the time of retirement; employees during the year, and the monetized value of
vacation and sick leave credits paid to government
and
officials and employees are NOT subject to income tax
v. It should have been availed of for the and to the withholding tax. These are ‗de minimis‘
first time. benefits.‘ [RR no. 5-2011, Sec 2.78.1(A)(7)] Note:
Monetization of sick leave credits of private employees
even if not exceeding 10 days is not exempt from
Separation pay – taxable if VOLUNTARILY availed of. It income tax and withholding tax on wages.
shall not be taxable if involuntary, i.e., death, sickness,
disability, reorganization/ merger of company and Terminal leave or money value of accumulated vacation
company at the brink of bankruptcy or for any cause and sick leave benefits received by heir upon death of
beyond the control of the said official or employee. employee is not taxable.
―For any cause beyond the control.‖ – Connotes Thirteenth month pay and other benefits - Not taxable if
involuntariness on the part of the official or employee. the total amount received is P82,000 [RA 10653] or
The separation from the service of the official or less. Any amount exceeding P82,000 is taxable. [Sec.
employee must not be asked for or initiated by him or it 32(7)e, NIRC]
was not of his own making. Such fact shall be duly
established by the employer by competent evidence
which should be attached to the monthly return for the Fringe Benefits and De Minimis
period in which the amount paid due to the involuntary Fringe Benefits – any good, service, or other benefit
separation was made. furnished or granted by an employer, in cash or in kind,
Amounts received by reason of involuntary separation in addition to basic salaries of an individual employee
[Sec. 33, NIRC]
remain EXEMPT from income tax even if the official or
the employee, at the time of separation, had rendered De Minimis – privileges of relatively small value as
less than ten (10) years of service and/or is below fifty given by the employer to his employees.
(50) years of age.
Fringe Benefits and De Minimis are not considered
Any payment made by an employer to an employer to an compensation subject to income tax and withholding
employee on account of dismissal, constitutes tax.
compensation regardless of whether the employer is
legally bound by contract, statute, or otherwise, to
make such payment. Overtime Pay – premium payment received for working
beyond regular hours of work which is included in the
PAGE 45 OF 275
computation of gross salary of employee. It constitutes withholding and remittance of FBT shall be made on a
compensation. calendar quarterly basis.
Managerial employee: one who is vested with the
powers or prerogatives to lay down and execute
Profit Sharing – the proportionate share in the profits of
management policies and/or to hire, transfer, suspend,
the business received by the employee in addition to his
lay-off, recall, discharge, assign or discipline
wages.
employees.
Supervisory employees: those who, in the interest of the
Awards for special services – awards for past services or employer, effectively recommend such managerial
suggestions to employers resulting in the prevention of actions if the exercise of such authority is not merely
theft or robbery, etc. are also compensations. routinary or clerical in nature but requires the use of
independent judgment.
All employees not falling within any of the above
Beneficial Payments – such as where employer pays the
income tax owed by an employee are additional definitions are considered rank-and-file employees.
compensation income. Fringe benefit tax is imposed on fringe benefits received
by supervisory and managerial employees. The fringe
benefits of rank and file employees are treated as part
Other forms of compensation – other forms received of compensation income subject to income tax and
due to services rendered are compensation paid in kind, withholding tax on compensation.
e.g., insurance premium paid by the employer for
insurance coverage where the heirs of the employee are
the beneficiaries is the employee‘s income. (b) Definition
Note: Any amount which is required by law to be Fringe benefit means any good, service, or other benefit
deducted by the employer from the compensation of an furnished or granted by an employer, in cash or in kind,
employee including the withheld tax is considered as in addition to basic salaries, to an individual employee
part of the employee‘s compensation and is deemed to (except rank and file employees) such as, but not
be paid to the employee as compensation at the time limited to the following:
the deduction is made. (This also applies to deductions
(a) Housing
not required by law.)
(b) Expense Account
(c) Vehicle of any kind
Withholding Tax on Compensation Income
(d) Household personnel, such as maid, driver and
The income recipient (i.e., EE) is the person liable to pay
others
the tax on income, yet to improve the collection of
compensation income of EEs, the State requires the ER (e) Interest on loan at less than market rate to the
to withhold the tax upon payment of the compensation extent of the difference between the market
income. rate and actual rate granted.
(f) Membership fees, dues and other expenses
borne by the employer for the employee in
ii. Fringe Benefits
social and athletic clubs and similar
(a) Special treatment of fringe benefits organizations
Persons liable: The Employer (as a withholding agent), (g) Expenses for foreign travel
whether individual, professional partnership or a
(h) Holiday and vacation expenses
corporation, regardless of whether the corporation is
taxable or not, or the government and its (i) Educational assistance to the employee or his
instrumentalities, is liable to remit the fringe benefit tax dependents; and
to the BIR once fringe benefit is given to a managerial
(j) Life or health insurance and other non-life
or supervisory employee.
insurance premiums or similar amounts on
The fringe benefit tax (FBT) is a final tax on the excess of what the law allows.[Sec. 33(B)]
employee‘s income to be withheld by the employer. The
PAGE 46 OF 275
Tax Rate and Tax Base (c) Taxable and non-taxable fringe benefits
Tax base is based on the grossed-up monetary value Fringe Benefits NOT subject to Tax
(GMV) of fringe benefits. Rate is generally 32%.
i. Fringe benefits not considered as gross
GMV represents: (a) the whole amount of income income – if it is required or necessary to the
realized by the employee which includes the net amount business of employer; if it is for the
of money or net monetary value of property that has convenience or advantage of employer
been received; and (b) the amount of fringe benefit tax
ii. Fringe Benefit that is not taxable under Sec.
due from the employee which has been withheld and
32 (B) – Exclusions from Gross Income
paid by the employer for and in behalf of his employee..
Fringe benefits not subject to Fringe Benefit Tax:

How GMV is determined
a) Fringe Benefits which are authorized and
GMV is determined by dividing the actual monetary
exempted from income tax under the Code or
value of the fringe benefit by 68% [100% - tax rate of
under special laws;
32%]. For example, the actual monetary value of the
fringe benefit is P1,000. The GMV is equal to b) Contributions of the employer for the benefit of
P1,470.59 [P1,000 / 0.68]. The fringe benefit tax, the employee for retirement, insurance and
therefore, is P470.59 [P1470.59 x 32%]. hospitalization benefit plans;
Special Cases: c) Benefits given to the rank-and-file employees,
whether granted under a collective bargaining
a) For fringe benefits received by non-resident
agreement or not; and
alien not engaged in trade of business in the
Philippines (NRANETB), the tax rate is 25% of d) Fringe benefits granted for the convenience of
the GMV. The GMV is determined by dividing the employer;
the actual monetary value of the fringe benefit e) De minimis benefits
by 75% [100% - 25%].
b) For fringe benefits received by alien individuals
and Filipino citizens employed by regional or The exemption of any FB from the FBT shall not be
area headquarters, regional operating interpreted to mean exemption from any other income
headquarters, offshore banking units (OBUs), tax imposed under the Tax Code except if the same is
or foreign service contractor or by a foreign likewise expressly exempt from any other income tax
subcontractor engaged in petroleum imposed under the Tax Code or under any other existing
operations in the Philippines, or by any of their law. Thus, if the FB is exempted from the FBT, the same
Filipino individual employees who are may, however, still form of the employee‘s gross
employed and occupying the same positions compensation income which is subject to income tax;
as those occupied by the alien employees, the hence, likewise subject to withholding tax on
tax rate is 15% of the GMV. The GMV is compensation income payment.
determined by dividing the actual monetary
value of the fringe benefit by 85% [100% -
15%]. De minimis benefits (exempt from income tax and
withholding tax on compensation income of both
What is the tax implication if the employer gives ‗fringe managerial and rank and file EEs) [Revenue Regulation
benefits‘ to rank-and-file employees? Fringe benefits No. 5-2011]:
given to a rank-and-file employee are treated as part of
his compensation income subject to normal tax rate a) Monetized unused vacation leave credits of
and withholding tax on compensation income, except private employees not exceeding ten (10) days
de minimis benefits and benefits provided for the during the year;
convenience of the employer. b) Monetized value of vacation and sick leave
Payor of Fringe Benefit Tax (FBT): The employer credits paid to government officials and
withholds and pays the FBT but the law allows him to employees;
deduct such tax from his gross income.
PAGE 47 OF 275
c) Medical cash allowance to dependents of Fringe Benefit Tax

employees, not exceeding P750 per employee Housing Privilege Base (Monetary
per semester or P125 per month; Value)
d) Rice subsidy of P1,500 or one (1) sack of 50 value of the FB
kg. rice per month amounting to not more than
P1,500; Assignment of residential MV= [5% (FMV or ZV,
property owned by employer whichever is higher) x
e) Uniform and clothing allowance not exceeding for use of employees 50%]
P5,000 per annum (RR 8-2012)
Purchase of residential MV= 5% x acquisition
f) Actual medical assistance, e.g., medical property in installment basis cost exclusive of
allowance to cover medical and healthcare for the use of the employee interest x 50%
needs, annual medical/executive check-up,
maternity assistance, and routine Purchase of residential MV= FMV or ZV,
consultations, not exceeding P10,000.00 per property and ownership is whichever is higher
annum; transferred in the name of the
employee
g) Laundry allowance not exceeding P300 per
month; ZV = Zonal Value = value of the land or improvement, as
declared in the Real Property Declaration Form
h) Employees achievement awards, e.g., for
length of service or safety achievement, which FMV = Fair Market Value = FMV as determined by the
must be in the form of a tangible personal Commissioner of Internal Revenue
property other than cash or gift certificate, with
an annual monetary value not exceeding
P10,000 received by the employee under an Non-taxable housing fringe benefit:
established written plan which does not a) Housing privilege of the Armed Forces of the
discriminate in favor of highly paid employees; Philippines (AFP) officials – i.e, those of the
i) Gifts given during Christmas and major Philippine Army, Philippine Navy, or Philippine
anniversary celebrations not exceeding Air Force
P5,000 per employee per annum; and b) A housing unit, which is situated inside or
j) Daily meal allowance for overtime work and adjacent to the premises of a business or
night/graveyard shift not exceeding twenty- factory – maximum of 50 meters from
five percent (25%) of the basic minimum wage perimeter of the business premises
on a per region basis; c) Temporary housing for an employee who stays
in housing unit for three months or less
All other benefits given by employers which are not

included in the above enumeration shall NOT be Motor Vehicle
considered as "de minimis" benefits and hence, shall
Motor Vehicle Fringe Benefit Tax
be subject to withholding tax on compensation (rank
Base
and file employees) and FBT (managerial/supervisory
employees). Purchased in the name of the MV= acquisition cost
employee
Housing Cash given to employee to MV= cash received by

purchase in his own name employee
Fringe Benefit Tax
Housing Privilege Base (Monetary Purchase on installment, in MV= acquisition cost
Value) the name of employee exclusive of interest
LEASE of residential property MV= 50% of lease Employee shoulders part of MV= amount
for the residential use of payments the purchase price, ownership shouldered by
employees in the name of employee employer
Employer owns and maintains MV= (AC/5) x 50%
where MV = monetary a fleet of motor vehicles for
PAGE 48 OF 275
use of the business and of Deductions from Gross

employees Income
Employer leases and MV= 50% of rental
maintains a fleet for the use payment (a) Types of Properties
of the business and of
employees Capital v. Ordinary Asset
iii. Professional Income Ordinary Assets Capital Assets
Refers to fees received by a professional from the

practice of his profession, provided that there is NO (1) Stock in trade of the Property held by the
employer-employee relationship between him and his taxpayer/ other property of taxpayer, whether or not
clients. a kind which would properly connected with his trade
be included in the inventory or business which is not
of the taxpayer if on hand an ordinary asset.
iv. Income from Business at the close of the taxable
- Any income derived from doing business year.
Generally, they include:
Doing business: The term implies a continuity of (2) Property held by the
commercial dealings and arrangements, and taxpayer primarily for sale (1) stocks and securities
contemplates, to that extent, the performance of acts or to customers in the held by taxpayers other
works or the exercise of some of the functions normally ordinary course of his trade than dealers in securities
incident to, and in progressive prosecution of, the or business. (2) real property not used
purpose and object of its organization. (3) Property used in the in trade or business,
trade or business of a such as residential
character which is subject house and lot, idle or
v. Income from Dealings in Property to the allowance for vacant land or building
Dealings in property such as sales or exchanges may depreciation, or
(3)investment property,
result in gain or loss. The kind of property involved (i.e., (4) Real property used in such as interest in a
whether the property is a capital asset or an ordinary the trade or business of the partnership, stock
asset) determines the tax implication and income tax taxpayer, including investment
treatment, as follows: property held for rent. (4)Personal or non-
Taxable Ordinary Net Capital Gains business properties,
Net Net Income (other than those such as family car, home
= +
Income subject to final appliances, jewelry.
CGT)
(b) Types of Gains from dealings in property

Ordinary Asset Capital Asset (1) Ordinary income vis-à-vis Capital gain. –
Gain from sale, exchange or other disposition If the asset involved is classified as ordinary, the entire
Ordinary Gain (part of Capital Gain amount of the gain from the transaction shall be
Gross Income) included in the computation of gross income [Sec
Loss from sale, exchange, or other disposition 32(A)], and the entire amount of the loss shall be
Ordinary Loss (part of deductible from gross income. [Sec 34(D)]. (See
Allowable Deductions Capital Loss Allowable Deductions from Gross Income - Losses
from Gross Income)
Excess of Gains over Losses If the asset involved is a capital asset, the rules on
capital gains and losses apply in the determination of
Part of Gross Income Net Capital Gain
the amount to be included in gross income. (See
Excess of Losses over Gains Capital Gains and Losses). These rules do not apply to:
Part of Allowable Net Capital Loss (a) real property with a capital gains tax (final tax), or (2)
shares of stock of a domestic corporation with a capital
PAGE 49 OF 275
gains tax (final tax). Also, sale of shares of stock of a b) Capital gains and losses are recognized to the
domestic corporation, held as capital assets, through extent of their full amount.
the stock exchange by either individual or corporate
c) Capital losses are deductible only to the extent
taxpayers, is subject to ½ of 1% percentage tax based
of capital gains.
on gross selling price.
d) Net capital losses are not deductible from
The following percentages of the gain or loss recognized
ordinary gain or income but ordinary losses are
upon the sale or exchange of a capital asset shall be
deductible from net capital gains.
taken into account in computing net capital gain, net
capital loss, and net income: Note: For sale, barter, exchange or other forms of
disposition of shares of stock subject to the 5% or 10%
a) If the taxpayer is an individual –
capital gains tax on the net capital gain during the
 100% if the capital asset has been taxable year, the capital losses realized from this type
held for not more than 12 months; of transaction during the taxable year are deductible
and only to the extent of capital gains from the same type of
transaction during the same period. If the transferor of
 50% of the capital asset has been the shares is an individual, the rule on holding period
held for more than 12 months and capital loss carry-over will not apply,
b) If the taxpayer is a corporation – notwithstanding the provisions of Section 39 of the Tax
Code. (RR 6-2008, c.4)
 100%, regardless of the holding
period of the capital asset (Sec. (2) Actual gain vis-à-vis Presumed gain
39(B), NIRC) Presumed Gain: In the sale of real property located in
The tax rules for the gains or losses from sales or the Philippines, classified as capital asset, the tax base
exchanges of capital assets over ordinary assets are as is the gross selling price or fair market value, whichever
follows: is higher. The law presumes that the seller makes a gain
from such sale. Thus, whether or not the seller makes a
a) Net capital gain is added to ordinary gain but profit from the sale of real property, he has to pay 6%
net capital loss is not deductible from ordinary capital gains tax. In fact, he has to pay the tax, even if
gain. he incurs an actual loss from the sale thereof. (However,
b) Net ordinary loss is deductible from ordinary when the buyer is the government, the individual seller
gain. has the option whether to be taxed at the graduated
income tax rates or at 6% capital gains tax.)
c) Capital losses are deductible only to the extent
of the capital gain. Actual Gain: The tax base in the sale of real property
classified as an ordinary asset is the actual gain. If the
d) There is a net capital loss carry-over on the net seller incurs a loss from the sale, such loss may be
capital asset‘s loss in a taxable year which deducted from his gross income during the taxable year.
may be deducted as a short-term capital loss The ordinary gain shall be added to the operating
from the net capital gain of the subsequent income and the net taxable income shall be subject to
taxable year; provided that the following the graduated rates from 5% to 32% (if an individual) or
conditions shall be observed: to 30% corporate tax or to 2% MCIT (if a corporation).
e) The taxpayer is other than a corporation;
f) The amount of loss does not exceed the Computation of the amount of gain or loss
income before exemptions at the year when
the loss was sustained; and Amount realized from sale or other
disposition of property
g) The holding period should not exceed 12
months. (Valencia) Less: Basis or Adjusted Basis
When a capital gain or capital loss is sustained by a NET GAIN (LOSS)
corporation, the following rules shall be observed:
a) There is no holding period; hence, there is no Note: Amount realized from sale or other disposition of
net capital loss carry-over.
property = sum of money received + fair market value of
the property (other than money) received
PAGE 50 OF 275
capital asset held for not more than 12 months (Sec.

39(D), NIRC).
Note: When a taxpayer sells a real or personal property,
he should deduct its cost from its selling price to
measure the gain or loss from the sales transaction
(6) Dealings in real property situated in the Philippines
(Sec. 40, NIRC).
Persons Liable and Transactions Affected:
(a) Individual taxpayers, estates and trusts
(3) Long term capital gain vis-à-vis Short term capital
gain (b) Sale or exchange or other disposition of real
property considered as capital assets.
Long-term capital gain: Capital asset is held for more
than twelve months before it is sold. Only 50% of the (c) Includes "pacto de retro sale" and other
gain is recognized. conditional sale.
Short-term capital gain: Capital asset is held for 12 (d) Domestic Corporation
months or less, 100% of the gain is subject to tax. (e) Sale or exchange or disposition of lands
and/or building which are not actually used in
business and are treated as capital asset.
(4) Net Capital Gain vis-à-vis Net Capital Loss
Rate and Basis of Tax
Net Capital Gain: Excess of the gains over the losses on
sales or exchange of capital assets during the taxable A final withholding tax of 6% is based on the gross
year. selling price or fair market value or zonal value
whichever is higher.
Net Capital Loss: Excess of the losses over the gains on
sales or exchanges of capital assets during the taxable Note: Gain or loss is immaterial, there being a
year. [Sec. 39A, NIRC] conclusive presumption of gain.
(5) Income tax treatment of capital loss (7) Dealings in shares of stock of Philippine
corporations
(a) Capital loss limitation rule (applicable to both
corporations and individuals) Persons Liable to the Tax:
General Rule: Losses from sales or exchanges of capital (a) Individual taxpayer, whether citizen or alien;
assets shall be allowed only to the extent of the gains (b) Corporate taxpayer, whether domestic or
from such sales or exchanges (Sec. 39(C), NIRC). foreign; and
Exception for Banks and Trust Companies: If a bank or (c) Other taxpayers not falling under (a) and (b)
trust company incorporated under the laws of the
above, such as estate, trust, trust funds and
Philippines, a substantial part of whose business is the pension funds, among others.
receipt of deposits, sells any bond, debenture, note,
certificate or other evidence of indebtedness issued by Persons not liable:
any corporation (including one issued by a government (a) Dealers in securities
or political subdivision thereof) with interest coupons or
in registered form, any loss resulting from such sale (b) Investor in shares of stock in a mutual fund
shall not be subject to the foregoing limitation and shall company
not be included in determining the applicability of such (c) All other persons who are specifically exempt
limitation to other losses (Sec. 39(C), NIRC). from national internal revenue taxes under
(b) Net loss carry-over rule (applicable only to existing investment incentives and other
individuals) special laws.
If an individual sustains in any taxable year a net capital
loss, such loss (in an amount not in excess of the net (a) Shares listed and traded through the stock exchange
income for the year) shall be treated in the succeeding other than sale by a dealer in securities:
taxable year as a loss from the sale or exchange of a
PAGE 51 OF 275
½ of 1% of the gross selling price of the stock or gross prescribed return of his intention to avail the
value in money of the shares of stock sold, bartered, tax exemption;
exchanged or otherwise disposed which shall be
(5) Can only be availed of onlyonce every ten (10)
assumed and paid by the seller or transferor through
years;
the remittance of the stock transaction tax by the seller
or transferor‘s broker. (6) The historical cost or adjusted basis of his old
principal residence shall be carried over to the
Note: In the nature of percentage tax and not income
cost basis of his new principal residence
tax; exempt from income tax per Section 127 (d):
(7) If there is no full utilization, the portion of the
―Any gain derived from the sale, barter, exchange or
gains presumed to have been realized shall be
other disposition of share of stock under this section
subject to capital gains tax.
shall be exempt from taxes imposed in Sections 24(C),
27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of this Code and (8) Portion of presumed gains subject to CGT:
from the regular individual or corporate income tax.‖ (Unutilized/GSP) x (higher of GSP or FMV)
Note: Percentage tax under Sec. 127 is NOT
DEDUCTIBLE for income tax purposes. vi. Passive Investment Income
Under Sec 24(B) of the Tax Code, a final tax is imposed
(b) Shares not listed and traded through the stock upon gross passive income of citizen and resident
exchange aliens. An income is considered passive if the taxpayer
merely waits for it to be realized.
Net capital gains derived during the taxable year from
sale, exchange, or transfer shall be taxed as follows (on
a per transaction basis): (a) Interest Income
An earning derived from depositing or lending of money,
Amount of Capital Gain Tax Rate goods or credits [Valencia and Roxas] e.g., interest
income from government securities such as Treasury
Not over P 100,000 5% Bills.
On any amount in excess 10% Unless exempted by law, interest income received by
of P 100,000 the taxpayer, whether or not usurious, is subject to
income tax.
(8) Sale of principal residence
Principal residence: the family home of the individual (b) Dividend Income
taxpayer (RR 14-2000) A form of earnings derived from the distribution made
Disposition of principal residence (capital asset) is by a corporation out of its earnings or profits and
exempt from Capital Gains Tax, provided: payable to its stockholders, whether in money or in
property.
(1) Sale or disposition of the old principal
residence; In general, dividends are subject to final tax under the
Tax Code.
(2) By natural persons - citizens or aliens provided
that they are residents taxable under Sec. 24
of the Code (does not include an estate or a (1) Cash dividends
trust);
Dividends are subject to final tax under the NIRC.
(3) The proceeds of which is fully utilized in (a) However, dividends received by a domestic corporation
acquiring or (b) constructing a new principal from another domestic corporation, and a non-resident
residence within eighteen (18) months from foreign corporation from a domestic corporation is
date of sale or disposition; exempt from income tax.
(4) Notify the Commissioner within thirty (30) days
from the date of sale or disposition through a
PAGE 52 OF 275
Cash dividend is the most common form of dividend,

valued at the amount of money received by the
stockholder. Cash dividends and property dividends are
subject to income tax.
(2) Stock dividends

Stock dividend is generally exempt from income tax,
EXCEPT:
(a) If a corporation cancels or redeems stock
issued as a dividend at such time and in such
manner as to make the distribution and
cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a
taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall
be considered as taxable income to the extent
that it represents a distribution of earnings or
profits (Sec. 73(B), NIRC); or
(b) Where there is an option that some
stockholders could take cash or property
dividends instead of stock dividends; some
stockholders exercised the option to take cash
of property dividends; and the exercise of
option resulted in a change of the
stockholders‘ proportionate share in the (c) Royalty Income
outstanding share of the corporation.
Royalty is a valuable property that can be developed
and sold on a regular basis for a consideration; in which
(3) Property dividends case, any gain derived therefrom is considered as an
active business income subject to the normal corporate
Property dividends or dividends in the form of property tax.
are subject to tax at preferential rate under the NIRC.
Where a person pays royalty to another for the use of its
intellectual property, such royalty is generally a passive
(4) Liquidating dividends income of the owner thereof subject to withholding tax.
Represents distribution of all the property or assets of a

corporation in complete liquidation or dissolution. It is (d) Rental Income
strictly not dividend income, but rather is treated in
effect, a return of capital to the extent of the Refers to earnings derived from leasing real estate as
shareholder‘s investment. The difference between the well as personal property. Aside from the regular
cost or other basis of the stock and the amount received amount of payment for using the property, it also
in liquidation of the stock is a capital gain or a capital includes all other obligations assumed to be paid by the
loss. Where property is distributed in liquidation, the lessee to the third party in behalf of the lessor (e.g.,
amount received is the FMV of such property. The interest, taxes, loans, insurance premiums, etc.) [RR
income is subject to ordinary income tax rates. It is 19-86]
subject neither to the FWT on dividends nor to the CGT
on sale of shares.
Rent income may be in the following forms:
(1) Cash, at the stipulated price
(2) Obligations of the lessor to third persons paid
or assumed by the lessee in consideration of
PAGE 53 OF 275
the contract of lease, e.g., real estate tax on Lessor Tax Rate
the property leased assumed by the lessee
Domestic Corporation Net taxable income shall
(3) Advance payment be subject to 30%
Resident Foreign
If the advance payment is actually a loan to the lessor, corporate income tax or
Corporation
its gross income will be
or an option money for the property, or a security
deposit for the faithful performance of certain subject to 2% MCIT
obligations of the lessee, such advance payment is not Non-resident Foreign Gross rental income
income to the lessor. Corporation from real property
However, a security deposit that is applied to rental is located in the
taxable income to the lessor. Philippines shall be
subject to 30%
If the advance payment is, in fact, a pre-paid rental, corporate income tax,
received by the lessor under a claim of right and without such tax to be withheld
restriction as to its use, then such payment is income to and remitted by the
the lessor. lessee in the Philippines
Pre-paid rent must be reported in full in the year of
receipt, regardless of the accounting method used by
the lessor. (3) Tax treatment of:
(1) Lease of personal property (a) Leasehold improvements by lessee
Rental income on the lease of personal property Rent Income from leasehold improvements:
located in the Philippines and paid to a non-resident (i) Outright method- lessor shall report as income
taxpayer shall be taxed as follows: FMV of the buildings or improvements subject
NRFC NRA-NETB to the lease in the year of completion.
(ii) Spread-out method- lessor shall spread over
Vessel 4.5% 25%
the remaining term of the lease the estimated
Aircraft, machineries 7.5% 25% depreciated (book) value of such buildings or
and other Equipment improvements at the termination of the lease,
and reports as income for each remaining term
Other assets 30% 25%
of the lease an aliquot part thereof.
estimated BV at the end of the lease
(2) Lease of real property contract/ remaining lease term = Income per
year
Lessor Tax Rate
If for any reason than a bona fide purchase from the
Citizen lessee by the lessor, the lease is terminated, so that the
Resident Alien Net taxable income shall lessor comes into possession or control of the property
be subject to the prior to the time originally fixed, lessor receives
Non-resident alien additional income for the year which the lease is so
graduated income tax
engaged in trade or terminated to the extent of the value of such buildings
rates
business in the or improvements when he became entitled to such
Philippines possession exceeds the amount already reported as
Non-resident alien not Rental income from real income on account of the erection of such building or
engaged in trade or property located in the improvement. No appreciation in value due to causes
business in the Philippines shall be other than the premature termination of lease shall be
Philippines subject to 25% final included (Sec. 49, Rev. Reg. No. 2).
withholding tax unless a If the building or other leasehold improvement is
lower rate is imposed destroyed before the expiration of the lease, the lessor
pursuant to an effective is entitled to deduct as a loss for the year when such
tax treaty destruction takes place, the amount previously reported
as income because of the erection of the improvement,
PAGE 54 OF 275
less any salvage value, to the extent that such loss was (b) The recipient was selected without any action
not compensated by insurance (Sec. 49, Rev. Reg. No. on his part to enter a contest or proceedings;
2), and
(c) The recipient is not required to render
substantial future services as a condition to
(b) VAT added to rental/paid by the lessee
receiving the prize or award.
If the lessee is VAT-registered, treat VAT paid as input
(d) Prizes and awards granted to athletes in local
VAT;
and international sports competitions and
If the lessee is not VAT-registered OR not liable to VAT, tournaments held in the Philippines and
treat VAT paid as additional rent expense deductible abroad and sanctioned by their national
from gross income. associations shall be EXEMPT from income tax.
(c) Advance Rental/ Long Term Lease ix. Pensions, Retirement Benefit, or Separation Pay
Pre-paid rent must be reported in full in the year of Paid for past employment services rendered.
receipt, regardless of the accounting method used by
A stated allowance paid regularly to a person on his
the lessor.
retirement or to his dependents on his death, in
consideration of past services, meritorious work, age,
loss or injury. It is generally taxable unless the law
vii. Annuities, Proceeds from Life insurance or Other
Types of Insurance states otherwise. [VALENCIA, Income Taxation 5th ed.
(2009)]
Annuities are installment payments received for life
insurance sold by insurance companies.
The aleatory contract of life annuity binds the debtor to x. Income from Any Source Whatever
pay an annual pension or income during the life of one Inclusion of all income not expressly exempted within
or more determinate persons in consideration of a the class of taxable income under the laws irrespective
capital consisting of money or other property, whose of the voluntary or involuntary action of the taxpayer in
ownership is transferred to him at once with the burden producing the gains, and whether derived from legal or
of the income. [Art. 2021, New Civil Code] illegal sources
The annuity payments represent a part that is taxable
and not taxable. If part of annuity payment represents
(a) Forgiveness of indebtedness
interest, then it is a taxable income. If the annuity is a
return of premium, it is not taxable.
The cancellation or forgiveness of indebtedness may
have any of three possible consequences:
viii. Prizes and Awards It may amount to payment of income. If, for example, an
A prize is a reward for a contest or a competition. It individual performs services to or for a creditor, who, in
represents remuneration for an effort reflecting one‘s consideration thereof, cancels the debt, income in that
superiority. amount is realized by the debtor as compensation for
personal services.
Contest prizes and awards received are generally
It may amount to a gift. If a creditor wishes merely to
taxable. Such payment constitutes gain derived from
labor. benefit the debtor, and without any consideration
therefore, cancels the debt, the amount of the debt is a
The EXCEPTIONS are as follows: gift to the debtor and need not be included in the
(a) Prizes and awards made primarily in latter‘s report of income.
recognition of religious, charitable, scientific, It may amount to a capital transaction. If a corporation
educational, artistic, literary or civic to which a stockholder is indebted forgives the debt, the
achievements are EXCLUSIONS from gross transaction has the effect of a payment of dividend.
income if:
PAGE 55 OF 275
Tax Benefit Rule

This is a general principle in taxation which states that In Case A, the entire amount recovered (P2,000) is
is a taxpayer deducted an item on his income tax return included in the computation of gross income in Year 2
and enjoyed a tax benefit (reduced his income tax) because the taxpayer benefited by the same extent.
thereby, and in a subsequent year recovers all or part of Prior to the write-off, the taxable income was
that item, he will recognize gross income in the year the P300,000; after the write-off, the taxable income was
deducted item is recovered. The rule has both an reduced to P298,000.
inclusionary and an exclusionary component, i.e., the
In Case B, none of the P2,000 recovered would be
recovery is included in the taxpayer‘s gross income to
recognized as gross income in Year 2. Note that even
the extent that the taxpayer obtained a tax benefit from
without the write-off, the taxpayer would not have paid
the prior year‘s deduction, and the recovery is excluded
any income tax anyway. The ―taxable income‖ before
to the extent that the prior year‘s deduction did not
the write-off was actually a net loss.
provide a tax benefit.
In Case C, only P5,000 of the P6,000 recovered would
(b) Recovery of accounts previously written-off
be recognized as gross income in Year 2. It was only to
this extent that the taxpayer benefited from the write-off.
Bad debts claimed as a deduction in the preceding
The taxpayer did not benefit from the extra P1,000
year(s) but subsequently recovered shall be included as
because at this point, the P1,000 was already a net
part of the taxpayer‘s gross income in the year of such
loss.
recovery to the extent of the income tax benefit of said
deduction. There is an income tax benefit when the
deduction of the bad debt in the prior year resulted in (c) Receipt of tax refunds or credit
lesser income and hence tax savings for the company.
(Sec. 4, RR 5-99)
General rule: A refund of a tax related to the business or
Illustration: the practice of profession, is taxable income (e.g.,
refund of fringe benefit tax) in the year of receipt to the
Case A Case B Case C
extent of the income tax benefit of said deduction (i.e.,
Year 1 the tax benefit rule applies).
Gross Income 500,000 400,000 500,000
Less: Allowable Exceptions: However, the following tax refunds are not
Deductions to be included in the computation of gross income:
(before write-off (1) Philippine income tax, except the fringe
of Uncollectible benefit tax
Accounts/Debts (200,000 (480,000 (495,000
) ) ) ) (2) Income tax imposed by authority of any foreign
Taxable Income country, if the taxpayer claimed a credit for
(Net Loss) 300,000 (60,000) 5,000 such tax in the year it was paid or incurred.
before write-off (3) Estate and donor‘s taxes
Deduction for
Accounts (4) Taxes assessed against local benefits of a kind
Receivable (2,000) (2,000) (6,000) tending to increase the value of the property
written off assessed (Special assessments)
Taxable Income (5) Value Added Tax
(Net Loss) after 298,000 (62,000) (1,000)
write-off (6) Fines and penalties due to late payment of tax
(7) Final taxes
Year 2 (8) Capital Gains Tax
Recovery of
Amounts Written 2,000 2,000 6,000 Note: The enumeration of tax refunds that are not
Off taxable (income) is derived from an enumeration of tax
payments that are not deductible from gross income.
Taxable Income 2,000 - 5,000
on the Recovery
PAGE 56 OF 275
If a tax is not an allowable deduction from gross income From property located in the Philippines or from any
when paid (no reduction of taxable income, hence no interest in such property, including rentals or royalties
tax benefit), the refund is not taxable. for –
(a) The use of or the right or privilege to use in the
Philippines any copyright, patent, design or
(d) income from any source whatever
model, plan, secret formula or process,
goodwill, trademark, trade brand or other like
(e) Source rules in determining income from within and property or right;
without
(b) The use of, or the right to use in the Philippines
any industrial, commercial or scientific
The following items of gross income shall be treated as equipment;
gross income from sources WITHIN the Philippines:
(c) The supply of scientific, technical, industrial or
(1) Interests commercial knowledge or information;
Derived from sources within the Philippines, and (d) The supply of any assistance that is ancillary
interests on bonds, notes or other interest-bearing and subsidiary to, and is furnished as a means
obligation of residents. of enabling the application or enjoyment of,
Ultimately, the situs of interest income is the any such property or right as is mentioned in
(a), any such equipment as is mentioned in (b)
residence of the debtor.
or any such knowledge or information as is
(2) Dividends mentioned in (c);
Dividends received: (e) The supply of services by a nonresident person
from a domestic corporation; and or his employee in connection with the use of
property or rights belonging to, or the
from a foreign corporation, UNLESS less than 50% installation or operation of any brand,
of its gross income for the previous 3-year period machinery or other apparatus purchased from
was derived from sources within the Philippines [in such nonresident person;
which case it will be treated as income partly from
within and partly from without]. (f) Technical advice, assistance or services
rendered in connection with technical
management or administration of any
The income which is considered as derived from within scientific, industrial or commercial
the Philippines is obtained by using the following undertaking, venture, project or scheme; and
formula: (g) The use of or the right to use:
Philippine Gross Income* x Dividend = Income Within (1) Motion picture films;
Worldwide Gross Income*
(2) Films or video tapes for use in connection
NOTE: * of the corporation giving the dividend with television; and
As a rule, the situs of dividend income is the residence (3) Tapes for use in connection with radio
of the corporation declaring the dividend. broadcasting.
As a rule, the situs of rental income is the place where
the property is located. The situs of royalty income is
(3) Services
where the rights are exercised.
Compensation for labor or personal services performed
in the Philippines: As a rule, the situs of compensation
is the place of performance of the services. (5) Sale of Real Property
As a rule, the situs of the income from sale of real
property is where the realty is located.
(4) Rentals and Royalties
(6) Sale of Personal Property

PAGE 57 OF 275
General Rule: Gains, profits and income from the sale Exclusions from gross income refer to income received
of personal property, subject to the following rules: or earned but is not taxable as income because it is
exempted by law or by treaty. Such tax-free income is
not to be included in the income tax return unless
Place of Place of Treatment** information regarding it is specifically called for.
PURCHASE SALE Receipts which are not in fact income are, of course,
excluded from gross income.
Philippines Abroad Income from
Without The exclusion of income should not be confused with
the reduction of gross income by the application of
Abroad Philippines Income from
allowable deductions. While exclusions are simply not
Within
taken into account in determining gross income,
** in other words, the situs of the income from the sale deductions are subtracted from gross income to arrive
of personal property is the place of sale. at net income. [De Leon]
Exceptions: Items of Exclusions representing return of capital

(a) Gain from the sale of shares of stock in a Amount of capital is generally recovered through
domestic corporation deduction of the cost or adjusted basis of the property
sold from the gross selling price or consideration, or
(b) Treated as derived entirely from sources within
through the deduction from gross income of
the Philippines regardless of where the said
depreciation relating to the property used in trade or
shares are sold.
business before it is sold.
(c) Gains from the sale of (manufactured)
It may also related to indemnities, such as proceeds of
personal property:
life insurance paid to the insured‘s beneficiaries and
(d) produced (in whole or in part) by the taxpayer return of premiums paid by the insurance company to
within and sold without the Philippines, or the insured under a life insurance, endowment or
annuity contract.
(e) produced (in whole or in part) by the taxpayer
without and sold within the Philippines Damages, in certain instances, may also be exempt
because they represent return of capital.
(f) Treated as derived partly from sources within
and partly from sources without the
Philippines.
Items of Exclusion because it is subject to another
internal revenue tax
Place of Place of Treatment The value of property acquired by gift, bequest, devise
PRODUCTION SALE or descent is exempt from income tax on the part of the
recipient because the receipt of such property is already
Philippines Abroad Partly within,
subject to transfer taxes (estate tax or donor‘s tax)
partly without
Abroad Philippines Partly within,
partly without Items of Exclusions because they are expressly exempt
from income tax
(1) Under the Constitution
(8) Shares of Stock of Domestic Corporation
(2) Under a tax treaty
Treated as derived entirely from sources within the
Philippines regardless of where the said shares are sold. (3) Under special laws
i. Rationale for the Exclusions

B.3.6. Exclusions from gross income The term ―exclusions‖ refers to items that are not
included in the determination of gross income because:
PAGE 58 OF 275
(a) They represent return of capital or are not b) Also, all assets and revenues of a non-stock,
income, gain or profit; non-profit private educational institution used
directly, actually and exclusively for private
(b) They are subject to another kind of internal
educational purposes shall be exempt from
revenue tax;
taxation.
(c) They are income, gain or profit expressly
exempt from income tax under the
Constitution, tax treaty, Tax Code, or a general v. Exclusions Under the Tax Code (Sec. 32(b), NIRC)
or special law. [Mamalateo]
(a) Proceeds of life insurance policies.—
General rule: The proceeds of life insurance policies
ii. Taxpayers Who May Avail of the Exclusions paid to his estate or to any beneficiary (but not a
transferee for a valuable consideration), directly or in
trust, upon the death of the insured, are excluded from
Exclusion Taxpayer the gross income of the beneficiary. However, if such
amounts are held by the insurer under an agreement to
Return of capital All taxpayers since there is
pay interest thereon, the interest payments received by
no income.
the insured shall be included in gross income. The
Already subject to internal All taxpayers unless interest income shall be taxed at the graduated income
revenue tax provided that income is to tax rates.
be included.
Express exclusion As expressly provided. (b) Return of premium paid.—
General rule: The amount received by the insured as a
iii. Exclusions Distinguished from Deductions and Tax return of premiums paid by him under life insurance,
Credit endowment, or annuity contracts, either during the term
or at the maturity of the term mentioned in the contract
Exclusions from gross income refer to flow of wealth to or upon surrender of the contract is a return of capital
the taxpayer which are not treated as part of gross and not income.
income for purposes of computing the taxpayer‘s
taxable income, due to the following reasons: (1) it is This refers to the cash surrender value of the contract.
exempted by the Constitution or a statute; or (2) it does Exception: If the amounts received by the insured (when
not come within the definition of income. added to the amounts already received before the
Deductions, on the other hand, are the amounts which taxable year under such contract) exceed the aggregate
the law allows to be subtracted from gross income in premiums or considerations paid (whether or not paid
order to arrive at net income. during the taxable year), then the excess shall be
included in gross income.
Exclusions pertain to the computation of gross income,
while deductions pertain to the computation of net
income. (c) Amounts received under life insurance, endowment
Exclusions are something received or earned by the or annuity contracts.— Amounts received (other than
taxpayer which do not form part of gross income while amounts paid by reason of the death of the insured and
deductions are something spent or paid in earning interest payments on such amounts) under a life
gross income. insurance, endowment or annuity contracts are
excluded from gross income, but if such amounts (when
Tax Credit refers to amounts subtracted from the added to amounts already received before the taxable
computed tax in order to arrive at taxes payable. year under such contract) exceed the aggregate
premiums of considerations paid (whether or not paid
during the taxable year), then the excess shall be
iv. Exclusions Under the Constitution
included in gross income. However, in the case of a
a) Income derived by the government or its transfer for valuable consideration, by assignment or
political subdivisions from the exercise of any otherwise, of a life insurance, endowment , or annuity
essential governmental function contract, or any interest therein, only the actual value of
such consideration and the amount of the premiums
PAGE 59 OF 275
and other sums subsequently paid by the transferee are (f) Income exempt under tax treaty.— Income of any kind,
exempt from taxation. to the extent required by any treaty obligation binding
upon the Government of the Philippines.
(d) Value of property acquired by gift, bequest, devise or

descent.— Gifts, bequests and devises (which are (g) Retirement benefits, pensions, gratuities, etc.—
subject to estate or gift taxes) are excluded from gross These are:
income, BUT not the income from such property. If the
(1) Retirement benefits under RA 7641, RA 4917,
amount received is on account of services rendered,
and Section 60(B) of the NIRC
whether constituting a demandable debt or not, or the
use or opportunity to use of capital, the receipt is (2) Terminal pay
income [Pirovano v. Commissioner G.R. No. L- (3) Retirement Benefits from foreign government
19865, July 31, 1965] agencies
(4) Veterans benefits
(e) Amount received through accident or health (5) Benefits under the Social Security Act
insurance (Compensation for damages).— As a rule,
amounts received through accident or health insurance (6) GSIS benefits
or under workmen‘s compensation acts, as
compensation for personal injuries or sickness, plus the
amount of any damages received, whether by suit or Retirement benefits received under RA 7641(The
agreement, on account of such injuries or sickness are Retirement Pay Law) and those received by officials and
excluded from gross income. employees of private firms under a reasonable private
benefit plan (RPBP) maintained by the employer under
RA 4917 (now Section 32(B)(6)(a) of NIRC) are
Examples of nontaxable and taxable damages excluded from gross income subject to income tax.
recoveries are:
Nontaxable – Taxable – compensation RA 7641 RPBP
compensation for for damages on account
damages on account of of Retiring employee must Retiring official or
be in the service of same employee must have been
Personal (physical) Actual damages for loss employer CONTINUOUSLY in the service of the same
injuries or sickness of anticipated profits for at least five (5) years employer for at least ten
(10) years.
Any other damages .Moral and exemplary
recovered on account of damages awarded as a Retiring employee must Retiring official or
personal injuries or result of break of contract be at least sixty (60) years employee must be at least
sickness old but not more than 65 fifty (50) years old at the
years of age at the time of time of retirement
Exemplary and moral Interest for non-taxable retirement
damages for out-of-court damages above
settlement, including Availed of only once, and Retiring employee shall
attorney‘s fees only when there is no not have previously
RPBP availed of the privilege
Alienation of affection, or Any damages as under a retirement benefit
breach of promise to marry compensation for plan of the same or
unrealized income another employer
Any amount received as a Plan must be reasonable.

return of capital or Its implementation must
reimbursement of be fair and equitable for
expenses the benefit of all
employees (e.g. from
president to laborer)
PAGE 60 OF 275
Plan must be approved by Retirement BENEFITS from foreign government

BIR agencies – The social security benefits, retirement
gratuities, pensions and other similar benefits received
by resident or non-resident citizens or aliens who come
A 'reasonable private benefit plan' means a pension, to reside permanently in the Philippines from foreign
gratuity, stock bonus or profit-sharing plan maintained government agencies and other institutions, private or
by an employer for the benefit of some or all of his public;
employees wherein contributions are made by such
employer, or employees, or both for the purpose of
distributing to such employees the earnings and Payments of VETERANS benefits under U.S. Veterans
principal of the fund thus accumulated by the trust in Administration – Payments of benefits due or to
accordance with such plan (trust fund) become due to any person residing in the Philippines
under the laws of the United States administered by the
Further, it should be provided in the plan that at no time United States Veterans Administration
prior to the satisfaction of all liabilities with respect to
employees under any trust, shall any part of the corpus
or income of the fund be used for, or be diverted to, any Social Security Act benefits – Payments of benefits
purpose other than for the exclusive benefit of his received under the Social Security Act of 1954 (RA
employees. 8282), as amended, e.g., Maternity Benefits
GSIS benefits – Benefits received from GSIS under the
Terminal pay/Separation pay GSIS Act of 1937, as amended, and the retirement
gratuity received by government officials and
Any amount received by an employee or by his heirs employees are not taxable. [Sec. 32B6., NIRC; Sec. B1,
from the employer as a consequence of separation of RR 2-98]
such official or employee from the service of the
employer because of death, sickness, other physical
disability or for any cause beyond the control of the (h) Winnings, prizes and award, including those in
employee. The phrase ―for any cause beyond the sports competitions.—All prizes and awards granted to
control of the said official or employee‖ means that the athletes:
separation of the employee must be involuntary and not
initiated by him. in local and international sports competitions and
tournaments whether held in the Philippines or abroad,
The separation must not be of his own making. AND
Notes: sanctioned by their national sports associations
Sickness must be life-threatening or one which renders shall not be included in gross income and shall be tax
the employee incapable of working exempt. [Sec. 32 B7d, NIRC]
Retrenchment of the employee due to unfavorable Prizes and awards made primarily in recognition of
business conditions or financial reverses is considered charitable, literary, educational, artistic, religious,
as involuntary. However, resignation or availment of an scientific, or civic achievement are not taxable,
optional early retirement plan is voluntary and bars a provided:
claim under this provision.
Recipient was selected without any action on his part to
BIR Ruling 143-98: The ―terminal leave pay‖ (amount enter the contest or proceeding; and
paid for the commutation of leave credits) of retiring
government employees is considered not part of the Recipient is not required to render substantial future
gross salary, and is exempt from taxes. The government services as a condition to receiving the prize or award
recognizes that for most public servants, retirement pay
is always less than generous if not meager and scrimpy.
Terminal leave payments are given not only at the same vi. Exclusions Under Special Laws
time but also for the same policy considerations (a) Personal Equity and Retirement Account
governing retirement benefits. (Commissioner v.
Castaneda, 203 SCRA 72). Under R.A. 6657 (Comprehensive Agrarian Reform
Package Law), gain arising from the transfer of
PAGE 61 OF 275
agricultural property covered by the law shall be exempt taxpayers spend adequate expenditures in order to
from capital gains tax. obtain a legitimate income.
Under R.A. 6938 (Cooperative Code of the Philippines),
as amended by R.A. 9520, cooperatives transacting
Types of deductions
business with both members and non-members shall
not be subject to tax on their transactions with There are three (3) types of deductions from gross
members. In relation to this, the transactions of income:
members with the cooperative shall not be subject to itemized deductions in Section 34(A) to (J) and (M)
any taxes and fees, including but not limited to final
available to all kinds of taxpayers engaged in trade or
taxes on members' deposits.
business or practice of profession in the Philippines;
Under R.A. 7916 (PEZA Law), as amended, PEZA- optional standard deduction in Section 34(L) available
registered enterprises are given income tax holidays of only to individual taxpayers deriving business,
six or four years from the date of commercial operations, professional, capital gains and passive income not
depending on whether their activities are considered subject to final tax, or other income; and
pioneer or non-pioneer.
the special deductions in Sections 37 and 38 of the
Under R.A. 9178 (Barangay Micro Business Enterprises
NIRC, and in special laws like the BOI law (E.O. 226).
Act of 2002), BMBEs shall be exempt from income tax
for income arising from the operation of the enterprise.
B.4.1. General rules
B.4. DEDUCTIONS FROM GROSS INCOME (a) Deductions must be paid or incurred in
connection with the taxpayer‘s trade, business or
profession
Deductions are items or amounts which the law allows
to be deducted from the gross of income of a taxpayer (b) Deductions must be supported by adequate
in order to arrive at taxable income. receipts or invoices (except standard deduction)
In general, deductions or allowable deductions are (c) Additional requirement relating to withholding
business expenses and losses incurred which the law
allows to reduce gross business income to arrive at net
income subject to tax. [Sec. 65, Rev. Reg. No. 2] B.4.2. Return of captial
Deductions are in the nature of an exemption from Income tax is levied by law only on income; hence,
taxation; they are strictly construed against the the amount representing return of capital should
claimant, who must point to a specific provision be deducted from proceeds from sales of assets
allowing them and who has the burden of proving that and should not be subject to income tax.
they falls within the purview of such provision. Thus, all Costs of goods purchased for resale, with proper
deductions must be substantiated, except when the law adjustment for opening and closing inventories, are
dispenses with the records, documents or receipts to deducted from gross sales in computing gross
support the deductions. income (Sec. 65, Rev. Reg. 2)
If the exemption is not expressly stated in the law, the (a) Sale of inventory of goods by manufacturers and
taxpayer must at least be within the purview of the dealers of properties:
exemption by clear legislative intent [Commissioner of
Customs v. Philippine Acetylene Co., G.R. No. L-22443 In sales of goods representing inventory, the
May 29, 1971] amount received by the seller consists of return of
capital and gain from sale of goods or properties.
However, if there is an express mention in the law or if That portion of the receipt representing return of
the taxpayer falls within the purview of the exemption by capital is not subject to income tax. Accordingly,
clear legislative intent, the rule on strict construction cost of goods manufactured and sold (in the case
will not apply. [Commissioner v. Anoldus Caprentry of manufacturers) and cost of sales (in the case of
Shop, G.R. No. 71122 March 25, 1988] dealers) is deducted from gross sales and is
The purpose of deductions from gross income is to reflected above the gross income line in a profit
provide the taxpayer a just and reasonable tax amount and loss statement.
as the basis of income tax. It is because many
PAGE 62 OF 275
(b) Sale of stock in trade by a real estate dealer and (iii) Rentals
dealer in securities:
(iv) Entertainment, recreation and amusement
Real estate dealers and dealers in securities are expenses
ordinarily not allowed to compute the amount
(v) Other expenses such as repairs or those
representing return of capital through cost of sales.
incurred by farmers and other persons in
Rather they are required to deduct the total cost
agribusiness
specifically identifiable to the real property or
shares of stock sold or exchanged.
(c) Sale of services: (1) Requisites for deductibility of business expenses.—
Their entire gross receipts are treated as part of
gross income. (a) Ordinary AND necessary;
ORDINARY - normal and usual in relation to the
B.4.3. Itemized Deductions taxpayer's business and surrounding circumstances;
need not be recurring
These are enumerated in Section 34 of the NIRC.
Additional deductions are granted to insurance NECESSARY - appropriate and helpful in the
companies in Section 37, while losses from wash development of taxpayer's business or are proper for
sales of stock or securities by a dealer in securities the purpose of realizing a profit or minimizing a loss
are provided for in Section 38 of the NIRC. Other
Paid or incurred during the taxable year;
itemized deductions could be granted under
general or special laws, e.g. additional training Others: (not in the SC syllabus)
expenses are allowed to enterprises registered with
PEZA, BOI, and SBMA.
(b) Paid or incurred in carrying on or which are directly
attributable to the development, management,
Timing of Claiming Deductions operation and/or conduct of the trade, business or
exercise of profession;
A taxpayer has the right to deduct all authorized
allowances for the taxable year. As a rule, if he does not
within any year deduct certain of his expenses, losses, (c) Substantiated by adequate proof – documented by
interest, taxes or other charges, he cannot deduct them official receipts or adequate records, which reflect the
from the income of the next of any succeeding year [Sec. amount of expense deducted and the connection or
76, Income Tax Regulations] relation of the expense to the business/trade of the
taxpayer);
(a) Expenses Legitimately paid (not a BRIBE, kickback, or otherwise
contrary to law, morals, public policy);
Business expenses deductible from gross income If subject to withholding tax, the tax required to be
include the ordinary and necessary expenditures withheld on the expense paid or payable is shown to
directly connected with or pertaining to the taxpayer‘s have been properly withheld and remitted to the BIR on
trade or business. The cost of goods purchased for time;
resale, with proper adjustment for opening and closing Amount must be reasonable.
inventories, is deducted from gross sales in computing
gross income.
Includes: Note: The expenses allowable to a non-resident alien or
a foreign corporation consist of only such expenses as
(i) Salaries, wages, and other forms of are incurred in carrying on any business or trade
compensation for personal services actually conducted within the Philippines exclusively. [Sec. 77
rendered, including the grossed-up monetary RR 2]
value of fringe benefits furnished or granted by
the employer to the employee
(ii) Travel expenses
PAGE 63 OF 275
COHAN Rule: This relief will apply if the taxpayer has (j) Training expenses
shown that it is usual and necessary in the trade to
(k) Others
entertain and to incur similar kinds of expenditures,
there being evidence to show the amounts spent and
the persons entertained, though not itemized. In such a (2) Salaries, wages and other forms of compensation
situation, deduction of a portion of the expenses
for personal services actually rendered, including the
incurred might be allowed even if there are no receipts grossed-up monetary value of the fringe benefit
or vouchers. Absence of invoices, receipts or vouchers, subjected to fringe benefit tax which tax should have
particularly lack of proof of the items constituting the
been paid
expense is fatal to the allowance of the deduction
[Gancayco v. Collector, G.R. No. L-13325, (1961)] Given for personal services must be actually rendered
and reasonable.
For income payment to be allowed as deduction, the
Substantiation requirement – Sec. 34(A)(1)(b), NIRC: withholding tax must have been paid [RR No. 12-2013].
No deduction from gross income shall be allowed
unless the taxpayer shall substantiate with sufficient
evidence, such as official receipts or other adequate Bonuses are deductible when:
records: (1) the AMOUNT of the expense being
deducted, and (2) the DIRECT CONNECTION or relation (1) made in good faith
of the expense being deducted to the development, (2) given as additional compensation for personal
management, operation and/or conduct of the trade, services actually rendered
business or profession of the taxpayer.
(3) such payments, when added to the stipulated
salaries, do not exceed a reasonable
When to ACCRUE expenses: ―all–events test‖ states compensation for the services rendered
that under the accrual method of accounting, expenses
are deductible in the taxable year in which: (1) all
events have occurred which determine the liability; and (3) Traveling expenses
(2) the amount of liability can be determined with This include transportation expenses and meals and
reasonable accuracy. lodging [Sections 65 and 66, Rev. Reg. No. 2]
(1) Expenses must be reasonable and necessary.
Kinds of business expenses (2) Must be incurred or paid ―while away from
These are: home‖
(a) Salaries, wages and other forms of (3) Tax home is the principal place of business,
compensation for personal services actually when referring to ―away from home‖
rendered, including the grossed-up monetary (4) Incurred or paid in the conduct of trade or
value of the fringe benefit subjected to fringe business.
benefit tax which tax should have been paid
(Compensation for
(b) Travelling expenses Note: However, necessary transportation expenses of
the taxpayer (which are different from the
(c) Cost of materials transportation expenses included in the term ―travel
(d) Rentals and/or other payments for use or expenses‖) in its ―tax home‖ are deductible. Thus, a
possession of property taxpayer operating its business in Manila is allowed
transportation expenses from its office to its customers‘
(e) Repairs and maintenance place of business and back. But the transportation
(f) Expenses under lease agreements expenses of an employee from his residence to its office
and back are not deductible as they are considered
(g) Expenses for professionals personal expenses.
(h) Entertainment expenses
(i) Political campaign expenses (4) Cost of materials
PAGE 64 OF 275
Deductible only to the amount that they are actually depreciation reserves if such account is kept. [Sec. 68,
consumed and used in operation during the year for Rev. Regs. 2]
which the return is made, provided that their cost has
All maintenance expenses on account of non-
not been deducted in determining the net income for
depreciable vehicles for taxation purposes are
any previous year.
disallowed in its entirely. [RR No. 12-2012]
(5) Rentals and/or other payments for use or

(7) Expenses under lease agreements
possession of property
Requisites for deductibility:
Required as a condition for continued use or
possession of property. (1) Required as a condition for continued use or
possession;
For purposes of trade business or profession.
(2) For purposes of the trade, business or
Taxpayer has not taken or is not taking title to the
possession;
property or has no equity other than that of lessee, user,
or possessor. (3) Taxpayer has not taken or is not taking title to
the property or has no equity other than that of
On the accrual basis, rent is deductible as expense
lessee, user, or possessor.
when liability is incurred during the period of use. On
cash basis, rent is deductible when it is incurred and
paid.
(8) Expenses for professionals
If the advance payment is a prepaid rental, such Deductible in the year the professional services are
payment is taxable income to the lessor in the year
rendered, not in the year they are billed, provided that
when it was received. However, an advance payment is the ―all events‖ is present.
not deductible expense of the lessee until the period is
used. [Valencia and Roxas] ―All events test‖ requires:
Fixing a right to income or liability to pay; and
(6) Repairs and maintenance The availability of reasonably accurate determination of
such income or liability.
Incidental or ordinary repairs are deductible. Repairs
which neither materially add to the value of the property The ―all-events test‖ does not demand that the amount
nor appreciably prolong its life, but keep it in an of income or liability be known absolutely; it only
ordinarily efficient working condition, may be deducted requires that a taxpayer has at its disposal the
as expenses, provided the plant or property account is information necessary to compute the amount with
not increased by the amount of such expenditure. The reasonable accuracy, which implies something less
life of the asset referred to is the probable, normal, than an exact or completely accurate amount.
useful life for the purpose of the allowance for the [Commissioner v. Isabela Cultural Corporation, GR.
return of the capital investment – not what the life that 172231, Feb. 12, 2007]
would have been if no repairs had been made after the A professional may claim as deductions the cost of
property was damaged by a casualty. Since the repairs supplies used by him in the practice of his profession,
prolonged the lives of the said vessels of petitioners, expenses paid in the operation and repair of
the disallowance must be sustained. [Visayan transportation equipment used in making professional
Transportation Co. v. CTA, CTA Case No. 1119, (1964)] calls, dues to professional societies and subscriptions
to professional journals. [Mamalateo]
Extraordinary repairs are not deductible – they are
capital expenditures (9) Entertainment/Representation expenses
Repairs which add material value to the property or These are entertainment, amusement and recreation
appreciably prolong its life (EAR) expenses incurred or paid during the year that are
Repairs in the nature of replacement, to the extent that directly connected to the development, management
they arrest deterioration and appreciably prolong the and operation of the trade, business or profession of
life of the property, should be charged against the the taxpayer.
PAGE 65 OF 275
Under Section 30 of the Tax Code, as implemented by

Sec. 20 of the Revenue Regulations No. 2, organization
Requisites for deductibility:
and pre-operating expenses of a corporation (including
(1) Reasonable in amount. training expenses) are considered as capital
(2) Paid or incurred during the taxable period. expenditures and are therefore, not deductible in the
year they are paid or incurred. But taxpayers who incur
(3) Directly connected to the development, these expenses and subsequently enter the trade or
management, and operation of the trade, business to which the expenditures relate can elect to
business or profession of the taxpayer, or that amortize these expenditures over a period not less than
are directly related to or in furtherance of the sixty (60) months. [BIR Ruling 102-97, Sept. 29, 1997]
conduct thereof.
(4) Not to exceed such ceiling as the Secretary of
Finance prescribe (under RR 10-02, in no case This rule, however, does not apply to a situation where
to exceed 0.50% of net sales for sellers of an existing corporation incurs these same expenditures
goods or properties or 1% of net revenues for for the purpose of expanding its business in a new line
sellers of services, including taxpayers of trade, venture or activity.
engaged in the exercise of profession and use
or lease of properties)
(12) Others
(5) Not incurred for purposes contrary to law,
Expenses Allowable to Private Educational Institutions:
morals, public policy or public order.
In addition to the expenses allowable as deductions
(6) Must be substantiated with sufficient evidence
under the NIRC, a private proprietary educational
such as receipts and/or adequate records.
institution may at its OPTION, elect either:
To deduct expenditures otherwise considered as capital
Exclusions from EAR expenses: outlays or depreciable assets incurred during the
taxable year for the expansion of school facilities, OR
(a) Expenses which are treated as compensation
or fringe benefits for services rendered under To deduct allowances for depreciation thereof.
an employer-employee relationship
(b) Expenses for charitable or fund raising events
Thus, where the expansion expense has been claimed
(c) Expenses for bona fide business meeting of as a deduction, no further claims for yearly depreciation
stockholders, partners or directors of the school facilities are allowed.
(d) Expenses for attending or sponsoring an
employee to a business league or professional
Advertising Expenses
organization meeting
The media advertising expenses which were found to be
(e) Expenses for events organized for promotion
inordinately large and thus, not ordinary, and which
marketing and advertising, including concerts,
were incurred in order to protect the taxpayer‘s brand
conferences, seminars, workshops,
franchise which is analogous to the maintenance of
conventions and other similar events; and
goodwill or title to one‘s property, are not ordinary and
(f) Other expenses of a similar nature. necessary expenses but are capital expenditures, which
should be spread out over a reasonable period of time.
[CIR v. General Foods Phils. Inc, GR No. 143672, April
(10) Political campaign expenses 24, 2003]
Amount expended for political campaign purposes or
payments to campaign funds are NOT deductible either
as business expenses or as contribution [CTA Case No. (b) Interest
695, April 30, 1969, citing Mertens]
(1) Requisites for deductibility.—
(1) There is a valid and existing indebtedness.
(11) Training expenses
(2) The indebtedness is that of the taxpayer
PAGE 66 OF 275
(3) The indebtedness is connected with the more than 50% of the outstanding stock of the
taxpayer‗s trade, profession, or business. corporation
(4) The interest must be legally due. (c) Except in the case of distributions in
liquidation, between two corporations where:
(5) The interest must be stipulated in writing.
(i) Either one is a personal holding
(6) The taxpayer is LIABLE to pay interest on the
company of a foreign personal
indebtedness.
holding company with respect to the
(7) The indebtedness must have been paid or taxable year preceding the date of the
accrued during the taxable year. sale of exchange; and
(8) The interest payment arrangement must not be (ii) More than 50% of the outstanding
between related taxpayers stock of each is owned, directly or
(9) The interest must not be incurred to finance indirectly, by or for the same
individual; or
petroleum operations.
(10) In case of interest incurred to acquire property (d) Between parties to a trust – Grantor and
used in trade, business or exercise of Fiduciary; or
profession, the same was not treated as a (e) Fiduciary of a trust and fiduciary of another
capital expenditure, trust if the same person is a grantor with
respect to each trust; or
Limitation: The taxpayer's allowable deduction for (f) Fiduciary and Beneficiary
interest expense shall be reduced by an amount equal
to 33% of the interest income subjected to final tax (see
(3) Interest subject to special rules.
chapter on taxation of passive income for interest
income); effective January 1, 2009. (a) Interest paid in advance
No deduction shall be allowed if within the taxable year
an individual taxpayer reporting income on cash basis
(2) Non-deductible interest expense.—
incurs an indebtedness on which an interest is paid in
(a) Interest paid in advance by the taxpayer who reports advance through discount or otherwise.
income on cash basis shall only be allowed as
But the deduction shall be allowed in the year the
deduction in the year the indebtedness is paid.
indebtedness is paid
(b) If the indebtedness is payable in periodic
amortizations, only the amount of interest which
corresponds to the amount of the principal amortized or (b) Interest periodically amortized
paid during the year shall be allowed as deduction in
If the indebtedness is payable in periodic amortizations,
such taxable year.
the amount of interest which corresponds to the
(c)Interest payments made between related taxpayers. amount of the principal amortized or paid during the
year shall be allowed as deduction in such taxable year
(d) Interest on indebtedness incurred to finance
petroleum exploration.
(c)Interest expense incurred to acquire property for use
in trade/business/profession
Related Taxpayers
At the option of the taxpayer, interest expense on a
(a) Between members of the family, i.e. brothers
capital expenditure may be allowed as:
and sisters (whether by the whole or half-
blood), spouse, ancestor, and lineal A deduction in full in the year when incurred;
descendants; or
A capital expenditure for which the taxpayer may claim
(b) Except in case of distributions in liquidation, only as a deduction the periodic amortization of such
between an individual and a corporation, expenditure.
where the individual owns directly or indirectly
PAGE 67 OF 275
Should the taxpayer elect to deduct the interest i) Interest on delinquent taxes.
payments against its gross income, the taxpayer cannot
at the same time capitalize the interest payments. In
other words, the taxpayer is not entitled to both the (2) Non-deductible taxes
deduction from gross income and the adjusted General Rule: All taxes, national or local, paid or
(increased) basis for determining gain or loss and the
incurred during the taxable year in connection with the
allowable depreciation charge. [Paper Industries Corp. taxpayer's profession, trade or business, are deductible
v. Commissioner, 250 SCRA 434] from gross income
Exceptions:
(d) Reduction of interest expense/interest arbitrage
a) Philippine income tax, except Fringe Benefit
The taxpayer's allowable deduction for interest expense Taxes;
shall be reduced by an amount equal to 33% of the b) Income tax imposed by authority of any foreign
interest income subjected to final tax; effective January
country, if taxpayer avails of the Foreign Tax
1, 2009. [RA 9337] Credit (FTC)
This limitation is apparently intended to counter the tax Exception to exception: When the taxpayer does NOT
arbitrage scheme where a taxpayer obtains an interest- signify his desire to avail of the tax credit for taxes of
bearing loan and places the proceeds of such loan in foreign countries, the amount may be allowed as a
investments that yield interest income subject to
deduction from gross income of citizens and domestic
preferential tax rate of 20% final withholding tax. corporations subject to the limitations set forth by law.
[Valencia and Roxas]
(3) Treatments of surcharges/interests/fines for

(c) Taxes delinquency
The amount of deductible taxes is limited to the basic
Taxes Proper: Refers to national and local taxes;
tax and shall not include the amount for any surcharge
or penalty on delinquent taxes. However, interest on
delinquent taxes, although not deductible as tax, can
(1) Requisites for deductibility
be deducted as interest expense at its full amount. [CIR
Such tax must be: v Palanca, 18 SCRA 496]
(1) Paid or incurred within the taxable year; Although interest payment for delinquent taxes is not
deductible as tax, the taxpayer is not precluded thereby
(2) Paid or incurred in connection with the
from claiming said interest payment as deduction as
taxpayer‗s trade, profession or business;
such. [CIR v. Vda. de Prieto, 1960]
(3) Imposed directly on the taxpayer;
(4) Not specifically excluded by law from being
(4) Treatment of special assessment.
deducted from the taxpayer‗s gross income.
Special assessments and other taxes assessed against
The following taxes are deductible:
local benefits of a kind tending to increase the value of
a) Import duties; the property assessed are non-deductible from gross
b) Business tax; income.
c) Professional/occupation tax;
d) Privilege and excise tax; (5) Tax credit vis-à-vis deduction.—
e) DST; Tax credit – amount allowed by law to reduce the

Philippine income tax due, subject to limitations, on
f) Motor vehicle registration fees; account of taxes paid or accrued to a foreign country
g) Real property tax;
h) Electric energy consumption tax; and Tax Credit Tax Deduction
PAGE 68 OF 275
Taxes are deductible from Taxes are deductible from taxpayer's taxable income from sources within
the Phil. Income tax itself gross income in such country bears to his entire taxable
computing the taxable income for the same taxable year; and
income (b) [Worldwide Limit] The total amount of the
Effect: Reduces Philippine Effect: Reduces taxable credit shall not exceed the same proportion of
income tax liability income upon which the tax the tax against which such credit is taken,
liability is calculated which the taxpayer's taxable income from
sources without the Philippines taxable bears
Sources: Only foreign Sources: Deductible taxes to his entire taxable income for the same
income taxes may be (e.g. business tax, excise taxable year.
claimed as credits against tax)
Philippine income tax.
Formula:
An amount subtracted from an individual's or entity's Limit #1
tax liability to arrive at the total tax liability. A tax credit Taxable
reduces the taxpayer's liability, compared to a Income Per Limit on
deduction which reduces taxable income upon which Foreign amount of
the tax liability is calculated. A credit differs from Phil. Income tax credit
deduction to the extent that the former is subtracted Country x =
Tax (Per
from the tax while the latter is subtracted from income Worldwide
before the tax is computed. [CIR v. Bicolandia Drug Country
Taxable Limit)
Corp. G.R. No. 148083, (2006)] Income
The following may claim tax credits: Limit #2

(a) Resident citizens Taxable
(b) Domestic corporations, which include all Income For all Limit on
partnerships except general professional Foreign amount of
partnerships Phil. Income
Countries x = tax credit
Tax
(c) Members of general professional partnerships (World
Worldwide
(d) Beneficiaries of estates or trusts Taxable Wide Limit)
Income
The following may NOT claim tax credits:

