SAN BEDA UNIVERSITY

COLLEGE OF LAW
Centralized Bar Operations

BEDAN
RED
BOOK

POLITICAL AND INTERNATIONAL LAW

LABOR LAW AND SOCIAL LEGISLATION
CIVIL LAW
TAXATION LAW

A Reviewer based on the 2019 Supreme Court Bar Exam Syllabus

Volume 1
Series of 2019
 SAN BEDA LAW
CENTRALIZED
BAR OPERATIONS
2019

EXECUTIVE COMMITTEE
Over-all Chairperson Mary Cyriell C. Sumanqui
Chairperson for Academics Erica Mae C. Vista
Chairperson for Hotel Operations Ben Rei E. Barbero
Vice Chairperson for Secretariat Jhelsea Louise B. Dimaano
Vice Chairperson for Operations Daniel Philip V. Barnachea
Vice Chairperson for Finance Ma. Angelica B. De Leon
Vice Chairperson for Audit Arra Olmaya J. Badangan
Vice Chairperson for EDP Jordan N. Chavez
Vice Chairperson for Logistics Hanz Darryl D.Tiu
Vice Chairperson for Membership Colleen F. Dilla

• SUBJECT MITTO,E
Subject Chair for Political Law Cherish Kim B. Ferrer
Subject Chair for Labor Law Kristina D. Cabugao
Subject Chair for Civil Law Ma. Cristina D. Arroyo
Subject Chair for Taxation Law Maria Carissa C. Guinto
Subject Chair for Mercantile Law Dentzen S. Villegas
Subject Chair for Criminal Law Maria Regina C. Gam.eng
Subject Chair for Remedial Law Raymond F. Ramos
Subject Chair for Legal Ethics Rhev Xandra Acuiia
61 f;:.e:WITIF ,
;-
*s114 tzs

Roger P. Cuaresma Camille Victoria D. Dela Cruz

Gabrielle Anne S. Endona Paulo 0. Hernandez
Joelle Mae J. Garcia Teresa Katherine R. Kua
Micah Regina A. Gonzales Ma. Lourdes M. Santos
Marie Anna Karla M. Regencia

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sairda2/64n.-jt...Sb...

Dean Atty. Marciano G. Delson

Vice Dean Atty. Risel G. Castillo-Taleon
Prefect of Student Affairs Atty. Adonis V. Gabriel
Administrative Officer Atty. Francesca Lourdes M. Seaga
Legal Aid Bureau Director Atty. Peter-Joey B. Usita
 PREFACE TO THE NINTH EDITION

In 2011, the Bedan Red Book (BRB) was crafted as an apt response to the
Bar Examination Syllabus released by the Supreme Court, complementing
significantly the other bar review materials in the repository of the San Beda
Centralized Bar Operations.

Now on its NINTH EDITION (9TH ed.), the BRB is tailor-fit for the 2019 Bar
Examination as to include the latest law and jurisprudence covered by the syllabus.
Being comprehensive yet concise, it serves as a handy tool for the reader's bar
review.

With this issue, the San Beda Law Centralized Bar Operations seeks to
uphold its legacy of service and excellence in helping the examinees achieve their
goal of becoming worthy members of the legal profession.

UT IN OMNIBUS GLORIFICETUR DEUS

SAN BEDA LAW

CENTRALIZED
BAR OPERATIONS
2019

THIS IS THE INTELLECTUAL PROPERTY OF THE

SAN BEDA UNIVERSITY COLLEGE OF LAW
CENTRALIZED BAR OPERATIONS.
THE UNAUTHORIZED COPYING, REPRODUCTION,
MODIFICATION OR DISTRIBUTION
OF ANY OF THE CONTENTS OF THIS BOOK IS
STRICTLY PROHIBITED.
 .&:".1•
1„/4
- %TPA. j

TABLE OF CONTENTS

POLITICAL AND INTERNATIONAL LAW

I. Preliminary Provisions and Basic Concepts 2

II. Legislative Department 9
III. Executive Department 29
IV. Judicial Department 42
V. Constitutional Commissions 49
VI. Bill of Rights 54
VII. Citizenship 93
VIII. Law on Public Officers 96
IX. Administrative Law 130
X. Election Law 141
XI. Local Governments 162
XII. National Economy and Patrimony 174
XIII. Social Justice and Human Rights 177
XIV. Education, Science, Technology, Arts, Culture and Sports 179
XV. The Family 180
XVI. Amendments or Revisions of The Constitution 180
XVII. Public International Law 182

1,5V1;,
..Str M3r',Ett,? V.4.MA:VattA

#44.4b -4101kan,
I. General Provisions 220
II. Pre-Employment 221
III. Labor Standards 231
IV. Social Welfare Legislation 271
V. Labor Relations 288
VI. Post-Employment 326
VII. Management Prerogative 353
VIII. Jurisdiction and Reliefs 357
 i st 14.,-.P.V.Itl.,:-A71A1Pliiii:f.441';:z4,
:cf;Altr°:447•S:'.
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RED B K
414:+4,,Y;'•ff-hIJA.01;:e::,:-311,10:4',7i14:4.:i*ZA-54 ,,.-':JF;-14'"

CIVIL LAW

I. General Principles 374

II. Persons and Family Relations 389
III. Property 444
IV. Succession 503
V. Obligations and Contracts 553
VI. Sales 613
VII. Lease 646
VIII. Partnership 651
IX. Agency 675
X. Credit Transactions 687
Xi. Land Titles and Deeds 708
XII. Torts and Damages 721

Cr

I. General Principles 738

II. National Taxation 769
III. Local Taxation 967
IV. Judicial Remedies 1009

g
VATPIT, atut,4511111...Tt,.wa itZtalW.P.iez.,.-51%, in=

Appendix A: Syllabus for the 2019 Bar Examinations: 1019

Political and International Law
Appendix B: Syllabus for the 2019 Bar Examinations: 1025
Labor Law and Social Legislation
Appendix C: Syllabus for the 2019 Bar Examinations: 1028
Civil Law
Appendix D: Syllabus for the 2019 Bar Examinations: 1032
Taxation Law
Bibliography 1037
 POLITICAL AND
INTERNATIONAL LAW
CHERISH KIM B. FERRER
Subject Chair

CHARLO 1'1'hVINA S. CASINILLO

Assistant Subject Chair

ROEN G. MECANO
Subject Electronic Data Processing

SUBJECT HEADS

Constitution Law I CHRISTIAN S. TADURAN

Constitution Law II PATRICK RAY B. BALISI
Administrative Law LEONORE MAE P. DEGOLLADO
Law on Public Corporation LEONORE MAE P. DEGOLLADO
• Election Law VOLTAIRE P. SOMERA
Law on Public Officers VOLTAIRE P. SOMERA
Public International Law GERANI D. MALIJAN

SUBJECT MEMBERS

AARON FRANZ SP. AURELIO REGINA PURITA B. LAVARIAS

FRANCIS ARTHUR A. CORPUZ JAIME NIKOLAI K PAGGAO
MARIA KATRINA L. DATUIN MARIA YSABELLA B. PALAMOS
JOHN LORENCE N. DE MESA KRISTINE JOANNE T. SAGMON
MARIA ERICA L. DELA CRUZ ELLAINE ROSE S. TAN
— -FRANCES CAMILLE A. FRANCISCO MAYRELL T. TAN
FERDINAND ELBERT D. JOMILLA JR.

ADVISERS

Atty. ADONIS V. GABRIEL Atty. ROWELL D. ILAGAN

Comm. RENE V. SARMIENTO Atty. ANTONIO EDUARDO S.
NACHURA, JR.
 TAXATION LAW
MARIA CARISSA C. GUINTO
Subject Chair

SHENA GLADDYS P. BAYLON

Assistant Subject Chair

ANGELICA MARIE C. MANUEL

Subject Electronic Data Processing

SUBJECT HEADS

General Principles REINA G. FABREGAS

Income Tax CARLOTA N. VILLAROMAN
Transfer Tax APOLLO JULIUS S. STA MARIA
Value-Added Tax JELLYN C. CLEMENTE
Tax Administration, Enforcement; MIGUIEL A. DE ALVA
and Remedies
Real Property and Local Tax ATHENAI FRANCES R. QUINTON

SUBJECT MEMBERS

LIANNE MAE D. ENRIQUEZ JEWEL JOICE G. DAYTIA

ANISHA M. HADJI HASSAN •MLKICAELA S. MONES
- MARY EVIELYN N. MATEO ANDREA PATRICIA D. DAQUIAL
MARIE SHERRYDANE C. REYES ALFRED-FRANCIS P. GALLEGOS
ALYSSA R. ZARRAGA JOY CRISTEL G. GAYONA
TAGMA ESTER V. GARABILES MARIONE NICOLE P. BUGARIN
MAREANE MABEL A. CHAVEZ KATRINA ANN S. PRADO

ADVISERS

Atty. NICASIO C. CABANEIRO, CPA

Atty. DANTE 0. DELA CRUZ, CPA
 :•7"

AN REDSBOOK

TAXATION LAW
I. GENERAL PRINCIPLES OF TAXATION
A. POWER OF TAXATION AS DISTINGUISHED FROM POLICE POWER AND
EMINENTDOMAIN
Q: Define Taxation.
ANS: Taxation is a mode by which governments make exactions for revenue in order to
support their existence and carry out their legitimate objectives. The term may refer to
either or both the power to tax or the act or process by which the taxing power is
exercised (VITUG & ACOSTA, Tax Law and Jurisprudence (2014), p. 1) [hereinafter
VITUG & ACOSTA, Tax Law].

Q: What is the rationale flax tion? / I

ANS: It is said that]eRes, ary Jipt,,wempy.tcic.diviliz,d'sbciety. Without taxes, the
government would b rapzedlar lack of the moRre,tow hONactivate and operate it. '
The gwernment, or i s4afLis-'6345;Ct41 , TO-ltspond IL the N9rm of tangible and
intangible benefi lierge'd tclimpror th \live,srof th pedplp nd'enhance their moral
and material va es, lt116 sy biotic relaticrry iPis the le Vexation and should
dispel the erro pus ndtion at it is an erbitra metho dtionlblt those in the seat
of power (com to 8er of Internal Roved e vAlgue, pc., G. OloA--28896, February
17, 1988). 1a. 111
:4
Q: What are t oses ta ' t:
ANS: The pu qeroktax
1. ReverVeZtk ram .,) ,ftR. P, e St5te to promote the
generalrelfarevand kites' its attz (AB , Law of Basic Taxation in
the Philippines, (2001), .1 ira76 AN, w of B sic Taxation]; and
Non-revenue/speCta o OTepry,
a. Prom tion Ofen‘a-welfbk--...-6cati ay)iused as an implement
of poll oh taerlo ote neral welfare of the people
(Id.);
Regulation - ermay be used in the rehabilitation
and stabilization of threa ened industry, which is affected with public
interest, like the oil industry (Caltex PHL v. Commission on Audit, G.R.
No. 92585, May 8, 1992);
Reduction of social inequality - this is made possible through the
progressive system of taxation where the objective is to prevent the
undue concentration of wealth in the hands of a few individuals.
Progressivity is based on the principle that those who are able to pay
should shoulder bigger portion of the tax burden. This is also known as
the compensatory purpose. (ABAN, Law of Basic Taxation, supra at 6);
d. Encourage economic growth - in the realm of tax exemptions and tax
reliefs, the purpose is to grant incentives or exemptions in order to
encourage investments and thereby promote the country's economic
growth (Id.);
e. Protectionism - in case of foreign importations, protective tariffs and
customs are imposed for the benefit of local industries (ABAN, Law of
Basic Taxation, supra at 6-7).

738
 le‘N RED BO
Q: What is the nature of the power of taxation?
ANS: Taxation may be described as follows:
1. It is an inherent attribute of sovereignty —The moment the State exists, the
power to tax automatically exists. It does not need constitutional conferment.
This power is inherent in the National Government but not in the Local
Government Units (LGUs) since they are merely an agency of the State for the
purpose of carrying out in detail the objects of the government. They can only
impose taxes when expressly granted to them by the Constitution or by laws
enacted by Congress (SABABAN, Taxation Law Review, (2008), p. 1)
thereinafter SABABAN, Reviewer]. Nevertheless, effective limitations thereon
may be imposed by the people through their Constitutions (Mactan Cebu Int'l.
Airport Authority v. Marcos, G.R. No. 120082, September 11, 1996);
2. It is legislative in character Taxes are a grant of the people who are taxed,
and the grant must be made by the immediate representatives of the people.
(Commissioner of Internal Revenue v. Fortune Tobacco Corp., G.R. Nos.
167274, July 21, 2008). This, pagans that in the legislature primarily lies the
discretion to determine tly04119 ure (kind), object (purpose), extent (rate),
coverage (subjects) andaW,(p pe) of taxation (Chamber of Real Estate and
Builders' Associations, G.R No. 160756, March 9, 2010);
3. It is subject to constitittiona, nd inherent limitations (1 DE LEON, The
National Internal Reveria4 Q 69" patated (20 f p. 3) [hereinafter 1 DE
LEON, NIRC Annotated].

Q: What are the chard'aristics of ti4 ing power?

ANS: The characterisievp i z.i the follain" (CUPS)
1. Comprehenkr‘Ve 1 Itosbaiers rsons, businesse activities, professions,
rights,Angfiiivil dat,
2. Unlinilted — ./tgx does nkc e to be vagd. meelycause it regulates,
disottiliges,„pMen de finitely ers the a .i.'" power to tax is
onelc,5 unlimiteforce._%
ril , d s earching '''we •"e courts scarcely
,to dellabat it'l
venture,,, 4to any restrioroW,Mtever, except such as
rest in tRAIrstrett of litre a hority which exercises it (Tio v. Videogram
RegulatotPBr G:4. No. 75697 9, 1987);
3. Plenary — It 1^.3.5.salp ete. Unde anal Internal Revenue Code (NIRC),
the BIR may Oil of ce Ittreme id °TensWM collection of taxes; and
4. Supreme — 4+,1thoug keferred to as the strongest of all the powers of the
government, iikets be interpreted to mean that it is superior to other
• -inherent powers nly hat it is supreme insofar as the selection of thesubject
of taxation is concerned (To v. Videogram Regulatory Board, supra).

Q: Why is the power of taxation essential?

ANS: The power of taxation is essential because the government can neither exist nor
endure without taxation. Taxes are the lifeblood of the government and their prompt and
certain availability is an imperious need (Bull v. United States, 295 U.S. 247, 15 APTR
1069,1073). •

739
 Q: Distinguish power of taxation from police power and power of eminent domain.
ANS: They may be distinguished as follows:
Distinctions
Power of Eminent
Power of Taxation Police Power
Domain
• As to purpose
To raise revenue. To promote public welfare To facilitate the taking of
through regulations. private property for
public use.
As to amount of exaction

It is unlimited in amount. It is limited only to the There is no exaction, but

cost of regulation, private property is taken
issuance,--of—,license or by the State for public
,osKrveillahce. ,744%,„, purpose.
As to benefits received
No special ov direct-benefi eceiVel4 • ust, compensation is
benefit is receivisili
. r p, hekilhy ',con is\ r egiv„ed by the property
taxpayer, but 'Trie}:e y standkii'd c2flogikty kno n 'elAt
general bgnefit / of as
b " daRtilr absq e
protection is e681yeaL —injuria-1is4I .aihed. )
#
As to non-impairment of contracts
1 il
No ggnrment
i of
contracts rule does not
API* /
As to transfer of property rights

Taxes paid becom Thare s—n

04w-
a sf er o T e transfer 'of property
of public funds. r ria”ighT§ r ut' I s effected in favor of the
straint s. State.
As to scope

Covers all persons, Covers all persons, Covers only a particular

property, and excises. property, rights and property.
privileges.

As to who may exercise the power

Exercised only by the Exercised only by the May be exercised by

government or its political 'government or its political. private entities.
subdivision. subdivision.

(ABAN, Law of Basic Taxation, supra at 13-14).

Note:
1. Where a permit collected from alien job applicants is in excess of the cost of
regulation, the exaction is a tax (Villegas v. Hiu Chiong Tsai Pao Ho, G.R. No.
L-29646, November 10, 1978).

740
 2.A charge of a fixed sum which bears no relation at all to the cost of inspection
and regulation may be held to be a tax rather than an exercise of the police
power (Progressive Development Corporation v. Quezon City, G.R. No.
36081, April 24, 1989). •
3. Police power may not be exercised by itself alone for the purpose of raising
taxes. However, police power may be exercised jointly with the power of
taxation for the purpose of raising revenues (Lutz v. Araneta, G.R. No. L-7859,
December 22, 1955).
4. The 20% senior citizen discount is an exercise of police power. The discount
may be properly viewed as belonging to the category of price regulatory
measures which affect the profitability of establishments subjected thereto. On
this face, therefore, the subject regulation is a police power measure (Manila
Memorial Park v. Secretary of DSWD, G.R. No. 175356, December 3, 2013).

Q: What is the determining factor in distinguishing tax and regulation as a form of

police power?
ANS: In distinguishing tax and regulAtion'as a form of police power, the determining
factor is the Orpose of the implerOritextrasure. If the purpose is primarily to raise
revenue, then it will be deemed a4p$Z9nai-lough the measure Jesuits in some form of
regulation. On the other hand, if tfiWpi,;ti1p45s,3p primarily to regulate, then it is deemed a
regulation and an exercise of the liolIOR§ ripkqe stategnven though incidentally,
revenue is. generated (Angelw•tlnidOt045EaktdrimaGity of Angeles, G.R. No.
189999, June 27, 2012. ) V' v:im4,
Q: What does the ph_.:̀
.t.
use Ithe poW01clax involves the v to destroy" mean?
ANS: The, pOwer to Mit 1,451e;les'the C p` er to destroy if it is used validly as an
implement of the Ode' pq:wp,r4 discoura ing and in effect, ul malo prohibiting certain
things or enteggises inimical to fhe ptiplic4Ifare (Cruz Conititutional Law, as cited in
DIMAAMPAO471px Principles and Remedies (2015), 20) ereirl'after DIMAAMPAO,
Tax PrinciPlesrd Reliedits). "`ft-tt, , ,.,-,
Note: Instead 8( beingireg*ded .6'§^a bl ket authorizttib unrestrained use of
taxing power'repagyAiitiell purpose `t is more reasonable to say that the maxim
"the power to tax istlpe powotto destroy"*, jiLdescribe not the purposes for which the
taxing power may be used the degregr a which the taxing power may be
employed in order to rq7revenge,l,,p0.0LEatthtionzittpL /, 4th Ed., p.179-181).
,,,,,
B. INHERENT AND CONSTITUTIONAL NAL LIMITATIONS OF TAXATION
Q: What is the scope of1 h-er egislative
'1/4 4q 111 taxing power?
ANS: Legislative taxing power or discretion extends to the following:(PAPKASiM)
1. Person, property, or occupation to be taxed;
2. Amount or rate of the tax;
3. Purposes for which taxes shall be levied provided they are public purposes;
4. Kind of tax to be collected
5. Apportionment of the tax, i.e., whether the tax shall be general or limited to a
particular locality or partly general and partly local;
6. SituS of taxation; and
7. Method of collection (ABAN, Law of Basic Taxation, supra at 8).
Inherent Limitations
Q: What are the inherent limitations of taxation?
ANS: The inherent limitations of taxation are: (PINES)
1. Taxes must be exacted for a Public Purpose;
2. International Comity;
3. The power to tax is Inherently Legislative in nature/ Non-delegability of the
taxing power;

741
 Government entities, agencies and instrumentalities are generally Exempt
from taxation;
5. Territoriality or Situs.
Note: A violation of these inherent limitations can amount to the taking of property
without due process of law (Pepsi-Cola v. Municipality of Tanauan, Leyte, G.R. No. L-
31156, February 27, 1976); hence, in this sense, it can be said that any tax law
contravening any limitation of taxation, in effect, will likewise be unconstitutional (V/TUG
& ACOSTA Tax Law, supra at 4-5).

Public Purpose
Q: When is tax considered for public purpose?
ANS: Jurisprudence states that 'public purpose" should be given a broad interpretation.
It does not :only pertain to those purposes which are traditionally viewed as essentially
. government functions, such as building roads and delivery of basic services, but also
includes thOse purposes designed to promote social justice Planters Products, Inc. v.
Fertiphil Coip., G.R. No. 166006,Afarch'14,'2008),,,,..
Note: It is the purpose wh' rdetermirips The pU liccharacter of the tax law, not the
number of .persons buff d4//v/MIIVAO, TErX Prin' ale,f and Remedies, supra at
42).
I fr
International Coirkt
9
Q: What is the' Pr pie of Inte national• omi iasanrinhent limitation of
taxation?
l
ANS: Under t iple, kstate-m Iln ize- e gen Icepted tenets of
international , aryl ng which arep9.4 9rrciple'syof overer fir equatyamong states
and of their reedpr from suit wrt.4.1 Illeirrconse t, that 11411%4 hoe authority of a
governmentlto -Ase taxes`i -k§:*ereig
ely irni le a d its instrumentalities, as
well as on lits HOT ‘TI'd emin hatlacity (VITUG &
ACOSTA, Tax ra • NV
Note: A state th nt 6 rnatib ns is bound to make in its
legislations thoselmodifi tion nsure e fulfillment of the
obligations tindertken. la nsure t at the reliefs granted
under tax treaties e acco ergt (Duetsche Bank AG
Manila. Branch v. CorTr isv *Inte.caaLR No. 188550, August 28,
2013).

Q: What are the bases of the rule o nternab al comity?

ANS: The bases of the rule of International Comity are as follows:
1. The Philippines adopts the generally accepted principles of international law
as 'part of the law of the land (CONST., Art. II, Sec. 2); and
2. Ddotrine of Sovereign Equality among the states (par in parem non habeat
imperium) (DIMAAMPAO, Tax Principles and Remedies, supra at 46).

Inherently Jegislative/Non-delegabayof the Taxing Power

Q: What is the rule on non-delegability of the taxing power?
ANS: As a general rule, the power to tax is exclusively vested in the legislative body
(DIMAAMPAO, Tax Principles and Remedies, supra at 52). This is embodied in the
Latin maxim "Potestas Delegata Non Delegari Potest" which means, what has been
delegated may not be delegated. This is based on the ethical principle that a delegated
power is not only a right but a duty that the delegate must perform through the
instrumentality of his own judgment and not through the intervening mind of
another (Quezon City PTCA Federation, Inc. v. Department of Education, G.R. No.
188720, February 23, 2016).

742
 AIVOL 1.
2019

Q: What are the exceptions to the rule on non-delegability?

ANS: The following are the exceptions: (LPAP)
1. Delegation to Local Governments;
2. Delegation to the President;
a. Tariff powers by Congress under the Flexible Tariff Clause (CONST.,
Art. VI, Sec. 28, par. (2)); and
b. Emergency powers (CONST., Art. VI., Sec. 23, par. (2)).
3. Delegation to Administrative Agencies (Power of Subordinate Legislation); and
4. Delegation to the People at large (Abakada Guro Party List v. Ermita, G.R. No.
168056, September 1, 2005).
Note: In every case of permissible delegation, there must be a showing that the
delegation itself is valid (Id.).
Q: What are the tests in determining if there is a valid delegation?
ANS: It is valid only if the law:
1. Is complete in itself, setting fortb,therein the policy to be executed, carried out,
or implemented by the deleggOompleteness test); and
2 Fixes a standard — theiiiiriiitWkof
-.. nw4-i4p, which are sufficiently determinate and
determinable — to whichine,m egate must conform in the performance of his
functions (sufficient star-000), sufficient standard is one which defines
legislative policy, marks itekiiriilfg mapsexit its bozdaries and specifies the
public agency to apply itl:7.,,,,0 , ,faiesetkateircuttances
:rd., -, under which the
legislative commaeis
..4i1,g to bp e ected (Aga ada uro Party List v. Errnita,
supra).
Exemption of GovernmentEntities: Agencies and instrumentalities
4.e!' twe-- W. 1 I, lk ent entities from
Q: What is the.v Aationale-0.05,the exemption of the go ern
taxation? 41- .4lw 0.1 : "`"'
,• 'sr'
e
ANS: ProPerlte;bi,Vol,41**Nelional,9ovem ent as Vtimiktbil.
i
subject 0. texlibtherwiqatit„& ill reAilt in t absurd sitatitklb
a LGUs are not
ovemment taking
money from °rated% nsl putti4 it inanother (BeiVefroP sessment Appeals of
Laguna v. ,Court olra'Apilkals, CIR. L-18125, May 31, 1963). It is a matter of
public policy (51 An?. ir. 5024 The State nnotbe taxed without its consent and such
consent, being in derogatioof its soveimig bybe strictly construed (Gomez v.
Palomar, supra). O ai
.,,,tor -,1:- gsgsa
:1
6
Q: Discuse the taxabili ;otAtivernment agencies.
ANS: Agencies performingnbvernmental functions are exempt from tax unless
expressly taxed, while proprietary functions are subject to tax unless expressly
exempted (DIMAAMPAO, Tax Principles and Remedies, supra at 59).
Q: Discuss the taxability of Government-owned or controlled corporation (GOCC).
ANS: Government-owned or controlled corporations perform proprietary functions;
hence, they are subject to taxation (DIMAAMPAO, Tax Principles and Remedies, supra -mail
at 59). 1 VPt
Q: What GOCCs have been granted tax exemption?
ANS: The following GOCCs are considered tax exempt:
1. Govemment Service Insurance System (GSIS);
2. Social Security System (SSS);
3. Philippine Health Insurance Corporation (PHIC); and
4. Local Water Districts (LWDs) (NIRC as amended by TRAIN Law, Sec. 27, par.
(c)).
Note: Before the TRAIN Law, PCSO was included among the tax-exempt entities under
Sec. 27, par. C. Pursuant to the amendment, the income of PCSO is now subject to tax
(NIRC, as amended by TRAIN Law, Sec. 27, par. (c)).
743
 DAN •
Q: Is an instrumentality of the government subject to real property tax?
ANS: No. The Supreme Court held that the real properties of Manila International
Airport Authority (MIAA) are owned by the national government and thus exempt from
real estate tax. It considered MIAA as a government instrumentality under Sec. 133 (0)
of the Local Government Code (LGC) which provides that "exercise of the taxing
powers...stiall not extend to the levy of taxes, fees or charges of any kind on the
National ggvemment, its agencies and instrumentalities and local government units"
(Manila Intl. Airport Authority v. Court of Appeals, G.R. No. 155650, July 20, 2006).
Note:
In the MIAA case, the Supreme Court considered MIAA as a government instrumentality
because MI'AA:
1. Islnot organized as a stock corporation because it has no capital stock divided
into shares; and
2. Is neither a non-stock corporation because it has no members.

The last paragraph of Section 230‘of.the.,„1,QC. unequivocally withdrew, upon the

effectivity of the LGC, exemptions train pa ecit'oLreal property taxes granted to
natural or juridical perso eirAuding tg2)er nhowped or controlled corporations
.--4t,l.1., r
x 1?..-
„• -•
,„ ,--....,„, ,4: , 4,„4t..
(LGC, Sea 234).
\-1
,‘
Q: When a goverrfinattigsiiilmenteliFfe'vestecl tith,cop - et at powers, does it
become a corpo.4 r s'ubje t to taper? 1,- ) 1, ,
ANS: No. Whe the ves s in aiffovemmefit instr corporate powers, the
4- •
instrumentality beco e a corpora tion. Unless e go e nn'at instrumentality is
t
organized as 97 tgp non- tock corpora ion, iffemai s a g verwent instrumentality
,- .rip,
exercising not ft- 1w overnrcentaloal0so, corporate pow rs ( ila Intl. Airport
Authority v. T
I peals, upra).:11;;-- ,1114.1- , .?-xit I 1....,
17;
Q: May
May the go inn 1 x4 f? r I i , t`...,,,4
,
le
ANS: The Co titutron, is ,, t\ n riliptherr;go gra,. is piohibire from taxing the
properties of the‘ gencibs of l 6-K9
MM nil-- eitroje", nqjfiing ca prevent Congress
from decre9ing t t eveN2st 'otal_iti Fies ofrthe go ernment performing
governmental func ons may diect#crt x\(Ma"giOebu Intl. Airport Authority v.
Marcos, supra). ‘--,I tiN
I
Territoriality or Situs
1
Q: Define sffus of taxation.
'.1 1 ,.....,:...„,,,,,,
\10i-
ANS: It is !the place or authority that has the right to impose and collect taxes
(Commissioner of Internal Revenue v. Marubeni Corp., G.R. No. 137377, December 18,
2001). It is also called "place of taxation" (ABAN, Law of Basic Taxation, supra at 57).

Q: State th9 rule on sifus of income tax.

ANS: On income derived:
1. Fr?m sources within the Philippines - all kinds of taxpayers are subject to
income tax on income derived from sources within the Philippines. Income is
derived from the Philippines if it is derived from activity within the Philippines
(NIRC, Sec. 23);
2. From sources without the Philippines - only resident citizens and domestic
corporations are liable to income tax on income derived from sources without
the Philippines (NIRC, Sec. 23 (A) & (E));
3. Partly within and partly without the Philippines - taxable income
attributable to sources within the Philippines may be determined by processes
or formulas of general apportionment prescribed by the Secretary of Finance.
Gains, profits, and Income from the sale of personal property produced (in
whOle or in part) by the taxpayer within and sold without the Philippines or

744
 C
kV; • 1"

produced (in whole or in part) by the taxpayer without and sold within the
Philippines, shall be treated as derived partly from sources within and partly
from sources without the Philippines (R.R. No. 02-40, Sec. 162).

Q: State the rule on situs of property taxes.

ANS: Taxes on:
1. Real Property - where the property is located, regardless of whether the
owner s a resident or a non-resident (Lex rei sitae,or lex situs) (First National
Bank v. Maine, 284 U. S. 312.77 ALR 401 as cited in DIMAAMPAO, Tax
Principfes and Remedies, supra at 47);
2. Personal Property - if the personal property is:
a. Tangible Personal Property - where the property is physically located
although the owner resides in another jurisdiction (51 Am. Jur. 467 as
cited in DIMAAMPAO, Tax Principles and Remedies, supra at 47);.
b Intangible Personal Property - as a general rule, the situs is the
domicile of the owner,4pplying the principle of mobilia sequuntur
personam (movableigilloit the person). The exceptions are:
i. When the,,Fjpe has acquired a business situs in another
jurisdiction; :pry^;4
ii. When thefakzi$ es for the situs of the subject of tax (NIRC,
Sec. 104),. i gge
Q: State the rule on situs to
ANS: The situs of:
1. Estate tax: .;.k .4s' .a,0-.
tot._pis
a. For ittpiikInt:ethei resident or not, and or es'dent aliens - they are
taxp:An plo, Perties wher&ter situated; art
4For nop; r4skIeht aliQqs - nly taxed op properties situated within the
ilihilipilitfes (R. A. No. 84 Secs. 85, 104. . I,
2. Dongis MIA ?' ,,,,, No. 8424, Se 98, 1 . -- -'71ePlerrs' in the case of
Estatei tax. the meatus alit lOca on are dete itt .:_iat,• „--r
he •time of donation
(DIMAZIVIP . A07
i 0,4„,,, e"
a -Principles a Remedies, supra at 51).
-
Q: State the rule o situs of usiness taxi
ANS: The rule on situys t follows: -ntgaga, 21 .4
1. On the sale ott it
a. Real Pr pqrty where the real property is located; and
b. Personalkagurty - where the sale is perfected and consummated.
(Sec. 104,NIRC)
2. VAT - the place where the transaction was made, i.e., where the property is
sold and consumed or where the service is performed or to be performed
(Cro9-border Doctrine/Destination Principle) (Commissioner on Internal
Revere v. American Express International, Inc., June 29, 2005).

Q: What are the criteria observed in fixing the situs?

ANS: The criteria observed in fixing the situs of taxation are as follows:
1. For p9ll taxes, the tax situs is the residence of the taxpayer;
2. For property.axes, the tax situs is the place where the property is situated;
3. For excise taxes, the tax situs can be the place:
a. I where the privilege is exercised;
b. where the taxpayer is a national of, or
c. ; where he has his residence (VITUG & ACOSTA, Tax Law, supra at 10).
4. In double taxation - In determining situs, it is of no importance that the
property has already been taxed or is subject to tax in another state. There are
two situses of taxation. Both the Philippines and the other imposing state have
the right to tax the same taxpayer (ABAN, Law of Basic Taxation, supra at 58).

745
 Q: What is1 the Maxim of Mobilia Sequuntur Personam?
ANS: This, maxim means "movables follow the person". According to this maxim, the
situs of personal property is the domicile of the owner. This is intended for convenience
and not to; be controlling where justice does not demand it. The maxim applies to
taxation of personal property (ABAN, Law of Basic Taxation, supra at 59).
Constitutional Limitations
Q: What are the Constitutional Limitations of the taxing power?
ANS: Constitutional Limitations may either be:
1. Provisions directly affecting taxation: (P2UTO SERV JAIL)
, a. Prohibition against imprisonment for non-payment of poll tax;
b. Progressive system of taxation;
c. Uniformity and equality of taxation;
d. Delegated authority of the President to impose Tariff rates, import and
export quotas, tonnage and wharfage dues (Flexible Tariff Clause);
e. Origin of revenue an appropriations;
f. Prohibition_grolse of toif lOied-lorigiieci0 purpose;
' g. Votes re.,qgke,V togrant taxigherfticitiszt N.\
;h. Tax e,xerrilltion fif ifeligidarcharake,firld e ucational entities;
i. Pre..,416 t's'Vte • N44 a 1''',.
.

e
j. N,drn-impay4tporStIrelir atIrt,s,,Juris.811dfion,N
3c. IficiAppropr -tion opuset ptiblia m3. ey‘kreligiouspurposes;
;I. Mon- i bill of norlistA non-profit E duck•nalArstitutions;
I and
.m. i• LGU' powe to create its 'isivn sources .f revq&e.)
2. PiovisigTai irectl affeeting_ta tiors.R FPJ) 11,,.01
la. g Zig Process .41. e4 1 4\ '
b. N protecton; kil .4
,,,,,,
,c. Ri5 on'-rtinp • Os of_co
cl. RECOIOLIS '4".<
.c - .711.,
e. feed prefisio
f., reside tial wert rp,~ra rep ev mr utatiow, and pardons, and
il,rnit finesnd o e ur by final Lodgement; and
g. Nol-V> fe ol‘p.pZ/at
king blic se withoUt Just compensation.
...1.
Provisions DirectlyA ctinvo) . --0'' 'cikkki
4",- isi1
Prohibition against Imprisahmen r for An€L .'.- e ?i,fPoll Tax
--..„,„,.........".L.c...;3.„,,,0.-
Q: What is a Poll Tax?
ANS: Poll Tax (also known as "community tax") is a tax of a fixed amount on individuals
residing within a specified territory, whether citizens bi. not, without regard to their
property or ,the occupation in which they may be engaged (51 Am. Jur. 660 cited in
Villanueva v. City of Iloilo, No.
• •
L-26521, December 28, 1968).
-•' I
Q: Can a taxpayer be imprisoned for non-payment of poll tax?
ANS: No. The Constitution states that "ndpeison shall be imprisoned for a debt or non-
payment of a poll tax" (CONST., Art. III, Sec. 20). One cannot be imprisoned for non-
payment of poll tax because payment. thefeof is not mandatory (SABABAN, Reviewer,
supra at 14). While a person may not be imprisoned for non-payment of a cedula or poll
tax, he may be imprisoned for non-payment of other kinds of taxes where the law so
expressly provides (D!MAAMPAO, Tax Principles and Remedies, supra at 51).
Progressive System of Taxation
Q: What kind of tax system does the Philippines follow?
ANS: The Constitution provides that the Congress shall evolve a progressive system of
taxation (CONST., Art. VI, Sec. 28). '

746
 i
ri
, r. ••
.-•
Ze
•

Q: Do indirect taxes, like VAT, comply with the constitutional requirement of

progressive system of taxation? If not, should the same be declared
unconstitutional?
ANS: No. Indirect taxes, like VAT, are admittedly regressive because they are imposed
regardless of income (INGLES, Tax Made Less Taxing: A Reviewer with Codals and
Cases (2015), p. 13) [hereinafter INGLES, Reviewer]. However, they are still valid as
the Constitution does not entirely prohibit a regressive system but merely directs the
Congress to evolve a progressive system of taxation. Further, the constitutional
provision on progressive system of taxation has been interpreted to mean simply that
direct taxes are to be preferred and as much as possible indirect taxes should be
minimized (Abakada Guro Party List v. Ermita, supra).
Uniformity and Equality of Taxation
Q: What does uniformity of taxation mean?
ANS: Uniformity in Taxation means that persons or things belonging to the same class
shall be taxed at the same rate (Constittitional Law, (2007), p. 90) [hereinafter CRUZ,
Constitutional Law].
Q: What does equality of taxation M0i*
ANS: Equality in taxation simply rneofi4:Alp. the tax shall be strictly proportional to the
relative value of the property. It ccinnON,Nati Vce.q,,shoulcyilp apportioned among the
people according to their capacity to 'pesi.''f(50.YzFediRgitettorf t Law, supra at 91).
• 4
Q: Distinguish uniformity from equitab 43..1
i kty. ji 1
ANS: Equality in, taxation simply means twat the tax shall be it ctly proportional to the
relative value of; the ,p?opelty.j.(1 COOLqyi, supra). In c9fitrOst, uniformity in taxation
means that persOns•or tnill'AARplonging i tp, the same class s all be taxed at the same
rate pmAAnip.A,o, Tax,pfinciples arIti.R47 dies, supraeat 9 .
AR!' . ,,Aik,, 1.. f
4
F.,
Grant by Conress of Authonty .to the President to TposeTbriffRates
Q: What is the FlObis'.Y4ff Claid4?
.-
ANS: The COngreOliig9, klaw, ailhoric the President to fix, within specified limits,
and subject to'. sOchilmitatiorAand restrictfgisA*A may impose, tariff rates, import and
export quotas, tonnag4and4harfage d_, .•ear ,,. file duties and imposts, within the
li,
framework of the natica deve(oLlyetTfOgrafirotilt -e Go ernment (CONST., Art. VI,
Sec. 28(2)). ' 141
, 16
tab•,41
017:9,117 of Revenue or Tariffalle
Q: Which body of Congress should initiate the filing of revenue or tariff bills?
ANS: All appropriation, revenue or tariff bills, bills authorizing the increase of the public
debt, bills of loCal application and private bills shall originate exclusively in the House of
RepresentatiVes but the Senate may propose or concur with amendments (CONST. Art
VI, Sec. 24).
Note: It is not the law, but the bill which is required to originate exclusively from the
House of RepreSentatives. A bill origination in the House may undergo such extensive
changes in the Senate that the' result may be a rewriting of the whole (Tolentino v.
Secretary of Finance, G.R. No. 115455, August 25, 1994).
Prohibition on Use of Tax Levied for Special Purpose
Q: What is the nature of the money collected on tax levied for a special purpose?
ANS: All money collected on any tax levied for a special purpose shall be treated asua
special fund and paid out for such purpose only. If the purpose for which a special fund
was created has been fulfilled or abandoned, the balance, if any, shall be transferred to
the general funds of the Government (CONST., Art. VI, Sec. 29, par. (3)).

747
 r ;!'

AN R
A •

J r VOL 1.
2019
Majority Vote of Congress for Grant of Tax Exemption
Q: What is the required vote of Congress for the granting of tax exemptions?
ANS: No law granting any tax exemption shall be passed without the concurrence of a
majority Of all the Members of the Congress (CONST. Art. VI, Sec. 28, par. (4)). The
phrase "majority of all the members of the Congress" means at least 1/2 plus one (1) of
all the members voting separately.
Note: In granting tax exemptions, an absolute majority of the members of Congress is
required, while in cases of withdrawal of such tax exemption, a relative majority is
sufficient (DIMAAMPAO, Tax Principles and Remedies, supra at 125).

Prohibition against Taxation of Religious Charitable, ono 'Educational Entities

Q: Discuss the rule on exemption of religious, charitable, and educational
institutions from taxation.
ANS:: Charitable institutions, churches and parsonages or convents appurtenant thereto,
mosques; non-profit cemeteries, and,,adaiida, buildings, and improvements, actually,
directly, end exclusively used,jorrairgioys,lhaMl)le,,or educational purposes shall be
exempt frOm taxation (CO, S7, ,kt. VI, Sec 28,par (8)P,,,
„, f•
:‘,„
.......,........./a,, i
Q: What kind of taxi s,,coverecWihe exemption?‘.P. ,,,,,,
V 4, N. .r e
ANS: The exempt'on a phase o ..to-Real-Properta. T x<ada4c v. Commissioner of
Internal Revenue oot- 201,,June!6,..1,965).- ..) \
4,
1” .f. '
Q: What is the est offrexem bon?

Aquino,G.R.G llo:49066, Jun 15mp-p8), ;1 ,, 1ko......

ANS: It is theike)of the ptoperty-atht of--owrrersrj (Ab (kle College, Inc. v.

• 1:::,.:-.)
Mr Lii •
4•4
Q: What. Is th I natur of efelt se of dieoto,Perty todb1grce-35empt?
ANS:, The propvtgstrnu R aclUely,p0Iy,--90,:le)cclusiveJyAU ed for religious,
charitable, or kdutationales ipatob- ,:Vf.CArifssio; er ow fnternal Revenue,
supra). :y
:-1."1 • :1/ '4,
\
Q: What is meantty actual cgiftqd-exicl sly6usef i
ANS: What is meant actuBt, irebtAd\ac)usteArsa, ,of the/ProPertjr for charitable
institutions is direct apre4io foNhe—pxopertylis If,. tcf,tVpurposes for which the
charitable! institution is orgarilze&II t is no4 t e ugekcIf I
d:dome from the real property
that is determinative of whethe-Ap•propaq u islslo ax-exempt purposes." Thus, the
Supreme Court held that only ge'portionveff real property actually, directly, and
exclusively used for charitable purposes are exempt from real property taxes, while
those portions leased to private entities and individuals are not exempt from real
property taxes (Lung Center of the Philippines v. Quezon City, G.R. No. 144104, June
29, 2004)1

President's Veto. Power on Appropriation. Revenue, and Tarif f Bills

Q: What is the extent of the veto power of the President in relation to taxation?
ANS: The President shall have the power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to
which he does not object (CONST., Art. VI, Sec. 27, par. (2)).
Note: The item or items vetoed shall be returned to the Lower House of Congress
together with the objections of the President. If after a reconsideration of two-thirds (2/3)
of all the members of such House shall agree to pass the bill, it shall be sente.together
with the objection, to the other House by which it shall likewise be reconsidered, and if
approved by two-thirds (2/3) of all the Members of that House, it shall become a law
(DIMAAMPAO, Tax Principles and Remedies, supra at 107).

748
 O

„„ .
• •

Non-impairment of Jurisdiction of the Supreme Court

Q: What is the jurisdiction of the Supreme Court on tax cases?
ANS: The Supreme Court shall have 'the power to review, revise, reverse, modify, or
affirm on appeal Or certiorari judgments or orders of lower courts in all cases involving:
1. The legality of any tax, impost, assessment, or toll; and
2. The legality of any penalty imposed in relation thereto (CONST., Art. VIII, Sec.
5, par. (b)).

Q: What is the Principle of Judicial Non-Interference?

ANS: Under the Principle of Judicial Non-Interference, the courts cannot inquire into the
wisdom of a taxing act unless there is a violation of constitutional limitations or
restrictions (CIRV. Lingayen Gulf Electronic Power Co., Inc., G.R. No. L-23771, August
4, 1968). The courts cannot inquire into the wisdom, morality or expediency of policies
adopted by the political departments of government in areas which fall within their
authority, except only when such policies pose a clear and present danger to the life,
liberty or property of the individual (Bascot". Philippine Amusements and Gaming Corp.,
63+-
G.R. No. 91649, May 14, 1991).

Non-Appropriation or Use of Pci.:P":.'igo,

it cvm
e. Pfor Religious Purposes
Q: May public money be appropilaWAIWtelialpus purposes?
ANS: No. There'Shall be no approprigetOrittgerAIWO 6N, for religious purposes,
except if the prieSt, preachWiiiinister, or ignitary is ass@ o:
1. The Armed fqrpes;
2. Any penal institution; 4k
,,,,
3. Government.44nage• , . , or
4. Leprosarlum
• •' • -.4 • (CONST,.Art
- 7 ''''-, • ea 28, par. (3)) /
VI, S''
ek,4
ael. 1 . ik
Prohibition aszi:il t7"..,F:x4idt
1 :1 torth of vNrpozstokion-Profi , EducattonatInstitutions
) 17 .
• Q:--Discuss-thVtaxabilArenon: stpk, w-profit e uckNAststitutions.
- — ANS: All reVenefe,c,idiatets of qon-spibk, non-profit educational institutions used
• actually, directly,allinkclu4fly for' educational purposes shall be exempt from taxes
and duties. Subject to pnditiii ,Yis prescribaiwijacy; all grants, endowments, donations,
or contributions,',used acetuelljt directly apagartayaooducational purposes shall be
exempt from: tax !(COWSt., Art. Sec: 4; gr3rHara
r
Note: Non-stock, NonAolit Rdfida'tional Institutions are exempt from income tax, real
property tax, . donor's
-I tat=fanAcustoms
41,1. duties because the provision speaks of "all
revenues and assets" (INGLES, Reviewer, supra at 15). Revenues derived from assets
used in the operation of cafeterias, canteens and bookstores are also exempt if they are
owned and Op4lated by the educational institution as ancillary activities and the same
are located within the school premises (R.M.C. No. 76-2003).

Q: What is the :'effect in Real Property Tax (RPT) and Income Tax when a property
of a "Non-StOCI Non-Profit Educational Institution" is devoted to non-educational
related activity but the resulting income is use for educational purposes?
ANS: The treatments
, are as follows:
1. Real Property Tax - The property is subject to RPT. It is not the use of the
income from the real property that is determinative of whether the property is
used for tax-exempt purposes (Lung Center of the Philippines v. Quezon City,
SuPra). The test of exemption from taxation is the use of the property for
purposes mentioned in the Constitution (Abra Valley College, Inc. v. Aquino,
G.R.'No. L-39086, June 15, 1988).
2. Income Tax - The income is still exempt. However, for the constitutional
exemption to be enjoyed, jurisprudence and tax rulings affirm the doctrinal rule
that there are two requisites: (1) The school must be non-stock and non-profit;

749
 4...
.r
• :..•;;,%,,ii'ZA‘
and (2) The income is actually, directly and exclusively used for educational
purposes. There are no other conditions and limitations (Jacinto-Henares v. St.
Paul College of Makati, G.R. No. 215383 (Resolution), March 8, 2017).

Q: Can a non-profit, non-stock educational institution refuse to settle the

assessment of a local government for its "building permit"?
ANS: No. The imposition of building permit fee is an exercise of police power to ensure
compliance with the standards under the National Building Code to protect the public
from any danger. Building permit fees are not impositions on property but on the activity
subject of government regulation. While it may be argued that the fees relate to
properties, i.e., buildings and structures, they are actually imposed on certain activities
the owner may conduct either to build such structures or to repair, alter, renovate or
demolish the same (Angeles University Foundation v. City of Angeles, supra).

Q: Differentiate the tax exemption of non-stock, non-profit educational institutions

from that of proprietary educationalAstituffqns.
ANS: The privilege grantectoTrno stock;kriph'pr9fit educational institutions is
conditioned only on the aorta-, tot and eiclkIsLve useftheir revenues and assets for
educational purposes.„Iri•lar ontrastrpropri45,educational institutions, including
those cooperatively Ancd:4-mayliawise be entitledstoYs:UcWeicemptions, but subject to
the limitations proyrded‘V Jarw includifiglii..b"Strictionp‘bn,:trVicietitcls and provisions for
reinvestment (CONST . XIV, Sear2t1(34 "7 \ Ncos‘c.
11. e
A proprietary edtcatio al inution is e9titlk only to th redticad. ate of 10% corporate
income tax. The r d rates applica510- nly
1. The proprietary edurtiolialitistitijtiori iarribn- rofit an .2
2. Its gross "ii4ome fro unralgadiragai: business or activity does not exceed
50% to NeotalOs incomV.(Cd4imissio dry Internal Revenue v. De La
Salle cr nApilsp No etnli r 9,1016)1
VAN :4 1
Consistent with rt. XI SectiV) Yof t e Cdriatp, tibn, flj,ese limitations do not apply
to non-stock, nonprofit ucatio alArittittactotilq0cemisiloner ofjntemal Revenue v.
De La Salle UniveNtjt, &Ciays...„. "\ j5,-)coo#ts,
Grant of Power to LOeal Governittinitstta-Creareitko n Sources of Revenue
114 tt
Q: Discuss the principle of4o.... I. utonppiji.t, 00ei•"9- 1)Y
ANS: Each local government urlit.shajj:lapjfieltrOwer to create its own sources of
revenues and to levy taxes, fees and charges subject to such guidelines and limitations
as the Congress may provide, consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to the local governments (CONST.,
Art X, Sec. 5).

Provisions IndirectlyAffecting Taxation

Due Process
Q: What is the principle of due process in relation to taxation?
ANS: Tax laws and their enforcement must comply with substantive and procedural due
process (INGLES, Reviewer, supra at 10).

Q: What is substantive due process?

ANS: Substantive due process requires that the tax statute must be within the
constitutional authority of Congress and that it must be fair, just, and reasonable
(SABABAN, Reviewer, supra at 8).

750
 • • 4'1' sl:"#-'s

Q: What is procedural due process?

' ANS: Procedural due process requires notice and hearing, or at least an opportunity to
be heard (Id.). There must be no arbitrariness in the assessment and collection; the
prescribed rules must be followed before assessment and collection (INGLES,
Reviewer, supra at 10).
Q: Are the requirements of notice and hearing always required before the
enactment of tax laws?
ANS: No. While the Sanggunians are required to conduct public hearings prior to the
enactment of tax ordinances and revenue measures (LGC, Secs. 186 and 187), the
National Legislature, on the other hand, has the discretion, whether or not they would
conduct public hearings before the enactment of tax laws (SABABAN, Reviewer, supra
at 9).
Equal Protection
Q: Discuss the:principle of equal protection of the laws in relation to taxation.
ANS: Equal protection neither reqyirgVual rates of taxation on different classes of
property, nor prohibits unequal t#atiqr,iiiss. long as the inequality is not based upon
arbitrary classification. It merely regirtslat all persons or property of the same class
subjected to such legislation sti011jtAlltmted alike, under like circumstances and
conditions, bOth in the privileges cd'IrrelfpcjilahLltabilitiLgimposed (COOLEY, cited
in Sison, Jr. v. Ancheta, G.R. klp:'5941,Juin5'
11 ,q910M-0
1,1
Q: How is the Equal Pitp
—t'ection Claute, 'olated?
ANS: The Equal'Protetootlause mlne,violated in two ays:
1. When clasaffica!riehzig made here there sjkuld Op none, i.e., where
doeS4fibtsest upon bstantial diff4fen+s; or
t
2. Whe6Wassificaticin is
.
called'for,
.
when subgtantial distvctions exist, but no
corregonclirspastfice
w on ade on ,th re49f (Villegas Hiu
Chiang Tsai P b suP*1.4)

Q: What are the reqiligifeetr a valid classification?

ANS: The requisites the following: (SueIGE)-3...
rc
1. It must be bakperSubstantial — etRaLs;,_
2. It must applptiboth pres'efit.IfiTtt reErebiditiliffs;
3. It must be Geuane to purposes of the law; and
4. It must applyEgyOly to all members of the same class (Onnoc Sugar
Company v. TreggiWrsof Ormoc, G.R. No. 23794, February 17, 1968).

Non-impairment of Obligations of Contracts

Q: Discuss'the principle of non-impairment of obligations of contracts.
ANS: No law impairing the obligations of contracts shall be passed (CONST., Art III,
Sec. 10). The non-impairment clause applies to the power of taxation but not to police
power and eminent domain. Further, it applies only where one party is the Government
and the other party, a private individual (SABABAN, Reviewer, supra at 13).

Q: Does the non-impairment clause apply to franchise grantees or licensees?

ANS: No. The tax exemptions protected by the non-impairment clause are contractual
tax exemptions,` not those granted by franchises or licenses.
1. Non-impairment may not be invoked in the case of a public utility franchises
because under Sec. 11, Art. XII of the Constitution, the legislature can impair a
grantee's franchise since a franchise or right is subject to amendment,
alteration or repeal by the Congress when public interest so requires (Cagayan
Electric Power & Light Co., Inc., v. Commissioner of Internal Revenue, G.R.
No. 60126, September 25, 1985).

751
 2. The rights granted under the Certificates of Registration and Tax Exemption
are not absolute and unconditional as to constitute rights in esse. These
certificates, granting permit to operate, which are in the nature of licenses is
neither a property nor a property right. The licensee takes his license subject
to such conditions as the grantor sees fit to impose, including its revocation at
pleasure. A license can thus be revoked at any time since it does not confer an
absolute right (Republic v. Caguioa, G.R. No. 168584, October 15, 2007).

Religious Freedom
Q: Discuss the constitutional limitation on Religious Freedom.
ANS: The constitutional limitation on Religious Freedom are as follows:
1. Non-establishment Clause - "No law shall be made respecting an
establishment of religion or prohibiting the free exercise thereof (CONST., Art.
III, Sec. 5)." It covers the prohibition to establish a national or official religion
since in that case, there would be an appropriation from taxes paid by the
,,,„?........7„,....
people; and
2. Free Exercise glaare,,,- "Tile Ifrep„,. xe-E,'Clse., and enjoyment of religious
profession anViiirspiprvjthout-discrihnationyorRreference, shall forever be
allowed (CCOVSNA9.4f/0-Ser.r. 'This:isihepagisbf tax exemptions granted
to religiousoineituto C. ,,,,,,.___, '‘" "•• *e
Note: A municipa fiCense orrsiTeof bibles 'arid•relidrofis articles by non-stock, non-
.-..4-•• i
profit missionary orgpnizatio at tijiihimit profit cori?tittitedle curtailment
,e of religious
freedom and wo hip wpich is guaranteed: th'esConstitutioii'dA glean Bible Society v.
City of Manila, G..EN,o. L-9 37.,April...300957_ cited_ n DO PAO, Tax Principles
and Remedie su re at 116). Hetrygrifhp income f sucll prga'nIxations from any
activity conducted folrofit o from'anytiith'eirprOpe , real d'r persolial, regardless of
t
the dispositionrn_adF - f such; comd,4 lOteXelit'd Old). --.1
1 , x,,,,i .4.--ez
Freedom of Speeilitind Com nicorkin s‘f
1," ' A . ` -.•".4 \\ 11."7*.n "1-* • ', i /c1-1
Q: Discuss thetonstitutionayjmitation •nSpeech,and Communication.
..
ANS: No law shall be avedXprOairig te,•fre,9do' , of speech, of expression, or the
press, or the right ol the peoWe peiC.-6alOopFe_Tble,,and petitipn the government for
redress of grievancel (CON 7-.4* - :-.1)f,-..k&.4)..,!-- .00' „ , ____
•
There is curtailment of pre s-Pecagm'and fcpelddNilt dud61 and expression if a tax is
levied in order to suppress liasiJghts gnaliKNippa or restraint thereto. A license
fee may not be imposed on the praftecauseirlays a prior restraint on the exercise of
its right (Tolentino v. Secretary of Finance, G.R. No. 115455, August 25, 1994).