(a) Non-resident citizens Note: Computation of FTC: Limit #2 applies where
taxes are paid to two or more foreign countries.
(b) Aliens, whether resident or non-resident Allowable tax credit is the lower between the tax credit
(c) Foreign corporations, whether resident on non- computed under Limit #1 and that computed under
resident Limit#2.
Note: Tax credits for foreign taxes are allowed only for FTC Limitations – lowest of the 3:
income derived from sources outside the Philippines. (a) Actual FTC
The above taxpayers are not entitled to tax credit; they
are taxable only on income derived from Philippine (b) For taxes paid to one foreign country
sources. (c) For taxes paid to 2 or more foreign countries
Limitations on Tax Credit.
(a) [Per Country Limit] The amount of tax credit (d) Losses
shall not exceed the same proportion of the tax
against which such credit is taken, which the (1) Requisites for deductibility.—
PAGE 69 OF 275
(1) Loss must be that of the taxpayer (e.g., losses Resulting from securities becoming worthless and
of the parent corp. cannot be deducted by its which are capital assets (considered loss from sale or
subsidiary); exchange) on last day of the taxable year;
(2) Actually sustained and charged off within the Losses from short sales of property;
taxable year;
Losses due to failure to exercise privileges or options to
(3) Incurred in trade, business or profession; buy or sell property.
(4) Of property connected with the trade, business,
or profession, if the loss arises from fires,
(b) Securities becoming worthless
storms, shipwreck or other casualties, or from
robbery, theft, or embezzlement; Loss in shrinkage in value of stock through fluctuation
in the market is not deductible from gross income. (To
(5) Sustained in a closed and completed
be deductible, the loss must be actually suffered when
transaction;
the stock is disposed of.)
(6) Not compensated for by insurance or other
Exception: If the stock of the corporation becomes
form of indemnity;
worthless, the cost or other basis may be deducted by
(7) Not claimed as a deduction for estate tax its owner in the taxable year in which the stock became
purposes; worthless, provided a satisfactory showing of its
worthlessness be made, as in the case of bad debts.
(8) In case of casualty loss, filing of notice of loss
with the BIR within 45 days from the date of
the event that gave rise to the casualty; and
(c) Losses on wash sales of stocks or securities
(9) The taxpayer must prove the elements of the
Wash Sale - a sale or other disposition of stock or
loss claimed, such as the actual nature and
securities where substantially identical securities
occurrence of the event and amount of the loss.
(substantially the same as those disposed of) are
In case a non-depreciable vehicle is sold at a loss, the acquired or purchased (or there was an option to
loss incurred from the sale of non- depreciable vehicle acquire, and the acquisition or option should be by
is not allowed as a deduction. [RR No. 2-2013] purchase or exchange upon which gain or loss is
recognized under the income tax law) within a 61-day
period, beginning 30 days before the sale and ending
No loss is recognized in the following.— 30 days after the sale
(a) Merger, consolidation, or control securities General rule: Not deductible from gross income
(where no gains are recognized either);
Exception: If by a dealer in securities in the course of
(b) Exchanges not solely in kind; ordinary business, it is deductible.
(c) Related taxpayers (see above – (c) Interest
expense incurred to acquire property for use in
(d) Wagering losses
trade/business/profession)
Losses from wagering (gambling) are deductible only to
(d) Wash sales;
the extent of gains from such transactions. A wager is
(e) Illegal transactions made when the outcome depends upon CHANCE.
(2) Other types of losses.— (e) Net Operating Loss Carry Over (NOLCO)
(a) Capital losses Net operating loss (NOL) is the excess of allowable
Incurred in the sale or exchange of capital assets deductions over gross income for any taxable year
(allowable only to the extent of capital gains, except for immediately preceding the current taxable year.
banks and trust companies under conditions in Sec. 39 NOLCO: The NOL of the business or enterprise which
of NIRC where loss from such sale is not subject to the had not been previously offset as deduction from gross
foregoing limitation); income shall be carried over as a deduction from gross
income for the next three (3) consecutive taxable years
PAGE 70 OF 275
immediately following the year of such loss, provided interrupted by the fact that the corporation is subject to
however, that any net loss incurred in a taxable year MCIT during such three-year period.
during which the taxpayer was exempt from income tax
shall not be allowed as a deduction. [Sec. 34(3)(D),
NIRC] Other Losses:
Exception: Mines other than oil and gas wells, where a (a) Abandonment losses in petroleum operation
net operating loss without the benefit of incentives and producing well.
provided for under EO No. 226 (Omnibus Investments (b) Losses due to voluntary removal of building
Code) incurred in any of the first ten (10) years of
incident to renewal or replacements are
operation may be carried over as a deduction from
deductible from gross income.
taxable income for the next five (5) years immediately
following the year of such loss. (c) Loss of useful value of capital assets due to
charges in business conditions is deductible
Requisites for NOLCO: only to the extent of actual loss sustained
(1) The taxpayer was not exempt from income tax (after adjustment for improvement,
the year the loss was incurred; depreciation and salvage value)
(2) There has been no substantial change in the (d) Losses from sales or exchanges of property
ownership of the business or enterprise between related taxpayers are not recognized,
wherein: but the gains are taxable.
(3) AT LEAST 75% of nominal value of outstanding (e) Losses of farmers incurred in the operation of
issued shares is held by or on behalf of the farm business are deductible.
same persons; or
(4) AT LEAST 75% of the paid up capital of the (e) Bad debts
corporation is held by or on behalf of the same
persons.
Debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amounts due the
taxpayer actually ascertained to be worthless and the
Taxpayers Entitled to NOLCO
corresponding receivable should have been written off
(a) Individuals engaged in trade or business or in or charged off within the taxable year.
the exercise of his profession (including
estates and trusts);
(1) Requisites for deductibility.—
Note: An individual who avails of 40% OSD
shall not simultaneously claim deduction of (1) Valid and legally demandable debt due to the
NOLCO. However, the three-year reglementary taxpayer
period shall continue to run during such period (2) Debt is connected with the taxpayer's trade,
notwithstanding the fact that the aforesaid business or practice of profession;
taxpayer availed of OSD during the said period.
(3) Debt was not sustained in a transaction
(b) Domestic and resident foreign corporations entered into between related parties;
subject to the normal income tax (e.g.,
manufacturers and traders) or preferential tax (4) Actually ascertained to be worthless and
rates under the Code (e.g., private educational uncollectible as of the end of the taxable year
institutions, hospitals, and regional operating (taxpayer had determined with reasonably
headquarters) or under special laws (e.g., degree of certainty that the claim could not be
PEZA-registered companies) collected despite the fact that the creditor
took reasonable steps to collect); and
Note: Domestic and resident foreign
corporations taxed during the taxable year with (5) Actually charged off the books of accounts of
Minimum Corporate the taxpayer as of the end of the taxable year
Income Tax cannot enjoy the benefit of NOLCO. However, General rule: Taxpayer must ascertain and demonstrate
the three-year period for the expiry of the NOLCO is not with reasonable certainty the uncollectibility of debt
PAGE 71 OF 275
Exceptions: off. Mere recording in the books of account of

estimated uncollectible accounts does not constitute a
(a) Banks as creditors – BSP Monetary Board
write-off.
shall ascertain the worthlessness and
uncollectibility of the debt and shall approve
the writing off
(2) Effect of recovery of bad debts.—
(b) Receivables from an insurance or surety
Tax Benefit Rule on Bad Debts
company (as debtor) may be written off as bad
debts only when such company is declared Bad debts claimed as deduction in the preceding
closed due to insolvency or similar reason year(s) but subsequently recovered shall be included as
part of the taxpayer‗s gross income in the year of such
The taxpayer must show that the debt is indeed
recovery the extent of the income tax benefit of said
uncollectible even in the future. He must prove that he
deduction. Also called the equitable doctrine of tax
exerted diligent efforts to collect:
benefit.
(1) Sending of statement of accounts
Requisites:
(2) Collection letters
(1) Allowance must be reasonable
(3) Giving the account to a lawyer for collection
(2) Charged off during the taxable year from the
(4) Filing the case in court [Phil. Refining Corp. v. taxpayer‗s books of accounts.
CA, G.R. No. 118794, May 8, 1996]
(3) Does not exceed the acquisition cost of the
In ascertaining the debt to be worthless, it is not property.
enough that the taxpayer acted in good faith. He must
show that he had reasonably investigated the relevant
facts from which it became evident, in the exercise of (f) Depreciation
sound, objective business judgment, that there
remained no practical, but only a vague prospect that An annual reasonable allowance to reduce the wasteful
the debt would be paid [Collector v. Goodrich, G.R. No. value of the tangible fixed assets resulting from wear
L-22265 (1967)] and tear and normal obsolescence
For intangible assets, the annual allowance to rduce
their useful value is called amortization.
Rev. Reg. No. 5-1999:
(1) Requisites for Deductibility. –
―Actually ascertained to be worthless‖ –
(1) It must be reasonable.
Determination of worthlessness must depend upon the
particular facts and circumstances of the case. A (2) It must be charged off during the year.
taxpayer may not postpone a bad debt deduction on the (3) The asset must be used in profession, trade or
basis of a mere hope of ultimate collection or because business.
of a continuance of attempts to collect, where there is
no showing that the surrounding circumstances differ (4) The asset must have a limited useful life.
from those relating to other notes which were charged The depreciable asset must be located in the
off in a prior year. Philippines if the taxpayer is a nonresident alien or a
Accounts receivable may be written off as bad debts foreign corporation. [Valencia and Roxas]
even without conclusive evidence that they had No depreciation shall be allowed for yachts, helicopters,
definitely become worthless when: airplanes and/or aircrafts, and land vehicles which
(a) the amount is insignificant; and exceed the threshold amount of P2,400,000, unless
the taxpayer‘s main line of business is transport
(b) collection through court action may be more operations or lease of transportation equipment and
costly to the taxpayer. the vehicles purchased are used in the operations. [RR
―Actually charged off from the taxpayer‘s book of No. 12-2012]
accounts‖
Receivable which has actually become worthless at the
Methods of computing depreciation allowance.—
end of the taxable year has been cancelled and written
PAGE 72 OF 275
(a) Straight-line cost- salvage value (e) Youth and sports development
estimated life (f) Human settlements
(b) Declining balance (cost – depreciation) x (g) Science and culture, and
Rate (h) Economic development
estimated life (i) in accordance with a National Priority Plan
(c)Sum-of-the-year-digit nth period x cost- determined by NEDA (otherwise, subject to
(SYD) salvage statutory limit)
SYD (j) Donations to Certain Foreign Institutions or
International Organizations which are fully
Any other method which deductible in compliance with agreements,
may be prescribed by the treaties or commitments entered into by the
Secretary of Finance upon Government of the Philippines and the foreign
the recommendation of the institutions or international organizations or in
CIR pursuance of special laws
(k) Donations to Accredited Non-government
(g) Charitable and other contributions Organizations subject to conditions set forth in
RR No. 13-98 – NGO means a non-stock non-
(1) Requisites for deductibility.— profit domestic corporation or organization:
Actually PAID or made to the ENTITIES or institutions (l) Organized and operated exclusively for:
specified by law; (i) scientific,
Made within the TAXABLE year. (ii) research,
It must be EVIDENCED by adequate receipts or records. (iii) educational,
For Contributions Other than Money: The amount shall (iv) character-building and youth and sports
be BASED on the acquisition cost of the property (i.e., development,
not the fair market value at the time of the contribution).
(v) health,
For Contributions subject to the statutory limitation: It
must NOT EXCEED 10% (individual) or 5% (corporation) (vi) social welfare,
of the taxpayer‗s taxable income before charitable (vii) cultural or
contributions
(viii) charitable purposes, or
(ix) a combination thereof,
(2) Amount that may be deducted.—
No part of the net income of which inures to the benefit
Kinds of Contributions: of any private individual
(a) Contributions deductible in full; Directly utilizes contributions for the active conduct of
(b) Contributions subject to the statutory limit. the activities constituting the purpose or function for
which it is organized, not later than 15th day of the
Contributions Deductible in Full: month following the close of its taxable year in which
(a) Donations to the Government of the contributions are received, unless an extended period is
Philippines, or to any of its agencies, or granted by the Secretary of Finance, upon
political subdivisions, including fully owned recommendation of the CIR
government corporations – Administrative expense ,on an annual basis, must not
(b) Exclusively to finance, provide for, or to be exceed 30% of total expenses for the taxable year
used in undertaking priority activities in Upon dissolution, its assets would be distributed to
(c) Education another accredited NGO organized for a similar purpose
or purposes, OR to the State for public purpose, OR
(d) Health would be distributed by a competent court of justice to
PAGE 73 OF 275
another accredited NGO to be used in such manner as Contribution to a pension trust may be claimed as
in the judgment of said court shall best accomplish the deduction as follows:
general purpose for which the dissolved organization
(a) Amount contributed for the present/normal
was organized.
service cost – 100% deductible
(b) Amount contributed for the past service cost –
Contributions subject to the Statutory Limit 1/10 of the amount contributed is deductible
in year the contribution is made, the remaining
These contributions are not deductible in full as
balance will be amortized equally over nine
specified by the law or such deduction has not met the
consecutive years
requirements to be deducted in full.
General Rule: An employer establishing or maintaining
a pension trust to provide for the payment of
Those made to: reasonable pensions to his employees shall be allowed
as a deduction, a reasonable amount transferred or
(a) Government or any of its agencies or political
subdivisions exclusively for public purposes paid into such trust in excess of the contributions to
(contributions for non-priority activities) such trust made during the taxable year.
(b) Accredited domestic corporation or

associations organized exclusively for (1) Requisites for deductibility of payments to pension
trusts.—
(c) Religious
(d) Charitable There must be a pension or retirement plan established
to provide for the payment of reasonable pensions to
(e) Scientific employees;
(f) youth and sports development The pension plan is reasonable and actuarially sound;
(g) cultural It must be funded by the employer;
(h) educational purposes or The amount contributed must no longer be subject to
(i) rehabilitation of veterans the employer‘s control or disposition; and
(j) Social welfare institutions The payment has not theretofore been allowed before
as a deduction.
(k) Non-government organizations: No part of the
net income of which inures to the benefit of
any private stockholder or individual (i) Deductions under special laws
Special deductions for productivity bonus and

Statutory Limit: manpower training under the Productivity Incentives Act
(a) 10% in the case of an individual (individual of 1990
donor), and Deductions for training expenses of qualified jewelry
(b) 5% in the case of a corporation (corporate enterprises (Jewelry Industry Development Act of 1998)
donor), of the taxpayer's/donor‘s income Deductions under the Adopt-a-School Act of 1998
derived from trade, business or profession
computed before the deduction for Deductions under the Expanded Senior Citizens Act of
contributions and donations 2003. [Domondon]
The amount deductible is the actual contribution or the

statutory limit computed, whichever is lower B.4.4. Optional Standard Deduction
(a) Individuals, except non-resident aliens
(h) Contributions to pension trusts May be taken by an individual in lieu of itemized
deductions except those earning purely compensation
income.
PAGE 74 OF 275
If an individual opted to use OSD, he is no longer deductions claimed by the GPP and the items of
allowed to deduct cost of sales or cost of services. deduction claimed by the partners.
Amount: 40% of gross sales or gross receipts (under RA If the GPP avails of OSD in computing its net income,
9504, effective July 6, 2008) the partners comprising it can no longer claim further
deduction from their share in the said net income for
Requisites:
the following reasons:
(1) Taxpayer is a citizen or resident alien;
The partners‘ distributive share in the GPP is treated as
(2) Taxpayer‘s income is not entirely from his gross income not his gross sales/receipts and the
compensation; 40% OSD allowed to individuals is specifically
mandated to be deducted not from his gross income
(3) Taxpayer signifies in his return his intention to
elect this deduction; otherwise he is but from his gross sales/receipts; and,
considered as having availed of the itemized The OSD being in lieu of the itemized deductions
deductions; allowed in computing taxable income as defined under
(4) Election is irrevocable for the year in which Section 32 of the Tax Code, it will answer for both the
made; however, he can change to itemized items of deduction allowed to the GPP and its partners.
deductions in succeeding years. Since one-layer of income tax is imposed on the income
of the GPP and the individual partners where the law
had placed the statutory incidence of the tax in the
(b) Corporations, except non-resident foreign hands of the latter, the type of deduction chosen by the
corporations GPP must be the same type of deduction that can be
The option to elect Optional Standard Deduction availed of by the partners. Accordingly, if the GPP
granted is now granted to corporations (domestic and claims itemized deductions, all items of deduction
resident foreign corporations) by virtue of RA 9504. The allowed under Sec. 34 can be claimed both at the level
OSD is 40% of its gross income. of the GPP and at the level of the partner in order to
determine the taxable income. On the other hand,
The domestic and resident foreign corporation shall should the GPP opt to claim the OSD, the individual
keep such records pertaining to his gross income as partners are deemed to have availed also of the OSD
defined in Sec. 32 of the NIRC during the taxable year, because the OSD is in lieu of the itemized deductions
as may be required by the rules and regulations that can be claimed in computing taxable income.
promulgated by the Secretary of Finance upon
recommendation of the CIR. If the partner also derives other gross income from
trade, business or practice of profession apart and
Corporations availing of OSD are still required to submit distinct from his share in the net income of the GPP, the
their financial statements when they file their annual deduction that he can claim from his other gross
ITR and to keep such records pertaining to its gross income would follow the same deduction availed of
income. (RR 2-2010). from his partnership income as explained in the
foregoing rules. Provided, however, that if the GPP opts
for the OSD, the individual partner may still claim 40%
(c) Partnerships of its gross income from trade, business or practice of
General Co-Partnership profession but not to include his share from the net
income of the GPP. (RR 2-2010)
For purposes of taxation, the Code considers general
co-partnerships as corporations. Hence, rules on OSD
for corporations are applicable to general co- B.4.5. Personal and additional exemptions
partnerships.
General Professional Partnerships (GPP) (a) Basic personal exemptions
If the GPP availed of itemized deductions, the partners According to RA 9504 (Minimum Wage Earner Law,
are not allowed to claim the OSD from their share in the effective July 6, 2008) basic personal exemption is Fifty
net income because the OSD is a proxy for all the items thousand pesos (P50,000) for each individual taxpayer,
of deductions allowed in arriving at taxable income. regardless of status, i.e., whether single, married or
This means that the OSD is in lieu of the items of head of the family.
PAGE 75 OF 275
But note Sec 35(A) of NIRC – In the case of married (2) Chiefly dependent for support upon on the
individuals where only one of the spouses is deriving taxpayer
gross income, only such spouse shall be allowed the
(3) Living with the taxpayer
personal exemption.
(4) Not more than 21 years old, unmarried and not
gainfully employed or
(b) Additional exemptions for taxpayer with dependents
(5) Regardless of age, is incapable of self-support
An individual, whether single or married, shall be because of mental or physical defect. [Sec
allowed an additional exemption of P25,000 for each 35(B), NIRC]
qualified dependent child (QDC), provided that the total
Note: Only children (not parents) may be considered
number of dependents for which additional exemptions
―dependent‖ for purposes of additional exemptions.
may be claimed shall not exceed 4 dependents
(depends on the number of qualified dependent The definition of the term ―dependent‖ under Section
children) 35(B) of the NIRC now includes a ―Foster Child‖ or a
child placed under planned temporary substitute
Married Individuals: Additional exemptions for QDC are
parental care by a Foster Parent or a Foster Family.
claimed by only one spouse.
[RMC No. 41-20i3, Jan. 23, 2013]
Generally, the spouse who is the gross compensation
earner is the claimant of the additional exemptions.
Who may claim personal exemptions?
Where the husband and wife are both compensation
income earners: the husband is the proper claimant of Citizens (whether resident or non-resident) and resident
the additional exemptions EXCEPT if there is an express aliens
waiver by the husband in favor of his wife, as embodied Non-resident aliens engaged in trade or business are
in the application for registration (BIR Form No. 1902) entitled personal exemptions subject to reciprocity.
or in the Certificate of Update of Exemption and of
(See below)
Employer‘s and Employee‘s Information (BIR Form No.
2305), whichever is applicable.
When the spouses have business and/or professional (c) Status-at-the-end-of-the-year rule
income only: either may claim the additional Change of Status [Sec 35(C), NIRC]
exemptions at the end of the year.
(a) If taxpayer marries during taxable year,
The employed spouse shall be automatically entitled to taxpayer may claim the corresponding BPE in
claim the additional exemptions for children in the full for such year (i.e., no need to pro-rate the
following instances: exemption).
(a) spouse is unemployed (b) If taxpayer should have additional
(b) spouse is a non-resident citizen deriving dependent(s) during taxable year, taxpayer
income from foreign sources may claim corresponding AE in full for such
year.
Legally separated spouses: Additional exemptions can
be claimed by the spouse with custody of the child or (c) If taxpayer dies during taxable year, his estate
children (but the total amount for the spouses shall not may claim BPE and AE as if he died at the
exceed the maximum of four). [Sec 35(B), NIRC] close of such year.
If the taxpayer should have additional dependents (d) If during the taxable year spouse dies; or any
during the taxable year, he may claim the of the dependents dies or marries, turns 21
corresponding additional exemption, as the case may years old or becomes gainfully employed,
be, in full for such year. taxpayer may still claim same exemptions as if
the spouse or any of the dependents died, or
Who is a dependent for purposes of additional married, turned 21 years old or became
exemptions? gainfully employed at the close of such year.
(1) A taxpayer‘s child, whether legitimate,
Note: When it comes to change of status, the status
illegitimate or legally adopted child beneficial to the taxpayer is used for purposes of
PAGE 76 OF 275
claiming deductions as long as the taxpayer achieved (g) Non-deductible interest – should the taxpayer elect
such status at any time during the taxable period. to deduct interest payments against its gross income,
he cannot at the same time capitalize such interest and
claim depreciation on the undepreciated cost which
(d) Exemptions claimed by non-resident aliens includes the interest. [PICOP v. Commissioner, G.R. No.
106949-50, Dec. 1, 1995]
Non-resident aliens engaged in trade or business are
entitled personal exemptions subject to reciprocity. (h) Non –deductible taxes
It means that NRA-ETB shall be allowed a personal (i) Non-deductible losses
exemption only if the income tax law in his country
(j) Losses on Wash Sales (except if by dealer in
grants allowance for personal exemptions to the
securities in ordinary course of exempt corporations)
citizens and residents of the Philippines as stipulated in
These are:
the reciprocity tax treaty with the Philippine Government.
(1) Proprietary Educational Institutions and
Limit of PE Allowed to NRAETB: An amount equal to the
hospitals
exemptions allowed by the non-resident alien‘s country
to Filipino citizens not residing therein but deriving (2) Government owned and controlled
income therefrom, but not to exceed the amount fixed corporations
by NIRC.(In other words, whichever is lower)
(3) Others
B.4.6. Items Not Deductible

General rule: In determining deductions, one of the
general rules is that deductions must be paid or
incurred in connection with the taxpayer‘s trade,
business or profession. Capital expenditures (e.g.
acquisition cost of a building) are also not deductible,
because these are not expenses, but form part of assets.
Exceptions: In computing taxable net income, no
deduction shall be allowed with respect to:
(a) Personal, living or family expenses (note: they are
not deductible from compensation and
business/professional income
(b) Any amount paid out for new buildings or for
permanent improvements (capital expenditures), or
betterments made to increase the value of any property
or estate
(c) Any amount expended in restoring property (major
repairs) or in making good the exhaustion thereof for
which an allowance [for depreciation or depletion] is or
has been made
(d) Premiums paid on any life insurance policy covering
the life of any officer, employee, or any person
financially interested in the trade or business carried on
by the taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a beneficiary under such
policy
(e) Interest expense and bad debts between related
parties [Sec. 36(B), NIRC)]
(f) Losses from sales or exchanges of property between
related taxpayers.
PAGE 77 OF 275
Summary Table for Taxation of Individuals (all individual taxpayers, including non-resident aliens)
Basic Personal Additional Personal

Classification Taxable Income Tax Rates
Exemption Exemption
Income from sources

Resident Citizen within and outside the Allowed Allowed 5%-32%
Philippines
Income from sources

Non-Resident Citizen Allowed Allowed 5%-32%
within the Philippines
Income from sources

Resident Alien Allowed Allowed 5%-32%
Lower amount between

Non-resident Alien PE allowed to Filipinos
Income from sources
Engaged in Trade or in the foreign country No specific provision 5%-32%
Business where he resides v. PE
in the Philippines
Non-resident Alien Not

Income from sources
Engaged in Trade or Not allowed Not allowed 25%
Business
PAGE 78 OF 275
C. INCOME TAX ON INDIVIDUALS Employment Administration (POEA) with

valid Overseas Employment Certificate
(OEC).
C.1. INCOME TAX ON RESIDENT CITIZENS,
NON-RESIDENT CITIZENS AND RESIDENT (c) An OCW‘s income arising out of his
ALIENS overseas employment is exempt from
income tax.
C.1.1. Coverage – Income From All Sources Within

and Without the Philippines; exception (iii) Resident Aliens
A resident alien is taxable only on income from
(i) Resident Citizens sources WITHIN the Philippines.
A Filipino resident citizen is taxable on income from A resident alien is an individual whose residence is
all sources (within and without the Philippines) in the Philippines and who is not a Filipino citizen.
An alien actually present in the Philippine who is not
a mere transient or sojourner is a resident of the
(ii) Non-resident Citizens Philippines for purposes of the income tax. Whether
A non-resident citizen is taxable only on income he is a transient or not is determined by his
derived from sources within the Philippines. intentions with regard to the length and nature of his
stay. A mere floating intention indefinite as to time,
A non-resident citizen is a Filipino citizen who: to return to another country is not sufficient to
(a) Establishes to the satisfaction of the CIR constitute him a transient. If he lives in the
the fact of his physical presence abroad Philippines and has no definite intention to stay, he
with a definite intention to reside therein is a resident.
(b) Leaves the Philippines during the taxable One who comes to the Philippines for a definite
year to reside abroad (as immigrant or for purpose which, in its nature, may be promptly
employment on a permanent basis) accomplished is a transient. But if his purpose is of
such a nature that an extended stay may be
(c) Works and derives income from abroad and necessary for its accomplishment, and to that end
whose employment requires him to be the alien makes his home temporarily in the
present abroad most of the time during the Philippines, he becomes a resident, though it may
taxable year be his intention at all times to return to his domicile
(d) Has been previously considered as a non- abroad when the purpose of which he came has
resident and arrives in the Philippines at been consummated or abandoned. [Sec. 5, RR No.
any time during the taxable year to reside 2]
here permanently (only with respect to his
income from sources abroad until the date
of his arrival in the country) C.1.2. Coverage – Taxation on Compensation
Income
Other considerations:
Income arising from an ER-EE relationship. It means
(a) A Filipino citizen working and deriving all remuneration for services performed by an EE for
abroad as an Overseas Contract Worker is his ER, including the cash value of all remuneration
taxable only on income from sources paid in any medium other than cash. [Sec. 78(A)] It
WITHIN the Philippines. includes, but is not limited to salaries and wages,
(b) OCW refers to Filipino citizens in foreign commissions, tips, allowances, bonuses, Fringe
countries, who are physically present in a Benefits of rank and file EEs and other forms of
foreign country as a consequence of their compensation.
employment in that country. Their salaries
and wages are paid by an employer abroad
and is not borne by an entity or person in i. Inclusions
the Philippines. They must be duly
registered with the Philippine Overseas
PAGE 79 OF 275
(a) Monetary compensation – If compensation is (3) Bonuses, 13th month pay, and other benefits not
paid in cash, the full amount received is the exempt
measure of the income subject to tax.
Tips and Gratuities – those paid directly to the
employee (usually by a customer of the employer)
which are not accounted for by the employee to the
(1) Regular salary/wage
employer. (taxable income but not subject to
Salary – earnings received periodically for a regular withholding tax) [RR NO. 2-98, Sec. 2.78.1]
work other than manual labor, such as monthly
Thirteenth month pay and other benefits - Not
salary of an employee
taxable if the total amount received is P82,000 or
Wages – all remuneration (other than fees paid to a less. Any amount exceeding P82,000 is taxable.
public official) for services performed by an [Sec. 32(7)(e), NIRC]
employee for his employer, including the cash value
Overtime Pay – premium payment received for
of all remuneration paid in any medium other than
working beyond regular hours of work which is
cash. [Sec. 78A, NIRC]
included in the computation of gross salary of
employee. It constitutes compensation.
(2) Separation pay/retirement benefit not otherwise
exempt
(4) Directors‘ fees
Retirement pay – a lump sum payment received by
Fees – received by an employee for the services
an employee who has served a company for a
rendered to the employer including a director‘s fee
considerable period of time and has decided to
of the company, fees paid to the public officials
withdraw from work into privacy. [RR 6-82, Sec. 2b]
such as clerks of court or sheriffs for services
General rule: Retirement pay is taxable rendered in the performance of their official duty
over and above their regular salaries.
Exceptions:
(a) SSS or GSIS retirement pays.
(b) Nonmonetary compensation - If services are paid
(b) Retirement pay (R.A. 7641) due to old age
provided the following requirements are for in a medium other than money, the fair market
met: value of the thing taken in payment is the measure
of the income subject to tax.
(1) The retirement program is approved by
the BIR Commissioner;
(1) Fringe benefit not subject to tax
(2) It must be a reasonable benefit plan.
(fair and equitable) (See Chapter on Gross Income for the discussion of
(3) The retiree should have been Taxable and Non-taxable fringe benefits)
employed for 10 years in the said If the recipient of the fringe benefits is a rank and
company; file employee, and the said fringe benefit is not tax-
(4) The retiree should have been 50 years exempt, then the value of such fringe benefit shall
old or above at the time of retirement; be considered as part of the compensation income
and of such employee subject to tax payable by the
employee. [Domondon]
(5) It should have been availed of for the
first time.
Separation pay – taxable if voluntarily availed of. It ii. Exclusions
shall not be taxable if involuntary i.e. Death, (a) Fringe benefit subject to tax
sickness, disability, reorganization /merger of
(See Chapter on Gross Income for the discussion of
company and company at the brink of bankruptcy or
Taxable and Non-taxable fringe benefits)
for any cause beyond the control of the said official
or employee Where the recipient of the fringe benefit is not a rank
and file employee, and the said benefit is not tax-
exempt, then the same shall not be included in the
PAGE 80 OF 275
compensation income of such employee subject to According to RA 9504 (effective July 6, 2008) basic
tax. The fringe benefit [tax] is instead levied upon personal exemption is Fifty thousand pesos
the employer, who is required to pay. [Domondon] (P50,000) for each individual taxpayer, regardless
whether single, married or head of the family.
Convenience of the ER Rule

Additional Exemptions
If meals, living quarters, and other facilities and
privileges are furnished to an employee for the Depends on the number of qualified dependent
convenience of the employer, and incidental to the children
requirement of the employee‘s work or position, the
Amount allowed as a deduction  P25,000 per
value of that privilege need not be included as
dependent child, but not to exceed four children
compensation [Henderson v. Collector (1961)]
[RA 9504]
(b) De minimis benefits

(b) Health and hospitalization insurance
Facilities or privileges of relatively small value
Premium Paid on Health or Hospitalization
furnished by an employer to his employees and are
Insurance [Sec.34 (M)]
as a means of promoting the health, goodwill,
contentment, or efficiency of his employees. Amount of premium paid on health and/or
hospitalization by an individual taxpayer (head of
These are exempt from fringe benefit tax and
family or married), for himself and members of his
compensation income tax.
family during the taxable year.
(c) 13th month pay and other benefits and payments

Requisites for Deductibility
specifically excluded from taxable compensation
income (1) Insurance must have actually been taken
Gross benefits received by employees of public and (2) The amount of premium deductible does
private entities provided that the total exclusion not exceed P2,400 per family or P200 per
shall not exceed P82,000 (amounts in excess are month whichever is lower during the
considered compensation income) taxable year.
Benefits include: (3) That said family has a gross income of not
more than P250,000 for the calendar year.
(a) Benefits received by government
employees under RA 6686 (4) In case of married individual, only the
spouse claiming additional exemption
(b) Benefits received by employees pursuant
shall be entitled to this deduction.
to PD 851 (13th Month Pay Decree)
Note: The spouse claiming the additional
(c) Benefits received by employees not
exemptions for qualified dependent children shall
covered by PD 851 as amended by
be the same spouse to claim the deductions for
Memorandum Order No. 28; and,
premium payments.
(d) Other benefits such as productivity
The following may avail of the deduction
incentives and Christmas bonus
(a) Individual taxpayers earning purely
compensation income during the year.
Iii. Deductions
(b) Individual taxpayer earning business
(a) Personal and additional exemptions (See the income or in practice of his profession.
Chapter on Deductions for the full discussion of
Personal and additional exemptions)
C.1.3. Taxation of Business Income/Income From
Practice of Profession
Basic Personal Exemptions
PAGE 81 OF 275
All income obtained from doing business and/or (See summary table)
engaging in the practice of a profession shall be
included in the computation of taxable income. (5-
32% For citizens, resident aliens & NRA Engaged in (c) Dividends from domestic corporation
trade or business; 25% in case of NRANETB) (a) cash and/or property dividends actually or
constructively received by an individual
from
C.1.4. Taxation of Passive Income
(b) a domestic corporation
Passive Income Subject to Final Tax
(c) a joint stock company
―Final tax‖ means tax withheld from source, and the
amount received by the income earner is net of the (d) insurance or mutual fund companies
tax already. The tax withheld by the income payor is (e) regional operating headquarters of
remitted by him to the BIR. The income having been multinational companies
tax-paid already, it need not be included in the
income tax return at the end of the year. These (f) share of an individual in the distributable
passive income items are as follows: net income after tax of a partnership
(except a general professional partnership)
(a) Interest income of which he is a partner
(b) Royalties (g) share of an individual member or co-
(c) Dividends from domestic corporations venturer in the net income after tax of an
association, a joint account, or a joint
(d) Prizes and other winnings
venture or consortium taxable as a
corporation
(a) Interest income
(a) on any currency bank deposit, yield or any RATE:
other monetary benefit from deposit
(a) 10%for residents (RC, RA) and non resident
substitutes, trust funds and similar
citizens (NRC);
arrangements - 20% final tax
(b) 20% for NRAETB(non-resident aliens
(b) under the expanded foreign currency
engaged in trade or business)
deposit system (EFCDS) - 7.5% final tax for
residents, exempt if non-residents
A stock dividend representing the transfer of surplus
to capital account shall not be subject to tax.
Treatment of income from long-term deposits
However, if a corporation cancels or redeems stock
On long-term deposit or investment certificates
issued as a dividend at such time and in such
(LTDIC) in banks (e.g., savings, common or
manner as to make the distribution and cancellation
individual trust funds, deposit substitutes,
or redemption, in whole or in part, essentially
investment management accounts and other
equivalent to the distribution of a taxable dividend,
investments, which have maturity of 5 years or more)
the amount so distributed in redemption or
– exempt
cancellation of the stock shall be considered as
Should LTDIC holder pre-terminate LTDIC before the taxable income to the extent that it represents a
5th year, a final tax shall be imposed on the entire distribution of earnings or profits. [Sec. 73B, NIRC]
income based on the remaining maturity:
In other words, stock dividends are generally not
4 years to less than 5 years 5% subject to tax as long as there are no options in lieu
of the shares of stock.
3 years to less than 4 years 12%
less than 3 years 20%
On the other hand, a stock dividend constitutes
income if it gives the shareholder an interest
(b) Royalties
PAGE 82 OF 275
different from that which his former stockholdings

represented.
Passive income not subject to tax
(d) Prizes and other winnings Interest income from long-term deposit or
investment in the form of savings, common or
(a) Winnings, except Philippine Charity individual trust funds, deposit substitutes,
sweepstakes / lotto winnings – 20% investment management accounts and other
investments evidenced by certificates in such form
(b) Prizes exceeding P10,000 – 20%
prescribed by the BSP shall be exempt from tax
Prize, differentiated from winnings
A prize is the result of an effort made (e.g., prize in a
But should the holder of the certificate pre-
beauty contest), while winnings are the result of a
terminate the deposit or investment before the 5th
transaction where the outcome depends upon
year, a final tax shall be imposed on the entire
chance (e.g., betting).
income and shall be deducted and withheld by the
depository bank from the proceeds of the long-term
For interest from foreign currency loans granted by deposit or investment certificate based on the
FCDUs to residents other than Offshore Banking remaining maturity thereof:
Units (OBUs) or other depository banks under the Four (4) years to less than five (5) years - 5%;
expanded system – tax rate is 10% if payors are
Three (3) years to less than four (4) years - 12%; and
RESIDENTS, whether individuals or corporations.
Less than three (3) years - 20%.
For interest from foreign currency loans granted by
OBUs to residents other than OBUs or local Any income of nonresidents, whether individuals or
commercial banks, including branches of foreign corporations, from transactions with depository
banks that may be authorized by the BSP to transact banks under the expanded system shall be exempt
business with OBUs - tax rate is 10% if payors are from income tax.
RESIDENTS, whether individuals or corporations.
C.1.5. Taxation of Captial Gains

Gross income from all sources within the Philippines
(1) Income from sale of shares of stock of a
derived by non-resident cinematographic film
philippine corporation
owners, lessors or distributors – tax rate is 25% if
payee is: (a) non-resident alien individual, or (b)
(a) Shares traded and listed in the stock exchange –
non-resident foreign corporation. The term
exempt
―cinematographic films‖ includes motion picture
films, films, tapes, discs and other such similar or The transaction is exempt from income tax
related products. regardless of the nature of business of the seller or
transferor. However, it is subject to the one-half of
one percent (1/2 of 1%) stock transaction tax
Informer‘s reward given to persons who voluntarily imposed under Sec. 127(A) of the Tax Code based
provide definite and sworn information that lead to on the gross selling price or gross value in money of
or was instrumental in the discovery of fraud or the shares of stock sold or transferred.
violation of the provisions of the NIRC or special
laws being administered by the BIR and resulted in
the actual recovery or collection of revenues, (b) Shares not listed and traded in the stock
surcharges and fees and/or the conviction of the exchange – subject to final tax
guilty party or parties, and/or the imposition of any On sale, barter, exchange or other disposition of
fine or penalty or the actual collection of a shares of stockof a domestic corporation not listed
compromise amount, in case of amicable
and traded through a local stock exchange, held as
settlement, shall be subject to income tax, collected a capital asset:
as a final withholding tax, at the rate of 10%,
pursuant to Sec. 282 of the NIRC [RR 16-2010]
PAGE 83 OF 275
On the net capital gain: Sale or disposition by a natural person of his

principal residence,
Not over P100,000 = Final Tax of 5%
The proceeds of which is fully utilized in
On any amount in excess of P100,000 = plus Final
acquiring/constructing a new principal residence,
Tax of 10% on the excess
Such acquisition/construction taking place within
18 calendar months from the date of sale or
Key Definitions disposition,
Net capital gain: selling price less cost The taxpayer notifies the Commissioner within 30
days from the sale/disposition through a prescribed
Selling price: consideration on the sale OR fair
return of his intention to avail of the exemption,
market value of the shares of stock at the time of the
sale, whichever is higher The tax exemption can only be availed of once every
Cost: original purchase price 10 years.
Tax treatment: Exempt from capital gains tax (CGT).
If there is no full utilization of the proceeds of sale or
(2) Income from the sale of real property situated in disposition, the portion of the gain presumed to
the philippines have been realized from the sale or disposition shall
be subject to CGT.
What property covered How taxable portion and tax determined:
Property located in the PH classified as capital
assets
[ ]
What transactions covered
Sales, exchanges, or other disposition of real
property (classified as capital assets), including The historical cost or adjusted basis of the real
pacto de retro sales and other forms of conditional property sold or disposed shall be carried over to the
sales of the following: citizens, resident aliens, new principal residence built or acquired.
NRAETB, NRANETB, domestic corporations.
Computation for the basis of new principal
residence:
Tax rate XXX
General rule: 6% of —whichever is higher of: Historical cost of old principal
residence
(a) Gross selling price, or
Add: Additional cost to acquire new XXX
(b) Fair market value (determined in accordance
principal residence*
with Sec. 6(E), NIRC).
Adjusted cost bases of the new XXX
Exception:
principal residence
In case of sales made to the government, any of its
political subdivisions or agencies, or to GOCCs, it
can be taxed either: *Additional cost to acquire new
Under Sec. 24(D)(1), NIRC – 6% CGT, or principal residence:
Under Sec. 24(A), NIRC, at the option of the Cost to acquire new principal XXX
taxpayer. residence
In case of the sale of or disposition of their principal Less: Gross selling price of old (XXX)
residence by natural persons principal residence
Requirements: Additional cost to acquire new XXX

principal residence
PAGE 84 OF 275
One who comes to the Philippines for a definite

purpose which, in its nature, may be promptly
accomplished is a transient. But if his purpose is of
(3) Income from the sale, exchange, or other such a nature that an extended stay may be
disposition of other capital assets necessary for its accomplishment, and to that end
the alien makes his home temporarily in the
Other properties shall be subject to income tax Philippines, he becomes a resident, though it may
be his intention at all times to return to his domicile
(a) At the graduated income tax rates, if the abroad when the purpose of which he came has
seller is an individual; been consummated or abandoned. [Sec. 5, RR No.
(b) Long-term capital gains: only 50% is 2]
recognized. In general, a non-resident alien individual who shall
(c) Short-term capital asset transactions: come to the Philippines and stay therein for an
100% subject to tax. [Sec. 39(B), NIRC] aggregate period of more than 180 days during any
calendar year shall be deemed a non-resident alien
doing business in the Philippines.
Determination of whether short- or long-term: Short- Intended stay in the Philippines:
term if held for 12 months or less; otherwise, it is a
long-term capital gain. a) Up to 180 days – Non-resident alien not
engaged in trade or business
At 30% corporate income tax, if the seller is a
corporation. b) More than 180 days but less than 1 year –
Non-resident alien engaged in trade or
Rule: Capital gain/loss is recognized in full. business
Capital assets shall refer to all real properties held c) 1 year or more – Resident alien
by a taxpayer, whether or not connected with his
trade or business, and which are not included
among the real properties considered as ordinary General Rule: Subject to an income tax in the same
assets under Section 39(A)(1) of the NIRC. manner as an individual citizen and a resident alien
individual on taxable income from all sources within
Ordinary assets shall refer to all real properties the Philippines.
specifically excluded from the definition of capital
assets under Section 39(A)(1) of the NIRC, namely: Cash and/or property dividends
Stock in trade of a taxpayer or other real property of The following shall be subject to an income tax of
a kind which would properly be included in the twenty percent (20%) on the total amount thereof: 
inventory of the taxpayer if on hand at the close of (a) Cash and/or property dividends from:
the taxable year; or (1) A domestic corporation;  
Real property held by the taxpayer primarily for sale (2) A joint stock company;  
to customers in the ordinary course of his trade or (3) An insurance or mutual fund company;  
business; or (4) A regional operating headquarter of
 multinational company;  
Real property used in trade or business (i.e., (5) The share of a nonresident alien
buildings and/or improvements) of a character
 individual in the distributable net income
which is subject to the allowance for depreciation
after tax of a partnership (except a general
provided for under Sec. 34(F) of the Code; or
professional partnership) of which he is a
Real property used in trade or business of the partner;
taxpayer (6) The share of a nonresident alien individual
in the net income after tax of an association, a
joint account, or a joint venture taxable as a
C.2. INCOME TAX ON NON-RESIDENT corporation of which he is a member or a co-
ALIENS ENGAGED IN TRADE OR BUSINESS venturer;
A non-resident alien is an individual whose (b) Interests  
residence and citizenship is not in the Philippines. (c) Royalties (in any form); and  
PAGE 85 OF 275
(d) Prizes (except prizes amounting to Ten (1) Alien individuals employed by:
 thousand pesos (P10,000) or less which shall be (a) Regional or Area Headquarters (RAHQ) and
subject to graduated tax) and other winnings (except Regional Operating Headquarters (ROHQ)
Philippine Charity Sweepstakes and Lotto winnings) established in the Philippines by multinational
companies
Except:
(1) The following Royalties shall be subject to a final Multinational company: a foreign firm or
tax of ten percent (10%) on the total amount entity  engaged in international trade with
thereof:  affiliates or subsidiaries or branch offices in
(a) On books as well as other literary the Asia-Pacific Region and other foreign
works; and (b) On musical compositions markets.
(2) Cinematographic films and similar works shall
be subject to twenty-five percent (25%) of the gross (b) Offshore Banking Units established in the
income   Philippines
(3) Interest income from long-term deposit or
investment in the form of savings, common or (2) Alien individuals who are permanent residents
individual trust funds, deposit substitutes, of a foreign country but who are employed and
investment management accounts and other assigned in the Philippines by a foreign service
investments evidenced by certificates in such form contractor or by a foreign service subcontractor
prescribed by the Bangko Sentral ng Pilipinas (BSP) engaged in petroleum operations in the Philippines.
shall be exempt from the tax    
But should the holder of the certificate pre-
terminate the deposit or investment before the fifth Tax Rate and Base - 15% of gross income received
(5th) year, a final tax shall be imposed on the entire as salaries, wages, annuities, compensation,
income and shall be deducted and withheld by the remuneration and other emoluments, such as
depository bank from the proceeds of the long-term honoraria and allowances.
deposit or investment certificate based on the
remaining maturity thereof: The same tax treatment shall apply to Filipinos
employed and occupying the same positions as
(i) Four (4) years to less than five (5) years - 5%;   those of aliens employed by these multinational
(ii) Three (3) years to less than four (4) years - 12%; companies, offshore banking units and petroleum
and   service contractors and subcontractors.
(iii) Less than three (3) years - 20%.  
Note that the coverage of the special classification
Capital gains (and the corresponding tax rate) is limited to income
Capital gains realized from sale, barter or exchange received as wages. Hence, any income earned from
of shares of stock in domestic corporations not all other sources within the Philippines by the alien
traded through the local stock exchange, and real employees shall be subject to the pertinent income
properties shall be subject to the similar tax tax (example: sale of real property in the Philippines
prescribed on citizens and resident aliens. is subject to 6% capital gain tax, imposed on the
(a) Sale, barter or exchange of Shares of stock in gross selling price or fair market value of the
domestic corporation not traded – property at the time of the sale, whichever is higher)
(1) Net over P100,000 – 5% of net capital gains
realized C.4. INDIVIDUAL TAXPAYERS EXEMPT
(2) On any amount in excess of P100,000 – 10% FROM INCOME TAX
of net capital gains realized
(b) Sale, barter or exchange of real properties – 6% Individual Taxpayers exempt from income tax are:
of gross selling price or current FMV whichever is (1) Senior Citizens  
higher
(2) Minimum wage earners  
(3) Exemptions granted under international
C.3. INCOME TAX ON NON-RESIDENT  agreements  
ALIENS NOT ENGAGED IN TRADE OR
BUSINESS
PAGE 86 OF 275
All individuals and entities claiming exemption from The minimum wage shall be exempt from the
imposition of taxes on income and, consequently, payment of income tax on their taxable income:
from withholding taxes are required to provide a Provided, further, That the holiday pay, overtime pay,
copy of a valid, current and subsisting tax exemption night shift differential pay and hazard pay received
certificate or ruling, as per existing administrative by such minimum wage earners shall likewise be
issuances and any issuance that may be issued from exempt from income tax
time to time, before payment of the related income.
(3) Income also subject to tax exemption: holiday
The tax exemption certificate or ruling must explicitly
pay, overtime pay, night shift differential, and
recognize the grant of tax exemption, as well as the
hazard pay
corresponding exemption from imposition of
withholding tax. Failure on the part of the taxpayer Compensation income including overtime pay,
to present the said tax exemption certificate or holiday pay and hazard pay, earned by minimum
ruling as herein required shall subject him to the wage earners who has no other returnable income
payment of appropriate withholding taxes due on are NOT taxable and not subject to withholding tax
the transaction. [RMC No. 8-2014] on wages [RA 9504]
C.4.1 Senior Citizens

Who are covered: any resident citizen— (a) At least
C.4.3. Exemptions Granted Under international
60 years old,and Agreements
(b) Who are considered minimum wage earners
See RMC No, 31-2013, April 12, 2013 – taxation of
under RA 9504 (Sec. 4 (b) RA 7432, as amended by compensation income of Philippine nationals and
RA 9994) and/or the aggregate amount of gross alien individuals employed by foreign
income earned by the senior citizen during the
governments/embassies/diplomatic missions and
taxable year does not exceed the amount of his
international organizations situated in the
personal exemptions (BPE and APE). Philippines.
C.4.2. Minimum Wage Earners
Rule: they shall be exempt from payment of income

tax on their taxable income. 
Limit: However, if he receives ―other benefits‖ in
excess of the allowable statutory amount of
P82,000, then he shall be taxable on the exceeds
benefits as well as his salaries, wages, and
allowances, just like an employee receiving
compensation income beyond the statutory
minimum wage.
Taxation of compensation income of a minimum

wage earner
(1) Statutory minimum wage – earner shall refer to
rate fixed by the Regional Tripartite Wage and
Productivity Board, as defined by the Bureau of
Labor and Employment Statistics (BLES) of the
Department of Labor and Employment. [Sec.22 GG,
as amended by RA 9504]
(2) Minimum wage earner – shall refer to a worker in
the private sector paid the statutory minimum wage,
or to an employee in the public sector with
compensation income of not more than the statutory
minimum wage in the non-agricultural sector where
he/she is assigned. [Sec.22 HH, as amended by RA
9504]
PAGE 87 OF 275
PAGE 88 OF 275
PAGE 89 OF 275
D. INCOME TAX ON CORPORATIONS and contemplate to that extent the performance of

acts or works, or the exercise of some of the
D.1. INCOME TAX ON DOMESTIC functions normally incident to, and in progressive
CORPORATIONS AND RESIDENT FOREIGN prosecution of commercial gain or of the purpose
CORPORATIONS and object of the business organization: Provided,
however, That the phrase "doing business" shall
Domestic Corporations not be deemed to include mere investment as a
shareholder by a foreign entity in domestic
Taxes payable are: corporations duly registered to do business, and/or
(1) Regular Tax the exercise of rights as such investor; nor having a
(2) Minimum Corporate Income Tax nominee director or officer to represent its interests
in such corporation; nor appointing a representative
Resident Foreign Corporations or distributor domiciled in the Philippines which
transacts business in its own name and for its own
General rule: A resident foreign corporation is a account; [Sec. 3 (d)]
corporation organized under the laws of a foreign
country, which is engaged in trade or business in the With respect to their income from sources within the
Philippines. Philippines
(a) A Philippine branch of a foreign corporation duly Resident foreign corporations are subject to any or
licensed by the SEC is considered a resident foreign some of the following:
corporation. Thus, only the income of the Philippine (1) Capital Gains Tax  
branch from sources within the Philippines is (2) Final Tax on Passive Income  
subject to Philippine income tax.   (3) Normal Tax [OR] Minimum Corporate  Income
(b) Marubeni v. Commissioner: As general rule, the Tax (MCIT) [OR] Gross Income Tax  (GIT)  
head office of a foreign corporation is the same (4) Branch Profit Remittance Tax  
juridical entity as its branch in the Philippines
following the single entity  concept. Thus, the
income from sources within the Philippines of the D.1.1. Regular Tax
foreign head office shall thus be taxable to the Normal Corporate Income Tax Rate: 30% of Taxable
Philippine branch. Income (effective January 1, 2009)
But, when the head office of a foreign corporation Gross Income xxx
independently and directly invested in a domestic Less: Allowable Deductions xxx
corporation without the funds passing through its Taxable Income xxx
Philippine branch, the taxpayer, with respect to the
tax on dividend income, would be the non-resident
foreign corporation itself and the dividend income D.1.2. Minimum Corporate Income Tax (MCIT)
shall be subject to the tax similarly imposed on non- Applies to domestic corporations and RFCs
resident foreign corporations.  whenever such corporations have zero or negative
taxable income or whenever the MCIT is greater than
Definition of ―doing business‖ under the Foreign the normal income tax due from such corporations.
Investment Act of 1991   
The phrase "doing business" shall include soliciting
orders, service contracts, opening offices, whether Domestic Corporations
called "liaison" offices or branches; appointing
representatives or distributors domiciled in the (1) Imposed upon any domestic corporation
Philippines or who in any calendar year stay in the beginning the fourth taxable year in which such
country for a period or periods totaling one hundred corporation commenced its business operations.
eighty [180] days or more; participating in the For purposes of the MCIT, the taxable year in which
management, supervision or control of any domestic business operations commenced shall be the year
business, firm, entity or corporation in the when the corporation registers with the BIR (not in
Philippines; and any other act or acts that imply a which the corporation started commercial
continuity of commercial dealings or arrangements
operations).  
PAGE 90 OF 275
(2) Tax rate: 2% of the Gross Income   relation to the revenue realized by the sellers of
services. These refer to costs which are considered
Imposition of MCIT indispensable to the earning of the revenue such
Gross Sales xxx that without such costs, no revenue can be
Less: Sales Returns xxx generated.
Sales Discounts xxx
Pointers
Allowances xxx MCIT is in the nature of a tax credit, not an allowable
Cost of Goods Sold xxx xxx deduction. Its purpose is to prevent corporations
MCIT GI xxx from escaping being taxed by including frivolous
expenses in their statement of income.
Computation of gross income
The term ―Gross Income‖ shall be equivalent to Is the Minimum Corporate Income Tax (MCIT) an
gross sales less sales returns, discounts and addition to the regular or normal income tax?
allowances and cost of goods sold. ―Cost of goods No, the MCIT is not an additional tax. The MCIT is
sold‖ shall include all business expenses directly compared with the regular income tax, which is due
incurred to produce the merchandise to bring them from a corporation. If the regular income is higher
to their present location and use. than the MCIT, then the corporation does not pay
the MCIT.
If apart from deriving income from core business
activities there are other items of gross income Who are covered by MCIT?
realized or earned by the taxpayer which are subject The MCIT covers domestic and resident foreign
to the normal corporate income tax, they must be corporations which are subject to the regular
included as part of gross income for computing income tax. The term ―regular income tax‖ refers to
MCIT. [Sec. 27 (E), NIRC; RR 12-2007] the regular income tax rates under the Tax Code.
Thus, corporations which are subject to a special
This means that the term ―gross income‖ will also corporate tax system do not fall within the coverage
include all items of gross income enumerated under of the MCIT.
Section 32(A) of the NIRC, except: (a) income
exempt from income tax, and (b) income subjected These special corporations are:
to FWT. (1) Corporations that are subject to ten percent
 (10%) preferential tax rate: Proprietary educational
Computation by type of business institutions, nonprofit hospitals, Offshore Banking
(a) Merchandising/Manufacturing Concerns Units (OBUs) on their income from foreign currency
transactions which has been subjected to a final
Net Sales xxx income tax at 10% of such income, and depository
Less: Cost of Goods Sold xxx banks under the expanded foreign currency deposit
Gross Income xxx system on their income from foreign currency
transactions which has subjected to final income tax
(b) Service Concerns at 10%; RFCs engaged in business as Regional
Operating Headquarters  
Gross Receipts/Revenue xxx (2) Firms under special income tax regime such as
Less: Direct Cost of Services xxx those under the PEZA law [RA 7916], the Bases
Gross Income xxx Conversion Development Act [RA 7227] and forms
enjoying Income Tax Holiday (ITH) under EO No. 226;
Net Sales is gross sales less sales returns, discounts  
and allowances (3) International carriers subject to tax at 2 ½ % of
their gross Philippine billings;  
Direct cost of services includes salaries of personnel
rendering the services, expenses on the facilities Note: For domestic corporations whose operations
directly utilized, cost of supplies, and the like. or activities are partly covered by the regular income
―Direct costs and expenses‖ shall only pertain to tax and partly covered under a special income tax
those costs exclusively and directly incurred in
PAGE 91 OF 275
system, the MCIT shall apply on operations covered corporate income tax returns whether this be MCIT
by the regular corporate income tax system. or normal income tax.
MCIT gross income differentiated from the normal In the computation of annual income tax due, if the
tax gross income  normal income tax due is higher than the computed
The latter would include other incidental income annual MCIT, the following shall be allowed to be
items, such as rent income, interest, gain on sale of credited against the annual income tax: (a) quarterly
assets, certain tax refunds, etc. MCIT payments, (b) quarterly normal income tax
payments, (c) excess MCIT in the prior year/s
What amount of income tax is paid by the (subject to the prescriptive period allowed for its
corporation to the BIR?  creditability), (d) CWTs in the current year, (d) excess
Whichever is higher between the normal tax and the CWTs in the prior year.
minimum corporate income tax
If in the computation of annual income tax due, the
Illustration: computed annual MCIT due is higher than the
E Co., a domestic trading corporation, in its fourth annual normal income tax due, the following may be
year of operations had a gross profit from sales of credited against the annual income tax: (a) quarterly
P300,000 and net taxable income of P100,000. MCIT payments of current taxable quarter, (b)
How much was the income tax paid by the quarterly normal income tax payments in current
corporation for the year? year, (c) CWTs in the current year, (d) excess CWTs in
the prior year.
MCIT (P300,000 x 2%) P6,000
Normal Income Tax (P100,000 x P30,000 Excess MCIT from the previous taxable year/s shall
30%) not be allowed to be credited against the annual
Income Tax to be paid for the P30,000 MCIT due as the same can only be applied against
year (whichever is higher) normal income tax.
Manner of Filing and Payment.

Quarterly MCIT Computation
The MCIT shall be paid in the same manner
The computation and the payment of MCIT shall
prescribed for the payment of the normal corporate
likewise apply at the time of filing the quarterly
corporate income tax. In the computation of the tax income tax which is on a quarterly and on a yearly
due for the taxable quarter, if the quarterly MCIT is basis.
higher than the quarterly normal income tax, the tax
due to be paid for such taxable quarter at the time of Carry forward of excess minimum tax
Any excess of the minimum corporate income tax
filing the quarterly corporate income tax return shall
over the normal income tax shall be carried forward
be the MCIT.
on an annual basis. The excess can be credited
against the normal income tax in the nextthree (3)
Items allowed to be credited against quarterly MCIT
succeeding taxable years. [Sec. 27(E)(2)] In the year
due: (a) CWT, (b) Quarterly income tax payments
to which carried forward, the normal tax should be
under the normal income tax; and (c) MCIT paid in
higher than the MCIT.
the previous taxable quarter(s).
Illustration:
Excess MCIT from the previous taxable year/s shall
A domestic corporation had the following data on
not be allowed to be credited against the quarterly
computations of the normal tax (NT) and the
MCIT tax due.
minimum corporate income tax (MCIT) for five years.
Annual Income Tax Computation.
The final comparison between the normal income Yr 4 Yr 5 Yr 6 Yr 7 Yr 8
tax payable and the MCIT shall be made at the end MCIT 80K 50K 30K 40K 35K
of the taxable year. The payable or excess payment NT 20K 30K 40K 20K 70K
in the Annual Income Tax Return shall be computed
taking into consideration corporate income tax The excess MCIT over NT carry-forward is shown as
payment made at the time of filing of quarterly follows:
PAGE 92 OF 275
months and caused the temporary shutdown of

operations), or
(2) Force majeure (acts of God and other calamity;
includes armed conflicts like war or insurgency), or
(3) Legitimate business reverses (substantial losses
due to fire, robbery, theft or other economic
reasons).
Optional gross income tax (OGIT)

Section 27 (A) of the NIRC provides for an optional
gross income tax of 15% based on gross income.
The President, upon the recommendation of the

Secretary of Finance, may, effective January 1, 2000,
allow domestic corporations the option to be taxed
Arrow pointing downward means that the normal at fifteen percent (15%) of gross income as defined
tax is higher so that there can be an excess MCIT therein, after the following conditions have been
carry-forward against it. satisfied:
*Cannot carry forward an amount higher than the NT, Tax effort ratio 20% of GNP
hence the excess of 60K from Year 4 was reduced to Ratio of income tax collection 40%
40K. The unused P20,000 cannot be used in Year 8 to total tax revenues
because Year 8 was beyond three years from Year 4. VAT tax effort 4% of GNP
Ratio of Consolidated Public 0.90%
Relief from the MCIT under certain conditions (Sec. Sector Financial Position
27 (E)(3), NIRC) The Secretary of Finance, upon the (CPSFP) to GNP
recommendation of the Commissioner, may Ratio of the corporation‘s Cost Does not exceed
suspend the imposition of the MCIT upon of Sales to Gross Sales 55%
submission of proof by the applicant- corporation
that the corporation sustained substantial losses on
account of the following Gross Sales xxx
(LMB): Less: Sales Returns xxx
(1) Prolonged labor dispute (losses from a strike Sales Discounts xxx
staged by employees that lasts for more than 6
Allowances xxx
PAGE 93 OF 275
Cost of Goods Sold xxx xxx subheading of domestic corporations is equally

GI xxx applicable to resident foreign corporations, both as
to concepts and computations, except that RFCs are
taxed only on income from sources within the
Philippines.
The election of the gross income tax option by the
corporation shall be irrevocable for three (3) (a)  of
consecutive taxable years during which the net taxable income from sources within  the
corporation is qualified under the scheme. Philippines [RA 9337] (b) Minimum Corporate
Income Tax  (MCIT)  2% of MCIT Gross Income
For purposes of gross income tax, gross income from sources within the Philippines. The MCIT is
should be the same as gross income for purposes of imposed on RFCs under the same conditions as
MCIT in cases of trading, merchandising and domestic corporations. [Sec. 28(A)(2), NIRC]  
manufacturing concern business. However, for (c) Gross Income Tax (GIT)  The President, upon
service enterprises, gross income means gross the recommendation of the Secretary of Finance,
receipts less sales returns, discounts, allowances may allow resident foreign corporations the option
and cost of services. to be taxed at fifteen percent (15%) of gross income
within the Philippines, under the same conditions as
Note: At present, the OGIT has not been domestic corporations. [Sec. 28(A)(1), NIRC]  
implemented in the Philippines. D.1.3. Branch Profit Remittance Tax
Taxable transaction – any profit remitted by a
Corporations exempt from the MCIT: branch of a multinational corporation to its head
(1) Banks and other non-bank financial office
 intermediaries;  
(2) Insurance companies;   Tax Rate and Base – 15% final tax based on the
(3) Publicly-held corporations;   total profits applied or earmarked for remittance
(4) Taxable partnerships;   without any deduction for the tax component. The
15% final tax should excluding: (a) profits on
(5) General professional partnerships;  
activities which are registered with the Philippine
(6) Non- taxable joint ventures; and   Economic Zone Authority (PEZA) and (b) passive
(7) Enterprises that are registered: income gains and profits received not directly
(a) with the Philippine Economic Zone connected with the conduct of its trade or business
Authority (PEZA) under R.A. 7916;   in the Philippines.
(b) pursuant to the Bases Conversion and
Development Act of 1992 under R.A. 7227; Income not treated as branch profits unless
and   effectively connected with the conduct of trade or
(c) under special economic zones declared by business in the Philippines:
law which enjoy payment of special tax rate on (1) Interests, dividends, rents, royalties
their registered operations or activities in lieu  remuneration for technical services  
of other taxes, national or local.   (2) salaries, wages premiums, annuities,
 emoluments  
Applicability of the MCIT where a corporation is (3) other fixed or determinable annual,  periodic or
governed both under the regular tax system and a
casual gains, profits, income  (4) capital gains
special income tax system
received during each taxable year from all sources
For corporations whose operations or activities are
partly covered by the regular income tax and partly within the Philippines  
covered under special income tax system, the MCIT
shall apply on operations by the regular income tax Notes:
system. (1) imposed whether the head office of the foreign
corporation is located in a tax treaty country, in a tax
Resident Foreign Corporations haven or other non- treaty country.  
(2) imposed only on the profits remitted by a
The discussion with respect to this topic (income Philippine branch to the head office of a foreign
subject to normal tax, MCIT, or GIT) under the corporation.  
PAGE 94 OF 275
D.1.4. Allowable Deductions On the net capital gain:

i. Itemized Deductions (1) First P100,000: Final Tax of 5% 
(1) Bad debts   (2) On any amount in excess of P100,000: plus 10%
(2) Expenses   Final tax on the excess
(3) Losses  
(4) Taxes   Income derived from depository bank under the
expanded foreign currency deposit system
(5) Depreciation   Under the expanded foreign currency deposit system
(6) Interest   (EFCDS) - 7.5%
(7) Depletion of oil and gas wells and mines  
(8) Charitable and other contributions   Inter-corporate dividends
(9) Research and development   Dividends received from another domestic
(10) Pension trusts   corporation - exempt
ii. Optional Standard Deductions (OSD) Capital gains realized from the sale, exchange, or
Before RA 9504, effective July 6, 2009, OSD only disposition of lands and/or buildings 
applied to individuals except non-resident aliens.  On the sale, exchange or disposition of lands and/or
But by virtue of RA 9504, it now also applies to buildings which are not actually used in the
corporations, except non-resident foreign business of a corporation and are treated as capital
corporation. assets  On the gross selling price, or the current
Moreover, the rate was increased from 10% to 40%. fair market value at the time of the sale, whichever is
higher, a final tax of 6%
D.1.5. Taxation of Passive Income
Note: Tax treatment is the same as that of
Domestic Corporations individuals.
Passive Income Subject to Tax The capital gains tax is applied on the gross selling
(1) Interest from deposits and yield or any  other price, or the current fair market value at the time of
monetary benefit from deposit substitutes and from the sale, whichever is higher. Any gain or loss on the
sale is immaterial because there is a conclusive
trust funds and similar arrangements and royalties   presumption by law that the sale resulted in a gain.
(2) Capital gains from the sale of shares of stock
not traded in the stock exchange (3) Income derived Passive Income Not Subject to Tax
from depository bank under the expanded foreign (1) Income derived by a depository bank under the
currency deposit system   expanded foreign currency deposit system from
(4) Inter-corporate dividends   foreign currency transactions with nonresidents,
(5) Capital gains realized from the sale,  exchange, offshore banking units in the Philippines, local
or of lands and/or buildings   commercial banks, including branches of foreign
banks that may be authorized by the Bangko Sentral
Interest from deposits and yield or any other ng Pilipinas (BSP) to transact business with foreign
monetary benefit from deposit substitutes and from currency depository system units and other
trust funds and similar arrangements and royalties depository banks under the expanded foreign
On any currency bank deposit, yield or any other currency deposit system shall be exempt from
monetary benefit from deposit substitutes, trust income exempt from income tax
funds and similar arrangements - 20%
Except: Net income from transactions specified by
Capital gains from the sale of shares of stock not the Secretary of Finance upon recommendation by
traded in the stock exchange  the Monetary Board
On sale, barter, exchange or other disposition of
shares of stockof a domestic corporation not listed BUT: Interest income from foreign currency loans
and traded through a local stock exchange, held as granted by such depository banks under said
a capital asset: expanded foreign currency deposit system to
residents, other than offshore banking units in the
PAGE 95 OF 275
Philippines, shall be subject to a final tax at the rate On the sale, exchange or disposition of lands and/or
of 10%. buildings which are not actually used in the
business of a corporation and are treated as capital
(2) Any income of nonresidents, whether individuals assets  On the gross selling price, or the current
or corporations, from transactions with depository fair market value at the time of the sale, whichever is
banks under the expanded system shall be exempt higher, a final tax of 6%
from exempt from income tax.
Note: Tax treatment is the same as that of
Resident Foreign Corporations individuals. 
The capital gains tax is applied on the gross selling
Interest from deposits and yield or any other price, or the current fair market value at the time of
monetary benefit from deposit substitutes, trust the sale, whichever is higher. Any gain or loss on the
funds and similar arrangements and royalties sale is immaterial because there is a conclusive
On any currency bank deposit, yield or any other presumption by law that the sale resulted in a gain.
monetary benefit from deposit substitutes, trust
funds and similar arrangements – Final tax of 20% Resident Foreign Corporations
Income derived from a depository bank under the Capital gain from sale of shares of stock not traded
expanded foreign currency deposit system  in the stock exchange 
Under the expanded foreign currency deposit system On sale, barter, exchange or other disposition of
(EFCDS) – Final tax of 7.5% shares of stock of a domestic corporation not listed
and traded through a local stock exchange, held as
Intercorporate dividends a capital asset:
Dividends received from a corporation liable to tax
under the NIRC- exempt On the net capital gain: 
(a) First P100,000: Final Tax of 5% 
Exclude: (b) On any amount in excess of P100,000: plus 10%
(1) International carrier   Final tax on the excess
(2) Offshore banking units  
(3) Branch profits remittances  
(4) Regional or area headquarters and  regional D.2. INCOME TAX ON NON-RESIDENT
operating headquarters of multination companies   FOREIGN CORPORATIONS
D.1.6. Taxation of Capital Gains General rule

Except as otherwise provided, the tax is 30% of the
Domestic Corporations gross income (except certain passive
Income from sale of shares of stock  income)received during each taxable year from all
On sale, barter, exchange or other disposition of sources within the Philippines, such as interests
shares of stockof a domestic corporation not listed (except interests on foreign loans, dividends, rents,
and traded through a local stock exchange, held as royalties, salaries, premiums (except reinsurance
a capital asset: premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains,
profits and income, and capital gains EXCEPT
On the net capital gain:  capital gains on the sale of shares of stock (not
(1) First P100,000: Final Tax of 5%  listed and traded through a local stock exchange), of
(2) On any amount in excess of P100,000: plus 10% a domestic corporation which are subject to the tax
Final tax on the excess rates prescribed for individuals and resident foreign
corporations.
Income from the sale of real property situated in the
Philippines Tax on certain income
Income from the sale, exchange, or other
disposition of other capital assets  Interest on foreign loans
PAGE 96 OF 275
(1) on foreign loans contracted on or after August 1, Tax Rate and Base – 10% on net income (except on
1986 – 20% income subject to capital gains tax and passive
(2) under the expanded foreign currency deposit income subject to final tax) within and without the
system (EFCDS) - exempt Philippines
Intercorporate dividends Caveat: If gross income from unrelated trade or

(a) Intercorporate Dividend – 15%, as long as the business or other activity exceeds 50% of total gross
country in which the nonresident foreign corporation income derived from all sources, the tax rate of 30%
is domiciled allows a tax credit for taxes ―deemed shall be imposed on the entire taxable income.
paid‖ in the Philippines equivalent to at least 15%
(b) 15% represents the difference between the Unrelated trade, business or other activity – any
regular income tax of 30% on corporations and the trade, business or other activity, the conduct of
15% tax on dividends (―tax sparing credit‖)   which is not substantially related to the exercise or
(c) If the country within which the NRFC is domiciled performance by such educational institution or
does NOT allow a tax credit, a final withholding tax hospital of its primary purpose or function.
at the rate of30% is imposed on the dividends
received from a domestic corporation.   Proprietary educational institution – any private
school maintained and administered by private
Capital gains from sale of shares of stock not traded individuals or groups with an issued permit to
in the stock exchange  operate from the DECS, CHED or TESDA. [Sec. 27(B),
On sale, barter, exchange or other disposition of real NIRC]
property or on shares of stock of a domestic
corporation not listed and traded through a local ii. Non-profit Hospitals
stock exchange, held as a capital asset: (See Proprietary Educational Institutions and
On the net capital gain: Hospitals, supra)
(a) First P100,000 Final Tax of 5%
(b) On any amount in excess of P100,000 plus Final iii. Government-owned or Controlled Corporations,
Tax of 10% on the excess Agencies or Instrumentalities
Exclude: For GOCCS

(1) Film rentals and other payments to non- resident General rule: GOCCs are taxable as any other
cinematographic film owner, lessor or corporation engaged in similar business, industry or
distributor Final tax of 25% of gross income from all activity, except: 
(1) Government Service Insurance System
sources within the Philippines  
(2) Rental, lease and charter fees payable to non- (GSIS) 
resident owner or lessor of vessels chartered by (2) Social Security System (SSS)
(3) Philippine Health Insurance Corporation (PHIC)
Philippine nationals Final tax of 4.5% of gross
rentals, lease or charter fees from leases or charters  
to Filipino citizens or corporations, as approved by (4) Local water districts (LWDs)  
the Maritime Authority   (5) Philippine Charity Sweepstakes Office  (PCSO)
(3) Rentals, charter and other fees payable to non-  
resident owner or lessor of aircraft machineries and [Sec. 27(C), NIRC]
other equipment Final tax of 7.5% of gross rentals
or fees   For instrumentalities and agencies of government
General rule: The government is exempt from tax.
Exception: When it chooses to tax itself. Nothing can