C REQU/S/TES OFA VALID TAX

Q: What are the requisites of a valid tax?
ANS: The following are the requisites: (JAPUL)
1. That either the person or property taxed be within the Jurisdiction of the taxing
authority (Reagan v. C/R, G.R. No. L-26379, December 27, 1969);
2. That the Assessment and collection of certain "kinds' of taReE gbarantee
against injustice to individuals, especially by providing notice and opportunity
for hearing (VITUG & ACOSTA, Tax Law, supra at 12);
3. Should be for a Public purpose (Pascual v. Secretary of Public Works and
Communications, G.R. No. L-10405, December 29, 1960);
4. The rule of taxation shall be Uniform (CONST. Art. VI, Sec. 28, Par. (1)); and
5. The tax must not impinge on the inherent and Constitutional Limitations on the
power of taxation (Basco v. Philippine Amusements and Gaming Corp.,
supra).

752
D. TAX AS DISTINGUISHED FROM OTHER FORMS OF EXACTIONS
Q: Why is it important to distinguish taxes from other exactions?
ANS: It is important to differentiate taxes and other exactions, especially when it comes
to problems and issues on double taxation and tax exemptions. If an exaction is not a
tax, then the defense of the taxpayer of double taxation will necessarily fail. In the same
manner, a tax-exempt individual or corporation is generally only exempt from paying
taxes; hence, if the exaction is not a tax, then the individual or corporation must still pay
the exaction (INGLES, Reviewer, supra at 3).
Q: Distinguish Taxes from Customs duties and fees.
ANS: Customs duties and fees are charged upon commodities on their being imported
into or exported from a country. Customs duties are taxes, but a tax is a broader term to
include not only customs duties but other taxes as well (ABAN, Law of Basic Taxation,
supra at 23).
Q: Distinguish Taxes from Toll.
ANS: Taxes may be distinguished fro to[ as follows:
Taxes
As to purpose
,tk. •
r
Taxes are levied for the supportogth of
Government another s
As to determination of amount
Toll is deterfniifed y the cost of the
property ore the improvement
As to who may impose
‘:r sed4by th
Taxes may only btpAlm Toll ma' lis
jtredgi the government
State str\o
. or private individtil

(MAMAL4TE0,"PhiliPptev Inc,,ome„T:,,rffilg,71 . 16-17) (hereinafter MAMALATEO,

Income Tax].
Note: Fees paid!by thevyblic to ItillVOSeop ra bri4f6 e e of toll ways are not taxes.
These are exactions whikhencppplas
t earnings of toll way operators, not the government
(Diaz v. Secretary of Ping, d R. No. 193007, July 19, 2011).

Q: Distinguish Taxes from License Fee.

ANS: Taxes may be distinguished from license fee as follows:

Tax I License fee

As to basis
Levied in the exercise of the taxing power Emanates.from police power
As to purpose. .-
Purpose is revenue Purpose is regulation
As to liMitation on amount
Amount is unlimited Amount is limited to the cost of:
1.Issuance of license; and
2. Irispection and surveillance, except
for non-useful occupation (Physical
Thera. 0 anization of the
753
 "VOL 1.
2019
31T.;Z•es'i

Philippines, Inc. v. Municipality

Board of the City of Manila, G.R.
No. L-10448, August 30, 1957).
As to when paid
Normally paid before the
commencement of business
As to nature
t
Taxes; being the lifeblood of the State, License fee may be with or without
cannot be surrendered except for lawful consideration
consideration
As to effect of non-payment
Non-payment does not make the Non-payment makes the business
business illegal but may be gronfitlr. Or.
criminal prosecution
t
ik "'"•-•

(MAMAL4TEO, Moo (44 sa raerir -.1iN., P`

Q: What is the to etermsnigcreirle7iiii-IMpoiltkon i f,,.atlx or a fee?
ANS: If the geir p1 rePenue thy.. prit.(fary ntirpo'sr and regulation is merely
incidental, the i posit' n is itax; bilt if it.Ulaf6n is the priNktypyi-fose, the fact that
incidental' re rentwe is " nad___.notlinake tednpopition a tax (Smart
Communicatio f 4 v. Municipalk.of efilvar,-B9tangas, G.q.,,,No! 204429, February
18,2014
Q: Distinguis froi
ri li cial Aggess-thent.
sS)
ANS: Taxes miry ittin61,01\ frorrgptgltsse j ieas ~low
Tax Special Assessments
As to definition
EnfOrced propoNnal d";re)aoition
p fal contributions from
from persons or propl er pklatigslaspecially or peculiarly
nqt cl.likublic improvements
fi
As to subject
Taxes ,are levied on land, persons, Levied only on land
property, income, business, etc.
As to liability
Personal liability of the taxpayer Cannot be made a personal liability of the
person assessed
As to basia
Based on necessity and partially on Based solely on benefits
benefits
As to application.'
General application Special application only as to a particular
time and place

(ABAN, Law of Basic Taxation, supia at 15).

754
 BEDAN FRED BOOK
Note: Under, the Local Government Code, local government units may impose a special
levy on lands specially benefited by public works, projects, or improvements funded by
the local goverriment unit (LGC, Sec. 240).
Q: Distinguish!Taxes from Debt.
ANS: Taxes m9y be distinguished from debt as follows:
Tax I Debt
As to basis
Based on law . Based on contract or judgment
As to effect on non-payment
Failure to pay tax (other than poll tax) No imprisonment for non-payment of
may result in imprisonment debt
As to mode of payment
Generally payable in money .4151'q Payable in money, property, or service
As to assignability
Not assignable tAssignable
As to payment r
-fsr,
Not subject to compe abon or set-off May be subject4 compensation or set-
(Please refer to fliscussions off
compensation or set)-9, r exception)
As to interest
o6dralAinterest unless
-Tax does J 421- Debt dra in erest if stipulated or
delinquent delayed t&-Uit .
As to authority
Imposed by p
pubtnonty
u blics
. F Imposed by private individuals
As to prescription
Determined by NIRCI
firmr4 1.,1
1' 1ffr rniWd3 Civil Code
e el
e

(MAMAL4TE0, Income su ra at 16).

Q: Distinguish Taxes from Penalty.

ANS: Tax is a' civil liability. A person is criminally liable in taxation only when he fails to
satisfy his civil:obligation to pay taxes. (Republic of the Philippines v. Patanao, G.R. No.
L-22356, July21, 1967). Penalty is a punishment for commission of a crime (ABAN, Law
of Basic Taxation, supra at 14).

E. KINDS OF TAXES
Q: Define taxes.
ANS: Taxes are the enforced proportional contributions from persons and property
levied by the law-making body of the State by virtue of its sovereignty for the support of
the governmapt and for public needs (ABAN, Law of Basic Taxation, supra at 2).

Q: What are the characteristics of taxes?

ANS: The essential characteristics of taxes are: (SLEP6)
1. It is levied by the State which has jurisdiction over the person or property;
2. It is levied by the Law-making (legislative) body of the state;

755
 DAN RED •_BOOK VOL 1.
2019

3. It is an Enforced contribution - not dependent on the will of the person taxed,

not a contract but a positive act of the government;
4. It is generally Payable in money;
5. It is Proportionate in character - taxes must be based on the taxpayer's ability
to pay in accordance with the constitutional mandate to Congress to evolve a
progressive system of taxation;
6. It is levied on Persons and property;
7. It is levied for Public purpose/s;
8. Paid at regular periods or intervals; and
9. Personal to the taxpayer (ABAN, Law of Basic Taxation, supra at 2-3).

Q: What are the kinds of taxes?

ANS: Taxes may be:
1. As to Subject Matter or Object (ABAN, Law of Basic Taxation, supra at 23-
24)
a. Personal, Capitatio,por.Roll-Zax - a tax of a fixed amount imposed
upon all per necif a cert in' Ir'gwis,hin the jurisdiction of the taxing
power w out gard t-...sof their property, or the
occupatiogs r b Inesses, e'rk may be engaged (e.g.
Co0o itytta
Prope arim —ArFeTtin-alt.pr U property of a certain
e jurilgctike okhe OOLEY 118) (e.g.
e t x) A • 1. .. . ..
Ta - a chargelhosed upo the rm 4nce of an act, the
ent o"E"giwi ege engaging in an copation, profession or
ss (e. D ). 1.5/
2.' AS t n or in idence J, ta
a. trAoCta tax which_ls'exacte ersons who are
the burden of its
l lY stoth
eXicit
ote e tax (incidence),
s the same person
g. Inco
In ?act to a re I (?4,0 ide ce or lia ility for the payment
falls non
anothe ktt. -f,T4
:2,..„,
149,,,,, burEl, rernr5gifted or passed on to

AS to Determinajphidf Art/pup eic4 4des (ABAN, Law of Basic

Taxation, supra at 27). IV
a. Specific tax - a tarorefiXe- amount imposed by the head or number
or by some standard of weight or measurement; it requires no valuation
other than a listing or classification of the objects to be taxed (e.g.
taxes on distilled spirits, wines, and fermented liquors).
Ad Valorem tax - a tax of a fixed portion of the value of the property
with respect to which the tax is assessed; it requires the intervention of
assessors or appraisers to estimate the value of such property before
isyr
the amount due from each taxpayer can be determined (e.g. real
property tax, customs duties).
c. Mixed tax- a tax having both the characteristics of specific tax and ad
valorem tax.
As to Purpose (ABAN, Law of Basic Taxation, supra at 26-27)
General or Fiscal - a tax imposed for the general or ordinary purposes
ra of the Government, to raise revenue for governmental needs (e.g.,
Income tax).
b. Special, Regulatory, or Sumptuary - a tax imposed for a special
purpose, to achieve some social or economic ends irrespective of
whether revenue is actually raised or not.

756
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BJOO 2019

5. As to Scope or Authority Imposing the tax (ABAN, Law of Basic Taxation,

supra et 27)
a. ;National (Internal Revenue Taxes) — a tax levied by the National
Oovernment, through Congress, and administered by the Bureau of
Internal Revenue (BIR) or the Bureau of Customs (BOC).
b. Local (Real Property Tax, Municipal Tax) —a tax levied by the local
government, through their respective Sanggunians, and administered
by the local executive government through the local treasurer.
6. As to Graduation (ABAN, Law of Basic Taxation, supra at 27-28)
a. 1!Progressive tax — one where the tax rate increases as the tax base or
bracket increases.
b. Regressive tax — one where the tax rate decreases as the tax base
increases. (e.g. VAT)
c. Proportionate tax — one where tax rate is based on a fixed percentage
of the amount of the property, receipts or other bases to be taxed.
„AP
Q: Distinguish indirect taxes froMethAlding taxes.
ANS: Indirect taxes, like VAT anateXc'Sltax, are different from withholding taxes. To
distinguish, indirect taxes, the inckletA axation falls on one person but the burden
thereof can be shifted or passed On tigt rperson suchfas when the tax is imposed
upon goods before reaching the porippil g i. •ENxestifor it. On the other hand,
in case of withholding taxes he Ob and uttidt niVaaxation fall on the same
entity, the statutory tavoyer. The bulde • of taxation is no ifted to the withholding
agent who Merely collacts, y withholffigg e tax due from in e payments to entities
arising from certain trap ons andfiremits the same to the% e tpment (ING Bank N.V.
v. Commissioner of Inta ma Wnue, G. o. 167679, April 0, 2016).
A
F. DOCTRINESvocr 4'4
Constructiont7d IfirgrifforetatiortiaTax
Q: What are the espp Tax La
ANS: The sources failiaws re as•follo s.
1. 1907 onsiitution;
2. Legislation, tktrog bes and tax a
3. Admirtrative7egulatio Ilfird4thngs or opinions of tax_ officials, including
opinions of th if ecre of Justice;
4. judiAl.Decisio gd,/ E LEON, NIRC Annotated, supra at 8).
Q: What are the sources of internal revenue?
ANS: The foll*ing are the sources of internal revenue:
1. Income Tax;
2. Estate, Tax;
3. DOno'r's Tax;
4. Value:Added Tax;
5. Percentage Tax;
6. Excise Tax;
7. Docuirnentery-Stamp Tax; and
8. Such'other taxes as may be imposed or collected by the BIR (NIRC, Sec. 21).
Q: How are tax laws construed?
ANS: Tax lewd, are construed in accordance with the following:
1. Legislative intention must be considered — Tax statutes should receive' a
sensible construction, such as will give effect to the legislative intention and so
as to,' avoid an unjust or absurd conclusion (People v. Rivera, G.R. Nos. 3812
& 38216, December 22, 1933 cited in Commissioner of Internal Revenue v.
TMX Sales, G.R. No.83736, January 15, 1992);

757
 -,-,-",.0:•?I'l.g-T,,.:,:•';,l'A.'.,.:-.• 3.!:.;•f vi ' z 12.:-.'
..Iii... . VOL 1.
2019

2. Where there is doubt - Tax laws must be construed strictly against the
government and in favor of the taxpayer. This is because taxes are burdens on
the taxpayer, and should not be unduly imposed or presumed beyond what the
statutes expressly and clearly import (Commissioner of Internal Revenue v.
Philippine American Accident Insurance Co., Inc., G.R. No. 141658, March 18,
2005);
3 Where language is plain - If the provision of the law is clear and speaks
categorically, the need for interpretation is obviated, no plausible pretense
being entertained to justify non-compliance. All that has to be done is to apply
it in every case that falls within its terms (Sea-Land Service, Inc. v. Court of
Appeals, et al., G.R. No. 122605, April 30, 2001).

Q: How are tax rules and regulations construed?

ANS: TeX rules and regulations are construed strictly against the government and
liberally in'Ifavor of the taxpayer (ABAN, Law of Basic Taxation, supra at 144).

Q: In Case of conflict between.th-thr .0- de, which will prevail?

ANS: The NIRC, being eci aw, ill reai kere is a conflict between a
special law and gen, law, it s Jule-that-4 e 51>mtV be exerted to avoid a
conflict between st tutes. 11kreeasonable constrtiatiog!is pfispible, the laws must be
reconciled' in that aVi'r)(1.fopekodr.rt- C
riVII-Se ice OthrniVon, G.R. No. 8711-9,
April 161991). 77
ID
Note: Special I m s rev it since it evinces-the le•isla intentmore clearly than
that of a denera statute and ust not b& ;keen as inte ded tuff e more particular
and specific pri43/1 fof the ier ac , ess us a • iolutelyv ry so to construe
it in order, to giVb-its words ny"if0-pin acgirr(Ciwa ay V zone hato v. Fortune
Tobacco Corp.! G o. 141)09, Jtirien491,4-2007)1

Q: State the getter! ule opstrugio Q. -tax e. miition

ti I
ANS: Tax exempti nd gionspr.e eitiefsie • seyrogafion o overeign authority
and to be 'constrbed stnctissr d:pri`ga ,p1 or efility clai ing the exemption
(Commissioner ckIntemkRe e 0 aS ecomIrTunicatians Philippines, Inc.,
G:R. No. 153835, July 7, 2d
•
Q: What are the exceptipnts tconstrutztVameei rf
n ptions?
ANS: Th4xceptions areihmo
1. When the statute grghti exe td • p WI
for liberal construction thereof;
2. In case of special taxes re special cases and affecting only special
classes of persons (DE LEON, The Fundamentals of Taxation (2004), p. 69)
(hereinafter DE LEON, Fundamentals];
3. exemptions refer to public property (DIMAAMPAO, Tax Principles and
Remedies, supra at 121);
4. In cases of exemptions granted to traditional persons who are exempt, such as
religious, charitable and educational institutions (ABAN, Law of Basic
Taxation, supra at 119);
5. In cases of exemptions in favor of the government, its political subdivisions or
instrumentalities (Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991); or
6 If the taxpayer falls within the purview of exemption by clear legislative intent
(Commissioner of Internal Revenue v. Amoldus Carpentry Shop, G.R. No.
71122, March 25, 1988).

Q: Distinguish tax exemptions from tax exclusions.

ANS: Indeed, both in their nature and in their effect, there is no difference between tax
exemptionOnd tax exclusion. Exemption is an immunity or privilege; it is freedom from a
charge or burden to which others are subjected. Exclusion, on the other hand, is the

758
 VOL 1.
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removal of otherwise taxable items from the reach of taxation, e.g., exclusions from
gross income and allowable deductions. Exclusion is also an immunity or privilege which
frees a taxpayerilrom a charge to which others are subjected (Philippine Long Distance
Telephone Company, Inc. v. City of Davao, G.R. No. 143867, March 25, 2003).

Q: State the rule on construction of tax exclusions.

ANS: The rule :that tax exemption should be applied in strictissimi juris against the
taxpayer and liberally in favor of the government applies equally to tax exclusions
(Philippine LOng1;,Distance Telephone Company, Inc. v. City of Davao, G.R. No. 143867,
March 25, 2003) •

Q: How are penal provisions of tax laws construed?

ANS: Penal proyisions are given strict construction so as not to extend the plain terms
thereof that might create offenses by mere implication not so intended by the legislative
body (People v. Martin, G.R. No. L-38019, May 16, 1980).

Prospectivity of Tax Laws

mioq
Q: What is the doctrine of prosggslyli of laws?
ANS: The geneial rule under the rgiViS1913041-1at laws shall have prospective application
applies to tax !laws. While it isInfitYkd edem a statute ay nevertheless operate
retroactively, prqvided it is expesslVd,qc a 'q ,l' e legislative intent (Cebu
Portland Cement Co. v. CORLOtssionettrof tema I Rev . No. L-18649, February
27, 1965). :BYa ATE
Note: Retroactive application of revgi Ud aws may be allow if it will not amount to
denial of due PrOcess .mpAof-
. Tax1P "nciples and Rem dies, supra at 146).

Q: Does the, exit ost fact ruirapply4o x laws?

$
ANS: Tax la re neiltwpolittcal nor Atal in natuLe, ano they're deemed laws of
the occupiediesritoffia enhan'Ott e occpying eri6a i7 paz Collector of Internal
Revenue, G.R.'W.o. L-9408;Octobe1 ik6); hence,WeTvo cto rule, except for
the penalty impoRlrte hatteres0; woad be inapplicable (Central Azucarera de Don
Pedro v. Court of fjic Appegg
„ G.R. NosL-23236 & L-23254, May 31, 1967). A harsh
retroactivity of the law ay e it inequit 'dative of the Constitution; similarly,
due process is violated, e tax is•wp,me e ry, 305 LAS. 134 (1938)).

Q: What is the ,principle a Non-Retroactivity of Tax Rulings?

ANS: Any revocation, modifiation, or reversal of any of the rules and regulations
promulgated in accordance with the preceding Sections or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive application if the
revocation, modification or reversal will be prejudicial to the taxpayers (NIRC, Sec. 246).

Q: What are the exceptions to the non-retroactive application of tax rulings?

ANS: The exceptions are the following: (DeMB)
1. Where the taxpayer Deliberately misstates or omits material facts from his
return or any document required of him by the BIR;
2. Where the facts subsequently gathered by the BIR are Materially different from
the faCts on which the ruling is based; or
3. Where the taxpayer acted in Bad faith (NIRC, Sec. 246).

Imprescri,otibilityof Taxes

Q: Discuss the Doctrine of Imprescriptibility.

ANS: This doctrine means that the right to assess and collect taxes are imprescriptible
(Commissioner'. of Internal Revenue v. Ayala Securities Corp., G.R. No. L-29485,
November 21, 1980) as taxes are the lifeblood of the government (DIMAAMPAO, Tax

759
 VOL 1.
2019
,
1'
Principiesi'And Remedies, supra at 153). The law of prescription being a remedial
measure should be interpreted in a way conducive to bringing about the beneficent
purpose of affording protection to the taxpayer (Republic v. Ablaze, G.R. No. L-14519,
July 26, 1960).
Note: However, tax statutes may provide for statute of limitations (DIMAAMPAO, Tax
Principiest and Remedies, supra at 153) and although the NIRC provides for the
limitation in the assessment and collection of taxes imposed, such prescriptive period
will only be applicable to those taxes that were returnable (Collector v. Bisaya Land
Transporta tion Co., G.R. No. L-12100, May 29, 1958).

Double Taxation
Q: Define clouble taxation.
ANS: It is Idefined as taxing the same subject or object twice by the same taxing power
within the 'same taxable period for the same purpose (Victorias Milling v. Municipality of
Victork Negros Occidental, G.R. No. L-21183, September 27, 1968).
li
Q: What are the kinds of 011E3 taxation i
N.„
ANS: Double taxation mi. -k
/ t ;N
1. ! Direct Dupli a e Tax lionlabraibirs4StrivpSen,k9) — is the objectionable
kind of doff e ta 9,t1Tri sinc • v,igl&slfte e9p4PNtection clause of the
COnstituttO aietegien s are ttfa,folloilirtg: (S e P2 Ak,_ J P K )
a. we Plibpertyreit sZjetrnatter is t twice when it should be
1'! fily orice; j 1 ,R '''
b. xes a emiedior II 'Ielsame.Pur i(d)
ed by e kagle_Tai,f pg_Auttiori 1--'"4
I Withi the 4n_e_'s. 1-falicVnf i
T.:i
Ducin the s" r rk. CArgiPeriod 1,,
ui C ate g-the-sa _ind-o illanueva v. City
of Ito V,...R. vgi, 8, 1 ).
2. lndire icatel&c ,atLorr Brit 5e arise • in the absence of
one f th ktatlece do of dirgct double taxation
(ABAN, aw of basic is is ildally allowed as long
, as there no vidlato nd un' ormity clauses of the
COnstitution c? ation (2016), p. 31)
[hereinafter, LEM2t . aRCIS7FipoIlVxagofij.
Note: There is no double tliakl the ft? ft ba
1. By taxing corporate iftee e n cichiiiders' dividends from the same
corporation;
2. j A tax imposed by the state and the local government upon the same
occupation, calling or activity;
3. Real estate tax and income tax collected on the same real estate property
leased for earning purposes; and
4. Taxes imposed on the taxpayers' final product and the storage of raw
materials used in the production of the final product (Id. at 32).

Q: Discuss,the constitutionality of double taxation.

ANS: There .1 is no constitutional prohibition against double taxation in the Philippines. It
is something not favored, but is nevertheless permissible. Double taxation becomes
obnoxious only where the taxpayer is taxed twice for the benefit of the same
governMental entity or by the same jurisdiction for the same purpose. However, despite
the lack of specific prohibition, double taxation will not be allowed if it results in a
violation of the equal protection clause. Hence, if certain properties are subjected to an
additional tax whereas others similarly situated are not similarly taxed, the owners of the
first properties would have a right to complain (CRUZ, Constitutional Law, supra at 92).

760
Q: What are :the modes of eliminating double taxation?
ANS: The measures that are normally adopted by sovereign taxing authorities in order
to avoid the resulting inequalities of double taxation include : (CREDT)
1. TaX Ctedits — an amount subtracted from an individual's or entity's tax liability
to arrive at the total tax liability; A tax credit reduces the tax due, including
whenever applicable, the income tax that is determined after applying the
corresponding tax rates to taxable income (Commissioner of Internal Revenue
v. Central Luzon Drug Corp., G.R. No. 159647, April 15, 2005);
2. Reduction , of the Philippine income tax rate by a non-resident foreign
corporiation (NRFC) within the Philippines is reduced by imposing a lower rate
of 15% (in lieu of the 30%), on the condition that the country to which the
NRFC is domiciled shall allow a credit against the tax due from the NRFC,
which Ilexes are deemed to have been paid in the Philippines (NIRC, Sec.
28(8)0(b); Commissioner of Internal Revenue v. Procter & Gamble PHL
Manufacturing Corp., G.R. No. 66838, December 2, 1991);
3. Tax Eiemptions — an immunitypr privilege; it is freedom from a charge or
burCe(r: to which others are sift5ted (Philippine Long Distance Telephone Co.
v. City of Bacolod, G.R. of''`'` "2 July 15, 2005);
4. TeX Deductions — the a4dun -x is written off or treated as deduction from
an , individual's or entity's gto ome on which resulting amount the tax
liabil6 is calculated; an 4 '61 M.
5. TeX Tteaties — agrge enze soeo tR s pecifying what items of
income will be taxlioi by th a orities of the cou try where the income is
earned. fev-
l Ak‘
Escape from Taxati on;
Q: What are thle,feffs of esca
' pe from taxation?
ANS: They aols
4li-
1. Stiiftjtirottaxvbxrden;
2. Tax Avoidance,
3. Tax Evasion,
4. Capit'alizaWfr
5. Transformation; an
6. EZemption.
i!1
Shifting of TthiEurde
Q: What is the`;concept ing the tax burden?
ANS: It is the,t,tansfer of tax burden to another, the imposition of tax is transferred from
the statutory taxpayer to another without violating the law. For instance, taxes paid by
the manufaCturer may be shifted to the consumer by adding the amount of the tax paid
to the price:of the product sold (VALENCIA & ROXAS, Income Taxation, supra at 34).

Q: What are the ways of shifting the tax burden?

ANS: The burden or incidence of taxation may be shifted through:
1. Forward Shifting — when the burden of tax is transferred from the
manufacturer, then to the distributor and finally to the ultimate consumer of the
ptoduct; best example of which Is VAT;
2. Backward Shifting — when the burden is transferred from the ultimate
consumer through the factors of distribution to the factors of production; or
3. Onward Shifting — when tax burden is shifted two or more times either
forward or backward (Id. at 34-35).

Q: To what kind of taxes does shifting apply?

ANS As a rule,' only indirect taxes may be shifted; direct taxes cannot be shifted (Id.).

761
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IFVOL
2019

Q: Distinguish impact of taxation from incidence of taxation.

ANS: Impact of taxation is the point on which tax is originally imposed or the one on
whom the tax is formally assessed. On the other hand, incidence of taxation is the point
on which the tax burden finally rests or settles down (DE LEON, Fundamentals, supra at
52).

Q: What is,;the relation among Impact, Shifting and Incidence of Taxation?

ANS: The impact is the initial phenomenon, the shifting is the intermediate process and
the inciden'Ce is the result (ABAN, Law of Basic Taxation, supra at 16).
:
Q: Why, is it important to know where the impact of taxation lies?
ANS: The impact of taxation generally determines the proper party to claim a refund of
erroneousimposed indirect taxes and whether the indirect taxes can be passed on to
an exempt buyer (INGLES, Reviewer, supra at 6).
jlf
Tax Aithivance
.. _ 4,,,,a/kftarAlskl".4...,,„,,
N, ',I
Q: What is tax avoidance?
J i ei k1 r
ANS: Also loaned tax Tilnimkzaic,"450, it 'islh . eplditations'-kby the taxpayer of legally
permissible :alternativePfaXratys,,,qpmelliMrass4
' sitig taxable property or income, in
order to,avoid or rediccOaxliabilityisa„estate_elanningl..104bletx saving device within
the means jancticeest*/(a4pnd'houldfile useirby.theslakpisfrin good faith and at
arm's length (Co ' kg9rrer of InterWal fte‘vefge v. Estate1 /46VBenigno Toda, Jr., G.R.
11 dal. e11_,
No. 147188, Se temba ' 4, 2b04).

Tax - at I
' 'l
kJ
^ - '.
t:
1 'co\
•-i
Q: What is"ta evasion? Ani-Lin-r-,, ;)
,
ANS: SOrneti es-reNred,--tbIs tax do'001,1f is anjilgalmers o escaping taxation.
It connotes ra dAropgh ttle>se of ten eiAndlorhridden dpvicetp lessen or defeat
taxes (Yuqo hs Ha war "our ef ikApiffel?.R. LV203, January 28,
4961). It Ubjec ‘the\tkXpayektg ( 114:pr0 done') civil or criminal liabilities
(Commissioner o • ntemaltRet4 ue= ssE-st te,D3„eriT no T a Jr., ,epra).

Q: What are the ele ents ottax6r vcn? rf‘

r N
ANS: Tax evasion connoArterationgtf.thre 1) ac (ESC)
1. bids to be acrileeif391, paymerleAkthAn that what is known by the
taxpayer to be legafiSt 'Qv / nent ()Pt& when it is shown that the tax
is due;
2. An accompanying State of mind which is described as being evil, in bad faith,
willful, or deliberate and not coincidental; and
3. AI Course of action which is unlawful (Commissioner of Internal Revenue v.
Estate of Benign Toda Jr., supra).

Q: Explain the Willful blindness doctrine.

ANS: The taxpayer's deliberate refusal or avoidance to verify the contents of his or her
ITR and other documents constitutes "willful blindness” on his or her part. It is by reason
of this doctrine that taxpayers cannot simply invoke reliance on mere representations of
their accountants or authorized representatives in order to avoid liability for failure to pay
the correct itaxes. It is a rule that ignorance of the law excuses no one from compliance
therewith. In order to be liable, .it is enough that the taxpayer knows his or her obligation
to file the required return and he has failed to comply thereto in the manner required by
law (Peopld'of the PHL v. Kintanar, CTA EB Crim. No. 006, December 3, 2010).

762
 /VOL 1.
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•

Capitalization
Q: Define Tax Capitalization.
ANS: This refers to the reduction in the price of taxed object equal to the capitalized
value of the future taxes which the purchaser expects to be call ed upon to pay. It is
made when the 'price of the property is lowered to accommodate the exclusion of tax
which is expdct61 to be paid by the seller as a result of sale transaction (VALENCIA &
ROXAS, IncoMelTaxation, supra at 35).

Transformation;
Q: When is there Tax Transformation.
ANS: There is 0fax transformation when the producer absorbs the payment of tax to
reduce prices and to maintain market share. The producer recovers his additional tax
expense by itnprIpving the process of production. The tax, therefore, is transformed into
a gain through the medium of production (Id.).

Exemption fromiTaxation
,i.4)
Q: What are thelkinds of tax exelitiofiel,
ANS: Tax exemppons may be ,04; `61
1. As to Basis
a. Constitutional Exerrpitt 'mulles fro taxation which originate
from the CoVetiori•
bi Statut9„Ly,emptions • ose which eman, s from Legislation.
2. As to Fprm fv
a. Expresg1-1When e3emphons are expresslyig an ed by the Constitution,
[PAA
StatgeS, treaties', ordinances, franchises or c ontracts;
Whenever pa6cular perso s, pperlies or excises are
Ileerneda empt as eley 11 outside el scope of he taxing provision
Aelt,(DEltiEON,if_unda talc, sups 2
. • ..[ContradtriaP— Exe— tractual agreement
orza4wzr • •
. r4thc.,.gpt.mmen
EN-4tpTeonfctual fax e ptions must not be confused with the tax
lexerhplionsianted and fi a cb'ses which are not contracts within the
Purvietafee non-impa* Lthe Constitution. A franchise is
is spea01 privilege confeTreArg Pinfdntal authority. Contractual
ax exr ' vering matters that are not essentially governmental
in natureq,u,c, as those contained in government bonds or debentures,
.. may not - • revoked without impairing the obligations of contracts,
• I Unlike in franchises (VITUG & ACOSTA, Tax Law, supra at 35).
3. As to Extent
a. = [Total Exemption — Connotes absolute immunity;
b. Partial Exemption — One where collection of a part of the tax is
dispensed with (ABAN, Law of Basic Taxation, supra at 17).

Q: May tax exemptions be revoked?

ANS: Yes. A grant of exemption is an act of liberality which could be taken back by the
govemment. Since taxation is the rule and exemption is the exception, the exemption
may thus be withdrawn at the pleasure of the taxing authority (Mactan Cebu Intl Airport
Authority v. MarCos, supra).

Equitable Recoupment
Q: Discuss the Doctrine of Equitable Recoupment
ANS: This doctrine states that a tax claim for refund, which is prevented by prescription,
may be allowed to be used as payment for unsettled tax liabilities if both taxes arise

763

[[[
 AN
• RED
It
from the same transaction in which overpayment is made and underpayment is due
(VALENCIA & ROXAS, Income Taxation, supra at 38).
Note: This doctrine is not applicable in this jurisdiction. This is a common law principle
and is, not' binding on our courts and there is nothing in our laws, authorizing its
acceptance and application because if it will be allowed, both the collecting agency and
the taxpayer might be tempted to delay and neglect the pursuit of their respective claims
within the period prescribed by law (Collector of Internal Revenue v. University of Santo
Tomas, G•R. No. L-11274, November 28, 1958).

Prohibition on Compensation and Set-off

Q: When does compensation or set-off take place?
ANS: CoMpensation or set-off takes place when two persons, in their own right, are
creditors and debtors of each other (CIVIL CODE, Art. 1278).

Q: Are taxes subject to compensation and set-off?

ANS: As a general rule, no set-aisadriiiSS1b1Tagairist the demands for taxes levied for
general oil local governmentaltwposeisinirceiMax iabili,ty is a legal, not a contractual
obligation.! Taxes are 91116:tlif natyre cif,contrakes betvireN the parties but grow out of
duty toi and are positive eetts pf)peTbrerrirrielit.totheirndki ,and enforcing of which,
the persohal conseplotthelfidividual taxpayeris notls 1Republic of the PHL v.
Mambeilao G.R. NU-11125, February 24',1962P---,,,
Note: HoWever, dffeettihl s allowed:7 ,) A •7 '
1. When the Zetermi ation df tifpaki4ayer's liabitt. )srip‘ertwined with the
i,esoltition,offhe
. g • .,,-. cla tn_foLtax.teNtid_of_erroriaously" Killegkly collected taxes
Uncle Section
-.I 229 f thq4;1:11E2c YqqaitriVionAr
,, of In plaWevenue v. Toledo
Pow
r r Com any, G. . No,:k914,'-Dp.Igembe 02, 20 35 ; or
2. Whet.gbplh claipi f thei'g`tgermenr andl e....taxpa er jainst each other
have alie'a bepp e-due,a3'e- .indable,a, d"fully liqui.dated Aft.,wi
(Domingo v.
GarlitV(.4 kNoNt4 fli4e , 291 Ir , :19r-
.• ,,. • .1
1
j \i
; 11, ,. , ii
Q: Can ditaxplyer rAuse ci..1 ,pdlishi4x ks.e01-,,pn)imprding Id suit against the
government when tax Oexpect/Ot., &keggIcr td? ,
ANS: No.l'A person annot if AlLa .,_ e,6asis that thergovernment owes him
'a
•an amount: equal to-onoreat6',Az arbeingAdIrecter ilVcollection of tax cannot
await the,1 results of '5\6w again logrkutf(Philex Mining Corp. v.
Commissioner of Internal Rev tie( G.R. o 1 *A' ugust 28, 1998).
1.
Compromi
se and Tax Amnesty
Compiymise
Q: Whdt is meant by compromise?
ANS: A 1;Compromise is a contract whereby the parties, by making reciprocal
concessions, avoid litigation or put an end to one already commenced (CIVIL CODE,
Art. 2028)!ii
1
Q: Distinguish Compromise from Abatement.
ANS: Con'ipromise involves a reduction of the taxpayer's liability, while Abatement of tax
means, that the entire tax liability of the taxpayer is cancelled (ABAN, Law of Basic
TaxatiOn, supra at 235).
I!
Q: When's compromise allowed in taxation? ..
ANS: Conqpromises are allowed and enforceable when the subject matter thereof is not
prohibited` from being compromised and the person entering into it is duly authorized to
do so (VITUG & ACOSTA, Tax Law, supra at 48).

1
764
 VOL 1.
2019

Q: Who are the persons allowed to enter into compromise?

ANS: The f011owing persons are allowed to enter into compromise in behalf of the
government:', 1,
1. Commissioner of Internal Revenue - may enter, under certain conditions, into
a compromise for both the civil and criminal liabilities of the taxpayer (NIRC,
Sea. 204);
2. Collector of Customs - with respect to customs duties limited to cases where
legitimate authority is specifically granted, such as in the remission of duties
(TARIFF k CODE, Sec. 709);
3. Customs Commissioner - subject to the approval of the Secretary of Finance,
in cases involving the imposition of fines, surcharges and forfeitures (TARIFF
CODE, Sec. 2316); and
4. Local Government Code •:-. no provision regarding compromise; however, civil
(not criminal).liability is ridt prohibited from being compromised (CIVIL CODE,
Arts. 2034 and 2035).
1 1.
Please refer to NIRC Remedies for furthAiscussion.
I;
'
TaxAmnestyIi
Q: What is taxipmnesty? ' ,„„,„
tlj'r.isApo, trIV.,... . .6r* .
ANS: Tax amnesty is a general !pollrgozitmal owdooking by the State of its
authority to ,impose penalti,e.t.tin p`erto 1 otherw6f aiiiiKlf violating a tax law. It
partakes an abSiplute waiver' the goyprrent of its right to Ilect what is due it and to
give tax evaders whfikwih to relttgfll chance to stet) a clean slate (Asia
IntemationalAdationeelggic., v;;Cothmitpner of Intemal'Rev ue, G.R. No. 179115,
September 26,12012)1 sThgrAVelit of tax apinesty, similar to i to exemption, must be
construed strictly against gibvtaxpaxer aid liberally i/favor of the taxing authority
pommissi0664,4r% Inte Revenue Ir. ftilippine Aluminurd Wh pls, Inc., G.R. No.
0 1,-,,E,
216161, Auggsgb, 2017tAlt. ie4,-
- < ;V.
Note: To avalitbf a ta?stpmp'Osty„aia to be: immune frorr4glit tg delinquencies, the
taxpayer must ii1y,511igliiitly discldsedt is previous untaxe income and must have
paid the corresix4ndtax on, suctepreviisly untaxed income (Belies, Jr. v. Court of
Appeals, G.R. No. *102967, gebruary 10,t22000)Sl•on compliance with the procedure
set forth under;, DepartI ent of FipawseDifia- 1eg,..„.. .0Eder
r No. 29-07, the taxpayer is
immediately entitled 61 .the e9,164ment "EifiR immunities and privileges of the tax
amnesty program (Co',. issid,b1; of Internal Revenue v. Covanta Energy Philippine
Holdings Inc., G.R. No. 20YWOJanuary
,
i4ale
24, 2018).

Q: What are thp purposes of tax amnesty?

ANS: The purposes of tax amnesty are as follows:
1. Tolgive tax evaders who wish to'relent a chance to start a clean state; and
2. To, give the government a chance to collect uncollected tax from tax evaders
without having to go through the tedious process of a tax case (Barbs, Jr. v.
Colurtof Appeals, supra).
I
Q: When shall i the immunities and privileges of a tax amnesty program cease?
t1

ANS: When: (a)the taxpayer fails to file a SALN and the Tax Amnesty Return; or (b) the
net worth of the taxpayer in the SALN as of December 31, 2005 is proven to be
understated : to 'the extent of 30% or more, the taxpayer shall cease to enjoy these
immunities ;and privileges (Commissioner of Internal Revenue v. Apo Cement
Corporation, G.R. No. 193381, February 8, 2017):
ir

765
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Qnn VOL 1.
2 019

Q: Distinguish tax amnesty from tax exemption.

ANS: Tax amnesty is immunity from all criminal, civil and administrative liabilities arising
from non-payment of taxes, and it applies only to past tax periods, hence, of retroactive
application. On the other hand, tax exemption is immunity from civil liability only, and
has prosPective application (DIMAAMPAO, Tax Principles and Remedies, supra at 122).

Other Relevant Doctrines, Theories and Principles in Taxation

Q: What are the theories of taxation?

ANS: The theories of taxation are the following:
1 Lifeblood Theory (Commissioner of Internal Revenue v. Algue G.R. No. L-
28896 February 17, 1988);
2.; Necessity Theory (Phil. Guaranty Co. v. CIR G.R. No. L-22074 April 30, 1965);
3. Benefits-Protection Theory (Doctrine of Symbiotic Relationship)
(Commissioner of Internal Revenue v. Algue, supra).

Lifeblood Theory ‘,,o,"' •-•?- * - ,

Q: What is the Lifeblood i fti,
;of Takabov ,d .1 ,,,,
ANS: ;Taxes are the lifebria. of t ei.nationmthr&Ligh wiich‘e government agencies
continue io operateAd.witI3- hieh the State effects,itYfu Ctiorts for the welfare of its
constituents (Compssegloro / temffReFfitre-v:, OD of pp 'fs, G.R. No. 106611,
July 21, 1994). i go i4x .•;„:
Note: Taices are the loo01 of th ' go*nment an so sp uld b7 collected without
unnecessary h ndran On! the otheepapd, such oiled' fns quid be made in
accordanCe wi iVvIr s any tarbitracives4Wll negate the ve pra_si for government
itself (Coihmistidieri fInternil ReVinil,e,tili;11,410-ii0c.,ilsupra). eing,t ' e lifeblood of the
rn
Govement, ei rompt anci certakaypiiafillity is an impe ibasneed (Collector of
is
Internal R6ven :-G od ,),, tematian1I-R:u:.wo •bz„e.„r Co!, 42265, December 22, 1967).
ll' %... A':-.)
/
Necessr The .,-;.>.
I 11 ',.....:v
Q: Whatlis the cessi The bop
ANS: TaZation is he poihr e a ra, neces
,. •m- it is a ecessary burden to
sity .. ..,
preserve'f:he State' overei))ty ark- clumpy an •armyrt'd'resist an
aggression, a navy to efeq its›Ores rom was oltrika ,,r•p,ibf civil servants to serve,
public im6rovement desi nettr ti`e enjoy ent13,119,‘cifizenry and those which come
within the State's territory, antik acilities afici Etitget16 46 a government is supposed
to provide,(Philippine Guaranty Co., nc.v.,C.ommissioner of Internal Revenue, G.R. No.
L-22074; 'April 30, 1965). Therefore, it has a right.to compel all citizens and property
within its i.,limits to contribute. Taxes proceed upon the theory that the existence of
government is a necessity; that it cannot continue without the means to pay its
expensesk'and that for those means, it has the right to compel all citizens and property
within its limits to contribute (51 Am. Jur. 42).

Benefits Protection Theory

1 g.
Q: What is the Benefits-Protection Theory (Doctrine of Symbiotic Relationship) of
TaxatiOn?:
ANS: The!foundation of the obligation to pay taxes rests not upon the privileges enjoyed
by, or thekrprotection afforded to, a citizen by the government, but upon the necessity of
money foOhe support of the state. For this reason, no one is allowed to object to or
resist the payment of taxes solely because no personal benefit to him can be, pointed
out (Larer0 v. Posadas, 64 Phil. 353, G.R. No. 43082, June 18, 1937). In exchange for
the protection that the State gives to its citizens, taxes must be correspondingly paid to it
(Commissioner of Internal Revenue v. Algue, Inc., supra).
i

766
 1

/VOL 1.
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,-;;-;:!.-!;;T-t.;• •
ir
Jurisdiction oversubjects and objects
•'
Q: Discuss the State's jurisdiction over the subjects and objects of taxation.
ANS: The poweQto tax can only be exercised within the territorial jurisdiction of a taxing
authority. The State may not tax property lying outside its borders or lay an excise or
privilege tax upon the exercise or enjoyment of a right or privilege derived from the laws
of another state and therein exercised or enjoyed (51 Am. Jur. 88).
I .11
Basic principles of a sound tax system
Q: Discuss the basic principles of a sound tax system.
ANS: The folloving principles have been suggested in order to make a sound tax
system, but not riecessarily to make the tax law valid: (FAT)
1. Fiscal 'Adequacy — sources of government revenue must be sufficient to meet
government expenditures and other public needs (Chavez v. Ongpin, G.R. No.
76778, June 6, 1990);
2. Adminiptrative Feasibility — twilaws must be capable of being effectively
enforced with the least inogftlience to the taxpayer (ABAN, Law of Basic
TaxatiOn, supra at 13); ands
3. Theoretical Justice — azsotircVtabsystem
, must be based on the taxpayers'
ability to pay. This suggesli svega axation must be progressive conformably
with,' the constitutional jnat(tdAtp 7C,pagress all evolve a progressive
system, of taxation (CCIVSTtrait /, eck$20pia lity to Pay Theory).
Note: A law Will' retain itellity even ifqt is not in conson ce with the principles of
ia
fiscal adequacyandft mipistrativegsjibility because t tConstitution does not
expressly require so. TbeseprincipleedreRmly designed to nake our tax system sound.
However, if a tax la gris, ,,Ontrgry to th In-maple of the4, reira kustice, such violation
will render the is ncongtifati9nal consi 'rig that under the Cogstitution, the rule of
taxation shou e unitoWand equitSbJe MAAMPAO Tax rindiples and Remedies,
(2015), sup 13b)„„eptES ,N111
Stages or aspects oftaxott n
N%
Q: What are the stages or aspects of T
ANS: The stages or isOcts,,,irtaxation area.. s• (LACPR)
1. LeVy or Impositier(Tax LegislAdn osition by the legislature of
tax:on persoidropeWLor excises. It includes the:
e. . !DiscretiVos Ely Orposes for which taxes shall be levied;
b. !!DiscreticinXsasubjects of taxation; .
O. !Discretion as to amount or rate of tax; and
d. !Discretion as to the manner, means and agencies of collection of taxes
r(DIMAAMPAO, Tax Principles and Remedies, supra at 16-19);
2. Assespment and Collection (Tax AdMinistration)— the act of administration and
imPlerrientation of the tax law by the executive through its administrative
agendes. The term "assessment" here means notice and demand for payment
of tax liability (VITUG & ACOSTA, Tax Law, supra at 26);
3. PaYment — the act of compliance by the taxpayer, including such options,
schemes or remedies as may be legally available to him (Id.); and
4. Refund — the recovery of any tax alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessively, or in any
manner wrongfully collected.
1 !,

767
 • ' •

Taxpayer's Suit
Q: What is the nature and concept of taxpayer's suit?
ANS: A taxpayer's suit may only be allowed when an act complained of, which may
include legislative enactment, directly involves the illegal disbursement of public funds
derived frOm taxation (ARAN, Law of Basic Taxation, supra at 28; Pascual v. Secretary
of Public Works, G.R. No. L-10405, December 29, 1960).

Q: What iS Locus Standi?

ANS: it is the ability of a party to demonstrate to the court sufficient connection to and
harm from the law or action challenged to support that party's participation in the case
(White Light v. City of Manila, G.R. No. 122846, January 20, 2009).

Q: What are the requisites for taxpayers, to have locus standi to sue?
ANS: To have a locus standi, the two requisites must be met, namely:
I
1. Public funds derived from taxation are disbursed by a political subdivision or
instrumentality and irkdoirfrRirrslaw*is violated, or some irregularity is
Committed; and •'''" T
i i r
2.1 The petitioner js:directl, "affectedly:the; alleged ‘4,,(Land Bank of the PHL v.
•Cacayuran, R.V1 ,166rAprin177204).V
4-
Q: Whiltare the irlstar'Sles"Tutielg*";Ciirr;ii*Yeen b ou by parties who have
not be'eniPersoicallyVjuced? i
”0..
ANS: Locus Sandi beidg mdrely a matter,:o procedu e, ha eebie waived in certain
instanCes!,1wher#a•Re who .not-persV-injured-mpy
ei4 be fovtiatl o bring suit:
1.1 .Taxpayers its to uestign,csIntiia9ts pEpreof into b the'ffa 'anal 'government
or gaiem nt-owned orsVOblfeeccii;porations alle erd contravention of
, = I
law;
2., A taxpayer,
ayer,
r, s a1. to -to-susfidre-therefis-- clatrojtat public funds are
disbsr.sediat
; deflecte. to any improper
Ppurpo e, or that theresi,htwasta elf,740.15.q*nds tArough he enforcement of
1 an invalid or Ak7onstittkiihal . raw,,O ray v. dane, G.R. No. 167919,
Februarys
3. • Coctrine o‘firanscell enta grra'AtOcer'

Q: Taxpayer's Suit diaslingths edifrom itizeVsltip./

ANS: Taxpayer's suit is one -ere one /14. 1 ,9A e where there is an assertion
that pablic funds are illegally dis Fsed.or.de sted o an illegal purpose, or that there is
a wastage of public funds through the 'enforcement of an invalid or unconstitutional law.
Citizen's suit, on the other hand, is when a person complaining must allege that he has
been or is about to be denied some right.or privilege to which he is lawfully entitled or
that he is labout to be subjected to some burdens or penalties by reason of statue or act
complained of (Province of North Cotabato v. Government of the PHL, G.R. No. 183591,
October 14, 2008).

Doctrine of Transcendentailmportance
Q: What is the Doctrine of Transcendental Importance?
ANS: It is a principle that the Court, in the exercise of its sound discretion, brushes
aside the 'procedural barrier and takes cognizance of a petition (Bayan v. Zamora, G.R.
No. 138570, October 10, 2000). It dispenses with the requirement that petitioner has
experienced or is in actual danger of suffering direct and personal injury (Southern
Hemisphere Engagement Network, Inc. v. Anti-Terrorism Council, G.R. No. 178552,
October 5, 2010).

768
 2019

II. NATIONAL TAXATION

(National Internal
r Revenue Code of 1997, as amended
by RA 10963 or the Tax Reform for Acceleration and
J1
Inclusion Law)
11
A. TAXINGALIT ORITY
L JURISDICTION, POWER, AND FUNCTIONS OF THE COMMISSIONER OF
INTERNAL REVENUE
1 i,
Q: What are the general powers and duties of the Bureau of Internal Revenue
(BIR)? I HI
ANS: The powers and duties of the BIR in general are the following: (A-3E)
1. Assess and collect national internal revenue taxes, fees and charges;
2. Enforce all forfeitures, penaltiewnd fines connected with the assessment and
collection of taxes, fees, andAftges;
3. Execute judgment in all ceiOxleoided in its favor by the CTA and the ordinary
courts and (.4V,It
o:4- Wir
4. Effect and administer the, st,,.,:,egry and police powers conferred upon it by
I
the N RC and other lawsi(N/04r r

Q: What are the powerWitite Com oner of Internal avenue?

ANS: The CIR's poweEtlare to: (IDOWA -DAIS)
1. Inierpret tax Itys4 1V/RC, SO f4 il));
2. Decide tax ci..esf(NIEG, Sec. 4 0);
3. ObtaiUrfermatidp-zgi to summon, examine and take testimony of persons
(N113,15s amended by TRAlly Sec. 5);
‘ti
4. Matipannts ,and pr-scribe ddi eguyvents for tax
administration arillenfofceRent- otwithstan aWrequiring the prior
mithOriz.
1 74,tiorebfrirgoveitmen gency or inst e al (NIRC, as amended
by MAIM V Sec, 6 (AR?
Please se . discuss on on ass sstne nder E (Tax Remedies under the
NIRC) below. ,o,. -,;., .
5. Presaribe reartopertyadeerIVA , ,.cii-45VP.
6. Make arrests f,-9-A d seizures (NIRC, Sec. 15);
7. Delegate pow rtrIAC, Sec. 7);
8. Assign and reasgigtrinternal revenue officers involved in excise tax functions
to establishments where articles subject to excise tax are produced or kept
(NIRC, Sec. 16);
9. IMpOse duties on certain officers (NIRC, Secs. 95 & 97); and
10. Suspend business operations of taxpayers (NIRC, Sec. 115).

Please see discussion on suspension under E (Tax Remedies under the

NIRC).

Q: Are the pOwers of the Commissioner of Internal Revenue delegable?

ANS: As a general rule, the CIR may delegate the powers vested in him to any
subordinate official with the rank equivalent to a division chief or higher (NIRC, Sec. 7).
HOWEVER, the following powers cannot be delegated (RICA):
1. Power to Recommend the promulgation of rules and regulations by the
Secretary of Finance;
2. Power to Issue rulings of first impressions or to reverse, revoke, or modify any
existing ruling of the Bureau;

769
 it
"VOL 1.
2019

3.! Power to Compromise or abate any tax liability except matters which may be
compromised by the Regional Evaluation Board and National Evaluation
Board; and
4. Power to Assign or reassign internal revenue officers to establishments where
articles subject to excise tax are produced or kept (NIRC, Sec. 7).
1!
Interpreting tax laws and deciding tax cases
' 11
Q: DisCuss the Commissioner's power to interpret tax laws.
ANS: The power to interpret the provisions of the Code and other tax laws shall be
under thelexclusive and original jurisdiction of the Commissioner, subject to review by
the Secretary of Finance (NIRC, Sec. 4).

Q: What ire BIR rulings? What is required to make a BIR ruling or first impression
a valid on'e?
ANS: BIR" rulings are administrative opinions issued by the Commissioner of Internal
Revenue interpretative of a provisiorrifirrTqx-lak They are the best guess of the
moment and incidentally ojerr F,?ntainTsulh yvpljtconsigered and sound law, but the
courts haVe held that the0o.,nottevent.an &tile Aaligtpf front at any time and are
merelyladVisory — soXprap jfosmation seriCe.kOhttaxpl‘yer (ABAN, Law of Basic
Taxation, Supra at 1,9): ,',.,.,
...--------"'•-..,.,tNs >
k1
A BIR ruli9g of fi ti siod (rulin'oliNhy h'afno preced' titlet),,tp be valid must not
be against,I the I w and must be isstedr y by the Cillmmi
i figner,p1 Internal Revenue
(Philippine. Ban ,of.Co municationsit—CI .R...tio 1 202 , :Ianda 28, 1999; NIRC,
Sec. 7)i , 1 ,„,,,......_,
. . >: q
,....„.„7, . .
., , 4.,
,......4
I' 1 ' rItl
Q: Discuss the.p4r
B -7-4_, 5of th9,ComMis .tiAerito
._..,. deciTtax calses.
ANS: The Co missio er ko. powerldgecide:-(D .0
1., Disp e s ss t gyp`
2. , Refunds of in ma
R 11.0; ,c ,(', charges;
i`
up tajy
3. ' Penalth impo d in laIj Nherpto•
4. ; Other matters ar ing /Uri eL21§_go
11 e or plher law or portions thereof
administered by "- Eliqk Ike RevenuE is vested in the
Commissio1/2 /el
'N'if
Note: These are subjec lo2reexc usive '13 ]14.)3urViction of the Court of Tax
Appeals (NIRC, Sec. 4). *.„„li
Q: Whit is the power of the Commissioner to obtain information, and to summon,
examine and take testimony of persons?
ANS: In ascertaining the correctness of any return, or in making a return when none has
been made, or in determining the liability of any person for any internal revenue tax, or
in collecting any such liability, or in evaluating tax compliance, the Commissioner is
authorized: (EOSTC)
1. To i Examine any book, paper, record, or other data which may be relevant or
material to such inquiry;
2. To Obtain on a regular basis from any person other than the person whose
internal revenue tax liability is subiect to audit or investigation, or from any
office or officer of the national and local governments, government agencies
and instrumentalities, including the BSP and GOCCs, any information;
3. To Summon the person liable for tax or required to file a return, or any officer
or employee of such person, or any person having possession, custody, or
care of the books of accounts and other accounting records, or any other
person, to appear before the Commissioner or his duly authorized
representative and to produce such books, papers, records, or other data, and
to give testimony;

770
 4. To i Take such testimony of the person concerned, under oath, as may be
relevaint or material to such inquiry; and
5. To Cuse revenue officers and employees to make a canvass from time to
time of any revenue district or region and inquire after and concerning all
persons therein who may be liable to pay any internal revenue tax, and all
persons owning or, having the care, management or possession of any object
with respect to which a tax is imposed.
Note: Nothing listed above shall be construed as granting the Commissioner the
authority to incitiire into bank deposits other than as provided for in Section 6(F) of the
Tax Code (NIRC, as amended by TRAIN Law, Sec. 5).