D.3. INCOME TAX ON SPECIAL
prevent Congress from decreeing that even
CORPORATIONS instrumentalities or agencies of the government
performing governmental functions may be subject
D.3.1. Domestic Corporations to tax. Where it is done precisely to fulfill a
i. Proprietary Educational Institutions and Hospitals constitutional mandate and national policy, no one
PAGE 97 OF 275
can doubt its wisdom. [Mactan Cebu Airport v (c) The test of taxability is the source, and the
Marcos, 1996] source is that activity which produced the income.  
If the taxing authority is the local gov‘t unit In the case of International Shipping, GPB means: 
RA 7160 expressly prohibits LGUs from levying tax Gross revenue whether for passenger, cargo or mail
on the Nat‘l Gov‘t, its agencies and instrumentalities originating from the Philippines up to final
and other LGUs. destination, regardless of the place of sale or
payments of the passage or freight documents.
iv. Depositary Banks (Foreign Currency Deposit
Units) ii. Off-shore Banking Units
Income derived from a depository bank under the Coverage of the Rule
expanded foreign currency deposit system  Only income derived by offshore banking units from
Under the expanded foreign currency deposit system foreign currency transactions with:
(EFCDS) – Final tax of 7.5% (1) non-residents,  
(2) other offshore banking units  
D.3.2. Resident Foreign Corporations
(3) local commercial banks including branches  of
i. International Carrier Doing Business in the foreign banks that may be authorized by the Bangko
Philippines Sentral ng Pilipinas (BSP) to transact business with
Tax Rate and Base – 2.5% on Gross Philippine offshore banking units.  
Billings (GPB)
Tax Rate
What is GPB Exempt from all taxes, except net income from such
In the case of International Air Carriers, GPB refers transactions as may be specified by the Secretary of
to the amount of: Finance, upon recommendation by the Monetary
(a) gross revenue derived from carriage of  persons, Board to be subject to the regular income tax
excess baggage, cargo and mail originating from the payable by banks.
Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the Exception: Interest income derived from foreign
place of payment of the ticket or passage document currency loans granted to residents other than
offshore banking units or local commercial banks,
  including local branches of foreign banks that may
(b) gross revenue from tickets revalidated, be authorized by the BSP to transact business with
exchanged and/or indorsed to another international offshore banking units, shall be subject only to a
airline if the passenger boards a plane in a port or final tax at the rate of 10%. [Sec. 28(A)(4), NIRC]
point in the Philippines  
(c) for flights which originate from the Philippines, iii. Resident Depositary Banks (Foreign Currency
but transshipment of passenger takes place at any Deposit Units)
port outside the Philippines on another airline, the Income derived from a depository bank under the
gross revenue consisting of only the aliquot portion expanded foreign currency deposit system 
of the cost of the ticket corresponding to the leg Under the expanded foreign currency deposit system
flown from the Philippines to the point of (EFCDS) – Final tax of 7.5%
transhipment transshipment [RR 15-2002]  
iv. Regional or Area Headquarters and Regional
Air Canada vs. CIR (CTA Case No. 6572): Operating Headquarters of Multinational
(a) A foreign airline company selling tickets in the Companies
Philippines through their local agents shall be Regional or area headquarters: not subject to
considered as resident foreign corporation engaged income tax
in trade or business  in the country.  
(b) The absence of flight operations within the Regional or area headquarters – a branch
 Philippine territory cannot alter the fact that the established in the Philippines by multinational
income received was derived from activities within companies and which headquarters do not earn or
the Philippines.   derive income from the Philippines and which act as
supervisory, communications and coordinating
PAGE 98 OF 275
center for their affiliates, subsidiaries, or branches

in the Asia-Pacific Region and other foreign markets.
Regional operating headquarters

(a) 10% of their taxable income  
(b) a branch established in the Philippines by
 multinational companies which are engaged in any
of the following services:  
(1) general administration and planning
(2) business planning and coordination
(3) sourcing and procurement of raw materials
and components
(4)  corporate finance advisory services
(5) marketing control and sales promotion
(6) training and personnel management
(7) logistic services
(8) research and development services and

product development 
(9)  technical support and maintenance
(10) data processing and communications, and 
(11) business development.
PAGE 99 OF 275
D.4. IMPROPERLY ACCUMULATED

PAGE 100 OF 275
EARNINGS TAX (3) Earnings reserved for definite corporate

[Sec. 29, NIRC, as implemented by RR 2-2001] Expansion projects or programs requiring
considerable capital expenditure as approved by the
Rule: There is imposed for each taxable year, in Board of Directors or equivalent body;  
addition to other taxes, a tax equal to 10% of the (4) Earnings reserved for Building, Plant or
improperly accumulated taxable income of Equipment Acquisition as approved by the Board of
domestic and closely-held corporations formed or Directors or equivalent body;  
availed of for the purpose of avoiding the income tax (5) Earnings reserved for compliance with any Loan
with respect to its shareholders or the shareholders Covenant or pre-existing obligation established
of any other corporation, by permitting the earnings under a legitimate business agreement;  
and profits of the corporation to accumulate instead (6) Earnings required by Law or applicable
of dividing them among or distributing them to the regulations to be retained by the corporation or in
shareholders. respect of which there is legal prohibition against its
distribution;  
Rationale: It is a tax in the nature of a penalty to the
(7) In the case of subsidiaries of foreign
corporation for the improper accumulation of its
corporations in the Philippines, all undistributed
earnings, and a deterrent to the avoidance of tax
earnings intended or reserved for Investments within
upon shareholders who are supposed to pay
the Philippines as can be proven by corporate
dividends tax on the earnings distributed to them.
The touchstone of the liability is the purpose behind records and/or relevant documentary evidence.  
the accumulation of the income and not the
consequences of the accumulation. Covered Corporations
Only domestic corporations classified as closely-
Exception: The use of undistributed earnings and held corporations are liable for IAET.
profits for the reasonable needs of the business
would not generally make the accumulated or Closely-held corporations are those:
undistributed earnings subject to the tax. (1) at least 50% in value of the outstanding capital
stock; or  
What is meant by ―reasonable needs of the business‖ (2) at least 50% of the total combined voting power
is determined by the Immediacy Test of all classes of stock entitled to vote  
Immediacy Test (3) is owned directly or indirectly by or for not more
It states that the ―reasonable needs of the business‖ than 20 individuals. Domestic corporations not
are the  falling under the aforesaid definition are, therefore,
(1) immediate needs of the business; and  publicly- held corporations.  
(2) reasonably anticipated needs.
To determine whether the corporation is closely held
How to prove the ―reasonable needs of the corporation, insofar as such determination is based
business‖  on stock ownership, the following rules shall be
The corporation should prove that there is applied:
(1) Stock Not Owned by Individuals. - Stock owned
(1) an immediate need for the accumulation of  the
directly or indirectly by or for a corporation,
earnings and profits; or   partnership, estate or trust shall be considered as
(2) a direct correlation of anticipated needs to being owned proportionately by its shareholders,
 such accumulation of profits.   partners or beneficiaries.  
(2) Family and Partnership Ownership. - An
Composition individual shall be considered as owning the stock
The following constitute accumulation of earnings owned, directly or indirectly, by or for his family, or
for the reasonable needs of the business:
by or for his partner.  
(1) Allowance for the increase in the  accumulation
of earnings up to 100% of the paid-up capital of the For purposes of this paragraph, the ‗family of an
corporation as of Balance Sheet date,   individual‘ includes his brothers or sisters (whether
(2) inclusive of accumulations taken from other by whole or half-blood), spouse, ancestors and
years;   lineal descendants.  
PAGE 101 OF 275

Otherwise, such accumulation would be deemed to

(3) Option to Acquire Stocks. - If any person has an be not for the reasonable needs of the business, and
option to acquire stock, such stock shall be the penalty tax would apply.
considered as owned by such person.  
For purposes of this paragraph, an option to acquire
such an option and each one of a series of option D.5 EXEMPTION FROM TAX ON
shall be considered as an option to acquire such CORPORATIONS
stock.  
Tax exempt corporations
(4) Constructive Ownership as Actual Ownership. - (1) Nonprofit labor, agricultural or  horticultural
Stock constructively owned by reason of the organizations
application of (a) or (c) shall, for purposes of (2) Non-stock/ non-profit mutual savings bank or
applying (1) or (2), be treated as actually owned by non-stock/ non-profit cooperative bank  
such person. (3)   Associations, orders, beneficiary societies
operating for the exclusive benefits of their
But stock constructively owned by the individual by members
reason of the application of (b) shall NOT be treated (4) Cemetery company owned and operated
as owned by him for purposes of again applying exclusively for the benefit of its members
such paragraph in order to make another the (5) Non-stock corporation or association
constructive owner of such stock.  organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes
BIR Ruling 025-02 or for the rehabilitation of veterans, provided that no
The ownership of a domestic corporation for individual person owns its assets or no individual
purposes of determining whether it is a closely held
corporation or a publicly held corporation is person receives benefit on its earnings  
ultimately traced to the individual shareholders of (6) Non-profit business league, chamber of
the parent company. commerce, or board of trade
Where at least 50% of the outstanding capital stock (7) Non-profit civic league or organization operating
or at least 50% of the total combined voting power exclusively for the promotion of social welfare  
of all classes of stock entitled to vote in a (8) Non-stock and non-profit educational
corporation is owned directly or indirectly by at least  institutions
21 or more individuals, the corporation is (9)   Government educational institutions
considered as a publicly-held corporation, thus, (10) Organizations with a purely local operation
exempt from IAET. whose income is derived only from assessment,
duties and fees collected from their members to
Determination of reasonable needs of the business  meet operational expenses such as fire insurance
An accumulation of earnings or profits (including company, farmers‘ or other mutual typhoon
undistributed earnings or profits of prior years) is associations, mutual ditch or irrigation company
unreasonable if it is not necessary for the purpose of and mutual or cooperative  telephone company  
the business, considering all the circumstances of (11) Associations of farmers, fruit growers, and  the
the case. like whose primary function is to  market the
product of their members  [Sec. 30, NIRC]
To determine the ―reasonable needs‖ of the
business in order to justify an accumulation of
NPC in general is subject to income tax; PAGCOR is
earnings, the Regulations adhere to the so-called not subject to income tax [RA 9337]
―Immediacy Test‖ under American jurisprudence as
adopted in this jurisdiction. Accordingly, the term Qualification for tax exemption under Sec. 30 of the
―reasonable needs of the business‖ means the 1997 NIRC:
immediate needs of the business, including (1) It must be a non-stock corporation or
reasonably anticipated needs. In either case, the
corporation should be able to prove: (a) an  association organized and operated exclusively for
immediate need for the accumulation of the religious, charitable, scientific, athletic or cultural
earnings and profits, or (b) the direct correlation of purposes, or for the rehabilitation of veterans.  
anticipated needs to such accumulation of profits. (2) It should meet the following tests:
PAGE 102 OF 275
(a) Organizational Test–requires that he actually distributed or not. [Sec. 73(D), NIRC] Such
corporation or association‘s constitutive share will be subjected to a final tax of 10% to be
documents exclusively limit its purposes to one withheld by the partnership. [Sec. 24(B)(2), NIRC]
or more of those described in paragraph (E) of
 Section 30 of the 1997 NIRC.  
(b) Operational Test – mandates that the General Professional Partnerships
regular activities of the corporation or Partnerships formed by persons for the sole purpose
association be exclusively devoted to the of exercising their common profession, no part of
accomplishment of the purposes specified in the income of which is derived from engaging in any
paragraph (E) of Section 30 of the 1997 NIRC, trade or business. A GPP is exempt from income tax.
as amended. A corporation or association fails It is, however, required to file a tax return for its
to meet this test if a substantial part of its income for the purpose of furnishing information as
operations may be considered  ―activities to the share in the gains or profits that each partner
conducted for profit‖.   shall include in his individual tax return.
(3) All the net income or assets of the corporation or
association must be devoted to its purpose/s and Rules
no part of its net income or asset accrues to or (1) A GPP is a partnership formed by persons for the
purpose of exercising their common profession, no
benefits any  member or specified person. (4) It part of the income of which is derived from engaging
must not be a branch of a foreign non-  stock, non- in trade or business. A GPP as such shall not be
profit corporation.   subject to the income tax. It is not a taxable entity
[RMO No. 20-2013] for income tax purposes.  
(2) The partners shall only be liable for income tax
only in their separate and individual capacities.  
D.6. TAX ON GENERAL PARTNERSHIPS, (3) For purposes of computing the distributive share
GENERAL PROFESSIONAL PARTNERSHIPS, of the partners, the net income of the GPP shall be
CO-OWNERSHIPS, JOINT VENTURES AND computed in the same manner as a corporation.
CONSORTIUMS (4) Each partner shall report as gross income his
distributive share, actually or constructively received,
General Partnerships in the net income of the partnership.
Partnerships wherein all or part of their income is (5) The distributive share of a partner (actual or
derived from the conduct of trade or business. An constructive) shall be subject to a creditable
ordinary business partnership is considered as a withholding income tax of 10% if the amount share
corporation and is thus subject to corporate tax of is not more than P720,000 and 15% if the amount
30%. of the share is more than P720,000. [RR 2- 1998]
(6) If the partnership sustains a net operating loss,
Rules the partners shall be entitled to deduct their
(1) The partnership is subject to the same rules  on respective shares in the net operating loss from their
corporations (capital gains tax, final tax on passive individual gross income.
income, normal tax, minimum corporate income tax
[MCIT] and gross income tax [GIT]), but is not GPP is not a taxable entity
subject to the improperly accumulated earnings tax The GPP is deemed to be no more than a mere
[IAET]. The partnership must file quarterly and year- mechanism or a flow-through entity in the
end income tax returns.   generation of income by, and the ultimate
(2) The taxable income of the partnership, less the mechanism distribution of such income to the
normal corporate income tax (30%) thereon, is the individual partners. [Tan v. Commissioner (Oct. 3,
distributable net income of the partnership.   1994)]
The share of a partner in the partnership‘s But the partnership itself is required to file income
distributable net income of a year shall be deemed tax returns for the purpose of furnishing information
to have been actually or constructively received by as to the share in the gains or profits which each
the partners in the same taxable year and shall be partner shall include in his individual return. [RR 2-
taxed to them in their individual capacity, whether 1998]
PAGE 103 OF 275

The share of an individual partner in the net profit of

a general professional partnership is deemed to Joint Ventures and Consortiums
have been actually or constructively received by the To constitute a‖ joint venture,‖ certain factors are
partner in the same taxable year in which such essential. Each party to the venture must make a
partnership net income was earned, and shall be contribution, not necessarily of capital, but by way
taxed to them in their individual capacities, whether of services, skill, knowledge, material or money,;
actually distributed or not, at the graduated income profits must be shared among the parties; there
tax ranging from 5% to 32%. must be a joint proprietary interest and right of
mutual control over the subject matter of the
Thus, the principle of constructive receipt of income enterprise; and usually, there is single business
or profit is being applied to undistributed profits of transaction.
GPPs. The payment [to the partners] of such tax-paid
profits in another year should no longer be liable to An unincorporated joint venture is taxed likes a
income tax. [Mamalateo] corporation. The share of the joint venture partners
will no longer be taxable to them because they
Co-ownerships partake of dividends if paid to a domestic or
There is co-ownership  resident corporation. However, an unincorporated
(1) When two or more heirs inherit and joint venture formed for the purpose of undertaking
undivided property from a decedent. a construction project or engaging in petroleum
(2) When a donor makes a gift of an undivided operations pursuant to the consortium agreement
property in favor of two or more donees. with the Philippine Government is not subject to the
corporate income tax. Only the joint venture partners
When Co-ownership is not subject to tax will be taxed on their respective shares in the
When the co-ownership‘s activities are limited income of the joint ventures.
merely to the preservation of the co-owned property
and to the collection of the income from the property. Two elements necessary to exempt a joint venture or
The income derived by a co- owner from the property consortium from tax
shall be reported in his individual tax return (1) The joint venture must be an  unincorporated
regardless of whether such income is actually or entity formed by two or  more persons  
constructively received. (2) The joint venture was formed for the  purpose of
undertaking a construction project, or engaging in
When Co-ownership is subject to tax the petroleum and other energy operations with
The following circumstances would render a co- operating contract with the government.  
ownership subject to a corporate income tax: (a)
When a co-ownership is formed or established
voluntarily, or upon agreement of the parties; (b)
When the individual co-owner reinvested his share, E. FILING OF RETURNS AND PAYMENT
and (c) When the inherited property remained OF INCOME TAX
undivided for more than ten years, and no attempt
was ever made to divide to same among the co-heirs, E.1. DEFINITION OF A TAX RETURN AND
nor was the property under administration INFORMATION RETURN
proceedings nor held in trust, the property should be
considered as owned by an unregistered partnership. Tax Return
Tax return refers to a formal report prepared by the
Automatically converted into an unregistered taxpayer or his agent in a prescribed form showing
partnership the moment the said common an enumeration of taxable amounts and description
properties and/or the incomes derived from them of taxable transactions, allowable deductions,
are used as a common fund with intent to produce amount of tax and tax payable to the government.
profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project Examples of tax returns are:
partition either duly executed in an extrajudicial (a) BIR Form Nos. 1700 and 1701 – Annual Income
settlement or approved by the court in the Tax Returns for Individual
corresponding testate or intestate proceeding. [Ona (b) BIR Form No. 1702 – Annual Income Tax Return
v. CIR, May, 25 1972] for Corporations and Partnerships
PAGE 104 OF 275
(c) BIR Form No. 1800 – Donor‘s Tax Return on or before the 15th day of the fourth month
(d) BIR Form No. 1801 – Estate Tax Return following the close of the calendar year or fiscal year,
as the case may be (Sec. 74, NIRC). The deadlines
Information Return for the filing of the tax returns by a corporation using
Any individual not required to file an income tax the calendar year are as follows:
return may nevertheless be required to file an
information return pursuant to rules and regulations Period Due Date for Filing Return
prescribed by the Secretary of Finance, upon Q1 Return May 31 of the same year
recommendation of the Commissioner. [Sec. Q2 Return August 31 of the same year
51(A)(3), NIRC] Q3 Return November 30 of the same
year
Every withholding agent required to deduct and Annual Return April 15 of the following year
withhold taxes under Section 57 shall submit to the
Commissioner an annual information return
containing the list of payees and income payments, E.3. PERSONS LIABLE TO FILE INCOME TAX
amount of taxes withheld from each payee and such RETURNS
other pertinent information as may be required by
the Commissioner. [Sec. 58(C), NIRC] E.3.1. Individual Taxpayers
i. General Rule and Exceptions (Sec. 51(A), NIRC)
Every employer required to deduct and withhold the General Rule: The following are required to file
taxes in respect of the wages of his employees shall, income tax returns:
on or before January thirty-first (31st) of the (a) Every Filipino citizen residing in the Philippines
succeeding year, submit to the Commissioner an (b) Every Filipino citizen residing outside the
annual information return containing a list of Philippines on his income from sources within
employees, the total amount of compensation the Philippines
income of each employee, the total amount of taxes (c) Every alien residing in the Philippines, on
withheld therefrom during the year, accompanied by income derived from sources within the
copies of the statement referred to in the preceding Philippines
paragraph, and such other information as may be (d) Every non-resident alien engaged in trade or
deemed necessary. [Sec. 83(B), NIRC] business or in the exercise of profession in the
Philippines.
E.2. PERIOD TO FILE INCOME TAX RETURN
OF INDIVIDUALS AND CORPORATIONS Note: A grant of tax exemption is not necessariliy an
excuse from the requirement to file a tax return
(1) Individuals [Garrison v. CA, 187 SCRA 525].
Individuals deriving mixed income, or purely
business/professional income, or other income Exceptions:
must file quarterly income tax returns (BIR Form (a) Individuals whose gross income (not
1700 Q), and an annual income tax return (BIR Form necessarily from compensation income)
1700) as follows: (Sec. 74, NIRC) does not exceed his total personal and
additional exemptions for dependents,
Period Due Date for Filing Return except citizens and alien individuals
Q1 Return April 15 of the same year engaged in business or practice of
Q2 Return August 15 of the same year profession within the Philippines who shall
Q3 Return November 15 of the same file income tax returns regardless of the
year amount of gross income.
Annual Return April 15 of the following year (b) Individuals with respect to pure
compensation income derived from
(2) Corporations sources within the Philippines, the income
Domestic corporations and resident foreign tax on which has been withheld except
corporations shall file quarterly corporate income when such compensation has been derived
tax returns (BIR Form 1702 Q) within 60 days after from more than one employer.
the end of the calendar or fiscal quarter used, and
annual corporate income tax return (BIR Form 1702)
PAGE 105 OF 275
(c) A minimum wage earner as defined in Sec. income during the year, and said employee has (iii)
22(HH) of the NIRC, as amended by R.A. No. no taxable other income subject to income tax under
9504. the global tax system. In lieu of the regular tax
(d) Individuals whose sole income has been returns to be filed by the employees, the employer
subjected to final withholding tax pursuant shall file BIR Form 2316 (Certificate of Income Tax
to Sec. 57(A) of the Tax Code. Withheld on Compensation) with the BIR on or
(e) Individuals who are exempt from income before January 31 of the following year. BIR Form
tax pursuant to the provisions of the Tax 2316 shall contain a certification to the effect that
Code and other laws, general or special the employer‘s filing of BIR Form 1604-CF shall be
(Sec. 51, NIRC). considered as a substituted filing of the employee‘s
income tax return to the extent that the amount of
Special Provisions compensation and tax withheld in BIR Form 1604-
Income of non-resident aliens not engaged in trade CF as filed with BIR is consistent with the
or business in the Philippines is subject to corresponding amounts indicated in BIR Form 2316.
withholding income tax to be withheld by the payor However, non-resident citizens who receive purely
thereof. income from foreign sources are no longer required
to file their Philippine income tax return, although
In the case of married persons, whether citizens or they must still file an income tax return covering
aliens, residents or not, who do not derive income income from sources within the Philippines.
purely from compensation, only one consolidated
return to cover the income of both spouses for the E.3.2. Corporate Taxpayers
taxable year shall be filed by either spouse; where it All corporations subject to income tax, except
is impracticable for the spouses to file one foreign corporations not engaged in trade or
consolidated return, each may file a separate return business in the Philippines, shall render quarterly
but the returns so filed shall be consolidated for the income tax returns on a cumulative basis for the
purpose of verification. The husband shall be preceding quarter or quarters upon which their
deemed the head of family entitled to claim the income tax is paid and a final or adjustment return
additional exemption in respect of dependent on or before the 15th day of April or fourth month
children, unless he explicitly waives his right in favor following the close of the fiscal year covering the
of the wife in the withholding exemption certificate entire taxable income of the preceding calendar or
(Sec. 79 (F)(1), NIRC). fiscal year, signed and sworn to by the President,
Vice-President or principal officer and by the
The income of unmarried minors is a tax liability of treasurer or assistant treasurer (Sec. 52(A), NIRC).
the minor but where such income is derived from
property received from a living parent, the income E.4. WHERE TO FILE INCOME TAX RETURNS
shall be included in the return of the parent except
(a) when the donor‘s tax has been paid on such (1) Individuals
property, or (b) when the transfer of such property is Except in cases where the Commissioner otherwise
exempt form the donor‘s tax. permits, the return shall be filed with an authorized
agent bank, Revenue District Officer, Collection
If the taxpayer is unable to make his return, such as Agent or duly authorized Treasurer of the city or
when he suffers from disability, the return may be municipality in which such person has his legal
made by his duly authorized agent or representative residence or principal place of business in the
or by the guardian or other person charged with the Philippines, or if there be no legal residence or place
care of the taxpayer or his property, the principal of business in the Philippines, with the Office of the
and his representative or guardian incurring the Commissioner (Sec. 51(B), NIRC)
penalties for erroneous, false or fraudulent returns.
(2) Corporations
ii. Substituted Filing The return shall be filed at the place where the
Substituted filing of tax returns is required where (i) corporation‘s principal office is located and where
an employee receives purely compensation income its books of accounts and other date are kept;
from a single or one employer who deducted and otherwise, the returns shall be filed and the tax paid
remitted to the BIR the (ii) correct amount of thereon with the Office of the Commissioner of
withholding tax form the employee‘s compensation Internal Revenue.
PAGE 106 OF 275
withholding tax such as surcharges and deficiency

E.5. PENALTIES FOR NON-FILING OF interest are assessed by the BIR. [Mamalateo]
RETURNS
F.2. KINDS OF WITHHOLDING TAXES
(a) For failure to file any return and pay the tax due:
a penalty equivalent to 25% of the amount due (Sec. Withholding of final tax of certain income 
248(A)(1), NIRC). Subject to rules and regulations the Secretary of
(b) In case of willful neglect to file the return: a Finance may promulgate, upon the recommendation
penalty equivalent to 50% of the tax or of the of the Commissioner, requiring the filing of income
deficiency tax, in case, any payment has been made tax return by certain income payees, the tax
on the basis of such return before the discovery of imposed or prescribed by specific section of the
the falsity or fraud (Sec. 248(B), NIRC). NIRC on specified items of income shall be withheld
by payor-corporation and/or person and paid in the
same manner and subject to the same conditions as
F. WITHHOLDING OF TAXES provided in Section 58 of the NIRC.
F.1. CONCEPT OF WITHHOLDING TAXES Withholding of creditable tax at source 

The Secretary of Finance may, upon the
Withholding tax is a method of collecting income tax recommendation of the Commissioner, require the
in advance from the taxable income of the recipient withholding of a tax on the items of income payable
of income. It is a systematic way of collecting taxes to natural or juridical persons, residing in the
at source, an indispensable method of collecting Philippines, by payor- corporation/persons as
taxes to ensure adequate revenue for the provided for by law, at the rate of not less than one
government. percent (1%) but not more than thirty-two percent
(32%), which shall be credited against the income
The withholding of income tax on compensation tax liability of the taxpayer for the taxable year.
income, on certain income payments made to
resident taxpayers, and on income payments made Withholding of creditable tax (RR 2-98)
to non-resident taxpayers is very important for all (a) Under the creditable withholding tax system,
taxpayers, because the obligation to withhold and taxes withheld on certain income payments are
remit the tax is mandatory and prescribed by law. intended to equal or at least approximate the tax
due of the payee on said income.  
In the operation of the withholding tax system, the (b) The income recipient is still required to file an
payee is the taxpayer, the person on whom the tax is income tax return, to report the income and/or pay
imposed, while the payor, a separate entity, acts no the difference between the tax withheld and the tax
more than an agent of the government for the due on the income.  
collection of the tax in order to ensure its payment. (c) Taxes withheld on income payments covered by
The amount thereby used to settle the tax liability is the expanded withholding tax and compensation
deemed sourced from the proceeds constitutive of income are creditable in nature.  
the tax base. In an ad valorem tax, the tax paid or
withheld is not deducted from the tax base, except Withholding of VAT
when the law clearly spells out in defining the tax
(1) On gross payments for the purchase of goods  
base.
(2) On gross payments for the purchase of services
The duty to withhold is different from the duty to pay  
income tax. The revenue officers generally disallow (3) Payments made to government public works
the expenses claimed as deduction from gross contractors  
income, if no withholding of tax as required by law or (4) Payments for lease or use of property or property
the regulations was withheld and remitted to the BIR rights to non-resident owners  
within the prescribed dates.
In addition, the withholding tax that should have

been withheld and remitted to the BIR as well as the
penalties for non-, late or erroneous payment of the
PAGE 107 OF 275
UP COLLEGE OF LAW TAXATION 2 TAXATION LAW
TAXATION LAW
TAXATION 2
PAGE 108 OF 275

(2) Certain transfers, during his lifetime, which are

I. Estate Tax made by law as equivalent to testamentary
disposition.
A. BASIC PRINCIPLES
4 Justification Theories for the Imposition of Estate Tax
Death is the source of the taxing power. It is the power (1) Benefits-received theory– The State collects the tax
to transmit or the transmission from the dead to the because of the services it renders in the
living on which the tax is based. The tax accrues as of distribution of the estate of the decedent, either by
the death of the decedent by operation of law. [Lorenzo law or in accordance with his will.
v. Posadas, (1937)] (2) Privilege theory or state partnership theory –
Succession to the property of a deceased person is
(1) Estate tax accrues at the time of the decedent‘s not a right but a privilege granted by the State and
death, but the obligation to pay the same is consequently, the legislature can constitutionally
different and is fixed by law. The tax is measured by burden such succession with a tax. The State
the value of the property AT THE TIME OF DEATH. collects the tax because of the protection it
(2) Estate tax is measured (i.e., tax base) by the value provides in the acquisition of large estates. Hence,
at that time of such property as passes to him (i.e., the State is a ―silent or passive partner‖ in the
death). Subsequent appreciation or depreciation is accumulation of said large property.
immaterial; (3) Ability-to-pay theory – Receipt of inheritance,
(3) Estate taxation is governed by the statute in force which is in the nature of unearned wealth or
at the time of the death of the decedent. Tax laws windfall, places assets into the hands of the heirs
cannot be given retroactive effect unless they and beneficiaries. This creates an ability to pay the
explicitly provide for it. tax and thus contributes to government income.
(4) Redistribution of wealth theory – The imposition of
Inheritance taxes, which were imposed on the right of estate tax reduces the property received by the
the heirs to receive property upon the death of the successor, which helps promote a more equitable
decedent, were abolished. They are no longer imposed distribution of wealth in society. The taxes paid by
under the current NIRC. the rich are programmed for disbursement by
Congress for the benefit of the poor in terms on
B. DEFINITION social services, education, health, etc.
Estate tax is an excise tax on the right of transmitting

property at the time of death and on the privilege that a E. TIME AND TRANSFER OF PROPERTIES
person is given in controlling to a certain extent the
disposition of his property to take effect upon death. Art. 777, Civil Code. The rights to the succession are
[VITUG and ACOSTA at 211] transmitted from the moment of the death of the
decedent.
C. NATURE
The decedent‘s estate includes property to the extent of
It is a transfer tax, i.e., an excise tax on the right of the interest therein of the decedent at the time of his
transmitting property, not a property tax. Compared to death. (Sec. 85(A)) N.B. – It is the interest of the
old inheritance, this was a tax on the right to transfer decedent on the property, not the actual property itself.
and not the right to inherit property. In some cases, however, they may be the same.
D. PURPOSE OR OBJECT Estate taxation is governed by the statute in force at the

time of death of the decedent. Estate tax accrues as of
Purpose: To tax the shifting of economic benefits and the death of the decedent and the accrual of the tax is
enjoyment of property from the dead to the living. distinct from the obligation to pay the same. Upon the
death of the decedent, succession takes place and the
Taxable objects/subjects: right of the State to tax the privilege to transmit the
(1) Right/privilege of the deceased person to transmit estate vests instantly upon death. (Sec. 3, RR 2-2003)
his/her estate to his/her lawful heirs and N.B. – Note that in transfers for insufficient
beneficiaries at the time of death; consideration, the value to be included in the estate is
PAGE 109 OF 275

the excess of the FMV at time of death over the value of General Rule: Donation Inter Vivos are subject to
the consideration received at the time of transfer. Donor‘s Tax.
Despite the transfer of properties and rights at the time Exceptions: Donation Inter Vivos are subject to Estate
of death, the executor or administrator shall not deliver Tax when it is treated by law as substitutes for
a distributive share to any party interested in the estate, testamentary dispositions (i.e., transfers which are inter
unless there is a certification from CIR that estate tax vivos in form but mortis causa in substance)
has been paid. (Sec.94) (a) Transfers in Contemplation of Death [Sec. 85(B),
NIRC]
Time of death governs: (b) Revocable transfers [Sec. 85(C), NIRC]
(1) The determination of the extent of the decedent‘s (c) Transfers of property arising under general power
interest for computing his gross estate. of appointment [Sec. 85(D), NIRC]
(2) The statute that governs estate taxation. (d) Transfers for insufficient consideration [Sec. 85(G),
(3) The accrual of the estate tax. NIRC]
Taxable Transfers Note: These transfers would be included in the

computation of the gross value of estate. See further
Taxable transfers are complete when the transferor discussion in the valuation of Gross Estate.
divests himself of all economic beneficial interest in
himself or his estate. F. CLASSIFICATION OF DECEDENT
(1) Transfers Mortis Causa – These are gratuitous Estate Tax applies only to individuals. The decedent
transfers that take effect after death, either testate may be classified into:
or intestate. These transfers are subject to estate (1) Citizen (RC/NRC)
tax. (2) Resident alien (RA); or
(3) Non-resident alien (NRA).
A donation which purports to be one inter vivos but
withholds from the donee the right to dispose of the F.1. CONCEPT OF RESIDENCE
donated property during the donor's lifetime is in truth For purposes of estate taxation, ―residence‖ refers to
one mortis causa. In a donation mortis causa, the right domicile, the permanent home or the place to which
of disposition is not transferred to the donee while the whenever absent, one intends to return (animus
donor is still alive. The requisites of a testamentary revertendi), and depends on facts and circumstances,
disposition should be fulfilled. in the sense that they disclose intent. It is therefore, not
necessarily the actual place of residence. (Corre v Tan
Characteristics: (Maglasang v Heirs of Cabatingan, Corre, 1956)
2002)
(i) It conveys no title or ownership to the transferee Situs of Intangible Personal Properties
before the death of the transferor; or what General Rule: Mobilia Sequuntur Personam Principle:
amounts to the same thing, that the transferor Taxation of intangible personal properties (such as
should retain the ownership (full or naked) and credits, bills, bank deposits promissory notes, and
control of the property while alive; corporate stocks) follows the residence/domicile of
(ii) That before his death, the transfer should be owner thereof. Situs is the domicile or residence of the
revocable by the transferor at will, ad nutum; but owner. (Collector v Fisher)
revocability may be provided for indirectly by
means of a reserved power in the donor to dispose Exceptions:
of the properties conveyed; (1) Rule of Reciprocity
(iii) That the transfer should be void if the transferor (2) When it is inconsistent with express provisions of
should survive the transferee. law
(3) When justice does not demand that it should be,
(2) Transfers Inter Vivos. Gratuitous transfers that take as where the property in fact has a situs elsewhere
effect during the lifetime of the donor. (See Donor‘s
Tax for requisites) Intangible Properties which are considered situated in
the Philippines (Sec 104)
PAGE 110 OF 275

(1) Franchise which must be exercised in the

Philippines
(2) Shares, obligations or bonds issued by any
corporation or sociedad anonima organized or
constituted in the Philippines in accordance
with its laws
foreign corporation 85% of the business of
which is located in the Philippines
foreign corporation if such shares, obligations
or bonds have acquired a business situs in the
Philippines
(5) Shares or rights in any partnership, business or
industry established in the Philippines
F.2. RULE OF RECIPROCITY

There is reciprocity if the foreign country of which the
decedent was a citizen and resident at the time of his
death:
(a) Did not impose a transfer tax of any character, in
respect of intangible personal property of citizens
of the Philippines not residing in that foreign
country; OR
(b) Allowed a similar exemption from transfer tax in
respect of intangible personal property owned by
citizens of the Philippines not residing in that
country
If there is reciprocity, the intangible personal property
of an NRA shall not be included in his gross estate. If
there is no reciprocity, such intangible personal
property will be included. [Sec. 104]
PAGE 111 OF 275

G. GROSS ESTATE VIS-À-VIS NET ESTATE
Gross Estate Net Estate

Value at the time of death of all the decedent‘s property Value of the estate after all deductions have been made
wherever situated against the gross estate; subject to the graduated tax rates.
HOWEVER, in the case of a NRA at the time of his death, [Sec. 6, RR 2-2003]
only that part of the entire gross estate which is situated in
the Philippines shall be included in his taxable estate. [Sec This is the TAX BASE.
85, NIRC]
Formula for Estate Tax (see Annex A for expanded formulae)

Gross Estate (Sec. 85)
Less: Deductions (Sec. 86)
-------------------------------------------------------
Net estate before share of surviving spouse (if married)
Less: Net share of the surviving spouse in the conjugal property (Sec. 86(C))
-------------------------------------------------------
= Net taxable estate
Multiply by: Tax rate (Sec. 84)
-------------------------------------------------------
= Estate Tax Due
Less: Tax Credit, if any (Sec. 86(E), or 110 (B))
-------------------------------------------------------
= Estate Tax Due, if any
H. DETERMINATION OF GROSS ESTATE AND NET ESTATE (AND COMPOSITION)
Summary of the Composition of the Gross Estate and Exclusions, Deductions therefrom
RC/NRC/RA NRA
Composition and Determination of GROSS Estate
The value at the time of his death of all the deceased‘s: The value at the time of his death of all the deceased‘s:
a. Real property wherever situated a. Real property located in the Phil.
b. Tangible personal property wherever situated b. Tangible personal property located in the Phil.
c. Intangible personal property wherever situated c. Intangible personal property with a situs in the Phil.
(subject to the rule of reciprocity)
Note: If there is reciprocity, intangible assets are
excluded from gross estate
Exclusions from Gross Estate(Sec 85(H) and Sec 87)
a. Separate property of the surviving spouse (Sec. 85 (H))
b. GSIS proceeds/ benefits
c. Accruals from SSS
d. Proceeds of life insurance where the beneficiary is irrevocably appointed
e. Proceeds of life insurance under a group insurance taken by employer
f. War damage payments and Benefits received from US Veterans Administration
g. Transfer by way of bona fide sales
h. Transfer of property to the National Government or to any of its political subdivisions
i. Merger of usufruct in the owner of the naked title (Sec. 87 (A))
j. Properties held in trust by the decedent. Transmission of inheritance or legacy by fiduciary heir or legatee to the
fideicommissay (Sec. 87 (B))
PAGE 112 OF 275
RC/NRC/RA NRA
k. Transmission from the first heir, legatee, or done in favour of another beneficiary, in accordance with the desire
of their predecessor (Sec. 87 (C))
l. Acquisition and/or transfer expressly declared as not taxable
m. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, provided that not
more than 30% of said transfer shall be used for administration purposes (Sec. 87 (D))
Deductions from GROSS estate to arrive at the NET estate
Ordinary deductions Ordinary deductions1
(1) Expenses, losses, indebtedness, taxes. (ELIT) (1) Proportionate deductions for (ELIT)2
(a) Funeral expenses (a) Funeral expenses
(b) Judicial expenses (b) Judicial expenses
(c) Claims against the estate (c) Claims against the estate
(d) Claims against insolvent persons (d) Claims against insolvent persons
(e) Unpaid mortgage and debt (e) Unpaid mortgage and debt
(f) Taxes (f) Taxes
(g) Losses (g) Losses
(2) Vanishing deductions (2) Vanishing deductions

(3) Transfers for public use (3) Transfers for public use
(4) Amounts received under R.A. 4917
Special deductions No Amounts received under R.A. 4917

(a) Family home No special deductions
(b) Standard deduction
(c) Medical expenses
Share in conjugal property Share in conjugal property
1
No deduction shall be allowed for NRA, if the executor, administrator, or anyone of the heirs, DID NOT include in the
return required to be filed under Section 90 of the Code the value at the time of the decedent’s death of that part of his
gross estate NOT situated in the Philippines. [Sec. 86 (D), NIRC; Sec 7, RR 2-2003]
2
Formula for Proportionate Deductions of NRA: Allowable Deduction =
PAGE 113 OF 275

VALUATION OF GROSS ESTATE (SEC 88) (3) Properties not physically in the estate, such as:
General Rule: Gross Estate = FMV at the time of the (a) Transfers in contemplation of death [Sec.
decedent‘s death 85(B), NIRC];
(b) Transfers with retention or reservation of
Real Property certain rights [Sec. 85(B), NIRC];
(1) Appraised value, whichever is higher between: (c) Revocable transfers [Sec. 85(C), NIRC];
(a) FMV, as determined by the Commissioner (d) Property passing under general power of
of Internal Revenue (CIR) (zonal value) or appointment [Sec. 85(D), NIRC];
(b) FMV, as shown in the schedule of values (e) Transfers for insufficient consideration [Sec.
fixed by the Provincial or City Assessor. 85(G), NIRC];
If there is no zonal value, the taxable base (f) Proceeds of life insurance [Sec. 85(E),
is the FMV that appears in the latest tax NIRC];
declaration. (g) Claims against insolvent persons [Sec.
(2) If there is an improvement, the value of 86(A)(d)]; and
improvement is the construction cost per (h) Capital of the surviving spouse [Sec. 85(H),
building permit or the fair market value per NIRC].
latest tax declaration.
DECEDENT‘S INTEREST (Sec. 85(A))
Personal Property This includes any interest having value or capable of
(1) FMV at the time of death. being valued which is owned by the decedent
(2) If none, acquisition cost for recently acquired existing at the time of death, such as dividend
properties or the current market price for the declared on or before death, but is received by the
previously acquired properties. (Sec 40(B) estate after death, partnership profits which have
(3) Stocks, bonds, and other securities. accrued before his death, but received after death.
(a) If listed and traded stocks = value is the This also includes those transferred by the decedent
mean between the highest and lowest at the time of his death.
quoted selling prices at the date of death; Note: When decedent had relinquished his interest
if none, nearest the date of death (Sec 5, BEFORE his death, he could not be deemed to have
RR 02-2003) transmitted interest in such property at his death.
(b) If unlisted stocks = book value at time of
death (ordinary common shares) or par TRANSFERS IN CONTEMPLATION OF DEATH (Sec.
value (preferred shares) 85(B))
N.B: Bonds, mortgages, and Certificates of The term ―in contemplation of death‖, as used in
Stocks are taxable at the place where they are estate taxation, does not refer to the general
physically located. expectation of death. The words mean that it is the
(4) Proceeds of Life Insurance with Revocable thought of death, as a controlling motive, which
Beneficiary: face value of policy (not cash induces the disposition of the property for the
surrender value) purpose of avoiding the tax. The decedent‘s motive
is a question of fact. Thus, the imminence of death
Right to Usufruct use or habitation, and annuity may afford convincing evidence of the impelling
(1) Probable life of the beneficiary in accordance cause of transfer. However, it is a contemplation of
with the latest basic standard mortality table death and not necessarily contemplation of
shall be taken into account. imminent death to which the statute refers. These
transfers should be without or with insufficient
J. ITEMS TO BE INCLUDED IN GROSS considerations.
ESTATE The law does not specify the number of years prior to
a decedent‘s death within which a transfer can be
Items to be included in the Gross Estate
considered in contemplation of death. (De leon)
[Sec. 85, NIRC]
(1) Property owned by the decedent actually and
TRANSFERS WITH RETENTION OR RESERVATION OF
physically present in his estate at the time of his
CERTAIN RIGHTS
death;
These are transfers with retention or reservation of
(2) Decedent‘s interest;
certain rights that result to the incapacity of
PAGE 114 OF 275
transferee to freely enjoy and dispose of the (ii) Special Power of Appointment: when the
property until the transferor‘s death, and the decedent
transfer may be regarded as having been intended a. can appoint only among a designated
to take effect in possession or enjoyment at the class of persons other than himself,
transferor‘s death. These do not include bona fide his estate, the creditors of his estate,
sale for an adequate and full consideration. or
b. if the power of appointment is
REVOCABLE TRANSFERS (Sec. 85(C)) expressly not exercisable in favor of
General Rule: A transfer is a revocable transfer the decedent, his estate, his creditors,
where: or creditors of his estate.
(1) There is a transfer by trust or otherwise,
(2) The enjoyment thereof was subject at the date General Rule: Property over which the decedent held
of his death to any change through the exercise a power of appointment is excluded in his gross
of a power (in whatever capacity exercisable) estate
by:
(a) The decedent alone; Exception: Included in the gross estate if the
(b) The decedent in conjunction with any other property arises under a general power of
person without regard to when or from what appointment exercised by the decedent:
source the decedent acquired such power, (1) By will; or
to alter, amend, revoke, or terminate; or (2) By deed executed in contemplation of or
(c) Where any such power is relinquished in intended to take effect in possession or
contemplation of the decedent death. enjoyment at or after his death; or
(3) By deed under which he has retained for his life
Exception: Bona fide sale for an adequate and or any period not ascertainable without
full consideration in money or money‘s worth reference to his death or for any period which
does not in fact end before his death –
Note: The power to alter, amend or revoke shall be (a) The possession or enjoyment of, or the right
considered to exist on the date of the decedent‘s to the income from the property; or
death even though: (b) The right either alone or in conjunction with
(a) The exercise of the power is subject to a any person, to designate the persons who
precedent giving of notice, or shall enjoy or possess the property or the
(b) The alteration, amendment or revocation takes income therefrom.
effect only on the expiration of a stated period
after the exercise of the power, whether or not TRANSFERS FOR INSUFFICIENT CONSIDERATION
on or before the date of the decedent‘s death (Sec. 85(G))
notice has been given or the power has been Transfers, trusts, interests, rights, or powers
exercised. (denominated as transfer in contemplation of death,
revocable transfer and property passing under
If notice has not been given or the power has not general power of appointment) made, created,
been exercised before the date of his death, such exercised or relinquished for a consideration in
notice shall be considered to have been given, or the money or money‘s worth, but is NOT a bona fide sale
power exercised, on the date of his death. for an adequate and full consideration in money or
money‘s worth.
TRANSFER OF PROPERTY UNDER GENERAL POWER
OF APPOINTMENT (Sec. 85(D)) The value to be included in the gross estate is the
Power of Appointment – the right to designate the excess of the fair market value of the property at the
person or property who shall enjoy and possess time of the decedent‘s death over the consideration
certain property from the estate of a prior decedent. received.
(Domondon)
(i) General Power of Appointment: when it gives to Example:
the decedent the power to appoint any person Case A: If bona fide sale – no value shall be
he pleases including himself. He had a power included in the gross estate
exercisable in favor of himself, his creditors or Case B: If not a bona fide sale - the excess of the fair
creditors of his estate (AmJur) market value at the time of death over the value of
PAGE 115 OF 275
the consideration received by the decedent shall

form part of his gross estate.
Case C: If inter vivos transfer is proven
fictitious/simulated – total value of the property at
the time of death included in the gross estate.
Case Case Case

Over
A B C
FMV, transfer 2,000 1,500 2,500
FMV, death 2,500 2,000 2,000
Consideration received 2,000 800 0
Value included in the Gross 0 1,200 2,000
Estate
The transfer for insufficient consideration must fall

under any of the following:
(1) Transfer in contemplation of death;
(2) Revocable transfer, or
(3) Property passing under a GPA.
Otherwise, the tax imposed is donor‘s tax.
PROCEEDS OF LIFE INSURANCE (Sec. 85(E))

Inclusion of proceeds of life insurance to the gross
estate depends on i) designated beneficiary; ii)
revocability of the insurance; iii) period and source
of funds used in premiums.
When included in the gross estate

Proceeds of life insurance taken out by the decedent
on his own life shall be included in the gross estate
in the following cases:
(1) Beneficiary is the estate of the deceased, his
executor or administrator, irrespective of
whether or not the insured retained the power of
revocation; or
(2) Beneficiary is other than the decedent‘s estate,
executor or administrator, when designation of
beneficiary is not expressly made irrevocable.
When not taxable

(1) Irrevocably designated; how done –
(i) By expressly stating it in the policy (the
designation of a beneficiary is PRESUMED
to be revocable);
(ii) By not changing the beneficiary during the
lifetime of the insured. This was added in
Sec. 11, RA 10607 (2013) which provides
that, ―The insured shall have the right to
change the
PAGE 116 OF 275

beneficiary he designated in the policy (i.e., whether fully or partially, his debts. A judicial
it‘s revocable), unless he has expressly declaration of insolvency is not required but the
waived this right in said policy. incapacity of the debtor should be proven. As a rule,
Notwithstanding the foregoing, in the event regardless of the amount the debtor is unable to pay,
the insured does not change the the full amount of the claim against the insolvent
beneficiary during his lifetime, the person should be included in the gross estate of the
designation shall be deemed irrevocable.‖ decedent. The portion of the claim which is not
(2) Accident insurance proceeds as the Tax Code collectible should be allowed as a deduction from
specifically mentions only life insurance the gross estate.
policies
(3) Proceeds of a group insurance policy taken out
by a company for its employees. K. DEDUCTIONS FROM ESTATE
(4) Amount receivable by any beneficiary
irrevocably designated in the policy of Deductions and/or losses already deducted from
insurance by the insured. The transfer is gross income can no longer be deducted from gross
absolute and the insured did not retain any estate. Further, deductions should not be
legal interest in the insurance compensated for by any insurance or extrajudicial
(5) Amount receivable by any beneficiary settlement. Otherwise, they are not valid deductions.
irrevocably designated in the policy of
insurance by the insured. The transfer is K.1. ORDINARY DEDUCTIONS
absolute and the insured did not retain any
legal interest in the insurance 1.A. Expenses, Losses, Indebtedness and Taxes, Etc.
(6) Proceeds of insurance policies issued by the (ELIT)
GSIS to government officials and employees,
which are exempt from all taxes; (PD 1146) i. FUNERAL EXPENSES (Sec. 86 (A)(1)(a))
(i) Benefits accruing under the SSS law (RA Actual funeral expenses shall mean (i) those which
1161) are actually incurred (ii) in connection with, and
(7) Proceeds of life insurance payable to heirs of before the interment or burial of the deceased and
deceased members of military personnel (RA (iii) must be paid out of the estate and not by
360) another person or out of contributions from friends
and relatives. These must be (iv) duly supported by
receipts or invoices or other evidence to show that
CAPITAL OF THE SURVIVING SPOUSE [Sec.85(H), they were actually incurred. They include:
NIRC] (a) The mourning apparel of the surviving spouse
It is NOT part of the gross estate of the deceased and unmarried minor children of the deceased
spouse. (See Exclusions) bought and used on the occasion of the burial;
(b) Expenses for the deceased‘s wake, including
To determine the conjugal or separate character of food and drinks;
proceeds, the following factors are considered: (c) Publication charges for death notices;
(1) Policy was taken before marriage – Source of (d) Telecommunication expenses incurred in
funds determines ownership of the proceeds of informing relatives of the deceased;
life insurance (e) Cost of burial plot, tombstones, monument or
(2) Policy was taken during marriage mausoleum but not their upkeep. In case the
(a) Beneficiary is estate of the insured – deceased owns a family estate or several burial
Proceeds are presumed conjugal; hence, lots, only the value corresponding to the plot
one-half share of the surviving spouse is where he is buried is deductible;
not taxable (f) Interment and/or cremation fees and charges;
(b) Beneficiary is third person – Proceeds are and
payable to beneficiary even in premiums (g) All other expenses incurred for the performance
were paid out of the conjugal of the rites and ceremonies incident to
interment.
CLAIMS AGAINST INSOLVENT PERSONS
For estate tax purposes, an insolvent is a person Limitation: Allowable deduction is not to exceed
whose properties are not sufficient to satisfy, P200,000 and whichever is lower of:
PAGE 117 OF 275
(a) Actual funeral expenses (whether paid or Judicial expenses may include:
not) up to the time of interment, or (1) Fees of executor or administrator
(b) An amount equal to 5% of the gross estate. (2) Attorney‘s fees – These refer to the notarial fee
The unpaid portion of the funeral expenses incurred paid for the extrajudicial settlement is
which is in excess of the P200,000 threshold is NOT deductible since such settlement effected a
allowed to be claimed as a deduction under ―claims distribution of the decedent‘s estate to his
against the estate‖. (Sec. 6(A)(1), RR 02-200) lawful heirs. [CIR v. CA (2000)]
N.B. – Compare (1) ACTUAL, (2) 5% GROSS, or (3) (3) Court fees
200K and pick whichever is lower. (4) Accountant‘s fees
(5) Appraiser‘s fees
Not included are: (i) Expenses incurred after the (6) Clerk hire
interment, such as for prayers, masses, (7) Costs of preserving and distributing the estate
entertainment, or the like are not deductible. (ii) Any (8) Costs of storing or maintaining property of the
portion of the funeral and burial expenses borne or estate
defrayed by relatives and friends of the deceased (9) Brokerage fees for selling property of the estate
are not deductible. (iii) Medical expenses as of the Not deductible
last illness will not form part of funeral expenses but (a) Compensation paid to a trustee of the
should be claimed as medical expenses. (Sec. 6, RR decedent‘s estate for his services rendered for
2-2003) the purpose of managing the decedent‘s real
estate for the benefit of the testamentary heirs
Illustrations (Lorenzo v. Posadas)
(a) If five percent (5%) of the gross estate is (b) Expenses incurred by the presumptive heir and
P220,000 and the amount actually incurred is that of her witnesses for appearance at the trial
P215,000, the maximum amount that may be to oppose the probate of a will.
deducted is only P200,000; (c) Attorney‘s fees incident to litigation incurred by
(b) If five percent (5%) of the gross estate is P
the heirs in asserting their respective rights, or
100,000 and the total amount incurred is claims as to who are entitled to the estate left
P150,000 where P20,000 thereof is still by the deceased.
unpaid, the only amount that can be claimed as
(d) Premiums paid by the administrator on his
deduction for funeral expenses is P100,000.
bond, being exclusively used for his account,
The entire P50,000 excess amount consisting
since the giving of the bond is in the nature of a
of P30,000 paid amount and P20,000 unpaid
qualification for the office and not necessary in
amount can no longer be claimed as FUNERAL
the settlement of his estate.
EXPENSES. Neither can the P20,000 unpaid
portion be deducted from the gross estate as
iii. CLAIMS AGAINST THE ESTATE (Sec. 86 (A)(1)(c))
CLAIMS AGAINST THE ESTATE.
The word ―claims‖ is generally construed to mean (i)
debts or demands of a pecuniary nature (ii) which
ii. JUDICIAL EXPENSES OF TESTAMENTARY AND
could have been enforced against the deceased in
INTESTATE PROCEEDINGS (Sec. 86 (A)(1)(b))
his lifetime and could have been reduced to simple
Expenses allowed as deduction under this category
money judgements. These are liabilities of the
are (i) those incurred in the inventory-taking of
estate or indebtedness of such (iii) arising out of:
assets comprising the gross estate, their
contract, tort, or operation of law. (Dizon v CTA,
administration, the payment of debts of the estate,
2008)
as well as the distribution of the estate among the
heirs. They are (ii) incurred during the settlement of
Requisites for Deductibility of Claims Against the
the estate but not beyond the last day prescribed by
Estate:
law, or the extension thereof, for the filing of the (a) The liability represents a personal obligation of
estate tax return. (Sec. 86 (A)(2), RR 2-2003). the deceased existing at the time of his death
except unpaid obligations incurred incident to
These expenses must be (iii) for the benefit of the
his death such as unpaid funeral expenses (i.e.,
estate, and (iv) substantiated by recipts OR if
expenses incurred up to the time of internment)
unpaid, should be supported by a sworn statement
and unpaid medical expenses which are
of account issued and signed by the creditor.
classified under a different category of
deductions.
PAGE 118 OF 275
(b) The liability was contracted in good faith and for In case the creditor is an individual who is no
adequate and full consideration in money or longer required to file ITRs with the Bureau, a
money‘s worth duly notarized declaration by the creditor of his
(c) The claim must be a debt or claim which is valid capacity to lend at the time when the loan was
in law and enforceable in court; granted without prejudice to verification that
(d) The indebtedness must not have been may be made by the BIR to substantiate such
condoned by the creditor or the action to collect declaration of the creditor.
from the decedent must not have prescribed.
(e) They must be reasonably certain in amount, and If the creditor is a non-resident, the executor/
substantiated. administrator or any of the legal heirs must
submit a duly notarized declaration by the
Substantiation Requirements creditor of his capacity to lend at the time when
the loan was granted, authenticated or certified
In case of simple loan (including advances): to as such by the tax authority of the country
(1) The debt instrument must be duly notarized at where the non-resident creditor is a resident
the time the indebtedness was incurred, such
as promissory note or contract of loan, except (4) A statement under oath executed by the
for loans granted by financial institutions where administrator or executor of the estate
notarization is not part of the business reflecting the disposition of the proceeds of the
practice/policy of the financial institution- loan if it was contracted within 3 years prior to
lender. the death of the decedent.
(2) Duly notarized Certification from the creditor as If the unpaid obligation arose from purchase of
to the unpaid balance of the debt, including goods or services:
interest as of the time of death. If the creditor (1) Pertinent documents evidencing the purchase
is: of goods or service, such as sales
- CORPORATION: sworn certification should be invoice/delivery receipt (for sale of goods), or
signed by the President, or Vice-President, or contract for the services agreed to be rendered
other principal officer of the corporation. (for sale of services), as duly acknowledged,
- PARTNERSHIP: sworn certification should be executed and signed by decedent-debtor and
signed by any of the general partners. creditor, and statement of account given by the
- BANK/FINANCIAL INSTITUTIONS: Certification creditor as duly received by the decedent-
shall be executed by the branch manager of the debtor
bank/financial institution which monitors and
manages the loan of the decedent-debtor. (2) Duly notarized certification from the creditor as
- INDIVIDUAL: sworn certification should be to the unpaid balance of the debt, including
signed by him. interest as of the time of death.
In any of these cases, the one who should (3) Certified true copy of the latest audited balance
certify must not be a relative of the borrower sheet of the creditor with a detailed schedule of
within the 4th civil degree, either by its receivable showing the unpaid balance of
consanguinity or affinity, except when a copy of the decedent-debtor. Moreover, a certified true
the promissory note or other evidence of the copy of the updated latest subsidiary
indebtedness must is filed with the RDO having ledger/records of the debtor-decedent, should
jurisdiction over the borrower within 15 days likewise be submitted.
from the execution thereof.
Where the settlement is made through the Court
(3) Proof of financial capacity of the creditor to in a testate or intestate proceeding, pertinent
lend the amount at the time the loan was documents filed with the Court evidencing the
granted, as well as its latest audited balance claims against the estate, and the Court Order
sheet with a detailed schedule of its receivable approving the said claims, if already issued, in
showing the unpaid balance of the decedent- addition to the documents mentioned in the
debtor preceding paragraphs.
PAGE 119 OF 275

iv. CLAIMS AGAINST INSOLVENT PERSONS (Sec. 86 Not included:

(A)(1)(d)) (a) Income tax upon income received after death,
These are claims of the estate (i) against insolvent or
persons (ii) which are not collectible. To be (b) Property taxes not accrued before his death, or
deductible from the gross estate: (c) The estate tax due from the transmission of his
estate
Additional Requirements:
(a) The incapacity of the debtor to pay his Casualty Losses
obligation should be proven, although a judicial Requisites for Deductibility
declaration of insolvency is not required; (a) Incurred during the settlement of the estate
(b) The full amount owed by the insolvent must first (b) Arising from fires, storms, shipwreck, or other
be included in the decedent‘s gross estate; and casualties from robbery, theft, or embezzlement
(c) If the insolvent could only pay a partial amount, (c) Not compensated by insurance or otherwise
the full amount owed shall be included in the (d) At the filing of the estate tax return, such losses
gross estate, and the amount uncollectible have not been claimed as a deduction for
shall be allowed as a deduction. income tax purposes in an income tax return
N.B. – Unpaid claims on funeral expenses in excess (e) Incurred not later than the last day for the
of 200K cannot be designated as claims against the payment of the estate tax as prescribed by law.
estate.  6 MONTHS (or +30 days if an extension is
granted) after death. Therefore, all casualty
v. UNPAID MORTGAGES, LOSSES AND TAXES (Sec. losses AFTER 6 months (or +30 days) are not
86(A)(1)(e)) deductible.
Unpaid Mortgages Casualty loss can be allowed as deduction in one

Requisites for Deductibility [Sec. 6-A5(a), RR 2- instance only, either for income tax purposes or
2003] estate tax purposes. (Sec. 6(A)(5)), Rev. Reg 2-
(a) The value of the decedent‘s interest therein, 2003)
undiminished by such mortgage or
indebtedness, is included in the value of the NOTE: See Formula for computing Ordinary
gross estates. Deductions of NRA above.
(b) The mortgages were contracted bona fide and
for an adequate and full consideration in money 1.B. Property Previously Taxed [Sec. 86(A)(2)]
or money‘s worth. a.k.a. VANISHING DEDUCTIONS
In case the loan of the decedent is only an This is an amount allowed to reduce the taxable
accommodation loan where the loan proceeds went estate of a decedent where property:
to another person, the value of the unpaid loan must (1) Received by him from a prior decedent by gift,
be included as a receivable of the estate. If there is bequest, device, or inheritance
a legal impediment to recognize the same as a (2) Transferred to him by gift, has been the object
receivable of the estate, the said unpaid obligation of previous transfer transaction, subject to
shall not be allowed as a deduction. In all instances, transfer tax, either donor‘s tax or estate tax.
the mortgaged property, to the extent of the
decedent‘s interest therein, should always form part Conditions
of the taxable gross estate. (RR 2-2003) (1) There must be 2 deceased persons and the first
one is the donor
Unpaid Taxes (2) The second decedent dies within 5 years after
Requisites for Deductibility the death of a prior decedent, or in case of gift,
(a) Taxes which have accrued as of or before the the decedent-donee dies within the same
death of the decedent (if it was incurred after, it period after the date of the gift.
is chargeable to the income of the estate), and
(b) Unpaid as of the time of his death, regardless of Requisites
whether or not it was incurred in connection (1) Death – The present decedent died within 5
with trade or business years from the date of the prior decedent OR
date of gift.
PAGE 120 OF 275
(2) Identity of the property– The property with (4) Percentage of deductions – The vanishing
respect to which deduction is sought can be deduction shall be the value (final basis) in #3
identified as the one who received from prior multiplied by the ff. percentages:
decedent, or from the donor, or as the property
acquired in exchange for the original property VD If received by inheritance or gift
so received. Rate
(3) Inclusion of the property – The property must 100% Within 1 year prior to the death of the
have formed part of the gross estate situated in present decedent
the Philippines of the prior decedent, or have 80% More than 1 year but not more than 2 years
been included in the total amount of the gifts of prior to the death of the decedent
the donor made within 5 years prior to the 60% More than 2 years but not more than 3
present decedent‘s death. years
(4) Previous taxation of property – The estate tax on 40% More than 3 years but not more than 4
the prior succession, or the donor‘s tax on the years prior to the death of the decedent
gift must have been finally determined and paid 20% More than 4 years but not more than 5
by the prior decedent or by the donor, as the years prior to the death of the decedent
case may be.
(5) No previous vanishing deduction on the FORMULA FOR VANISHING DEDUCTIONS:
property – No such deduction on the property, (please take note of the limitations above)
or the property given in exchange therefor, was
allowed in determining the value of the net Value Taken of Property
estate of the prior decedent. This is intended to Less: Mortgage debt paid, if any
preclude the application of the vanishing
deduction on the same property more than once. = Initial Basis
Less: Proportionate Deduction**
Limitations
(1) Value of property – The deduction is limited by = Final Basis
the value of property previously taxed or the Multiplied by Deduction Rate
aggregate value of such property if more than
one item, as finally determined for the purpose VANISHING DEDUCTION
of the prior estate tax (or gift tax) or the value of
such property in present decedent‘s gross **Proportionate Deduction
estate, whichever is lower.
(2) Deduction for mortgage or lien – The initial )
value (in number 1 above) shall be reduced by
the total amount paid, if any, by the present
decedent on any mortgage or other lien on the Note: Amount of Vanishing Deductions is NOT
property where a deduction was allowed, by subtracted from the value of the CPG to determine
reason of the payment, of such mortgage or the share of surviving spouse. It is deducted from
other lien from the gross estate of the prior the exclusive property of the decedent.
decedent, or gift or donor, in determining the
estate tax of the prior decedent or the donor‘s 1.C. Transfers for Public Purpose (Sec. 86(A)(3))
tax. These are (i) dispositions in a last will and testament
(3) Deductions for expenses, etc. – The value as or transfers to take effect after death (ii) in favor of
reduced in #2 shall be further reduced by an the Government of the Republic of the Philippines,
amount which bears the same ratio to the or any political subdivision thereof, for exclusively
amounts allowed as deductions for: public purposes. The whole amount of all the
(a) Expenses, losses, indebtedness, and taxes bequests, legacies, devises, or transfers to or for the
(ordinary deductions), and use of shall be deductible from gross estate, (iii)
(b) Transfers for public use as the amount provided such amount or value had been included in
otherwise deductible for property the computation of the gross estate. Thus, there is
previously taxed bears to the value of the no limitation for the amount to be deducted.
decedent‘s gross estate; and
PAGE 121 OF 275

1.D. Amounts Received by Heirs Under RA 4917 (An of his death, as certified by the barangay
Act Providing that Retirement Benefits of Employees captain of the locality.
of Private Firms shall not be subject to attachment, (2) The total value of the family home must be
levy, execution or any tax whatsoever) [Sec. included as part of the gross estate of the
86(A)(7)] decedent
(3) Allowable deduction must be in an amount
Any amount received by the heirs from the equivalent to the current FMV of the family
decedent‘s employer as a consequence of the death home as declared or included in the gross
of the decedent-employee in accordance with RA estate, or the extent of the decedent‘s interest
4917, provided that such amount is included in the (whether conjugal/community or exclusive
gross estate of the decedent. These include: property), whichever is lower, but in no case
(1) Retirement benefits from private firms with shall the deduction exceed P1,000,000.
private benefit plan, if the retiring employee is (4) The decedent was married or if single, was a
50 years old or older. This can only be availed head of the family.
once. (5) Along with the decedent, any of the
(2) Benefits granted in case of separation beyond beneficiaries must be dwelling in the family
the control of the employee. home.
(6) The family home as well as the land on which it
SPECIAL DEDUCTIONS stands must be owned by the decedent.
Therefore, the FMV of the family home should
(A) Family Home (Sec. 86(A)(4)) have been included in the computation of the
It is the dwelling house, including the land on which decedent‘s gross estate.
it is situated, where the husband and wife, or a head
of the family, and members of their family reside, as Beneficiaries of a Family Home
certified to by the Barangay Captain of the locality. It (1) The husband and wife, or an unmarried person
is deemed constituted on the house and lot from the who is the head of a family; and
time it is actually occupied as the family residence (2) Their parents, ascendants, descendants,
and considered as such for as long as any of its brothers and sisters, whether the relationship
beneficiaries actually resides therein. (Arts. 152 and be legitimate or illegitimate, who are living in
153, Family Code) the family home and who depend upon the
head of the family for legal support.
Temporary absence from the constituted family
home due to travel or studies or work abroad, etc. Limitation: P1,000,000
does not interrupt actual occupancy. The family
home is generally characterized by permanency, (B) Standard Deduction (Sec. 86(A)(5), Sec. 6(E),
that is, the place to which, whenever absent for RR 2-2003)
business or pleasure, one still intends to return. An amount equivalent to one million pesos
(Sec. 6(D), RR 2-2003) (P1,000,000) shall be deducted from the gross
estate without need of substantiation.
It must be part of the ACP or CPG, or the exclusive
properties of either spouse. It may also be
constituted by an unmarried head of a family on his (C) Medical Expenses (Sec. 86(A)(6); Sec. 6(F), RR
or her own property. (Sec. 6(D), RR 2-2003 citing Art. 2-2003)
156, FC). All medical expenses (cost of medicine, hospital
bills, doctors‘ fees, etc.) incurred (whether paid or
For purposes of availing this deduction, a person unpaid).
may constitute only one family home. Sec. 6(D), RR
2-2003 citing Art. 161, FC. Requisites for Deductibility
1. The expenses were incurred by the decedent
Requisites for Deductibility (Sec. 6(D)(b), RR 2- within 1 year prior to his death
2003) 2. The expenses are duly substantiated with receipts
(1) The family home must be the actual residential and other documents in support thereof
home of the decedent and his family at the time
PAGE 122 OF 275

Limitation Provided, that in no case shall the chance, and, upon

deductible medical expenses exceed Five Hundred (1) The following are dissolution of the
Thousand Pesos (P500,000). excluded from the marriage or of the
community property: partnership, the net
Not allowed as deduction: (i) Any amount of medical (a) Property acquired gains or benefits
expenses incurred within one year from death in by gratuitous title obtained by either or
excess of P500,000 shall no longer be allowed as a by either spouse, both spouses shall be
deduction under this subsection. Neither can (ii) any and the fruits as divided equally between
unpaid amount thereof in excess of the P500,000 well as the income them, unless otherwise
threshold nor (iii) any unpaid amount for medical thereof, if any, agreed in marriage
expenses incurred prior to the one-year period from unless it is settlements. (Art. 106,
date of death be allowed to be deducted from the expressly provided Family Code)
gross estate under ―Claims against the estate‖. (RR by the donor,
2-2003, Sec. 6-F) testator, or (1) The following are
grantor that they exclusive property of
(D) Net Share of Surviving Spouse in CPG/ACP (Sec. shall form part of each spouse:
86(C),; Sec. 6(H), RR 2-2003) the community (a) That which is
property. brought to the
(Compare with Capital of Suriving Spouse which is (b) Property for marriage as his or
excluded from the gross estate). personal and her own
exclusive use of (b) That which each
The amount deductible is the net share of the either spouse; acquires DURING
surviving spouse in the CPG. The net share is however, jewelry the marriage by
equivalent to ½ of 50% of the conjugal property shall form part of gratuitous title
after deducting the obligations chargeable to such the community (c) That which is
property. Net share of the surviving spouse is neither property. acquired by right
an ordinary nor a special deduction. (c) Property acquired of redemption, by
before the barter or by
N.B. – There are three deductions with ceilings: (1) marriage by either exchange with
Funeral expenses at P200,000; (2) Medical spouse who has property
expenses at P500,000, and (3) Family home at 1M. legitimate belonging to only
descendants from one of the
L. EXCLUSIONS FROM ESTATE a former marriage, spouses
and the fruits as (d) That which is
Capital of the Surviving Spouse (Sec. 85(H)) well as the purchased with
Capital: property of the spouses brought into income, if any, of exclusive money
marriage. Strictly speaking, capital under the Civil such property. of the wife or the
Law refers to the property brought by the husband to (Art. 92 Family husband (Art.
the marriage while that brought into the marriage by Code) 109, Family
the wife known is as paraphernal property. (2) Property acquired Code)
(Domondon) during the marriage (2) Property bought on
is presumed to instalments paid
Exclusive Property of Each Spouse belong to the partly from exclusive
If ACP governs property If CPG governs property community, unless it funds of either or
relations relations is proved that it is both spouses and
one of those partly from conjugal
The community of The husband and wife excluded therefrom. funds belong to the
property shall consist of place in a common fund buyer or buyers if full
all the property owned by the proceeds, products, ownership was
the spouses at the time fruits, and income from vested BEFORE the
of the celebration of the their separate properties
marriage subject to
marriage or acquired and those acquired by reimbursement
thereafter. (Art. 91 either or both spouses advanced by the
Family Code) through their efforts or by conjugal partnership
PAGE 123 OF 275
or by either or both (1) Where net estate does not exceed P200,000.
spouses. (Art. 118, (Sec. 84)
Family Code) (2) The following transmissions shall not be taxed:
(3) Whenever an (a) Merger of the usufruct in the owner of the
amount or credit naked title
payable within a (b) Transmission or delivery of the inheritance
period of time or legacy by the fiduciary heir or legatee to
belongs to one of the the fideicomissary
spouses, the sums (c) The transmission from the first heir,
collated during the legatee, or done in favor of another
marriage in partial beneficiary in accordance with the desire
payments or by of the predecessor
instalments on the (d) All bequests, devises, legacies, or transfers
principal are to social welfare, cultural and charitable
considered the institutions, no part of the net income of
exclusive property of which inures to the benefit of any
the spouse. individual, and provided that not more
However, interest than 30% of the said bequests, etc shall
falling due during be used by such institution for
the marriage on the administration purposes.
principal belong to
the conjugal Note: Effectivity of Family Code (Aug 3, 1988)
partnership. Exemptions under special laws
(4) All property acquired (1) Benefits received by members from the GSIS
during the marriage and the SSS by reason of death
whether the (2) Amounts received from the Philippines and US
acquisition appears governments for damages suffered during the
to have been made, last war.
contracted or (3) Benefits received by beneficiaries residing in
registered in the the Philippines under laws administered by the
name of one or both US Veteran Administration
spouses,, is (4) Bequests, legacies, or donations mortis causa
presumed to belong to social welfare, cultural, or charitable
to the conjugal organizations. Bequests to be used actually,
partnership, unless directly and exclusively for educational
it is proved that it purposes are also exempt from tax.
pertains exclusively (5) Grants and donations to the Intramuros
to the husband or to Administration
the wife.
If separation of property governs property relations
Separation of property may refer to present or future M. TAX CREDIT FOR ESTATE TAXES
property or both. It may be total or partial. In the PAID IN A FOREIGN COUNTRY
latter case, the property not agreed upon as It is a remedy against international double taxation.
separate shall pertain to the absolute community. To minimize the onerous effect of taxing the same
(Art. 144, Family Code) property twice, tax credit against Philippine estate
tax is allowed for estate taxes paid to foreign
To each spouse shall belong all earnings from his or countries.
her profession, business or industry, and all fruits,
natural, industrial, or civil, due or received during Who may claim: RC/NRC/RA. Only the estate of a
the marriage from his or her separate property. (Art. decedent who was a citizen or a resident of the
145, Family Code) Philippines at the time of his death can claim tax
credit for any estate tax paid to a foreign country.
Exemptions:
PAGE 124 OF 275
General Rule
The estate tax imposed by the NIRC shall be
credited with the amounts of any estate tax imposed
by the authority of a foreign country.
PAGE 125 OF 275

Limitations on Credit
A. For Estate Taxes paid to one foreign country (Specific Country Limitation)
The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against
which such credit is taken, which the decedent's net estate situated within such country taxable under the tax code bears
to his entire net estate.
)
=
B. For estate taxes paid to 2 or more foreign countries (Global Limitation)

The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which
the decedent's net estate situated outside the Philippines taxable under the tax code bears to his entire net estate.
)
=
Compare the tax credit allowed under Limitation A and Limitation B. The lower of the two amounts is the final allowable
tax credit. In this case, the amount computed under Limitation A (4,400) is lower, thus it becomes the final allowable tax
credit.
If there is only one foreign country involved, both limitations will yield the same answer.
The resulting amount will be compared to the actual tax paid to the foreign country. The lower amount will be the final
allowable tax credit.
Illustration:
Net Estate – Philippines (reduced by all allowable P1,050,000

deductions, except standard deduction)
Country G Net Estate 300,000
Country H Net Estate 150,000
Tax paid/incurred:
Philippines 15,000
Country G 5,000
Country H 1,400
Net Estate – Philippines (reduced by all allowable P1,050,000
deductions, except standard deduction)
Net taxable estate is P500,000 (1,050,000 + 300,000 + 150,000 – 1,000,000 standard deduction). The Philippine
estate tax on P500,000 is P15,000
Solution – Limitation A
(1) Apply Formula A. The result after applying the formula above is compared to the tax actually paid for each foreign
country.
PAGE 126 OF 275

(2) The lower of the two amounts for each foreign country will be added to get the total tax credit allowed under
Limitation A.
Amount Allowed (whichever is lower)

Country G
3,000
(300/1500 x 15,000) 3,000
Actually paid to Country G 5,000
Country H
1,500
(150/1500 x 15,000) 1,400
Actually paid to Country H 1,400
Tax credit allowed under Limitation A P 4,400
Solution – Limitation B:
(1) Apply Formula B. The result after applying the formula above is compared to the tax actually paid in total to foreign
countries.
(2) The lower of the two amounts will be added to get the total tax credit allowed under Limitation B.
Amount Allowed (Lower)
450/1500 x 15,000 4,500
Total foreign income taxes paid 6,400

Tax credit allowed under Limitation A P 4,400
PAGE 127 OF 275

statement duly certified to by a Certified Public

N. FILING OF NOTICE OF DEATH Accountant containing the following:
(Section 89) (a) Itemized assets of the decedent with their
corresponding gross value at the time of
Notice of Death his death, or in the case of a non-resident,
When needed: not a citizen of the Philippines, of that part
(i) in all cases of transfers subject to tax; or of his gross estate situated in the
(ii) where, though exempt from tax, the value of the Philippines;
gross estate exceeds P20,000. (b) Itemized deductions from gross estate
allowed in Section 86; and
Period of sending notice: A written Notice of Death (c) The amount of tax due whether paid or still
must be given to the BIR. due and outstanding.
(a) Within 2 months after the death of the decedent
or Remember:
(b) Within 2 months after the executor or P20,000 – File Notice of Death
administrator or executor qualifies as such. P200,000 – File Estate Tax Return
P2,000,000 – Statement duly certified by CPA
Who will file: executor, administrator, or any of the
legal heirs, as the case may be. Period for Filing
General Rule: Filed within 6 months from the
O. ESTATE TAX RETURN decedent's death.
(Section 90 – 91)
Exception: The CIR shall have authority to grant, in
When Required (Copies in duplicate) meritorious cases, a reasonable extension not
(1) When the estate is subject to estate tax, OR exceeding 30 days for filing the return.
(2) When, though exempt from tax, the gross value
of the estate exceeds Two hundred thousand Who will file: executor, administrator, or any of the
pesos (P200,000), OR legal heirs, as the case may be, under oath. If there
(3) Regardless of the gross value of the estate, is no executor or administrator appointed, qualified,
when the said estate consists of registered or and acting within the Philippines, any person in
registrable property such as real property, actual or constructive possession of any property of
motor vehicle, shares of stock or other similar the decedent may file this return.
property for which a clearance from the Bureau
of Internal Revenue is required as a condition Where to file the estate tax return and pay the tax
precedent for the transfer of ownership thereof due (Sec. 9, RR 2-2003)
in the name of the transferee. Resident Citizen (RC and RA)
The executor or administrator shall register the
Contents estate of the decedent and secure a new TIN from
The executor, or the administrator, or any of the the RDO where the decedent was domiciled at the
legal heirs, as the case may be, shall file a return time of his death and shall file the estate tax return
under oath in duplicate, setting forth: and pay the corresponding estate tax with:
(1) The value of the gross estate of the decedent at (1) An authorized agent bank (AAB), or
the time of his death, or in case of a (2) Revenue District Officer (RDO), or
nonresident, not a citizen of the Philippines, of (3) Collection Officer,
that part of his gross estate situated in the (4) Duly authorized Treasurer of the city or
Philippines; municipality in which the decedent was
(2) The deductions allowed from gross estate in domiciled at the time of his death, or
determining the net taxable estate; and
(3) Such part of such information as may at the Non-resident decedent (NRA/NRC) with executor or
time be ascertainable and such supplemental administrator in the Philippines
data as may be necessary to establish the The estate tax return shall be filed with and the TIN
correct taxes. for the estate shall be secured from the RDO where
(4) For estate tax returns showing a gross value such executor or administrator is registered.
exceeding P2,000,000 - there must be a
PAGE 128 OF 275
If the executor or administrator is not registered, the

estate tax return shall be filed with and the TIN for Effects of granting an extension
the estate shall be secured from the RDO having (1) Payment of the amount in respect of which the
jurisdiction over the executor or administrator‘s extension is granted on or before the date of the
legal residence. expiration of the period of the extension
(2) Suspension of the running of statute of
Non-resident decedent does not have an executor or limitations for deficiency assessment for the
administrator in the Philippines period of any extension
The estate tax return shall be filed with and the TIN (3) Any amount paid after the statutory due date of
for the estate shall be secured from the Office of the the tax, but within the extension period, shall be
Commissioner through RDO 39 QC. subject to interest but not to surcharge.
The foregoing provisions notwithstanding, the CIR Can estate tax be paid in installments? Yes!
may continue to exercise his power to allow a In case the available cash of the estate is not
different venue/place in the filing of tax returns. sufficient to pay its total estate tax liability, the
estate may be allowed to pay the tax by installment
Payment: Pay as you file and a clearance shall be released only with respect
At the time the return is filed by the executor, to the property the corresponding/computed tax on
administrator or the heirs. which has been paid. (Sec. 9(F), RR 2-2003)
The executor or administrator, or if there is none
appointed, qualified, and acting within the Who are liable for the payment of estate taxes
Philippines, then any person in actual or Primarily, the estate, through the executor or
constructive possession of any property of the administrator.
decedent. The estate tax shall be paid by the (1) Payment shall be made before the delivery of
executor or administrator before the delivery of the the distributive share in the inheritance to any
distributive share in the inheritance to any heir or heir or beneficiary.
beneficiary. (2) If there are two or more executors or
administrators, all of them are severally liable
Exception: In meritorious cases, the CIR may grant a for the payment of the tax.
reasonable extension not exceeding 30 days from (3) The estate tax clearance issued by the CIR or
filing. the RDO having jurisdiction over the estate, will
serve as the authority to distribute the
Extension of Payment (Sec. 9(E), RR 2-2003) remaining properties/share in the inheritance
The CIR may allow an extension of payment, if he to the heir or beneficiary.
finds that the payment on the due date of the estate
tax or of any part thereof would impose undue Subsidiarily, heirs or beneficiaries, for the payment
hardship upon the estate or any of the heirs: of that portion of the estate which his distributive
(1) Extension not to exceed 5 years, in case the share bears to the value of the total net estate.
estate is settled judicially, or The extent of his liability, however, shall in no case
(2) 2 years in case the estate is settled exceed the value of his share in the inheritance.
extrajudicially.
Claims for taxes, whether assessed before or after
Where the taxes are assessed by reason of the death of the deceased, can be collected from
negligence, intentional disregard of rules and the heirs even after the distribution of the properties
regulations, or fraud on the part of the taxpayer, no of the decedent, xxx. The heirs shall be liable
extension will be granted by the CIR. therefor, in proportion to their share in the
inheritance. Marcos v. CA (1997)
If extension granted, the CIR may require the
executor, or administrator, or beneficiary, as the Tax deficiency after distribution of properties
case may be, to furnish a bond in such amount, not (1) Sue all the heirs and collect from each of them
exceeding double the amount of the tax and with the amount of tax proportionate to the
such sureties as the CIR deems necessary, inheritance received
conditioned upon the payment of the said tax in (2) By virtue of a lien created under Sec 219, sue
accordance with the terms of the extension. only one heir and subject the property he
PAGE 129 OF 275
received from the estate to the payment of

estate tax. Such heir may go against the other
heirs.
Tax Rates:
If the Net Estate is
Over But not Over The Tax Shall be
P 200,000.00 Exempt
P 200,000.00 500,000.00 0 5%
500,000.00 2,000,000.00 P 15,000.00 8%
2,000,000.00 5,000,000.00 135,000.00 11 %
5,000,000.00 10,000,000.00 465,000.00 15 %
10,000,000.00 1,215,000.00 20 %
Exempt: If net taxable estate ≤ 200,000
PAGE 130 OF 275

If donor is:
II. Donor’s Tax RC/NRC/RA = liable for donor‘s tax REGARDLESS of
where the gift was made or where property is located
A. BASIC PRINCIPLES
NRA = liable for donor‘s tax only if the property donated
The donor‘s tax is imposed on donations inter vivos or is within the Philippines.
those made between living persons to take effect during
the lifetime of the donor. It supplements the estate tax E. REQUISITES OF VALID DONATION
by preventing the avoidance of the latter through the (Art 725, NCC)
device of donating the property during the lifetime of
the deceased. Requisites of a VALID and COMPLETE donation
(1) Donative intent of the donor3
It shall not apply unless and until there is a completed (2) Capacity of the donor
gift. The transfer of property by gift is perfected from the (3) Delivery of the donated property
moment the donor knows of the acceptance by the (4) Acceptance of the donee
donee; it is completed by delivery, either actually or (5) Donation must be in the proper form
constructively, of the donated property, to the donee. (a) Movable: orally or in writing if value is equal to
Thus, the law in force at the time of the or less than P5,000. Otherwise, it shall be in
perfection/completion of the donation shall govern the writing.
imposition of the donor‘s tax. (Sec. 11, RR 2-2003) (b) Immovable: must be made in a public
document.
B. DEFINITION Re: acceptance (Sec. 11, RR 2-2003)
(1) For movables exceeding 5K – Acceptance shall be
A donor‘s tax is levied, assessed, collected and paid in writing (Art. 748, Civil Code)
upon the transfer by any person, resident or nonresident, (2) For immovable (Art. 749, Civil Code) –
of the property by gift. (Sec. 98(A), NIRC). It shall apply (a) Must be in the same deed of donation; or
whether the transfer is in trust or otherwise, whether the (b) In a separate public document – the donor
gift is direct or indirect, and whether the property is real shall be notified thereof in an authentic form,
or personal, tangible or intangible. [Sec. 98(B), NIRC] and this step shall be noted in both
instruments
It is the tax on donations. Thus, it is a tax on (i) an act of (c) But it shall not take effect unless it is done
the donor disposing gratuitously of a thing/right in during the lifetime of the donor.
favour of a done located within the Philippines, and on
(ii) sales/exchanges of properties, other than real A gift that is incomplete because of reserved powers
property (defined in Sec 24D) classified as capital asset becomes complete when either:
within the Philippines, for less than adequate and full (a) the donor renounces the power OR
consideration in money or money‘s worth. (b) his right to exercise the reserved power ceases
because of the happening of some event or
C. NATURE contingency or the fulfillment of some
condition, other than because of the donor‘s
Donor‘s tax is not a property tax but a tax imposed on death. [Sec. 11, RR 2-2003]
the transfer of property by way of gift inter vivos. [Sec 11,
RR 2-2003 citing Lladoc v. CIR (1965)] F. TRANSFERS WHICH MAY BE
CONSTITUTED AS DONATION
D. PURPOSE OR OBJECT
(1) Sale, exchange or transfer of property for
(1) To supplement estate tax; insufficient consideration
(2) To prevent avoidance of income tax through the (2) Condonation or remission of debt where the debtor
device of splitting income among numerous did not render service in favor of the creditor
donees, who are usually members of a family or
into many trusts, with the donor thereby escaping
the effect of the progressive rates of income tax.
3
Note: The transfers which may be constituted as
donation is exempt from the donative intent requirement.
PAGE 131 OF 275
Condonation or remission of debt is defined as an In this case, the amount by which the fair market value
act of liberality, by virtue of which, without of the property exceed the value of the consideration
receiving any equivalent, the creditor renounces shall be considered a gift.
the enforcement of the obligation, which is H. CLASSIFICATION OF DONOR
extinguished in its entirety or in that part or aspect
of the same to which the remission refers. It is an Donor‘s Tax applies to individuals and corporations (in
essential characteristic of remission that it be their secondary purpose). They may be classified into:
gratuitous, that there is no equivalent received for (a) Residents (RC/RA/DC/RFC)
the benefit given; once such equivalent exists, the (b) Non-Residents (NRC/NRA/NRFC)
nature of the act changes. It may become dation in Such classification is important in determining the
payment when the creditor receives a thing deductions from the gross gift of the donor, and in filing
different from that stipulated; or novation, when the return.
the object or principal conditions of the obligation
should be changed; or compromise, when the Situs of Intangible Personal Properties
matter renounced is in litigation or dispute and in General Rule: Mobilia Sequuntur Personam Principle:
exchange of some concession which the creditor Taxation of intangible personal properties (such as
receives. (Dizon v CTA, 2008) credits, bills, bank deposits promissory notes, and
corporate stocks) follows the residence/domicile of
(3) Renunciation in favor of other heirs (Sec 11, RR 2- owner thereof. Situs is the domicile or residence of the
2003) owner. (Collector v Fisher)
(a) Renunciation by the surviving spouse of their Exceptions:
share in the ACP/CPG after the dissolution of (1) When it is inconsistent with express provisions of
the marriage in favor of heirs of the deceased law
spouse or any other person/s (2) When justice does not demand that it should be, as
(b) Renunciation by an heir, specifically and where the property in fact has a situs elsewhere
categorically in favor of identified heir/s to the
exclusion or disadvantage of the other co-heirs Rule of Reciprocity
in the hereditary estate Same as in Estate Tax. See discussion above.
However, general renunciation by an heir,
including the surviving spouse, of their share in
the hereditary estate left by the decedent is
NOT subject to DT
(4) Sale of shares not listed and traded in a local stock

exchange below FMV. Sec. 7.c.1.4, RR 6-2008
provides: ―In case the fair market value of the shares of
stock sold, bartered, or exchanged is greater than the
amount of money and/or fair market value of the
property received, the excess of the fair market value of
the shares of stock sold, bartered or exchanged over the
amount of money and the fair market value of the
property, if any, received as consideration shall be
deemed a gift subject to the donor‘s tax under Sec. 100
of the Tax Code, as amended.‖
G. TRANSFER FOR LESS THAN ADEQUATE

AND FULL CONSIDERATION
In order for the rule to apply, there must be 1) a transfer

of property, other than real property classified as a
capital asset and subject to capital gains tax under Sec.
24 (D) and 2) the transfer was for less than an adequate
and full consideration in money or money‘s worth.
PAGE 132 OF 275

I. DETERMINATION OF GROSS GIFT (INCLUDING COMPOSITION OF GROSS GIFT)
RC/NRC/RA NRA
Composition and Determination of Gross Gift
(a) Real property wherever situated (a) Real property located in the Phil.
(b) Tangible personal property wherever situated (b) Tangible personal property located in the Phil.,
(c) Intangible personal property wherever situated (c) Intangible personal property with a situs in the Phil.
(subject to the rule of reciprocity)
Note: If there is reciprocity, intangible assets are excluded

from gross gifts
Deductions and Exemptions from GROSS gift to arrive at NET Gifts

Deductions (These are exempt donations but are Deductions (These are exempt donations but are
deductible from, and not treated as exclusions from the deductible from, and not treated as exclusions from the
gross gift) gross gift)
(1) Dowries or donations made: (1) NONE

(a) On account of marriage
(b) Before its celebration or within one year thereafter
(c) By parents to each of their legitimate, recognized
natural, or adopted children
(d) To the extent of the first P10,000
(2) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not
conducted for profit, or to any political subdivision of the said Government.
(3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution,
accredited nongovernment organization, trust or philanthropic organization or research institution or organization,
Provided not more than 30% of said gifts will be used by such donee for administration purposes.
Common Exemptions
(1) Encumbrances on the property donated if assumed by the donee in the deed of donation.
(2) Donations made to entities exempted under special laws
PAGE 133 OF 275

NOT SUBJECT TO DONOR‘S TAX the amount by which the FMV of the property at the time
(1) Contributions to candidate or political party for of the execution of the Contract to Sell or execution of
campaign purposes duly reported to COMELEC the Deed of Sale which is not preceded by a Contract to
(2) Gift to Parish Priest or Church (applies only to real Sell exceeded the value of the agreed or actual
property tax) consideration or selling price shall be deemed a gift,
(3) Onerous Donations or Donations in exchange for and shall be included in computing the amount of gifts
goods/services (since they are subject to income made during the calendar year. [Sec. 11, RR 2-2003]
tax) N.B. – Applies also to sale, barter, or exchange of
shares of stock not listed and traded in a local stock
SUBJECT TO DONOR‘S TAX exchange at prices below the FMV. (Sec. 7, RR 6-2008)
Gratuitous Donations to Homeowners‘ Association
However, where the consideration is fictitious, the
J. VALUATION OF GIFTS MADE IN entire value of the property shall be subject to donor‘s
PROPERTY tax.
Taxable Base: Donation to a Political Candidate

Net gifts i.e., net economic benefit from the transfer Prior to RA 7166, a donation for a political candidate
that accrues to the donee AT THE TIME OF DONATION was subject to donor‘s tax. (ACCRA v CIR)
(1) If gift is personal property = FMV at the time of
donation Under RA 7166, contributions duly reported to the BIR
(2) If gift is real property = whichever is HIGHER are not subject to donor‘s tax, as long as it is utilized in
(a) FMV as determined by the CIR (Zonal Value) or his campaign.
(b) FMV in the latest schedule of values fixed by
the provincial and city assessor (MV per Tax Unutilized/excess campaign funds, that is, campaign
Declaration) contributions net of the candidate‘s campaign
exepnditures, shall be considered as subject to income
NOTE: Real property considered as capital assets under tax and as such, must be included in the candidate‘s
the Tax Code are exempted from this rule because the taxable income as stated in his/her ITR filed for the
taxable value taken into account in the computation of subject taxable year (Sec. 2, RR 7-2011)
tax is the higher of either the zonal value or the
assessor‘s value; not the consideration. Therefore, the
insufficiency and inadequacy of the consideration paid
would not affect the computation of the tax due and
payable [Sec. 100 in relation to Sec. 24(d), NIRC]
Under Section 24(d), the fair market value itself, if

higher than the gross selling price, is the basis for
computing the capital gains tax imposed upon the sale
of such capital assets.
(3) If there is an improvement = construction cost

(based on the building permit and/or occupancy
permit) + 10% per year after the year of
construction; or the FMV based on the latest tax
declaration.
(4) If unlisted stocks = Adjusted Net Asset Method
shall be used whereby all assets and liabilities are
adjusted to fair market values. The net of
adjusted asset minus the adjusted liability value is
the indicated value of the equity.
Note:
Where property is transferred for less than an adequate
and full consideration in money or money‘s worth, then
PAGE 134 OF 275
K. TAX CREDIT FOR DONOR’S TAXES PAID IN A FOREIGN COUNTRY
Who may claim the tax credit

(1) Resident citizen
(2) Non-resident citizen
(3) Resident alien
1. Per Country Limit
2. Worldwide Limit
PAGE 135 OF 275

L. EXEMPTIONS OF GIFTS FROM DONOR’S Period for Filing

TAX General Rule: The return must be filed within 30 days
(See table above) after the date when the gift was made or completed.
The tax due thereon shall be paid at the same time that
(1) Encumbrances on the property donated if assumed the return is filed.
by the donee in the deed of donation.
(2) Donations made to entities exempted under Who will file: Any person who made a gift, such must be
special laws. filed under oath.
(a) Aquaculture Department of the Southeast
Asian Fisheries Development Center of the Where to file the donor‘s tax return and pay the tax due
Philippines (Sec. 9, RR 2-2003)
(b) Development Academy of the Philippines
(c) Integrated Bar of the Philippines Resident
(d) International Rice Research Institute Unless the CIR permits otherwise, the return shall be
(e) National Museum filed and tax paid to:
(f) National Library (1) To Authorized Agent Bank (AAB) or the Revenue
(g) National Social Action Council District Officer having jurisdiction over the place of
(h) Ramon Magsaysay Foundation the domicile of the donor at the time of the transfer.
(i) Philippine Inventor‘s Commission (2) If no AAB = to the Revenue Collection Officer or
(j) Philippine American Cultural Foundation duly Authorized City or Municipal Treasurer where
(k) Task Force on Human Settlement on the the donor was domiciled at the time of the transfer,
donation of equipment, materials and services (3) if no legal residence in Phil or NRA = with Revenue
District No. 39 - South Quezon City or with the
Philippine Embassy or Consulate in the country
where donor is domiciled at the time of the transfer.
M. PERSON LIABLE
(see Classification of Donor)
Non-residents
(1) The Philippine Embassy or Consulate in the country
Every person, whether natural or juridical, resident or
where he is domiciled at the time of the transfer, or
non-resident, who transfers or causes to transfer
(2) Directly with the Office of the Commissioner.
property by gift, whether in trust or otherwise, whether
the gift is direct or indirect and whether the property is
Payment: Pay as you file.
real or personal, tangible or intangible. (Sec. 98, NIRC)
DONOR‘S TAX RETURN N. TAX BASIS

Separate return is filed for each gift made on different
dates during the year reflecting therein any previous net The tax for each calendar year shall be computed on the
gifts made in the same calendar year. In case of basis of the total net gifts made during the calendar.
donation to relatives, only one return shall be filed for (Sec. 99, NIRC)
several gifts by the donor to the different donees on the
same date. If the gift involves CPG, each spouse shall ―Net Gifts‖
file separate return with respect to his/her respective (a) The net economic benefit from the transfer that
share in the CPG. accrues to the donee.
(b) Accordingly, if a mortgaged property is transferred
Contents as a gift, but imposing upon the donee the
(1) Each gift made during the calendar year which is to obligation to pay the mortgage liability, then the
be included in computing net gifts; net gift is measured by deducting from the fair
(2) The deductions claimed and allowable; market value of the property the amount of the
(3) Any previous net gifts made during the same mortgage assumed. (Sec. 11, RR 2-2003)
calendar year;
(4) The name of the donee; General Formula
(5) Relationship of the donor to the donee; Gross Gifts
(6) Such further information as the CIR may require. Less: Deductions from gross gifts
-----------------------------------------------------
Net gifts
PAGE 136 OF 275
Multiply by: Tax rate

-----------------------------------------------------
= Estate Tax Due
Less: Tax Credit, if any
-----------------------------------------------------
= Donor‘s Tax Due, if any
If there are several gifts during the year

Gross Gifts made on a certain date
Less: Deductions from gross gifts
-----------------------------------------------------
Net gifts made on a certain date
Add: Prior Net gifts during the year
-----------------------------------------------------
=Aggregate Net Gifts
Multiply by: Tax rate
-----------------------------------------------------
= Donor‘s Tax on Aggregate Net Gifts
Less: Donor‘s Tax Paid on Prior Net Gifts
-----------------------------------------------------
Donor‘s Tax Due on the Net Gifts to Date
Less: Tax Credit, if any
-----------------------------------------------------
= Donor‘s Tax Due, if any
PAGE 137 OF 275

Tax Rate
(1) IF NOT A STRANGER
Net Gift Over But not Over The Tax Shall be Plus Of the Excess Over
100,000.00 Exempt
100,000.00 200,000.00 0 2% 100,000.00
200,000.00 500,000.00 P 2,000.00 4% 200,000.00
500,000.00 1,000,000.00 14,000.00 6% 500,000.00
1,000,000.00 3,000,000.00 44,000.00 8% 1,000,000.00
3,000,000.00 5,000,000.00 204,000.00 10% 3,000,000.00
5,000,000.00 10,000,000.00 404,000.00 12% 5,000,000.00
10,000,000.00 and over 1,004,000.00 15% 10,000,000.00
(2) IF A STRANGER: 30%
(1) Rate applicable shall be based on the law prevailing at the time of donation.
(2) When the gifts are made during the same calendar year but on different dates, the donor's tax shall be computed
based on the total net gifts during the year.
Donation made to a stranger is subject to 30% of the net gift. A stranger is a person who is not a:
 Brother, sister (whether by whole or half blood), spouse, ancestor and lineal descendants; or
 Relative by consanguinity in the collateral line within the fourth degree of relationship.
SUMMARY OF TRANSFER TAXES
TRANSFER TAXES
Estate Tax Donor‘s Tax
Time for filing a return and payment of tax
FILED: within six (6) months from the decedent's death. NOTE: separate return is filed for each gift made on different dates
E: not exceeding 30 days (in meritorious cases) during the year reflecting therein any previous net gifts made in the
same calendar year.
NB: Written notice of death to CIR w/in 2 mos. After death
FILED: within thirty (30) days after the gift (donation) is made
PAID: before the delivery of the distributive share in the
inheritance to any heir or beneficiary; upon filing of return. In case of donation to relatives, only one return shall be filed for
E: extension (when payment on the due date would impose undue several gifts by the donor to the different donees on the same date.
hardship) not to exceed
1. 5 years, in case the estate is settled through the courts; or If the gift involves CPG, each spouse shall file separate return wrt
2. 2 years in case the estate is settled extra-judicially. his/her respective share in the CPG.
NB: when extension is granted, a bond may be required by CIR ≤

2x amount of tax
Where to file and to whom paid
General Rule: to the Authorized Agent Bank (AAB), Revenue Resident
Collection Officer (RCO) or duly authorized Treasurer of the city or GR: to AAB of the RDO having jurisdiction over the place of the
municipality in the Revenue District Office having jurisdiction over domicile of the donor at the time of the transfer.
the place of domicile of the decedent at the time of his death
Exception:
Exception: If NRA/NRC, (1) If no AAB = to the RCO or duly Authorized City or Municipal
PAGE 138 OF 275
If w/ Aor, Eor in Phil = to the AAB of the RDO where such Aor,Eor is Treasurer where the donor was domiciled at the time of the
registered/domiciled, if not yet registered with the BIR. transfer,
If w/o Aor,Eor in Phil = to AAB under the jurisdiction of RDO No.
39 (2) If no legal residence in Phil or NRA = with Revenue District No.
39 - South Quezon City or with the Philippine Embassy or
Consulate in the country where donor is domiciled at the time
of the transfer.
Non-resident
(1) The Philippine Embassy or Consulate in the country where he is
domiciled at the time of the transfer, or
(2) Directly with the Office of the Commissioner.
Who should file

(1) The Eor/Aor or any of the legal heirs of the decedent, whether Any person, natural or juridical, resident or non-resident, who
resident or non-resident of the Philippines, under any of the transfers or causes to transfer property by gift, whether in trust or
following situations: otherwise, whether the gift is direct or indirect and whether the
(a) In all cases of transfers subject to estate tax; property is real or personal, tangible or intangible.
(b) Where though exempt from estate tax, the gross value of
the estate exceeds two hundred thousand (P200,000)
pesos; or
(c) Regardless of the gross value of the estate, where the
said estate consists of registered or registrable property
such as real property, motor vehicle, shares of stock or
other similar property for which a clearance from the BIR
is required as a condition precedent for the transfer of
ownership therof in the name of the transferee; or
(2) If there is no executor or administrator appointed, qualified,
and acting within the Philippines, then any person in actual or
constructive possession of any property of the decedent.
NB: Eor/Aor has the primary obligation to pay the estate tax but
the heir or beneficiary has subsidiary liability for the payment of
that portion of the estate which his distributive share bears to the
value of the total net estate. The extent of his liability, however,
shall in no case exceed the value of his share in the inheritance.
PAGE 139 OF 275

ESTATE TAX
EXCLUSIVE COMMUNITY TOTAL

Gross Estate4
Add:
Taxable Transfers & Others
Revocable Transfers/Donation Mortis Causa
Transfers in contemplation of death
Property passing under GPoA Value Taken of Property
Transfers for insufficient consideration5 Less: Mortgage debt paid, if any
Decedent‘s Interest Accrued6
Proceeds of Life Insurance w/ Initial Basis
Less: Proportionate Deduction
revocable beneficiary7
Family Home Final Basis
Claims against an Insolvent Person8 Multiplied by Deduction Rate
Amount received by heirs
VANISHING DEDUCTION
Less: (Ordinary Deductions) **Proportionate Deduction
7 ELIT9
Vanishing Deductions = )
Transfers for Public Use
Retirement Benefits received by heirs
Net Estate
Less: (Special Deductions10)
Standard Deduction
Family Home If only 1 country is involved: (whichever is lower)
Medical Expenses
Amounts received by heirs Estate Tax Credit =
Net Taxable Estate (before share of surviving OR actual estate tax paid to foreign country
spouse)
If two or more countries are involved: (whichever is lower)
Less: Share of Surviving Spouse
Estate Tax Credit =
Net Taxable Estate
Multiply by Tax Rate
OR
Estate Tax Due
Less: Tax Credit11, if any OR actual estate tax paid to foreign country
ESTATE TAX DUE
DONOR‘S TAX
ON FIRST DONATION
4
DO NOT INCLUDE: Exemptions
5
Amount included in the GE = FMV at the time of death – consideration amount
6
Accrued before his death but only received after his death, e.g., dividends declared on/before, and received after death;
partnership’s profit earned on/before and received after, accrued interest and rents on/before and collected after death
7
Beneficiary must be the estate of the decedent, E/Aor or a third person. If premiums are paid using conjugal funds, part
of conjugal funds.
8
Full amount of the receivable. However, the uncollectible amount may be deducted from GE under ELIT.
9
If NRA, Allowable Deduction wrt ELIT =
10
These are not allowable deductions when TP is NRA.
11
Applies only to RC/NRC/RA
PAGE 140 OF 275
Gross Gift xxx

Less: Deductions (those not beneficial
to the done e.g., mortgage) xxx
Net Gift xxx

Less: Exemptions, if applicable xxx
Net Taxable Gift xxx

Multiply by Tax Rate xx%
Donor‘s Tax Due xxx

Less: Tax Credit12, if any xxx
DONOR‘S TAX DUE xxx
ON SUBSEQUENT DONATIONS w/in the same calendar year
Gross Gift xxx

Less: Deductions (those not beneficial
to the done e.g., mortgage) xxx
Net Gift xxx

Less: Exemptions, if applicable xxx
Net Taxable Gift xxx

Add: All previous net gifts during the year xxx
Aggregate Net Gifts xxx
Multiply by Tax Rate xx%
Donor‘s Tax on Aggregate Net Gifts xxx

Less: Donor‘s tax on previous net gifts during the year xxx
Donor‘s Tax Due xxx

Less: Tax Credit13, if any xxx
DONOR‘S TAX DUE xxx
If only 1 country is involved: (whichever is lower)
Tax Credit =
w/ w/
If two or more countries are involved: (whichever is lower)
Tax Credit =
w/ w/
OR
w/
w/ w/
OR actual donor’s tax paid to foreign country
12
13
PAGE 141 OF 275
ESTATE TAX
GR: w/in 6m after death

DEATH
E: extension of 30d ESTATE TAX
RETURN + CANCEL TIN
PAYMENT
(NB: Date of
payment may be Transfer
Prepare the LIST of assets and extended, 5yrs or
properties to
NOTICE OF DEATH to RDO by liabilities and their supporting 2yrs), if estate
Get TIN for ESTATE exceeds
the heirs
Eor/Aor documents
200,000php
DONOR‘S TAX
Full Exemption NO TAX RETURN

NECESSARY
COMPLETION/ Exempt
PERFECTION OF
DONATION Partial Exemption
w/in 30d after gift
was made DONOR‘S TAX RETURN + No Notice of Donation
PAYMENT Necessary
(NB: Date of payment may
be extended ≤ 6 months)
Liable
PAGE 142 OF 275

removed. Power producers are now exempt

III. Value-Added Tax from paying franchise tax.
(e) VAT, by its very nature, is regressive. BUT the
(VAT) Constitution does not really prohibit the
imposition of indirect taxes (which is essentially
A. CONCEPT regressive).
(f) What it simply provides is that Congress shall
VAT is a consumption tax imposed at every stage of ―evolve a progressive system of taxation‖.
distribution process on (i) the sale, barter, exchange,
or lease of goods or properties and (ii) rendition of Tolentino v. Secretary of Finance (1995):
services in the course of trade or business, or the (iii) (a) Regressivity is not a negative standard for
importation of goods, whether such imported goods courts to enforce. What Congress is required
are for use in business or non-business purposes. by the Constitution to do is to ―evolve a
(Sec. 4.105-2, RR 16-2005) progressive system of taxation.‖
This provision is placed in the Constitution as
The taxpayer (seller) determines his tax liability by moral incentives to legislation, not as judicially
computing the tax on the gross selling price or gross enforceable rights.
receipt (output tax), and subtracting or crediting the (b) Direct taxes are to be preferred, and as much
earlier VAT on the purchase or importation of goods as possible, indirect taxes should be
or on the purchase of service (input tax) against the minimized but not avoided entirely because it
tax due on his own sale is difficult, if not impossible, to avoid them.
(c) The regressive effects are corrected by the zero
B. CONSTITUTIONALITY OF VAT rating of certain transactions and through the
exemptions.
ABAKADA Guro Party List, et. al. v. Ermita (2005):
(a) The validity of raising the VAT rate from 10% to C. CHARACTERISTICS/ELEMENTS OF A
12% by the President was upheld by SC. VAT-TAXABLE TRANSACTION
(b) With respect to Sec. 8, amending Sec. 110 (A),
which provides for 60-month amortization of General Characteristics/Nature:
the input tax on capital goods purchased: It is (1) Privilege/Percentage Tax – imposed by law
not oppressive, arbitrary, and confiscatory. The directly not on the thing or service but on the
taxpayer is not permanently deprived of his ACT (sale, barter, exchange, lease, importation,
privilege to credit the input tax. For whatever is or performance of service)
the purpose, it involves executive economic (2) Ad Valorem Tax – the amount is based on the
policy and legislative wisdom in which the Court gross selling price or gross value in money of
cannot intervene. the goods or service, including the use or lease
(c) The tax law is uniform: it provides a standard or properties.
rate of 0% or 10% (or 12% now) on all goods or (3) Indirect Tax – The seller is the one statutorily
services. The law does not make any distinction liable for the payment of the tax but the amount
as to the type of industry or trade that will bear of the tax may be shifted or passed on to the
the 70% limitation on the creditable input tax, buyer, transferee or lessee of the goods,
5-year amortization of input tax on purchase of properties or services.
capital goods, or the 5% final withholding tax by (4) Excise Tax - a tax on the privilege of engaging in
the government. the business of selling goods or services, or in
(d) It is equitable: The law is equipped with a the importation of goods
threshold margin (P1.5M). Also, basic marine
and agricultural products in their original state Nature – VAT is a tax on consumption levied on the
are still not subject to tax. Congress also sale, barter, exchange or lease of goods or
provided for mitigating measures to cushion the properties and services in the Philippines and on
impact of the imposition of the tax on those importation of goods into the Philippines.
previously exempt. Excise taxes on petroleum
products and natural gas were reduced. This rule shall likewise apply to existing contracts of
Percentage tax on domestic carriers was sale or lease of goods, properties or services at the
time of the effectivity of RA No. 9337. However, in
PAGE 143 OF 275
the case of importation, the importer is the one The statutory taxpayer, One who bears the
liable for the VAT. (Sec. 4.105.2, RR 16-2005) the one from whom the burden of taxation
government collects.
General Features: Seller/Importer – Buyer/Final Consumer –
(1) VAT uses the Tax Credit Method Seller/Importer is the the buyer is the one who
(2) All goods, properties and services (except one who collects the tax bears the burden of the
exempt transactions) including goods subject and pays to the taxation.
to excise taxes, and use or lease of properties, government
whether real or 144ersonal, are subject to tax
at all levels of distribution. E. TAX CREDIT METHOD
(3) Although tax is levied at all stages, the
cumulative effect is that the final value of the A taxpayer‘s tax payable is the excess of output tax
goods sold to the ultimate consumers is taxed over input tax:
only once.
(4) VAT, as a general rule, follow the destination OUTPUT VAT – INPUT VAT = VAT PAYABLE
principle (goods and services are taxed only in
the country where they are consumed). Under the VAT method of taxation, which is invoice-
Therefore, no VAT shall be imposed to form part based, an entity can subtract from the VAT charged
of the cost of goods destined for consumption on its sales or outputs the VAT it paid on its
outside the territorial border of the taxing purchases, inputs and imports. [CIR v. Seagate
authority. (2005)].
Elements of a VAT-taxable transaction in general Input tax – the VAT due on or paid by a VAT-
1. There must be a sale, barter, exchange, or registered person on importation of goods or local
lease in the Philippines purchases of goods, properties, or services,
2. The subject matter must be taxable goods or including lease or use of properties, in the course of
properties or services his trade or business.
GR: The sale must be made by a taxable (1) It includes the transitional input tax and the
person in the course of trade or business or in presumptive input tax as determined in
the furtherance of their profession. accordance with Section 111 of the Code.
Exception: In the case of importation of goods, (2) It includes input taxes which can be directly
the transaction is taxable whether or not done attributed to transactions subject to the VAT
in the course of business. plus a ratable portion of any input tax which
cannot be directly attributed to either the
Meaning of ―in the course of trade or business‖ taxable or exempt activity.
Means the regular conduct of pursuit of a (3) Input tax must be evidenced by a VAT invoice or
commercial or an economic activity, including official receipt issued by a VAT-registered
transactions incidental thereto, by any person person in accordance with Secs. 113 and 237
regardless of whether or not the person engaged of the Code. [RR 16-2005]
therein is a nonstock, nonprofit private organization
(irrespective of the disposition of its net income and Output tax – the VAT due on the sale or lease of
whether or not it sells exclusively to members or taxable goods or properties or services by any
their guests), or government entity. person registered or required to register under
Section 236 of the Code.
N.B. – Services rendered by non-resident foreign
persons shall be considered as being rendered in If at the end of any taxable month or quarter:
the course of trade or business, even if the (a) The output tax exceeds the input tax, the excess
performance of services is not regular (Section shall be paid by the VAT-registered person
4.105-3, RR No. 16-2005) (b) The input tax exceeds the output tax, the excess
shall be carried over to the succeeding quarter
D. IMPACT OF TAX V. INCIDENT OF TAX or quarters [Sec. 110(B), NIRC]
Impact Incidence F. DESTINATION PRINCIPLE
PAGE 144 OF 275

As a general rule, the VAT system uses the impose the VAT. Performed in the Philippines, such
destination principle as a basis for the jurisdictional service is necessarily subject to its jurisdiction, for
reach of the tax. Goods and services are taxed only the State necessarily has to have ―a substantial
in the country where they are consumed. Thus, connection‖ to it, in order to enforce a zero rate. The
exports are zero-rated, while imports are taxed. [CIR place of payment is immaterial; much less is the
v. American Express International (2005)] place where the output of the service will be further
or ultimately used. [CIR v. American Express
N.B. – Cross Border Doctrine mandates that no VAT International (2005)]
shall be imposed to form part of the cost of the
goods destined for consumption outside the G. PERSONS LIABLE
territorial border of the taxing authority. Transactions subject to VAT:
1. Sale, Barter or Exchange of Goods or Properties
Atlas Consolidated Mining & Dev. Corp. v. CIR 2. Sale of Services, including Lease or use of
(2007): Actual export of goods and services from the Properties
Philippines to a foreign country must be free of VAT, 3. Importation of Goods.
while those destined for use or consumption within
the Philippines shall be imposed with 12% VAT. Persons Liable:
[Deoferio Jr. and Mamalateo, p. 422] 1. Any person who sells, barters, exchanges, or
leases goods or properties, or who renders
Exception to destination principle – Sec. services, in the course of trade or business
108(b)(2)14 a. Exception – A non-VAT- registered
person whose annual gross sales or
Sec. 108(b)(2), which subjects certain services receipts does not exceed P1,919,500.
rendered in the Philippines to a zero-rated VAT, is an 2. Any person who imports goods, whether or not
exception under the destination principle. The Court in the course of business
in CIR v. AMEX (2005) enumerated the requisites to
fall under that provision. The term ―person‖ refers to any individual, trust,
1. The service is performed in the Philippines; estate, partnership, corporation, joint venture,
2. the service falls under any of the categories cooperative or association (Sec. 4.105-1, RR 16-
provided in Section 102(b) of the Tax Code; 2005).
and
3. it is paid for in acceptable foreign currency General Rule: VAT and Percentage Tax cannot be
that is accounted for in accordance with charged together. It‘s either the transaction is under
the regulations of the BSP. VAT or Other Percentage Tax.
In that case, the Court held that a ruling providing Exception: When one erroneously declares himself
that the service must be ―destined for consumption to VAT registered.
outside of the Philippines‖ in order to qualify for
zero rating contravenes both the law and the H. VAT ON SALE OF GOODS OR
regulations issued pursuant to it. The Court held that
such ruling was ultra vires and therefore void.
PROPERTIES
Sale of goods or properties in general

The law neither makes a qualification nor adds a
condition in determining the tax situs of a zero-rated Rate: 12% VAT beginning 1 February 2006 [RMC
service. Under this criterion, the place where the No. 7-06]
service is rendered determines the jurisdiction to Transactions:
1. Every sale, barter or exchange (actual sale)
14
Services other than those mentioned in the 2. Transactions ―deemed sale‖ of taxable goods or
preceding paragraph rendered to a person engaged properties (RR 16-2005) (See also Sec. J, infra)
in business conducted outside the Philippines or a Basis: Gross selling price or gross value in money of
nonresident person not engaged in business who is the goods or properties sold, bartered or exchanged.
outside the Philippines when the services were Who Pays: Paid by SELLER/TRANSFEROR.
performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of the
BSP.
PAGE 145 OF 275
(Sec. 106, NIRC); N.B. – the end-user is the one who exempt
is actually burdened with the tax since the tax is
passed on to him. Residential If SP > 3,199,200.00 = subject
House and to VAT
Lot IF SP ≤ 3,199,200.00 = VAT-
Meaning of goods or properties exempt
Goods or properties – all tangible and intangible
objects which are capable of pecuniary estimation, Sales of real properties subject to VAT – Sale of real
including: properties held primarily for sale to customers or
(1) Real properties held primarily for sale to held for lease in the ordinary course of trade or
customers or held for lease in the ordinary business of the seller shall be subject to VAT. (Sec.
course of trade or business; 4.106-3, RR 16-2005)
(2) The right or the privilege to use patent,
copyright, design, or model, plan, secret Types of sales of real estate; Effects
formula or process, goodwill, trademark, trade 1. Cash sale – entire selling price taxable in the
brand or other like property or right; month of the sale.
(3) The right or the privilege to use in the 2. Installment sales
Philippines of any industrial, commercial or a. Meaning of installment sale – initial
scientific equipment; payments of which in the year of sale ≤
(4) The right or the privilege to use motion picture 25% GSP
films, films tapes and discs; b. Effect – the real estate dealer shall be
(5) Radio, television, satellite transmission and subject to VAT on the installment
cable television time. payments, including interest and
penalties, actually and/or
Goods/Personal Properties constructively received by the seller.
(i) Actual/deemed sale for a valuable 3. Deferred sales
consideration a. Meaning – initial payments exceed
(ii) For use or consumption in the Phil (regardless 25% of the GSP
of the payment arrangements) b. Effect – Treated as a cash sale which
(iii) Not exempt from VAT (NIRC, special law, special makes the entire selling price taxable
agreement) in month of sale
4. Tax free exchanges under Sec. 40[C][2] are not
Special rules subject to VAT.
Sale of Real Properties (RP)
Casual Sale Subject to CGT (6%) Reference: Sec. 4.106-3, RR 16-2005
(Capital Assets)
Meaning of GSP – total amount of money or its
Regular Sales
equivalent which the purchaser pays or is obligated
(Ordinary
to pay to the seller in consideration of the sale,
Assets)
barter or exchange of the goods or properties,
Commercial Subject to 12% VAT
excluding VAT. The excise tax, if any, on such goods
Property
or properties shall form part of the gross selling
(Sale/Lease)
price.
Residential If monthly rental ≤ 12,800 = VAT
Units (Lease) and OPT-exempt
In the case of sale, barter or exchange of real
If monthly rental > 12,800 but
property subject to VAT, GSP shall mean:
aggregate annual rentals
1. The consideration stated in the sales document
≤1,919,500 = subject to OPT or
If monthly rental > 12,800 and 2. The fair market value (FMV) whichever is higher.
aggregate annual rentals >
1,919,500 = subject to VAT Meaning of FMV – Whichever is higher of the
Residential If SP > 1,919,500.00 = subject following:
Lot to VAT 1. The fair market value as determined by the CIR
IF SP ≤ 1,919,500.00 = VAT- (zonal value) or
PAGE 146 OF 275
2. The fair market value as shown in schedule of Exception: However, if the property
values of the Provincial and City Assessors (real transferred is originally intended for sale, lease
property tax declaration). or use in the ordinary course of trade or
business AND the transfer constitutes a
General Rule: GSP is the total amount of money completed gift, the transfer is subject to VAT as
paid in consideration of sale, barter, exchange, or a deemed sale transaction. The transfer is a
lease. completed gift if the transferor divests himself
absolutely of control over the property, i.e.,
Excludes: VAT, sales discounts and, allowances irrevocable transfer of corpus and/or
and returns (See Section on Allowable Discounts) irrevocable designation of beneficiary.
(7) Transfer to corporation in exchange of shares of
Includes: Excise tax paid, initial payments 15 , stocks (see Sec. 40, NIRC for Tax-free
interests and penalties (if instalment), commission exchange)
income (if exported), purchase price, charges for (8) Advance payment by the lessee
packing, delivery and insurance (9) Security deposits for lease agreements.17
If goods/personal properties, Allowable Deductions from GSP

GSP = amount paid in consideration
IF DEEMED SALE: FMV at the time of the transaction The following are deductible from the gross selling
NB: in retirement/cessation, inventory (raw price:
materials, finished goods, machinery, equipment,
furniture, fixture), tax base = whichever is lower, (1) Sales returns and allowances – the selling price
i. acquisition cost of the goods or properties returned and not sold
ii. current market price of goods necessarily reduces the gross sales on which
the rate is applied.
N.B.: CIR has the power to determine the (a) Sales returns and allowances for which a
appropriate tax base in 1) SBE in deemed sales and proper credit/refund was made during the
2) when GSP is unreasonably lower than AMV16 month or quarter to the buyer for sales
previously recorded as table sales are
Not taxable: [Sec. 109 (P)(Q)] allowed as a deduction in the period when
(1) Not primarily held for sale or lease in the course they are made. Excess may be carried over
of trade or business to the succeeding period.
(2) Low cost or socialized housing (b) The value of goods or properties sold and
(3) Residential lot when value does not exceed subsequently returned or for which
P1,919,500 allowances were granted by a VAT-
(4) House and lot/other residential dwelling < registered person may be deducted from
P3,199,200 the gross sales or receipts for the quarter in
(5) Lease (rental per unit < 12,800/month and which a refund is made or a credit
total rental from all units < P1,919,500/ year) memorandum is issued.
(6) Transmission to a trustee (Except: transmission
is deemed sale transaction) (2) Sales Discounts – bona fide or regular
General Rule: Transmission of property to a discounts given to purchasers, which are
trustee shall NOT be subject to VAT if the ascertainable and definitely agreed upon
property is to be merely held in trust for the between the vendor and the vendee at the time
trustor and/or beneficiary. of sale are deductible from the GSP.
(a) If given after the sale or are in the nature of
a rebate or partial remission of
15
Initial payments does not include the amount of indebtedness, they will not be allowed as a
mortgage on RP sold (except excess when deduction from the GSP.
mortgage exceeds the cost of the property), notes (b) Furthermore the discount must be
and other evidence on=f indebtedness issued by the
purchaser at the time of the sale expressly indicated in the sales invoice and
16
GSP is unreasonably lower than the actual market
value if it is lower than 30% of AMV of the same
goods of the same quantity or quality sold in the 17 Please take note of the difference between
immediate locality or the nearest date of sale. security deposits and those applied to rent.
PAGE 147 OF 275
the amount forming part of the gross sales (a) Any enterprise whose export sales exceed
duly recorded in the books of accounts. 70% of the total annual production of the
(c) Credits for allowances to cover roll back in preceding taxable year shall be considered
prices and other adjustments are not an export-oriented enterprise upon
deductible. accreditation under the rules & regulations
of Export Development Act, RA 7844 (RR 7-
I. ZERO-RATED SALES OF GOODS OR 95)
PROPERTIES, AND EFFECTIVELY ZERO- (4) Sale of gold to the Bangko Sentral ng Pilipinas
(BSP)
RATED SALES OF GOODS OR (5) The sale of goods, supplies, equipment and fuel
PROPERTIES to persons engaged in international shipping or
international air transport operations (RA 9337)
Rate: 0% Output VAT; 12% Input VAT (a) Limited to goods, supplies, equipment and
Transactions: Every sale, barter or exchange, or fuel pertaining to or attributable to the
transactions ―deemed sale‖ of taxable goods or transport of goods and passengers from a
properties (RR 16-2005) port in the Phil. directly to a foreign port
without docking or stopping at any other
Concept – A zero-rated sale of goods or properties port in the Phil.
by a VAT-registered person is a taxable transaction (b) If any portion of such fuel, goods, or
for VAT purposes, but shall not result in any output supplies is used for purposes other than
tax. However, the input tax on purchases of goods, that mentioned, such portion of fuel, goods,
properties or services, related to such zero-rated and supplies shall be subject to 12% VAT.
sale, shall be available as tax credit or refund. (RR 16-2005)
(6) Those considered export sales under the
Transaction is subject to VAT but at 0% instead of Omnibus Investment Code of 1987, and other
12%. special laws (ex. Bases Conversion &
(1) Export Sales Development Act of 1992)
(2) Foreign Currency Denominated Sales
(3) Sales of Goods or Property to persons or Under Omnibus Investment Code (EO 226):
entities who are tax-exempt/Effectively Zero- Considered Export Sales
Rated Sales (1) Phil. port FOB value of export products
exported directly by a registered export
Export Sales [Sec. 106(A)(2)(a), NIRC] producer; OR
(2) Net selling price of export products sold by a
(1) The (i) sale and actual shipment of goods from registered export producer to another export
the Philippines to a foreign country AND (ii) paid producer, or to an export trader that
for in acceptable foreign currency or its subsequently exports the same (only when
equivalent in goods or services, AND (iii) actually exported by the latter) evidenced by
accounted for in accordance with the rules and landing certificates.
regulations of the BSP
(2) (i) Sale of raw materials or packaging materials Constructive Exports (without actual exportation):
to a nonresident buyer (ii) for delivery to a (1) Sales to bonded manufacturing warehouses of
resident local export-oriented enterprise (iii) to export-oriented manufacturers;
be used in manufacturing, processing, packing (2) Sales to export processing zones (RA 7916);
or repacking in the Philippines of the said (3) Sales to registered export traders operating
buyer's goods AND (iv) paid for in acceptable bonded trading warehouses supplying raw
foreign currency AND (v) accounted for in materials in the manufacture of export
accordance with the rules and regulations of products (RA 7227)
the BSP. (4) Sales to diplomatic missions and other
(3) (i) Sale of raw materials or packaging materials agencies and/or instrumentalities granted tax
(ii) to export-oriented enterprise (iii) whose immunities, of locally manufactured,
export sales exceed seventy percent (70%) of assembled or repacked products, whether paid
total annual production. for in foreign currency or not.
PAGE 148 OF 275

(5) Sales by a VAT-registered supplier to a zero-rated. Conversely, sales by a PEZA-registered

manufacturer/producer whose products are entity to a person in the customs territory are
100% exported are considered export sales. A deemed imports from a foreign country.
certification to this effect must be issued by
the Board of Investment which shall be good Tax treatment of sales to & by PEZA-registered
for 1 year unless subsequently re-issued. (RR enterprise within & without the ecozone [RMC 74-
16-2005) 99]:
(1) Any sale of goods, property or services made by
Export sales of registered export traders shall a VAT registered supplier from the Customs
include commission income, and that Territory** to any registered enterprise
exportation of goods on consignment shall not operating in the ecozone, REGARDLESS of the
be deemed export sales until the export class or type of the latter‘s PEZA registration, is
products consigned are in fact sold by the actually qualified and thus LEGALLY ENTITLED
consignee. TO THE 0% VAT.
Foreign Currency Denominated Sale (FCDS) ―Customs Territory‖ shall mean the national territory
(1) (i) Sale to a nonresident of goods (except those of the Philippines outside of the proclaimed
mentioned in Sections 149 and 150 i.e., boundaries of the ECOZONES except those areas
automobiles and non-essential goods like specifically declared by other laws and/or
jewelry, perfume, and yachts), (ii) assembled or presidential proclamations to have the status of
manufactured in the Philippines (iii) for delivery special economic zones and/or free ports. [Sec. 2(g),
to a resident in the Philippines (iv) paid for in Rule 1, Part I, RA 7916-IRR]
acceptable foreign currency AND (v) accounted
for in accordance with the rules and regulations (2) By a VAT-Exempt Supplier from the Customs
of the BSP. Territory to a PEZA registered enterprise
(2) (i) Sales of locally manufactured or assembled
goods (ii) for household and personal use (iii) to Sale of goods, property and services by VAT-Exempt
Filipinos abroad and other non-residents of the supplier from the Customs Territory to a PEZA
Philippines as well as returning Overseas registered enterprise shall be treated EXEMPT FROM
Filipinos under the Internal Export Program of VAT, regardless of whether or not the PEZA
the government (iv) paid for in convertible registered buyer is subject to taxes under the NIRC
foreign currency AND (v) accounted for in or enjoying the 5% special tax regime.
accordance with the rules and regulations of
the BSP shall also be considered export sales. (3) By a PEZA Registered Enterprise
(RR 16-2005) (a) Sale of Goods by a PEZA registered
enterprise to a buyer from the Customs
Effectively Zero-Rated Sales Territory (i.e., domestic sales) -- this case
(1) Sales to persons or entities whose exemption shall be treated as a technical
under special laws or international agreements IMPORTATION made by the buyer. Such
to which the Philippines is a signatory buyer shall be treated as an IMPORTER
effectively subjects such sales to zero rate. thereof and shall be imposed with the
(2) (i) The local sale of goods and properties (ii) by corresponding VAT.
a VAT-registered person (iii) to a person or entity (b) Sale of Services by a PEZA registered
who was granted indirect tax exemption under enterprise to a buyer from the Customs
special laws or international agreement. (RR Territory – this is NOT embraced by the 5%
16-2005) special tax regime, hence, such seller shall
be SUBJECT TO 12% VAT.
ECOZONES (c) Sale of Goods by a PEZA registered
The ECOZONES shall be managed and operated by enterprise to Another PEZA registered
the PEZA as separate customs territory. (Sec. 8, RA enterprise (ie Intra-ECOZONE Sales of
7916 ―Special Economic Zone Act of 1995‖). Goods) – this shall be EXEMPT from VAT.
Consequently, sales made by a person in the
customs territory to a PEZA-registered entity are
considered exports to a foreign country and thus,
PAGE 149 OF 275
(4) Sale of Services by ECOZONE enterprise, to Example: when a VAT-registered person

Another ECOZONE enterprise (Intra-ECOZONE withdraws goods from his business for his
enterprise Sale of Service) personal use. (RR 16-2005)
(a) if PEZA registered seller is subject to 5% (2) Distribution or transfer to shareholders,
special tax regime - EXEMPT from VAT investors or creditors
(b) if PEZA registered seller is subject to taxes (a) Shareholders or investors as share in the
under NIRC (ie not subject to 5% special profits of the VAT-registered persons;
tax regime) – subject to 0% VAT pursuant (b) Creditors in payment of debt;
to ―cross border doctrine‖ (3) Consignment of goods if actual sale is not
made within 60 days following the date such
Difference between Zero-rated and VAT-exempt goods were consigned
Zero-rated VAT-exempt (4) Retirement from or cessation of business, with
It is a taxable transaction Not subject to output tax respect to inventories of taxable goods existing
but does not result in an as of such retirement or cessation
output tax
The input VAT on the The seller in an exempt Distribution or transfer to shareholders, investors or
purchases of a VAT- transaction is not entitled creditors
registered person with to any input tax on his As regards distribution to shareholders or investors
zero-rated sales may be purchases despite the as share in the profits of the VAT-registered persons,
allowed as tax credits or issuance of a VAT invoice property dividends which constitute stocks in trade
refunded or receipt; or properties primarily held for sale or lease
Persons engaged in Registration is optional declared out of retained earnings on or after Jan. 1,
transactions which are for VAT-exempt persons. 1996 and distributed by the company to its
zero-rated, being subject shareholders shall be subject to VAT based on the
to VAT, are required to zonal value or FMV at the time of the distribution,
register whichever is applicable. (RR 16-2005)
J. TRANSACTIONS DEEMED SALE (SEC. Consignment of goods

106 (B) Consigned goods returned by the consignee within
the 60-day period are not deemed sold. (RR 16-
2005)
Rate: 12% VAT
Basis: Market value of the goods deemed sold as of
the time of the occurrence of the transactions or as Retirement from or cessation of business
the CIR shall prescribe. In the case of With respect to ALL goods on hand, whether capital
retirement/cessation of business, the tax base shall goods, stock-in-trade, supplies or materials, as of
be the acquisition cost or the current market price of the date of such retirement or cessation, whether or
the goods or properties, whichever is lower. In the not the business is continued by the new owner or
case of a sale where the gross selling price is successor ARE CONSIDERED DEEMED SALES
unreasonably lower than the fair market value, the
actual market value shall be the tax base. The gross Examples: change of ownership of the business (e.g.,
selling price is unreasonably lower than the actual when a sole proprietorship incorporates, or the
market value if it is lower by more than 30% of the proprietor sells his entire business) and dissolution
actual market value of the same goods of the same of a partnership and creation of a new partnership
quantity and quality sold in the immediate locality which takes over the business. (RR 16-2005)
on or nearest the date of sale. (RR 16-2005)
K. CHANGE OR CESSATION OF STATUS
Transactions Deemed Sale AS VAT-REGISTERED PERSON (SEC
(1) Transfer, use or consumption not in the course 106[C])
of business of goods or properties originally
intended for sale or for use in the course of Rate: 12% VAT
business. Basis: the acquisition cost or the current market
price of the goods or properties, whichever is
LOWER.
PAGE 150 OF 275
Note: The INPUT VAT of the dissolved

VAT shall apply to goods disposed of or existing as corporation will be absorbed by the surviving
of a certain date if under the circumstances to be corporation
prescribed in rules and regulations to be (4) Inventory used for promotions and Office
promulgated by the Secretary of Finance, upon Supplies
recommendation of the CIR, the status of a person
as a VAT-registered person changes or is terminated. L. VAT ON IMPORTATION OF GOODS
Subject to output VAT (RR 16-2005, Sec. 4.106 (b)) Rate: 12% VAT
12% VAT is applicable to goods/properties Basis: total value used by the Bureau of Customs in
originally intended for sale or use in business and determining tariff and customs duties, plus customs
capital goods which are existing as of the duties, excise taxes, if any, and other charges (such
occurrence of the following: as postage, commission).
(1) Change of business activity from VAT taxable Where the customs duties are determined on the
status to VAT-exempt status basis of the quantity or volume of the goods, VAT
Example: A VAT-registered person engaged shall be based on the landed cost plus excise taxes,
in a taxable activity like wholesaler or retailer if any.
who decides to discontinue such activity and
engages instead in life insurance business or in Who Pays: IMPORTER prior to the release of such
any other business not subject to VAT. goods from customs custody (Sec. 107 (A), NIRC)
(2) Approval of request for cancellation of a Importer: any person who brings goods into the
registration due to reversion to exempt status Philippines, whether or not made in the course of his
(3) Approval of request for cancellation of trade or business, including non-exempt persons or
registration due to desire to revert to exempt entities who acquire tax-free imported goods from
status after lapse of 3 consecutive years from exempt persons, entities or agencies (RR 16-2005)
the time of registration by a person who
voluntarily registered despite being exempt Importation of Goods
under Sec. 109 (2) Importation of goods BEGINS when the carrying
(4) Approval of request for cancellation of vessel/aircraft enters the Philippine jurisdiction with
registration of one who commenced business an intention to unload its cargoes. It ENDS when
with the expectation of gross sales/receipts there is already payment of duties/taxes/other
exceeding P1,919,500 (per RR 16-2011) but charges and issuance of permit to withdraw.
who failed to exceed this amount during the Note: Importation of goods to bonded
first 12 months of operation warehouse for processing is not importation.
Importation connotes permanency and gain. Thus, if
Not Subject to Output Vat – goods or properties goods are only for exhibit, such goods are VAT-
existing as of the occurrence of the following: exempt.
(1) Change of control of a corporation by the
acquisition of the controlling interest of such Customs duty – amount of customs duty legally due
corporation by another stockholder (individual and paid by the importer. Therefore, if importer is
or corporate) or group of stockholders. entitled to 90% customs duty exemption, the 10%
Note: Exchange of goods or properties duty paid should be the base in computation of the
including the real estate properties used in VAT.
business or held for sale or for lease by the
transferor, for shares of stocks, whether Other similar chargers – specific charges which an
resulting in corporate control or not, is SUBJECT importer has to pay.
TO VAT (RR 10-11) (a) Other taxes (special import tax)
(2) Change in the trade or corporate name of the (b) Bank charges
business (c) Arrastre charges
(3) Merger or consolidation of corporations. The (d) Wharfage dues
unused input tax of the dissolved corporation, (e) Brokerage fees
as of the date of merger or consolidation, shall (f) All other charges or expenses
be absorbed the surviving or new corporation.
PAGE 151 OF 275