Q: How is the power of the Commissioner to obtain information, and to summon,

examine and take testimony of persons strengthened by the TRAIN Law?
ANS: TRAIN Law amended Sec. 5 of NIRC by providing that the Cooperative
Development Authority shall submit to the Bureau a tax incentive report, which shall
include information on the income tax, vgl -added tax, and other tax incentives availed
of by cooperatives registered an 4.46j mg incentives under R.A. No. 6938, as
amended: Prodded, That the inf 40 submitted by the Cooperative Development
Authority to the Bureau shall be Ail Aiitte o the Department of Finance and shall be
included in the (database createdUnkil No. 10708, otherwise known as The Tax
Incentives Management and Trangpreh OTIMTA) (NI 0, as amended by TRAIN
Law, Sec. 5 (B)). dr
." 4- . ..0
,47
, •2&•1>
.,›
II
Q: May the bank depoits — peso and n individual taxpayer
' eign currency
be disclosed j by a Ito fnerciar ban to the CIR i connection with a tax
investigation being Atted13y reVe e officials, IN' ho,. t violating the relevant
bank secrecy a,wg?'ExpIrtypur answeri.
ANS: No. Apiegeneg rule, bankNe fits of an i divid al to payer may not be
:rnoscitDpankAo the C missioner sex eptio -Section 6 of the
disclosed by Ptito
NIRC provides,that the Cbritlissie is a orized to irnitPt e ank deposits of:
1. a decedut to"'ditekine'his rosy. state;
2. any taxpekefahotas Medi an application for compromise of his tax liability by
reason of lifiaRcial ibtapacity to Ji *s,tax liability (NIRC, Sec. 6 (f)); and
Note His appliptia shall not fe. '7.oosTizire: s.. unless and until he waives in
writing his privilege unddt 10' Ba ' ecrecy Law) or under other
general or srgial la and such waiver shall constitute the authority of the
Commissioner 'o Ire into the bank deposits of the taxpayer (NIRC, Sec. 6
(I)).
3. A specific taxpayer or taxpayers subject of a request for the supply of tax
information from a foreign tax authority pursuant to an international convention
or, agreement on tax matters to which the Philippines is a signatory or a party
of: provided, that the information obtained from the banks and other financial
institutions may be used by the Bureau of Internal Revenue for tax
assessment, verification, audit and enforcement purposes (R.A. No. 10021,
Sec. 0.
,
Q: How is the authority of the Commissioner to Prescribe Real Property Values
exercised? il
ANS: In exercising this authority, the following shall be observed: (M-P3-A)
1. Mandatory consultation with both private and public competent appraisers
before division of the Philippines into zones.
2. Prior notice to affected taxpayers before the determination of fair market
values of the real properties.
3. Publication or posting of adjustments in zonal value in a newspaper of general
circulation in the province, city or municipality concerned.

771
 BEDAN RED BOO VOL 1.
2019

The basis of valuation and records of consultation shall be Public records open
to the inquiry of any taxpayer.
5. Zonal valuations shall be automatically Adjusted once every three years
(NIRC, as amended by TRAIN Law, Sec. 6 (E)).

Q: Canilthe CIR delegate to the Chief of the Accounts Receivable and Billing
Division the issuance of a demand letter for tax deficiency assessment which
contains denial of the taxpayer's request for reconsideration?
ANS: Yes. The act of issuance of the demand letter by the Chief of the Accounts
Receivable and Billing Division does not fall under any of the exceptions that have been
mentioned as non-delegable above. Furthermore, Sec. 6 of the Tax Code provides that
the authority to make tax assessments may be delegated to subordinate officers
(Oceanid Wireless Network v. Commissioner of Internal Revenue, G.R. No. 148380;
Decembbr 9, 2005).

Non-retroactivity of rulings . ,,,,,,

.12.sro.. „,..,
1 -1 '.........

Pleaie see discussion underifF (Generll Pr

rindiplas ,PrOsRectivity of tax laws).
i —N, l'N- ..,,,''''' ,:,,,,
a RULE-MAKING AUfHCRITY-OPtHESECirETAI?Y OFFINANCE
Q: What's the rule-m iri pig horiViAhrSibreta„ 4iiiab.e?
ANS: The Secretary”rnan iff e, upqa theYecqmmen atiortd etommissioner, shall
promylgte all eedial rule and tegulationNor. th effh we el bforcement of the
proviSions of th Code NIRC Sec. 244 --' /'‘,
II..... ..
; i , — ,,,,,,.:2
Q: What are t ecific provisions ,to .,.,e•containe nd Regulations
‘ 1,;_ _ ..___I-„ja
of BIR? ..v:Iti ip.a.a
ANS: The foil byR% " ntainedln- in -e Rules eg latio of the BIR: (TF-
EOSA-CERP) % ri- cp r td-=
1. 'The _ ankman'Q.kl(1 Kebte,r, al!) al di ectors hall canvass their
respec 'ye revenue sforichviarp; e o discovering persons and
!grope
their lis liable t natioagl.V Aue ta)se , and e manner in which
ts bakea e,,per§Ans)antiltaxable bjects shall be made
and kept;
.
2. 'The Forms orHebbIs 7a9 arlts,tol)e e don goods subject to an
'excise tax, and ffie an' in Alai tteplaelli ebranding or marking shall be
effected;
3. 1The conditions under which ancrigrmanner in which goods intended for
,Export, which if not exported would be subject to an excise tax, shall be
,tabelled, branded or marked;
4. ',The conditions to be observed by revenue Officers respecting the institutions
l and conduct of legal actions and proceedings;
5. IIThe conditions under which goods intended for Storage in bonded warehouses
."shall be conveyed thither, their manner of storage and the method of keeping
the entries and records in connection therewith, also the books to be kept by
l'revenue inspectors and the reports to be made by them in connection with
their supervision of such houses;
6. iThe conditions under which denatured Alcohol may be Removed and dealt in,
the character and quantity of the denaturing material to be used, the manner in
which the process of denaturing shall be effected, so as to render the alcohol
';suitably denatured and unfit for oral intake, the bonds to be given, the books
,and records to be kept, the entries to be made therein, the reports to be made
to the commissioner, and the signs to be displayed in the business ort by the
person for whom such denaturing is done or by whom, such alcohol is dealt in;

772
 VOL 1.
2019

1
7. 'The manner in which revenue shall be Collected and paid, the instrument,
,d4ument or object to which revenue stamps shall be affixed, the mode of
cancellation of the same, the manner in which the proper books, records,
invoices and other papers shall be kept and entries therein made by the
pei-son subject to the tax, as well as the manner in which licenses and stamps
,shall be gathered up and returned after serving their purposes;
8. The conditions to be observed by revenue officers respecting the Enforcement
of Title III imposing a tax on estate of a decedent, and other transfers mortis
causa, as well as on gifts and such other rules and regulations which the
commissioner may consider suitable for the enforcement of the said title iii;
9. The manner in which tax Returns, information and reports shall be prepared
and reported and the tax collected and paid, as well as the conditions under
Which evidence of payment shall be furnished the taxpayer, and the
preparation and publication of tax statistics; and
10. The manner in which internal revenue taxes, such as income tax, including
Withholding tax, estate and dono 's taxes, value-added tax, other percentage
taxes, excise taxes and dc," tary stamp taxes shall be Paid through the
collection officers of the Al.VCV f internal revenue or through duly authorized
agent banks which are Ike_putized to receive payments of such taxes
and the returns, papersiEncLtare 'gents that may be filed by the taxpayers in
connection with the pa men of,ae.,. tax: Mcvided, however, That
notwithstanding the qtjibr 06.1iik s' f“ ISL,VaT5Icribing the place of filing
of returns anggRernent oCia es, the Commiss'b i er may, by rules and
regOlations, cpirq that the, etums, papers a tatements that may be
filed by the taApa ers in.conne on with the pay e , f the tax (NIRC, Sec.
245)•,- •- r•
1 , ..4 ifr, .ftw
11 ...,,,,
Q: Is BIR's act of issui g Rules and gulationz,_ 4.t.,
exe
:_;
..,0:17,e, of judicial or
quasi-judici401)q,916R .1, '.,..
ANS: No. BlikVact of issuing rule-Sle d oulations is- T e se of any judicial
or quasi judicial q.apadi 1- „ s in ft! 4exe e of BIR's q as gative or rule-making
powers (Clark InveRW-and' ocators Ass ration Inc. v. Secretary of Finance, G.R. No.
200670, July 6, 208). 4,
Note: Thus, petition fofte orari under 5, RtteA2n Civil Procedure is not the
proper remedy agains ct of issyng rti s4 orife-gMeins of the Secretary (Clark
Investors and Locators,' sociari Inc. v. Secretary of Finance, supra).

B. INCOMEiTAX
J. DEP/NIT/0/V. NATURE. AND GENERAL PRINCIPLES
Q: Define income tax.
ANS: It is a tax on all yearly profits arising from property, professions, trades or offices,
or as a tax on a person's income, emoluments, profits and the like (LG Electronics
Philippines, Inc v. Commissioner of Internal Revenue, G.R. No. 165451, December 3,
2014).

Q: What is the nature of income tax?

ANS: Income tax is a kind of tax levied upon the privilege of receiving income or profit. It
is an excise tax and not a tax on property (2 DIMAAMPAO, Taxation, supra at 3).

773
 of
Q: Discuss the general principles of income taxation under NIRC.
ANS: Under the Section 23 of NIRC, the following are the general principles of income
taxation:;
WHO TAXABLE ON
Citizen of the Philippines, All income derived from sources within and without
residing the Philippines
Therein

Non-resident citizen Only on income derived from sources within the

Philippines

Individual citizen of the Only on income from sources within the Philippines,
Philippines who is provided, that a seaman who is a citizen of the
working and deriving Philippines and receives compensation abroad as a
income from abroad as an member 91 the complement of a vessel engaged
Overseas Contract okegoltis \ay in Ihterutional trade shall be treated as
Worker ten ov rsdas t.oritract worker
../ I v t
Alien individual, whether soOfily on incomekOnved ,froni sources within the
a resident or not of the ;.c,
Philippines

Domestic corporation Alliincotri% (laved fijom sbucce..within and without

_th_e
Foreign corporation, Only orp..inconie.''denved from sop ces within the
whether engaged or not in Philippi es
trade or business in the
Philippines

Q: What are theancom •taxyse stin the P thylvies?

ANS: Thefollowinkare thavco\gntiqd I X%fsten) :
1.1 Global Tax System c , h•t'KeIste(61011 btevi vgs indifferently the tax base and
generally tratsini cr9rorull-categolis textle yleOme of the individual. It
taxes all catotred
g rincortre-eXeep ce alpyg-sive incomes and capital
gains; 1 1 k
2. Schedular Tax Systenis, y,Ar,wh re the income tax treatment varies
and is made to depend on the kind or category of taxable income of the
taxpayer. It itemizes the different income and provides for varied percentages
Of taxes, to be applied thereto; and
3., Semi-schedular or Semi-global Tax System:
,! a. Global, in the sense that:
i. All compensation income, business or professional income,
capital gain and passive income not subject to final withholding
income tax, and other income not subject to final tax are added
together to arrive at the gross income;
ii. After deducting the total allowable deductions from business or
professional income, capital gain and passive income and other
income not subject to capital gains tax and final tax, in the case
of corporations, as well as personal and additional exemptions,
in the case of individual taxpayers; and
Hi. The taxable income (i.e., gross income less allowable
deductions and exemptions) is subjected to one set of
graduated tax. rates (if individual) or regular corporate income
tax rate (if corporation).

774
 b. Schedular, in the sense that, passive investment income subject to final
tax and capital gains from the sale or transfer of shares of stocks of a
domestic corporation and sale or transfer of real properties remain
subject to different sets of tax rates covered by different tax returns
(MAMALATEO, Income Tax, supra at 3-7).
Criteria inimposing Philippine income tax
I
Q: What are the criteria in imposing Philippine income tax?
ANS: The thre principles being used as criteria are the following:
1. Citizenship Principle — where a citizen taxpayer is subject to income tax on
his worldwide income (from sources within and without the Philippines) if he
resides in the Philippines, or only on his income from sources within the
Philippines if he qualifies as a non-resident citizen;
2. Resfdence Principle — where an alien is subject to Philippine income tax
beceuse of his residence in the Philippines but only on his income from
sources within the Philippines; 40
3. Sburce Principle — where eii'dlien is subject to Philippine income tax because
he
• derivesincome from sources within the Philippines (MAMALATEO, Income
Taxi supra at 89-90).
Types of hilippine income taxes
I "li
Q: Enumerate the types of ome
•
ANS: The types of Philippifie income tax e the following:
1. Graduated InOme:Tax on „pals (Sec. 24 (A)( NI/3C);
2. Regular/NormalCorporate Incoe Tax on CorpOraliorts (RCIT) (Sec 27(A),
NIRC);
3. Minirrom Corporateincome Tax o`4 Corporatiq (M IT) (fec. 27(E), NIRC);
4. Bp9ael Income Tax on Certain Corporations i.e. private educational
instiltionsv•fdkgri;hurrenpy dept units, Ferlee(iiirrairAfriers);
5. Gains..TipaCGT).V.salP, r exchangehlkilMNares of stock of a
• ,
DorriesibCorpdittiqn classified Ca capital asset (Sea 24(C), NIRC);
6. CGT on saleor exchange of reaVproperty located in the Philippines classified
as capital asset (sof 24(D), NlIt),,,
7. FinA WithholteTax •hinteiff,01, . Mae investment income (Sec.
28(8)(5)(b), NIRC);
8. Final WithhoOkig Ter(FWT) on income payments made to non-residents
(indiVidual or ccirptsaon);
9. Fringe Benefit Tax (FBT) (Sec. 33, NIRC);
10. Branch Profit Remittance Tax (BPRT) (Sec. 28, NIRC);
11. Improperly Accumulated Earnings Tax (IAET) (Sec. 29, NIRC); and
12. Gros Income Tax (GIT) (Sec. 27(A), NIRC).
Taxable period
Q: What are the different taxable periods under the NIRC?
ANS: The taxable periods are the following:
1. Calndar period — an accounting period which starts from January 1 to
Oecember 31. Taxable income shall be computed on the basis of the calendar
year4 the: (OPBI)
a Taxpayer's accounting period is Other than fiscal year;
b Taxpayer has no annual accounting Period;
• c Taxpayer does not keep Books; or
• d Taxpayer is an Individual (NIRC, Sec. 43);
2. Fiscal period — an accounting period of 12 months ending on the last day of
any month other than December (NIRC Sec. 22, par. (Q)), which is allowed
only for corporations; and
775
 3. Short period — an accounting period where income is computed on the basis
of a period less than twelve (12) months when the:
a. Taxpayer, other than an individual, with the approval of the
Commissioner, changes his accounting period from fiscal year to
calendar year, or from calendar year to fiscal year, or from one fiscal
year to another (NIRC, Sec. 47);
b. Taxpayer dies (applicable to the decedent's final personal income tax
covering the beginning of the taxable year until his death, the income of
his. estate, and estate tax return) (NIRC. Sec. 90, par. (A));
c. Corporation is newly organized;
d. Corporation is dissolved; and
e. Tax period is terminated by the Commissioner by authority of law
(NIRC, Sec. 6, par. (D)).
Q: May a corporation change its taxable period?
ANS: ;Yes. A taxpayer, other than an jacljy*al with the approval of the Commissioner,
may change the basis of coutiffg it nett o om fiscal year to calendar year,
from caletndar year to fisc I ea \or fro o,ne IlyellAo,another fiscal year (NIRC,
Sec. 47)
Kinds of Tax e
Q: Enumerate t nds o taigyec.s;
ANS: The differ payer areftie following
Indivi -ft;•••
2. Corp „md
3 Pa (inclu ingtErt:Sjneisq'ariders )224:ral Professional
etc. _.11181
Part
4. Esta
bo-o

Q: What are th classi cat' a ers?

ANS: hid vidual t payers may
1. Citizens
a. Re !tent cite
b. Non-radef-
Aliens
a. Resident alie ( ); orMA
b. Non-resident aliens NFL.k .
i. Non-resident aliens engaged in trade or business in the
Philippines (NRAETB); or
ii. Non-resident aliens not engaged in trade or business in the
Philippines (NRANETB).
3.1 Special class of individual employees
a. Minimum wage earners (MWEs) (Sec. 22(HH), Sec. 24 NIRC);
b. Those aliens individuals employed by Regional or Area Headquarters
(RHQ) and Regional Operating Headquarters (ROHQ) of Multinational
Companies, by Offshore Banking Units (OBU), and by Petroleum
Service Contractor and Subcontractor (PSCS) (Sec. 22, Subsections
(C), (D) and (E), NIRC).
Citizens
Q: Who are the citizens of the Philippines?
ANS: The following are the citizens of the Philippines: (CFBNM)
1. Those who are citizens of the Philippines at the time of the adoption of the
1987 Constitution (i.e., February 2, 1987);

776
 •••• ' .

If
DA RED B N
VOL 1.
2 019

2. Thoie whose Fathers or mothers are citizens of the Philippines;

3. ThoSe born Before January 17, 1973 (effectivity of 1973 Constitution), of
Filipino mothers, who elect Philippine citizenship upon reaching the age of
majCrity; and
4. Those who are Naturalized in accordance with law (CONST., Art. IV, Sec. 1).
5. Citizens of the Philippines who Marry aliens shall retain their citizenship,
unless by their act or omission, they are deemed, under the law to have
renounced it (CONST., Art. IV, Sec. 4).

Q: Who is a resident citizen?

ANS: A citizen of the Philippines who stayed in the Philippines or stayed outside the
Philippines' for less than 183 days during the taxable year (VALENCIA & ROXAS,
Income Taxation, supra at 583).

Q: What is meant by residence for taxation purposes?

ANS: This its the permanent home, the pl,. ce to which, whenever absent for business or
pleasure, one,ptends to return (Sa(40 v. American Express International, Inc., G.R.
No. 159507, April 19, 2006).
i
Q: Who is 'a non-resident citizen?
ANS: The follPwing are considered'Air4,
.4, •9:•.iii,.
d‘enAcitizens:4( /yELP)
1. A citizen of the PhilipyinesWip MitIV raki come from abroad and
Who'Se emploppoethereat rfciui es him to be Physt . Ily present abroad most
of the time dafierg the taxalAgar,
2. A citizen ofltlae1Philippip8s- who . Establishes e satisfaction of the
dornmissionith Oct•tif his phi cal presence a ro ith a definite intention
to retiVilerein;ftwi
3. A citizen of the.,P ' ilippines Oho ''eaves the Philff ppin s du Ong the taxable year
to ARO absaaWeither as an immigrant orr ept4, n a permanent
--- ,..0 . . Ii4,1,..
bass
basisig ,,,
,, •
4. A citizen..whchts):"een Pie. mu .-considered as ident citizen and who
arrives ratheRili pines.Y'at time during the taxable year to reside
permanently in theA vPhilippines yalWikjwise be treated as a non-resident
citizen for the`' ap.ble year in wpi.*- - ,......„. s,in the Philippines with respect to
his income dejived frorrfOrree iiiltie dite_ of his arrival in the
Philippines (00C, Sen2, par. (E)).
if...
. ..
Q: What doeS the phrasewtfiest of the time" means?
ANS: The phfase "most of the time" means at least 183 (365. 2) days (R.R. No. 1-79,
Sec. 2). His presence abroad, however, need not be continuous (INGLES, Reviewer,
supra at 39).
Note: CitiZens who work outside the Philippines for at least 183 days in a taxable year
due to a contract of employment with a Philippine employer are not considered non-
resident citizens because they are not considered employed abroad (Id.).
,
i•
Q: Who is ar overseas contract worker?
ANS: An overseas
E contract worker (OCW) refers to a Filipino citizen employed in
foreign.country, who is physically present in a foreign country as a consequence of his
employment thereat. His salaries and wages are paid by an employer abroad and not
borne by any entity or person in the Philippines.
Note: To be considered as an OCW:
1. He must be duly registered as such With the Philippine'Overseas Employment
Administration (POEA); and
2. He must have a valid working contract to work abroad (R.R. No. 01-2011, Sec.
2).

777
 I

Q: When is a seaman considered as an OCW?

ANS: kseaman is considered as an OCW provided the following requirements are met
(CAIRO):
1. A Citizen of the Philippines;
2. f Receives compensation for services rendered Abroad as a member of the
complement of a vessel;
3. Such vessel is engaged exclusively in International trade (NIRC, Sec. 23, Par.
(C));
4. He must be duly Registered as such with the POEA; and
5. He has a valid Overseas Employment Certificate (OEC) and a Seafarers
Identification Record Book or Seaman's book issued by the Maritime Industry
Authority (MARINA) (R.R. No. 01-2011, Sec. 2).

Aliens
Q: Who is a resident alien?
ANS: A resident alien is an indiyjduaritiMnidengt ) is within the Philippines and who
is not a citizen thereof (N/RAtelq, 22 (R)). An ieh ni,4,1:econsidered a resident of the
Philippines for income tOurgo56rt>if: "--/
,....
1. • I He is not a mere)rtqsikntOr sojoumerr. o:"u2s,4CkSec. 5);
2. , ,: He has noder Re iptglit'swi as.to-j isslaun e. Rhil)cipines:. or
3. His purposestic • .aiature 1 at an eeendem dgtaskN be necessary for its
feccompfisih ran to tha ndep lien m 1kes 11 m temporarily in the
} Philip Ines ( DA ITAD I ulinq- (o. 63-06, er,.2006).
' ;,•-•
Q: When is re lost? '`C---1 illil e-,:-.1W
ANS: ,.An alie as acq fired ces:1,(lence..to e P ilippine FetaInS his status as a
resident alien aban s the SWA rid actuAin, epa s frd the Philippines.
Mere intention e 's•;" 'dence-i-S-nor-6noUgly R. No. 04-4,6, ec. 6).
i:;31/4 .i..77°..i ,_. \

ta
.' .
h.:,.(0` ..'
Q: Who is a no rtal -resid t a it?;\ ki-14 * 's:A/ „i.s\.,,,
ANS: 'A rion-resi ent alieVs a 19.‹iv , ikej.wpo e 1 enc s not "thin the Philippines
and who is not a c 'zen thereof q frt'..-_Set,, par.
l .,... non-resident-alien individual
maybe: LIEN1 vr-
1 ',Engaged in de.A5bsi 'ess,.(ETBIlmt Nilo i es— if the aggregate period
I 'of stay in the P11- 11Vik§Oceets VII9AyAlq.?) ach calendar year; or
Z 'Not engaged in trade.or-m 'rfrie aggregate period of stay in
the Philippines does nOrei'cceed480..d s for each calendar year (NIRC, Sec.
25, par. (A)(1)).

Special Class of Individual Employees

Q: Who is a minimum wage earner (MWE)?
ANS: A minimum wage earner refers to a worker in the private sector who is 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 is assigned (NIRC, Sec. 22, par. (HH)). He is exempt from income tax . The
exemption also covers the holiday pay, overtime pay, night shift differential pay, and
hazard pay earned by an MWE (R.R. No. 8-2018, Sec. 2 (0).
Note: HaZard pay shall mean the amount paid by the employer to MWEs who were
actually assigned to danger or strife-tom areas, disease-infested places, or in distressed
or isolated stations and camps, which expose them to great danger or contagion-or peril
to life. Any hazard paid to MWEs which does not satisfy the above criteria is deemed
subject to income tax and consequently, withholding tax on the said hazard pay (R.R.
No. 11-2018 dated January 31, 2018).

778
 Q: What is ine'ent by statutory minimum wage (SMW)?
ANS: It shall refer to the 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 (DOLE) (R.R. No. 11-2018, Sec. 6).
Q: Who are the special class of individual aliens who enjoys preferential tax
treatment under the NIRC?
ANS: Those alien individuals employed by Regional or Area Headquarters (RHQ) and
Regional Operating Headquarters (ROHQ) of Multinational Companies, by Offshore
Banking Units (OBU), and by Petroleum Service Contractor and Subcontractor (PSCS)
shall enjoy a preferential 15% tax rate based on their gross income. Provided, that, the
same tax treatment shall apply to Filipinos employed and occupying the same positions
as those of aliens employed in RHQ, ROHQ, OBU, and PSCS (NIRC Sec. 25
(C)(D)(E)). • j;
Note: The preferential income tax rate under subsection (C), (D) and (E) of Section 25
of the Tax Code, as amended, shall no longer be applicable without prejudice to the
application of preferential tax rates urflOrldsting international tax treaties, if warranted.
Thus, all concerned employees of t*RfickROHQ, OBU, and PSCS shall be subject to
the regular incerne Tax rate under,c040)(2)(a) of the Tax Code, as amended (R.R.
No. 8-2018,;Seb. 4 (C)).
44*
Corporatiolij
-14p it
Q: Define corporation%forAnc ome tqx pruposes.
ANS: The term corpordbion shall incl*AN-JAI)
1. Partnershipso.Oatter hVefeA,ted or organized,
2. Joint stocks9rnpaes;
3. JOintle Vidlits (diatas en partiltion); and 4
4. Assdaationsasurance
s darnpaes.
It does not intro:19AV,
1. • Gene I profesgio Q al pa, shipr nd
2. A; JoinQe JgreA cons • diu formed fort e rpose of undertaking
constructcorprojec s or errgagine in petroleum, coal, geothermal, and other
energy operations, `pursuantto a aeration or consortium agreement under a
service contrAtvalhe governe%1,v airec. 22, par. (B)).

Q: What are the class( eljon'svf corporate- taxpayers?

ANS: Corporate taxpaya,".
)Abe:
1. Domestic corporiffeins (DC) (NIRC, Sec. 27) or
2. FOreign corporations (FC) (NIRC, Sec. 28), either
a. Resident foreign corporation (RFC) (NIRC, Sec. 28 (A)); or
b. Non-resident foreign corporation (NRFC) (NIRC, Sec. 28 (B)).

Q: What is'a domestic corporation?

ANS: The term domestic, when applied to a corporation, means created or organized in
the PhilippineS or under its laws (NIRC, Sec. 22 (C)).

Q: What Ise foreign corporation?

ANS: A foreign corporation is one which is not domestic (NIRC, Sec. 22 (D)).