Landed Cost - invoice amount including costs of (1) The service must be performed or is to be
loading, shipping and unloading, customs duties, performed (which may be performed by a
freight, insurance, other charges, excise tax (if any) subcontractor) in the course of trade or
business in the Philippines;
Expenses incurred after the release of the goods (2) For a valuable consideration actually or
such as those incurred in delivering goods do not constructively received; and
form part of the landed cost. (3) The service is not exempt under the Tax Code,
special law or international agreement
Transfer of goods by tax exempt persons: (4) Person selling or rendering service is liable to
(1) If importer is tax-exempt, the subsequent VAT
purchasers, transferees or recipients of such
imported goods shall be considered as ―Sale/Exchange of Services‖: means the
importers who shall be liable for the tax on performance of all kinds of services in the
importation. Philippines for others for a fee, remuneration or
(2) The tax due on such importation shall constitute consideration.‖ (Sec 108, Diaz v Secretary of
a lien on the goods superior to all charges or Finance, 2011). It includes:
liens on the goods, irrespective of the possessor (1) Construction and service contractors
thereof. (As amended by RA 9337) (2) Stock, real estate, commercial, customs and
immigration brokers
M. VAT ON SALE OF SERVICE AND USE (3) Lessors of property, whether personal or real18
OR LEASE OF PROPERTIES (4) Persons engaged in warehousing service.
[Sec 108] (5) Lessors or distributors of cinematographic films
(6) Persons engaged in milling, processing,
manufacturing or repacking goods for others
Rate: 12%
are subject to VAT,
Basis: Gross receipts derived from the sale or
EXCEPT palay into rice, corn into corn grits,
exchange of services, including the use or lease of
and sugarcane into raw sugar (not subject to
properties.
VAT)
(7) Proprietors, operators, or keepers of hotels,
Gross Receipts - the total amount of money or its motels, rest houses, pension houses, inns,
equivalent representing the contract price, resorts, theaters, and movie houses
compensation, service fee, rental or royalty, (8) Proprietors or operators of restaurants,
including the amount charged for materials supplied refreshment parlors, cafes and other eating
with the services and deposits and advanced places, including clubs and caterers
payments actually or constructively received during (9) Dealers in securities including pre-need
the taxable quarter for the services performed or to companies
be performed for another person, excluding VAT. ―Gross receipts‖ means gross selling price
(Sec. 108 (A), NIRC) less cost of the securities sold. RR 7-95:
(10) Lending investors: All persons OTHER than
―Constructive receipt‖ occurs when the money banks, non-bank financial intermediaries,
consideration or its equivalent is placed at the finance companies and other financial
control of the person who rendered the service
without restrictions by the payor.
(a) Deposit in banks which are made available to 24
the seller of services without restrictions SUBJECT TO VAT NOT SUBJECT TO
(b) Issuance by the debtor of a notice to offset any VAT
Loan to the lessor
debt or obligation and acceptance thereof by
from the lessee
the seller as payment for services rendered Pre-Paid Rental Option money for the
(c) Transfer of the amounts retained by the property
contractee to the account of the contractor. (RR Security deposit Security deposit to
16-2005) when applied to insure the faithful
the rental performance of
certain obligations of
Requisites for taxability the lessee to the
lessor
PAGE 152 OF 275

intermediaries NOT performing quasi-banking ―Lease of Properties―: subject to the VAT imposed
functions who make a practice of lending irrespective of the place where the contract of lease
money for themselves or others at interest. or licensing agreement was executed if the property
(11) Transportation contractors on their transport of is leased or used in the Philippines.
goods or cargoes, including persons who (1) The lease or the use of or the right or privilege to
transport goods or cargoes for hire and other use any copyright, patent, design or model,
domestic common carriers by land relative to plan secret
their transport of goods or cargoes (2) formula or process, goodwill, trademark, trade
(12) Common carriers by air and sea relative to their brand or other like property or right
transport of passengers, goods or cargoes from (3) The lease of the use of, or the right to use of any
one place in the Philippines to another place in industrial, commercial or scientific equipment
the Philippines (4) The supply of scientific, technical, industrial or
(13) Sales of electricity by generation, transmission, commercial knowledge or information
and/or distribution companies (5) The supply of any assistance that is ancillary
EXCEPT sale of power or fuel generated and subsidiary to and is furnished as a means
through renewable sources of energy, such as, of enabling the application or enjoyment of any
but not limited to, biomass, solar, wind such property, or right as is mentioned in #2 or
hydropower, geothermal, ocean energy, and any such knowledge or information as is
other emerging energy sources using mentioned in #3
technologies such as fuel cells and hydrogen (6) The supply of services by a nonresident person
fuels, which shall be subject to 0% rate of VAT or his employee in connection with the use of
(zero-rated). property or rights belonging to, or the
(14) Franchise grantees of electric utilities, installation or operation of any brand,
telephone and telegraph, radio and/or machinery or other apparatus purchased from
television broadcasting and all other franchise such nonresident person
grantees (including PAGCOR and its (7) The supply of technical advice, assistance or
licensees/franchisees) services rendered in connection with technical
EXCEPT franchise grantees of radio and/or management or administration of any scientific,
television broadcasting whose annual gross industrial or commercial undertaking, venture,
receipts of the preceding year do not exceed project or scheme
Ten Million Pesos (P10,000,000.00) (which (8) The lease of motion picture films, films, tapes
shall be subject to 3% franchise tax under Sec. and discs
119, subject to optional registration), and (9) The lease or the use of or the right to use radio,
franchise grantees of gas and water utilities television, satellite transmission and cable
(under Sec. 109, subject to 2% franchise tax) television time
With respect to franchise grantees of
telephone and telegraph services, amounts Additional services subject to VAT:
received for overseas dispatch, message, or (1) Services performed in the exercise or practice of
conversation originating from the Philippines profession or calling by individuals subject to
are subject to the percentage tax under Sec. professional tax under the LGC, and
120 and hence exempt from VAT professional services rendered by general
(15) Non-life insurance companies including surety, professional partnerships (GPPs);
fidelity, indemnity and bonding companies; (2) Services performed by actors/actresses, talents,
EXCEPT crop insurance, life and disability singers, emcees, radio/television broadcasters,
insurance, and health and accident insurance choreographers,
Insurance and reinsurance commissions, musical/radio/movie/television/stage
as opposed to premiums, whether life or non- directors, and professional athletes;
life, are subject to VAT while non-life insurance (3) Services rendered by customs, real estate,
premiums are subject to VAT. stock, immigration and commercial brokers;
(16) Similar services regardless of whether or not the (4) Services rendered by doctors, and lawyers.
performance thereof calls for the exercise or (5) Association dues or membership fees and other
use of the physical or mental faculties assessment or charges for the beneficial
services of the homeowner‘s association (RMC
No. 9-2013)
PAGE 153 OF 275
(6) Lease/use of sports facilities and equipment Provided, however, that the services
(RA 6847) referred to herein shall not pertain to those
made to common carriers by air and sea relative
The performance of the services should not be in to their transport of passengers, goods or
pursuit of an employer-employee relationship cargoes from one place in the Phil. to another
between the service-provider and the service- place in the Phil. (the same being subject to
recipient. 12% VAT under Sec. 108)
(5) Services performed by subcontractors and/or
N. ZERO-RATED SALE OF SERVICES contractors in processing, converting, or
manufacturing goods for an enterprise whose
The following services performed in the Philippines export sales exceed seventy percent (70%) of
by VAT-registered persons are effectively 0% VAT total annual production.
sales of services: (6) Transport of passengers and cargo by air or sea
(1) Processing, manufacturing or repacking goods vessels from the Philippines to a foreign country
for other persons doing business outside the (as added by RA 9337) and;
Philippines which goods are subsequently (7) Sale of power or fuel generated through
exported, where the services are paid for in renewable sources of energy such as, but not
acceptable foreign currency AND accounted for limited to, biomass, solar, wind, hydropower,
in accordance with the rules and regulations of geothermal, ocean energy, and other emerging
the BSP energy sources using technologies such as fuel
(2) Services other than those mentioned in the cells and hydrogen fuels. (as added by RA
preceding paragraph rendered to a person 9337)
engaged in business conducted outside the Zero-rating shall apply strictly to the sale of
Philippines or a nonresident person not power or fuel generated through renewable
engaged in business who is outside the sources of energy, and shall not extend to the
Philippines when the services are performed, sale of services related to the maintenance or
the consideration for which is paid for in operation of plants generating said power.
acceptable foreign currency AND accounted for
in accordance with the rules and regulations of Effectively zero-rated sale of service – a local sale of
the BSP services by a VAT-registered person to a person or
The services referring to ‗processing, entity granted indirect tax exemption under special
manufacturing, repacking‘ and ‗services other laws or international agreement.
than those in (1)‘ both require  The taxpayer must seek prior approval or prior
(i) payment in foreign currency; confirmation from the appropriate offices of the
(ii) inward remittance; BIR so that a transaction is qualified for
(iii) accounted for by the BSP; effective zero-rating except in export sales and
(iv) AND that the service recipient is doing foreign denominated sales.
business outside the Philippines.  RR 4-2007 removed the distinction between
If this is not the case, taxpayers can automatic and effectively zero-rated
circumvent just by stipulating payment in transactions found in prior Revenue
foreign currency. (CIR v. Burmeister, G.R. No. Regulations (inc. RR 16-2005) with respect to
153205 [2007[)) prior application from the BIR.
(3) Services rendered to persons or entities whose
exemption under special laws or international O. VAT EXEMPT TRANSACTIONS
agreements to which the Philippines is a
signatory effectively subjects the supply of such Vat Exempt Transactions, in general
services to zero percent (0%) rate (as amended (a) Sale of goods or properties and/or services and
by RA 9337) the use or lease of properties that is NOT
(4) Services rendered to persons engaged in subject to VAT (output tax) and the seller is not
international shipping or international air allowed any tax credit of VAT (input tax) on
transport operations, including leases of purchases.
property for use thereof [as amended by RA (b) The person making the exempt sale of goods,
9337]; properties or services shall not bill any output
tax to his customers. (RR 16-2005)
PAGE 154 OF 275
(c) But, the VAT-registered person may elect that actually coming to settle in the Philippines and
the exemption not apply to its sale of goods or that the change of residence is bona fide;
properties or services; provided that the  EXCEPT vehicles, vessels, aircrafts,
election made shall be irrevocable for a period machineries, and other goods for use in
of three (3) years from the quarter the election manufacturing and merchandise of any
was made (Sec. 109(2), NIRC). kind in commercial quantity)
(5) Services subject to percentage tax under the
Exempt Transactions Enumerated NIRC;
[4.109-1 of RR 16-2005] (6) Services by agricultural contract growers and
(1) Sale/import of agricultural and marine food milling for others of palay into rice, corn into
products in their original state, livestock and grits, and sugar cane into raw sugar;
poultry of a kind generally used as or yielding or (7) Medical, dental, hospital and veterinary
producing foods for human consumption and services, except those rendered by
breeding stock and genetic materials therefor; professionals:
 Original state even if they have undergone  Laboratory services are exempted. If the
the simple processes of preparation or hospital or clinic operates a pharmacy or
preservation for the market, such as drug store, the sale of drugs and medicine
freezing, drying, salting, broiling, roasting, is subject to VAT. [RR 16-2005]
smoking or stripping. Also includes  Note: RR-2004 granting VAT-exemption to
preservation using advanced technological doctors registered with the PRC and
means of packaging, such as shrink lawyers registered with the IBP was
wrapping in plastics, vacuum packing, superseded by RA 9337 and RR 16-2005.
tetra-pack, and other similar packaging (8) Educational services rendered by private
methods (RR 16-2005) educational institutions, duly accredited by
 Polished and/or husked rice, corn grits, DepED, CHED, TESDA, and those rendered by
raw cane sugar and molasses, ordinary salt, government educational institutions;
AND COPRA shall be considered in their  ―Educational services‖ does not include
original state seminars, in-service training, review
 Livestock or poultry do not include fighting classes and other similar services rendered
cocks, race horses, zoo animals and other by persons who are not accredited by the
animals generally considered as pets. DepED, CHED, and/or TESDA. [RR 16-
(2) Sale/ importation of fertilizers, seeds, 2005]
seedlings and fingerlings, fish, prawn, livestock (9) Services rendered by individuals pursuant to an
and poultry feeds including ingredients, employer-employee relationship;
whether locally produced or imported, used in (10) Services rendered by regional or area
the manufacture of finished feeds (EXCEPT headquarters established in the Philippines by
specialty feeds for race horses, fighting cocks, multinational corporations which act as
aquarium fish, zoo animals, and other animals supervisory, communications and coordinating
generally considered pets); centers for their affiliates, subsidiaries or
(3) Importation of personal and household effects branches in the Asia-Pacific Region and do not
belonging to Philippine residents returning from earn or derive income from the Philippines;
abroad and non-resident citizens coming to (11) Transactions which are exempt under
resettle in the Philippines; provided, that such international agreements to which the
goods are also exempt from customs duties Philippines is a signatory or under special laws,
under the TCC (now CMTA) except those under PD No. 529 (Petroleum
(4) Importation of professional instruments and Exploration Concessionaires under the
implements, wearing apparel, domestic Petroleum Act of 1949);
animals, and personal household effects (12) Sales by agricultural cooperatives duly
belonging to persons coming to settle in the registered with the Cooperative Development
Philippines, for their own use and not for sale, Authority (CDA) to their members, as well as
barter or exchange, accompanying such sale of their produce, whether it is original state
persons, or arriving within 90 days before or or processed form, to non-members; their
after their arrival, upon production of evidence importation of direct farm inputs, machineries
satisfactory to the CIR that such persons are and equipment, including spare parts thereof,
PAGE 155 OF 275
to be used directly and exclusively in the wherein the unit selling price is within
production and/or processing of their produce. the selling price ceiling per unit of
 Sale by agricultural cooperatives to non- P750,000.00 under RA 7279, and
members can only be exempted from VAT if other laws, such as RA 7835 and RA
the producer of the agricultural products 8763.
sold is the cooperative itself. If the (c) Sale of real properties utilized for
cooperative is not the producer (e.g., socialized housing as defined under RA
trader), then only those sales to its 7279, and other related laws, such as RA
members shall be exempted from VAT. [RR 7835 and RA 8763, wherein the price
16-2005] ceiling per unit is P225,000 or as may from
(13) Gross receipts from lending activities by credit time to time be determined by the HUDCC
or multi-purpose cooperatives duly registered and the NEDA and other related laws.
with the CDA  "Socialized housing" refers to
(14) Sales by non-agricultural, non- electric and housing programs and projects
non-credit cooperatives duly registered and in covering houses and lots or home lots
good standing with the CDA; Provided, that the only undertaken by the Government or
share capital contribution of each member does the private sector for the
not exceed P15,000 and regardless of the underprivileged and homeless citizens
agrgregate capital and net surplus ratably which shall include sites and services
distributed among the members. BUT their development, long-term financing,
importation of machineries and equipment, liberated terms on interest payments,
including spare parts thereof, to be used by and such other benefits in accordance
them are SUBJECT to VAT. with the provisions of RA 7279 and RA
(15) Export sales by persons who are not VAT- 7835 and RA 8763.
registered;  "Socialized housing" shall also refer
(16) Sale of real properties as follows: to projects intended for the
(a) Sale of real properties NOT primarily held underprivileged and homeless wherein
for sale to customers or held for lease in the housing package selling price is
the ordinary course of trade or business. within the lowest interest rates under
 However, even if the real property is the Unified Home Lending Program
not primarily held for sale to (UHLP) or any equivalent housing
customers or held for lease in the program of the Government, the
ordinary course of trade or business private sector or non-government
but the same is used in the trade or organizations.
business of the seller, the sale thereof (d) Sale of residential lot valued at
shall be subject to VAT being a P1,919,500 and below, or house & lot and
transaction incidental to the other residential dwellings valued at
taxpayer‘s main business. [RR 4- P3,199,200 and below
2007]  If two or more adjacent residential lots
(b) Sale of real properties utilized for low-cost are sold or disposed in favor of one
housing as defined by RA 7279, ("Urban buyer, for the purpose of utilizing the
Development and Housing Act of 1992") lots as one residential lot, the sale
and other related laws, such as RA 7835 shall be exempt from VAT only if the
and RA 8763; aggregate value of the lots does not
 ―Low-cost housing" refers to housing exceed P1,919,500. [RR 13-2012]
projects intended for homeless low-  Adjacent residential lots, although
income family beneficiaries, covered by separate titles and/or
undertaken by the Government or separate tax declarations, when sold
private developers, which may either or disposed to one and the same buyer,
be a subdivision or a condominium whether covered by one or separate
registered and licensed by the Housing Deed of Conveyance, shall be
and Land Use Regulatory presumed as a sale of one residential
Board/Housing (HLURB) under BP lot. [RR 16-2005]
220, PD 957 or any other similar law,
PAGE 156 OF 275
 Sale, transfer or disposal within a 12-  The term 'residential units' shall refer to
month period of 2 or more adjacent apartments and houses & lots used for
residential lots, house and lots or residential purposes, and buildings or
other residential dwellings to one parts or units thereof used solely as
buyer, whether from the same or from dwelling places (e.g., dormitories, rooms
different sellers shall be considered and bed spaces) except motels, motel
one single transaction. Hence, the sale rooms, hotels and hotel rooms.
of the adjacent lots shall be subject to  The term 'unit' shall mean an apartment
VAT if the aggregate value exceeds unit in the case of apartments, house in the
P1,919,500 for residential lots and case of residential houses; per person in
P3,199,200 for residential house lots the case of dormitories, boarding houses
or residential dwellings, and bed spaces; and per room in case of
notwithstanding that the value of the rooms for rent. [RR 16-2005]
individual properties do not exceed the (18) Sale, importation, printing or publication of
VAT exemption thresholds. books and any newspaper, magazine review or
 Sale/purchase of parking lots shall bulletin which appears at regular intervals with
not be considered a sale of residential fixed prices for subscription and sale and which
lot/dwelling. Hence, it shall be subject is not devoted principally to the publication of
to VAT regardless of its selling price. paid advertisements;
[RR 13-2012] (19) Transport of passengers by international
(17) Lease of residential units with a monthly rental carriers [Added by RA 10378 (2013)]
per unit not exceeding P12,800, regardless of (20) Sale, importation or lease of passenger or
the amount of aggregate rentals received by the cargo vessels and aircraft, including engine,
lessor during the year. equipment and spare parts thereof for
 Lease of residential units where the domestic or international transport operations
monthly rental per unit exceeds P12,800 [added by RA 9337];
but the aggregate of such rentals of the  The exemption from VAT on the importation
lessor during the year do not exceed and local purchase of passenger and/or
P1,919,500 shall likewise be exempt from cargo vessels shall be limited to those of
VAT, however, the same shall be subjected 150 tons and above, including engine and
to 3% percentage tax. spare parts of said vessels;
 In cases where a lessor has several  The vessels to be imported shall comply
residential units for lease, some are leased with the age limit requirement, at the time
out for a monthly rental per unit of not of acquisition counted from the date of the
exceeding P12,800 while others are leased vessel's original commissioning, as
out for more than P12,800 per unit, his tax follows:
liability will be as follows: o for passenger and/or cargo vessels,
(a) The gross receipts from rentals not the age limit is 15 years old,
exceeding P12,800 per month per o for tankers, the age limit is 10 years
unit shall be exempt from VAT old, and
regardless of the aggregate annual o for high-speed passenger crafts, the
gross receipts. age limit is 5 years old [RR 16-2005]
(b) The gross receipts from rentals (21) Importation of fuel, goods, and supplies by
exceeding P12,800 per month per persons engaged in international shipping or air
unit shall be subject to VAT IF the transport operations; [added by RA 9337]
aggregate annual gross receipts from  The said fuel, goods and supplies shall be
said units only (not including the used exclusively or shall pertain to the
gross receipts from units leased for transport of goods and/or passenger from
not more than P12,800) exceeds a port in the Philippines directly to a
P1,919,500. Otherwise, the gross foreign port without stopping at any other
receipts will be subject to the 3% tax port in the Philippines;
imposed under Sec. 116 of the Tax  If any portion of such fuel, goods or
Code. supplies is used for purposes other than
that mentioned in this paragraph, such
PAGE 157 OF 275
portion of fuel, goods and supplies shall be (8) Services rendered by proprietors, lessees or
subject to 12% VAT starting Feb. 1, 2006. operators of cockpits, cabarets, night or day
[RR 16-2005] clubs, boxing exhibitions, professional
(22) Services of banks, non-bank financial basketball games, jai-alai and race tracks; and
intermediaries performing quasi-banking (9) Receipts on sale, barter for exchange of shares
functions and other non-bank financial of stock listed and traded through the local
intermediaries subject to Percentage Tax; and stock exchange or through initial public offering.
(23) Sale or lease of goods or properties or the
performance of services other than the
transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of
P1,919,500
 For purposes of the threshold of
P1,919,500, the husband and the wife
shall be considered separate taxpayers.
However, the aggregation rule for each
taxpayer shall apply.
 For instance, if a professional, aside from
the practice of his profession, also derives
revenue from other lines of business which
are otherwise subject to VAT, the same
shall be combined for purposes of
determining whether the threshold has
been exceeded.
 The VAT-exempt sales shall NOT be
included in determining the threshold. [RR
16-2005]
Other Services Exempt from VAT – such services are

those subject to percentage tax (infra)
(1) Services rendered by domestic common carriers
by land for the transport of passengers and
keepers of garages;
(2) Services rendered by international air/shipping
carriers;
(3) Services rendered by franchise grantees of
radio and/or television broadcasting whose
annual gross receipts of the preceding year do
not exceed P10,000,000 and by franchise
grantees of gas and water utilities; [N.B. –
Compare with other franchise grantees which
are subject to VAT]
(4) Services rendered for overseas dispatch,
message, by franchise grantees or conversation
originating from the Philippines;
(5) Services by any person, company or corporation
(except purely cooperative
(6) companies or associations) doing life insurance
business of any sort in the Philippines;
(7) Services rendered by fire, marine or
miscellaneous insurance agents of foreign
insurance companies;
PAGE 158 OF 275

PAGE 159 OF 275

Summary table of VAT-exemptions (Sec. 109)
A Of agricultural and marine products in their original state

Sale or Of fertilizers; seeds, seedlings and fingerlings; prawn, livestock and poultry feeds. XPN  specialty
B importation feeds for race horses, fighting cocks, aquarium fish, zoo animals, and other animals generally
considered pets.
Of personal and household effects belonging to the residents of the Philippines returning from
C
abroad
Importation Of professional instruments and implements, wearing apparel, domestic animals and personal
D household effects, belong to persons coming to settle for the first time in the Philippines for their own
use and not for sale, barter or exchange.
E Subject to percentage tax
By agricultural contract growers and milling for others of palay into rice, corn into grits and sugarcane
F
into raw sugar
G Medical, dental, hospital and veterinary services XPN  those rendered by professionals
Services
Educational services rendered by private educational institutions duly accredited by DepEd, CHED,
H
and TESDA, and those by governmental educational institutions
I Rendered pursuant to an employer-employee relationship
J Rendered by a RAHQ established in the Philippines
Transactions which are exempt under international agreements to which the Philippines is a signatory
K
or under special laws, except those under PD 529 (Petroleum concessionaires)
L Sales By agricultural cooperatives duly registered with the CDA
Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the
M Services
CDA whose lending is limited to members
By non-agricultural, non-electric, and non-credit cooperatives duly registered and in good standing
N Sales
with the CDA. Provided, the share capital contribution of each member does not exceed 15K
By persons who are not VAT-registered
O Export sales
Of real property not primarily held for sale to customers or held for lease in the ordinary course of
P Sales business or sales within the low-cost cap of below P1,919,500 for a residential lot and P3,199,200
for a house and lot and other residential building
Q Lease Of a residential unit with a monthly rental not exceeding P12,800
Sale,
importation, Books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed
R
printing, or prices for subscription and sale and is not devoted principally to publication of paid advertisements .
publication
S Transport of passengers by international carriers (RA 10378)
Sale,
Of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for
T importation, or
domestic or international transport operations
lease
U Importation Fuel, goods, and supplies by persons engaged in international shipping or air transport operations
Of banks, non-bank financial intermediaries performing quasi-banking functions and other non-bank
V Services
financial intermediaries
Sale or lease Of goods or properties
W Performance of services other than the transactions mentioned in the preceding paragraphs, the
Services
gross annual sales and/or receipts do not exceed the amount of 1,919,500
PAGE 160 OF 275

Q. SOURCES OF INPUT TAX exempt from VAT under Sec. 109 of the Tax Code. (RR
16-2005)
(1) Purchase or importation of goods (evidenced by
VAT invoice/receipt) Note: A real estate dealer is entitled to claim
(a) For sale; or transitional input VAT based on the value of the entire
(b) For conversion into or intended to form part of (including the value of the land and the improvements
a finished product for sale including packaging thereon) real property sold regardless of whether there
materials; or was in fact actual payment of VAT on the purchase of
(c) For use as supplies in the course of business; the real property. At the time the purchase was made,
or there was still no VAT imposed. (Fort Bonifacio
(d) For use as materials supplied in the sale of Development Corp. v. CIR)
service; or
(e) For use in trade or business for which R. PERSONS WHO CAN AVAIL OF INPUT
deduction for depreciation or amortization is TAX CREDIT
allowed under the Code.
(2) Purchase of real properties for which VAT has Input tax on domestic purchase or importation of goods
actually been paid or properties shall be creditable:
(3) Purchase of services in which VAT has actually been (1) To the purchaser upon consummation of sale and
paid on importation of goods or properties; and
(4) Transactions deemed sale (2) To the importer upon payment of the VAT prior to
(5) Presumptive Input Tax the release of the goods from the custody of the
(6) Transitional Input Tax Bureau of Customs.
(a) The input tax on goods purchased or imported
Presumptive Input Tax (Sec. 111(B)) in a calendar month for use in trade or
Persons or firms engaged in the processing of sardines, business for which deduction for depreciation
mackerel and milk, and in manufacturing refined sugar is allowed under the Code, shall be spread
and cooking oil and packed noodle based instant meals, evenly over the month of acquisition and the
shall be allowed a presumptive input tax, creditable fifty-nine (59) succeeding months if the
against the output tax, equivalent to FOUR PERCENT aggregate acquisition cost for such goods,
(4%) of the gross value in money of their purchases of excluding the VAT component thereof, exceeds
primary agricultural products which are used as inputs One million pesos (P1,000,000). If the
to their production. aggregate acquisition cost does not exceed
P1,000,000, the total input taxes will be
―Processing‖ means pasteurization, canning and allowable as credit against output tax in the
activities which through physical or chemical process month of acquisition.19
alter the exterior texture or form or inner substance of a (b) However, if the estimated useful life of the
product in such manner as to prepare it for special use capital good is less than five (5) years, as used
to which it could not have been put in its original form for depreciation purposes, then the input VAT
or condition. shall be spread over such a shorter period
(3) To the purchaser of services or the lessee or
Transitional Input Tax (Sec 111) licensee upon payment of the compensation, rental,
Who may avail: (i) By a person who becomes VAT-liable royalty or fee.
for the 1st time, or (ii) any person who elects to be a VAT-
registered person Input tax on purchase of services, lease or use of
Rate: 2% Input VAT of the value of the beginning properties shall be creditable:
inventory on hand or actual VAT paid on such, goods, (1) To the purchaser upon payment of the
materials and supplies, whichever is HIGHER, which compensation, royalty or fee
amount shall be creditable against the output tax of (2) To lessee or licensee upon payment of the
VAT-registered person. compensation, royalty or fee
Tax base: The value allowed for income tax purposes on Claiming of input Tax on motor vehicles subject to the
inventories shall be the basis for the computation of the following conditions:
2% transitional input tax, EXCLUDING goods that are
19
Please refer below for the example.
PAGE 161 OF 275
(1) Purchase of vehicle must be substantiated with S.3. ALLOCATION OF INPUT TAX ON MIXED
official receipts and other records; TRANSACTIONS20
(2) Taxpayer has to prove the direct connection of the
motor vehicle to the business; There are four possible transactions a VAT-registered
(3) Only one vehicle for land transport is allowed for person may enter into:
the use of an official/employee with value not (i) VAT taxable,
exceeding P2.4 million; (ii) VAT-exempt,
(4) No depreciation shall be allowed for yachts, (iii) zero-rated VAT and
helicopters, airplanes (iv) sale to governments.
S. DETERMINATION OF OUTPUT/INPUT A VAT-registered person who is also engaged in

TAX; VAT PAYABLE; EXCESS INPUT TAX transactions not subject to VAT shall be allowed to
CREDITS recognize input tax credit on transactions subject to VAT
as follows:
(1) All the input taxes that can be directly attributed to
transactions subject to VAT may be recognized for
Output VAT – Input VAT = VAT Payable input tax credit. Input taxes that can be directly
attributable to VAT taxable sales of goods and
services to the Government or any of its political
S.1. DETERMINATION OF OUTPUT TAX subdivisions, instrumentalities or agencies,
(RR 16-2005) including GOCCs shall not be credited against
output taxes arising from sales to non-Government
Output VAT in a sale of goods/properties shall be entities
computed by multiplying the total amount indicated in (2) If any input tax cannot be directly attributed to
the invoice or receipt by 12%. either a VAT taxable or VAT-exempt transaction, the
input tax shall be pro-rated to the VAT taxable and
VAT-exempt transactions and ONLY the ratable
) portion pertaining to transactions subject to VAT
may be recognized for input tax credit.
Output VAT in a sale of services shall be computed by
multiplying the total amount indicated in the invoice or T. SUBSTANTIATION OF INPUT TAX
receipt by 12%. CREDITS
(1) INPUT TAXES must be substantiated and supported

) by the following documents, and must be reported
in the information returns required to be submitted
S.2. DETERMINATION OF INPUT TAX to the Bureau:
CREDITABLE (a) For the importation of goods = Import entry or
other equivalent document showing actual
(1) The sum of the excess input tax carried over from payment of VAT on the imported goods.
the preceding month or quarter and the input tax (b) For the domestic purchase of goods and
creditable to a VAT-registered person during the properties = Invoice showing the information
taxable month or quarter shall be reduced by the required under Secs. 113 (Invoicing and
amount of claim for refund or tax credit for value- Accounting Requirements for VAT-Registered
added tax and other adjustments, such as Persons) and 237 (Issuance of Receipts or
purchase returns or allowances and input tax Sales or Commercial Invoices) of the Tax Code.
attributable to exempt sale. (c) For the purchase of real property = public
instrument i.e., deed of absolute sale, deed of
(2) The claim for tax credit referred to includes not only conditional sale, contract/agreement to sell,
those filed with the BIR but also those filed with etc., together with VAT invoice issued by the
other government agencies, such as the Board of seller.
Investments the Bureau of Customs.
20
Please refer below for the example
PAGE 162 OF 275
(d) For the purchase of services = official receipt

showing the information required under Secs.
113 and 237 of the Tax Code.
A cash register machine tape issued to a
registered buyer shall constitute valid proof of
substantiation of tax credit only if it shows the
information required under Secs. 113 and 237
of the Tax Code.
(2) TRANSITIONAL INPUT TAX shall be supported by an

inventory of goods as shown in a detailed list to be
submitted to the BIR.
(3) Input tax on "deemed sale" transactions shall be

substantiated with the invoice required.
(4) Input tax from payments made to non-residents

(such as for services, rentals and royalties) shall be
supported by a copy of the Monthly Remittance
Return of Value Added Tax Withheld (BIR Form
1600) filed by the resident payor in behalf of the
non-resident evidencing remittance of VAT due
which was withheld by the payor.
(5) Advance VAT on sugar shall be supported by the

Payment Order showing payment of the advance
VAT.
PAGE 163 OF 275

Example regarding the input tax on goods where deduction for depreciation is allowed from RR 16-2005
Illustration: LBH Corporation sold capital goods on installment on October 1, 2005. It is agreed that the selling
price, including the VAT, shall be payable in five (5) equal monthly installments. The data pertinent to the sold assets are
as follows:
Selling Price - P 5,000,000.00 (exclusive of VAT)

Passed-on VAT - 500,000.00
Original Cost of Asset - 3,000,000.00
Accumulated Depreciation - 1,000,000.00
Unitilized Input Tax (Sold Asset) - 100,000.00
Accounting:
SELLER BUYER
Oct. 1, 2005 Oct. 1, 2005
Cash P 1,100,000.00 Asset P 5,000,000.00 Input
Installment Receivable 4,400,000.00 Tax 500,000.00
AccumulatedDepreciation 1,000,000.00
Output Tax 500,000.00 Cash 1,100,000.00
Asset 3,000,000.00 Installment Payable 4,400,000.00
Gain on sale of asset 3,000,000.00
To Record VAT Liability:

Output Tax 500,000.00 ------------
Input Tax 100,000.00
VAT Payable 400,000.00
Periodic Receipt of Installment:

Cash 1,100,000.00 Periodic Subsequent Payment:
Installment Receivable 1,100,000.00 Installment Payable 1,100,000.00
Cash 1,100,000.00
* The input tax of P 500,000.00 on the bought capital goods worth P 5,000,000.00 shall be spread evenly over a
period of 60 months starting the month of purchase.
If the depreciable capital good is sold/transferred within a period of five (5) years or prior to the exhaustion of the
amortizable input tax thereon, the entire unamortized input tax on the capital goods sold/transferred can be claimed
as input tax credit during the month/quarter when the sale or transfer was made but subject to the limitation
prescribed under Sec. 4.110-7 of these Regulations.
PAGE 164 OF 275

Example regarding the allocation of input tax on mixed transactions from RR 16-2005
Illustration: ERA Corporation has the following sales during the month:
Sale to private entities subject to 12% - P100,000.00

Sale to private entities subject to 0% - 100,000.00
Sale of exempt goods - 100,000.00
Sale to gov‘t. subjected to 5% final VAT WH - 100,000.00
Total sales for the month - P400,000.00
The following input taxes were passed on by its VAT suppliers:
Input tax on taxable goods (12%) - P5,000.00

Input tax on zero-rated sales - 3,000.00
Input tax on sale of exempt goods - 2,000.00
Input tax on sale to government - 4,000.00
Input tax on depreciable capital good
not attributable to any specific activity (monthly
amortization for 60 months) - P20,000.00
A. The creditable input tax for the month shall be computed as follows:
Input tax on sale subject to 12% - P 5,000.00

Input tax on zero-rated sale 3,000.00
Ratable portion of the input tax not directly attributable to any activity:
Taxable sales (0% and 12%) X Amount of input tax not directly attributable
Total Sales
P100,000.00 X P20,000.00 - P5,000.00

400,000.00
Total input tax attributable to sales - P9,000.00

to government
B. The input tax attributable to sales to government for the month shall be computed as follows:
Input tax on sale to gov‘t. - P 4,000.00

Taxable sales to the government X Amount of input tax not directly attributable
Total Sales
P100,000.00 X P20,000.00 - P5,000.00

400,000.00
Total input tax attributable to sales - P 9,000.00

to government
C. The input tax attributable to VAT-exempt sales for the month shall be computed as follows:
Input tax on VAT-exempt sales - P 2,000.00

PAGE 165 OF 275
VAT-exempt sales X Amount of input tax not directly attributable

Total Sales
P100,000.00 X P20,000.00 - P 5,000.00

400,000.00
Total input tax attributable to - P 7,000.00

VAT-exempt sales
PAGE 166 OF 275

U. REFUND OR TAX CREDIT OF EXCESS (iii) The claimed input tax must not have been
INPUT TAX (CF REFUND OF applied to any output tax during the period
covered and subsequent periods covered by
ERRONEOUSLY PAID TAXES) the claim.
(iv) The claimed input tax must have been declared
Who may claim for refund/apply for issuance of tax
from the VAT quarterly return.
credit certificate
(v) The claimed input tax are directly attributable
(1) Zero-Rated Sales (Sec. 112(A), NIRC)
to 0%-rated transactions.
(a) Any VAT-registered person, whose sales are
(vi) Acceptable foreign currency exchange
zero-rated or effectively zero-rated may apply
proceeds must have been duly accounted for
for the issuance of a tax credit
(vii) Claimed input tax must be duly supported by
certificate/refund of creditable input tax due
VAT invoices/receipts.
or paid attributable to such sales, EXCEPT
(viii) VAT returns for the succeeding quarters must
transitional input tax, to the extent that such
have been submitted.
input tax has not been applied against output
tax, within two (2) years after the close of the
(2) Cancellation of VAT Registration.
taxable quarter when the sales were made. The
(a) A person whose registration has been
input tax that may be subject of the claim shall
cancelled due to (i) retirement from or
exclude the portion of input tax that has been
cessation of business, or due to changes in or
applied against the output tax.
(ii) cessation of status under Section 106(C) of
(b) The acceptable foreign currency exchange
the Code may, within two (2) years from the
proceeds must have been duly accounted for in
date of cancellation, apply for the issuance of
accordance with the rules and regulations of
a tax credit certificate for any unused input tax
the Bangko Sentral ng Pilipinas (BSP) in the
which may be used in payment of his other
case of zero-rated transactions paid for in
internal revenue taxes.
acceptable foreign currency and requiring that
(b) He shall be entitled to a refund if he has no
such be accounted for in accordance with BSP
internal revenue tax liabilities against which
rules & regulations (Secs. 106(A)(2)(a)(1) and
the tax credit certificate may be utilized.
(2), and Sec. 106(A)(2)(b) and Sec. 108(B)(1)
and (2), NIRC).
Period to file claim/apply for issuance of tax credit
(c) Where the taxpayer is engaged in zero-rated or
certificate
effectively zero-rated sale and also in taxable
This period must be distinguished from normal tax
or exempt sale of goods of properties or
refunds for erroneous payments where an
services, and the amount of creditable input
administrative claim and judicial claim may be
tax due or paid cannot be directly and entirely
made together, and the reckoning point of the 2
attributed to any one of the transactions, it
years is from the date of the erroneous payment.
shall be allocated proportionately on the basis
(1) Application for issuance of tax credit certificate
of the volume of sales.
or refund of creditable input tax (except
(d) In the case of a person engaged in the
transitional input tax)
transport of passenger and cargo by air or sea
 WITHIN 2 YEARS after the close of the
vessels from the Philippines to a foreign
taxable quarter when the sale was made,
country, the input taxes shall be allocated
not from the payment of the VAT. Sec. 229
ratably between his zero-rated sales and non-
is not applicable in claiming refunds for
zero-rated sales (sales subject to regular rate,
subject to final VAT withholding and VAT- VAT.
exempt sales). (RR 16-2005)  If the VAT registration has been cancelled
due to retirement or cessation of business,
Requirements: (Summary) or change of status, the 2 year period shall
(i) The claimant should be a VAT-registered be after the date of cancellation
person (2) Administrative Claim
(ii) There should be an application filed with the  The CIR shall grant the tax credit/refund
BIR or DOF center, as the case may be, within within 120 days from the date of
2yrs after close of taxable quarter. submission of complete documents in
support of the application
PAGE 167 OF 275

 ―Complete Documents‖ is determined by

taxpayer himself. Information Contained in the VAT Invoice or VAT
 Taxpayer may only resort to a Judicial Claim Official Receipt:
within 30 days either after the end of the (1) A statement that the seller is a VAT-registered
120 day period or after a decision is made person, followed by his taxpayer's identification
by the Commission, whichever comes first. number (TIN);
(3) Judicial Claim (2) The total amount which the purchaser pays or is
 In case of denial of the application or the obligated to pay to the seller with the indication
expiry of the 120 days, the taxpayer may that such amount includes the VAT:
appeal to the CTA within 30 days from the (a) The amount of the tax shall be shown as a
receipt of said denial or inaction. separate item in the invoice/receipt;
(b) If the sale is exempt from VAT, the term
Manner of refund "VAT-exempt sale" shall be written or
Revenue Memorandum Circular no. 57-2013 printed prominently on the invoice or
(August 23, 2013): Unutilized creditable input taxes receipt;
attributed to zero-rated sales can only be recovered (c) If the sale is subject to zero percent (0%)
through the application for refund or tax credit. value-added tax, the term "zero-rated
There is no other mode of recovering unapplied sale" shall be written or printed
input taxes aside from an application for refund or prominently on the invoice or receipt;
tax credit. The Memorandum Circular also instructed (d) If the sale involves goods, properties or
the disallowance of unutilized creditable input taxes services some of which are subject to and
attributable to VAT zero-rated sales that is claimed some of which are VAT zero-rated or VAT-
as a deduction for income tax purposes. exempt, the invoice or receipt shall clearly
indicate the breakdown of the sale price
Refunds shall be made upon warrants drawn by the between its taxable, exempt and zero-rated
CIR or by his duly authorized representative without components, and the calculation of the
the necessity of being countersigned by the value-added tax on each portion of the sale
Chairman, Commission on Audit, the provisions of shall be shown on the invoice or receipt.
the Administrative Code of 1987 notwithstanding: The seller has the option to issue separate
provided that refunds shall be subject to post audit invoices or receipts for the taxable, exempt,
by the Commission on Audit. (Sec. 112(D), NIRC) and zero-rated components of the sale.
(3) The date of transaction, quantity, unit cost and
V. INVOICING REQUIREMENTS description of the goods or properties or nature
(Sec 113) of the service; and
(4) In the case of sales in the amount of one
Invoicing requirements in general thousand pesos (P1,000) or more where the
A VAT-registered person shall issue: sale or transfer is made to a VAT-registered
(1) A VAT invoice for every sale, barter or exchange person, the name, business style, if any,
of goods or properties; and address and taxpayer identification number
(2) A VAT official receipt for every lease of goods or (TIN) of the purchaser, customer or client.
properties, and for every sale, barter or (5) Name of buyer and seller
exchange of services
Only VAT-registered persons are required to print

their TIN followed by the word ―VAT‖ in their invoice
or ORs. Said documents shall be considered as a
―VAT Invoice‖ or VAT official receipt. All purchases
covered by invoices/receipts other than VAT
Invoice/VAT OR shall not give rise to any input tax.
[RR 16-05]
Note: VAT component of all transactions shall be

separately indicated in the VAT invoice or receipt.
(RR 18-2011)
PAGE 168 OF 275
PAGE 169 OF 275

Invoicing Requirements and Recording in Deemed Sale Transactions
Transaction Invoicing Requirement

Transfer, use or consumption not in the course of Memorandum entry in the subsidiary sales journal to record
business of goods or properties originally withdrawal of goods for personal use
intended for sale or for use in the course of
business
Distribution or transfer to shareholders/investors
Invoice, at the time of the transaction, which should include all
or creditors the info prescribed above; data in the invoice shall be duly
recorded in the subsidiary sales journal
Consignment of goods if actual sale is not made Invoice, at the time of the transaction, which should include all
within 60 days the info prescribed above; data in the invoice shall be duly
recorded in the subsidiary sales journal
Retirement from or cessation of business with An inventory shall be prepared and submitted to the RDO who
respect to all goods on hand has jurisdiction over the taxpayer‘s principal place of business
not later than 30 days after retirement or cessation from
business. An invoice shall be prepared for the entire inventory,
which shall be the basis of the entry into the subsidiary sales
journal. The invoice need not
enumerate the specific items appearing in the inventory
regarding the description of the goods. If the business is to be
continued by the new owners or successors, the entire amount
of output tax on the amount deemed sold shall be allowed as
input taxes.
PAGE 170 OF 275

Consequences of issuing erroneous VAT invoice or or excess input tax/over-payment as of the end of a
VAT official receipt quarter.
Issuance of a VAT Invoice or VAT Receipt by a non- Administrative and Penal Provisions (Sec 115)
VAT person (1) Suspension of business operations. In addition
If a person who is not a VAT-registered person issues to other administrative and penal sanctions
an invoice or receipt showing his Taxpayer provided for in the Tax Code and implementing
Identification Number (TIN), followed by the word regulations, the CIR or his duly authorized
"VAT", the erroneous issuance shall result to the ff: representative may order suspension or closure
(1) The non-VAT person shall be liable to: of a business establishment for a period of not
 Percentage taxes applicable to his less than five (5) days for any of the following
transactions; violations:
 VAT due on transactions under Section 106 (a) Failure to issue receipts and invoices.
or 108 of the Code, without the benefit of (b) Failure to file VAT return as required under
any input tax credit; and the provisions of Sec. 114 of the Tax Code.
 A 50% surcharge under Section 248 (B) of (c) Understatement of taxable sales or
the code; receipts by 30% or more of his correct
(2) The VAT shall, if the other requisite information taxable sales or receipt for the taxable
required is shown on the invoice/receipt, be quarter.
recognized as an input tax credit to the (d) Failure of any person to register as required
purchaser. under the provisions of Sec. 236 of the Tax
Code.
Issuance of a VAT Invoice or VAT Receipt on an (2) Surcharge, interest and other penalties. The
Exempt Transaction by a VAT-registered Person interest on unpaid amount of tax, civil penalties
If a VAT-registered person issues a VAT invoice or and criminal penalties imposed in Title XI of the
VAT official receipt for a VAT-exempt transaction, but Tax Code shall also apply to violations of the
fails to display prominently on the invoice or receipt provisions of Title IV of the Tax Code (VAT).
the term "VAT-exempt Sale:
(1) the transaction shall become taxable and the X. WITHHOLDING OF FINAL VAT ON
(2) issuer shall be liable to pay VAT thereon. SALES TO GOVERNMENT
(3) The purchaser shall be entitled to claim an (RR 16-2005)
input tax credit on his purchase. [RR 16-05]
General Rule: Withholding tax does not apply on
W. FILING OF RETURN AND PAYMENT transactions subject to VAT.
(Sec 114) Exceptions:
(1) Gross payments by the government shall be
VAT returns - VAT paid on a monthly basis. Payments subject to the 5% final withholding tax;
in the monthly VAT declarations shall be credited in (2) Gross payments by resident VAT-taxpayers to
the quarterly VAT return to arrive at the net VAT non-resident foreign persons of rentals,
payable or excess input tax/over-payment as of the royalties, reinsurance premiums, and services
end of a quarter. done in the Philippines—12% (Sec. 114(c),
(1) Filed by person liable to pay the VAT NIRC)
(2) Quarterly return of the amount of his gross sales
or receipts within twenty-five (25) days after the * Beginning Nov. 1, 2005, when R.A. 9337 became
close of each taxable quarter prescribed for effective, all sales of goods, properties, or services
each taxpayer. to the government shall be subject to the 5% final
(3) The monthly VAT Declarations of taxpayers withholding tax. The government shall, before
whether large or non-large shall be filed and the making payment on account of each purchase of
taxes paid not later than the 20th day following goods and/or services taxed at 12% VAT (Sec. 106
the end of each month. and 108) deduct and withhold a final VAT due at the
rate of 5% of the gross payment thereof.
Note: VAT paid on a monthly basis. Payments in the (Mamalateo, Reviewer on Taxation, 2008)
monthly VAT declarations shall be credited in the
quarterly VAT return to arrive at the net VAT payable Sales to Government
PAGE 171 OF 275
(1) The Government or any of its political

subdivisions, instrumentalities or agencies,
including GOCCs shall, before making payment
on account of each purchase of goods and
services which are subject to the VAT (Secs. 106
and 108, NIRC), deduct and withhold a final
VAT due at the rate of five percent (5%) of the
gross payment thereof.
The payment for lease or use of properties or
property rights to nonresident owners shall be
subject to 12% withholding tax at the time of
payment.
(a) The payor or person in control of the payment
is considered as the withholding agent.
(b) The VAT withheld shall be remitted within ten
(10) days following the end of the month the
withholding was made.
The 5% final VAT shall represent the net VAT payable
of the seller. The remaining 7% effectively accounts
for the standard input VAT, in lieu of the actual input
VAT directly attributable or ratably apportioned to
such sales. (This means that where the 5% final VAT
applies, the basic formula of output tax less input
tax does not apply.)
Should actual input VAT exceed 7% of the gross

payments, the excess may form part of the sellers‘
expense or cost. On the other hand, if actual input
VAT is less than 7% of gross payment, the difference
must be closed to expense or cost, in effect reducing
it.
However, 12% final VAT shall be withheld with

respect to the following:
(1) Lease or use of properties or property rights
owned by non-residents;
(2) Services rendered to local insurance companies,
with respect to reinsurance premiums payable
to non-residents; and;
(3) Other services rendered in the Philippines by
non-residents
PAGE 172 OF 275

VAT FORMULA (IN GENERAL)

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

Sales Discounts xxx xxx
Total Sales (Taxable Base) xxx

Multiplied by 12% 12%
Output VAT on sales or gross recipts xxx
Less: Input VAT on purchases and services xxx
Transitional Input VAT, if applicable xxx
Presumptive Input VAT, if applicable xxx
Input VAT Carry-over from previous period xxx
Creditable VAT withheld xxx xxx
Net VAT payable (refundable) xxx
MONTHLY RETURN
Gross Sales/Receipts for the Month xxx
Multiplied by VAT rate 12%
Output VAT xxx
Less Input Taxes:
Transitional/Presumptive Input Tax xxx
On taxable goods/services xxx xxx
Net VAT Payable xxx
Add Penalties:
Surcharge xxx
Interest xxx
Compromise xxx xxx
Total Amount Payable xxx
INVOLVING GOVERNMENT
When Actual Input VAT > Standard Input VAT: excess forms part of seller‘s expense/cost
When Actual Input VAT < Standard Input VAT: difference is treated as taxable other income
Sales xxx
Output VAT (Sales x 12%) xxx
Purchases xxx
Input VAT (Purchases x 12%) xxx
OUTPUT VAT Payable:

Output VAT xxx
Less: Actual Input VAT xxx
Standard Input VAT (Sales x 7%) xxx xxx
Cost of sale/Expense (Income and expense summary) xxx
Net VAT Payable xxx
Less: Creditable Withholding Tax (Sales x 5%) xxx
Output VAT Payable xxx
PAGE 173 OF 275

Quick Notes on VAT
Transactions subject to VAT

General Requirements
(1) Done in the course of trade or business (w/n profit-oriented): rule of regularity + incidental thereto (inc isolated)
EXCEPTION:
(a) NRC/NRA who perform services in Phil, even if no regularity
(b) Importation of Goods may be for business or non-business use
(2) Gross sales or receipts for the past 12 months or the next 12 months > 1,919,500php
OR there are reasonable grounds to believe
Taxable Transactions and Specific Requirements

(1) SBEL of Goods or Properties21
Goods/Personal Properties
(i) Actual/deemed sale (4) for a valuable consideration
(ii) for use or consumption in the Phil (regardless of the payment arrangements)
(iii) not exempt from VAT (NIRC, special law, special agreement)
Real Properties22:
(i) Seller (w/n natural) executes contract to SBE of RP
(ii) RP is in the Phil
(iii) Seller is engaged in sale or exchange of RP or real estate (dealer, developer, lessor)
(iv) RP is held primarily for sale/lease ICT/B or an ordinary asset used in T/B as an incident to his vatable
activity (NOT a capital asset)
not exempt from VAT (NIRC, special law, special agreement
(2) Sale of Services23
(i) for a valuable consideration (actually/constructively received)
(ii) performed ICTB in the Phil.
(iii) not exempt from VAT (NIRC, special law, special agreement)
(iv) person rendering service is VAT-liable
(v) no ee-er relationship
(3) Importation of Goods
Persons Liable to pay VAT

(1) Any person who Sells, Barters, Exchanges or Leases (SBEL) goods or properties
if real property: persons engaged in real estate business:
(i) Any person who SBE real properties in the course of trade or business (ICT/B)
(ii) Real estate lessors/ sub-lessors
(iii) NRA/NRC lessors when Real Property is in the Phil
21
Sec 106
22
Casual Sale (Capital Assets) Subject to CGT (6%)

Regular Sales (Ordinary
Assets)
Commercial Property Subject to 12% VAT
(Sale/Lease)
Residential Units (Lease) If monthly rental ≤ 12,800 = VAT and OPT-exempt
If monthly rental > 12,800 but aggregate annual rentals ≤1,919,500 = subject to OPT
If monthly rental > 12,800 and aggregate annual rentals > 1,919,500 = subject to VAT
Residential Lot If SP > 1,919,500.00 = subject to VAT
IF SP ≤ 1,919,500.00 = VAT-exempt
Residential House and If SP > 3,199,200.00 = subject to VAT
Lot IF SP ≤ 3,199,200.00 = VAT-exempt
23
Sec 108
PAGE 174 OF 275
(iv) Non-stock, non-profit corporations engaged in SBE of real properties ICT/B, regardless of disposition of
income
(v) Gov‘t inc GOCCs in SBEL of RP ICT/B
(2) Renders services
(3) Imports goods
 if importer is tax-exempt/VAT-exempt AND goods are subsequently SBE to non-exempt persons,
purchasers/recipients = importer
 if the Philippine branch of an NRFC ―imported‖, first local buyer = importer
Tax Bases of VAT

(1) Gross (Sales) Selling Price: total amount of money paid in consideration of SBEL
 excludes: VAT, sales discounts24 and, allowances and returns (2)
 includes: Excise tax paid, initial payments25, interests and penalties (if instalment), commission income (if
exported), purchase price, charges for packing, delivery and insurance
o If goods/personal properties,
 GSP = amount paid in consideration
 IF DEEMED SALE: FMV at the time of the transaction
 NB: in retirement/cessation, inventory (raw materials, finished goods, machinery, equipment,
furniture, fixture), tax base = whichever is lower,
(i) acquisition cost
(ii) current market price of goods
o If real property,
 GSP = amount higher:
i. consideration stated in the sales document
ii. FMV, whichever is higher of
 Zonal value: FMV as determined by CIR
 Real Property Tax Value: FMV as determined by provincial & city assessors
o IF ON INSTALLMENT:
GSP = down payments received + interests + penalties + other charges – amount of mortgage (paid)
NB: If zonal/FMV, tax base =
)
)
Upon full collection, if a difference is uncovered because the zonal value or market value at the date of
sale is higher than the total receipts or collections based on the agreed consideration, the additional VAT
shall be paid accordingly (RMC 03-96)
NB:
o IF DEFERRED Deferred Payments (initial > 25% GSP)
Instalment Plan (initial ≤ 25% GSP)
GSP = entire selling price or zonal/FMV, whichever is higher
NB: CIR has the power to determine the appropriate tax base in 1) SBE in deemed sales and 2) when
GSP is unreasonably lower than AMV26
(2) Gross Value in money of goods
(3) Gross Receipts derived from transaction: total amount of money/equivalent = contract price + compensation +
service fee + rental fee + royalties + amount charged for materials supplied with the services + deposits and
24
It should be determined at the time of the sale, indicated in the invoice and granting does not depend on the happening
of a future event
25
Initial payments does not include the amount of mortgage on RP sold (except excess when mortgage exceeds the cost
of the property), notes and other evidence on=f indebtedness issued by the purchaser at the time of the sale
26
GSP is unreasonably lower than the actual market value if it is lower than 30% of AMV of the same goods of the same
quantity or quality sold in the immediate locality or the nearest date of sale.
PAGE 175 OF 275
advanced payments actually or constructively received + costs items of construction projects – (VAT + amounts
earmarked for payments to unrelated 3rd party + amounts received as reimbursement + monies/receipts held in
trust w/c do not redound to the benefit of taxpayer + universal charge passed on and collected by distribution
companies and electric coop (if sale of electricity) + receivables + local taxes)
IF DEALER IN SECURITIES: gross selling price – cost of securities sold
(4) Total Value/Landed Cost (determined on the basis of quantity/volume of goods)

Total Value used by Customs: tariff and customs duties + custom duties +excise tax + charges
Landed Cost: invoice amount inc. cost of loading, shipping, unloading, + custom duties + freight + insurance +
other charges +excise tax – expenses incurred after release of goods (e.g., cost of delivery)
 Customs duty: amount of customs duty legally due and paid by the importer
 Charges: special import tax,foreign marginal fees, bank and arrastre charges, wharfage dues, broker fees,
other charges paid to complete importation
Rates of VAT
(A) Output Tax (Sale/Barter/Exchange/Lease)
(1) 12% standard rate: applied directly to TB
(2) 0%: applied directly to TB
(B) Input Tax (Purchase from VAT-registered businesses/Importation of goods)
(1) 12% standard rate: applied directly to TB
(2) 0%: applied directly to TB
(3) 2% transitional VAT (: applied to the (inventory on hand) value of goods (exc. VAT-exempt good) existing at the
date a person commences business and/or becomes liable to VAT) or 12% actual input tax rate, higher
(4) 4% presumptive input tax rate: applies to purchases of VAT-exempt goods used as inputs by a VAT-registered
person in manufacturing or processing certain food products
(5) 7% FWT (standard input VAT, when government), 5% withholding
Creditable Input VAT Requirements

(1) Proper documentation
(2) No double input tax credit is allowed.
 Input VAT on a particular purchase transaction can be claimed once only upon consummation of the sale of
goods and based on the entire GSP (whether paid on cash, credit or instalment)
(3) Ignore erroneous VAT rate. The correct rate of input VAT can still be claimed.
(4) Transactions should have been made with VAT-registered persons.
(5) IF MIXED TRANSACTIONS and input VAT cannot be directly attributable::
Formula Input Tax Treatment

)
Untraceable Input VAT x Creditable Input VAT
- )
Untraceable Input VAT x Input VAT Credit, eligible for tax refund or TCC
- )
Untraceable Input VAT x Cost of Sales or Operating Expense
) Compare to Standard Input VAT (Creditable against
Untraceable Input VAT x Standard input VAT)
NB: Creditable Input VAT is

(1) increased by any input VAT carried over from the preceding month or quarter
(2) decreased by
PAGE 176 OF 275
(i) amount of the claim for refund or tax credit for VAT filed during the same period
(ii) input tax attributable to exempt sales and unauthorized input tax attributable of depreciable capital goods
(iii) amount of input VAT wrt uncollected portion of instalment receivable in instalment sales
VAT-EXEMPT and 0% VAT

VAT-Exempt 0% VAT
 Non-VAT taxable transaction  Taxable transaction
 Taxpayer is relieved from payment of VAT for w/c he is
directly liable
 NO output and input VAT  No output VAT, but input VAT is available as tax credit or
 Optional VAT Registration refund
 Partial relief  Total relief
 Only removes VAT at the exempt stage  All VAT is removed at whatever stage
SALE OF SERVICES
VAT-Exempt 0% VAT
NB: There are 31 VAT-exempt sales of services (Sec 109 (1) Processing, manufacturing, repacking goods to non-
and special laws) resident (5)
(2) Processing, manufacturing, repacking goods to
(1) For lease of property =exempt export-oriented (3)
 if advance payment = loan, option money, (3) Services other than processing, manufacturing,
security deposit repacking (4)
 NB: if security deposit is applied to rental = VAT (4) Services to exempted persons (3): effectively 0-rate
(2) For persons engaged in milling, processing, (5) Sale of power/fuel-generated through renewable
manufacturing or repacking goods = exempt resources (3)
 if palay  rice; corn  corn grits; sugar cane  (6) Services rendered to int‘l shipping/air transport (2)
raw sugar (7) Transport of passengers and cargo by air from Phil to
(3) For franchise grantees of electric utilities, telephone Foreign (3)
and telegraph, radio and/or television broadcasting = (8) Transactions of VAT-reg person to foreign embassies
exempt (2)
 if annual gross receipts <= 10M;
franchise grantees of gas and water utilities;
of telephone & telegraph services, amounts
received for overseas dispatch from Phil.
(4) For PREMIUMS of insurance companies = exempt IF
 life and disability insurance;
crop insurance; health and accident insurance
(included are only those with exceptions) Exceptions to the Exemptions (Subject to VAT)
1. Sale/import of agricultural & marine food products in (1) Livestock and poultry DOES NOT INCLUDE fighting
their original state; livestock and poultry (used/yield cocks, race horses, zoo animals and pets
for human consumption); breeding stock and genetic (2) DOES NOT INCLUDE vehicles, vessels, aircrafts,
materials machineries, and other goods for use in
2. Import of professional instruments, implements, manufacturing in commercial quantities
wearing apparel, domestic animals, and personal (3) DOES NOT INCLUDE those under Petroleum
household effects Exploration Concessionaires under Petroleum Act of
3. Transactions exempt pursuant to special laws 1949
4. Cooperatives (4) For sales by agricultural coops to non-members, if
5. Residential lots ≥ 1,919,500 & lot & dwellings ≥ seller is the member = VAT
3,199,200 For sales by non-agri, non-electric and non-credit,
6. lease of residential units, importation of machineries and equipment = VAT
 if ≤ 12,800/unit/month (regardless of aggregate (5) DOES NOT INCLUDE parking lot
amount); (6) If any portion of such goods are used for purposes
PAGE 177 OF 275
 if ≥ 12,800/unit/month (AND aggregate amount other than those stated = VAT

is ≥ 1,919,500)
(5) importation of fuels, goods, supplies by international
shipping or air transport
SALE OF GOODS
VAT-Exempt 0% VAT
Real Property Actual Export Sales (3)
(i) Not primarily held ICT/B
(ii) Low-cost or socialized housing Deemed Export Sales
(iii) Residential lot <= 1,919,500 (i) Internal or constructive export sales
(iv) House and/or other residential dwellings <= (a) Raw/Packaging materials to non-resident buyer (5)
3,199,200 (b) Raw/Packaging materials to export-oriented (3)
(v) Lease (12,800/unit/year or total 1,919,500/year) (c) Phil. Port FOB value of export products (2)27
(vi) Transmission to a trustee (d) Net selling price of export products (4)28
Except: if transmission is deemed sale (e) sales to bonded manufacturing warehouses (2)29
(vii) Transfer to corporation in exchange of SoS (f) sales to export processing zones30
(viii) Advance payments/Security Deposits in lease (g) sales to enterprises duly accredited by Subic Bay
E: if applied to the rent Metropolitan Authority (2)
(h) sales to registered export traders (3)
As regards ecozones and PEZA-registered entities (i) sales to diplomatic missions etc. (2)
(i) Made by VAT-exempt supplier from customs (j) sale by VAT-supplier to manufacturer/producer whose
territory to any registered enterprise inside ecozone products are 100% exported (3)
(ii) Intra-ecozone enterprise sale of service, if PEZA (ii) Sale of gold to BSP
registered seller is subject to 5% special tax regime (iii) Sale of goods/supplies/equipment/fuel to persons engaged
(iii) Intra-ecozone sales of goods in int‘l shipping/air transport (4)
(iv) Docking/Undocking services to foreign vessels
Foreign currency denominated goods

(i) To a NRC/NRA of goods (5)
(ii) To a NRC/NRA of goods locally manufactured for household
and personal use (2)
E: automobiles and non-essential goods
Effectively-zero rated sales (3)

(i) Made by VAT registered supplier from customs territory to any
registered enterprise inside ecozone
(ii) Intra-ecozone enterprise sale of service, if PEZA registered
seller is subject to NIRC taxes
27
Under Omnibus Investment Code (EO226)
28
Ibid
29
RA7227
30
RA 7916
PAGE 178 OF 275
Taxable Activity/Property TR Tax Base Tax Payable

Actual SBE of Goods or Properties Gross Selling Price
Goods/ Personal Properties = amt. paid to the seller
Real Properties 12% = consideration/FMV, higher
IF sale is on instalment
plan AND ZV/FMV > SP = )
(excluding VAT)
VAT Payable paid
Deemed Sale Transactions
by
Not ICB/T, but originally seller/transferor
intended for sale/use ICB/T FMV (at the time of transaction)
Transfer to SH in share of profit E: if FMV is unreasonably lower (by more than 30% of AMV) = AMV or
or Cr in payment of debt 12% determined by CIR
Consignment after 60d
Retirement/Cessation of
Acquisition Cost or current market price, lower
business
VAT Payable paid
Sale of Services 12% Gross receipts derived
by performer
Importation of Goods Total Value used by BOC VAT paid by
In general =tariff & custom duties + custom duties + excise tax + charges importer PRIOR
12% to the release of
When custom duties are based
= landed cost + excise tax goods in
on quantity or volume
Customs custody
(1) Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input tax credit beginning on the
first day of the month following registration.
(2) The cancellation for registration will be effective from the first day of the following month the cancellation was approved.
(3) What is the treatment for Withholding of VAT on Government Money Payments?
 The government or any of its political subdivisions, instrumentalities or agencies, including government-owned or
controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or services
taxed at twelve percent (12%) VAT pursuant to Sections 106 and 108 of the Tax Code, deduct and withhold a Final VAT due
at the rate of five percent (5%) of the gross payment.
 The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller. The remaining seven
percent (7%) effectively accounts for the standard input VAT for sales of goods or services to government or any of its
political subdivisions, instrumentalities or agencies including GOCCs in lieu of the actual input VAT directly attributable or
ratably apportioned to such sales. Should actual input VAT attributable to sales to government exceeds seven percent (7%)
of gross payments, the excess may form part of the sellers' expense or cost. On the other hand, if actual input VAT
attributable to sale to government is less than seven percent (7%) of gross payment, the difference must be closed to
expense or cost.
 The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as private
corporation, individuals, estates and trusts, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT
with respect to the following payments:
(i) Lease or use of properties or property rights owned by non-residents; and
(ii) Other services rendered in the Philippines by non-residents.
PAGE 179 OF 275

Before start of business or within VAT-registered Person
VAT-Exempt Person 10d before the beginning of
(w/ TIN)
(cannot be cancelled w/in taxable quarter
3years; franchise of radios/tv VAT AND NON-VAT REGISTRATION
broadcasting, irrevocable)
Compliance activities after registration:
Optional Registration Registration Fee (500php) to
1. Registration of books of accounts (3) of the
authorized bank agent, Certificate of business/occupation/calling including practice of
RDOfficer, Rev Collection Officer,
Registration profession, before using the same.
Before start of business authorized city/municipal
Register to RDO 2. Registration of sales invoices and official receipts (If
and every year thereafter treasurer
(on/before Jan 31)
for every there are transactions not subject to VAT, registration
separate and of non-VAT invoices or non-VAT official receipts)
EXEMPT from 500php
distinct 3. Annual Registration: Pay registration fee for every place
1. if aggregate gross
establishment APPROVE of business that generates sales after updating the
Person Liable sales/receipts ≤ 100,000;
registration records.
for VAT 2. cooperative;
4. Filing of the Monthly VAT Declaration and Quarterly VAT
3. individuals earning pure
compensation income; Return to be submitted to RTO/LTDO
4. overseas workers
Did not register:
 Still liable for VAT DENY
 No input credit
CANCELLATION/UPDATE OF VAT REGISTRATION (registration of
a taxpayer of a franchise grantee of radio and/or tv broadcasting whose gross
annual receipts≤ 10,000,000 = irrevocable)
Before start of business or within Certificate of Non-VAT Cancellation/Update Minor change in original
10d before the beginning of registration
taxable quarter necessitating cancellation
APPROVE w/in 15d
w/in 25d from
Registration Fee (500php) to cancellation
from change
Register to RDO authorized bank agent,
for every RDOfficer, Rev Collection Officer, Filing of Short Period Return (for
separate and authorized city/municipal the remaining period that he was Notice of Change (f
distinct treasurer VAT-reg) change of address)
establishment DENY
EXEMPT from 500php
if aggregate gross sales/receipts Instances when a taxpayer may
≤ 100,000; cooperative; CANCEL his registration:
individuals earning pure 1. When TP‘s gross sales/receipts for the following 12 months ≤ 1,919,500
compensation income; overseas 2. When TP has ceased to carry on his T/B and does not expect to recommence within 12m
workers 3. In case of a single proprietorship, a change of ownership
4. Dissolution of a partnership or corporation
5. Merger/consolidation wrt dissolved corporations
6. Person who registered prior to planned business commencement but failed to actually start business
UPDATE his registration:

1. When TP‘s business has become exempt
2. When there is a change of the nature of business (from vatable to exempt)
3. When TP a tax-exempt individual who applied for optional registration and cancelled his registration after 3yrs.
RE applications for VAT zero-rating: Taxpayers shall file their application directly with the Audit 4. When TP is a VAT-registered person whose gross sales/receipts for 3 consecutive years ≤ 1,919,500
Information, Tax Exemption and Incentives Division (AITEID) under the Assessment Service, or with the
LTAID I and II, BIR National Office, as the case may be. PAGE 180 OF 275
VAT REFUND OR VAT CREDIT CERTIFICATE
VAT- registered cancelling

their registration (regardless
of the source of input tax)
w/in 2 years after close of
the taxable quarter when
sales are made
Input Tax wrt Zero-rated and Application for w/in 2 years after
Effectively zero-rated Sales refund or TCC to close of the taxable
Direct Tax CIR + supporting quarter when sales
docs are made
Credit
VAT-registered
Taxpayer Presumptive Input Tax
w/in 120 days
Transitional Input Tax w/in 120 days
Carry-over Tax from
If VAT-exempt Actual Input Tax not related to from submission
changes his zero-rated sales Credit submission
status to VAT-
registered = GRANTED
transitional input
tax VAT-exempt Transactions DENIED INACTION
w/in 30 days w/in 30 days from

Non-VAT Apply against OUTPUT from receipt of expiration of 120-
Taxpayer VAT denial days
Appeal to CTA ISSUANCE
Related INPUT VAT shall be

NO INPUT TAX treated as a cost of sale or
operating expense
DENIED GRANTED
Related INPUT VAT shall Related OUTPUT VAT

be treated as cost of shall be treated as an
purchases operating expense Tax Credit Tax Refund
Certificate
PAGE 181 OF 275

No return filed – 10 years from date of discovery of

IV. Tax Remedies under omission
 Criminal offense
the NIRC o 5 years from date of commission, and if
not known then, from discovery and the
A. TAXPAYER’S REMEDIES institution of judicial proceedings for its
investigation and punishment.
(1) ADMINISTRATIVE (BIR)
(a) Before payment Assessment
(i) Filing a petition or reconsideration or (i) Concept of assessment
reinvestigation; and Assess means to impose a tax; to charge with
(ii) Entering into a compromise a tax; to declare a tax to be payable; to apportion a tax
(b) After payment to be paid or contributed, to fix a rate; to fix or settle a
(i) Filing a claim for refund; and sum to be paid by way of tax; to set, fix or charge a
(ii) Filing a claim for tax credit certain sum to each taxpayer; to settle determine or fix
the amount of tax to be paid (84 C.J.S 74-750)
(2) JUDICIAL (CTA/RTC) An assessment is the notice to the effect that
(a) Civil action the amount therein stated is due from a taxpayer as a
(i) Appeal to the CTA tax with a demand for payment of the same within a
(ii) Action to contest forfeiture of chattel; and stated period of time. (CIR v. CTA, 27 SCRA 1159)
(iii) Action for damages
(b) Criminal action Forms of assessment
(i) Filing a criminal complaint against erring 1. Self-assessment – Assessments made by
BIR officials and employees taxpayers who then file returns.
2. Deficiency assessment – Assessments made
Periods: by the BIR after the conduct of an investigation
 Assessment (3 or 10 years) or audit when it finds that the tax return filed
o Return was filed by the taxpayer contains an under-declaration
(i) Not false or fraudulent – 3 years from of income or when the taxpayer does not at all
date of filing of the return OR date file a tax return.
legally due or actual date of filing 3. Jeopardy assessment (Section D, infra)
after it wad due, whichever is LATER
(ii) False or fraudulent – 10 years from A. Requisites for valid assessment
date the fraud or falsity was
discovered (a) The taxpayer shall be informed in writing of the law
o No return filed – 10 years from the and the facts on which the assessment is made
discovery of omission (Sec. 228, NIRC)
 Collection (3 or 5 years) (b) An assessment contains not only a computation of
o Collections with assessments – 5 years tax liabilities, but also a demand for payment
from date of finality of assessment (FAN if within a prescribed period (CIR v. PASCOR)
unprotested or the Final Decision on (c) An assessment must be served on and received by
Disputed Assessment [FDDA] if protested) the taxpayer (CIR v. PASCOR)
o Collections without assessments –must
be made within the period of making an Note: The presumption of the correctedness of
assessment. assessment CANNOT be made to rest on another
(i) With a REGULAR return filed, i.e., one presumption, e.g., presumption of regularity of
which is not false or fraudulent – 3 performance of official functions.
years from date of filing of the return
OR date or actual date of filing after it B. Constructive methods of income determination
was due, whichever is LATER (a) Rely upon circumstantial evidence of determining
(ii) Return filed was false or fraudulent – the correct income or transaction of a taxpayer
10 years from date of discovery of (Indirect Method)
fraud or falsity (b) Expenditure Method: It proceeds on the theory that
where the amount of money which a taxpayer
PAGE 182 OF 275
spends during a given year exceeds his reported books of accounts and/or pertinent records, or to
income, and the source of such money is otherwise substantiate all or any of the deductions, exemptions,
unexplained, it may be inferred that such or credits claimed in his return. (As defined in Sec.
expenditures represent unreported income. 3(1)(a), RR 30-2002 for the purposes of entering into a
(c) Percentage Method: This method is a computation compromise)
whereby determinations are made by the use of
percentages or ratios considered typical of the E. Tax delinquency and tax deficiency
business under investigation. By reference to
similar business or situations, percentage Deficiency is defined as the amount still due and
computations are secured to determine sales, collectible from a taxpayer upon audit or investigation;
gross profit or even net profit. whereas delinquency is defined as the failure of the
(d) Unit and Value Method: The determination of gross taxpayer to pay the tax due on the date fixed by law or
receipts may be computed by applying price and indicated in the assessment notice or letter of demand.
profit figures to the known ascertainable quality of Deficiency interest is imposed for the shortage of taxes
business done by taxpayer paid, while delinquency interest is imposed for the
delay in payment of taxes. [Takenaka Corporation
C. Inventory method for income determination (Net Philippine Branch v. CIR (2012); First Lepanto Taisho
Worth Method) Insurance Corporation v. CIR, (2013)]
Holland v. US: In a typical net worth prosecution, the
Government, having concluded that the taxpayer's Deficiency Delinquency
records are inadequate as a basis for determining Basic tax +
income tax liability, attempts to establish an "opening Base Basic tax deficiency interest
net worth" or total net value of the taxpayer's assets at and surcharge
the beginning of a given year. It then proves increases in From the due date
From the date
the taxpayer's net worth for each succeeding year appearing in the
Reckoning prescribed for its
during the period under examination, and calculates notice and demand
payment until the
the difference between the adjusted net values of the date of the CIR until the
full payment thereof
taxpayer's assets at the beginning and end of each of amount is fully paid
the years involved. The taxpayer's nondeductible
Rate
expenditures, including living expenses, are added to 20% p.a.
these increases, and if the resulting figure for any year
is substantially greater than the taxable income Tax Delinquency v. Tax Deficiency
reported by the taxpayer for that year, the Government Tax Delinquency Tax Deficiency
claims the excess represents unreported taxable It is when: It is when:
income. Self-assessed taxpayer filed The amount of tax imposed
his tax return but did not by law is greater than the
Formula pay or only partially paid the amount shown in the tax
Increase in Net worth tax return
Add: Non-deductible Item
Deficiency Tax assessed by If no amount is shown in the
Less: Non-taxable income or receipts subjected to the BIR became final and return, or if there is no
final tax transfer taxes executory return, amount by which the
Taxable Net Income tax as determined by the
Less: Personal and additional exemptions CIR exceeds the amount
NET INCOME SUBJECT TO TAX previously assessed as a
deficiency
D. Jeopardy assessment CAN be collected CANNOT be immediately
IMMEDIATELY through collected. CAN be collected
Under BIR Regulations, a jeopardy assessment is a tax 1. Administrative Actions only AFTER the process of
assessment which was assessed without the benefit of (warrant of distraint or levy) protest
2. Judicial Actions
complete or partial audit by an authorized revenue Thus, a civil action for
officer, who has reason to believe that the assessment Thus, civil action for collection to ordinary courts
and collection of a deficiency tax will be jeopardized by collection to ordinary courts pending protest may be
delay because of the taxpayer‘s failure to comply with is the proper remedy. subject to Motion to
the audit and investigation requirements to present his Dissmiss
PAGE 183 OF 275
SUBJECT to administrative SUBJECT to administrative lapse if the period previously agreed upon in a
penalties of: penalties of: prior agreement;
1. 25% surcharge 1. interest iii. Indicate the definite agreed date;
2. interest 2. compromise penalty iv. Indicate the date of acceptance, which must
3. compromise penalty be before the expiration of the period to
Mamalateo: Reviewer on Taxation (2014) assess or to collect taxes, or before the lapse
(ii) Power of the CIR to make assessments and of the period agreed upon in a prior
prescribe additional requirements for tax agreement; and
administration and enforcement v. Taxpayer must be furnished with a copy of the
waiver.
Powers of the CIR –
1. Examination of returns and determination of tax due Suspension of running of statute of limitations
2. Use of the best evidence obtainable 
3. Authority to conduct inventory-taking, (1) Period during which the CIR is prohibited from
surveillance, and to prescribe presumptive gross sales making the assessment or beginning distraint or
and receipts  levy or a proceeding in court, and for sixty (60) days
4. Authority to terminate the taxable period  thereafter
5. Authority to prescribe real estate values  (2) When the taxpayer requests for a reinvestigation
6. Authority to inquire into bank deposits  which is granted by the CIR
7. Authority to accredit and register tax agents  (3) When the taxpayer cannot be located in the
8. Authority to prescribe additional procedural or address given by him in the return filed upon which
documentary requirements a tax is being assessed or collected, BUT if the
9. Obtain information, and to summon/examine, and taxpayer informs the CIR of any change in address,
take testimony of persons the running of the statute of limitations shall not be
suspended
(iii) When assessment is made (4) When the warrant of distraint or levy is duly served
Prescriptive period for assessment (Sec. 203, NIRC) upon the taxpayer, his authorized representative, or
General Rule: 3 years a member of his household with sufficient
 If the taxpayer filed a return: internal revenue taxes discretion, and No Property is located
shall be assessed within 3 years after the last day (5) When the taxpayer is out of the Philippines
prescribed by law for the filing of the return.
 If a return is filed beyond the period prescribed by (iv) General provisions on additions to the tax
law: the 3-year period shall be counted from the (a) Civil penalties (Sec. 248, NIRC)
day the return was filed. 1. 25% surcharge
a. Failure to file a return and pay tax due
Exception: (i) False return, (ii) Fraudulent return with thereon
intent to evade tax, (iii) Failure to file a return (Sec. 222, b. Filing with unauthorized revenue office
NIRC) c. Failure to pay deficiency tax within time
prescribed in assessment notice
NB: Waiver d. Failure to pay full or part of the amount
The taxpayer and the CIR may agree in writing, before shown in ITR required to be filed or the full
the expiration of the time prescribed in Sec. 203, to amount of tax due for which no return is
extend the period of assessment (Sec. 222(b), NIRC) required to be filed on or before the date
(1) The waiver of prescription must be executed prescribed for its payment
properly, otherwise, invalid and results to 2. 50% surcharge
prescription of the right to assess/collect. a. Willful neglect to file the return within the
(Philippine Journalists Inc. vs. CIR, December 16, period prescribed
2004) b. False or fraudulent return is willfully made
(2) Requirements for a valid waiver under RMO 20-90 (b) Interest (Sec. 249)
and RMO 14-2016: 1. General – there shall be assessed and
i. In writing (may be but need not be notarized); collected any unpaid amount of tax, interest at
ii. Indicate the date of execution by the taxpayer, the rate of 20% per annum or such higher rate
which must be before the expiration of the as may be prescribed from the date prescribed
period to assess or collect taxes, or before the for payment until fully paid
PAGE 184 OF 275
2. Deficiency interest – 20% p.a. on the tax due

3. Delinquency interest – 20% p.a. on the unpaid The notice for informal conference and the PAN shall
amount of not be required in any of the ff cases, in which case,
a. Failure to pay the amount of tax due on issuance of the Formal Assessment Notice (FAN) shall
any return required to be filed be sufficient:
b. Failure to pay the amount of tax due for 1. The finding for any deficiency tax is the result
which no return is required of mathematical error in the computation of
c. Failure to pay a deficiency tax or the tax as appearing on the face of the return;
surcharge or interest thereon on the due or
date appearing on the notice and 2. A discrepancy has been determined between
demand of the CIR the tax withheld and the amount actually
4. Interest on extended payments – if any person remitted by the withholding agent; or
is qualified and elects to pay installments but 3. A taxpayer who opted to claim a refund or tax
fails to pay the tax or any installment on or credit of excess creditable withholding tax for
before the date prescribed, there shall be a taxable period was determined to have
assessed and collected interest at the rate of carried over and automatically applied the
20% per annum on the tax or deficiency tax or same amount claimed against the estimated
part thereof unpaid tax liabilities for the taxable quarter or
(c) Compromise penalties quarters of the succeeding taxable year; or
4. The excise tax due on excisable articles has
ADMINISTRATIVE REMEDIES not been paid; or
5. An article locally purchased or imported by an
Assessment process [Sec. 228, NIRC; RR 12-99; RR exempt person, such as, but not limited to,
18-13] vehicles, capital equipment, machineries and
(a) Tax audit – In a tax audit, revenue officers examine spare parts, has been sold, traded or
the books of account and other accounting records of transferred to a non-exempt person.
taxpayers to determine the correct tax liability. This is
through the issuance of a Letter of Authority. (e) Reply to preliminary assessment notice (PAN)
Letter of Authority: An official document that empowers Taxpayer is given 15 days from date of receipt of PAN to
a Revenue Officer to examine and scrutinize a respond
taxpayer‘s books of accounts and other accounting  If he/she fails to respond: taxpayer is considered in
records, in order to determine the taxpayer‘s correct default; a formal letter of demand and assessment
internal revenue tax liabilities. notice shall be issued to the taxpayer
 N.B. – In Oakwood Management Services, Inc. v.
Cases which need not be covered by a valid LA: Cases CIR (2013), the CTA held that the issuance of the
involving civil/criminal tax fraud which fall under the FAN before the lapse of the 15-day period to reply
jurisdiction of the tax fraud division of the Enforcement to PAN does not violate due process. A protest
Services, and Policy cases under audit by the special against the PAN, unlike the protest against the FAN,
teams in national offices is not indispensable. A PAN may or may not be
protested by the taxpayer, and the non-filing of
(b) Notice of informal conference such protest does not render the PAN final and
N.B. – RR 18-2013 amended RR 1812-99 and deleted unappealable. Therefore, the issuance of the FAN
the service of notice of informal conference. before the lapse of the 15-day period for the
taxpayer to file its protest to the PAN does not
(c) Issuance of preliminary assessment notice (PAN) – inflict prejudice on the taxpayer, for as long as the
The Assessment Division issues PAN if it determines BIR properly served a FAN and the taxpayer was
that there exists sufficient basis to assess the taxpayer able to intelligently contest the FAN by filing a
for any deficiency tax. It shall show in detail the facts protest letter within the period provided by law.
and the law on which the proposed assessment is
based. If he/she responds: a FAN/FLD shall be issued within
15 days from filing/submission of the taxpayer‘s
(d) Exceptions to issuance of preliminary assessment response, calling for payment of the taxpayer‘s
notice (PAN)
PAGE 185 OF 275
deficiency tax liability, inclusive of the applicable (3) Forms of protest – for the general concept of a
penalties. request for reconsideration and reinvestiation, see (g),
supra.
(f) Issuance of formal letter of demand and assessment
notice/final assessment notice (FAN/FLD) (3.1) – Request for RECONSIDERATION
Effect on prescriptive period to COLLECT – A request for
A Final Assessment Notice (FAN) is a declaration of reconsideration does not toll the running of the
deficiency taxes issued to a taxpayer who: prescriptive period for the collection of an assessed tax.
 fails to respond to a pre-assessment notice within (CIR vs. Philippine Global Communication Inc., G.R. No.
the prescribed period of time, or 167146, October 31, 2006)
 whose reply to the PAN was found to be without
merit. (3.2) – Request for REINVESTIGATION
 Sec 228: The taxpayer shall be informed in writing Effect on prescriptive period to COLLECT – A Request
of the law and the facts on which the assessment is for Reinvestigation will only toll the prescriptive period
made; otherwise the assessment shall be void to COLLECT if the request for reinvestigation is granted
An assessment contains not only a computation of tax by the BIR.
liabilities, but also a demand for payment within a
prescribed period. (b) If request for REINVESTIGATION and GRANTED –
Submission of documents within 60 days from filing of
(g) Disputed assessment protest
The taxpayer or his duly authorized representative may  Within sixty (60) days from filing of the protest, all
protest administratively against the formal letter of relevant supporting documents must be submitted,
demand and assessment notice within thirty days (30) otherwise the assessment shall become final.
from date of receipt. The taxpayer protesting an  ―Relevant supporting documents‖ – documents
assessment may file a written request for necessary to support the legal and factual bases in
reconsideration or reinvestigation disputing a tax assessment as determined by the
 RECONSIDERATION – refers to a plea of re- taxpayer
evaluation of the assessment on the basis of  ―Assessment shall become final‖ – taxpayer is
existing records without need of additional barred from disputing the correctness of the issue
evidence. It may involve both question of fact or of assessment by introduction of newly discovered or
law or both additional evidence, and the FDDA shall
 REINVESTIGATION – refers to a plea of re- consequently be denied.
evaluation of an assessment on the basis of newly-  Only applies to request for reinvestigation
discovered evidence that a taxpayer intends to
present in the reinvestigation. It may also involve a (4) Content and validity of protest
question of fact or law or both. The protest shall state: (Failure to state shall render
Failure to file a protest against FLD/FAN within 30 days, protest null and void)
the assessment shall become final, executory and  Nature of protest, whether Reconsideration or
demandable reinvestigation, specifying new or additional
evidence if request for reinvestigation
(h) Administrative decision on a disputed assessment  Date of the assessment notice
(FDDA)  Applicable law, rules and regulations, or
jurisprudence on which his protest is based.
(vi) Protesting the assessment
(c) Effect of failure to protest – FAN/FLD becomes final
(a) Protest of assessment by taxpayer and demandable.
(1) Protested assessment – After issuance of FAN,
taxpayer may protest the assessment either by a (d) Period provided for the protest to be acted upon –
request for reconsideration or reinvestigation. 180 DAYS from
a. Submission of documents if request for
(2) When to file a protest – 30 days after receipt of REINVESTIGATION; or
FAN/FLD.
PAGE 186 OF 275

b. Filing of protests if request for (b) In case of inaction by CIR within 180 days from
RECONSIDERATION submission of documents
(vii) Rendition of decision by CIR If the protest is not acted upon by the CIR‘s duly
authorized representative within 180 days from filing of
N.B. – An administrative appeal to the CIR may only be the protest or from submission of required documents,
availed of upon the denial of the protest to the FAN by the taxpayer may either:
the CIR representative. Under RR 18-2013, there is no (a) Appeal to the CTA within 30 days after the
administrative appeal to the CIR for inaction by the CIR expiration of the 180 days,
representative. The remedy is to await the decision or (b) Await the final decision of the CIR‘s duly
file a petition for review to the CTA 30 days after the authorized representative.
lapse of 180-day waiting period.
If the CIR did not act upon the petition within 180 days
Denial of protest – Issuance of a Final Decision on a from the time the documents were submitted, the
disputed assessment (FDDA): The decision of the CIR or taxpayer may either:
his duly authorized representatives shall state the facts, (a) Appeal to the CTA within thirty days from the lapse
the applicable law, rules and regulations or of the 180-day period OR
jurisprudence on which such decision is based, and (b) Wait until the CIR decides before he elevates the
that the same is his final decision. case to the CTA.
(1) CIR‘s actions equivalent to denial of protest: These options are mutually exclusive, and resort to one
 Filing of collection suit against taxpayer (CIR v. bars the application of the other. [Rizal Commercial
Union Shipping) Banking Corporation vs. CIR   (2007)]
 Issuing a warrant of distraint and levy (CIR v. Algue)
 Where there is a request for reconsideration, final N.B. – if the protest is a request for RECONSIDERATION,
demand letter from BIR (CIR v. Isabela Cultural count the 180 days from the filing of the protest. The
Corp.) submission of documents is only for a request for
 Notice of delinquency (CIR v. Ayala Securities) reinvestigation.
 Inaction by CIR - If the protest is not acted upon
within one hundred eighty (180) days from (c) Effect of failure to appeal – Assessment becomes
submission of documents, the inaction by the CIR final and demandable.
is considered as a denial of protest.
 Filing of criminal action against taxpayer JUDICIAL REMEDIES
 Issuing a warrant of distraint and levy
(2) Inaction by CIR Petition for Review at the CTA
Remedy if the taxpayer is not satisfied with the CTA
(viii) Remedies of taxpayer to action by CIR Division‘s ruling:
 FIRST, he may file a motion for reconsideration
(a) In case of denial of protest before the same Division of the CTA within fifteen
If the protest is denied, in whole or in part, by the CIR‘s (15) days from notice thereof. (Sec. 11, RA 1125
duly authorized representative, the taxpayer may either: as amended by RA 9282 [2004])
(a) Appeal to the CTA within 30 days from the date  THEN, a party adversely affected by a resolution of
of receipt of the decision a Division of the CTA on a motion for
(b) Elevate his protest through request for reconsideration may file a petition for review with
reconsideration to the CIR (the only case where the CTA en banc. (Sec. 18, RA 1125 as amended
an administrative appeal is possible) by RA 9282 [2004])
If the CIR denies the protest filed by the taxpayer, the Remedy of injunction; generally unavailable
latter may appeal to the CTA within 30 days from No court may grant injunction to restrain the collection
receipt of the decision denying the protest. A motion for of any national internal revenue tax, fee or charge. (Sec.
reconsideration of the CIR‘s denial of the protests shall 218, NIRC)
not toll the 30 day period to appeal to the CTA. Exception:
When the all of the following conditions concur:
PAGE 187 OF 275

(1) It is an appeal to the CTA from a decision of the CIR, that they may personally observe and attest to
or Commissioner of Customs or the RTC, provincial, such absence. The notice shall then be given
city or municipal treasurer or the Secretary of to said barangay official.
Finance, the case may be, AND  Should party be present but refuses to receive
(2) In the opinion of the Court of Tax Appeals, the the notice, the revenue officers shall bring a
collection may jeopardize the interest of the barangay official and 2 disinterested
Government and/or the taxpayer. (Sec. 11, R.A. witnesses in the presence of the party so that
1125 as amended by R.A. 9282) they may personally observe and attest such
act of refusal. The notice shall then be left with
Requisite before availing of injunction the barangay official.
(1) Taxpayer has to deposit the amount claimed; OR  Service to the tax practitioner, who is
File an injunction bond with the Court for not more appointed by the taxpayer under
double the amount (R.A. 1125) circumstances prescribed in the pertinent
regulations on accreditation of tax agents,
Petition for Review with the SC shall be deemed service to the taxpayer (RR
Remedy if the taxpayer is not satisfied with the decision 18-2013)
of the CTA en banc:
 A party adversely affected by a decision or ruling of (3) SERVICE BY MAIL – Service by mail is done by
the CTA en banc may file with the Supreme Court a sending a copy of the notice by registered mail to
verified petition for review on certiorari pursuant to the registered or known address of the party with
Rule 45 of the 1997 Rules of Court. (Sec. 19, RA instruction to the Postmaster to return the mail to
1125 as amended by RA 9282 [2004]) the sender after 10 days if undelivered. A copy of
the notice may also be sent through reputable
Modes of Service - The notices to the taxpayer required professional courier service. If no registry or
may be served by the CIR or his duly authorized reputable professional courier service is available,
representative through the following modes: service may be done by ordinary mail
(1) PERSONAL SERVICE – the notice shall be served Refund

through personal service by delivering personally a Nature of a claim for refund: It partakes of the nature of
copy thereof to the party at his registered or known an exemption and is strictly construed against the
address or wherever he may be found. A known claimant. The burden of proof is on the taxpayer
address shall mean a place other than the claiming the refund that he is entitled to the same. (CIR
registered address where business activities of the v. Tokyo Shipping, 1995)
party are conducted or his place of residence.
(i) Grounds and requisites for refund
In case personal service is not practicable, the 1. There is a tax collected erroneously or illegally, or
notice shall be served by substituted service or by a penalty collected without authority, or a sum
mail. excessively or wrongfully collected (see Section
229, Tax Code)
(2) SUBSTITUTED SERVICE – substituted service can 2. There must be a written claim for refund filed by
be resorted to when the party is not present at the the taxpayer to the CIR (see Vda. De Aguinaldo v.
registered or known address under the following CIR [February 26, 1965])
circumstances: Exceptions
 May be left at the party‘s registered address, a. When on the face of the return upon which
with his clerk or with a person having charge payment was made, such payment appears
thereof. clearly to have been erroneously paid, the
 May be left in place where business activities CIR may refund or credit the tax even
of the party are conducted with his clerk or without a written claim (Section 229, Tax
person having charge thereof. Code)
 May be left in the place of residence with a b. A return filed showing an overpayment
person of legal age residing therein. shall be considered as a written claim for
 If no person is found, the revenue officers credit or refund. (Sec. 204(C), Tax Code)
concerned shall bring a barangay official and
2 disinterested witnesses to the address so
PAGE 188 OF 275
3. The claim must be a categorical claim for  In the CIR‘s discretion, redeem or change unused
reimbursement (see Bernejo v. CIR [July 25, stamps that have been rendered unfit for use and
1950]) refund their value upon proof of destruction
4. The claim for refund must be filed within 2 years
from the date of the payment of the tax regardless (b) Necessity of proof for claim or refund -
of any supervening cause (Section 229, Tax Code) No credit or refund of taxes or penalties shall be
5. Taxpayer must show proof of the tax (Sec. 229) allowed unless the taxpayer files in writing with the CIR
a claim for credit or refund within two (2) years after the
(ii) Requirements for refund as laid down by cases payment of the tax or penalty. (Sec. 204, NIRC)
(1) Necessity of written claim for refund A return filed showing an overpayment shall be
(2) Claim containing a categorical demand for considered as a written claim for credit or refund.(Sec.
reimbursement 204, NIRC)
(3) Filing of administrative claim for refund and the
suit/proceeding before the CTA within 2 years from (c) Burden of proof for claim of refund
date of payment regardless of any supervening Tax refunds, like tax exemptions, are construed strictly
cause against the taxpayer and liberally in favor of the taxing
 The claim for refund must be filed within 2 authority. (United Airlines, Inc. v. CIR, G.R. No. 178788,
years from the date of payment of the tax Sept. 29, 2010)
regardless of any supervening cause (Section
229, Tax Code) (d) Nature of erroneously-paid tax/illegally assessed
collected
Judicial remedy for refund – File with suit with the CTA A claim for tax refund is in the nature of a claim for
1. Within 30 days from receipt of denial by the exemption and should be construed strictissimi juris
CIR; and against the taxpayer. (see CIR V. TOKYO SHIPPING [MAY
2. Before the expiration of the 2-year period 26, 1995])
Simultaneous filing allowed Taxes are erroneously paid when a taxpayer pays under
If the 2 year period is about to lapse, the taxpayer may a mistake of fact, such as, he is not aware of an existing
already appeal to the CTA even if the CIR has not yet exemption in his favor at the time that payment is made.
made any decision on the claim for refund. In GIBBS V. Taxes are illegally collected when payments are made
COLLECTOR OF INTERNAL REVENUE [FEBRUARY 29, under duress.
1960], the Supreme Court noted that if the CIR takes
time in deciding the claim and the period of two years is (e) Tax refund vis-à-vis tax credit
about to end, the suit or proceeding must be started in REFUND takes place when there is actual
the CTA before the end of the 2 year period without reimbursement while TAX CREDIT takes place upon the
awaiting the decision of the CIR. issuance of a tax certificate or tax credit memo, which
can be applied against any sum that may be due and
N.B. – Compare with the rule on refunds of input VAT. collected from the taxpayer.
The awaiting of the decision of CIR or the lapse of the
180-day period is mandatory. (f) Essential requisites for claim of refund
(Comm. v. CA and Citytrust, cited in United Airlines Inc.
Legal basis of tax refunds – solutio indebitii and the v. CIR, 2010): The grant of a refund is founded on the
rules on quasi-contracts (prevention of unjust assumption that the tax return is valid, that is, the facts
enrichment) stated therein are true and correct. The deficiency
assessment, although not yet final, created a doubt as
Statutory basis for tax refund under the tax code (Sec. to and constitutes a challenge against the truth and
204[c] and Sec. 229) accuracy of the facts stated in said return which, by
(a) Scope of claims for refund itself and without unquestionable evidence, cannot be
The CIR may: the basis for the grant of the refund. To grant the refund
 Credit or refund taxes erroneously or illegally without determination of the proper assessment and
received or penalties imposed without authority; the tax due would inevitably result in multiplicity of
 Refund the value of internal revenue stamps when proceedings or suits. If the deficiency assessment
they are returned in good condition by the should subsequently be upheld, the Government will be
purchaser; and forced to institute anew a proceeding for the recovery of
PAGE 189 OF 275
erroneously refunded taxes which recourse must be If the income tax is withheld at source – payment is at
filed within the prescriptive period of ten years after the end of the taxable year.
discovery of the falsity, fraud or omission in the false or If the income is paid on a quarterly basis – payment is
fraudulent return involved. from the time of filing the final adjustment return.
Who may claim/apply for tax refund/tax credit CIR vs. TMX Sales (January 16, 1992): When a tax is
Taxpayer/withholding agents of non-resident foreign paid in installments, the prescriptive period should be
corporation – the withholding agent is directly and counted from the date of final payment or the last
independently liable for the correct amount of tax that installment. This rule proceeds from the theory that
should be withheld and for deficiency assessments, there is no payment until the entire tax liability is
surcharges and penalties. completely paid. Installments should be treated as
advances or portions of the annual tax due.
General Rule: The taxpayer must file a written claim for
refund stating a categorical demand for reimbursement Other consideration affecting tax refunds
before the CIR within two years from the date of
payment. (Sec. 229, NIRC) Remedy of the taxpayer upon denial or inaction on the
claim for refund:
When it comes to recovery of unutilized input VAT, (a) CIR denies claim - appeal to the CTA within thirty
Section 112, and not Section 229 of the 1997 Tax (30) days from the receipt of the CIR‘s decision and
Code, is the governing law. Second, prior to 8 June within two years from the date of payment.
2007, the applicable rule is neither Atlas nor Mirant, (b) CIR does not act on the claim and the 2-year period
but Section 112(A). The Atlas doctrine, which held that is about to lapse - file a claim before the CTA
claims for refund or credit of input VAT must comply before the 2-year period lapses. Otherwise, he may
with the two-year prescriptive period under Section 229, no longer file a claim before the CTA in case the
should be effective only from its promulgation on 8 June CIRrenders an adverse decision beyond the 2-year
2007 until its abandonment on 12 September 2008 in period. (Revised Rules of the CTA, as amended)
Mirant. (CIR v. San Roque)
Period for claiming refund once granted:
Within five years from the date such warrant or check
was mailed or delivered, otherwise it shall be forfeited
in favor of the government and the amount thereof shall
revert to the general fund. (Sec. 230, NIRC)
Period for using the Tax Credit Certificate (TCC):

Exceptions to requirement of a written claim:
Tax credit certificates (TCCs) can be applied against all
When on the face of the return upon which payment was
internal revenue taxes, excluding withholding tax. TCCs
made, such payment appears clearly to have been
which remain unutilized after five years from the date of
erroneously paid (e.g., mathematical errors), the CIR
issue shall be considered as invalid, unless revalidated.
may refund or credit the tax even without a written claim
If not revalidated, the amount covered by the TCC shall
therefore. (Sec. 229, NIRC)
revert to the general fund. (Sec. 230, NIRC)
A return filed showing an overpayment shall be
considered as a written claim for credit or refund. (Sec. B. GOVERNMENT’S REMEDIES
204(C), NIRC)
Collection
Prescriptive period for recovery of tax erroneously or Remedies of the Government in Collection
illegally collected
Note: Under Sec. 229, there is no exception to the 2-
year prescriptive period.
Two-year period when counted:

From the date that tax was paid.
How date of payment determined:
PAGE 190 OF 275

(iii) Distraint of Personal Property

Administrative
Distraint of Personal Property including Distraint – remedy enforced on the goods, chattels, or
garnishment deposit effects, and other personal property of whatever
Summary remedy of levy on real property character including stocks and other securities, debts,
Forfeiture to the government for want of bidder credits, bank accounts, and interest in and rights to
Further Distraint or Levy personal property (Sec. 205(a), NIRC)
Tax Lien
Compromise and Abatement Kinds of Distraint:
Penalties and Fines (1) Constructive Distraint
(2) Actual Distraint
Judicial
Civil Constructive Distraint – may be placed by the CIR or
Criminal any taxpayer to safeguard the interest of the
Government (Sec. 206, NIRC). Delinquency of the
(i) Requisites taxpayer is not necessary.
Delinquency tax – can be immediately collected
administratively through issuance of a warrant of Grounds for Constructive Distraint:
distraint or levy and/or through judicial action (see When in the opinion of the CIR,
Section 205, Tax Code) (1) the taxpayer is retiring from any business subject to
tax; or
Deficiency tax – can be collected also through (2) the taxpayer is intending to leave the Philippines;
administrative and/or judicial remedies but has to go or
through the process of filing the protest by the taxpayer (3) the taxpayer is intending to remove his property
against the assessment and the denial of such protest from the Philippines or to hide or conceal his
by the CIR. property; or
(4) the taxpayer is planning to perform any act tending
(ii) Prescriptive periods to obstruct the proceedings for collecting the tax
due or which may be due from him (Sec. 206,
Collections with assessments NIRC)
FIVE YEARS after the assessment becomes final,
executory, and demandable. How constructive distraint is effected:
(1) Signing of receipt by the taxpayer
Collections without assessments By requiring the taxpayer or any person having
 In case of false or fraudulent return with intent to possession or control of such property to sign a
evade tax or of failure to file a return, collection receipt covering the property distrained and
without assessment (or assessment) may be made obligate himself to preserve the same intact and
within 10 years from discovery of falsity, fraud or unaltered and not to dispose of the same in any
omission. (Sec. 222(a), NIRC) manner whatever, without the express authority of
o An assessment may also be made which the CIR
carries its own 5-year prescriptive period (2) If the taxpayer refuses to sign the receipt: signing
to collect. of receipt by revenue officer in the presence of two
 Collections without assessment may be made witnesses
within the period for making an assessment (3 In case the taxpayer or the person having the
years from the required date of filing or actual filing, possession and control of the property refuses or
whichever is later) (See Sec. 203, NIRC) fails to sign the receipt, the revenue officer
effecting the constructive distraint shall proceed to
Waiver of prescriptive period prepare a list of such property and, in the presence
If tax was assessed within the different period agreed of two (2) witnesses, leave a copy thereof in the
upon by the CIR and the taxpayer, it may be collected by premises where the property distrained is located
distraint or levy or by a proceeding in court within the (Sec. 206, NIRC)
period agreed upon in writing before the expiration of Note: In constructive distraint, the property is not
the 5-yr period.(Sec. 222d, NIRC) actually confiscated or seized by the revenue
officer.
PAGE 191 OF 275
distraint and the cost of the subsequent sale. (Sec.

Actual distraint - placed on a person who owes any 207(A), NIRC)
delinquent tax or delinquent revenue (see Sec. 207,
NIRC); involves actual seizure of the property (3) Report on the Distraint
A report shall be submitted by the distraining
Garnishment – taking of personal properties, usually officer to the Revenue District Officer, and to the
cash or sums of money, owned by a delinquent taxpayer Revenue Regional Director.
which is in the possession of a third party
(4) Power of the CIR or proper officer to lift the order of
Distraint of intangible properties (Sec. 208, NIRC) distraint
(1) Stocks and other securities: by serving a copy of The taxpayer may request that the warrant be lifted.
the warrants of distraint on the taxpayer, AND upon The CIR may, in his discretion, allow the lifting of
the president, manager, treasurer or other the order of distraint. He may ask for a bond as a
responsible officer of the corporation, company or condition for the cancellation of the warrant. (Sec.
association which issued the stocks or securities. 207(A), NIRC)
(2) Debts and credits: by leaving with the person owing
the debts or having in his possession or under his (5) Notice of Sale of Distrained Properties
control such credits, or with his agent, a copy of the  The Revenue District Officer or his duly
warrant of distraint. The person owing the debts authorized representative (not the officer who
shall then pay the CIR instead of his creditor served the warrant), shall cause a notification
(taxpayer) on the strength of such warrant. of the public sale to be posted in not less than
(3) Bank accounts: by serving a warrant of two (2) public places in the municipality or city
garnishment upon the taxpayer AND upon the (one of which is the Office of the Mayor) where
president, manager, treasurer or other responsible the distraint was made.
officer of the bank. The bank shall then turn over to  The notice shall specify the time and place of
the CIR so much of the bank accounts as may be the sale. The time of sale shall not be less than
sufficient to satisfy the claim of the Government. twenty (20) days after notice to the owner and
(NOTE: distraint of bank accounts is called the publication or posting of such notice. (Sec.
GARNISHMENT) 209, NIRC)
Summary remedy of distraint of personal property (6) Sale at Public Auction
(1) Purchase by the government at sale upon distraint (a) At the time of the public sale, the revenue
(2) Report of sale to the Bureau of Internal Revenue officer shall sell the goods, chattels, or effects,
(BIR) or other personal property, including stocks
(3) Constructive distraint to protect the interest of the and other securities so distrained at a PUBLIC
government AUCTION, to the HIGHEST BIDDER for CASH or
with the approval of the CIR, through a DULY
Procedure for Actual Distraint LICENSED COMMODITY or STOCK EXCHANGES.
(1) Commencement of Distraint Proceedings (b) Any residue over and above what is required to
Who issues the warrant of distraint: pay the entire claim, including expenses of
(a) CIR or his duly authorized representative – sale and distraint, shall be RETURNED to the
where the amount involved is more than P1M owner of the property sold. Expenses shall be
(b) Revenue District Officer – where the amount limited to actual expenses of SEIZURE and
involved is P1M or less (Sec. 207(A), NIRC) PRESERVATION of the property pending the
sale, no charge shall be imposed for the
(2) Service of Warrant of Distraint services of the local internal revenue officer or
How actual distraint is effected: his deputy. (Sec. 209, NIRC)
The proper officer shall seize and distraint any (c) If the proceeds from the sale of the distrained
goods, chattels, or effects, and the personal properties are not sufficient to satisfy the tax
property, including stocks and other securities, delinquency, the CIR or his duly authorized
debts, credits, bank accounts and interests in and representative shall within thirty (30) days
rights to personal property of the taxpayer in after execution of the distraint, proceed with
sufficient quantity to satisfy the tax, expenses of the levy on the taxpayer‘s real property. (Sec.
207(B), NIRC)
PAGE 192 OF 275
GOVERNMENT in satisfaction of the claim. (Sec.

(7) Release of the Properties from Distraint 215, NIRC)
If at any time prior to the consummation of the sale
all proper charges are paid to the officer (5) Redemption of Property Sold
conducting the sale, the goods or effects distrained  At any time before the day fixed for the sale,
shall be restored to the owner. (Sec. 210, NIRC) the taxpayer may discontinue all proceeding
by paying the taxes, penalties and interest.
(8) Purchase by the government at sale upon distraint (Sec. 213, NIRC)
If the amount offered by the highest bidder is not  Within one (1) year from the date of sale, the
equal to the amount of the tax or is very much less taxpayer or anyone for him, may pay to the
than the actual market value of the articles offered Revenue District Officer the total amount of
for sale, the CIR or his deputy may purchase the the following: public taxes + penalties +
same in behalf of the National Government for the interest from the date of delinquency to the
amount of taxes, penalties and costs due. The date of sale + interest on said purchase price
property so purchased may be resold by the CIR or at the rate of fifteen percent (15%) per annum
his deputy. (Sec. 212, NIRC) from the date of sale to the date of redemption.
(Sec. 214, NIRC)
(9) Report of sale to BIR
Within two (2) days after the sale, the officer Note: If the property was forfeited in favor of the
making the same shall make a report of his government, the redemption price shall include only the
proceedings in writing to the CIR and shall himself taxes, penalties and interest plus costs of sale (no
preserve a copy of such report as an official record. interest on purchase price since the Government did not
(Sec. 211, NIRC) ―purchase‖ the property anyway, it was forfeited)
(iv) Summary remedy of levy on real property Note: The taxpayer-owner shall not be deprived of
possession of the said property and shall be entitled to
(1) Release of the Properties from Distraint rents and other income until the expiration of the period
If at any time prior to the consummation of the sale for redemption (Sec. 214, NIRC)
all proper charges are paid to the officer
conducting the sale, the goods or effects distrained (6) Final Deed of Purchaser
shall be restored to the owner. (Sec. 210, NIRC) After the period of redemption, a final deed of sale is
issued in favor of the purchaser.
(2) Purchase by the government at sale upon distraint
If the amount offered by the highest bidder is not (v) Forfeiture to government for want of bidder
equal to the amount of the tax or is very much less Forfeiture implies a divestiture of property without
than the actual market value of the articles offered compensation in consequence of a default or offense.
for sale, the CIR or his deputy may purchase the The effect of forfeiture is to transfer the title of the
same in behalf of the National Government for the specific thing from the owner to the government. (De
amount of taxes, penalties and costs due. The Leon, NIRC Annotated, p. 412)
property so purchased may be resold by the CIR or
his deputy. (Sec. 212, NIRC) Instances when forfeiture is appropriate
(1) All chattels, machinery, and removable fixtures of
(3) Report of sale to BIR any sort used in the unlicensed production of
Within two (2) days after the sale, the officer articles (Sec. 268, NIRC)
making the same shall make a report of his (2) Dies and other equipment used for the printing or
proceedings in writing to the CIR and shall himself making of any internal revenue stamp, label or tag
preserve a copy of such report as an official record. which is in imitation of or purports to be a lawful
(Sec. 211, NIRC) stamp, label or tag. (Sec. 268, NIRC)
(3) Liquor or tobacco shipped under a false name or
(4) Forfeiture in Favor of the Government brand (Sec. 262, NIRC)
If there is no bidder for the real property OR if the
highest bid is not sufficient to pay the taxes, Remedy of enforcement of forfeitures
penalties and costs, the IR Officer conducting the
sale shall declare the property FORFEITED to the
PAGE 193 OF 275
(1) Forfeiture of chattels and removable fixtures: (13) The Government reserves the right to reject or
enforced by the seizure, sale or destruction of the cancel any or all bids.
specific forfeited property.
(2) Forfeiture of real property: enforced by a judgment When property to be sold or destroyed
of condemnation and sale in a legal action or (1) Forfeited chattels and removable fixtures: sold in
proceeding civil or criminal as the case may require the same manner and under the same conditions
(Sec. 224, NIRC) as the public notice and the time and manner of
sale as are prescribed for sales of personal
Resale of real estate taken for taxes (RR No. 22-2002) property distrained for the non-payment of taxes
(1) All acquired/forfeited properties transferred in the (2) Distilled spirits, liquors, cigars, cigarettes, other
name of the Republic of the Philippines, having manufactured products of tobacco and all
passed the one-year redemption period, shall be apparatus used in or about the illicit production of
converted into cash from the date of acquisition or such articles: destroyed by the order of the CIR
forfeiture. when the sale or use would be injurious to public
(2) The sale of acquired/forfeited real properties shall health pr prejudicial to the enforcement of the law
be by sealed bids in a public auction to be (3) All other articles subject to excise tax
witnessed by a representative of the COA. manufactured or removed in violation of the Code,
(3) The Notice of Sale of the acquired real properties dies for the printing or making of internal revenue
shall be published once a week for two (2) stamps and labels: sold or destroyed in the
consecutive weeks in a newspaper of general discretion of the CIR
circulation in the Philippines which must be (4) Forfeited property shall not be destroyed until at
completed at least 20 days prior to the date of least 20 days after seizure. (Sec. 225, NIRC)
such public auction.
(4) Unless the CIR provides otherwise, the Minimum Disposition of funds recovered in legal proceedings or
Bid Price/Floor Price shall be the latest fair market obtained from forfeiture
value as determined by the CIR or the fair market All judgments and monies recovered and received for
value shown in the latest tax declaration issued by taxes, costs, forfeitures, fines and penalties shall be
the provincial, city or municipal assessor, paid to the CIR or his authorized deputies as the taxes
whichever is higher, pursuant to Sec. 6(E) of the Tax themselves are required to be paid, and except as
Code. specially provided, shall be accounted for and dealt
(5) Anyone could bid except foreign nationals, within the same way. (Sec. 226, NIRC)
corporate or otherwise, and those qualified under
existing laws, rules and regulations, including (vi) Further distraint or levy
employees of the Bureau of Internal Revenue. The remedy by distraint of personal property and levy on
(6) Bidders shall be required to post a bond in cash or realty may be repeated if necessary until the full
manager‘s check in an amount representing 10% amount due, including all expenses, is collected. (Sec.
of the minimum bid price at least one day before 217, NIRC)
the scheduled public auction.
(7) Unless the CIR allows extension of time to pay, in (vii) Tax lien
meritorious cases, the winning bidder shall pay the
full amount of his bid cash or manager‘s check Tax liens
within two days after receipt of notice of award. (1) When a taxpayer neglects or refuses to pay his
(8) All taxes and expenses relative to the issuance of internal revenue tax liability after demand, the
title shall be borne by the winning bidder. amount so demanded shall be a lien in favor of the
(9) The winning bidder shall be responsible at his own government from the time the assessment was
expense for the ejectment of squatters and/or made by the CIR until paid with interest, penalties,
occupants, if any, of the auctioned property. and costs that may accrue in addition thereto upon
(10) Negotiated or private sale shall be resorted to as a ALL PROPERTY AND RIGHTS TO PROPERTY
consequence of failed public bidding for two BELONGING to the taxpayer.
consecutive times. (2) HOWEVER, the lien shall not be valid against any
(11) Negotiated or private sale shall in all cases be mortgagee, purchaser or judgment creditor until
approved by the Secretary of Finance. NOTICE of such lien shall be filed by the CIR in the
(12) Public auction sale shall be approved by the CIR or Office of the Register of Deeds of the province or
his authorized representative.
PAGE 194 OF 275
city where the property of the taxpayer is situated (1) By filing a civil case for the collection of sum of
or located. (Sec. 219, NIRC) money with the proper regular court; and
(2) By filing an answer to the petition for review filed by
Seizure under forfeiture vs. Seizure to enforce a tax lien the taxpayer with the Court of Tax Appeals.
In the former all the proceeds derived from the sale of (Mamalateo, 2008)
the thing forfeited are turned over to the Collector of
Internal Revenue; in the latter, the residue of such Criminal Action
proceeds over and above what is required to pay the tax Any person convicted of a crime under the Code shall:
sought to be realized, including expenses, is returned to (1) Be liable for the payment of the tax, and
the owner of the property. (BPI v. Trinidad) (2) Be subject to the penalties imposed under the
Code. (Sec. 253(A), NIRC)
(viii) Compromise
Form and Mode of Proceeding:
Authority of the CIR to compromise and abate taxes Civil and criminal action and proceedings instituted in
behalf of the Government under the authority of this
Compromise – to reduce the amount of tax payable Code or other law enforced by the BIR:
(1) Shall be BROUGHT IN THE NAME OF THE
Grounds for a compromise GOVERNMENT of the Philippines; and
The CIR may compromise the payment of any internal (2) Shall be CONDUCTED BY LEGAL OFFICERS OF THE
revenue tax in the following cases: BIR
(1) A REASONABLE DOUBT as to the validity of the (3) Shall be filed in court with the approval of the CIR.
claim against the taxpayer exists; or (Sec. 220, NIRC)
(2) The financial position of the taxpayer demonstrates
a clear inability to pay the assessed tax. Criminal action as a collection remedy
(FINANCIAL INCAPACITY) The judgment in the criminal case shall impose the
penalty; and order payment of the taxes subject of the
Limits of the CIR‘s power to compromise: criminal case as finally decided by the CIR. (Sec. 205,
(1) For cases of financial incapacity: a minimum NIRC)
compromise rate equivalent to ten percent (10%)
of the basic assessed tax Assessment not necessary before filing a criminal
(2) For other cases: a minimum compromise rate charge for tax evasion
equivalent to forty percent (40%) of the basic An assessment is not necessary before a criminal
assessed tax charge can be filed. The criminal charge need only be
Note: When the basic tax involved exceeds One Million proved by a prima facie showing of a wilful attempt to
Pesos (P1,000,000), or where the settlement offered is file taxes, such as failure to file a required tax return.
less than the prescribed minimum rates, the [CIR v. Pascor Realty, (1999)]
compromise must be approved by the National
Evaluation Board (composed of the CIR and 4 Deputy Suit to recover tax based on false or fraudulent returns
Commissioners) A proceeding in court for the collection of the tax
assessed may be filed without assessment at any time
Abatement - to cancel the entire amount of tax payable within ten (10) years after the discovery of the falsity,
fraud or omission. Provided, that in a fraud assessment
When the CIR may abate or cancel a tax liability: which has become final and executor, the fact of fraud
(1) The tax or any portion thereof appears to be shall be judicially taken cognizance of in the civil or
UNJUSTLY or EXCESSIVELY ASSESSED; or criminal action for the collection thereof. (Sec. 222,
(2) The ADMINISTRATION and COLLECTION COSTS do NIRC)
not justify the collection of the amount due. (e.g.,
when the costs of collection are greater than the False Return v. Fraudulent Return
amount of tax due) A false returns is due to mistakes, carelessness or
ignorance and a fraudulent return is filed with intent to
(ix) Civil and criminal action evade taxes.
Civil Action The fraud contemplated by law is actual and not

Two ways by which civil liability is enforced: constructive, and must amount to intentional
PAGE 195 OF 275
wrongdoing with the sole object of avoiding the tax.

(Aznar v. CTA, 1974) Rates of Surcharge (25% or 50%)
25% of the amount due in the following cases:
Payment of tax not defense (1) Failure to file any return and pay the tax due on
Payment of the tax due after a case has been filed shall the date prescribed; or
not constitute a valid defense in any prosecution for (2) Filing a return with an internal revenue officer
violation of the provisions under the Code. (Sec. 253(A), other than those with whom the return is
NIRC) required to be filed unless the CIR authorizes
otherwise; or
Liability of person who aids or abets: (3) Failure to pay the deficiency tax within the time
Any person who wilfully aids or abets in the commission prescribed for its payment in the notice of
of a crime penalized under the Code or who causes the assessment; or
commission of any such offense by another shall be (4) Failure to pay the full or part of the amount of
liable in the same manner as the principal. (Sec. tax due on or before the date prescribed for its
253(B), NIRC) payment (Sec. 246 (A), NIRC)
50% of the tax or of the deficiency tax in the following

Offender Penalty cases:
(1) Willful neglect to file the return within the
Not a citizen of the he shall be deported period prescribed; or
Philippines immediately after serving the (2) A false or fraudulent return is willfully made
sentence
(Sec. 248(B), NIRC)
A public officer or the maximum penalty
employee prescribed for the offense shall
be imposed on him Prima facie evidence of a false or fraudulent return:
shall be dismissed from public Substantial underdeclaration of taxable sales, receipts
office, and perpetually or income, or a substantial overstatement of deductions.
disqualified from holding any Failure to report sales, receipts or income in an amount
public office, to vote, and to exceeding thirty percent (30%) of that declared per
participate in any election return, and a claim ofdeductions in an amount
CPA his license shall be exceeding (30%) of actual deductions, shall render the
automatically revoked or taxpayer liable for substantial underdeclaration or for
cancelled once he is convicted overstatement. (Sec. 248(B), NIRC)
Corporations, imposed on the partner,
associations, president, general manager,
partnerships etc. branch manager, treasurer,
(ii) Interest
officer-in-charge and
employees responsible for the In General
violation (Sec. 253, NIRC) 20% per annum on the unpaid amount of tax, interest
at the rate of twenty percent (20%) per annum from the
Minimum amount of fine: date prescribed for payment until the amount is fully
The fines imposed for any violation of the Code shall not paid. (Sec. 249(A), NIRC)
be lower than the fines imposed herein or twice the
amount of taxes, interests and surcharges due from the Deficiency Interest
taxpayer, whichever is higher. (Sec. 253, NIRC) 20% per annum on any deficiency in the tax due from
the date prescribed for its payment until the full
Prescriptive period for criminal action: payment thereof. (Sec. 249(B), NIRC)
All violations of any provision of the Code shall
prescribe after five (5) years. (Sec. 281, NIRC) Delinquency interest
20% per annum on the unpaid amount in case of failure
to pay:
3. Statutory offenses and penalties (a) The amount of the tax due on any return required to
a. Civil Penalties be filed; or
(b) The amount of the tax due for which no return is
(i) Surcharge – penalty imposed in addition to the tax required; or
required to be paid (Sec. 248(A), NIRC)
PAGE 196 OF 275
(c) A deficiency tax, or any surcharge or interest or otherwise, any sum of money or other thing of
thereon on the due date appearing in the letter of value for the compromise, adjustment or
demand and assessment notice (Sec. 249(C), settlement of any charge or complaint for any
NIRC) violation or alleged violation of law.
Interest on extended payment Informer‘s Reward[Sec. 282, NIRC]

20% per annum on the tax or deficiency tax or any part To whom given:
thereof unpaid from the date of notice and demand Persons instrumental in the discovery of violations of
until it is paid if any person required to pay the tax is: the NIRC and in discovery and seizure of smuggled
(a) Qualified and elects to pay the tax on installment goods.
but fails to pay the tax or any installment or any
part of such amount or installment or before the Amount of reward:
date prescribed for its payment; or 10% of the revenues, surcharges or fees recovered
(b) Where the CIR has authorized an extension of time and/or fine/penalty imposed, or P1,000,000,
within which to pay a tax or a deficiency tax or any whichever is LOWER.
part thereof (249(D), NIRC)
The same amount shall be given if the offender offered
Penalties Imposed on Public Officers(Sec. 269, NIRC) to compromise and such offer has been accepted and
The law imposes a fine of not less than P50,000 nor collected by the CIR.
more than P100,000 or imprisonment for not less than
10 years nor more than fifteen years on every official, If no revenue, surcharge or fees be actually collected,
agent or employee of the BIR or of any agency or such person is not entitled to a reward.
employee of the Government charged with the
enforcement of the Tax Code, who shall: (CONED- FRAP) For discovery and seizure of SMUGGLED GOODS: The
(a) Extort or willfully oppress under color of law; cash reward is 10% of the FMV of the smuggled and
(b) knowingly Demand other or greater sums than are confiscated goods, or P1,000,000, whichever is LOWER.
authorized by law or receive any fee, compensation
or reward, except as by law prescribed, for the 4. Compromise and Abatement of Taxes (See also notes
performance of any duty; above regarding compromise)
(c) willfully Neglect to give receipts, as by law required,
for any sums collected in the performance of duty, Cases which may be compromised: (Sec. 2, R.R. 30-
or who willfully 2002)
(1) Delinquent accounts
neglect to perform any of the duties enjoined by (2) Cases under administrative protest after issuance
law; of the Final Assessment Notice to the taxpayer
(d) Conspire or collude with another or others to which are still pending in the Regional Offices,
defraud the revenues or otherwise violate the law; Revenue District Offices, Legal Service, Large
(e) willfully make Opportunity for any person to Taxpayer Service (LTS), Collection Service,
defraud the revenues, or who do or omit to do any Enforcement Service and other offices in the
act with intent to enable any other person to National Office
defraud the revenues; (3) Civil tax cases being disputed before the courts
(f) negligently or by design Permit the violation of the (4) Collection cases filed in courts
law by any other person; (5) Criminal violations, other than those already filed
(g) make or sign any False certificate or return in any in court or those involving criminal tax fraud
case where the law requires the making by them of
such entry, certificate or return; Cases which cannot be compromised: (Sec. 2, R.R. 30-
(h) having knowledge or information of a violation of 2002)
any provision of the Code or of any fraud (1) Withholding tax cases, unless the applicant-
committed on the revenues collectible by the BIR, taxpayer invokes provisions of law that cast doubt
fail to Report such knowledge or information to on the taxpayer's obligation to withhold
their superior officer, or to report as otherwise (2) Criminal tax fraud cases confirmed as such by the
required by law; or CIR or his duly authorized representative
(i) without the authority of law, demand or Accept or (3) Criminal violations already filed in court
attempt to collect, directly or indirectly, as payment
PAGE 197 OF 275
(4) Delinquent accounts with duly approved schedule

of installment payments
(5) Cases where final reports of reinvestigation ore
reconsideration have been issued resulting to
reduction in the original assessment and the
taxpayer is agreeable to such decision by signing
the required agreement form for the purpose. On
the other hand, other protested cases shall be
handled by the Regional Evaluation Board (REB) or
the National Evaluation Board (NEB) on a case to
case basis
(6) Cases which become final and executory after final
judgment of a court, where compromise is
requested on the ground of doubtful validity of the
assessment; and
(7) Estate tax cases where compromise is requested
on the ground of financial incapacity of the
taxpayer
Compromise penalty v. Compromise

Compromise penalty – an amount of money paid by a
taxpayer to compromise a tax violation that he has
committed, which may be the subject of criminal
prosecution. The basis of the amount paid is the gross
sales or receipts during the year or the tax due.
Compromise – an amount of money paid by the

taxpayer to settle his civil liability for tax assessed by
the government. The basis of the amount paid is the
basic tax assessed. (Mamalateo, 2008)
PAGE 198 OF 275

 Retiring from business subject to tax, or

V. Organization and  Intending to leave the Philippines or to
remove his property therefrom or to hide
Function of the Bureau of or conceal his property;
 Performing any act tending to obstruct the
Internal Revenue proceedings for the collection of the tax
for the past or current quarter or year or to
A. POWERS OF THE CIR render the same totally or partially
ineffective unless such proceedings are
(A) To make assessments and prescribe additional begun immediately
requirements for tax administration and (5) Prescribe Real Property Values
enforcement (Sec. 6, NIRC)  Dividing the Philippines into different
(1) Examination of Returns and Determination of zones or areas, and determining the FMV
Tax Due of real properties in each zone or area,
(a) After a return has been filed, the CIR may upon consultation with competent
authorize the examination of any taxpayer appraisers from private and public sectors.
and the assessment of the correct amount  For the purpose of computing any internal
of tax. revenue tax, the value of the property shall
(b) Failure to file a return shall not prevent the be WHICHEVER IS HIGHER OF:
CIR from authorizing the examination. o The FMV as determined by the
(2) Best evidence obtainable CIR, or
The CIR shall assess the proper tax on the best o The FMV as shown in the
evidence obtainable when: schedule of values of the
 The taxpayer fails to submit the required provincial and city assessors
returns, statements reports and other (6) Inquire into Bank Deposit Accounts
documents Notwithstanding any contrary provision of R.A.
 There is a reason to believe that any such 1405 (Bank Secrecy Law) and other general or
report is false, incomplete or erroneous special laws, the CIR is authorized to inquire
(3) Conduct inventory-taking, survaillance and to into bank deposits of:
prescribe presumptive gross sales and  A decedent to determine his gross estate,
receipts and
 Inventory-taking – at any time during the  Any taxpayer who has filed an application
taxable year, for the purpose of for compromise of tax liability by reason of
determining the correct tax liabilities. financial incapacity: the taxpayer must
 Surveillance – done if there is reason to waive in writing his privilege under R.A.
believe that the taxpayer is not declaring 1405 and other relevant laws, before the
his correct income, sales or receipts for CIR may inquire into his bank accounts.
tax purposes. (7) Accredit and register Tax Agents
 Prescribe presumptive gross sales and Accrediting and registering tax agents (may be
receipts if: individuals or general professional
o It is found that the taxpayer has partnerships) based on the following criteria:
failed to issue receipts and  Professional competence
invoices, or  Integrity
o When there is reason to believe  Moral fitness
that the books of accounts or (8) Prescribe additional procedural or
other records do not correctly documentary requirements
reflect the declarations made by In relation to the manner of compliance of any
the taxpayer requirement in connection with the submission
(4) Terminate Taxable Period or preparation of financial statements
Terminating taxable period and ordering the accompanying the tax returns.
immediate payment of the tax for the
terminated period and any remaining tax that (B) To obtain information and to summon, examine,
is unpaid, when the taxpayer is: and take testimony of persons (Sec. 5, NIRC)
PAGE 199 OF 275
(1) Examine Returns and Determine Tax due The Secretary of Finance, upon recommendation of the
Authorizing the examination of any taxpayer CIR, shall promulgate all needful rules and regulations
and the assessment of the correct amount of for effective enforcement of the provisions of the Code.
tax, WON a return has been filed by such
taxpayer. SPECIFIC PROVISIONS TO BE CONTAINED IN RULES
(2) Access Letter AND REGULATIONS (Sec. 245, NIRC)
 Obtaining on a regular basis, from any (a) The time and manner in which Revenue Regional
person other than the person whose tax Director shall canvass their respective Revenue
liability is subject to audit or Regions for the purpose of discovering persons and
investigation, or from any office or officer property liable to national internal revenue taxes,
of the national and local governments, and the manner in which their lists and records of
government agencies or taxable persons and taxable objects shall be made
instrumentalities, including BSP and and kept;
GOCCs; (b) The forms of labels, brands or marks to be required
 Any information such as, but not limited on goods subject to an excise tax, and the manner
to, costs and volumes of production, in which the labelling, branding or marking shall be
receipts or sales and gross incomes of effected;
taxpayers, and the names addresses, (c) The conditions under which and the manner in
and financial statements of corporations, which goods intended for export, which if not
mutual fund companies, insurance exported would be subject to an excise tax, shall be
companies etc. labelled, branded or marked;
(d) The conditions to be observed by revenue officers
(C) Interpret Tax Laws and to Decide Tax cases respecting the institutions and conduct of legal
(1) Shall be under the exclusive and original actions and proceedings;
jurisdiction of the CIR, subject to review by the (e) The conditions under which goods intended for
Secretary of Finance. storage in bonded warehouses shall be conveyed
(2) A ruling by the BIR Commissioner shall be thither, their manner of storage and the method of
presumed valid unless modified, reversed or keeping the entries and records in connection
superseded by the Secretary of Finance. therewith, also the books to be kept by Revenue
(3) A taxpayer who receives an adverse ruling from Inspectors and the reports to be made by them in
the CIR may, within thirty (30) days from the connection with their supervision of such houses;
date of receipt of such ruling, seek its review (f) The conditions under which denatured alcohol may
by the Secretary of Finance, either by be removed and dealt in, the character and
himself/itself or though his/its duly authorized quantity of the denaturing material to be used, the
representative. manner in which the process of denaturing shall be
(4) A reversal or modification of the BIR ruling effected, so as to render the alcohol suitably
shall terminate its effectivity upon denatured and unfit for oral intake, the bonds to be
(9) The receipt by the taxpayer or the BIR of given, the books and records to be kept, the entries
written notice of reversal or modification, to be made therein, the reports to be made to the
whichever came earlier. CIR, and the signs to be displayed in the business
ort by the person for whom such denaturing is done
**The Secretary of Finance may now also review the or by whom, such alcohol is dealt in;
rulings MOTU PROPRIO. (DOF ORDER 7-02) (g) The manner in which revenue shall be collected
and paid, the instrument, document or object to
B. ORGANIZATION AND FUNCTION OF THE which revenue stamps shall be affixed, the mode of
cancellation of the same, the manner in which the
BIR proper books, records, invoices and other papers
shall be kept and entries therein made by the
RULE-MAKING AUTHORITY OF THE SECRETARY OF
person subject to the tax, as well as the manner in
FINANCE
which licenses and stamps shall be gathered up
and returned after serving their purposes;
AUTHORITY OF SECRETARY OF FINANCE TO
(h) The conditions to be observed by revenue officers
PROMULGATE RULES AND REGULATIONS (Sec. 244,
respecting the enforcement of Title III imposing a
NIRC)
tax on estate of a decedent, and other transfers
PAGE 200 OF 275
mortis causa, as well as on gifts and such other (2) Excise tax - Business establishment with excise tax
rules and regulations which the CIR may consider paid or payable of at least P1,000,000 for the
suitable for the enforcement of the said Title III; preceding taxable year;
(i) The manner in which tax returns, information and (3) Corporate Income Tax - Business establishment
reports shall be prepared and reported and the tax with annual income tax paid or payable of at least
collected and paid, as well as the conditions under P1,000,000 for the preceding taxable year; and
which evidence of payment shall be furnished the (4) Withholding tax - Business establishment with
taxpayer, and the preparation and publication of withholding tax payment or remittance of at least
tax statistics; P1,000,000 for the preceding taxable year.
(j) The manner in which internal revenue taxes, such
as income tax, including withholding tax, estate Provided, however, That the Secretary of Finance, upon
and donor's taxes, value-added tax, other recommendation of the CIR, may modify or add to the
percentage taxes, excise taxes and documentary above criteria for determining a large taxpayer after
stamp taxes shall be paid through the collection considering such factors as inflation, volume of
officers of the Bureau of Internal Revenue or business, wage and employment levels, and similar
through duly authorized agent banks which are economic factors.
hereby deputized to receive payments of such taxes The penalties prescribed under Section 248 shall be
and the returns, papers and statements that may imposed on any violation of the rules and regulations
be filed by the taxpayers in connection with the issued by the Secretary of Finance, upon
payment of the tax: recommendation of the CIR, prescribing the place of
filing of returns and payments of taxes by large
Provided, however, That notwithstanding the other taxpayers.
provisions of this Code prescribing the place of
filing of returns and payment of taxes, the CIR may, NON-RETROACTIVITY OF RULINGS (Sec. 246, NIRC)
by rules and regulations, require that the tax General Rule: No retroactive application if the
returns, papers and statements that may be filed revocation, modification or reversal of rules and
by the taxpayers in connection with the payment of regulations, rulings or circulars will be prejudicial to the
the tax. taxpayers Exceptions:
(a) Where the taxpayer deliberately misstates or
Provided, however, That notwithstanding the other omits material facts from his return or any
provisions of this Code prescribing the place of document required of him by the BIR;
filing of returns and payment of taxes, the CIR may, (b) Where the facts subsequently gathered by the BIR
by rules and regulations require that the tax returns, are materially different from the facts on which
papers and statements and taxes of large the ruling is based; or
taxpayers be filed and paid, respectively, through (c) Where the taxpayer acted in bad faith.
collection officers or through duly authorized agent
banks: POWER OF THE CIR TO SUSPEND THE BUSINESS
OPERATION OF A TAXPAYER (Sec 115, NIRC)
Provided, further, That the CIR can exercise this The CIR or his authorized representative is empowered
power within six (6) years from the approval of to suspend the business operations and temporarily
Republic Act No. 7646 or the completion of its close the business establishment of any person for any
comprehensive computerization program, of the following violations:
whichever comes earlier: (a) IN THE CASE OF A VAT-REGISTERED PERSON. -
(i) Failure to issue receipts or invoices;
Provided, finally, That separate venues for the (ii) Failure to file a value-added tax return as
Luzon, Visayas and Mindanao areas may be required under Section 114; or
designated for the filing of tax returns and payment (iii) Understatement of taxable sales or receipts by
of taxes by said large taxpayers. thirty percent (30%) or more of his correct
taxable sales or receipts for the taxable
For the purpose of this Section, 'large taxpayer' means quarter.
a taxpayer who satisfies any of the following criteria: (b) FAILURE OF ANY PERSON TO REGISTER AS
(1) Value-Added Tax (VAT) - Business establishment REQUIRED UNDER SECTION 236. -
with VAT paid or payable of at least P100,000 for
any quarter of the preceding taxable year;
PAGE 201 OF 275
The temporary closure of the establishment shall be for

the duration of not less than five (5) days and shall be
lifted only upon compliance with whatever requirements
prescribed by the CIR in the closure order.
PAGE 202 OF 275

Who is liable Penalty

Offense
Willful attempt to evade or defeat tax. Any person who willfully attempts in any Fine: P30,000 - P100,000
(Sec. 254) manner to evade or defeat any tax or the AND
payment thereof. Imprisonment: 2-4 years
Plus other penalties
Failure to File Return, Supply Correct and Any person required to pay any tax, make Fine: P10,000 or more
Accurate Information, Pay Tax, Withhold a return, keep any record, or supply AND
and Remit Tax and Refund Excess Taxes correct and accurate information Imprisonment:1-10 years
Withheld on Compensation (Sec. 255) Plus other penalties
Any person who attempts to make it Fine - P10,000 - P20,000
appear for any reason that he or another AND
has in fact filed a return or statement, or Imprisonment: 1-3 years
actually files a return or statement and Plus other penalties
subsequently withdraws the same return
or statement
Making false entries, records, or reports, Any financial officer or Independent CPA Fine - P50,000 - P100,000
or using falsified or fake accountable engaged to examine and audit books of AND
forms (Sec. 257) accounts of taxpayers under Sec.232 (A) Imprisonment: 2-6 years
and any person under his direction.
Unlawful pursuit of business (Sec. 258) Any person who carries on any business Fine: P5,000 - P20,000
for which in annual registration fee is AND
imposed without paying the tax as Imprisonment: 6 months-2 years
required by law.
A person engaged in the business of Fine: P30,000 - P50,000 AND
distilling, rectifying, repacking, Imprisonment: 1-2 years
compounding or manufacturing any
article subject to excise tax.
Illegal Collection of Foreign Payments Any person who knowingly undertakes the Fine: P20,000 - P50,000;
(Sec. 259) collection of foreign payments under Sec. AND
67 without a license or without complying Imprisonment: 1-2 years
with the implementing rules and
regulations.
Unlawful Possession of Cigarette Paper Any person, manufacturer or importer of Fine: P20,000 - P100,000; AND
in Bobbins or Rolls, Etc. (Sec. 260) cigar or cigarettes Imprisonment - 6 years 1 day - 12
years
Unlawful Use of Denatured Alcohol (Sec. Any person who for the purpose of Fine: P20,000 - P100,000; AND
261) manufacturing any beverage, uses Imprisonment - 6 years 1 day - 12
denatured alcohol or alcohol specially years
denatured to be used for motive power or
withdrawn under bond for industrial uses
or alcohol knowingly misrepresented to
be denatured to be unfit for oral intake or
who knowingly sells or offers for sale such
preparations containing as an ingredient
such alcohol.
Any person who unlawfully recovers or

attempt to recover by distillation or other
process any denatured alcohol or who
knowingly sells or offers for sale,
conceals or otherwise disposes of alcohol
as recovered or redistilled
Shipment or Removal of Liquor/Tobacco Any person who ships, transports or Fine: P20,000 – P 100,000; AND
Products under False Name or Brand or removes Imprisonment: 6 years 1 day - 12
as an Imitation of any Existing or Known years
Product Name or Brand (Sec. 262)
PAGE 203 OF 275

Offense
Unlawful Possession or Removal of Any person who owns or is found in

Articles Subject to Excise Tax W/o possession of these articles
Payment of the Tax (Sec. 263) Where:
Value of goods < P1,000 Fine: P1,000 - P2,000 AND
Imprisonment: 60-100 days
Value of goods < P50,000 but >P1000 Fine: P10,000-P20,000 AND

Imprisonment: 2-4 years
Value of goods < P150,000, but
>P50,000 Fine: P30,000 - P60,000 AND
Value of goods > P150,000
Fine: P50,000 - P100,000 AND
Failure or Refusal to Issue Receipts or Any person who, being required under Fine: P 1,000 - P50,000
Sales or Commercial Invoices, Violations Section 237 to issue receipts or sales or AND
Related to the Printing of Such Receipts commercial invoices Imprisonment: 2- 4 years
or Invoices and Other Violations (Sec.
264)
Offenses Relating to Stamps (Sec. 265) Fine: P20,000 - P50,000 AND
Failure to Obey Summons (Sec. 266) Any person who being duly summoned to Fine: P 5,000 - 10,000;
appear to testify, or to appear and AND
produce books of accounts, records, Imprisonment:1-2 years
memoranda or other papers, or to furnish
information as required under the
pertinent provisions of this Code.
Declaration under Penalties of Perjury Any person who willfully files a Penalty for Perjury under the
(Sec. 267) declaration, return or statement Revised Penal Code
containing information which is not true
and correct as to every material matter
Misdeclaration or Misrepresentation of Any manufacturer subject to excise tax Summary cancellation or
Manufacturers Subject to Excise Tax withdrawal of the permit to
(Sec. 268) engage in business as a
manufacturer of articles subject
to excise tax
Use of Property in Unlicensed Business Any person who conducts an unlicensed Forfeiture of property used
or Use of Dies for Printing False Stamps, business or uses dies for printing false
Etc. (Sec. 268) stamps
Illegal Storage or Removal of Goods Any person subject to excise tax who fails Forfeiture of goods
(Sec. 268) to store the goods in proper place, or
removes goods without payment of excise
tax
Penalty for Second and Subsequent Maximum of the penalty
Offenses (Sec. 274) prescribed for the offense
Violation of Other Provisions of the Tax Any person who violates any provision of Fine: P1000 or less
Code or Rules or Regulations in General this Code or any rule or regulation OR
(Sec. 275) promulgated by the Department of Imprisonment: 6 months or less
Finance for which no specific penalty is OR Both
provided by law
Penalty for Selling, Transferring, Any taxpayer, whose property has been Fine: at least P5,000 AND
Encumbering or in any way disposing of placed under constructive distraint at least twice the value of the
property Placed under Constructive property
Distraint (Sec. 276) OR
PAGE 204 OF 275

Offense
Imprisonment: 2 years 1 day - 4

years
OR Both
Failure to Surrender Property Placed Any person having in his possession or Fine: P 5,000 or more
under Distraint and Levy (Sec. 277) under his control any property or rights to OR
property, upon which a warrant of Imprisonment: 6 months 1 day - 2
constructive distraint or actual distraint years,
and levy has been issued OR Both
Procuring Unlawful Divulgence of Trade Any person procures an officer or Fine: not more than P 2,000
Secrets (Sec. 278) employee of the BIR to divulge any OR
confidential information regarding the Imprisonment: 6 months - 5 years
business, income or inheritance of any OR Both
taxpayer, knowledge of which was
acquired by him in the discharge of his
official duties, and which it is unlawful for
him to reveal, and any person who
publishes or prints in any manner
whatever, not provided by law, any
income, profit, loss or expenditure
appearing in any income tax return
PAGE 205 OF 275

Flowchart I: Taxpayer’s Remedies from Tax Assessment-NIRC
START
Commissioner or Revenue Officer (RO)

RO sends notice Taxpayer
Regional Director conducts Audit w/in 120
of informal responds w/in 15
Issues Letter of days. If 120 days lapse
conference days
Authority (LA) LA is revalidated,
Regional
Send Formal Letter Assessment
Is response w/n Taxpayer
of demand and Final NO to Division issues a
15 days? Is it responds w/in
Assessment Notice either Preliminary
meritorious? 15 days
(FAN) is issued Assessment Notice
(PAN)
Yes to ASSESSMENT
both ENDS
File protest w/n 30 Protest made w/in

days from receipt of 30 days?
YES to Commissioner decides on
assessment. Submit Supporting papers
both protest within 180 days
supporting papers wi/in submitted w/in 60
60 days from protest days?
Assessment becomes
NO to
Final, Warrant of Distraint
either
& Levy Issued
Decision Commissioner
YES favorable to YES decides w/n
taxpayer? 180 days?
ASSESSMENT
ENDS NO NO
Appeal to the Court of Tax Appeal to the Court of Tax

appeals within 30 days OR file Appeals w/in 30 days after
motion for reconsideration lapse of 180 days OR wait for
within 30 days. MR tolls 30 a decision by the BIR
day period to appeal to CTA (Lascona Land oil vs. CIR)
If MR is denied, appeal to
the CTA within remainder
of the 30 days
Assessment
CTA decides on Appeal made becomes Final,
YES NO
the appeal on time? Warrant of Distraint
& Levy Issued
If CTA decision is unfavorable to

taxpayer, file MR with CTA Appeal to
END
Division w/in 15 days. Appeal to Supreme Court
CTA en banc if MR denied.
PAGE 206 OF 275

Flowchart II: Procedures for Distraint and Levy-NIRC
RCO - Revenue Collection Officer RDO - Revenue District officer

START
RRD - Revenue Regional Director LGU- Local Government Unit
Person owing any Commissioner seizes sufficient

delinquent tax to Delinquent tax personal property to satisfy the
Yes
fails to pay w/in more than 1M? tax, charge & expenses of seizure
the time required (Sec. 207 (A))
RDO seizes sufficient

personal property to satisfy
No
the tax, charges & expenses
RDO posts notice in at least 2 public Property may be resold and
of seizure (Sec. 207 (A))
places in the municipality/city where the net proceeds shall be
the distraint is made. One place of remitted to the National
posting must be at the mayor’s office. Treasury as internal revenue.
Time of sale shall not be less than 20 Distraining Officer accounts for (Sec. 212)
days after the notice (Sec. 209) the goods distrained (Sec. 208)
Bid less than

Officer Commissioner may purchase
Goods shall be restored to owner, amount of tax/
conducts Yes property for the National
if charges are paid (Sec. 210) FMV of goods
public auction Government (Sec. 212)
distrained?
No, bid just right
W/in 5 days after sale, W/in 2 days after Excess of proceeds over the Officer sells the goods to the
distraining officer shall enter the sale, officer entire claim, shall be returned highest bidder for cash or
return of proceedings in the shall report to the to the owner. No charge shall with the Commissioner’s
records of RCO, RDO and Commissioner. be imposed for the services of approval, through commodity/
RRD (Sec. 213) (Sec. 211) the officer (Sec. 209) stock exchanges. (Sec. 209)
Internal revenue officer,

Real property may be levied Levy shall be affected by writing upon said certificate a
designated by the Commissioner,
on before, simultaneously, or description of the property. Notice of the levy shall be
shall prepare a certificate with the
after the distraint of personal served upon the Register of Deeds of LGU where the
force of a nationwide legal
property (207 (B)) property is located and upon the owner (Sec. 207 B)
execution (Sec. 207 B)
W/n 20 days after levy, officer shall post

W/n 10 days after receipt of the notice at the main entrance of the Sale shall be held at the
warrant, levying officer shall municipal/city hall & in public place in the main entrance of the
report to the Commissioner who barrio/district where the real estate lies for municipal/city hall, or on the
shall have the authority to lift the at least 30 days by AND publish it once a premises of the levied
warrant of levy (Sec. 207 B) week for 3 weeks. Owner may prevent property. (Sec. 213)
sale by paying all charges (Sec. 213)
W/n 1 year from forfeiture, W/n 2 days, he shall make a return

Officer conducting the
the taxpayer, may redeem of the forfeiture. Register of Deeds, No bidder or
sale shall forfeit the
said property by paying full upon registration of forfeiture shall Yes highest bid
property to the
amount of the taxes and transfer title to the Government w/o insufficient?
Government (Sec. 215)
charges (Sec. 215) court order. (Sec. 215)
No, bid ok
W/n 1 year from sale, the W/n 5 days after the sale, Excess of proceeds
The Commissioner may, owner may redeem, by paying levying officer shall enter of the sale over claim
after 20 days notice, sell to the RDO the amount of the return of the proceedings and cost of sale shall
property at public auction taxes, penalties, and interest upon the records of the RCO, be turned over to the
or at private sale with thereon from the date of RDO and RRD (Sec. 213) owner (Sec. 213)
approval of the SoF. delinquency to the date of sale,
Proceeds shall be and 15% per annum interest on
deposited with the National purchase price from the date
Treasury (Sec. 216) Owner shall not be
of purchase to the date of Levy and distraint
deprived of the
redemption. (Sec. 214) may be repeated until
possession and shall
the full amount due,
be entitled to the
and all expenses are
fruits until 1 year
collected. (Sec. 217)
expires (Sec. 214)
PAGE 207 OF 275

PAGE 208 OF 275

VI. Local Government Vested in the sanggunian

The sanggunian of a local government unit is authorized
Code of 1991, As Amended to prescribe fines or other penalties for violation of tax
ordinances but in no case shall such fines be less than
A. LOCAL GOVERNMENT TAXATION One thousand pesos (P1,000.00) nor more than Five
thousand pesos (P5,000.00), nor shall imprisonment
1. Fundamental principles (UEPIP) be less than one (1) month nor more than six (6) months.
a. Taxation shall be Uniform in each local government Such fine or other penalty, or both, shall be imposed at
unit; the discretion of the court. The sangguniang barangay
b. Taxes, fees, charges and other impositions shall: may prescribe a fine of not less than One hundred
(EPUC) pesos (P100.00) nor more than One thousand pesos
 be Equitable and based as far as (P1,000.00). (Sec. 516, LGC)
practicable on the taxpayer's ability to
pay; c. Authority to grant local tax exemptions
 be levied and collected only for Public LGUs may, through ordinances duly approved, grant tax
purposes; exemptions, incentives or reliefs under such terms and
 not be Unjust, excessive, oppressive, or conditions as they may deem necessary. (Sec. 192,
confiscatory; LGC)
 not be Contrary to law, public policy,
national economic policy, or in the d. Withdrawal of exemptions
restraint of trade;
c. The collection of local taxes, fees, charges and General rule (Sec. 193, LGC): Unless otherwise
other impositions shall not be let to any Private provided, tax exemptions or incentives granted to, or
person; presently enjoyed by all persons, whether natural or
d. The revenue collected shall inure solely to the judicial, including government-owned or controlled
benefit of, the local government unit levying the tax, corporations are withdrawn upon the effectivity of the
fee, charge or other Imposition unless otherwise Code.
specifically provided herein; and, Exceptions: Tax exemptions not withdrawn
e. Each local government unit shall, as far as  Local water districts
Practicable, evolve a Progressive system of  Cooperatives duly registered under R.A. No.
taxation. (SEC. 130, LGC) 6938,
 Non-stock and non-profit hospitals and
2. Nature and Source of Taxing Power education institutions
a. Grant of local taxing power under the Local ―[Sec. 193 is] an express and general repeal of all
Government Code statutes granting exemptions from local taxes, withdrew
the sweeping tax privileges previously enjoyed by the
―Each local government unit shall have the power to National Power Corporation under its Charter.‖ (NPC v.
create its own sources of revenues and to levy taxes, Cabanatuan, G.R. No. 149110)
fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent e. Authority to adjust local tax rates
with the basic policy of local autonomy. Such taxes, LGUs shall have the authority to adjust the tax rates as
fees, and charges shall accrue exclusively to the local prescribed not oftener than once every five (5) years,
governments.‖ (Sec. 5, Art. X, 1987 Constitution) but in no case shall the adjustment exceed ten percent
(10%) of the rates fixed by the Code. (Sec. 191, LGC)
Each local government unit shall exercise its power to
create its own sources of revenue and to levy taxes, fees, f. Residual taxing power of local governments
and charges subject to the provisions herein, consistent LGU may exercise the power to levy taxes or charges on
with the basic policy of local autonomy. Such taxes, ANY base or subject
fees, and charges shall accrue exclusively to the local Required:
government units. (Sec. 129, LGC)  Not otherwise specifically enumerated in the LGC
or taxed under NIRC or other applicable laws
b. Authority to prescribe penalties for tax violations
PAGE 209 OF 275
 Not unjust, excessive, oppressive, confiscatory or  It must not be unreasonable (Magtajas v. Pryce
contrary to declared national policy Properties [234 SCRA 225])
 Pursuant to an ordinance enacted with public
hearing conducted for the purpose. (Sec. 186, 4. Scope of Taxing Power
LGC)
LGU Scope of Taxing Power
g. Authority to issue local tax ordinances
The power to impose a tax, fee, or charge, or to Provinces May levy only:
(Sec. 134, Transfer of Real Property Ownership
generate revenue under this Code shall be exercised by LGC) Business of Printing and Publication
the sanggunian of the local government unit concerned Franchise Tax
through an appropriate ordinance. (Sec. 132, LGC) Tax on Sand, Gravel and Other Quarry
Resources
3. Local Taxing Authority Professional Tax
Amusement Tax
a. Power to create revenues exercised thru LGUs Annual Fixed Tax for every delivery truck or
Each LGU shall exercise its power to create its power to van
create its own sources of revenue and to levy taxes, fees Municipalities May levy taxes, fees and charges not
and charges. (Sec. 128, LGC) otherwise levied by provinces (Sec. 142,
LGC)
Exercised by the Sanggunian concerned through an
Cities May levy taxes, fees and charges which the
appropriate ordinance. (Sec. 132, LGC) province or municipality may impose (Sec.
151, LGC)
Ordinances may be vetoed by local chief executives of Barangays May levy only:
the LGUs, except the Punong Barangay, on the ground Taxes on stores or retailers
that it is ultra vires or prejudicial to public welfare. His Service fees or charges
reasons shall be stated in writing. (Sec. 55 (a) and (b), Barangay clearance
LGC) Other fees and charges (Sec. 152, LGC)
b. Procedure for approval and effectivity of tax

ordinances But all LGUs may also impose reasonable service fees,
rates for operation of public utilities, andtoll fees and
A public hearing must be conducted prior to the charges. (See letter e below) (Sec. 153-155, LGC)
enactment of a tax ordinance. (Sec. 187, LGC)
Within ten (10) days after the approval of the ordinance, 5. Specific taxing power of local government unit (LGUs)
certified true copies of all tax ordinances or revenue
measures shall be published in full for three (3)
consecutive days in a newspaper of local circulation.
In provinces, cities and municipalities where there are

no newspapers of local circulation, it must be posted in
at least two (2) conspicuous and publicly accessible
places. (Sec. 188, LGC)
N.B. – Requisites for substantive validity of an

ordinance:
 It must not contravene the Constitution or any
statute
 It must not be unfair or oppressive
 It must not be partial or discriminatory
 It must not prohibit but may regulate trade
 It must be general and consistent with public
policy
PAGE 210 OF 275