Q: What is ia resident foreign corporation?

ANS: A resident foreign corporation is a foreign corporation engaged in trade or
business within the Philippines (NIRC, Sec. 22 (H)).
Note: In oncld, that a foreign corporation may be regarded as doing business within a
State, there must be continuity of conduct and intention to establish a continuous
business, such as the appointment of local agent, and not one of a temporary character

779
 DAN RED:BOOK i rVOL
2019
it
if
(Commissioner of Internal Revenue v. British Overseas Airways Corp., G.R. Nos. L-
65773-74, April 30, 1987). It involves any other act or acts that imply a continuity of
commercial dealings or arrangements and contemplate to that extent the performance
of acts or works, or the exercise of some of the functions normally incident to, and in the
progressive prosecution of commercial gain or of the purpose and object of the business
organization (R.A. No. 7042, Foreign Investment Act of 1991, Sec. 3 (d)).

Q: Is an offline international air carrier selling passage tickets in the Philippines,

through a general sales agent, considered as a resident foreign corporation?
ANS: Yes. Doing business includes appointing representatives or distributors operating
under full, control of the foreign corporation, domiciled in the Philippines or who in any
calendar 'year stay in the country for a period totaling one hundred eighty (180) days or
more. Hence, an offline carrier has appointed in the Philippines, through whom, it sells
or offers for sale any air transportation is undoubtedly "doing business" or "engaged in
trade or business in the Philippines", therefore considered resident foreign corporation
(Air Canada v. Commissioner of IntemeLl3eyepaq‹,No. 169507, January 11, 2016).

Q: What is a non-reside t4rei n cor o ti • pci i•

ANS: Anon-resident fo h r oratio o elgotcorp91,ation not engaged in trade or
business Within the P iippi (All C, Sec. 22 (I)).
„
Q: What is mea t y ntureoanOotwrtiuni?
ANS: It is gene rstood to niean4la otanizatipn f fots4he execution of a
single ,trailsacti n an is albs of a teriiporary natuPe. 5) rporation cannot
generally enterlirlq?,-a ontraat-ofirartrgriii! less-atithoriz G
tar or its charter, it
has been held /Kati may ntarOto,z,strint7gerituri g whit YrAiki to a particular
partnership (tile Thing orp. sirf —co' niiploner f Inter ai—drenue, G.R. No.
148187, April citi rbachry Ware anu actuan Corp., G.R. No.
75875; December d
IL
Q: What are thessen "al fa veri ure?
ANS: The follow' are t esOi a o to afibint velure: (CS-JMS)
1. Each pa mak a Cod ce sarily of,papital but by way of
services, s II, know
2., Profits must aglz QI ang&a.„parti
3. Profits must belqpin liprietalytt e
4. Right of Mutual writ er the 'ec rha teeof the enterprise; and
5. Usually, there is a Sing e busine Faction (MAMALATEO, Income Tax,
supra at 41-42).

Partnerships
.1
Q: What is a partnership?
ANS: It ; a contract whereby two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profits
among themselves (CIVIL CODE, Art. 1767).

Q: Discuss the tax liability of partnerships.

ANS: Partnerships, no matter how created or organized, except general professional
pattnershOs and joint ventures or consortiums engaged in construction or energy
related Operations, are taxable as corporations (NIRC, Sec. 22 (B)).

Q: What is a General Professional Partnership?

ANS: A general professional partnership (GPP) is one formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is
derived from engaging in any trade or business (NIRC, Sec. 22 (B)).

780
 -.:
( x-- -.....
.- ..,... ZVOL t.
a:,,,,, t.ii,/ 2019
, ..kv-,„,,,.,....,-,...,„,...,-....,.,,,.....,,,,,,ir.....
Q: Discuss tlie tax liability of GPPs.
ANS: A GPP;'„shall not be subject to income tax. Persons engaging in business as
partners in; a 'GPP shall be liable for income tax only in their separate and individual
capacities.lEach partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership (NIRC, Sec. 26).
Note: For purposes of computing the distributive share of the partners, the net income
of the GPP s11011 be computed in the same manner as a corporation. As such, a GPP
may claim either the itemized deductions allowed under Section 34 of the Tax Code or
in lieu thereof, it can opt to avail of the Optional Standard Deduction (OSD) allowed to
corporations in claiming the deductions in an amount not exceeding forty percent (40%)
of its gross income. Once availed, individual partner is not allowed to claim further
deduction frorn his distributive share and not allowed to avail of the 8% income tax rate
option since share from GPP is already net of cost and expenses (R.R. No. 8-2018,
Sec. 8).
Under R.M.C. No. 1-2018 dated January 4, 2018, income payments to partners of
general prOfessional partnership is subjectl.to 8% creditable withholding tax.
1
Estate and Trusts
Q: Define the term estate for inconietaxafjon purposes.
ANS: Estate'i is composed of all, oresqfghts and obligations including those
properties, earnings or obligations tfig-Alav,9crii;edilerefsince the opening of the
succession (VALENCIA & %WAS, iiicantGatiokkiiNt25).
Note: The status of theigStge is deterspin4d by the status of* decedent at the time of
his death. So,:n estate incomifaOyer, can be a citizeili or an alien. In the case
of a nonresident deci elenOto, aCthe kne of his deatA ivas not a citizen of the
Philippines, only th,a41:36rt.„14466 entire gross estate whicr is situ ted in the Philippines
shall be inCludepais taXAblObState,,(Se065, NIRC), .r '
...b _ .i.
Q: DiscusS thfitavliabijittof aniVate.
ANS: When srerson 0114,oins pro&rty les, the follOnn 3....ssipre payable under the
provisions of the incm
oeAanaw: P
1. Income 481 -IndNftluals (to cov_ the period beginning January to the time of
death) (NIRC,Ve424 and 25);
2.Estate incomegal'ff
,4. thsestate &Oration or judicial settlement
(NIRC, Sec. 62,(3)). fecr-214
Note: Estate income trMndelSec. 60 of the NIRC is different from the imposition of
estate tax. While the firstAg, the nature of income tax, the latter is a transfer tax
imposed on the privilege w to transfer the properties of the deceased to his heirs.
Moreover, the exemption amounting to P20,000 for estates and trusts is removed under
TRAIN Law.
I I
Q: Define thj,term trust for income taxation purposes.
ANS: A trust is a right of property, real or personal, held by one party for the benefit of
another (Guy v. Court of Appeals, G.R. No. 165849, December 10, 2007, citing
Gayondato v. Treasurer of the PHL Islands, G.R. No. L-24597, August 25, 1926).

Q: Discuss the tax liability of an estate.

ANS: A trust is taxable on:
1. Trust income to be accumulated;
2. Trust income to be distributed currently by the fiduciary to the beneficiaries;
3. IncOrne collected by a guardian of an infant which is to be held or distributed
as the court may direct; and
4. Trust in which the fiduciary may, at his discretion, either distribute or
accumulate the income (NIRC, Sec. 60).
, a

781
 Q: Is employee's trust or benefit plans exempt from income tax?
ANS: Yes. Employees' trusts or benefit plans normally provide economic assistance to
employ9es upon the occurrence of certain contingencies, particularly, old age
retirement, death, sickness, or disability. It provides security against certain hazards to
which members of the Plan may be exposed. It is an independent and additional source
of protection for the working group. It is evident that tax-exemption is likewise to be
enjoyed 'by the income of the pension trust. Otherwise, taxation of those earnings would
result in a diminution accumulated income and reduce whatever the trust beneficiaries
would receive out of the trust fund. This would run afoul of the very intendment of the
law (Cdmmissioner of Internal Revenue vs GCL Retirement Plan, G.R. No. 95022,
March 23, 1992).
1
Co-ownerships
Q: When is there co-ownership?
ANS: There is co-ownership whenever the ownership of an undivided thing or right
belongs,to different persons (CXIL,,C0 , 484)„„,„
..i,
Q: Isla co-ownership consider has a e arateitlita tity?
ANS: It depends. It 17, ) 1-
1. Not taxabj WA erit .a.are.lirettc
41. . .m-rely&tbi reservation of the co-
owned pfgp„ egt -owners,gfe liable or‘inc me their separate and
individ/61"UVierties• 717. \‘n
2. Taxab e whe he income o th,e• .,p,-ownershi is in .i stc.,$:Abs vtheco-owners in
i
busin ss-ttle by creatingara4bistered-pa ners p.ir Commissioner
of Inte IR venue G. -1Vo..1.-r934201/tay
„.% , 197

Q: Is the dislolato of thR co-ownersfiWby agr ',lent ubjec /the division of

property to cd ita ms ta ,-,://
ANS:, No. Thei- r of arte51 change or other
dispoSition cont mplatepy Hof t e tax ( IR Ruling No. 145-
98, Oct. 9, 1998kThe aCtof p wne grope to each co-owner
should not be treated as .gktea hin tore thae terminating the co-
ownersh'p by makikeach cd-4) ntifiable portion or unit of the
property (BIR Ruling N
V
2. INCOME
a. Definition and nature
Q: Define Income.
ANS: Income means all wealth that flows into the taxpayer other than as a mere return
of capital. It includes the forms of income specifically described as gains and profits
including gains derived from the sale or other disposition of capital assets (R.R. No. 02-
40, Sec. 36).
Note: It 's an arnotifit dioney coming to a person or corporation within a specified
time, whether as payment for services, interest, or profit from investment. Unless
otherwise specified, income means cash or its equivalent (Hernando Conwi v. Court of
Tax Appeals, G.R. No. 48532, August 31, 1992).

Q: Is the increasein the value of the property considered as income?

ANS: No. It is merely an unrealized increase in capital. Increase or appreciation in the
value of the property is not even an accrual of income to the taxpayer prier to the
realization of such appreciation through sale or conversion of the property (VALENCIA &
ROXAS, Income Taxation, supra at 151). .

782
 DAN RED BOOK
When income is taxable
i. Existence of income

Q: When is income considered to have been received?

ANS: Incornelis received not only when it is actually handed to a person but also when it
is merely constructively received by him (Limpan Investment Corp. v. Commissioner of
Internal Revenue, G.R. No. L-21570, July 26, 1966).

Q: Discuss the Doctrine of Constructive Receipt of Income.

ANS: Incorna'which is credited to the account of or set apart for a taxpayer and which
may be draw0 upon by him at any time is subject to tax for the year during which credit
is set apart although not then actually reduced to possession. To constitute receipt in
such sense,ifhe income must be credited to the taxpayer without any substantial
limitation or restriction as to the time, or manner of payment, or condition upon which
payment is to be made (R.R. No. 2-40, Sec. 52).
„ 445
Realization and recognition of income :
udiW4
Q: What are the requisites for irAco taxable?
ANS: The following are the requis0 e to be taxable:
1. There must be a gain orpngit
2. Th&gain or profit must rta raeca al y, or constructively; and
3. It is: notexempteOrlaw or tre from inco lanCOMmisSiOnet of Internal
Revenue v. elftp-Pine Daily -r, Inc., G.R. No. t 943, March 22, 2017).

Q: What are the consi#e sn ...2yirdete in whether some is taxable?

ANS: The;differeg.,,ansidagos are the lowing:
1. ExisAdMe of_kcbtrie— income applies on is income, gain, or
proflyirMAC4:EO, Income Ta f upra a
2. Rekation of nsome ncrease n e property is not
incOM but mere! an unre crease in c ris a o "'come is derived nor
a loss in e owns r u after the actual sale or other disposition of
the prope uu ex of its cost
3. Reaognitionof Ome — the e shall be computed upon the
ba§Ti of theiMayersann od in accordance with the
method ofibuntirfregularly employed in keeping the books of such
taxpayer; but 4cs, utamethod of accounting has been so employed, or if the
Method employe not clearly reflect the income, the computation shall be
Made in accordance with such method as in the opinion of the Commissioner
Clegrly reflects the income (NIRC, Sec. 43).
11
Cash method of accounting versus Accrual method of accounting
11
Q: What is the cash method of accounting?
ANS: Under the cash method of accounting (cash receipts and disbursements method),
income is; realized upon receipt of cash or its equivalent including those constructively
received (suCh as deposits for the taxpayer's account by customers) but not including
gifts or donations (Revenue Audit Memorandum Order No. 1-2000, Chap. II-A).
1
Q: What is the accrual method of accounting?
ANS: Under Ithe accrual basis method of accounting, income is reportable when all the
events have Occurred that fix the taxpayer's right to receive the income, and the amount
can be deterMined with reasonable accuracy. Thus, it is the right to receive income, and
not the actual receipt, that determines when to include the amount in gross income.

783
 ,

Gleanable from this notion are the following requisites of accrual method of accounting:
1.' That the right to receive the amount must be valid, unconditional, and
enforceable, i.e., not contingent upon future time;
2.44 The amount must be reasonably susceptible of accurate estimate; and
4
3. 4 There must be a reasonable expectation that the amount will be paid in due
course (Filipinas Synthetic Fiber Corp. v. Court of Appeals, G.R. Nos. 118498
& 124377, October 12, 1999).

c. Tests in determining whether income is earned for tax purposes

Q: What are the tests in determining whether income is earned for tax purposes?
ANS: The tests are the following:
1. , Realization - income is generally recognized when both of the following
conditions are met:
a. The earning process is complete or virtually complete; and
b. An exchange has taken place (Mandarin Hotels, Inc. v. Commissioner
of Internal Revepue,--C-Fease ,Alo,,,,5046, March 24, 1997).
2. Claim of Right Doctfirr -a t?xapeitgain ihoRditioned upon the presence of
a claim of right,tfillleged gain andlybIeri:c‘of a definite unconditional
obligation tviturq o repayMorarliWorkzoptertlacRevenue v. Wilcox, 286
U.S. 417, $124,Thisjea'Iso callgsthzDocTrinp ofciwn,ership, Command, or
Control ik_mmiisfogerelniern§ Rei7ellUe GV;Ato,A8t53, July 31, 1991).
3. , Econori6 ,nefit
e Test -iptate_ % thrany e onkl9benetfit to the employee
that increasediis net worth, whaOyemay h ve besn,tpi rode by which it is
4 elfectkisla able. Thisjs_alac/A Oditte,Raa rine of roopnetary Interest.
..
4. q Seve a ce Best
- - tier•Okup,tai,cal.gjo4pcom until ttrre-ts t separation from
capital of ethindkof aphandAable 2arue, hereby i s pplyipg the realization
4 or trams tation wirch world Te,s_ulnii the e eipt ro Ingo e. This is also
as h& M% rs4 er_test(Eisde&v...Mac rb'd 262 U S 89, 207-208).
._ ' ..&...—
5 4All
;All Ete,tifs'ik,
. st n\incornerqr xj.cte-pe c e, fits tef equires the fixing
of a net to ihco ,c;IN iabiy% tb--'00.1';a availability of the reasonable
sk . s,. r, .s.
l accurak dete inati rvo loTitcope- r bilityiThe amount of liability does
Ilnot hav&Jo be ete4)i'o..iLgt....10411
el st be"determ,ified with reasonable
raccuracyYgorniniAionma210ffliCi?e v. lsabe a Cultural Corp., G.R. .
'No. 172231 ebTa `12407,.: *,.•
d. Tax-free exchanges
'I 1.VIA
Q: What are tax-free exchanges
ANS: TO-free exchanges refer to those instances enumerated in Section 40(C)(2) of
the National Internal Revenue Code (NIRC) of 1997 that are not subject to Income Tax,
Capital Gains Tax, Documentary Stamp Tax and/or Value-added Tax, as the case may
be. Therelare two kinds of tax-free exchange:
1. Transfer to a controlled corporation : no gain or loss shall be recognized if
Property is transferred to a corporation by a person in exchange for stock or
unit
, of participation in such corporation of which as a result of such exchange
said person, alone or together with others, not exceeding four persons, gains
control of said corporation; and
2. Merger
1, or consolidation - no gain or loss shall be recognized if in pursuance
of a plan of merger or consolidation:
a. a corporation, which is a party to a merger or consolidation, exchanges
property solely for stock in a corporation, which is a party to the merger
or consolidation; or
b. a shareholder exchanges stock in a corporation, which is a party to the
merger or consolidation, solely for the stock of another corporation also
a party to the merger or consolidation; or

784 •
 )AN RED
•

••:: •

c. a security holder of a corporation, which is a party to the merger or

consolidation, exchanges his securities in such corporation, solely for
stock or securities in another corporation, a party to the merger or
consolidation (NIRC, Sec. 40 (C) (2)).

Q: Define "merger" or "consolidation" for purposes of exchange of property.

ANS: Merger or Consolidation shall be understood to mean:
1. The ordinary merger or consolidation; or
2. The acquisition by one corporation of all or substantially all the properties of
another corporation, solely for stock undertaken for a bona fide business
purpose and not solely for the purpose of escaping the burden of taxation
(NIRC, Sec. 40 (C)(6)(b)).

Please see discussion on II-B (3)(d)(v) (National Taxation — Gross Income (Income from
dealings in property)).

e. Situs of income taxation

Please see discussion on I-B (Gerierai' Adel• les - Inherent Limitations).

Sources of income subject to tail

Q: What are the classificatioprOf iiipiirrjp"res OSO,
ANS: As to source, incomoiay be classed as follows.
1. Gross incomek18 taxable i t,1 from sources wit t the Philippines;
2. Gross income)axdxitaxable,Oo from sources wih the Philippines; and
3. Income parr itOoliartly witut the Philippi bs NI C, Sec. 42).
:40 4,.‘av •
Income from Sburces with'', the Philippines
Q: What aretit items t treated t t a
e from sources
h
within the P ill ippines? ---
ANS: They are:
1. Interest denim front sources wi hin the Philippines, on bonds, notes, or other
--A
interest-beariu obtfgations of re ntswrporate or otherwise;
2. Dividends recArdifrom: ,
a. Domeec corp241816, an a-
b. Foreign4orporioni provided:
i. At as 50% of its gross income is from sources within the
Phili' pines; and .
ii. Such gross income must be for the 3-year period ending with
the close of the taxable year preceding the declaration of such
dividends.
Note: It is limited only in an amount which bears the same ratio
to such dividends as the gross income of the corporation for
such period derived from sources within the Philippines bears to
its gross income from all sources.
3. Compensation for labor or personal services performed in the Philippines;
4. Rentals and royalties- from property located in the Philippines or from any
interest in such property;
5. Gains, profits and income from the sale of real property located in the
Philippines; and
6. Gains, profits and income from the sale of personal property is treated as
derived entirely from sources within the country if the property was:
a. Purchased within and sold without the Philippines; or
b. Purchased without and sold within the Philippines (NIRC, Sec. 42, par.
- (A)).

785
 Note: Gain from the sale of shares of stock in a domestic corporation, shall be treated
as derived entirely from sources within the Philippines regardless of the place where the
shares were sold (N/RC, Sec. 42, par. (E)).

Income from Sources without the Philippines

Q: What are the items of gross income treated as gross income from sources
without the Philippines?
ANS: They are:
1. Interests other than those derived from sources within the Philippines (e.g.,
interest earned from deposits on banks located outside the Philippines,
interest on loans where the debtor is not a resident of the Philippines);
2. Dividends other than those derived from sources within the Philippines (e.g.,
dividends received from a foreign corporation less than 50% of the gross
income of which is from sources within the Philippines for the 3-year period
ending with the close ofnc,,.......,.
its taxable year preceding the declaration of such
dividends);
3. Compensation f r-olror o pl 'T services performed without the
Philippines; N- 1 I k
4. Rentals or rp, air f eRrIGTOtate' wifheit Philippines or from any
interest in •sru6Vp o jsid..-----...
d..--""'
5. Gains, p f" 1 ol i9cbme fror4he
5. located without the
Philippi' RC, Sec. 42,Par.0).X
AIX'
Income Partly &kb nd
IPottly-withoiltirhe-Philippi es
Q: What arefrA 1 to Is of i cc;rne;\11,
—-- eril
,e yillll cr17crmsolarces darttyiithin and partly
without the P itippi es? '.73V .. I'l
ANS: Items or g s in of allb ateb to so with or without the
Philippines shAll( Filgss ithip i'irS
\, urce without the
Philippines, blriareokas wit Tri an artly without the
Philippines (R. No. 0*40, income from the sale of
personal prope is treated a within an:/ p - artly from sources
without the Philippi s if theV o If
1. Produced, 1 holOir le wi ()Witte Philippines; or
2. Produced, in oleo i parC vith an sol v lffin the Philippines (N/RC,
Sec. 42, par. (E)

3. GROSS INCOME
a Definition
Q: Define grossincome.
ANS: Gross income means all income derived from whatever source, including but not
limited to the following:
1. Compensation for services in whatever form paid, including, but not limited to
fees, salaries, wages, commissions, and similar items; • . •
2. Gross income derived from the conduct of trade or business or the exercise of
a profession;
3. Gains derived from dealings in poperty;
• 4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and

786
 11. Partner's distributive share from the net income of the general professional
partnership (NIRC, Sec. 32, par. (A)).
Note: The definition of gross income is broad enough to include all passive income
subject to specific rates or final taxes. However, since these passive incomes are
already subject to different rates and taxed finally at source, they are no longer included
in the computation of gross income which determines taxable income (Commissioner of
Internal Revenue v. Philippine Airlines, Inc., G.R. No. 160628, October 9, 2006).
b. Concept of income from whatever source derived
Q: Discuss the concept of "income derived from whatever source."
ANS: All income not expressly excluded or exempted from the class of taxable income,
irrespective of the voluntary or involuntary action of the taxpayer in producing the
income and regardless of the source of income, is taxable (Gutierrez v. Collector of
Internal Revenue, CTA Case No. 65, August 31, 1965; Banco de Oro et al., v. Republic,
G.R. No. 198756, January 13, 2015).
.11
.
Q: Are the proceeds of stolen or e bezzled property included as part of gross
income? %

t.
ANS: Yes. Embezzled money cowtutpaa. ss income. It opined that unlawful, as well,
as lawful gain is comprehended with tbel
366 U.S. 213, May 15, 1961). It isIttAil
"gross income" (James v. United States,
ey or °per proceeds of the sale or
diSposition of stolen property qr redage Q-14itrryof,ght (US v. Lozia, 104 F.
Supp. 346, DCJDNY, 195201'
c.Gross income vs. net me vs. taxa income
, .0
Q: Compare Gross corAWs"-ra-vis ne ncome xable Income.
ANS: The followiware
Gross
Ar.,.., theerstinctions:
itt, I'
Net Income Taxable Income
Income
• -• -
All income, sp_ss irippme Pe ent items of gross income specified in this
gain, or profit •
subject to
Le ss stigito
ded ction
Co
suc
less deductions, if any, authorized for
come by this Code or other
income tax (R{ , lo 02 R as amended by TRAIN
under Sec. 04KSec. 36 Law, Sec. 31).
32(A) of the Note: The phrase "and/or personal and
NIRC. additional exemptions" is removed in the
definition pursuant to TRAIN Law.

d. Classification of income subject to tax

Q: What are the sources of income subject to tax?

ANS: The sources of income subject to tax are the following: (CF-PIPI-APRID)
1. Compensation income; . •
2. Fringe benefits;
3. Professional income;
4. Income from business;
5. Passive investment income;
6. Income from dealings in property;
7. Annuities proceeds from life insurance or other types of insurance;
8. Prizes and awards;
9. Pensions, Retirement benefits, or separation pay; and
10. Income from whatever source derived;
11. Partner's Distributive share from the net income of the general professional
partnership (NIRC, Sec. 32).

787
 Vg-sTa•W:45)::14...;;•:,fr).•‘...4..t;"••

i. Compensation income
Q: Define compensation income.
ANS: All remunerations for services performed by an employee for his employer under
an employer-employee relationship, unless excepted under the provisions of the NIRC
are considered as compensation income (R.R. No. 02-98, Sec. 2.78.1, R.R. No. 2408,
as amended).
Note: The basis upon which the remuneration is paid is immaterial in determining
whether the remuneration constitutes compensation. Thus, it may be paid on the basis
of piece-work, or a percentage of profits, and may be paid hourly, daily, weekly, monthly
or annually. Compensation may be paid in money or in some medium other than money,
as for example, stock, bond, or other forms of property (DE LEON, NIRC Annotated, p.
355).

Q: What is the test to determine whether an income is compensation or not?

ANS: The test is whether such income is received by virtue of an employer-employee
relationship (R.R. No. 02-98, S?,702:78:r""'-'..4.....,
Note: Remuneration for setvistes co sautes ico inpezation income even if the
relationship of employ 'and dnipi.oyee-doe of exisrazy longer at the time the
payment is made If i tweeti thb,,pevor4'
1 urwho...4 wptoNhe services had been
performed and the 'rid vdualiNffb pe _rsa them, d Ion asIlle employer-employee
,.a..
relationship is exi • abg 'ffi e se Toes we'reTe orme )( .R. No. 02-98, Sec.
2.78.1). 4.4 V.
P ZiA rt1]
4.1-•
Q: Are "love iftsr 11
ceive .y_pastiirsr.from_lbei Liginistry cbnt iddred
taxable comp nsdb 1r-^"4
ANS: Yes. It i subj ct to income OthlmIding ax. Ev fo of compensation
for personal s s s taxa N, reddk103333i6vit it i Y m it is paid, the
label by which it i§st sigirt 1-the-bair pon-which de ermin , or the form by
which it is rece R 'OA DAVI !OA)?

Q: When are bo uses, 3th‘' o ay a Tothb•:. benefits pa of compensation

income?
ANS: When the bo uses,. benefits exceed the threshold
amount of P90,000, t exc ss
amount 11r e,,ct Ota:(PE.A. No. 10653).
Note: The amount of ta4x er benefits is increased to
P90,000 (Old: P82,000) pursu

H. Fringe benefits

Q: What is fringe benefit?

ANS: It means any good, service or other benefit furnished or granted in cash or in kind
by an employer to an individual employee (except rank-and-file employees) (NIRC, Sec
33 (B)).

Q: What is fringe benefit tax?

ANS: The fringe benefit tax (FBT), is treated as a final income tax on the employee that
shall be withheld and paid by the employer on a calendar quarterly basis (Commissioner
of Internal Revenue v. Secretary of Justice and PAGCOR, G.R. No. 177387, November
9, 2016).

Q: Who pays the fringe benefit the tax?

ANS: The fringe benefit tax is actually due from the employee but paid by the
employer for and in behalf of the employee. The tax is additional cost to the employer.
When the employer pays the FBT in behalf of the employee, the tax becomes an
additional benefit of the employee subject thereto. Thus, the need to gross up the

788
monetary value of the fringe benefit received in computing the FBT due thereon (R.R.
No. 3-98, Sec. 2.33 (A); DE LEON, NIRC Annotated, supra at 389).

Q: Discuss the scope of FBT.

ANS: The FBT covers only the taxable fringe benefits of managerial and supervisory
employees. For purposes of FBT, R.R. No. 3-98 clarifies that taxable fringe benefits
exclude those items considered as compensation income (BANGGAWAN, Income
Taxation (2017), p. 362) [hereinafter, BANGGAWAN, Income Taxation].

Q: Who are considered as managers? Supervisors? Rank-and-file?

ANS: Managerial employees refer to those who are given powers or prerogatives to
lay down and execute management policies and/ or to hire, transfer, suspend, lay-off,
recall, discharge, assign or discipline employees.

Supervisory Employees are those who effectively recommend such managerial

actions if the exercise of such authorityjsvot merely routinary or clerical in nature but
requires the use of independent jucigmentl

Rank-and-file employees mean 4AKTRIo pes who are holding neither managerial nor
supervisory position (DIMAAMPAOg Tel& o r supra at 40).