Power Province Municipality City Barangay
Tax on Transfer of Real Property  (135)  (151)

Tax on Business of Printing and Publication  (136) 
Franchise tax  (137) 
Tax on sand, gravel and other quarry resources  (138) 
Professional tax  (139) 
Amusement tax  (140) 
Annual Fixed Tax For Every Delivery Truck or Van
of Manufacturers or Producers, Wholesalers of,  (141) 
Dealers, or Retailers in, Certain Products
Tax on Business  (143) 
Fees and charges on regulation/licensing of
 (147) 
business and occupation
Fees for Sealing and Licensing of Weights and
 (148) 
Measures
Fishery Rentals, Fees and Charges  (149) 
Community Tax  
Tax on Gross Sales or Receipts of Small-Scale
 (152a)
Stores/Retailers
Service Fees on the use of Barangay-owned
 (152b)
properties
Barangay Clearance  (152c)
Other Fees and Charges (on commercial
breeding of fighting cocks, cockfights, cockpits;
 (152d)
places of recreation which charge admission
fees; outside ads)
Service Fees and Charges (153)    
Public Utility Charges (154)    
Toll Fees or Charges (155)    
  
Real Property Tax
(within Metro Manila)
a. Taxing powers of provinces
Tax Imposed Rate/Amount Base Exemptions Others
Tax on Transfer of Real Not more than Total acquisition Sale, transfer, or other Evidence of payment of tax is
Property. Imposed on the 50% of 1% price or fair market disposition of real to be required by Register of
sale, donation, barter, or value, whichever is property pursuant to Deeds as a requisite to
any other mode of transfer higher R.A. 6657 registration; and by the
of ownership or title to real (Comprehensive provincial assessor as a
property (Sec 135m LGC) Agrarian Reform Law) condition for cancellation of
old tax declaration.
Tax must be paid 60 days

from the date of execution of
deed or from the date of
decedent's death.
PAGE 211 OF 275

Tax on Business of Printing Not exceeding Gross annual Receipts from printing
and Publication (Sec 136, 50% of 1% receipts for the and/or publishing of
LGC) preceding calendar books and other reading
Imposed on the business of year materials prescribed by
persons engaged in the DECS as school
printing, and/or publication texts or references
of books, cards, posters,
leaflets, handbills,
certificates, receipts,
pamphlets, and others of
similar nature
Newly started business Not exceeding Capital investment In the succeeding calendar
1/20 of 1% year, regardless of when
business started operating,
tax shall be based on gross
receipts for preceding
calendar year, or any fraction
thereof.
Franchise Tax (Sec 137,

LGC) Not exceeding Gross annual
Notwithstanding any 50% of 1% receipts for the
exemption granted by any preceding calendar
law or any other special law, year based on the
tax may be imposed on incoming receipt, or
business enjoying a realized, within its
franchise territorial
jurisdiction
Capital investment
Newly-started business Not more than In the succeeding calendar
1/20 of 1% year, regardless of when
business started operating,
tax shall be based on gross
receipts for preceding
calendar year, or any fraction
thereof.
Tax on Sand, Gravel and Not more than Fair market value in Permit to extract sand, gravel
Other Quarry Resources. 10% the locality per cubic and other quarry resources to
Levied on ordinary stones, meter of resources be issued exclusively by the
gravel, earth and other referred to in provincial governor pursuant
quarry resources as defined Column 1 to an Ordinance by the
in the NIRC, extracted from Sangguniang Panlalawigan
public lands or from the
beds of seas, lakes, rivers, Distribution of proceeds:
streams, creeks, and other Province - 30%
public waters within its Component City/ Municipality
territorial jurisdiction (Sec where resources were
138, LGC) extracted - 30%
Barangay where resources
were extracted - 40%
Professional Tax. Provinces Such amount as Such reasonable Professionals To be paid to the province
may levy annual the Sangguniang classification by the exclusively employed by where the profession is
professional tax on each Panlalawigan Sangguniang the government practiced, or where a principal
PAGE 212 OF 275

person engaged in the may determine, Panlalawigan office is maintained.

exercise of a profession in no case to
requiring government exceed P300.00 A person who pays for
examination (Sec 139, professional tax may practice
LGC) his profession anywhere in the
country without being
subjected to similar taxes.
Employers shall require

payment of professional tax
as a condition for
employment.
Payable annually, on or before

Jan 31.
Amusement Tax. Collected Not more than Gross receipts from Holding of operas, In case of theaters or
from proprietors, lessees, or10% (amended admission fees concerts, dramas, cinemas, tax shall first be
operators of theaters, by RA 9640, recitals, painting, and deducted and withheld by
cinemas, concert halls, 2009) art exhibitions, flower their proprietors, lessees and
circuses, boxing stadia, and shows, musical operators
other places of amusement programs, literary and
(Sec 140, LGC) oratorical presentations Proceeds to be shared equally
by the province and
Note: The case of Alta Vista Exception to exemption: municipality where
Golf and Country Club v. Pop, rock, or similar amusement places are
City of Cebu (20 Jan. 2016) concerts located.
states that golf courses are
not subject to amusement
tax because ―people do not
enter a golf course to see or
view a show or
performance.‖
Annual Fixed Tax For Every Amount not Every truck, van, Manufacturers, producers,
Delivery Truck or Van of exceeding P500 vehicle wholesalers, dealers and
Manufacturers or retailers referred to in column
Producers, Wholesalers of, 1 shall be exempt from tax on
Dealers, or Retailers in, peddlers
Certain Products. Imposed
on vehicles used for the
delivery of distilled spirits,
fermented liquors, soft
drinks, cigars and
cigarettes, and other
products as may be
determined by the
sanggunian, to sales
outlets, or consumers in the
province, whether directly
or indirectly (Sec 141, LGC)
b. Taxing powers of cities

The City may levy taxes, fees, charges which the province or municipality may impose.
Those levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in
accordance with the provisions of LGC.
PAGE 213 OF 275

Rates on levy made by the city may exceed the maximum rates allowed for the province or municipality by not more than
50%
Exception: Rates of professional and amusement taxes. (Sec. 151, LGC)
C. TAXING POWERS OF MUNICIPALITIES

C.1. TAX ON VARIOUS TYPES OF BUSINESSES
[Sec. 143, LGC]
Rate/Amount and Base Other Information
Manufacturers, assemblers, repackers, In accordance with the schedule in Section
processors, brewers, distillers, rectifiers, 143 [a], NIRC
and compounders of liquors, distilled
spirits, and wines or manufacturers of any
article of commerce of whatever kind or
nature
Wholesalers, distributors, or dealers in any Schedule in Article 143 [b], NIRC
article of commerce of whatever kind or
nature
Exporters and on manufacturers, millers, Not exceeding 1/2 of rates prescribed in
producers, wholesalers, distributor, the schedule in Sec 143, NIRC
dealers or retailers of essential
commodities enumerated below: [RWC-
CLAPS]
(1) Rice and corn
(2) Wheat and or cassava flour, meat,
dairy products, locally manufactured,
processed or preserved food, sugar,
salt, and other agricultural, marine,
and fresh water products, whether in
original state or not
(3) Cooking oil and cooking gas
(4) Cement
(5) Laundry soap, detergents, and
medicine
(6) Agricultural implements. equipment
and post-harvest facilities, fertilizers,
pesticides, insecticides, herbicides
and other farm inputs;
(7) Poultry feeds and other animal feeds;
(8) School supplies
Retailers Gross sales or receipts for the preceding Barangays have the exclusive power to tax
calendar year of: gross receipts amounting to:
400k or less: 2% per annum 50k or less: in cities
more than 400k: 1% per annum 30k or less: in municipalities [Sec. 143 [d],
Sec. 152, LGC]
Contractors and other independent In accordance with the schedule in Sec.
contractors 143 [e]
Banks and other financial institutions Not exceeding fifty percent 50% of 1% on
the gross receipts of the preceding
calendar year from interest, commissions
and discounts from lending activities,
income from financial leasing, dividends,
rentals on property and profit from
exchange or sale of property, insurance
premium.
Peddlers engaged in the sale of any Not exceeding P50.00 per peddler
merchandise or article of commerce annually.
PAGE 214 OF 275
Rate/Amount and Base Other Information
Any business which the sanggunian Catch-all provision.

concerned may deem proper to tax
If on any business subject to excise, value-
added or percentage tax is subject to tax
not exceeding two percent [2%] of gross
sales or receipts of the preceding calendar
year
PAGE 215 OF 275

General rule: As a condition to the conduct of

C.2 CEILING ON BUSINESS TAX IMPOSSIBLE business or profession, the municipality may impose
ON MUNICIPALITIES WITHIN METRO reasonable fees and charges not yet imposed by the
MANILA province, commensurate with the cost of regulation,
Such municipalities may not 50% more than the inspection and licensing. [Sec.147, LGC]
maximum rates prescribed in Sec 143. [Sec. 144,
LGC] Exception: Professional tax in Sec. 139
C.3. TAX ON RETIREMENT ON BUSINESS Specific rules:

Upon termination of a business subject to tax under (1) Municipality has power to impose reasonable
Sec.143 a sworn statement of its gross sales or rates for sealing and licensing of weights and
receipts for the current year shall be submitted. If measures [Sec. 148, LGC]
the tax paid is less than the tax due, the difference (2) The Municipality has exclusive authority to grant
shall be paid before the business is considered fishery privileges in municipal waters. The
officially retired. [Sec. 145, LGC] sangguniang bayan may:
(a) Grant fishery privileges to erect fish corrals,
C.4 RULES ON PAYMENT OF BUSINESS TAX oysters, mussels or other aquatic beds or
(1) Taxes in Sec. 143 shall be paid for every bangus fry areas, within a definite zone of
separate or distinct establishment or place the municipal waters, as
where business subject to tax is conducted. (b) Grant marginal fishermen the privilege to
(2) One line of business is not exempted by being gather, take or catch bangus fry, prawn fry
conducted with some other businesses for or kawag-kawag or fry of other species and
which such tax has been paid fish from the municipal waters by nets,
(3) The tax on a business must be paid by the traps or other fishing gears free of rental,
person conducting it. fee, charge or imposition.
(4) If a person operates 2 or more businesses (c) Issue licenses for the operation of fishing
mentioned in Sec 143 which are taxed; vessels of three [3] tons or less
computation shall be based on: (3) The Sanggunian may penalize the use of
(a) combined total gross sales/receipts IF explosives, noxious or poisonous substances,
subject to the same tax rate electricity, muro-ami, and other deleterious
(b) separate reports on gross sales/receipts if methods of fishing and prescribe a criminal
subject to different tax rates penalty therefor [Sec. 149, LGC]
Yamane vs. Lepanto Condo Corp. (Oct. 23, 1995): C.6. SITUS OF TAX COLLECTED
Condominium corporations are not business entities, According to Sec. 150 of the LGC,situs shall be
and are thus not subject to local business tax. Even determined by the ff. rules:
though the corporation is empowered to levy
assessments or dues from the unit owners, these RULE 1: In case of persons maintaining/operating a
amounts are not intended for the incurrence of profit branch or sales outlet making the sale or
by the corporation, but to shoulder the multitude of transaction, the tax shall be recorded in said branch
necessary expenses for maintenance of the or sales outlet and paid to the municipality/city
condominium. where the branch or sales outlet is located.
Ericsson Telecoms vs. City of Pasig. (Nov. 2007): RULE 2: Where there is NO branch or sales outlet in
Business tax must be based on gross receipts, it the city/municipality where the sale is made, sale
being different from gross revenue. The right to shall be recorded in the principal office and the tax
receive income, and not the actual receipt shall be paid to such city/municipality.
determines when to include the amount in gross
income. RULE 3: In the case of manufacturers, contractors,
producers, and exporters having factories, project
C.5. FEES AND CHARGES FOR REGULATION offices, plants, and plantations, proceeds shall be
allocated as follows:
& LICENSING
PAGE 216 OF 275

(1) 30% of sales recorded in the principal office the situs of the contract for purposes of taxation,
shall be made taxable by the city/municipality and not merely the place of the perfection of the
where the principal office is located contract.
(2) 70% shall be taxable by the city/municipality
where the factory, project office, plant, or D. TAXING POWERS OF BARANGAYS
plantation is located The following shall exclusively accrue to the
Illustration of Rules 1 to 3: barangays:
A company has a principal office in Mandaluyong, (1) Taxes on Stores or Retailers with Fixed Business
while its sales office and factory are in Sta Rosa: Establishments.
(1) sales made in Sta Rosa, will be recorded in Sta (a) Rate: not greater than one percent (1%)
Rosa (b) Base:
(2) sales made in Los Baños, Calamba or Cabuyao (i) Cities: gross sales or receipts of the
[i.e., delivered to customers located in those preceding calendar year of
places], will be recorded in Mandaluyong P50,000.00 or less
(3) aside from sales made in Sta Rosa, Sta Rosa (ii) Municipalities: gross sales or receipts
also gets 70% of sales recorded in of P30,000.00 or less
Mandaluyong, pursuant to Rule 3 (2) Service Fees or Charges. For services rendered
in connection with the regulations or the use of
RULE 4: In case the plantation is located in a place barangay-owned properties or facilities such as
other than the place where the factory is located, the palay, copra, or tobacco dryers.
70% in Rule 3 will be divided as follows: (3) Barangay Clearance. A city or municipality
60% to the city/municipality where the factory is cannot issue a permit for business without a
located clearance from the barangay concerned. The
40% to the city/municipality where the plantation is sangguniang barangay may impose a
located reasonable fee on the clearance.
(4) Other Charges Allowed.
RULE 5: In case of 2 or more factories, plantations, (a) charges on commercial breeding of fighting
etc. in different localities, the 70% shall be prorated cocks, cockfights and cockpits;
among the localities where the factories, (b) charges on places of recreation which
plantations, etc. are located in proportion to their charge admission fees; and
respective volume of production. (c) charges on billboards, signboards, neon
signs, and outdoor advertisements. [Sec.
Illustration: 152, LGC]
A company has a principal office in Valenzuela and
has its factory in Bulacan. It also has branches E. COMMON REVENUE RAISING
selling merchandise in Muntinlupa, Bacolod, Cebu.
(1) sales made in Muntinlupa, Bacolod and Cebu
POWERS
(1) Service fees and charges
will go to the said cities
LGUs may impose and collect such reasonable
(2) sales in all other places which do not have a
fees and charges for services rendered. [Sec.
sales branch shall be distributed as follows:
153, LGC]
30% to Valenzuela and 70% to Bulacan
(2) Public utility charges
LGUs may fix the rates for the operation of
Excise Tax: Allied Thread Co., Inc. v. City Mayor of
public utilities owned, operated and
Manila [1984] Tax is imposed on the performance of
maintained by them within their jurisdiction.
an act or occupation, enjoyment of a privilege. The
[Sec. 154, LGC]
power to levy such tax depends on the place in
(3) Toll fees or charges
which the act is performed or the occupation is
(a) The sanggunian may prescribe the terms
engaged in; not upon the location of the office.
and conditions and fix the rates for the
imposition of toll fees or charges for the
Sales Tax: Shell Co., Inc. v. Municipality of Sipocot,
use of any public road, pier, or wharf,
Camarines Sur [1959]
waterway, bridge, ferry or
It is the place of the consummation of the sale,
telecommunication system funded and
associated with the delivery of the things which are
the subject matter of the contract that determines
PAGE 217 OF 275
constructed by the local government unit

concerned.
(b) The sanggunian may also discontinue the
collection of the tolls when public safety
and welfare requires.
(c) No toll fees or charges shall be collected
from:
(i) Officers and enlisted men of the AFP
and members of the PNP on mission
(ii) Post office personnel delivering mail
(iii) Physically-handicapped
(iv) Disabled citizens who are sixty-five
(65) years or older. [Sec. 155, LGC]
PAGE 218 OF 275

F. COMMUNITY TAX
Who may levy [Sec. Cities or municipalities
156, LGC]
(1) Individuals who are:
(a) Inhabitants of the Philippines
(b) Eighteen years of age or over
(c) Either:
(i) Regularly employed on a wage or salary basis for at least 30 consecutive working days
during any calendar year
(ii) Engaged in business or occupation
(iii) Owns real property with an aggregate assessed value of P1,000 or more
(iv) Is required by law to file an income tax return
Persons Liable [Sec. (2) Juridical Persons
157 &158, LGC] (a) Every corporation no matter how created or organized,
(b) Whether domestic or resident foreign,
(c) Engaged in or doing business in the Philippines
(1) Individuals
(a) Annual community tax of P5.00 PLUS annual additional tax of P1.00 per P1,000.00 of
income regardless whether from business, exercise of profession or property
(b) Never to exceed P5000
(c) Husband and wife shall pay a basic tax of P5.00 each PLUS additional tax based on total
property owned by them and the total gross receipts or earnings derived therefrom
(2) Juridical Persons
(a) Annual community tax of P500.00 PLUS annual additional tax of not more than P10,000.00
according to the ff. schedule:
(i) P2.00 for every P5,000 worth of real property in the Philippines owned during the
preceding year based
(ii) P2.00 for every P5,000.00 of gross receipts derived from business in the Philippines
during the preceding year.
Rates [Sec. 157 &158, (b) Dividends received by a corporation from another corporation shall be deemed part of the
LGC] gross receipts or earnings for purposes of computing additional tax.
Persons Exempt [Sec. (1) Diplomatic and consular representatives
159, LGC] (2) Transient visitors who stay in the Philippines for not more than 3 months
Place of Payment [Sec. Where individual resides, or where the principal office of the juridical entity is located.
160, LGC]
Time of Payment [Sec Accrues on the 1st day of January of each year to be paid not later than the last day of February of each
161, LGC] year
Penalty If unpaid within the prescribed period, an interest of 24% shall be added per annum from the due date
until payment. [Sec. 161, LGC]
PAGE 219 OF 275

goods or merchandise. It is therefore irrelevant

Presentation of Community Tax Certificate is if the fees imposed are actually for police
necessary when an individual subject to community surveillance on the goods, because any other
tax: form of imposition on goods passing through
(1) Acknowledges any document before a notary the territorial jurisdiction of the municipality is
public clearly prohibited. (See Palma Development
(2) takes the oath of office upon election or Corp. v. Municipality of Managas [G.R. No.
appointment to any position in the government 152492. October 16, 2003])
service
(3) receives any license, certificate, or permit from (6) Taxes, fees or charges on Agricultural and
any public authority aquatic products when sold by marginal
(4) pays any tax or fee farmers or fishermen;
(5) receives any money from any public fund (7) Taxes on business enterprises certified to by the
(6) transacts other official business Board of Investments as Pioneer or non-pioneer
(7) receives any salary or wage from any person or for a period of 6 and 4 years, respectively from
commission the date of registration;
(8) Excise taxes on articles enumerated under the
Presentation of certificate is not needed in the NIRC, as amended, and taxes, fees or charges
registration of a voter. [Sec. 163, LGC] on petroleum products;
(9) Percentage or VAT on sales, barters or
The city or municipal treasurer shall deputize the exchanges or similar transactions on goods or
barangay treasurers to collect, provided the latter be services except as otherwise provided herein;
bonded. (10) Taxes on the Gross receipts of transportation
contractors and persons engaged in the
If: actually and directly collected by the city or transportation of passengers or freight by hire
municipal treasurer, community tax accrues entirely and common carriers by air, land or water,
to the general fund. If: collected through the except as provided in the Code;
barangay treasurers, apportioned equally. [Sec. 164, (11) Taxes on premiums paid by way or Reinsurance
LGC] or retrocession;
(12) Taxes, fees or charges for the Registration of
6. Common limitations on the taxing powers of LGUs motor vehicles and for the issuance of all kinds
Unless otherwise provided, the following cannot be of licenses or permits for the driving thereof,
levied by the local governments: [IDEC-GAPEP-GRR- except tricycles;
ECN]: (13) Taxes, fees, or other charges on Philippine
(1) Income tax, except when levied on banks and products actually Exported, except as otherwise
other financial institutions; provided;
(2) Documentary stamp tax; (14) Taxes, fees, or charges, on Countryside and
(3) Estate tax, inheritance, gifts, legacies and other Barangay Business Enterprises and
acquisitions mortis causa, except as otherwise cooperatives duly registered under the
provided; Cooperative Code of the Philippines; and
(4) Customs duties, registration fees of vessel and (15) Taxes, fees or charges of any kind on the
wharfage on wharves, tonnage dues, and all National Government, its agencies and
other kinds of customs fees, charges and dues instrumentalities, and local government units.
except wharfage on wharves constructed and [Sec. 133, LGC]
maintained by the LGU concerned;
(5) Taxes, fees or charges on Goods carried into or 7. Collection of business tax
out of, or passing through, the territorial F.1. TAX PERIOD AND MANNER OF
jurisdictions of local government units in the PAYMENT
guise of charges for wharfage, tolls for bridges Based on calendar year, unless otherwise provided.
or otherwise, or other taxes, fees, or otherwise May be paid annually or in quarterly instalments.
[Sec. 165, LGC]
Sec.133(e) prohibits the imposition, in the
guise of wharfage, of fees, as well as all other F.2. ACCRUAL OF TAX
taxes or charges in any form whatsoever, on
PAGE 220 OF 275
General rule: Accrues on the first day of January of Collection: 5 years from the date of assessment by
each year administrative or judicial action.
Except: New taxes, fees or charges, or changes in
the rates thereof which shall accrue on the first day Instances When Running of Prescription Periods is
of the quarter next following the effectivity of the Suspended
ordinance imposing such new levies or rates. [Sec. (1) When the treasurer is legally prevented from
166, LGC] making the assessment or collection
(2) When taxpayer requests for reinvestigation and
F.3. TIME OF PAYMENT executes a waiver in writing before lapse of the
Within the 20 days of January or of each subsequent period for assessment or collection.
quarter. [i.e., Jan 20, Apr 20, July 20, and Oct 20]. It (3) When the taxpayer is out of the country or
may be extended by the sanggunian for justifiable otherwise cannot be located [Sec. 194 (d), LGC]
reasons, without surcharges or penalties. Extension
cannot exceed 6 months. [Sec. 167, LGC] G.2. PROTEST OF ASSESSMENT
Within sixty (60) days from the receipt of the notice
F.4. PENALTIES ON UNPAID TAXES, FEES of assessment, the taxpayer may file a written
OR CHARGES protest with the local treasurer contesting the
(1) Surcharge not exceeding 25% on taxes, fees or assessment; otherwise it shall become final and
charges NOT paid on time; and executory. [Sec. 195, LGC]
(2) Interest not exceeding 2% per month of the
unpaid taxes, fees or charges including G.3. CLAIM FOR REFUND OF TAX CREDIT
surcharges, until the amount is fully paid FOR ERRONEOUSLY OR ILLEGALLY
(3) In no case shall the total interest exceed 36 COLLECTED TAX, FEE OR CHARGE
months. [Sec. 168, LGC] Requires a written claim for refund or credit to be
filed with local treasurer before protest is
F.5. AUTHORITY OF TREASURER IN entertained.
COLLECTION AND INSPECTION OF BOOKS Must be brought within 2 years from payment of tax
All local taxes, fees and charges shall be collected or from the date the taxpayer became entitled to
by the local treasurer or their duly authorized refund or credit [Sec. 196, LGC]
deputies [Sec. 170, LGC]
H. CIVIL REMEDIES BY THE LGU FOR
The local treasurer may, by himself or through his COLLECTION OF REVENUES
deputies duly authorized in writing, examine the
books, accounts, and other pertinent records of any H.1. LOCAL GOVERNMENT’S LIEN FOR
person subject to local taxes, fees and charges in
DELINQUENT TAXES, FEES OR CHARGES
order to ascertain, assess and collect the correct Non-payment of a tax, fee or charge creates a lien
amount of the tax, fee or charge. superior to all liens or encumbrances in favor of any
other person, enforceable by administrative or
Examination must be done during business hours, judicial action.
only once for every tax period and shall be certified
to by the examining official. [Sec. 171, LGC] The lien may only be extinguished upon full payment
of the delinquent local taxes, fees, and charges
G. TAXPAYER’S REMEDIES including related surcharges and interests. [Sec.
G.1. PERIODS OF ASSESSMENT AND 173, LGC]
COLLECTION OF LOCAL TAXES, FEES OR
CHARGES H.2. CIVIL REMEDIES, IN GENERAL
Assessment: Within 5 years from the date they (1) Administrative action
become due (2) Judicial action
In case of Fraud or Intent to Evade Tax: Within 10 Procedure for administrative action
years from discovery of fraud or intent to evade Distraint of personal property
payment. [Sec. 194, LGC] Personal properties subject to distraint: goods,
chattels or effects and other personal property of
PAGE 221 OF 275
whatever character, including stocks and other (7) any material or Article forming part of a house
securities, debts, credits, bank accounts, and or improvement of any real property
interest in and rights to personal property
Appeal before the Secretary of Justice; Procedure
Procedure: [Sec. 175, LGC]  Appeal to the Secretary of Justice within 30
(1) Seizure of personal property days from effectivity
(2) Accounting of distrained goods  The Secretary of Justice has 60 days to
(3) Publication of time and place of sale and the decide but an appeal does not suspend the
articles distrained effectivity of the ordinance
(4) Release of distrained property upon payment  Within 30 days from the Secretary of
prior to sale Justice‘s decision or after 60 days inaction,
(5) Procedure of sale an appeal may be filed with the RTC. (See
(6) Disposition of proceeds Sec. 187, RA 7160)
Levy of real property Penalty on local treasurer for failure to issue and
Levy upon real property and interest in or rights to execute warrant of distraint or levy
real property Automatically dismissed from the service after due
notice and hearing [Sec. 177, LGC]
Procedure [Sec. 176, LGC]
(1) Preparation of a duly authenticated certificate Procedure for judicial action
by the LGU Treasurer effecting the levy on the The local government may institute an ordinary civil
real property action with regular courts of proper jurisdiction for
(2) Service of written notice of levy to the assessor the collection of delinquent taxes, fees, charges or
and Register of Deeds other revenues.
(3) Annotation of the levy on the tax declaration The civil action shall be filed by the local treasurer.
and the certificate of title [Sec. 183, LGC]
(4) Advertisement and Sale [Sec. 178, LGC]
Valley Trading Co. vs. CFI of Isabela, (1989);
Further distraint or levy Angeles City v. Angeles City Electric Corporation,
The remedies by distraint or levy may be repeated if (2010): LGC does not contain a provision
necessary until the full amount due, including all prohibiting courts from enjoining the collection of
expenses, is collected [Sec. 184, LGC] local taxes. Such lapse may have allowed
preliminary injunction under Rule 58, ROC where
Exemption of personal property from distraint or levy local taxes are involved.
(ToB-CUPLA)
(1) Tools and implements necessarily used by the I. REAL PROPERTY TAXATION
taxpayer in his trade or employment
(2) One horse, cow, carabao, or other Beast of
I.1. FUNDAMENTAL PRINCIPLES (CAPUE)
burden, such as the delinquent taxpayer may
(1) Current fair market value is the basis for
select and necessarily used by him in his
assessment
ordinary occupation
All real property, whether taxable or exempt,
(3) his necessary Clothing, and that of all his family
shall be appraised at the CURRENT AND FAIR
(4) household furniture and Utensils necessary for
MARKET VALUE prevailing in the locality where
housekeeping and used for that purpose by the
the property is situated. [Sec. 201, LGC]
delinquent taxpayer, such as he may select, of a
(2) Actual use shall be the basis of classification
value not exceeding P10,000
for assessment
(5) Provisions, including crops, actually provided
(a) Real property shall be classified, valued
for individual or family use sufficient for 4
and assessed on the basis of its actual use
months
regardless of where located, whoever owns
(6) the professional Libraries of doctors, engineers,
it, and whoever uses it.
one fishing boat and net, not exceeding the
(b) Actual Use- refers to the purpose for which
total value of P10,000 by the lawful use of
the property is principally or predominantly
which a fisherman earns his livelihood
utilized by the person in possession thereof
[Sec. 199 (b), LGC]
PAGE 222 OF 275
(c) MCIAA v. Marcos [G.R. No. 120082, Sept. their owner has placed them or preserves them with
11, 1996]: ―Usage means direct, the intention to have them permanently attached to
immediate and actual application of the the land, and forming a permanent part of it; the
property animals in these places are included;
(7) Fertilizer actually used on a piece of land;
(3) Private persons cannot be left to the appraisal, (8) Mines, quarries, and slag dumps, while the
assessment, levy and collection of real property matter thereof forms part of the bed, and waters
tax. either running or stagnant;
(4) uniform classification within each local (9) Docks and structures which, though floating, are
government unit shall be observed. intended by their nature and object to remain at a
(5) equitable appraisal and assessment is required. fixed place on a river, lake, or coast;
[Sec. 197, LGC] (10) Contracts for public works, and servitudes and
other real rights over immovable property. (334a)
I.2. NATURE OF REAL PROPERTY TAX
(1) It is a direct tax on the ownership or use of real Coverage; For a Province, or a City or Municipality
property within Metro Manila
(2) It is an ad valorem tax. Value is the tax base. (1) Land
(3) It is proportionate because the tax is calculated (2) Building
on the basis of a certain percentage of the value (3) Machinery
assessed. (4) Other improvements not specifically exempted
(4) It creates a single, indivisible obligation [Sec. 232, LGC]
(5) It attaches on the property [i.e., a lien] and is
enforceable against it. The rate shall be as follows:
(6) With respect to LGUs, it is levied thru a Province: not exceeding one percent (1%) of the
delegated power assessed value of real property; and
City or municipality within Metro Manila: not
I.3. IMPOSITION OF REAL PROPERTY TAX exceeding two percent (2%) of the assessed value of
real property. [Sec. 233, LGC]
N.B. Real property under the Art. 415, Civil Code;
The following are immovable property: Special Levy on Idle Lands
A province, or city or municipality within Metro
(1) Land, buildings, roads and constructions of all Manila may levy an annual tax on idle lands at the
kinds adhered to the soil; rate not exceeding five percent [5%] of the assessed
(2) Trees, plants, and growing fruits, while they are value of the property in addition to the basic tax
attached to the land or form an integral part of an
immovable; Lands covered
(3) Everything attached to an immovable in a fixed (1) Agricultural Lands
manner, in such a way that it cannot be separated More than one hectare in area suitable for
therefrom without breaking the material or cultivation, dairying, inland fishery, and other
deterioration of the object; agricultural uses, one-half of which remain
(4) Statues, reliefs, paintings or other objects for uncultivated or unimproved
use or ornamentation, placed in buildings or on (2) Other than Agricultural
lands by the owner of the immovable in such a More than one thousand square meters in area
manner that it reveals the intention to attach them one half of which remain unutilized or
permanently to the tenements; unimproved [Sec. 236 and 237, LGC]
(5) Machinery, receptacles, instruments or
implements intended by the owner of the tenement Exempt Idle Lands
for an industry or works which may be carried on in a Lands exempt by reason of
building or on a piece of land, and which tend  Force majeure,
directly to meet the needs of the said industry or  Civil disturbance,
works;  Natural calamity or
 Any cause or circumstance which physically
(6) Animal houses, pigeon-houses, beehives, fish or legally prevents improving, utilizing or
ponds or breeding places of similar nature, in case cultivating the same. [Sec. 238, LGC]
PAGE 223 OF 275
(3) Within 30 days from date of declaration

Special Levy for Public Works (4) Failure to file, will be listed as in Assessment
A tax ordinance shall describe with reasonable Rolls as taxable
accuracy the nature, extent and location of the
public works to be undertaken, the estimated cost, GOCCs
the metes and bounds by monuments and lines and Philippine Ports Authority vs. City of Iloilo [G.R. No.
the number of annual installments which should not 109791, July 14, 2003]: GOCCs are not covered by
be less than 5 nor more than 10 years. the exemption since the exemption only refers to
The sanggunian may fix different rates for different instrumentalities without personalities distinct from
parts or sections thereof, depending on whether the government.
such land is more or less benefited by the proposed
work. [Sec. 241, LGC] Mactan Airport v. MIAA cases
Provision involved SC Ruling
Special Education Fund (SEF) Mactan Sec 133 (o), LGC. Airport Authority
A province, or city or municipality within Metro Airport LGUs not allowed is a GOCC, not
Manila may levy and collect an annual tax of one Authority to levy… [o] exempt from RPT.
percent (1%) on the assessed value of real property vs. Marcos taxes/fees/ Legislature in
(1996) charges of any amending the law
which shall be in addition to the basic real property kind on the specifically
tax. national gov‘t, its deleted GOCCs
agencies, from the
Exempt from real property tax instrumentalities enumeration in
(1) Owned by the Republic of the Philippines or any and LGUs. Sec 234 (a).
of its political subdivisions except when
beneficial use is granted for a consideration or Sec 234 (a), LGC.
to a taxable person. Properties exempt
(2) Charitable institutions, churches, parsonages, from RPT: real
or convents appurtenant thereto, mosques, properties owned
by the Republic or
non-profit or religious cemeteries, and all lands, any of its political
buildings, and improvements actually, directly subdivisions…
and exclusively used for religious, charitable, or Manila Sec 133 (o), LGC MIAA falls under
educational purposes. Airport the term
(3) Machinery and equipment actually, directly and Authority Sec 234 (a), LGC ―instrumentality‖
exclusively used by local Water utilities and vs. CA outside the scope
GOCCs engaged in the supply and distribution (2006) of LGS‘s local
of water and/or generation and transmission of taxing powers
electric power. under Sec 133[o].
(4) Real property owned by duly registered
cooperatives as provided for under Republic Act Mactan The Mactan
Airport Airport is a
No. 6938 [Cooperative Code of the Philippines]. Authority government
(5) Machinery and equipment used for pollution vs. City of instrumentality;
control and Environmental protection. [Sec. Lapu-Lapu only portions of
234, LGC] (2015) the land leased to
taxable persons
Provincial Assessor of Marinduque v. CA [G.R. No. like private
170532, Apr. 30, 2009]:A claim for exemption parties are
under Sec. 234 (e) should be supported by evidence subject to real
that the property sought to be exempt is actually, estate tax.
directly and exclusively used for pollution control
and environmental protection. Charitable Institutions
Lung Center of the Philippines vs. Quezon City [G.R.
Proof of Exemption No. 144104, June 29, 2004]: A charitable
(1) Documentary evidence such as affidavits, by- institution doesn't lose its character and its
laws, contract, articles of incorporation exemption simply because it derives income from
(2) Given to local assessor paying patients so long as the money received is
PAGE 224 OF 275

devoted to the charitable object it was intended to (3) Name and address of the transferee [Sec. 208,
achieve, and no money inures to the benefit of LGC]
persons managing the institution.
I.6. LISTING OF REAL PROPERTY IN THE
Property leased to private entities is not exempt ASSESSMENT ROLLS
from RPT, as it is not actually, directly and The local assessor must maintain an assessment
exclusively used for charitable purposes. Portions of roll wherein all real property, whether taxable or
the land occupied by the hospital and portions used exempt, located within the territorial jurisdiction of
for its patients, whether paying or non-paying, are the LGU, is listed.
exempt from real property taxes.
Real property in general—
I.4. APPRAISAL AND ASSESSMENT OF REAL Shall be listed, valued and assessed in the name of
PROPERTY TAX the owner or administrator, or anyone having legal
interest in the property.
I.5. DECLARATION OF REAL PROPERTY
Declaration by the Owner or Administrator For undivided real property—
Prepare a sworn statement declaring the true value May be in the name of the estate or of the heirs and
of the property which shall be the current and fair devisees, or in the name of one or more co-owners
market value of the property.
Real property of a corporation, partnership or
It must contain a sufficient description of the association—
property to enable the assessor or his deputy to Same manner as an individual
identify the same for assessment purposes
Real property owned by the Republic of the
The declaration must be filed with the assessor once Philippines, its instrumentalities, political
every three (3) years during the period from January subdivision, the beneficial use has been granted to
1 to June 30. [Sec. 202, LGC] a taxable person—
Declaration by Any Person Acquiring Real Property In the name of the possessor, grantee or of the
or Making Improvements public entity if such property has been acquired or
The sworn statement declaring the true value of the held for resale or lease. [Sec. 205, LGC]
property must be filed to the provincial, city or
municipal assessor within sixty [60] days after the I.7. APPRAISAL AND VALUATION OF REAL
acquisition or upon completion or occupancy of the PROPERTY
improvement, whichever comesealier. [Sec. 203, Land
LGC] The assessor of the province, city or municipality or
his deputy may summon the owners or persons
Declaration by the Provincial or City or Municipal having legal interest therein and witnesses,
Assessor administer oaths, and take deposition concerning
When the person required to file the sworn the property, its ownership, amount nature, and
declaration refuses or fails to make sich declaration, value. [Sec. 213, LGC]
the provincial, city or municipal assessor shall
declare the property in the name of the defaulting Before any general revision of property assessment
owner. is made, there shall be prepared a schedule of FMV
by the provincial, city or municipal assessors; which
Notice of Transfer of Real Property shall be published in a newspaper of general
Any person who shall transfer real property circulation or in the absence thereof, shall be
ownership to another shall notify the provincial, city posted in the provincial capital, city or municipal
or municipal assessor within sixty [60] days from the hall and in two other conspicuous public places
date of such transfer. therein. [Sec. 212, LGC]
CLASSES OF REAL PROPERTY
The notification shall include: (1) Residential – Is land principally devoted to
(1) Mode of transfer, habitation
(2) Description of the property alienated, and
PAGE 225 OF 275
(2) Agricultural – Is land devoted principally to the 225, LGC]

planting of trees, raising of crops, livestock and
poultry, dairying, salt making, inland fishing I.8. ASSESSMENT OF REAL PROPERTY
and similar aquaculture activities and other i. Assessment levels
agricultural activities and is not classified as Assessment level – is the percentage applied to the
mineral, timber, residential, commercial or fair market value to determine the taxable value of
industrial land the property [Sec. 199(g), LGC]
(3) Commercial – Is land devoted principally for the Assessment levels shall be fixed by ordinances of
object of profit and is not classified as the sanggunian at rates not exceeding those
agricultural, industrial, mineral, timber or prescribed in Sec. 218
residential land
(4) Industrial – Is land devoted principally to ii. General revisions of assessments and property
industrial activity as capital investment and is classification
not classified as agricultural, commercial, The local assessor shall undertake a general
timber, mineral or residential land revision of real property assessments every 3 years.
(5) Mineral – Are lands in which minerals exist in [Sec. 219, LGC]
sufficient quantity or grade to justify the
necessary expenditures to extract and utilize iii. Date of effectivity of assessment or
such minerals reassessment
(6) Timberland General rule: All assessments or reassessments
(7) Special – all lands, buildings and other made after the first day of January of any year shall
improvements actually, directly and exclusively take effect on the first day of January of any year
used for hospitals, cultural, or scientific
purposes, and those owned and used by local Exceptions: reassessments due to
water districts, and GOCCs rendering essential (1) partial or total destruction
public services in the supply and distribution of (2) major change in actual use;
water and/or generation and transmission of (3) great and sudden inflation or deflation of real
electric power [Sec. 216, LGC] property values;
(4) gross illegality of the assessment when made;
Machinery or
Brand New The FMV is the acquisition cost (5) any other abnormal cause shall be made within
If the machinery is imported, the ninety (90) days from the date of any cause and
acquisition cost includes freight, shall take effect at the beginning of the quarter
insurance, bank and other next following the reassessment. [Sec. 221,
charges, brokerage, arrastre and
LGC]
handling, duties and taxes, plus
cost of inland transportation,
handling, and installation iv. Assessment of property subject to back taxes
charges at the present site. [Sec. Property declared for the first time: assessed for
224, LGC] taxes for the period during which it would have been
All other Cases FMV is determined by dividing the liable but in no case for more than ten [10] years
remaining economic life of the prior to the date of initial assessment [Sec. 222,
machinery by its estimated LGC]
economic life and multiplied by
the replacement/reproduction v. Notification of new or revised assessment
cost. [Sec. 224, LGC] When real property is assessed for the first time or
Depreciation Rate—not exceeding five percent
when an existing assessment is increased or
Allowance (5%) of its original cost or
replacement cost, for each year of
decreased, the local assessor shall within thirty [30]
use days give written notice of the new or revised
The remaining value shall be fixed assessment to the person in whose name the
at not less than twenty percent property is being declared.
(20%) of such original,
replacement or reproduction cost Notice may be given personally or by registered mail
for so long as the machinery is or through the assistance of the punong barangay to
useful and in operation. [Sec.
PAGE 226 OF 275

the last known address of the person to be served. Payments of real property taxes shall first be applied
[Sec. 223, LGC] to prior years delinquencies, interests and penalties,
if any, and only after the delinquencies are settled
I.9. COLLECTION OF REAL PROPERTY TAX may tax payments be credited for the current period.
Real property tax for any year [Sec. 250, LGC]
Date of Accrual shall accrue on the first day of
(5.1) January. [Sec. 246, LGC] ii. Interests on unpaid real property tax
On or before the 31st of January In case of failure to pay the basic real property tax or
or on any date prescribed, the any other tax when due shall subject the taxpayer to
local treasurer shall post the the payment of interest at the rate of two percent per
notice of the dates when the tax
may be paid without interest at a
month on the unpaid amount or a fraction thereof
Notice for conspicuous and publicly until the delinquent tax shall have been fully paid.
Collection (5.2) accessible place at the city or But the total interest on the unpaid tax shall not
municipal hall. exceed thirty-six months. [Sec. 255, LGC]
The notice shall also be iii. Condonation of real property tax

published in a newspaper of By SANGGUNIAN: in case of general failure of crops
general circulation in the locality or substantial decrease in the price of agricultural or
once a week for two consecutive agri-based products or calamity in any LGU [Sec.
weeks. [Sec. 249, LGC] 276, LGC]
Within five years from the date
they become due
Prescriptive By the PRESIDENT of the Philippines: when public
Periods for Within ten years from discovery interest so requires [Sec. 277, LGC]
Collection (5.3) of fraud, in case there is fraud or
intent to evade Remedies of LGUs for Collection of Real Property
Local treasurer is legally Tax
prevented to collect tax.
The owner or property requests i. Administrative
Instances for for reinvestigation and writes a Local Government‘s Lien—
Suspension of waiver before expiration of The basic real property tax shall constitute a lien on
Prescriptive period to collect.
the property subject to tax, superior to all liens,
Period The owner of property is out of
the country or cannot be located
charges or encumbrances in favour of any person,
[Sec. 270, LGC] irrespective of the owner or possessor thereof,
The local treasurer. enforceable by administrative or judicial action and
Collecting He may deputize the barangay may only be extinguished upon payment of the tax
Authority treasurer to collect all taxes and the related interests and expenses. [Sec. 257,
upon filing of a bond. [Sec. 247, LGC]
LGC]
Levy
I.10. SPECIAL RULES ON PAYMENT Upon the failure to pay the tax when due, the local
treasurer shall issue a warrant levying the real
i. Payment of real property tax in installments property subject to tax. The warrant shall include a
Payment of real property tax and the additional tax duly authenticated certificate showing the name of
for the Special Education Fund, without interest, the owner or person having legal interest therein,
may be made in four [4] equal instalments: description of the property, amount of the tax due
1st : March 31st and interest thereon.
2nd : June 30th Warrant must be mailed or served to owner or
3rd : September 30th person having legal interest in the property
4th : December 31st Written notice of levy must be mailed or served to
the assessor and the Register of Deeds where the
This shall not apply to special levies which shall be property is located
governed by ordinance of the sanggunian concerned. The Register of Deeds must annotate the levy on
the tax declaration and certificate of title [Sec. 258,
LGC]
PAGE 227 OF 275
Failure to issue or execute the warrant of levy Fels Energy v. Province of Batangas [G.R. No.
within one year from the time the tax becomes 168557, Feb. 16, 2007]: Under Section 226 of R.A.
delinquent or within thirty days from the date of the No 7160, the last action of the local assessor on a
issuance thereof shall be dismissed from service particular assessment shall be the notice of
[Sec. 259, LGC] assessment; it is this last action which gives the
owner of the property the right to appeal to the LBAA.
Purchase by LGU for Want of Bidder The procedure likewise does not permit the property
There is no bidder; or owner the remedy of filing a motion for
reconsideration before the local assessor.
When The highest bid is for an amount
Available insufficient to pay the real property tax Victorias Milling v. CTA [G.R. No. L-24213, Mar. 13,
and the related interest and costs of
1968]: The failure to appeal within the statutory
sale
The local treasurer conducting the sale
period renders the assessment final and
shall purchase the property in behalf of unappealable.
Duty of the the LGU to satisfy the claim and within
Local Treasurer two years thereafter shall make a Appeal to the Central Board of Assessment Appeals
report of his proceedings. (CBAA)
Within one year from the date of Appeal must be filed within 30 days from the receipt
Redemption forfeiture of the decision of LBAA [Sec. 229, LGC]
Period
Effect of payment of tax
Appeal on assessments of real property shall not
ii. Judicial suspend the collection of the corresponding realty
The LGU may enforce the collection by civil action in taxes on the property involved as assessed by the
any court of competent jurisdiction. provincial or city assessor without prejudice to the
subsequent readjustment depending upon the final
Must be filed by local treasurer within 5 to 10 years. outcome of the appeal. [Sec. 231, LGC]
[Sec. 266 in relation to Sec. 270, LGC]
Payment of real property under protest
J. TAXPAYER’S REMEDIES Protest must be filed with the local treasurer. No
J.1. ADMINISTRATIVE protest shall be entertained unless the tax is first
Protest paid. The protest must be in writing and filed within
Appeal to the Local Board of Assessment Appeals 30 days from payment of the tax to the local
(LBAA) treasurer.
(1) Appeal must be filed within 60 days from the
date of receipt of the written notice of Meralco v. Nelia Barlis [G.R. No. 114231, May 18,
assessment 2001]: The trial court has no jurisdiction to issue a
(2) By filing a petition under oath in the form writ of prohibition which seeks to set aside the
prescribed for the purpose warrant of garnishment over petitioner‘s bank
(3) Copies of tax declarations and other affidavits deposit in satisfaction of real property taxes without
or documents must be submitted [Sec. 226, paying first under protest the tax assessed and
LGC] without exhausting available administrative
remedies.
The LBAA shall decide the appeal within 120 days
from the date of receipt of such appeal The local treasurer shall decide the protest within 60
The LBAA shall have the power to summon days from receipt.
witnesses, administer oaths, conduct ocular Appeal to the CTA En Banc
inspection, take depositions, and issue subpoena Appeal must be filed through a petition for review
duces tecum and/or subpoena within 30 days from the receipt of the decision of
CBAA [Sec. 11, R.A. 1125 as amended]
The LBAA must furnish the appellant a copy of the
decision of the board. [Sec. 229, LGC] Appeal to the SC
Appeal must be filed within 15 days from receipt of
decision of the CTA [Rule 45, Rules of Court]
PAGE 228 OF 275
J.2. JUDICIAL
Question on the legality of a tax ordinance
Any question on the constitutionality or legality of a
tax ordinance may be raised on appeal within 30
days from effectivity to the Secretary of Justice who
shall render a decision within 60 days from the date
of receipt of the appeal.
The appeal shall not have the effect of suspending

the effectivity of the tax ordinance and the accrual
and payment of the tax.
Within 30 days after receipt of the decision or the

lapse of the sixty-day period without the Secretary of
Justice acting upon the appeal, the aggrieved party
may file appropriate proceedings with a court of
competent jurisdiction. [Sec. 187, LGC]
Assailing the validity of a tax sale

No court shall entertain any action assailing the
validity of any sale at public auction until the
taxpayer shall have deposited with the court the
amount for which the real property was sold,
together with interest of two percent per month from
the date of sale to the time of the institution of the
action. [Sec. 267, LGC]
PAGE 229 OF 275

Flowchart V: Procedure for Assessment of Land Value for Real Property Tax
Purposes-Local Gov’t Code
For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto
Assessor prepares
Owner declares real Assessor declares
assessment rolls
property once every 3 real property if owner/
START wherein real property
years (sec. 202) w/n administrator fails to
shall be listed, valued
Jan 1 to June 30 do so (sec. 204)
and assessed (sec. 205)
Submit documents
Owner may claim
supporting exemption w/ Is real property
for tax exemption Yes
in 30 days from tax exempt?
Required (sec. 206)
declaration (sec. 206)
Documents
submitted w/in
30 days? Property shall be
Property dropped from
Yes proven as tax Yes
assessment roll
No exempt? (sec. 206)
Property shall be
listed as taxable in
No
the assessment
roll (sec. 206) END
Within 30 days from

assessment, assessor
No
sends notice to owner
(sec. 223)
Owner may protest
If LBAA rejects protest, owner
assessment within 60 LBAA must decide
may appeal to the Central
days from receipt of notice within 120 days
Board of Assessment Appeals
to the Local Board of from receipt of
(CBAA) w/in 30 days from
Assessment Appeals appeal (sec. 229)
receipt of notice (Sec. 229)
(LBAA) (Sec. 226)
If CBAA rejects protest,

Appeal to the owner may appeal to
END Supreme Court w/ the CTA en banc within
in 15 days 30 days from receipt of
decision
PAGE 230 OF 275

Flowchart VI: Taxpayer’s Remedies Involving Collection of Real Property

Tax-Loc Gov’t Code
For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto
LT- Local Treasurer

LGU - Local Government Unit
LBAA- Local Board of Assessment Appeals
CBAA- Central Board of Assessment Appeals
START CTA- Court of Tax Appeals
LT posts notice of deadline for

Owner pays the tax.
Assessor submits payment at a conspicuous place at LT collects the tax
Written protest must be
assessment roll to the LGU hall OR publish the same starting Jan 1 of
filed with the local
local treasurer in a newspaper of general the calendar year.
treasurer w/in 30 days
(sec. 248) circulation in the LGU 1x a week for (Sec. 257)
from payment. (sec. 252)
2 consecutive weeks (sec. 249)
Amount of tax
LT must decide w/
protested shall be
LT grants LT decides w/in in 60 days from
refunded or Yes Yes
protest? 60 days? receipt of protest
applied as tax
(sec. 252)
credit (Sec. 252)
No
Refund or tax credit must Taxpayer may appeal within within 60

No days from receipt of notice (or expiration
be claimed with the local
treasurer w/in 2 years from of 60 days) to the LBAA (Sec. 226)
the date taxpayer is entitled
to such (sec. 253) LBAA must decide
within 120 days
from receipt of
appeal (sec. 229)
LT acts on claim
LT grants
for refund/tax Taxpayer happy.
Yes refund/tax Yes END
credit w/in 60
credit?
days?
If LBAA rejects protest/

No refund, owner may
appeal to the CBAA w/
in 30 days from receipt
Taxpayer may appeal of notice (Sec. 229)
w/in 60 days from
No receipt of notice (or
expiration of 60 days)
to LBAA (Sec. 226)
If CBAA rejects protest/
Appeal to the refund, owner may appeal to
END Supreme Court w/ the CTA en banc within 30
in 15 days days from receipt of decision
(Rule 43, ROC)
PAGE 231 OF 275

Flowchart VII: Procedure for Levy for Purposes of Satisfying Real

Property Taxes-Local Gov’t Code
For purposes of this flowchart owner means owner or administrator of real property or any
START person having legal interest thereto
Warrant of Levy issued

Tax constitutes a lien on the
by the Local Treasurer Warrant is mailed
property superior to all liens Time for payment
(LT), which has the force to or served upon
& may only be extinguished of real property
of legal execution in the the delinquent
upon payment of the tax and taxes expires
LGU concerned. (sec. owner (sec. 258)
charges. (sec. 257)
258)
30 days from service of warrant, local

treasurer shall advertise sale of the
property by:
Before the date of sale, 1. posting notice at main entrance of written notice of the levy &
the owner may stay the LGU hall/bldg and in a conspicuous the warrant is mailed/served
proceedings by paying the place in the barangay where prope is upon the assessor and the
delinquent tax, interest & located AND Registrar of Deeds of the
the expenses of sale. 2. by publication once a week for 2 LGU (sec. 258)
weeks (sec. 260) (Note: In cases of
levy for unpaid local taxes publication
Sale is held: is once a week for 3 weeks)
1. at the main entrance
LT shall purchase the property in behalf of
of the LGU building, OR
the LGU (sec. 263) (Note: in cases of levy
2. on the property to be
No for unpaid local taxes, LT may purchase if
sold, OR at
there is no bidder or if the highest bid is
3. any other place
insufficient-sec. 181)
specified in the notice
w/in 1 year from sale, owner may

Registrar of Deeds shall transfer the
redeem upon payment of the
title of the forfeited property to the LGU
1. delinquent tax,
w/o need of a court order (sec. 263)
Is there a 2. interest due,
bidder? 3. expenses of sale (from date of
delinquency to date of sale) and
4. add’l interest of 2% per month on W/n 1 year from forfeiture, the
the purchase price from date of sale owner, may redeem the property by
Yes to date of redemption. (sec. 261) paying to the local treasurer the full
Delinquent owner retains amount of the tax and the related
possession and right to the fruits interest and the costs of sale
Bidder pays & 30 days (sec. 261) otherwise the ownership shall be
after the sale, the LT vested on the local government unit
shall report the sale to concerned. (sec. 263)
the sanggunian
LT returns to the
Sanggunian concerned
purchaser/bidder the
may, by ordinance sell
price paid + interest
and dispose of the real
of 2% per month
LT shall deliver to property acquired under
(sec. 261)
purchaser certificate the preceding section at
of sale public auction. (sec. 264)
If property is not
redeemed, the local Levy may be repeated
Proceeds of sale in treasurer shall until the full amount due,
excess of delinquent execute a deed of including all expenses, is
tax, interest & conveyance to the collected. (sec. 265)
expenses of sale purchaser (sec. 262)
remitted to the owner
(sec. 260)
END
PAGE 232 OF 275

B. GENERAL RULE: ALL IMPORTED

VII. Tariff and Customs ARTICLES ARE SUBJECT TO DUTY [SEC.
101, TCC; SEC. 104, CMTA]
Code of 1978, as Importation by the government taxable ―except as
Amended otherwise specifically provided, all importations by
[Note: The Tariff and Customs Code (TCC) has been the government for its own use or that of its
repealed by RA 10863 or the Customs subordinate branches on instrumentalities, or
Modernization and Tariff Act (CMTA). CMTA came corporations, agencies or instrumentalities owned
into effect on 30 May 2016] or controlled by the government, shall be subject to
the duties, taxes, fees and other charges provided
for in this code: provided, however, that upon
A. TARIFF AND DUTIES, DEFINED certification of the head of the department or
Tariff
political subdivision concerned, with the approval of
Taxes or list of articles liable to duties
the auditor general, that the imported article is
A list or schedule of articles on which a duty is
actually being used by the government or any of its
imposed upon the importation into the country, with
political subdivision concerned, the amount of duty,
the rates at which they are severally taxed. And
tax, fee or charge shall be refunded to the
derivatively, the system of imposing duties or taxes
government or the political subdivision which paid
on the importation of foreign merchandise.
it.‖ [Sec. 1205 TCC]
Custom duties – taxes on the importation or
CMTA, Sec. 406: ―Except those provided for in Sec.
exportation of commodities. Tariff or tax assessed
800 (conditionally tax and/or duty-exempt
upon the merchandise imported from or exported to
importation), all importations by the Government for
a foreign country –
its own use or that of its subordinate branches or
instrumentalities, or corporations, agencies or
Export tariff – levied, assessed and collected an
instrumentalities owned or controlled by the
export duty on the gross FOB value at the time of
government, shall be subject to the duties, taxes,
shipment based on the prevailing rate on traditional
fees and other charges under the CMTA.‖
export products, such as certain wood products,
mineral products, plant and vegetable products [Sec.
Articles – goods, wares, merchandise and in general
514, TCC]
anything that may be made subject of importation or
exportation [Sec. 3514, TCC]
Note: Export duties imposed upon all export
products under Sec. 514, TCC had been abolished,
U.S. Dollars, having ceased to be legal tender in the
except the export duty upon logs [Sec. 1, EO 26
Philippines, fall within the meaning of the term
issued on 1 July 1986].
merchandise [Bastida v. Commissioner of Customs
(1970)]
Import tariff – All articles, when imported from any
foreign country into the Philippines, shall be subject
to duty upon each importation, even though C. PURPOSE FOR IMPOSITION
previously exported from the Philippines, except as For the protection of consumers and manufacturers,
otherwise specifically provided for in this Code or in as well as Philippine products from undue
other laws [Sec. 101, TCC] competition posed by foreign-made products.
CMTA, Sec. 104: ―All goods, when imported into the D. FLEXIBLE TARIFF CLAUSE
Philippines, shall be subject to duty upon Constitutional Basis: Sec. 28[2], Art. VI, 1987
importation, including goods previously exported Constitution. The Congress may, by law, authorize
from the Philippines, except as otherwise the President to fix with specified limits, and subject
specifically provided under CMTA or other laws.‖ to such limitations and restrictions, as it may
impose, tariff rates, import and export quotas,
tonnage and wharfage duties, and other duties or
imposts within the framework of the national
development program of the Government.
PAGE 233 OF 275
official designated to receive such entry papers and

The flexible clause refers to the authority given to any duties, taxes, fees and/or other lawful charges
the President, upon the recommendation of NEDA, required to be paid at the time of making such entry
to adjust the tariff rates in the interest of national have been paid or secured to be paid with the
economy, general welfare and/or national security customs official designated to receive such monies,
[Sec. 401, TCC]. provided that the article has previously arrived
within the limits of the port of entry. [Sec. 206, TCC]
CMTA, Sec. 1608: ―In the interest of the general
welfare and national security,‖ the President is CMTA, Sec. 115: ―Imported goods shall be deemed
empowered to adjust the tariff rates, upon ―entered‖ in the Philippines for consumption when
recommendation of NEDA. the goods declaration is electronically lodged,
together with any required supporting documents,
The President is empowered to increase (by not with the pertinent customs office.‖
more than 5x) or reduce (by not more than 50%) the
rates of import duty expressly fixed by statute. This E.2. OBLIGATIONS OF IMPORTER
includes the authority to modify the form of duty. i. Cargo manifest
[Sec. 401, TCC] [Sec. 1005, TCC; the same under CMTA, Sec. 1204]
CMTA, Sec. 1608: The President is empowered to: Every vessel from a foreign port must have on board
(1) Increase, reduce or remove existing rates a complete manifest of all her cargo.
[increase in the rate cannot exceed 100% ad
valorem], including authority to modify the form All the cargo intended to be landed at a port in the
of duty Philippines must be described in separate
(2) Establish import quotas or ban imports of any manifests for each port of call.
commodity
(3) Impose an additional duty not exceeding 10% The manifest shall include:
ad valorem (1) Port of departure
(2) Port of delivery
E. REQUIREMENTS OF IMPORTATION (3) Marks, numbers, quantity and description of
E.1. BEGINNING AND ENDING OF the packages
IMPORTATION (4) Names of the consignees
Importation begins when the carrying vessel or
aircraft enters the jurisdiction of the Philippines with General rule: It cannot be changed or altered after
intention to unload therein [Sec. 1202, TCC; the entry of vessel.
same under CMTA, Sec. 103]
Exception:
Importation is deemed terminated upon payment of Amendment by the master, consignee or agent
duties, taxes and other charges due upon the attached to the original manifest
articles, or secured to be paid, at a port of entry AND
the legal permit for withdrawal shall have been CANNOT amend the manifest after the invoice
granted, or in case said articles are free of duties, and/or entry covering the importation have been
taxes and other charges, until they have legally left received and recorded in the office of the appraiser
the jurisdiction of the customs. [Sec. 1202, TCC; the
same under CMTA, Sec. 103] EXCEPT: (a) Obvious clerical error or any other
discrepancy is committed in the preparation; (b)
Note: The payment of the duties, taxes, fees and Without fraudulent intent; (c) Discovery would not
other charges must be in full. [Papa v. Mago (1968)] have been made until after examination of the
importation is completed.
Imported articles shall be deemed "entered" in the
Philippines for consumption when the specified The cargo manifest and each copy thereof shall be
entry form is properly filed and accepted, together accompanied by a translation into the official
with any related documents required by the TCC language of the Philippines, if originally written in
and/or regulations to be filed with such form at the another language. [Sec. 1006, TCC; different under
time of entry, at the port or station by the customs
PAGE 234 OF 275
CMTA, Sec. 1205—the translation shall be in lodgement of a goods declaration. A goods

English] declaration may be for consumption, for customs
bonded warehousing, for admission, for conditional
Master shall deliver and mail the cargo manifest to importation, or for customs transit.‖
(endorsed by boarding officer):
(1) Auditor General Kinds of Import Entry [Sec. 1302, TCC]
(2) Collector (Present original) [Sec. 1007, TCC; (1) Formal Entry
different under CMTA, Sec. 1206—the Bureau (2) Informal Entry
of Customs shall provide electronic copies to
the COA Chairperson; the master shall present CMTA, Sec. 401—Kinds of Goods Declaration
to the District Collector the original properly (1) For Consumption
endorsed by the boarding officer] (2) For Customs Bonded Warehousing
(3) For admission
ii. Import entry (4) For conditional importation
- Now called ―Goods Declaration‖ under the CMTA (5) For customs transit
Imported articles must be entered in the Content and Form of Import Entry
customhouse at the port of entry within fifteen days Content [Sec. 1304, TCC]
from date of discharge of the last package from the (1) That the entry delivered to the Collector
vessel either contains a full account of the value or price
(1) by the importer, being holder of the bill of articles, including subject of the entry;
lading (2) That the invoice and entry contain a just and
(2) by any other holder of the bill of lading in due faithful account of the value or price of said
course, articles including and specifying the value of all
(3) by a customs broker acting under authority from containers or coverings, and that nothing has
a holder of the bill, or been omitted, therefrom or concealed whereby
(4) by a person duly empowered to act as agent or the government of the Republic of the
attorney-in-fact for such holder. Philippines be defrauded of any part of the
duties lawfully due on the articles;
The Collector may grant an extension of not more (3) That, to the best of the declarant's information
than fifteen days. [Sec. 1301, TCC; the same under and belief, all the invoice and bills of lading to
CMTA, Sec. 106 and 407, except that for declarants, the articles are the only ones in existence
#2 is changed to—the exporter, being the owner of relating to the importation in question and that
the goods to be shipped out. And, in case the they are in the state in which they were actually
consignee or the person who has the right to received by him;
dispose of the goods is a juridical person, it may (4) That, to the best of the declarant's information
authorize a responsible officer of the company to and belief, the entries, invoices and bill of and
sign the goods declaration as declarant on its the declaration thereon under penalties of
behalf.] falsification of perjury are in all respects
genuine and true, and were made by the person
CMTA, Sec. 102(y): ―Goods Declaration - a by whom the same purpose to have been made.
statement made in the manner prescribed by the [The same under CMTA, Sec. 412, except that
Bureau and other appropriate agencies, by which #1 is omitted]
the persons concerned indicate the procedure to be
observed in the application for the entry or Form
admission of imported goods and the particulars of (1) signed by the importer, consignee or holder of
which the customs administration shall require.‖ the bill, by or for whom the entry is effected [Sec.
1305, TCC; CMTA, Sec. 107—signed by the
All imported articles, except importation admitted declarant];
free of duty, shall be subject to a formal or informal (2) in the required number of copies in such form
entry. [Sec. 1302, TCC] as prescribed by regulations [Sec. 1306, TCC];
and
CMTA, Sec. 401: ―Unless otherwise provided for in (3) shall contain the names of the importing vessel
this Act, all imported goods shall be subject to the or aircraft, port of departure and date of arrival,
PAGE 235 OF 275
the number and mark of packages, or the iii. Declaration of correct weight or value
quantity, if in bulk, the nature and correct [Sec. 1313, TCC]
commodity description of the articles contained Classification
therein, and its value as set forth in a proper When article is not specifically classified in the Code,
invoice to be presented in duplicate the entry the interested party, importer or foreign exporter
[Sec. 1306, TCC; the same under CMTA, Sec. may submit a sample with full description of
411, except that the latter provides for the component materials in a written request.
inclusion of the names of the consignees and
port of destination] Value
Upon written application, Collector shall furnish
Articles to be cleared on informal entry importer within 30 days the latest information as to
[Sec. 1302, TCC] the value of the articles to be imported.
(1) Articles of a commercial nature intended for
sale, barter or hire, the dutiable value of which Importer must present all pertinent papers and
is P2000 or less; [Value changed to P50,000 documents, act in good faith and unable to obtain
under CMTA, Sec. 402] information due to unusual conditions
(2) Personal and household effects or articles,
regardless of value, imported in passenger's Information given is not an appraisal nor is it
baggage, mail, or otherwise, for personal use. binding upon the Collector‘s right of appraisal.
The Collector may, upon instruction of the Secretary The declaration, ascertainment or verification of the
of Finance, when he deems it necessary for the correct weight of the cargo at the port of loading is
protection of the revenue, require a formal entry the duty or obligation of the master, pilot, owner,
regardless of value. officer or employee of the vessel. If he omits or
disregards this duty and a punishable discrepancy
Types of Formal Entry between the declared weight and actual weight of
[Sec. 1302, TCC] the cargo exists, the inevitable conclusion is that he
A formal entry may be: is negligent or careless. Similarly, if in the exercise
(1) For immediate consumption, or or performance of this duty, he is negligent or
(2) Under irrevocable domestic letter of credit, careless resulting in the commission of excessive
bank guarantee or bond for: discrepancy in the weight of the ship's cargo
(a) Placing the article in customs bonded penalized under the law, carelessness or
warehouse; incompetency is, nonetheless, imputable to him.
(b) Constructive warehousing and immediate
transportation to other ports of the PROVISIONAL GOODS DECLARATION (PGD) UNDER
Philippines upon proper examination and CMTA, SEC. 403: Where the declarant does not have
appraisal; or all the information or supporting documents
(c) Constructive warehousing and immediate required to complete the goods declaration, the
exportation. lodging of a provisional goods declaration may be
allowed: Provided, That it substantially contains the
CMTA, Sec. 402: ―All goods declaration for necessary information required by the Bureau and
consumption shall be cleared through a formal entry the declarant undertakes to complete the
process.‖ information or submit the supporting documents
within 45 days from the filing of the PGD, extentible
Note: All importations entered under formal entry for another 45 days for valid reasons.
shall be covered by a letter of credit or any other
verifiable document evidencing payment. [R.A. If the Bureau accepts a PGD, the duty treatment of
9135 (2001); slightly modified under CMTA, Sec. the goods shall not be different from that of goods
402—―a letter of credit or any verifiable commercial with complete declaration.
document evidencing payment or in cases where
there is no sale for export, by any commercial Goods under a PGD may be released upon posting
document indicating the commercial value of the of any required security equivalent to the amount
goods.‖] ascertained to be the applicable duties and taxes.
PAGE 236 OF 275

iv. Liability for payment of duties passed free of duty or final adjustment of duties
[Sec. 1204, TCC; the same under CMTA, Sec. 405] made, after the expiration of 3 years from the date
General rule: the liability for duties, taxes, fees and of the final payment of duties.
other charges attaching on importation constitutes
a personal debt due from the importer to the Exceptions:
government; it constitutes a lien upon the articles (1) Fraud
imported which may be enforced while such articles (2) Protest
are in custody or subject to the control of the (3) Compliance audit pursuant to the provisions of
government. the Code
How to discharge: Discharged only by payment in Note: Exceptions do not apply in case of tentative
full of all duties, taxes, fees and other charges liquidation
legally accruing
Fractions in the Liquidation — a fraction of a peso
Exception: Relieved by laws or regulations less than fifty centavos shall be disregarded, and a
fraction of a peso amounting to fifty centavos or
v. Liquidation of duties more shall be considered as one peso. In case of
When made: Upon approval by the Collector of the overpayment or underpayment of duties, taxes,
returns of the appraiser and reports of the weights, surcharges, wharfage and/or other charges paid on
gauge or quantity [Sec. 1601, TCC] entries, where the amount involved is less than five
pesos, no refund or collection shall be made. [Sec.
How: the liquidation shall be made on the face of 1604, TCC]
the entry showing the particulars thereof, initiated
by the liquidating clerk, approved by the chief Other Notes:
liquidator, and recorded in the record of Readjustment of Appraisal, Classification or Return
liquidations. [Sec. 1601, TCC] [Sec. 1407, TCC]
Prescriptive Period for Appraisal, Classification or
Additional Process: A daily record of all entries Return
liquidated shall be posted in the public corridor of General rule: Appraisal, classification or return as
the customhouse, stating the name of the vessel or finally passed upon and approved or modified by the
aircraft, the port from which she arrived, the date of Collector shall not be altered or modified in any
her arrival, the name of the importer, and the serial manner.
number and date of the entry. A daily record must
also be kept by the Collector of all additional duties, Exceptions:
taxes and other charges found upon liquidation, and (1) Within one year after payment of the duties,
notice shall promptly be sent to the interested upon statement of error in conformity with
parties. [Sec. 1601, TCC] seventeen hundred and seven hereof, approved
by the Collector
Tentative and Final Liquidation (2) Within fifteen days after such payment upon
Tentative Liquidation request for reappraisal and/or reclassification
[Sec. 1602, TCC] addressed to the Commissioner by the Collector,
When liquidation shall be deemed to be tentative: If if the appraisal and/or classification is deemed
to determine the exact amount due under the law in to be low
whole or in part some future action is required [only (3) Upon request for reappraisal and/or
as to item/s affected] reclassification, in the form of a timely protest
addressed to the Collector by the interested
Effect: shall to that extent be subject to future and party if the latter should be dissatisfied with the
final readjustment and settlement; entry in such appraisal or return
case shall be stamped "Tentative liquidation" (4) Upon demand by the Commissioner of Customs
after the completion of compliance audit
Final Liquidation pursuant to the provisions of this Code." [R.A.
[Sec. 1603, TCC as amended by RA 9135] 9135 (2001)]
When liquidation is final and conclusive upon all the
parties: when articles have been entered and vi. Keeping of records
PAGE 237 OF 275
All importers are required to keep at their principal When the defendant is shown to have or to have had
place of business, in the manner prescribed by possession of the article in question, such
regulations to be issued by the Commissioner of possession shall be deemed sufficient evidence to
Customs and for a period of 3 years from the date of authorize conviction, unless the defendant shall
importation, all records of their importations and/or explain the possession to the satisfaction of the
books of accounts, business and computer systems court. [Sec. 3601, TCC]
and all customs commercial data including payment
records relevant to the verification of the accuracy of Note: The penalties for unlawful importation are very
the transactions value declared by the different in the CMTA, under Sec. 1401; the
importer/customs brokers on the import duty penalties are dependent on the appraised value of
the goods unlawfully imported.
All brokers are required to keep at their principal
place of business for a period of 3 years from date of F.2. OTHER FRAUDULENT PRACTICES
importation copies (1) Various Practices against Customs Revenue:
Any person who
Custom officer authorized by BOC may enter during (1) makes or attempts to make any entry of
office hours any premises or place where the records imported or exported article by means of
are kept to conduct an audit examination, any false or fraudulent invoice, declaration,
inspection, verification or investigation. The officer affidavit, letter, paper, or
may make copies or take extracts from any of such (2) by means of any false statement, written or
documents. A certified copy may be evidence verbal, or by means of any false or
admissible in all courts as if original. fraudulent practice whatsoever, or
(3) shall be guilty of any willful act or omission
Note: The same under CMTA, Secs. 1002-1003. by means of whereof the Government might
be deprived of the lawful duties, taxes and
F. IMPORTATION IN VIOLATION OF TCC other charges, or any portion thereof,
F.1. SMUGGLING accruing from the article or any portion
In order to prevent smuggling and to secure the thereof, embraced or referred to in such
collection of the legal duties, taxes and other invoice, declaration, affidavit, letter, paper,
charges, the customs service shall exercise or statement, or affected by such act or
surveillance over the coast, beginning when a vessel omission [Sec. 3602, TCC]
or aircraft enters Philippine territory and concluding (2) Failure to Report Fraud: Any master, pilot in
when the article imported therein has been legally command or other officer, owner or agent of any
passed through the customhouse. [Sec. 2202] vessel or aircraft trading with or within the
Philippines and any employee of the Bureau of
Smuggling – any person who shall fraudulently Customs, who, having cognizance of any fraud
import or bring into the Philippines, or assist in so upon the customs revenue, shall fail to report
doing, any article, contrary to law, or shall receive, all information relative thereto to the Collector,
conceal, buy, sell, or in any manner facilitate the as required by law [Sec. 3603, TCC]
transportation, concealment, or sale of such article (1) Concealment or Destruction of Evidence of
after importation, knowing the same to have been Fraud: Any person who willfully conceals or
imported contrary to law; includes the exportation of destroys, any invoice, book or paper relating to
articles in a manner contrary to law. [Sec. 3519, any article liable to duty, after an inspection
TCC] thereof has been demanded by the Collector of
any Collection district, or at any time conceals
Penalties for Unlawful Importation: or destroys any such invoice, book or paper for
Person found guilty of smuggling shall be punished the purpose of suppressing any evidence of
by a fine of not less than six hundred pesos nor more fraud therein contained [Sec. 3605, TCC]
than five thousand pesos and imprisonment for not (2) Affixing Seals: Any person who shall willfully
less than six months nor more than two years and, if break or destroy any seal placed by a customs
the offender is an alien, he shall be deported after official upon any car, or other conveyance by
serving the sentence. land, sea or air, or any compartment thereof
[Sec. 3606, TCC]
PAGE 238 OF 275