Q: What is the tax treatment tpl;fri e iss

ANS: If the benefit givenAtIot exemp tax, and the reel is a:
1. Rank and fqlginployee-t • lue of such fringe e eft shall be considered
as part of thecoapensatisrp In me of such emv, o e‘subject to withholding
from the empO &co mpensat and to the g d tell tax rates under Sec.
24(A) of4115WIRgN
2. Man4rial ax„ dupe isey, e loyee - th, vat 4p shall not be included in
the,gs
. ea§atIanco e of suc mployeVubjed o-ta T e fringe benefit
tax anstead levied upo the ern loyer e pay (NIRC, Sec.
33). 04‘,egal• a

Q: Discuss the speciaEis trea~iient of FB

ANS: FBT on fringe beVellis paid by tl „e .but he is allowed by law to deduct
the grossed up monetary valtialaxthetringe- eriMrnished or granted to the
employee as a busineslexpeaWin determining his taxable income provided that the
final tax imposed underAtigi,f 33 has been paid (NIRC, Sec. 34, par. (A)(1(a)(i)). The
FBT is not an additional faitiffri'the employer.- He can claim the fringe benefit and the
FBT as a deductible expense from his gross income (DIMAAMPAO, supra at 40).

Q: What is the basis of the FBT?

ANS: The FBT is imposed on the grossed-up monetary value of fringe benefit furnished,
granted, or paid by the employer to the employee, except rank and file employees,
whether such employer is an individual, professional partnership, or corporation, -"Mg
regardless of whether the corporation is taxable or not, or the government and its
instrumentalities (R.R. No. 03-98, Sec. 2.33 (A)).

Q: What does the grossed-up monetary value represent?

ANS: The grossed-up monetary value (GMV) represents:
1. The whole amount of income realized by the employee which includes the net
amount of money or net monetary value of property which has been received;
and
2. The amount of FBT thereon otherwise due from the employee but paid by the
employer for and in behalf of the employee (R.R. No. 03-98, Sec. 2.33 (A)).

789
 Q: What are the taxable fringe benefits?
ANS: Fringe benefits subject to FBT are the following: (HEV-HIM-EHEL)
1. Housing;
2. Expense account;
3. Vehicle of any kind;
4. Household personnel, such as maid, driver and others;
5. Interest on loan at less than market rate to the extent of the difference
between the market rate and actual rate granted;
6. 'Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents; and
10. Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows (NIRC, Sec. 33 (B)).
Q: Discuss the FBT rates to cprrib-1;7
up yvi , rosped-up monetary value.
ANS: The rates of fringe.peffgfiqax vary del) ncling)othow the employees are taxed.
The reason is that the Tlenalto reati've6pYogie tax,:i3fIlthe employee so the rate
follows the income lion f employees an hgeinpeN121e below:
RC,
NRC, NRA- 'Special Alien Employees (SAE) and
RA, NETB Special Filipino Employees (SFE)**
NRAET

Monetary va e P XX
Divide by grqpst 65
monetary val
factor ti
c(f)

Fringe benefit tax %461 P XX

Note: ;1/4
1. Prior to 2018, the FBT was /o.
2. **Upon effectivity of the TRAIN Law, SAEs and SFEs are now subject to
graduated tax rate on their compensation income. Consequently, the FBT rate
applicable to them shall be 35% beginning January 1, 2018. Therefore, the
15% tax rate illustrated in the table shall only apply if the taxable fringe benefit
was given prior to 2018 taxable year.

Q: Discuss the valuation of fringe benefits.

ANS: If the fringe benefit is granted or furnished in:
1. Money, or is directly paid by the employer — the value is the amount
granted or paid for, •
2. Property other than money and ownership is transferred to the employee
— the value of the fringe benefit shall be equal to the fair market value of the
property. The FMV of the property is the FMV determined by the BIR
Commissioner or the FMV determined by the Provincial or City Assessor,
whichever is higher (NIRC, Sec. 6 (e)).
3. Property other than money BUT ownership is NOT transferred to the
employee (i.e. only the usufruct) — the value of fringe benefit is equal to the
depreciation value of the property (R.R. No. 03-98, Sec. 2.33 (A)).
790
Q: What are the instances when housing privilege is subject to FBT?
ANS: It may arise under any of the following:
1. Employer leases residential property for use of the employee;
2. Employer owns a residential property and assigns the same for use by the
employee;
3. Employer purchases a residential property on instalment basis and allows use
by the employee;
4. Employer purchases a residential property and transfers ownership to the
employee; or
5. Employer provides a monthly fixed amount for the employee to pay his
landlord (R.R. No. 03-98, Sec. 2.33 (B)(1)).

Q: What are the housing privileges not subject to FBT?

ANS: The following are not taxable fringe benefits:
1. Housing privileges of military officials of the AFP consisting of officials of the
Philippine Army, Philippine I\l,Aand Philippine Air Force;
Rationale: The State sh911,00Ide its soldiers with necessary quarters which
are within or accessible ;frl:Yttemilitary camp so that they can readily be on
call to meet the exigenciepAie gulitary service.
2. Housing unit which is sit at e or adjacent (i.e., the unit is located within
a maximum of 50 metetOftiali* ettr of e usiness premises) to the
premises of a business or fatiflata e°'.- -*,z , .,
3. Temporary houe-§Ifcir an ers3109ee who stays in ousing unit for three (3)
months or lee .R. No. 0348 ec. 2.33 (B)(1)).

Q: What expenses infisrrOpylfheempp ee are subject to F T?

ANS: They are: 19 116,
1. Expeefires incurt- d by the-errit3 ee, but w ich age paid by his employer
en-a tOhalthlie,pen,!:litures re duly recelptest,-pr and. gem name of the
emp o er and not iigOai bre of a personal
expensgettrifftrab to ea1516mp ee;
2. Expensespalnak the emplci ee but reimbursed by his employer except
when the ekpRnditui•es are duly i ledafor and in the name of the employer
and the exp dittlits do not ID At 03 , nature of a personal expense
attributable to said emplo;kere'Fa -,i• - - 7
3. Personal expeses
4,r 4 ii
fie employee paid for or reimbursed by the employer
whether or norArie sg e are duly receipted for in the name of the employer
(R.R. No. 03-98, c. .33 B (2)).
Note: Representation and transportation allowances which are fixed in amounts and are
regularly received by the employees as part of their monthly compensation are not
treated as taxable fringe benefits but are considered taxable compensation income
subject to regular tax rates (R.R. No. 03-98, Sec. 2.33 (B)(2)(d)).

Q: What are the instances when motor vehicles privilege is subject to FBT?
ANS: It may arise under any of the following:
1. Employer purchases vehicle in employee's name;
2. Employer provides employee cash forvehicle purchase; •
3. Employer purchases car on instalment and the ownership of which is placed in
the name of the employee;
• 4. Employer shoulders a portion of purchase price;
5. Employer owns and maintains a fleet of motor vehicles for use of business and
employees;
6. Employer leases and maintains a fleet of motor vehicles for the use of the
business and employees;
7. The use of aircraft owned and maintained by the employer; and

791
 8. The use of yacht whether owned and maintained or leased by the employer (2
CASASOLA, National Internal Revenue Code (2013), p 267-269) [hereinafter
2 CASASOLA, NIRC].

Q: Is the use of aircraft subject to FBT?

ANS: No. The use of aircraft, including helicopters owned and maintained by the
employer, shall be treated as business use and not subject to FBT (R.R. No. 03-98,
Sec. 2.33 (B)(3)(g)).

Q: Is the use of yacht subject to FBT?

ANS: Yes. The use of yacht whether owned and maintained or leased by the employer
shall be treated as taxable fringe benefit (R.R. No. 03-98, Sec. 2.33 (B)(3)(h)).
Note: The high cost of ownership of aircrafts makes it inherently prohibitive or
impractical to be for personal use. Thus, aircrafts are deemed by regulations as solely
for business use; hence, they are exempt from fringe benefit tax. Yachts, though pricey
on the other hand, generally lack aily„„sensible usiness purpose aside from being for
personal pleasure; hence, its depfeciation value is bjpct to FBT in full (BANGGAWAN,
Income Taxation, supra a 72).
.„,_,....,.......,,,,,t. ,..-
Q: Are household erson e e penses of employees bap by employer subject
to FBT?
ANS: Yes. The loXD :1 er onal e4dpe,ekRkthe e pl eelybibli 1t„ ,‘are borne by the
employer shall be trek[ as t xable ing,a)enefits:
1. Salari ( s of h seho d help, pei;d4k1 driver of he emptiWiar
2. other 540a perso a expensep i epayme t for ilomeo ner's association
dues Orba e dues etcripi : AllaiD313;"Se . 2.33 00))
Li-e--yto '
1)
Q: When is in elet,i n I a • btaine .t.t /0 emp o ,.9 from the employer subject
to FBT? :;-" If`a t',..)
ANS: If the ell Inds -I • el; toItt pl9ya ea- of ilerest a rate lower than
12%, such inter t foregone • h '. • ero' e, fferepe of t interest assumed
by the employee nd the te o I b r as taxable fri e benefit (R.R. No.
03-98, Sec. 2.33 (B),(5)).
s'cEgrkh-
Q: Are membership des' 7ppdi*to ibther.e
, xirt. bi r, by the employer for his
employee, in social an' 05.1 yr hrAginv ar organizations subject to
FBT?
ANS: Yes, these expenditures sha b-e-ta re ed as taxable fringe benefits of the
employee in full (R.R. No. 03-98, Sec. 2.33 (B)(6)). The monetary value is the amount
paid (BANGGAWAN, Income Taxation, supra at 373).

Q: What are the expenses for foreign travel which are NOT subject to FBT?
ANS: Reasonable expenses of the employee paid by the employer for the purpose of
attending business meetings and conventions are exempt:
1. Inland travel expenses such as expenses for .food, beverages and local
• transportation;
2. The cost of lodging in a hotel or similar establishmeht amounting to an
average of US $300 or less per day;
3. The cost of economy and business class airplane tickets;
4. 70% of the cost offirst-class airplane ticket (R.R. No. 3-98, Sec. 2.33 (B)(7);
DE LEON, NIRC Annotated, supra at 397).

792
Q: What are the expenses for foreign travel which are subject to FBT?
ANS: The expenses for foreign travel which are subject to FBT are the following: (30%-
LTE)
1. 30% of the cost of first-class airplane tickets;
2. Lodging cost in a hotel or similar establishment in excess of US$300 per day;
3. Travelling expenses paid by the employer for the travel of the family
members of the employee; (BANGGAWAN, Income Taxation, supra at 374)
Note: When there is no documentary evidence showing that the employee's travel -
abroad was in connection with business meetings or conventions, the Entire cost of the
ticket, including the cost of hotel accommodations and other expenses incident thereto
shouldered by the employer, shall be treated as taxable fringe benefits (R.R. No. 03-98,
Sec. 2.33 (B)(7)).
Q: Is the cost of educational assistance to the employee or his dependents
subject to FBT?
ANS: Educational assistance to the employee is generally taxable except when it is
incurred for the convenience or further 06 tof the employer's business such as:
1. Education/study of the effjpOVe 'tom directly connected with employer's trade or
business; and ".
e):.
2. There is a written contract tis employee shall remain employed with the
employer for a period of finle, tt.T yo reed uporty the parties;
Note: Educational assistance, glOnte,14-j o ziePer kits-of fie employee is generally
taxable except when thmaistance ways,provided hroug a competitive scheme
under a scholarship pffigram (R.R.A 3-98, Sec. 2.33 (B
Q: What insurance pLelni s s paidfor the employer re sLibject to FBT?
ANS: Premiums onpire—orlhealth insuran and other no -life insurance are subject to
FBT, except for a.
- 1. Cos premiums borne by emplo e °us insurance of
emp o eeg;'grid,
2. Contri utiongotith em(51cLer g, the benefi sq4o 1 %gPloyee to the SSS,
GSIS, anateiramontriblition -Arising from provisions of any existing law
(R.R. No.V-98, Sepl 2.33r(B)(1
Q: What are the non-ta able- fringe be 4e, . .As
ANS: Fringe benefitshall opiMose. owing fringe benefits:
;
1. Those which ut zed n and exempted from income tax under the NIRC;
2. Contributions of ployer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
3. Benefits given to rank and file employees, whether granted under a• collective
bargaining agreement or not;
4. De minimis benefits (NIRC, Sec. 33 (C); R.R. No. 03-98, Sec. 2.33 (C)); and
5. If required by the nature of or necessary to the trade, business or profession of
the employer;
6. If it is for the convenience or advantage of the employer;
7. Benefits received by an employee by virtue of a CBA and productivity incentive
schemes provided that the total annual monetary value received from both
CBA and productivity incentive schemes combined, does not exceed P10,000
per employee per taxable year (R.R. No. 1-2015).
Note: Exemption from FBT is not an exemption from other income taxes, unless such
benefit is also stated expressly to be exempt from other income taxes (2 CASASOLA,
NIRC, supra at 273).

793
 Q: What are de minimis benefits?
ANS: These are facilities or privileges furnished or offered by an employer to his
employees that are of relatively small value and are offered or furnished by the
employer merely as a means of promoting the health, goodwill, contentment, and
efficiency of his employees (R.R. No. 3-98, Sec. 2.33 (C)).

Q: What is the tax treatment for de minimis benefits?

ANS: The following shall be considered as de minimis benefits not subject to income tax
as well as withholding tax on compensation income of BOTH managerial and rank and
file employees: (MUM-RUM-LECO-CBA)
1. Monetized value of vacation and sick leave credits paid to government officials
and employees (no limit as to the number of credits);
2. Monetized Unused vacation leave credits of private employees NOT
EXCEEDING TEN (10) DAYS during the year (monetization of unused VL
credits in excess of ten (10) days and monetization of sick leaves even if not
exceeding 10 days are sub 9ctto4ax),,,. •
Note: Payment offfio e "A'cafign" leave credits exceeding 10
days as well as n‘meof "sik1De9.Ve, egtr ens of number of days shall be
added to "ot er-ken fi 4 •
joth-a-P9041,0,(beilingAny amount exceeding the
P90,000 cilirtg .ee—subject to basband credit ble withholding tax on
compensalioN, TR.-IT6.71E21700).
3. Medical I ow nce dep-enCents of Onus NOT EXCEEDING
P1,50 loyee per seimefir on12250 p r maRtfi;
4. Rice f P2, 00 or one sack of 50kg. ice pet* Cat amounting to not
morei ha
5. g if n clothin allbWance NOTTXbE DING .t16760 ter annum (R.R.
,000;
.\.
No. 2)
6. Actul era Benefits T` CEEILG7101000 pe annum;
7. kaun All9 AG P30 pa mob , 04
8. Employ /length of ervice or safety
achieve ent, e'fd'-!tangy' pers nal property other
than cagi or nnuar monetary value of NOT
EXCEED1 G P10, lo .61; underAn established written
plan which es not igh 'employees;
9. Gift given 4 aj sary celebrations NOT
EXCEEDING P5; R. No. 8-2012)
10. Daily meal allowanc kand night/graveyard shift NOT
EXCEEDING 25% of the basic urn wage on a per region basis (R.R. No.
3-98); and
Note: The grant of meal allowance, if not for overtime work or night/graveyard
shift, should be subject to income tax. (R.R. No. 05-2011) However, meal
allowance and lodging furnished by the employer to the employees are exempt
from tax if furnished for the "advantage or convenience" of the employer. Meal
allowance, in this particular case, should be furnished within the premises of
the employer (TABAG, Income Taxation with Special Topics in Taxation
(2018), p. 161) (hereinafter, TABAG, Income Taxation].
11. Benefits received by an employee by virtue of a CBA and productivity
incentive schemes provided that the total annual monetary value received from
both CBA and productivity incentive schemes combined, do not exceed
P10,000 per employee per taxable year (R.R. No. 1-2015).
Note: The foregoing list of de minimis benefits are exclusive. Meaning, all. other
benefits given by employers which are not included in the enumeration above shall not
be considered de minimis benefits (R.R. No. 08-2012; R.R. No. 01-2015).

794
Q: When is de minimis benefit a part of compensation income?
ANS: De minimis benefits granted by an employer shall form part of compensation
income subject to the graduated rates but only the amount in excess of the ceiling
prescribed and the same were given to rank-and-file .employees. If the same were given
to managerial and supervisory employees, the excess shall be subject to FBT (R.M.C.
No. 5-2011).
Note: The amount of de minimis benefits conforming to the ceiling of de minimis
benefits shall not be considered in determining the P90,000 ceiling of "other benefits"
excluded from the gross income under Section 32(B)(7)(e) of the Code as amended by
the TRAIN Law. On the other hand, the excess of the de minimis benefits over their
respective ceilings prescribed under this regulation shall be considered as part of other
benefits subject to tax only on the excess over the P90,000 ceiling.
IL Professional Income
Q: Define professional income.
ANS: It includes the. fees derived frqutengaging in an endeavor requiring special
training• as professional as a meansOliglihood, which includes, but is not limited to,
the fees of CPAs, doctors, lawyers;:i#400ers, and the like (RR. No. 02-98).
,ilhadit,
Q: Who is a professional incom9j: a,t5.10y,tsq
ANS: It refers to a person certified lilcglatonal bp belonging to a specific
profession by having completed reqfde , '6 67W, s el pts _ aglebnd or practice (DASCIL,
NIRC of the Philippines Wit, p. 57)1h6 einofter, DA'SOIL, IRC Annotated]. It also
refers to a person wppngages irAs.9 , e art or sport foi oney, as a means of
livelihood, rather than a:M. yobby (T4021'01Income Taxation it at 69).
t 411-2, . —of ' 1'
Q: Distinguish profsgroullincome from compensationinfonie.
1
ANS: The existwe of emp,lo9e
the fees receiAps cornp,e,
-
d
r:emizioyebelationship ifessgritiakin order to constitute
nsation inc%mat his fact isElateripl for 0.1.irposes of taxation
because there noadeVertifon allowed Apinst cotrigesi, -tio ,Trrilychrey (except for his
personal and additionmption;Awhe As allowablel efltl- Jogs:‘may be made from
(A
professional incoliteA(MARANTE0,1 1nco Tax, supra at 11j.
'9'
iv. Income from business
erL
Q: Define business inkeitie. "wow Afff11--
ANS: It arises from hNtual e .po ement in any commercial activity involving regular
sales of goods or servicese byIndividual or a corporation. The income from business,
legal or illegal, registere ntegistered, is taxable .(BANGGAWAN, Income Taxation,
supra at 219).
Q: What is the tax treatment of trade or business income?
ANS: Trade or business income shall be subject to graduated rates (5-32%) for
individuals and normal corporate income tax for corporations (30%).

v.Income from dealings in property "

Q: What are kinds of assets in taxation purpose?
ANS: The following are the kinds of assets:
1. Ordinary Assets; and
2. Capital Assets.
Q: What is the yardstick for determining whether a property is capital asset or
ordinary asset?
ANS: The yardstick for determining whether a property is capital asset or ordinary asset
is its actual use. In the determination of whether a piece of property is a capital asset or
ordinary asset, a careful examination and weighing of all circumstances revealed in
each case must be made (BIR Ruling No. DA 212-07, April 3, 2007).

• 795
 Q: What are the distinctions between Ordinary Asset and Capital Asset
ANS: The following are the distinctions between Ordinary Asset and Capital Asset

Ordinary Asset • • Capital Asset

Property held by the taxpayer used in Defined by an exclusion of all
connection with his trade or business ordinary assets
Includes the following: All real properties held by a
1. Stock in trade of a taxpayer or other real taxpayer, whether or not connected
property of a kind which would properly be with his trade or business, and
included in the inventory of the taxpayer if which are not included among the
on hand at the close of the taxable year; real properties considered as
2. Real property held by the taxpayer ordinary assets under Sec. 39(A)(1)
primarily for sale to customers in the of the Code (R.R. No. 07-2003, Sec.
ordinary course of his trade or business; 2.a).
3. Real property used in tradg..op.bu§Mgs..
(i.e., buildings and/or improxementI) Property held by the taxpayer
character which is subject td,, the allowance iprinarqfor sale to customers in the
for depreciation ,p(Ovileci
,) for .under %pi'dinauy' Gb rse of his trade or
34(F) of the Code4{,.. busioession.
)
4. Real propertyAec pir5d,e-Orbustnes of ''Prope Used in the trade or
the taxpayerfRNave 0712003, Sec. • busiliesAvO ctiaracter which is
Note: The IV exc sive. The yA-dstrick for' subject *el allowance for
determining help a pro erty...is_caPitPar.... _depreciatio Vg/Rb Sec. 39 (A)(1)).
ordinary asset,_
ordinary actual'. use,(Be
No. DA 212- 7A:17
, p 3, 200). A f 4. .4
-rn 1-3
..A!,.vaill,L9.•
i
Q: When are ha es of tucks-ITe-trte:r ,,.: as ets ahp when are they
treated as cap th s/s ts?'.6 .---i 17 3 •Ct I -
/
ANS: An equityNnvest 1 piptil orcYfdi9 sse f the investor the sale or
exchange of whiot) resul in eil ep.., caz aj, tfy,o,,,a cal)) al loss. hares of- stock like
_the other securitiekdefinedliR Sec., einc0f-thq RI5C, would be y, maty assets only to
a dealer in securitidkor a pets sii-IngihitilloOth_eptirclw. ! and sale of, or an active
trader (for his own accotintri09 ritiesja,tbe,hal ryk, tyweTer, craffatfier who holds
the shares of stock by w'ay ar attrilestmprli t Igrg,t1,7fiim would be capital assets.
When the shares held by su 4i /estor b'eqbe o hless, the loss is deemed to be a
loss from the sale or exchange o c itaeassett China Banking Corporation vs. C.A.,
G.R. No. 125508, July 19, 2000).

Q: What is the tax treatment of gains or losses from the sale or disposition of
ordinary assets?
ANS: Gains or losses from sale or other disposition of ordinary asset are subject to
graduated rates in case of an individual or normal corporate income tax in the case of a
corporation (NIRC, Secs. 22, 32, and 34).

Q: What is the tax treatment of gains or losses from the sale or disposition of
capital assets?
ANS: Under the NIRC, capital losses are deductible only up to the extent of capital
gains from dealings in capital assets other than domestic stocks and real properties.
Hence, capital gain and capital losses are offset. A net capital gain is an item 9f gross
income subject to regular income tax, except for certain cases. A net capital loss is not
an item of deduction against gross income. The law views net capital losses as
unnecessary expenses since capital assets are not used in the business or trade of the
taxpayer (BANGGAWAN, Income Taxation, supra at 393).

796
 BO
Q: Is the sale of goodwill subject to ordinary income tax?
ANS: No. The sale of goodwill is not subject to ordinary income tax since goodwill is not
an ordinary asset and is not among the exceptions under the definition of capital assets
in Section 39(A)(1) of the 1997 National Internal Revenue Code. It is subject to capital
gains tax (WM. H. Anderson v. Juan Posadas, Jr, G.R. No. 44100, September 22,
1938).
Q: Is a membership seat in the Philippine Stock Exchange considered a capital
asset?
ANS: Yes. The existence of seat connotes that the taxpayer is engaged in business. A
person who deals in securities or invests in stock market to monitor the day to day
transactions will have to maintain such seat in PSE where stocks are being traded. With
the said seat are some rights and privileges enjoyed by the member which are
intangible assets, the taxpayer may never have carried in his books (DE LEON, NIRC
Annotated, supra at 534).
Note: The gain realized by the subsequeat sale of the seat should be included in the
taxpayer's gross income (BIR Ruling NOT 151-98).
Q: What is the relevance of dete**444,hether an asset is capital or ordinary?
ANS: The relevance of the 4tinglips in the applicability of the following
provisions/limitations of the
1. Holding period under WC. q91q);V:Ratiljko,
2. Loss Limitation Ruldainder Sec.9(C); and •
3. Net Capital Losst arry-Ove(dLCO) Rule under 4,, A 39(D).
Note: Those three prOV;ioris apply • the asset involved is. a capital asset (NIRC,
Sec. 39).
„to, ;
Q: What is a hAillig perik)d•re;" :0,
ANS: It is th9agth Ol asset
f:),!ttr:.' hasgpen held by taxg.ayer. t covers the period
from the daterquisitiOpho thetd9te of sale of the p- noggat
Q: Discuss the Ryles onp Period-
ANS: The rules onVIA !Nod are as feel
1. In the casOiokan individual taXpayer, nly the following percentages of the
gain or loss recognized uponet,e-ori-e09gf of a capital asset shall be
taken into ac'egunt in Carribltinnide' altaih, net capital loss, and net
income:
a. 100% — ORA pital asset has been held for not more than twelve (12)
months (Aor(term capital gain);
b. 50% — if the capital asset has been held for more than twelve (12)
months (Long term capita! gain).
2. In case of a corporation, regardless of the holding period, 100% if the capital
gain or loss is recognized, the rule on holding period does not apply (NIRC,
Sec. 39 (8)).
3. The above rules do not apply to real property subject to 6% capital gain tax
and shares of stock of a domestic corporation not traded in the stock
exchange with a 15% rate. These are not included in the taxable income since
these are subject to final tax already. For corporations, capital gains and
losses are always 100% (INGLES, Reviewer, supra at 175).
Note: Pursuant to Section 24 (C) of NIRC as amended by TRAIN Law, the final tax rate
for net capital gains tax on the sale, barter, exchange or other disposition of shares of
stock in a domestic corporation not traded through the stock exchange is increased from
the 5/10% CGT to a flat rate of 15% CGT.
In sale of shares of stock not traded through the local stock exchange, what is
controlling is whether the shares of stock are traded in the local stock exchange and not

797
 where the actual sale happened (Del Rosario v. Commissioner of Internal Revenue,
CTA Case No. 4796, December 1, 1994).
Q: What is the loss limitation rule?
ANS: Losses from sales or exchange capital assets shall be allowed only to the extent
of the gains from such sales or exchanges. If a bank or trust company incorporated
under the laws of the Philippines, a substantial part of whose business is the receipt of
deposits, sells any bond, debenture, note, or certificate or other evidence of
indebtedness issued by any corporation (including one issued by a government or
political subdivision thereof), with interest coupons or in registered form, any loss
resulting from such sale shall not be subject to the foregoing limitation Sand shall not be
included in determining the applicability of such limitation to other losses (NIRC, Sec.
39(c))
Q: Will the non-use of ordinary assets intended for business convert such asset
into a capital asset?
ANS: Generally, no. A property,purchTs'eTfo-cfutukuse in the business, even though
this purpose is later thwartRirifi4rcumttad,ces'44-yorld4tie taxpayer's control, does not
lose its character as ag,,,oldinary,..bsset.'Ntdoes l'rmdre:Ncontinuance of the active
use of the property chdrigekits)chargrer previousljlrestablisf ed as a business property
(R.R. No. 07-03, See. 4e)). >ri' ,,,.-.,-,,
Exception: Prop9iie&611stifirras orditiOry, a!sks,lotN12;ein id in business by a
taxpayer engagdeiri Vsiness °tip- than teal ete ' sin es are automatically
converted into capital gssets pon shog,o(Voofwiri thet the 6rin ve not been used
,than two-yeart-ii;iiria-to-the , cons in I
In business fol•r-msysi a io i of the taxable
transactions intolviAgjhe propertiesl(R.R.1:No. ;..11 c. 07-:03,
..,_,. Sec.
i 3(e))
• 1•1111 , • 6.3
Q: May a property' itially-classifiget:ap-woiPital alset theLter e treated as an
ordinary asset? --I ,.1!., \.____- -- -
t‘t..... 1 ..c";)
,, . .. .._
ANS: Yes. Junsprclafive p)consisWritl ,ijeld.that Yope , k-ifila ly classified as a
capital asset miethere,after'boll•eatO sl .'atOOr asst if a combination of the
factors indubitably tendsNo sht ;k4ilAtie ctii,i g. n fustfieranclof or in the course
of the taxpayer's Trade or business , tale:o inherited real property usually gives
capital .gain or loss wen thOtigh'tilafkirseftyli lysubdividda or improved or both
to make it salable. ovev, e,',icthe..„ir
ifieed-prop7,r e 42s 'itibgalitially improved or very
actively sold or both it'ln,a.y...bictle,ated 'IT e c ,priRaTljilor sale to customers in the
ordinary course of the heirt-Nbusiik§ss (ON+ Y.' ptitzmussioner of Internal Revenue,
G.R. No. L-26284, October 8,1986).1 /4 „,
Q: Distinguish ordinary gain from capital gain.
ANS: The distinctions are the following:
Ordinary Gain Capital Gain
' I
As to Source
Ordinary gain is derived from property Capital gain is derived from property not
used in trade or business used in trade or business (whether or not
connected thereto).
As to Adjustments
Ordinary gains are not adjusted by Some types of capital gains are adjusted
the holding period by the holding period
As to Deductibility
Ordinary losses can be offset from Capital losses can only be offset from
both ordinary gains and capital gains capital gains

798
 DAN RF„4!?..
Q: Explain the concept of actual gain and presumed gain.
ANS: As a general rule, the income tax law imposes tax only when there is actual
income, gain, or profit by deducting the cost or adjusted basis of the property sold from
the amount realized (NIRC, Sec. 40, par. (A)); this is known as actual gain. However, as
an exception, where an individual or a corporation sold a real property (land or building)
classified as capital asset, the law presumes that there was a capital gain realized, and
the capital gains tax is 6% of the actual consideration or the fair market value at the time
of sale of the real property, whichever is higher. This is known as the presumed gain.
But, as an exception to the exception, the rule on presumed gain does not apply to sale
of shares of stock of a domestic corporation, not listed and sold through a stock
exchange, because there is actual gain whenever an individual or corporate taxpayer
sold shares of stock treated as capital assets (DOMONDON, National Taxation, supra at
152) Thereinafter 2 DOMONDON, Taxation].