(3) Removal, Breakage, Alteration of Marks: Any conception is prevented or unlawful abortion
person who alters, defaces or obliterates any produced.
distinctive mark placed by a customs official on (5) Roulette wheels, gambling outfits, loaded dice,
any package of warehoused articles [Sec. 3607, marked cards, machines, apparatus or
TCC] mechanical devices used in gambling, or in the
(4) Removing Goods from Customs Custody: Any distribution of money, cigars, cigarettes or other
importer or owner of warehoused articles, or articles when such distribution is dependent
person in his employ, who by contrivance, upon chance, including jackpot and pinball
fraudulently opens the warehouse, or gains machines or similar contrivances.
access to the articles, except in the presence of (6) Lottery and sweepstakes tickets,
the proper official of the customs acting in the advertisements thereof and lists of drawings
execution of his duty [Sec. 3608, TCC] therein.
(5) Failure to Keep Importation Records and Give Except those authorized by the Philippine
Full Access to Customs Officers: Any person Government
who shall fraudulently remove warehoused (7) Any article manufactured in whole or in part of
articles from any public or private warehouse or gold silver or other precious metal, or alloys
shall fraudulently conceal such articles in any thereof, the stamps brands or marks of which
such warehouse, or shall aid or abet any such do not indicate the actual fineness or quality of
removal or concealment [Sec. 3609, TCC] said metals or alloys.
(8) Any adulterated or misbranded article of food or
G. CLASSIFICATION OF GOODS any adulterated or misbranded drug in violation
G.1. TAXABLE IMPORTATION of the provisions of the "Food and Drugs Act."
All articles, when imported from any foreign country (9) Marijuana, opium poppies, coca leaves, or any
into the Philippines, shall be subject to duty upon other narcotics or synthetic drugs which are or
each importation, even though previously exported may hereafter be declared habit forming by the
from the Philippines, except as otherwise President of the Philippines, any compound,
specifically provided for in this Code or in other laws. manufactured salt, derivative, or preparation
[Sec. 100, TCC] thereof,
Except: when imported by the Government of
G.2. PROHIBITED IMPORTATION the Philippines or any person duly authoriwhen
[Sec. 101, TCC] (POPP-LAW-DING) imported by the Government of the Philippines
(1) Dynamite, gunpowder, ammunitions and other or any person duly authorized by the Collector of
explosives, firearm and weapons of war, and Internal Revenue for medicinal purposes only
detached parts thereof, except when authorized (10) Opium pipes and parts thereof, of whatever
by law. material.
(2) Written or printed article in any form containing: (11) All other articles the importation of which is
(a) any matter advocating or inciting treason, prohibited by law.
rebellion, insurrection or sedition against
the Government of the Philippines G.3. CONDITIONALLY-FREE IMPORTATION
(b) forcible resistance to any law of the [Sec. 105, TCC]
Philippines The following articles shall be exempt from the
(c) containing any threat to take the life of or payment of import duties upon compliance with the
inflict bodily harm upon any person in the formalities prescribed in, or with, the regulations
Philippines. which shall be promulgated by the Commissioner of
(3) Written or printed articles, photographs, Customs with the approval of the Secretary of
engravings, lithographs, objects, paintings, Finance:
drawings or other representation of an obscene (1) Aquatic products (e.g., fishes, crustaceans,
or immoral character. mollusks, marine animals, seaweeds, fish oil,
(4) Articles, instruments, drugs and substances roe), caught or gathered by fishing vessels of
designed, intended or adapted for preventing Philippine registry: Provided, That they are
human conception or producing unlawful imported in such vessels or in crafts attached
abortion, or any printed matter which advertises thereto: And provided, further, That they have
or describes or gives directly or indirectly not been landed in any foreign territory or, if so
information where, how or by whom human landed, they have been landed solely for
PAGE 239 OF 275
transshipment without having been advanced in wearing apparel, articles of personal

condition; adornment [except luxury items], toilet articles,
(2) Equipment for use in the salvage of vessels or portable appliances and instruments and
aircrafts, not available locally, upon similar personal effects, excluding vehicles,
identification and the giving of a bond in an watercrafts, aircrafts, and animals purchased in
amount equal to one and one-half times the foreign countries by residents of the Philippines
ascertained duties, taxes and other charges which were necessary, appropriate and
thereon, conditioned for the exportation thereof normally used for the comfort and convenience
or payment of the corresponding duties, taxes in their journey and during their stay abroad
and other charges within six [6] months from upon proof satisfactory to the Collector of
the date of acceptance of the import entry: Customs that same have been in their use
Provided, That the Collector of Customs may abroad for more than six [6] months and
extend the time for exportation or payment of accompanying them on their return, or arriving
duties, taxes and other charges for a term not within a reasonable time which, barring
exceeding six [6] months from the expiration of unforeseen circumstances, in no case shall
the original period; exceed ninety days before or after the owners'
(3) Cost of repairs, excluding the value of the return: Provided, That the personal and
article used, made in foreign countries upon household effects shall neither be in
vessels or aircraft documented, registered or commercial quantities nor intended for barter,
licensed in the Philippines, upon proof sale or hire and that the total dutiable value of
satisfactory to the Collector of Customs [1] that which shall not exceed two thousand pesos
adequate facilities for such repairs are not [P2,000.00]: Provided further, That the
afforded in the Philippines, or [2] that such returning residents have not previously received
vessels or aircrafts, while in the regular course the benefit under this section within one year
of her voyage or flight was compelled by stress from and after the last exemption granted:
of weather or other casualty to put into a foreign Provided furthermore, That a fifty [50] per cent
port to make such repairs in order to secure the ad valorem duty across the board shall be
safety, seaworthiness or airworthiness of the levied and collected on the personal and
vessel or aircraft to enable her to reach her port household effects [except luxury items] in
of destination; excess of two thousand pesos: And provided,
(4) Articles brought into the Philippines for repair, finally, That the personal and household effects
processing or reconditioning to be re-exported [except luxury items] of a returning resident who
upon completion of the repair, processing or has not stayed abroad for six months shall be
reconditioning: Provided, That the Collector of subject to fifty per cent ad valorem duty across
Customs shall require the giving of a bond in an the board, the total dutiable value of which
amount equal to one and one-half times the does not exceed two thousand pesos; any
ascertained duties, taxes and other charges excess shall be subject to the corresponding
thereon, conditioned for the exportation thereof duty provided in this Code;
or payment of the corresponding duties, taxes (7) Wearing apparel, articles of personal
and other charges within six [6] months from adornment, toilet articles, portable tools and
the date of acceptance of the import entry; instruments, theatrical costumes and similar
(5) Medals, badges, cups and other small articles effects accompanying travelers, or tourists. or
bestowed as trophies or prizes, or those arriving within a reasonable time before and
received or accepted as honorary distinction; after their arrival in the Philippines, which are
(6) Personal and household effects belonging to necessary and appropriate for the wear and use
residents of the Philippines returning from of such persons according to the nature of the
abroad including jewelry, precious stones and journey, their comfort and convenience:
other articles of luxury which were formally Provided, That this exemption shall not apply to
declared and listed before departure and articles intended for other persons or for barter,
identified under oath before the Collector of sale or hire: Provided, further, That the Collector
Customs when exported from the Philippines by of Customs may, in his discretion, require either
such returning residents upon their departure a written commitment or a bond in an amount
therefrom and during their stay abroad; equal to one and one-half times the
personal and household effects including ascertained duties, taxes and other charges
PAGE 240 OF 275
conditioned for the exportation thereof or privilege of free entry was never granted to them
payment of the corresponding duties, taxes and before or that such person qualifies under the
other charges within three [3] months from the provisions of Letters of Instructions 105, 163
date of acceptance of the import entry: And and 210, and that the articles are brought from
Provided finally, That the Collector of Customs their former place of abode, shall be exempt
may extend the time for exportation or payment from the payment of customs duties and taxes:
of duties, taxes and other charges for a term not Provided, That vehicles, vessels, aircrafts,
exceeding three months from the expiration of machineries and other similar articles for use in
the original period; manufacture, shall not be classified hereunder;
(8) Personal and household effects and vehicles (10) Articles used exclusively for public
belonging to foreign consultants and experts entertainment, and for display in public
hired by, and/or rendering service to, the expositions, or for exhibition or competition for
government, and their staff or personnel and prizes, and devices for projecting pictures and
families, accompanying them or arriving within parts and appurtenances thereof, upon
a reasonable time before or after their arrival in identification, examination, and appraisal and
the Philippines, in quantities and of the kind the giving of a bond in an amount equal to one
necessary and suitable to the profession, rank and one-half times the ascertained duties,
or position of the person importing them, for taxes and other charges thereon, conditioned
their own use and not for barter, sale or hire for exportation thereof or payment of the
provided that, the Collector of Customs may in corresponding duties, taxes and other charges
his discretion require either a written within six [6] months from the date of
commitment or a bond in an amount equal to acceptance of the import entry; Provided, That
one and one-half times the ascertained duties, the Collector of Customs may extend the time
taxes and other charges upon the articles for exportation or payment of duties, taxes and
classified under this subsection; conditioned other charges for a term not exceeding six [6]
for the exportation thereof or payment of the months from the expiration of the original
corresponding duties, taxes and other charges period; and technical and scientific films when
within six [6] months after the expiration of their imported by technical, cultural and scientific
term or contract; And Provided, finally, That the institutions, and not to be exhibited for profit:
Collector of Customs may extend the time for Provided, further, That if any of the said films is
exportation or payment of duties, taxes and exhibited for profit, the proceeds therefrom
other charges for term not exceeding six [6] shall be subject to confiscation, in addition to
months from the expiration of the original the penalty provided under Section Thirty-six
period; hundred and ten as amended, of this Code;
(9) Professional instruments and implements, tools (11) Articles brought by foreign film producers
of trade, occupation or employment, wearing directly and exclusively used for making or
apparel, domestic animals, and personal and recording motion picture films on location in
household effects belonging to persons coming the Philippines, upon their identification,
to settle in the Philippines or Filipinos and/or examination and appraisal and the giving of a
their families and descendants who are now bond in an amount equal to one and one-half
residents or citizens of other countries, such times the ascertained duties, taxes and other
parties hereinafter referred to as Overseas charges thereon, conditioned for exportation
Filipinos, in quantities and of the class suitable thereof or payment of the corresponding duties,
to the profession, rank or position of the taxes and other charges within six [6] months
persons importing them, for their own use and from the date of acceptance of the import entry,
not for barter or sale, accompanying such unless extended by the Collector of Customs for
persons, or arriving within a reasonable time, in another six [6] months; photographic and
the discretion of the Collector of Customs, cinematographic films, undeveloped, exposed
before or after the arrival of their owners, which outside the Philippines by resident Filipino
shall not be later than February 28, 1979 upon citizens or by producing companies of
the production of evidence satisfactory to the Philippine registry where the principal actors
Collector of Customs that such persons are and artists employed for the production are
actually coming to settle in the Philippines, that Filipinos, upon affidavit by the importer and
change of residence was bona fide and that the identification that such exposed films are the
PAGE 241 OF 275
same films previously exported from the air stores; or articles purchased abroad for sale
Philippines. As used in this paragraph, the on board a vessel or aircraft as saloon stores or
terms "actors" and "artists" include the air store supplies: Provided, That any surplus or
persons operating the photographic cameras or excess of such vessel or aircraft supplies
other photographic and sound recording arriving from foreign ports or airports shall be
apparatus by which the film is made; dutiable;
(12) Importations for the official use of foreign (17) Articles and salvage from vessels recovered
embassies, legations, and other agencies of after a period of two years from the date of filing
foreign governments: Provided, That those the marine protest or the time when the vessel
foreign countries accord like privileges to was wrecked or abandoned, or parts of a
corresponding agencies of the Philippines; foreign vessel or her equipment, wrecked,
(13) Articles imported for the personal or family use abandoned in Philippine waters or elsewhere:
of the members and attaches of foreign Provided, That articles and salvage recovered
embassies, legations, consular officers and within the said period of two years shall be
other representatives of foreign governments: dutiable;
Provided, That such privilege shall be accorded (18) Coffins or urns containing human remains,
under special agreements between the bones or ashes, used personal and household
Philippines and the countries which they effects [not merchandise] of the deceased
represent: And Provided, further, That the person, except vehicles, the value of which does
privilege may be granted only upon specific not exceed ten thousand pesos, upon
instructions of the Secretary of Finance in each identification as such;
instance which will be issued only upon request (19) Samples of the kind, in such quantity and of
of the Department of Foreign Affairs; such dimension or construction as to render
(14) Imported articles donated to, or for the account them unsalable or of no appreciable
of, any duly registered relief organization, not commercial value; models not adapted for
operated for profit, for free distribution among practical use; and samples of medicines,
the needy, upon certification by the Department properly marked "sample-sale punishable by
of Social Services and Development or the law," for the purpose of introducing a new
Department of Education, Culture and Sports, article in the Philippine market and imported
as the case may be; only once in a quantity sufficient for such
(15) Containers, holders and other similar purpose by a person duly registered and
receptacles of any material including kraft identified to be engaged in that trade: Provided,
paper bags for locally manufactured cement for That importations under this subsection shall
export, including corrugated boxes for bananas, be previously authorized by the Secretary of
mangoes, pineapples and other fresh fruits for Finance: Provided, however, That importation of
export, except other containers made of paper, sample medicine shall be previously authorized
paperboard and textile fabrics, which are of by the Secretary of Health that such samples
such character as to be readily identifiable are new medicines not available in the
and/or reusable for shipment or transportation Philippines: Provided, finally, That samples not
of goods shall be delivered to the importer previously authorized and/or properly marked
thereof upon identification, examination and in accordance with this section shall be levied
appraisal and the giving of a bond in an amount the corresponding tariff duty.
equal to one and one-half times the (20) Commercial samples, except those that are not
ascertained duties, taxes and other charges readily and easily identifiable [e.g., precious
within six months from the date of acceptance and semi-precious stones, cut or uncut, and
of the import entry; jewelry set with precious stones], the value of
(16) Supplies which are necessary for the any single importation of which does not exceed
reasonable requirements of the vessel or ten thousand pesos [P10,000.00] upon the
aircraft in her voyage or flight outside the giving of a bond in an amount equal to twice the
Philippines, including articles transferred from ascertained duties, taxes and other charges
a bonded warehouse in any collection district to thereon, conditioned for the exportation of said
any vessel or aircraft engaged in foreign trade, samples within six [6] months from the date of
for use or consumption of the passengers or its the acceptance of the import entry or in default
crew on board such vessel or aircrafts as sea or thereof, the payment of the corresponding
PAGE 242 OF 275
duties, taxes and other charges. If the value of (23) Educational, scientific and cultural materials
any single consignment of such commercial covered by international agreements or
samples exceeds ten thousand pesos commitments binding upon the Philippine
[P10,000.00],the importer thereof may select Government so certified by the Department of
any portion of same not exceeding in value of Education, Culture and Sports.
ten thousand pesos [P10,000.00] for entry (24) Bibles, missals, prayer books, Koran, Ahadith
under the provision of this subsection, and the and other religious books of similar nature and
excess of the consignment may be entered in extracts therefrom, hymnal and hymns for
bond, or for consumption, as the importer may religious uses;
elect; (25) Philippine articles previously exported from the
(21) Animals (except race horses), and plants for Philippines and returned without having been
scientific, experimental, propagation, botanical, advanced in value or improved in condition by
breeding, zoological and national defense any process of manufacture or other means,
purposes: Provided, That no live trees, shoots, and upon which no drawback or bounty has
plants, moss, and bulbs, tubers and seeds for been allowed, including instruments and
propagation purposes may be imported under implements, tools of trade, machinery and
this section, except by order of the Government equipment, used abroad by Filipino citizens in
or other duly authorized institutions: Provided, the pursuit of their business, occupation or
further, That the free entry of animals for profession; and foreign articles previously
breeding purposes shall be restricted to imported when returned after having been
animals of recognized breed, duly registered in exported and loaned for use temporarily abroad
the book of record established for that breed, solely for exhibition, testing and
certified as such by the Bureau of Animal experimentation, for scientific or educational
Industry: Provided, furthermore, That certificate purposes; and foreign containers previously
of such record, and pedigree of such animal imported which have been used in packing
duly authenticated by the proper custodian of exported Philippine articles and returned empty
such book of record, shall be produced and if imported by or for the account of the person
submitted to the Collector of Customs, together or institution who exported them from the
with affidavit of the owner or importer, that such Philippines and not for sale, barter or hire
animal is the animal described in said subject to identification: Provided, That any
certificate of record and pedigree: And Provided, Philippine article falling under this subsection
finally, That the animals and plants are certified upon which drawback or bounty has been
by the National Economic and Development allowed shall, upon re-importation thereof, be
Authority as necessary for economic subject to a duty under this subsection equal to
development; the amount of such drawback or bounty.
(22) Economic, technical, vocational, scientific, (26) Aircraft, equipment and machinery, spare parts
philosophical, historical, and cultural books commissary and catering supplies, aviation gas,
and/or publications: Provided, That those fuel and oil, whether crude or refined, and such
which may have already been imported but other articles or supplies imported by and for
pending release by the Bureau of Customs at the use of scheduled airlines operating under
the effectivity of this Decree may still enjoy the Congressional franchise: Provided, That such
privilege herein provided upon certification by articles or supplies are not locally available in
the Department of Education, Culture and reasonable quantity, quality and price and are
Sports that such imported books and/or necessary or incidental for the proper operation
publications are for economic, technical, of the scheduled airline importing the same;
vocational, scientific, philosophical, historical (27) Machineries, equipment, tools for production,
or cultural purposes or that the same are plants to convert mineral ores into saleable
educational, scientific or cultural materials form, spare parts, supplies, materials,
covered by the International Agreement on accessories, explosives, chemicals, and
Importation of Educational Scientific and transportation and communication facilities
Cultural Materials signed by the President of imported by and for the use of new mines and
the Philippines on August 2, 1952, or other old mines which resume operations, when
agreements binding upon the Philippines. certified to as such by the Secretary of
Agriculture and Natural Resources upon the
PAGE 243 OF 275
recommendation of the Director of Mines, for a Ordinary or regular duties refer to those that, as a
period ending five [5] years from the first date of matter of course, are imposed on dutiable articles
actual commercial production of saleable [Sec. 104, TCC]
mineral products: Provided, That such articles
are not locally available in reasonable quantity, i. Ad valorem; Methods of valuation
quality and price and are necessary or The tax rates are based on
incidental in the proper operation of the mine; (1) The cost (FMV) or price of the imported articles,
and aircrafts imported by agro-industrial in wholesale quantities in the principal market
companies to be used by them in their of the exporting country or the country of origin,
agriculture and industrial operations or including expenses connected with the
activities, spare parts and accessories thereof; importation, such as insurance, freight,
(28) Spare parts of vessels or aircraft of foreign packaging, loading and unloading charges, but
registry engaged in foreign trade when brought excluding internal excise taxes to be remitted or
into the Philippine exclusively as replacements rebated; or
or for the emergency repair thereof, upon proof (2) In case such value is not ascertainable, the
satisfactory to the Collector of Customs that reports of the Revenue or commercial attaches;
such spare parts shall be utilized to secure the or
safety, seaworthiness or airworthiness of the (3) If still not ascertainable, the domestic
vessel or aircraft, to enable it to continue its wholesale market price in the ordinary course of
voyage or flight; trade less import duty and not more than 25%
(29) Articles of easy identification exported from the for expenses and profits. [Sec. 201, TCC]
Philippines for repair and subsequently
reimported upon proof satisfactory to the Basis for all Methods of Valuation
Collector of Customs that such articles are not [Sec. 201, TCC and CAO 4-2004]
capable of being repaired locally: Provided, Methods for determining dutiable value –
That the cost of the repairs made to any such (1) Transaction value – an ad valorem rate of duty
article shall pay a rate of duty of thirty per cent equivalent to the price actually paid or payable
ad valorem; for the goods when sold for export to the
(30) Trailer chassis when imported by shipping Philippines, as adjusted;
companies for their exclusive use in handling (2) Transaction value of identical goods – the
containerized cargo, upon posting a bond in an transaction value of identical goods sold for
amount equal to one and one-half times the export to the Philippines and exported at or
ascertained duties, taxes and other charges about the same time as the goods being valued;
due thereon to cover a period of one year from ―identical goods‖ shall mean goods which are
the date of acceptance of the entry, which the same in all respects, including physical
period for meritorious reasons may be extended characteristics, quality and reputation,
by the Commissioner of Customs from year to discounting minor differences in appearances;
year, subject to the following conditions: (3) Transaction value of similar goods – the
(a) That they shall be properly identified and transaction value of similar goods sold for
registered with the Land Transportation export to the Philippines and exported at or
Commission; about the same time as the goods being valued;
(b) That they shall be subject to customs ―similar goods‖ shall mean goods which,
supervision fee to be fixed by the Collector although not alike in all respects, have like
of Customs and subject to the approval of characteristics and like component materials
the Commissioner of Customs; which enable them to perform the same
(c) That they shall be deposited in the functions and to be commercially
Customs zone when not in use; and interchangeable;
(d) That upon the expiration of the period (4) Deductive value – an amount based on the unit
prescribed above, duties and taxes shall be price at which the imported gods or identical or
paid, unless otherwise re-exported similar imported goods are sold in the
Philippines, in the same condition as when
H. CLASSIFICATION OF DUTIES imported, in the greatest aggregate quantity, at
H.1. ORDINARY/REGULAR DUTIES or about the time of importation of the goods
being valued, to persons not related to the
PAGE 244 OF 275
persons from whom they buy such goods, as (2) They are legally recognized partners in
adjusted business;
(5) Computed value – the aggregate value of the (3) There exists in an employer-employee
cost or value of materials and fabrication or relationship between them;
other processing employed in producing the (4) Any person directly or indirectly owns, controls
imported goods, amount for profit and general or holds 5% or more of the outstanding voting
expenses, freight, insurance fees and other stock or shares of bother seller and buyer;
transportation expenses for the importation of (5) One of them directly or indirectly controls the
the goods, among others; and other;
(6) Fallback value – an amount determined by (6) Both of them are directly or indirectly controlled
using other reasonable means and on the basis by a 3rd person;
of data available in the Philippines. (7) Together they directly or indirectly control a 3rd
person; or
General rule: The foregoing methods are (8) Related by affinity or consanguinity up to 4th
sequentially applied civil degree.
Exception: [CAO 4-2004] Methods 4 and 5 may be If related, use of TV acceptable if:
reversed at the request of the importer, subject to (1) circumstances surrounding transaction
the approval of the Commissioner. show that relationship did not influence the
price
Ground to refuse the request: if the Commissioner (2) TV closely approximates:
deems that he will experience real difficulties in (3) TV of unrelated buyers of identical or
determining the dutiable value using Method 5 similar goods
(4) Deductive value of identical or similar
Dutiable Value (DV) must not include: goods determined according to method #4
(1) Charges for construction, erection, assembly (5) Computed value of identical or similar
maintenance or technical assistance goods determined according to method #5
undertaken after importation
(2) Cost of transport after importation Transaction Value of Identical Goods
(3) Duties and taxes of Phil The DV shall be the transaction value of identical
(4) Other permissible deduction under WTO goods sold for export to the Phil and exported at or
Valuation Agreement about the same time as the goods being valued.
Identical goods must be same commercial level and
ALL the following conditions must be satisfied so substantially same quantity as the goods being
the Transaction Value (TV) shall be the DV (CREPD): valued.
(1) Sale for export to Phil
(2) No restrictions as to the disposition or use of Identical goods
goods by buyer except: (1) Same in all respects (physical characteristics,
(3) Those imposed by law or Phil authorities quality and reputation)
(4) Limit the geographical area where goods may (2) Produced in the same country as the goods
be resold being valued
(5) Do not substantially affect the value of the (3) Produced by producer of the goods being
goods valued
(6) Not be subject to some condition or
consideration for which value cannot be Excludes: imported goods for which engineering,
determined development, artwork, design work, plans and
(7) No part of the proceeds of any subsequent sketches is undertaken in the Phil and provided
disposal shall accrue to the seller by the buyer to the producer free of charge or at
(8) Buyer and seller are not related or if they are, a reduced rate
relationship did not affect the price
When no identical goods produced by the same
Deemed related if: person: Identical goods produced by different
(1) They are officers or directors of one another‘s producer in the same country
business;
PAGE 245 OF 275
If NO identical goods at same commercial level and (c) transport, insurance and associated costs
same quantity, (d) customs duties and other national taxes
(1) TV of identical goods at a different commercial
level and different quantity may be utilized PRICE
(2) TV shall be adjusted upward or downward to Less: COMMISSIONS/ADDITIONS
account for the difference Less: COSTS
Less: DUTIES and TAXES
Transaction value of similar goods DEDUCTIVE VALUE
The DV shall be the transaction value of similar
goods sold for export to the Phil and exported at or The sales must meet the following conditions:
about the same time as the goods being valued. (1) sold in the Phil in the same condition as
imported
Similar goods must be same commercial level and (2) sales taken place at or about the same time of
substantially same quantity as the goods being importation of good being valued
valued.
If no sale took place at or about the time of
Similar goods importation, use sales at the earliest date after
(1) like characteristics and like component importation (of the similar or identical good])but
materials before expiration of 90 days
(2) capable of performing same functions
(3) commercially interchangeable If no sale meet the above conditions, importer may
(4) produced in same country choose the use of sales of goods being valued after
(5) produced by same producer further processing
Excludes: imported goods for which engineering, ―At or about the same time‖
development, artwork, design work, plans and 45 days prior to and 45 days following the
sketches is undertaken in the Phil and provided importation
by the buyer to the producer free of charge or at Computed value
a reduced rate DV is determined on the basis of cost of production
+ profit + general expenses reflected in sales from
When no similar goods produced by the same exporting country to the Phil of goods of same class
person: similar goods produced by different or kind
producer in the same country
DV is calculated by:
If NO similar goods at same commercial level and Determining aggregate of relevant costs, charges
same quantity, and expenses or value of
(1) TV of similar goods at a different (1) materials and
commercial level and different quantity (2) production or processing costs
may be utilized Costs* containers, packing, assists, engineering,
(2) TV shall be adjusted upward or downward artwork, plans and sketches undertaken in Phil and
to account for the difference charged to producer
profits and general expenses
Deductive value cost of transport, insurance and charges to the port
DV is determined on the basis of sales in the Phil of or place of importation
goods being valued of identical or similar imported
goods less certain expenses resulting from *Note: these additional costs are added only if not
importation and sale of goods. included in the determination of the aggregate of
relevant costs, charges and expenses or value of
Deductive Value is determined by making a materials and production.
deduction from the established price per unit for the
aggregate of the ff. elements: Fallback value
(a) Commissions or If DV cannot be determined using any of the above
(b) additions made in connection with profit and methods, use other reasonable means consistent
general expenses and
PAGE 246 OF 275
with principles and general provisions of General the duty to exhibit the written authority upon
Agreements on Tariffs and Trade [GATT] demand.
ii. Specific What is seized:

[Sec. 202, TCC] To make seizure of any vessel, aircraft, cargo,
Rates are based on units of weight number or animal or any movable property when the same is
measurement subject to forfeiture or liable for any fine under the
tariff and customs law
Kinds of weight:
Gross Weight – weight of same, together with the Where authority may be exercised:
weight of all containers, packages, holders and At any place within the jurisdiction of the Bureau of
packings, of any kind, in which said articles are Customs
contained, held or packed at the time of importation
Legal Weight – weight at the time of their sale to the Other Rights/Authority of the Official effecting the
public in usual retail quantities search and seizure
Net Weight – only the actual weight at the time of (1) Authority to require assistance of any police
importation excluding the weight of the immediate officer if necessary [Sec. 2207]
and all other containers (2) At any time, right to enter, pass through or
search any inclosure or warehouse, or other
H.2. SPECIAL DUTIES building, not being a dwelling house [Sec.
These are additional import duties imposed on 2208]
specific kinds of imported articles [See Table of (3) Right to enter and search a dwelling house,
Special Duties] upon warrant issued by the Judge of the Court,
or any responsible officer as may be authorized
I. REMEDIES [Sec. 2209]
I.1. GOVERNMENT (4) Right to Search Vessels or Aircrafts and Persons
i. Administrative/Extrajudicial or Articles Conveyed [Sec. 2210]
Search, seizure, forfeiture, arrest (5) Right to Search Vehicles, Beasts and Persons
Enforcement of Tax Lien when he has reasonable cause to suspect the
Tax Lien – attaches upon the articles imported presence therein of dutiable or prohibited
which may be enforced while such are in custody or article introduced into the Philippines contrary
subject to the control of the government [Sec. 1204] to law [Sec. 2211]
(6) Search of Persons Arriving From Foreign
Sec. 1508. Countries [Sec. 2212]
When an importer has an outstanding and
demandable account with the Bureau of Customs, Administrative Proceedings [Secs 2301 – 2316]
Collector shall hold the delivery of the article.
Upon notice, he may sell such importation or a Procedure for Seizure:
portion of it to satisfy the obligation. Collector shall issue a warrant for the detention of
Importer may settle his obligation anytime before the property
the sale.
Cash bond
Seizure and Forfeiture If the importer wishes to secure release of article for
[Sec. 2205] legitimate use
Who may effect: (1) amount fixed by Collector
(1) Customs official; (2) appraised value of article and/or fine, expenses,
(2) Fisheries Commissions; costs
(3) Philippine Coast Guard
Note: Article will not be released if:
Note: Person who is exercising such an authority has (1) there is prima facie evidence of fraud in the
the duty to make known his official character, upon importation
being questioned at the time of the exercise. If his (2) article is prohibited by law
authority came from a special authorization, he has
PAGE 247 OF 275

Report to Commissioner and Chairman of his action or ruling in any case of seizure may appeal
Commission of Audit to the Court of Tax Appeals, in the manner and
Written notice to owner or importer. He shall he within the period prescribed by law and
given opportunity to be heard regulations.
Notification to an unknown owner Unless an appeal is made to the Court of Tax

(1) posting for 15 days in the public corridor of Appeals in the manner and within the period
customhouse prescribed by laws and regulations, the action or
(2) publication in newspaper ruling of the Commissioner shall be final and
(3) other means Collector considers desirable conclusive. [Sec. 2402, TCC]
Collector shall make a list and particular description I.2. TAXPAYER

and classification of the seized property, appraisal i. Protest
based on local wholesale values by When made: at the time payment of the amount
(1) at least 2 appraising officials claimed to be due is made within 15 days thereafter
(2) absent such, 2 competent disinterested citizens [Sec. 2308]
If within 15 days from notification, no owner or Form

agent is found or appears before Collector, then the (1) Must be in writing
property would be forfeited to Government and sold (2) Must point out the particular decision or ruling
at auction of the Collector of Customs to which exception
is taken or objection made
Settlement (3) Must state the grounds relied upon for relief
[Sec. 2307] [Sec. 2310, TCC]
While case is pending, Collector may accept
settlement of any seizure case Scope
(1) Upon approval of Commissioner Limited to the subject matter of a single adjustment
(2) Payment of fine (25% to 80% of the landed cost (refers to the entire content of one liquidation
of the article) including duties, fees, surcharges and fines) or other
independent transaction
In case of forfeiture, should pay the domestic
market value of the seized article Other requirements:
(1) Payment of the amount due and the
When settlement not allowed corresponding docket fee shall be made before
(1) Fraud in importation protest [Sec. 2308]
(2) Importation prohibited by law (2) Upon demand of Collector, the importer shall
(3) Release would be contrary to law furnish samples of the articles which are the
subject of the protest
Compromise
[Sec. 2316, TCC] Effect of Failure to Protest
Commissioner may compromise any case subject to Failure renders the action of the Collector final and
approval by Secretary of Finance conclusive except for manifest error
ii. Judicial Review of Commissioner

Requisites for filing of criminal/civil case [Sec. 2313]
[Sec, 2401, TCC]: A person aggrieved by the decision or Collector in
(1) Brought in the name of the government of the any matter presented upon protest or by his action
Phil in any case of seizure may, within days after
(2) Conducted by Customs officers notification on writing by the Collector of his actions
(3) With approval from the Commissioner or decisions, file a written notice to the Collector
with a copy furnished to the Commissioner of his
Rules on appeal including jurisdiction intention to appeal the action or decision of the
The party aggrieved by a ruling of the Commissioner Collector to the Commissioner
in any matter brought before him upon protest or by
PAGE 248 OF 275
Automatic Review (2) error in return of weight, measure and gauge

Happens in case a decision is made adverse to the (certified, under penalties of falsification or
Government perjury, by examining official)
(3) error in the distribution of charges on invoices
ii. Abandonment [which does not involve any question of law and
When article deemed abandoned certified, under penalties of falsification or
(1) owner, importer or consignee expressly signifies perjury, by examining official] [Sec. 1707]
in writing to Collector his intention to abandon
(2) after due notice, fails to file an entry within 30 Conditions for refund of excess payments
days from date of discharge of last package (1) errors discovered before payment or discovered
from vessel or aircraft within 1 year after the final liquidation
(3) after filing entry, fails to claim his importation (2) written request and notice from importer or
15 days from date of posting of the notice to statement of error certified by the Collector
claim such importation [Sec. 1801, TCC]
How claimed
Effect (1) Claim made in writing
[Sec. 1802, TCC] (2) Collector shall verify with the records in his
(1) deemed to have renounced his interest and office
property rights (3) Certify claim to Commissioner with his
(2) ipso facto deemed property of the Government recommendation and necessary papers
(4) Commissioner shall then cause the claim to be
If the abandoned articles are transferred to a paid if found correct
customs bonded warehouse, the operator shall be
liable for the payment of duties and taxes in the If the result of the refund would result to a
case of loss of the stored abandoned imported corresponding refund of the internal revenue taxes
articles [R.V. Marzan v. CA, GR No. 128064, March on the same importation, Collector shall certify to
4, 2004] Commissioner who shall cause the said excess to be
paid, refunded or credited in favor of the importer
Liability of Official for Failure to Report
Abandonment
Any official or employee who:
(1) had knowledge of the existence of
abandoned article
(2) custody or charge of such article
fails to report within 24 hours from time article
deemed abandoned shall be punished according to
sec. 3604 (fine: P5000 – P50,000; imprisonment:
1 yr – 10 yrs, perpetual disqualification to hold
public office, vote and participate in election)
iii. Abatement and Refund

When available
(1) Abatement for Damage incurred during Voyage
[Sec. 1701]
(2) Abatement or Refund for the following:
(3) Missing Packages [Sec. 1702]
(4) Deficiency of Contents in Packages [Sec. 1703]
(5) Articles Lost or Destroyed after Arrival [Sec.
1704]
(6) Dead or Injured animals [Sec. 1705]
Refund in case of excess payments due to:

(1) manifest clerical error made in invoice or entry
PAGE 249 OF 275

Flowchart IX: Remedies from Seizure and Forfeiture Cases-Tariffs and

Customs Code
START
Collector seizes goods

Importer may secure
Collector determines and reports it to the
release of goods by Collector conducts
probable cause Commissioner and to
(illegal importation) filing of cash bond hearing
COA. Owner is notified
(Sec. 2301)
of seizure
Collector’s Amount
decision favorable Automatic review* by Customs
Yes involved less Yes
to taxpayer/ Commisioner (Sec. 2313)
than 5M?
adverse to gov’t?
Is
Does
No Commissioner’s
commissioner
Yes decision favorable
decide w/in 30
Taxpayer appeals to taxpayer/
days?
to Customs adverse to gov’t?
Commissioner 15
days from receipt No
of notice
Inaction construed as affirmation
of Collector’s decision
Does
Commissioner
Yes No, amount is at least
decide w/n 30
Is 5M
days?
Commissioner’s Yes
Automatic Review* by
decision
the Secretary of
favorable to Yes
Finance (SOF) (Sec.
taxpayer/
2313, CMO 3-2002)
adverse to
gov’t?
Is SOF’s
decision Does SOF
No favorable to Yes decide within
No No taxpayer/adverse 30 days?
to gov’t?
No
Yes
Inaction construed as
affirmation of
Decision becomes
commissioner’s decision No
END final &
(or of collector’s decision Appeal
unappealable
in case of inaction by to CTA
commissioner)
Appeal to the
Inaction construed
Court of Tax
as affirmation of
Appeals within 30
Collector’s
days from notice
decision
of decision
Appeal to CTA en
MR within 15 days
banc 15 days from Appeal to the
from receipt of END
receipt of decision Supreme Court
decision
denying MR
*Automatic review is intended to protect the interest of the Government. W/o auto review, the Commissioner and SoF would not know
about the decision laid down by the Collector favoring the taxpayer. Automatic review is necessary because nobody is expected to appeal
the decision of the Collector which is favorable to the taxpayer & adverse to the Government. (Yaokasin v. Commissioner 180 SCTA 591
PAGE 250 OF 275

TABLE OF SPECIAL DUTIES: When Imposed

Anti-Dumping Countervailing
[Sec. 301, TCC as [Sec. 302 as Marking Discriminatory
amended by RA amended by RA [Sec. 303] [Sec. 304]
Safeguard [RA 8800]
8752] 8751]
Where a product or Whenever any If at the time of Whenever the [Sec 5] General [Sec 21] Special
commodity is product, importation any President finds Safeguard Safeguard
imported in the commodity or article [or its that the public Measure: Measure for
Philippines at an article of container if the interest will be Whenever there is Agricultural
export price less commerce is article cannot be served thereby,
a positive final Products: Imposed
than the normal granted directly or marked], is not additional customs
value in the indirectly by the marked in in any duty shall be determination of upon agricultural
ordinary course of government in the official language imposed upon the Commission products,
trade for the like country of origin or of the Philippines articles wholly or in that a product is consistent with
product or article exportation, any and in a part the growth or being imported Phil international
destines for kind or form of conspicuous product of, or into the country in treaty obligations,
consumption in the specific subsidy place as legibly, imported in a increased if its:
exporting country upon the indelibly and vessel of, any quantities, (a) Cumulative
or materially production, permanently as foreign country whether absolute import volume
regarding manufacture or the nature of the whenever he shall or relative to the in a given year
establishment of a exportation of such article (or find as a fact that
domestic exceeds its
domestic industry product, container). such country —
producing the like commodity or This is used to production, as to trigger volume
product [Sec. 3, RA article, and the prevent deception (1) Imposes, be a substantial subject to the
8752] importation of such of consumers. directly or cause of serious conditions
subsidized indirectly, upon injury or threat under Sec.
product, has any Phil product thereof to the 23, RA 8800,
caused or unreasonable domestic or but not
threatens to cause charge, exaction, industry; however, currently; and
material injury to a regulation or in the case of (b) Actual CIF
domestic industry limitation which is non-agricultural import price is
or has materially not equally
products, the less than its
retarded the enforced upon the
growth or prevents like articles of
Secretary of trigger price
the establishment other foreign Agriculture shall subject to
of a domestic countries; or first establish that conditions
industry the application of under Sec.
(2) Discriminates such safeguard 24, RA 8800
in fact against the measures will be
commerce of the in the public
Philippines, as to interest
place the
commerce of the
Philippines at a
disadvantage
compared with the
commerce of any
foreign country.
PAGE 251 OF 275

TABLE OF SPECIAL DUTIES: Imposing Authority and Amount

Anti-Dumping
Countervailing [Sec.
[Sec. 301, TCC as Marking Discriminatory
302 as amended by Safeguard [RA 8800]
amended by RA [Sec. 303] [Sec. 304]
RA 8751]
8752]
Secretary of Trade and Industry - non- Commissioner of President [through a For non- Secretary of
agricultural products Customs proclamation] agricultural Agriculture
Secretary of Agriculture - agricultural products:
products Secretary of Trade
Tariff Commission - decides whether or and Industry
not to impose anti- For agricultural
dumping/countervailing duty products:
Secretary of
Agriculture
Anti-Dumping Equivalent to the 5% ad valorem of Not exceeding tariff increase, For a]:
Duty = Normal subsidy the articles 100% ad valorem either ad valorem
Value - Export upon the articles or specific, or appropriately set to
Price both, to be paid a level not
through a cash exceeding one-
bond set at a level third of the
sufficient to applicable out-
redress or prevent quota customs duty
injury to the on the agricultural
domestic industry product under
[Sec. 8, RA 8800] consideration in
the year when it is
imposed
For b], compute as

follows:
0 - if price
difference is at
most 10% of the
trigger price
30% of the amount
by which the price
difference exceeds
10% of the trigger
price
50% - if it exceeds
40% but less than
60%
70% - if it exceeds
60 but at most
75%
90% - if it exceeds
75%
PAGE 252 OF 275

Notes:
Exceptions to the Marking of Articles (in the following
situations, the containers shall be the one subject to
marking):
(1) Article is incapable of being marked
(2) Article cannot be marked prior to shipment to the
Philippines without injury
(3) Article cannot be marked prior to shipment to the
Philippines, except at an expense economically
prohibitive of its importation
(4) Marking of a container of such article will reasonably
indicate the origin of such article
(5) Article is a crude substance
(6) Article is imported for use by the importer and not
intended for sale in its imported or any other form
(7) Article is to be processed in the Philippines by the
importer or for his account otherwise than for the
purpose of concealing the origin of such article and in
such manner that any mark contemplated by this
section would necessarily be obliterated, destroyed or
permanently concealed
(8) An ultimate purchaser, by reason of the character of

such article or by reason of the circumstance of its
importation, must necessarily know the country of origin
of such article even though it is not marked to indicate
its origin
(9) Article was produced more than twenty years prior to its
importation into the Philippines
(10) Article cannot be marked after importation except at an
expense which is economically prohibitive, and the
failure to mark the article before importation was not
due to any purpose of the importer, producer, seller or
shipper to avoid compliance with this section
PAGE 253 OF 275

countervailing duties under Section 301 and

VIII. Judicial Remedies 302, respectively, of the Tariff and Customs
A. JURISDICTION OF THE COURT OF TAX Code, and safeguard measures under Republic
APPEALS Act No. 8800, where either party may appeal
A.1. CIVIL TAX CASES the decision to impose or not to impose said
i. Exclusive Original Jurisdiction duties. [Sec. 7, RA No. 1125 as amended]
Tax collection cases involving final and executory
assessments for taxes, fees, charges and penalties, CTA en Banc
where the principal amount of taxes and fees, (1) Decisions or resolutions on motions for
exclusive of charges and penalties, claimed is one reconsideration or new trial of the Court in
million pesos or more. Divisions in the exercise of its exclusive
appellate jurisdiction over:
ii. Exclusive Appellate Jurisdiction in civil cases (2) Cases arising from administrative agencies –
Bureau of Internal Revenue, Bureau of Customs,
CTA Division Department of Finance, Department of Trade
(1) Decisions and Inaction of CIR in cases involving and Industry, Department of Agriculture;
disputed assessments, refunds of internal (3) Local tax cases decided by the Regional Trial
revenue taxes, fees or other charges, penalties Courts in the exercise of their original
in relation thereto, or other matters arising jurisdiction; and
under the National Internal Revenue or other (4) Tax collection cases decided by the Regional
laws administered by the Bureau of Internal Trial Courts in the exercise of their original
Revenue; jurisdiction involving final and executory
Inaction of the CIR shall be deemed a denial assessments for taxes, fees, charges and
in which the taxpayer may appeal. penalties, where the principal amount of taxes
Inaction does not necessarily constitute a and penalties claimed is less than one million
formal decision and the taxpayer may opt to pesos;
await the final decision of the CIR by constitute (5) Decisions, resolutions or orders of the Regional
a formal decision and the taxpayer may opt to Trial Courts in local tax cases and in tax
await the final decision of the CIR beyond the collection cases decided or resolved by them in
180 days and may appeal such final decision. the exercise of their appellate jurisdiction;
For claim for refund, the taxpayer must file a (6) Decisions, resolutions or orders on motions for
petition for review with the CTA prior to the reconsideration or new trial of the Court in
expiration of the two year prescriptive period. Division in the exercise of its exclusive original
(2) Decisions, orders or resolutions of the RTC in jurisdiction over tax collection cases;
local tax cases and in tax collection cases (7) Decisions of the Central Board of Assessment
originally decided or resolved by them in their Appeals (CBAA) in the exercise of its appellate
original jurisdiction. jurisdiction over cases involving the assessment
(3) Decisions of the Commissioner of Customs in and taxation of real property originally decided
cases involving liability for customs duties, fees by the provincial or city board of assessment
or other money charges, seizure, detention or appeals;
release of property affected, fines, forfeitures or
other penalties in relation thereto, or other A.2. CRIMINAL CASES
matters arising under the Customs Law or other [Sec. 7, RA 1125 as amended]
laws administered by the Bureau of Customs;
(4) Decisions of the Secretary of Finance on i. Exclusive Original Jurisdiction
customs cases elevated to him automatically All criminal offenses arising from violations of the
for review from decisions of the Commissioner National Internal Revenue Code or Tariff and
of Customs which are adverse to the Customs Code and other laws administered by the
Government under Sec. 2315 of the TCC; Bureau of Internal Revenue or the Bureau of
(5) Decisions of the Secretary of Trade and Industry, Customs. Principal amount of taxes and fees,
in the case of non-agricultural product, exclusive of charges and penalties, claimed is more
commodity or article, and the Secretary of than or equal to one million pesos.
Agriculture in the case of agricultural product,
commodity or article, involving dumping and
PAGE 254 OF 275
The filing of the criminal action being deemed to jurisdiction over cases involving criminal
necessarily carry with it the filing of the civil action, offenses arising from violations of the National
and no right to reserve the filling of such civil action Internal Revenue Code or the Tariff and
separately from the criminal action will be Customs Code and other laws administered by
recognized. the Bureau of Internal Revenue or Bureau of
Customs;
ii. Exclusive appellate jurisdiction in criminal cases (2) Decisions, resolutions or orders on motions for
reconsideration or new trial of the Court in
CTA Division Division in the exercise of its exclusive
(1) Over appeals from the judgments, resolutions appellate jurisdiction over criminal offenses
or orders of the Regional Trial Courts in tax mentioned in the preceding subparagraph; and
cases originally decided by them, in their (3) Decisions, resolutions or orders of the Regional
respected territorial jurisdiction. trial Courts in the exercise of their appellate
(2) Over petitions for review of the judgments, jurisdiction over criminal offenses mentioned in
resolutions or orders of the Regional Trial subparagraph [f].
Courts in the exercise of their appellate
jurisdiction over tax cases originally decided by B. JUDICIAL PROCEDURES
the Metropolitan Trial Courts, Municipal Trial B.1. JUDICIAL ACTION FOR COLLECTION OF
Courts and Municipal Circuit Trial Courts in their TAXES
respective jurisdiction. i. Internal revenue taxes
The remedies for the collection of internal revenue
Does the CTA have jurisdiction over a special civil taxes, fees or charges, and any increment thereto
action for certiorari assailing an interlocutory order resulting from delinquency can be through the
issued by the RTC in a local tax case? YES. institution of a civil or criminal action. [Sec. 205,
NIRC]
While there is no express grant of such power, with
respect to the CTA, Section 1, Article VIII of the Note: Please refer to Taxpayer‘s Remedies (B.
1987 Constitution provides, nonetheless, that Collection)
judicial power shall be vested in one Supreme Court
and in such lower courts as may be established by When this remedy is resorted to:
law and that judicial power includes the duty of the The tax assessment becomes final and executory
courts of justice to settle actual controversies because of the failure to appeal.
involving rights which are legally demandable and Even pending decision of the administrative protest
enforceable, and to determine whether or not there [CIR v. Union Shipping, 1990]
has been a grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of any ii. Local taxes
branch or instrumentality of the Government. The LGU concerned may enforce the collection of
delinquent taxes, fees, charges or other revenues by
On the strength of the above constitutional civil action in any court of competent jurisdiction.
provisions, it can be fairly interpreted that the power The civil action shall be filed by the local treasurer.
of the CTA includes that of determining whether or [Sec. 183, LGC]
not there has been grave abuse of discretion
amounting to lack or excess of jurisdiction on the MTC/RTC depending on jurisdictional threshold
part of the RTC in issuing an interlocutory order in amount.
cases falling within the exclusive appellate
jurisdiction of the tax court. It, thus, follows that the Prescriptive period
CTA, by constitutional mandate, is vested with Local taxes, fees, or charges may be collected within
jurisdiction to issue writs of certiorari in these cases. 5 years from the date of assessment by
[City of Manila v. Grecia-Cuerdo, (2014)] administrative or judicial action.
CTA En Banc No judicial or administrative action for collection
(1) Decisions, resolutions or orders on motions for can be instituted after lapse of the period for
reconsideration or new trial of the Court in assessment except when there is fraud or intent to
Division in the exercise of its exclusive original evade tax. [Sec. 194 LGC]
PAGE 255 OF 275
for payment, by levy, distraint or sale of any property

The running of the periods of prescription shall be of the taxpayer, or by whatever means, as provided
suspended for the time during which: under existing laws, may jeopardize the interest of
(1) The treasurer is legally prevented from making the Government or the taxpayer, an interested party
the assessment of collection; may file a motion for the suspension of the
(2) The taxpayer requests for a reinvestigation and collection of the tax liability (Sec. 11, RA 1125, as
executes a waiver in writing before expiration of amended by RA 9282)
the period within which to assess or collect; and
(3) The taxpayer is out of the country or otherwise Injunction not available to restrain collection
cannot be located. [Sec. 194, LGC] No court shall have authority to grant an injunction
to restrain the collection of any national internal
B.2. CIVIL CASES revenue tax, fee or charge imposed by the Code.
i. Who may appeal, mode of appeal, effect of appeal [Sec. 217, NIRC]
Appeal to CTA Division
(1) A party aggrieved or adversely affected by the Exception: Sec. 11, RA 1125, supra.
decision or ruling or inaction of
(a) The CIR; Note: The Local Government Code does not have a
(b) The Commissioner of Customs; provision prohibiting injunction in the collection of
(c) The Secretary of Finance; tax.
(d) The Secretary of Trade and Industry;
(e) The Secretary of Agriculture; or Taking of evidence
(f) The RTC exercising original jurisdiction The Court may receive evidence in the following
(2) may appeal within 30 days from the receipt of cases:
the copy of the decision or ruling, or the (1) In all cases falling within the original
expiration of the period fixed by law for the jurisdiction of the Court in Division pursuant to
Commissioner to decide, to the Court of Tax Section 3, Rule 4 of these Rules; and
Appeals Division. (2) In appeals in both civil and criminal cases
where the Court grants a new trial pursuant to
Mode of Appeal: Rule 42 Section 2, Rule 53 and Section 12, Rule 124 of
Aggrieved party may file a motion for the Rules of Court. [Sec. 2, Rule 12, A.M. No.
reconsideration or new trial within 15 days from 05-11-07]
receipt of the copy of the decision.
Taking of evidence by:
Appeal to CTA en Banc Justice—
A party adversely affected by a decision or resolution The Court may, motu proprio or upon proper motion,
of a Division of the Court on a motion for direct that a case, or any issue therein, be assigned
reconsideration or new trial may appeal within 15 to one of its members for the taking of evidence,
days from receipt of the copy of the decision. when the determination of a question of fact arises
at any stage of the proceedings, or when the taking
Mode of Appeal: Rule 43 of an account is necessary, or when the
A party adversely affected by a decision or ruling of determination of an issue of fact requires the
the Central Board of Assessment Appeals and the examination of a long account. The hearing before
Regional Trial Court in the exercise of their appellate such justice shall proceed in all respects as though
jurisdiction may appeal within 30 days from the the same had been made before the Court.
receipt of the copy of the decision.
Upon the completion of such hearing, the justice
Suspension of collection of tax concerned shall promptly submit to the Court a
General rule: No appeal taken to the Court shall written report thereon, stating therein his findings
suspend the payment, levy, distraint, or sale of any and conclusions. Thereafter, the Court shall render
property of the taxpayer for the satisfaction of his tax its decision on the case, adopting, modifying, or
liability as provided under existing laws. rejecting the report in whole or in part, or, the Court
may, in its discretion, recommit it to the justice with
Exception: Where the collection of the amount of the instructions, or receive further evidence. [Sec. 12,
taxpayer‘s liability, sought by means of a demand
PAGE 256 OF 275
RA No. 1125, as amended; also Sec. 3, Rule 12, documents which are proposed to be introduced in
A.M. No. 05-11-07] evidence.
Court Official – A motion for reconsideration or new trial that does

In default or ex parte hearings, or in any case where not comply with the foregoing provisions shall be
the parties agree in writing, the Court may delegate deemed pro forma, which shall not toll the
the reception of evidence to the Clerk of Court, the reglementary period for appeal.
Division Clerks of Court, their assistants who are
members of the Philippine bar, or any Court attorney. Effect: The filing of a motion for reconsideration or
The reception of documentary evidence by a Court new trial shall suspend the running of the period
official shall be for the sole purpose of marking, within which an appeal may be perfected.
comparison with the original, and identification by
witnesses of such documentary evidence. The Court Grounds: A motion for new trial may be based on
official shall have no power to rule on objections to one or more of the following causes materially
any question or to the admission of exhibits, which affecting the substantial rights of the movant:
objections shall be resolved by the Court upon (1) Fraud, accident, mistake or excusable
submission of his report and the transcripts within negligence which ordinary prudence could not
ten days from termination of the hearing. [Sec. 4, have guarded against and by reason of which
Rule 12, A.M. No. 05-11-07] such aggrieved party has probably been
impaired in his rights; or
Motion for reconsideration or new trial (2) Newly discovered evidence, which he could not,
[Rule 15, A.M. No. 05-11-07] with reasonable diligence, have discovered and
Who: Any aggrieved party may seek a produced at the trial and, which, if presented,
reconsideration or new trial of any decision, would probably alter the result.
resolution or order of the Court.
A motion for new trial shall include all grounds then
May be opposed by: The adverse party may file an available and those not included shall be deemed
opposition to the motion for reconsideration or new waived.
trial within ten days after his receipt of a copy of the
motion for reconsideration or new trial of a decision, Restrictions: No party shall be allowed to file a
resolution or order of the Court. second motion for reconsideration of a decision,
final resolution or order; or for new trial.
When: He shall file a motion for reconsideration or
new trial within fifteen days from the date he ii. Appeal to the CTA, en banc
received notice of the decision, resolution or order No civil proceeding involving matter arising under
of the Court in question. the National Internal Revenue Code, the Tariff and
Customs Code or the Local Government Code shall
The Court shall resolve the motion for be maintained, except as herein provided, until and
reconsideration or new trial within three months unless an appeal has been previously filed with the
from the time it is deemed submitted for resolution. CTA and disposed of in accordance with the
provisions of this Act.
How: The motion shall be in writing stating its
grounds, a written notice of which shall be served by A party adversely affected by a resolution of a
the movant on the adverse party. Division of the CTA on a motion for reconsideration
or new trial, may file a petition for review with the
A motion for new trial shall be proved in the manner CTA en banc. [Sec. 18, RA No. 1125 as amended]
provided for proof of motions. A motion for the
cause mentioned in subparagraph [a] of the iii. Petition for review on certiorari to the Supreme
preceding section shall be supported by affidavits of Court
merits which may be rebutted by counter-affidavits. [Rule 16, A.M. No. 05-11-07]
A motion for the cause mentioned in subparagraph A party adversely affected by a decision or ruling of
(b) of the preceding section shall be supported by the Court en banc may appeal by filing with the
affidavits of the witnesses by whom such evidence is Supreme Court a verified petition for review on
expected to be given, or by duly authenticated certiorari within fifteen days from receipt of a copy of
PAGE 257 OF 275
the decision or resolution, as provided in Rule 45 of Regional Trial 15 days from Appeal pursuant
the Rules of Court. If such party has filed a motion Court in the receipt of to Sec. 3[a] and
for reconsideration or for new trial, the period herein exercise of its decision 6, Rule 122 of
fixed shall run from the party‘s receipt of a copy of original the Rules of
jurisdiction Court
the resolution denying the motion for
[to CTA Division]
reconsideration or for new trial. CTA Division 15 days from Petition for
[to CTA En Banc] receipt of review as
The motion for reconsideration or for new trial filed decision provided in Rule
before the Court shall be deemed abandoned if, 43 of the Rules
during its pendency, the movant shall appeal to the May be extended of Court
Supreme Court. for good cause
for not more The Court en
B.3. CRIMINAL CASES than 15 days banc shall act on
i. Institution and prosecution of criminal actions the appeal.
Regional Trial 15 days from Petition for
Institution of criminal action
Courts in the receipt of review as
Instituted by the filing an information in the name of exercise of their decision provided in Rule
the People of the Philippines appellate 43 of the Rules
jurisdiction of Court
Those involving violations of the NIRC and other [To CTA division]
laws enforced by the BIR: Must be approved by the
CIR
Solicitor General as counsel for the People and
Those involving violations of the tariff and Customs government officials sued in their official capacity
Code and other laws enforced by the Bureau of The Solicitor General shall represent the People of
Customs: Must be approved by the Commissioner of the Philippines and government officials sued in
Customs their official capacity in all cases brought to the
Court in the exercise of its appellate jurisdiction. He
Institution shall interrupt the running of the period of may deputize the legal officers of the Bureau of
prescription Internal Revenue in cases brought under the
National Internal Revenue Code or other laws
Prosecution of criminal action enforced by the Bureau of Internal Revenue, or the
Conducted and prosecuted under the direction and legal officers of the Bureau of Customs in cases
control of the public prosecutor brought under the Tariff and Customs Code of the
Philippines or other laws enforced by the Bureau of
Those involving violations of the NIRC and other Customs, to appear in behalf of the officials of said
laws enforced by the BIR or violations of the tariff agencies sued in their official capacity: Provided,
and Customs Code and other laws enforced by the however, such duly deputized legal officers shall
Bureau of Customs - The prosecution may be remain at all times under the direct control and
conducted by their respective duly deputized legal supervision of the Solicitor General.
officers.
iii. Petition for review on certiorari to the Supreme
Institution on civil action in criminal action Court
In cases within the jurisdiction of the Court, the A party adversely affected by a decision or ruling of
criminal action and the corresponding civil action the CTA en banc may file with the Supreme Court a
for the recovery of civil liability for taxes and verified petition for review on certiorari pursuant to
penalties shall be deemed jointly instituted in the Rule 45 of the 1997 Rules of Civil Procedure. [Sec.
same proceeding. The filing of the criminal action 19, R.A. No. 1125 as amended]
shall necessarily carry with it the filing of the civil
action. No right to reserve the filing of such civil C. TAXPAYER’S SUIT IMPUGNING THE
action separately from the criminal action shall be
VALIDITY OF TAX MEASURES OR ACTS
allowed or recognized.
OF TAXING AUTHORITIES
ii. Appeal and period to appeal criminal cases
Deciding Body Period to Appeal Mode of Appeal C.1. TAXPAYER’S SUIT, DEFINED
PAGE 258 OF 275
Taxpayer‘s suit – refers to a case where the act many decisions nullifying, at the instance of
complained of directly involves the illegal taxpayers, laws providing for the disbursement of
disbursement of public funds derived from taxation. public funds, upon the theory that "the expenditure
[Kilosbayan v. Guingona, Jr. (1994)] of public funds by an officer of the State for the
purpose of administering an unconstitutional act
C.2. DISTINGUISHED FROM CITIZEN’S SUIT constitutes a misapplication of such funds," which
The plaintiff in a taxpayer's suit is in a different may be enjoined at the request of a taxpayer.
category from the plaintiff in a citizen's suit. In the [Pascual v. Secretary of Public Works (1960)]
former, the plaintiff is affected by the expenditure of
public funds, while in the latter, he is but the mere A taxpayer is allowed to sue where there is a claim
instrument of the public concern. [De Castro v. that public funds are illegally disbursed, or that the
Judicial and Bar Council (2010)] public money is being deflected to any improper
purpose, or that there is wastage of public funds
C.3. REQUISITES FOR CHALLENGING THE through the enforcement of an invalid or
CONSTITUTIONALITY OF A TAX MEASURE unconstitutional law. A person suing as a taxpayer,
OR ACT OF TAXING AUTHORITY however, must show that the act complained of
directly involves the illegal disbursement of public
i. Concept of locus standi as applied in taxation funds derived from taxation. He must also prove that
The doctrine of locus standi is the right of he has sufficient interest in preventing the illegal
appearance in a court of justice. The doctrine expenditure of money raised by taxation and that he
requires a litigant to have a material interest in the will sustain a direct injury because of the
outcome of a case. In private suits, locus standi enforcement of the questioned statute or contract.
requires a litigant to be a "real party in interest," In other words, for a taxpayer‘s suit to prosper, two
which is defined as "the party who stands to be requisites must be met:
benefited or injured by the judgment in the suit or (1) public funds derived from taxation are disbursed
the party entitled to the avails of the suit." by a political subdivision or instrumentality and in
In public suits, this Court recognizes the difficulty of doing so, a law is violated or some irregularity is
applying the doctrine especially when plaintiff committed and
asserts a public right on behalf of the general public (2) the petitioner is directly affected by the alleged
because of conflicting public policy issues. On one act. [Mamba v. Lara, G.R. No. 165109, Dec. 14,
end, there is the right of the ordinary citizen to 2009]
petition the courts to be freed from unlawful
government intrusion and illegal official action. At ii. Doctrine of transcendental importance
the other end, there is the public policy precluding Recognizing that a strict application of the "direct
excessive judicial interference in official acts, which injury" test may hamper public interest, this Court
may unnecessarily hinder the delivery of basic relaxed the requirement in cases of "transcendental
public services. importance" or with "far reaching implications."
Being a mere procedural technicality, it has also
The Court has adopted the "direct injury test" to been held that locus standi may be waived in the
determine locus standi in public suits. In People v. public interest. [Ibid]
Vera, it was held that a person who impugns the
validity of a statute must have "a personal and Planters Products, Inc. v. Fertiphil Corp.: Even
substantial interest in the case such that he has assuming arguendo that there is no direct injury, We
sustained, or will sustain direct injury as a result." find that the liberal policy consistently adopted by
The "direct injury test" in public suits is similar to this Court on locus standi must apply. The issues
the "real party in interest" rule for private suits raised by Fertiphil are of paramount public
under Section 2, Rule 3 of the 1997 Rules of Civil importance. It involves not only the constitutionality
Procedure. [Planter‘s Products, Inc. v. Fertiphil of a tax law but, more importantly, the use of taxes
Corporation, G.R. No. 166006, March 14, 2008] for public purpose. Former President Marcos issued
LOI No. 1465 with the intention of rehabilitating an
As applied to taxation: ailing private company. This is clear from the text of
It is well-stated that the validity of a statute may be the LOI. PPI is expressly named in the LOI as the
contested only by one who will sustain a direct injury direct beneficiary of the levy. Worse, the levy was
in consequence of its enforcement. Yet, there are made dependent and conditional upon PPI
PAGE 259 OF 275
becoming financially viable. The LOI provided that

"the capital contribution shall be collected until CJH Development Corp. v. BIR (2008): However, CJH
adequate capital is raised to make PPI viable." is not left without recourse. The Tariff and Customs
Code provides for the administrative and judicial
The constitutionality of the levy is already in doubt remedies available to a taxpayer who is minded to
on a plain reading of the statute. It is Our contest an assessment, subject of course to certain
constitutional duty to squarely resolve the issue as reglementary periods. The TCC provides that a
the final arbiter of all justiciable controversies. The protest can be raised provided that payment first be
doctrine of standing, being a mere procedural made of the amount due. The decision of the
technicality, should be waived, if at all, to Collector can be reviewed by the Commissioner of
adequately thresh out an important constitutional Customs who can approve, modify or reverse the
issue. decision or action of the Collector. If the party is not
satisfied with the ruling of the Commissioner, he
iii. Ripeness for judicial determination may file the necessary appeal to the Court of Tax
―Ripeness for judicial determination‖ means that Appeals. Afterwards, the decision of the Court of Tax
litigation is inevitable or there is no adequate relief Appeals can be appealed to this Court.
available in any other form or proceeding.
PAGE 260 OF 275

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i

A. DEFINITION, CONCEPT AND PURPOSE OF TAXATION O.10. TAXPAYER‘S SUIT ............................................. 28

B.2 CHARACTERISTICS................................................. 3 A.2. JURISDICTION, POWER AND FUNCTIONS OF THE

N. SOURCES OF TAX LAWS ..................................... 21 D.6. TAX ON GENERAL PARTNERSHIPS, GENERAL

A. BASIC PRINCIPLES .......................................... 109 N. TAX BASIS ....................................................... 136

B. DEFINITION..................................................... 109 III. VALUE-ADDED TAX (VAT) ................... 143

F.2. RULE OF RECIPROCITY....................................... 111 E. TAX CREDIT METHOD ........................................ 144

H. DETERMINATION OF GROSS ESTATE AND NET G. PERSONS LIABLE............................................. 145

C.3. TAX ON RETIREMENT ON BUSINESS................... 216 J.2. JUDICIAL ........................................................... 229

VIII. JUDICIAL REMEDIES .......................... 254

police power of the state. These regulatory purposes are

C. POWER OF TAXATION AS DISTINGUISHED FROM POLICE POWER AND EMINENT DOMAIN

TAXATION EMINENT DOMAIN POLICE POWER

Purpose The property (generally in the The use of the property is

(ii) Uniformity and equality of taxation

fields. [Abra Valley College v. Art. XIV, Sec. 4, 1987 Constitution

(xii) Exemption from real property taxes (1) Public purpose

(iii) Religious freedom

Taxes Toll License is in the nature of a special privilege, of a

Note: Taxes may also be imposed for regulatory Taxes Debt

A special assessment is not a personal liability of (6) Penalty

(6) As to graduation (4) Citizenship of the taxpayer;

Kind of Excise Tax Situs doubt as to the legislative intent. (see 51

appealable to the Supreme Court by a petition for

O.2. IMPRESCRIPTIBILITY OF TAXES

According to Chief Justice John Marshall, "the

being a mere procedural technicality, it has also

Provided, however, That notwithstanding the other

(c) Where the taxpayer acted in bad faith.

Definition Service of wealth Wealth itself

Income Situs (h) Dividends

and/or personal and additional exemptions, if any, i. Compensation Income

Tips and Gratuities – those paid directly to the

Pension – a stated allowance paid regularly to a person

Fringe benefits not subject to Fringe Benefit Tax:

c) Medical cash allowance to dependents of Fringe Benefit Tax

All other benefits given by employers which are not

Housing Cash given to employee to MV= cash received by

use of the business and of Deductions from Gross

iii. Professional Income Ordinary Assets Capital Assets

Refers to fees received by a professional from the

(b) Types of Gains from dealings in property

capital asset held for not more than 12 months (Sec.

Cash dividend is the most common form of dividend,

(2) Stock dividends

Represents distribution of all the property or assets of a

(1) Lease of personal property (a) Leasehold improvements by lessee

Tax Benefit Rule

(6) Sale of Personal Property

Exceptions: Items of Exclusions representing return of capital

i. Rationale for the Exclusions

(d) Value of property acquired by gift, bequest, devise or

Any amount received as a Plan must be reasonable.

Plan must be approved by Retirement BENEFITS from foreign government

(5) Rentals and/or other payments for use or

Under Section 30 of the Tax Code, as implemented by

(3) Treatments of surcharges/interests/fines for

e) DST; Tax credit – amount allowed by law to reduce the

The following may claim tax credits: Limit #2

(c) Where the taxpayer acted in bad faith.  

F.1. CONCEPT OF WITHHOLDING TAXES Withholding of creditable tax at source 