Q: Distinguish the subject of capital gains tax on the sale of real properties by an
individual and a corporate taxpayer.
ANS: The following are the distincjjo06 een individuals and corporate taxpayers as
regards the subject of capital gainaelc.:Itii,•
Allan .-fonk% .
Taxpayer Capital Gains Taxable ..
I
. .1 tke,m7--- -c21 . OA
Citizen (Resident or Non-resident) q Ntgaga-pita) g in presumed to have been
r.-• 4. ;
(NIRC, Sec. 24 (D)(1)) „Iii' •,realized froni416—'saLe, exchange or other
44, -'' position of real ploperty located in the
, o', tlippines, classifidi ;Ncapital assets.
,f 1 k
,,A lamo•
Resident Alien, p 4V4 ThA capital gaing presumed to have been
S r ,S
(NIRC, Sec. 24(' )(1)), V ,realfzed from tpe sale, ekchange or other
— • • oli e ,114 - disp sition of _Tea!, ;c) ertv located in the
I:, '• i...,-
..6, j 1:
'NZ tgt% P pines, R- s li 1 0- as al assets.
— 1/4we'-•
NRA-ETB oNn , t in the • realizeoi trom the sale, exchange
Capital gains
Philippines 1, orther disposition of real property.
(NIRC, Sec. 25 (A (3)1
' ,,,,. —
'''.,,
NRA-NETS within the411
, jAppinee4W)'eTealWel a ad from the sale, exchange
(NIRC, Sec. 25 (B)) t # or other disposition of real property.
,-.1a.,..
Domestic Corporation '411! Gain presumed to have been realized on the
(NIRC, Sec. 27 (D)(5)) sale, exchange or other disposition of lands
and/or buildings which are not actually used
in the business of a corporation and are
treated as. capital assets.

The NIRC does not impose the 6% capital

gains tax on the realized from the sale of
machineries and equipment (SMI-Ed
Philippines Technology, lnc.v. CIR, G.R. No.
. . 175410, November 12, 2014).
.

Q: Is a labor union required to pay CGT when it sells its property?

ANS: No. Not being an individual, estate, or trust, a labor union is not required to pay
CGT when it sells its property. Any gain realized from the sale is ordinary income (NIRC,
Sec. 22(Z)), subject to income tax under Section 27 of the Tax Code (B1R Ruling No.
350, July 21, 1988).

799
 .. .*: `. . - ,;:..
,, . is,''''•••••.;;• ,•••: R i,,..,,:,,i...s.
DAN ED
(

-'.-.., ZY:,4

Q: Is the transfer of title to real property from the trustee to the beneficiary
without monetary consideration under and by virtue of the Deed of
Acknowledgment of Implied Trust and Waiver of Rights and Interest to Real
Estate Properties subject to capital gains tax?
ANS: No. There is in fact and in law no transfer of beneficial ownership since the naked
ownership of the trustee and the beneficial ownership of the beneficiary are
consolidated in the latter (BIR Ruling No. 108-98, June 29, 1998).
Q: Discuss the basis of determining the gain or loss from sale or exchange of
property.
ANS: If the property is acquired:
1. By Purchase — the basis is the cost of the property;
2. By Inheritance — the basis is the fair market price or value as of the date of
acquisition;
3. By Gift — the basis shall be the same as if it would be in the hands of the
donor or the last preceding,,9mer.J2y. whom it was not acquired by gift, except
that if such basis is.sreatgr tIlan-ithejairmKtcet value of the property at the
time of the gift, the bals shall. b0 An' fair market value for the purpose of
determining 1_,
ostk: t‘ j': v• ...,.,;:.:.' 4' '.. ‘
_,,,-
4. For less t av . amader4tiate consideratiori If mormy or money's worth —
the basis• I e -,,.aodid-bylrans
..- me kpa he.tferee
•••,„ o lhd plqperty (NIRC, Sec. 40
(B));
1\ ''.
5. Tax fro' aiia ge Iransa ror$ ..
a. /Share of stock received:by transfero r origirtalib041s less the money
b. „pt:_ei
R ad y, a_nt (fearre io
r-m
cfa: trOmeottheither p‘dprerty teceived, plus the
fainci nt trea ted ft:.'.41tfivi,ddr,#:1,otlfyeitshireholder rarid:t 'e amount of any
gain that was\recogbiZeetitih. lieexchrge; 0, .?,....1
:Viitrinds of Fpransforee Lisame as it would
be 9 Wads, f tlittrproTinerfegs-fid bptike.ja ount of the gain
rebog ze 461 eJranger i-cirqbeffrAnsfer (TRC,'S c. 40 (C)(5)).
-.4', \ c....11 i nc.• t/..'c--/ ..4,
Q: Distinguish n t capital gain iroL, ',net lcapit‘ipp. ,04'
✓
ANS: Net capital aain meals thee'...e). 'es..be:thei airs fro sales orexchanges of capital
assets over the lases froiksuc" alreriltklil c angest, Net capital loss means the
excess of the losses atkzi staVexchmaspfzetat aqelseciver the from such
sales or exchanges (NIRGh.S 37(A)(2karld ( )).4\-"
,,,,..%,.
M I
Q: What is the difference of tfibMaxAraktentrdf net capital gain from net capital
loss?
ANS: The net capital gain, except capital gains subject to final tax and percentage tax,
shall be reported in the taxpayer's income tax return and shall be subject to the
graduated income tax rates in addition to the net income from other sources. The net
capital loss cannot be deducted from the ordinary income because the loss can be
deducted only to the extent of capital gains (INGLES, Reviewer, supra at 171 and 176).
Q: What is the general rule on exchange of property?
ANS: Upon the sale or exchange of property, the entire amount of the gain or loss, as
the case may be, shall be recognized (NIRC, Sec. 40 (C)(1)).
Note: The following are the exceptions: (RMS-Not)
1. Gains are recognized but losses are not recognized in transactions between
Related parties (NIRC, Sec. 36 (B));
2. No gain or loss shall be recognized if in pursuance of a plan of Merger or
consolidation where there is an exchange solely in kind (NIRC, Sec. 40
(C)(2));
3. No gain or loss shall be recognized if property is transferred to a corporation
by a person in exchange for Stock or unit of participation of which as a result

800
 •

BOOK- .
of such exchange said person, alone or together with others not exceeding
four, gains control of said corporation (NIRC, Sec. 40 (C)(2)); and
4. Gain is recognized but loss is not recognized where the exchange is Not
solely in kind (NIRC, Sec.40 (C)(3)).

Q: Who are related taxpayers?

ANS: The following are related taxpayers:
1. Members of the same family (brothers and sisters, whether by the full or half
blood, spouse, ancestors and lineal descendants);
2. Stockholders and a corporation, when the stockholder holds more than 50% in
value of the corporation's outstanding capital stock, except in case of
distribution in liquidation;
3. Two corporations more than 50% in value of outstanding capital stock of each
of which is owned, directly or indirectly, by or for the same individual if either
one of such corporations, with respect to the taxable year of the corporation
preceding the date of the sale %exchange was a personal holding company
or a foreign personal holding#pany;
4. Grantor and fiduciary in a'hagt;t„k
5. Fiduciary of a trust andiillgyparAz'n another trust, if the same person is a
grantor with respect to ea§hairkpd
6. Fiduciary of a trust and bfirral,,,400 trust (NI C, Sec. 36 (8)).
4: ;1r ". '
Q: Define exchange solely,11(Vkind.
ANS: It is an exchang„af property vItith another property os. El no money is involved
(e.g., shares of stoclq;exchanged fOt•Fh res of stock) (2fA DOMONDON, Taxation,
supra at 306). 4e-t' A if
,,,-0' Oliwr. "1
Q: What are thern;tanaPiiihen'4the lain or loss in tie sale or exchange of
Af
property is nop,_ecogriked?
ANS: No gainiross:stel0 reCbgNzed
1. A corppraticp-..etch ispalpart o a merg plE4s jsoli•ation, exchanges
propertr Veiyafitikitock lira core oration, which is a party to the merger or
consolidakon (prof:ally forkock)"
so4
2. A sharehol8eLexcl-L anges stock trk —ration, which is a party to the merger
or consolidatiiiMOTely for the,Sto. :nolkroco • oration also a party to the
merger or coglidatio,,,ATfor
it sock ,
3. A security hItcler o a corporation, which is a party to the merger or
consolidation, el e hatg) es his securities in such corporation, solely for stock or
securities in another corporation, a party to the merger or consolidation
(security for stock); or
4. If property is transferred to a corporation by a person in exchange for stock or
unit of participation in such a corporation of which as a result of such
exchange said person, alone or together with others, not exceeding four
persons, gains control of said corporation: Provided, That stocks issued for
services shall not be considered as issued in return for property (estate
planning) (NIRC, Sec. 40 (C)(2))..
Note: Control means ownership of stocks in a corporation possessing at least
fifty-one percent (51%) of the total voting power of all classes of stocks entitled
to vote (NIRC, Sec. 40 (C)(6)(c)).
Q: What is the Net Loss Carry-Over Rule (NCLCO)?
ANS: Under the NCLCO, if any taxpayer, other than a corporation, sustains in „any
taxable year a net capital loss, such loss (in an amount not in excess of the net income
for such year) shall be treated in the succeeding taxable year as a loss from the sale or
exchange of a capital asset held for not more than 12 months (i.e., deductible in full)
(NIRC, Sec. 39 (D)).

801
 Note: This is an exception to the general rule that losses shall be deducted from the
gross income in the same taxable year in which the losses were incurred
(Commissioner of Internal Revenue v. PAL, G.R. No. 179259, September 25, 2013).

Q: Discuss the taxability of gains derived from dealings in real property situated
in the Philippines.
ANS: If the real property is:
1. Capital asset - regardless of the holding period, a final tax of 6% shall be
imposed upon capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in the Philippines
(individuals, estates and trusts) or land/building (corporations), classified as
capital assets, based on:
a. Gross selling price;
b. Current fair market value as determined by the Commissioner; or
c. Current fair market value as shown in the schedule of values of the
provincial and cityassessors, ichever is higher;
Note: Capital gainVarifiay-als be, du in„pacto de retro sales and other
forms of condi,parsal 4 U _IV t IN,
.0.:,,,,,,,,;,,„,:„,
Gains from](al s-4b h'er dispositions orteallTropertkby an individual to the
government o NanyoUts-polltraplibdivisjonkr*enPies or to government-
owned iii-rtoi trAecrcorporptickp may beNulijecto t the option of the
taxpayer, to4 6 gr duateOncohle tax ratesli or 6P06apit I gains tax (NIRC,
Sec.I 4par. D)(1) -'':: 1
2. Ordi arr,s, et - s jec g
gra ya ed rates ip case ividual or normal
corp rabin ,orne to in IfiVas 4:ifialaifibration.

Q: What is th n ur of ca I gains,stax?.-. 11,!:

:0
i
ANS: Capital g.sinri a passKe corpe, 1, j ,tp s tep..11 , g the buyer, who
generally woula‘sfidu der ge-ji fa,10fr h6LL, hilippilies, *resented by the
Department of kublid Works' R. Soriano, G.R. No. 211666,
February 25, 201B

Q: Are real prope es tags er ed-pulai nt-

rt • proprnhoo
" procebdings subject •
to capital gains tax? „ii9 Sc‘), -
ANS: Yes. The transfer e'rty thipu01- Ipr pnition proceedings is a sale or
exchange within the meaning ectiora/24r(kpe56(A) (3) of the Tax Code, and
profit from the transaction constitu es itarTain. Such capital gains is subject to
capital gains tax (Republic of the Philippines, represented by the Department of Public
Works and Highways (DPWH) v. Spouses Senando F. Salvador and Josefina R.
Salvador, G.R. No. 205428, June 7, 2017).
Note: The expropriation of property classified as capital asset is subject to CGT and
DST based on the amount of just compensation (R.M.C. No. 41-91). It is not subject to
CWT and VAT (BIR Ruling No. DA-212-07, April 03, 2007).

Q: Who is liable for capital gains tax in expropriation proceedings?

ANS: The seller is liable. It is settled that the transfer of property through expropriation
proceedings is a sale or exchange within the meaning of Secs, 24(D) and 56(A)(3) of
the NIRC, and profit from the transaction constitutes capital gain. Since capital gains tax
is a tax on passive income, it is the seller, or respondents in this case, who are liable to
shoulder the tax. Thus, as far as the government is concerned, the capital gains,tax in
expropriation proceedings remains a liability of the seller, as it is a tax on the seller's
gain from the sale of real property (Republic of the Philippines v. Spouses Salvador,
supra).

802
Q: May capital gains tax be awarded as consequential damages in expropriation
proceedings?
ANS: No. If only part of the property of the owners was expropriated, the amount of
capital gains tax cannot be awarded to the owners as consequential damages.
Consequential damages are only awarded if as a result of the expropriation, the
remaining property of the owner suffers from an impairment or decrease in value. Given
that the payment of capital gains tax on the transfer of the subject property has no effect
on the increase or decrease in value of the remaining property, it can hardly be
considered as consequential damages that may be awarded to owners (Republic of the
Philippines v. Spouses Salvador, supra).

Q: Are all capital gains realized in case of sale of real property subject to 6%
capital gains tax?
ANS: No. Capital gains presumed to have been realized from the sale or disposition of
principal residence by natural persons may be exempted from the 6% capital gains tax
subject to conditions prescribed by law, Sec. 24 (D)(2)). To be exempted, the
following requirements must be mq,(BO: 13-30-10-CP)
1. Sale or•disposition of th9col 4 al principal residence;
2. By a Citizen or resident,dltex,
3. Proceeds of which is qiilgecjil cquiring or constructing a new principal
residence within eighteene r18 lenag mon t "- from date of sale or
disposition; v
v't
4. Notify the Commissioner wi ni thirty (30)a om the date of sale or
disposition thgVuPe.h a pre,sbe return of his ntion to avail the tax
exemption;
5. Can be avale o lykinCe• eve en MR years.
6. The hiRteli I c $‘osa,,adjusted sis of his old'
e pripciA residence shall be
Car idtrover to the cost baftpf new princieal re denc-e;
7. If t e is kitilizaton, the rtion of ain L. -11u.ed to have been
realm _d shall lid so jec o api a gains ta tig:„ .4471
: ..51 V at the time of
AttA
sale, igher, spell b multiplied by a . • which the unutilized
amount b:kars e grops sel g price in order to determine the taxable
portion; and
8. Subject to release: ipon certifica .eiRD
, 0 that the proceeds of the sale
have been u zed (Esc*,Watea 3(NIR- 1,24(D); R.R. No. 17-03, Sec.
2).

Q: Discuss the taxability of dealing in shares of stock not listed and traded in the
stock exchange.
ANS: Regardless of the holding period, a final tax at the rate of fifteen percent (15%) is
imposed upon the net capital gains realized during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in a domestic corporation except
shares sold or disposed of through the stock exchange (NIRC, as amended by TRAIN
Law, Sec 27 (D)(2)).

Q: How is selling price determined?

ANS: The following rules shall apply in determining the selling price:
1. In the case of cash sale — the selling price shall be the total consideration per
deed of sale;
2. If the total consideration is partly in money and in kind — the selling price
shall be the sum of money and the fair market value of the property received.;
3. In the case of exchange — the selling price shall be the fair market value of
the property received.
4. 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

803
 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 the NIRC (R.R. No. 06-08, Sec.
7 (c)).

Q: Discuss the taxability of dealing in shares of stock listed and traded in the
stock exchange.
ANS: Every sale, barter, exchange, or other disposition of shares of stock listed through
a local stock exchange, other than the sale of a dealer in securities, shall be subject to:
1. A stock transaction tax of % of 1%;
2. Based on the gross selling price or gross value in money of the shares (R.R.
No. 06-08, Sec. 5).
Note: If the sale is made by a dealer in securities, the resulting gain or loss is
considered as ordinary gain subject to graduated rates (20%-35%) for individual and
normal corporate income tax (30%) fgr,corpdratipns (Sec. 127, NIRC).

The term 'dealer in secujitrie means rc t df aocis.s or securities, whether an

individual, partnershippiorebrith-art,esta6sItedprilafe of business, regularly
engaged in the purctfiseAsiotift. ties and the resale4hgieofV,customers; that is, one
who, as a mercha Arbi§Obu • es-ard7Fgells*tfterrho,di)stor4rs with a view to the
gains and profits erived-itherW)m,(N/RC,

vi Pass/ye In income
i hpLo 2E,1
CO
.

Q: Define pas .
ANS: Passive cy_mitir ' tive involvement
of the taxpaye ocess YeAN6GA axabo supra at 99).

Q: What is the
ANS: Passive inpome m y b a:•••ff
1. Subjec d
, di e received by a domestic
corpora(' tion u der Sec. 28(B)(1) of
NIRC); or
2. Subject to int tai
(-Mr t m Pte'Ign currency bank deposits
ntamaggm ro
by a resident citi el Sec 4 ,Eyea
,,HRO1),

Q: What are the sources of passiVe,income..subject to final tax?

ANS: The following are the sources of passive income subject to final tax: (DRIP)
1. Dividends;
2. Royalties;
3. Interests; and
4. Prizes, awards and winnings.
Note: They are not added to other income in the determination of ordinary income tax
liability (NIRC, Sec. 24).

Q: Define dividend income.

ANS: It refers to any distribution made by a corporation to its shareholders out of its
earnings or profits and payable to its shareholders, whether in money or other property
(NIRC, Sec. 73. (A)).

Q: When is dividend income subject to tax? •

ANS: Dividend income is taxable at the time of their declaration by the corporation, and
not at the time of actual payment of dividends, since dividend income is taxable,
whether actually or constructively received (MAMALATEO, Income Tax, supra at 213).

804
 Q: Are stock dividends taxable?
ANS: The general rule is that stock dividends are not taxable (applying the Severance
Test).
Exception: Cancellation or redemption of shares of stock issued as dividends, the
amount distributed in redemption or cancellation shall be considered taxable income
(NIRC, Sec. 73 (B)).
Note: For the exempting clause to apply, it is indispensable that: (RCSE)
1. there is Redemption or Cancellation;
2. the transaction involves Stock dividends and
3. the time and manner of the transaction makes it Essentially equivalent to a
distribution of taxable dividends. Of these, the most important is the third
(Commissioner of Internal Revenue v. The Court of Appeals, G.R. No. 108576,
January 20, 1999).

Q: Does reclassification/exchange of shares give rise to a taxable event?

ANS: No. Neither the reclassification nowchange per se, yields realize income for tax
purposes. The exchange of shares, Op more, produces no realized income to the
subscriber. There is only a modifiqkttn,:plkhe subscribers' rights and privileges - which
is not a flow of wealth for tax purrOpirO:Apissioner of Internal Revenue v. The Court
of Appeals, G.R. No. 108576, Jad0:401999)
., -
*44.,
Q: Discuss how dividends rveived'apittia'donrekeorPOration is taxed.
ANS: The final tax on diy,idear receivefis ixed at:
1. 10% — cashAvitlior proper y, j Bends, actually of O structively received by
citizens andtEepident ali9Ps' (r cluding the sh9re o an individual in the
distributableigt #1.021ne after t of a taxablea hip of which he is a
partnedpIRC, ST4g4 (B)(2)); ib c,
2. 20°/ t7 andlor properthdi ends, actuapi or ctively received by
pollatiCler6aliak engaged in de or b sidessE tpAtg-the share of an
individual in the distriburghlp ne ncome a tOble partnership of
which 17.0_4140 (1\110„ Se 5 (A)(2));
3. 25% --calrgfiaialprope d* ends, actually or constructively received by
non-resident p,lienskot engaged tradmr business (NIRC, Sec. 25, par. (B));
r:"
4. Exempt — Twifk'd by do s7-• -anth resident foreign corporation
(intercorporatnividensK • ' ,i4;,ii.
,„ ••:,' . ,k
5. 15% — receivrd by nonresident foreign corporation, provided that the country
in which the nonresident foreign corporation is domiciled, shall allow a credit
against the tax dtieffrOm the nonresident foreign corporation taxes deemed to
have been paid in the Philippines equivalent to fifteen percent (15%), which
represents the difference between the regular income tax of thirty percent
(30%) and the fifteen percent (15%) tax on dividends (Tax Sparing Rule)
(NIRC, Sec. 28 (B)(5)(b)).
Note: A principal defect of the tax credit system is when low tax rates or special tax
concessions are granted in a country for the obvious reason of encouraging foreign
investments. For instance, if the usual tax rate is 35 percent but a concession rate
accrues to the country of the investor rather than to the investor himself. To obviate this,
a tax sparing provision may be stipulated. With tax sparing, taxes exempted or reduced
are considered as having been fully paid (CIR v. Procter & Gamble Philippine
Manufacturing Corporation, G.R. No. L-66838, December 2, 1991). •
•
Q: Discuss how dividends received from a foreign corporation is taxed.
ANS: If dividends declared by a foreign corporation are received by a resident citizen
and domestic corporation, it is subject to regular income tax and normal corporate
income tax respectively. If such dividends are received by a non-resident citizen, alien
and foreign corporation, it is not subject to tax since only resident citizens and domestic

805
 corporations are subject to tax on income derived from sources within and without the
Philippines (NIRC, Sec. 23).
Note: Dividends received from a foreign corporation are considered as derived from
sources within the Philippines if at least fifty percent (50%) of the gross income of such
foreign corporation for the three-year period ending with the close of its taxable year
preceding the declaration of such dividends or for such part of such period as the
corporation has been in existence) was derived from sources within the Philippines
(NIRC, Sec. 42 (A)(2)(b)).

Q: Goodyear Philippines ("Goodyear") increased its Authorized Capital Stock

from P400M (divided to 4M shares with par value of P100) to P1.73B (divided to
4M common shares and 13.3M preferred shares with par value of P100 each).
Consequently, all the preferred shares were subscribed by Goodyear Tire and
Rubber Company ("GTRC"), a foreign company registered in the US. Thereafter,
Goodyear's Board of Directors authorized the redemption of GTRC's 3.72M worth
of preferred shares at the redemplign,..pric.e4 P372M representing the aggregate
par value and P97M repr".serfting 0:1-.ukipaid dividends. Is the gain
derived by GTRC subjestito 151%,fina W th ohliq6Tpx47WT") on dividends?
ANS: No. The term di1idinli ny ibufiont tpaa‘by a corporation to its
shareholders out ofoitfeeamin s,d r profits and pa beloylIkareholders, whether in
one or in other pr pe'rtydo f-ttfe—rolegoing the hays therefore that the
redemption price 94,1e
§e' fin the arurOf fil..97,73 314 etyed by GTRC could
not be treated s aZhd ulat d dividendein 44-ears at d beisubjected to 15%
FWT. Verily, reds"ponde is A S covering:44 . years 2003 to/2 0 ow that it did not
have unrestric dffita ned e nings, and fact, operated in of deficit. Thus,
.1
absent the a it bill of u resth-6 egAr tain-e&earn ngs, th of directors of
respondent h ower to issuddll.• '43 om t's ne mal Revenue v.
Goodyear Phill nc. r" No. 21\6;30,6tugust 3 a 6).

Q: What are di ..6 e •,,,s8 in morne,texatto t/

)'s
ANS: Disguised ividen s are1 to inestic corporation,
which is a subs! 'ary of latter ostensibly for
services rendered y bthe
last tarth9rfo re disproportionately
larger than the actua alue of h e, the amount over and
above the true value o s a dividend and shall be
subjected to the correspo dwIta rced gross income, or such
other preferential rate as may corresponding Tax Treaty. An
example is Royalty payments under a co ng licensing agreement.

Q: Define royalty income.

ANS: It is the payment for the use and exhaustion of property such as earnings from
copyrights, patents, trademarks, formulas, and natural resources under lease. It covers
both payments made:
1. Under a license; and
2. Compensation which a person would be obliged to pay for fraudulently copying
or infringing the right.
Note: Royaltied must be derived from sources within the Philippines to be considered as
passive income (Sec. 42(A)(2), NIRC).

Q: What is the tax treatment of royalty income?

ANS: Royalty income derived from the sale of royalty on a regular basis for a
consideration is considered as an active business income subject to the normal
corporate income tax. When a person pays royalty to another for the use of its
intellectual property, such royalty is passive income. of the owner thereof subjeCt to final
tax (MAMALATEO, Income Tax, supra at 143).

806
 Q: What are the tax rates imposed on royalty income subject to final tax?
ANS: Royalty income subject to final tax is taxed as follows:
1. In general - 20%;
2. Derived from books, other literary works or musical compositions - 10%
(NIRC, Secs. 24-25).
Note: In all instances above, for non-resident alien not engaged in business, rate is
25%; while for domestic and resident foreign corporation, rate is 20% and 30% for
nonresident foreign'corporation (NIRC, Secs. 27-28).
Q: What are the conditions for interest income to be treated as passive income?
ANS: Interest income must be:
1. Derived from sources within the Philippines;
2. Earned by an individual citizen, resident alien individual, or non-resident alien
individual engaged in trade or business in the Philippines or earned by a
domestic corporation or resident foreign corporation; and
3. Derived from any currency 44 deposit and yield or any other monetary
benefit from deposit substjtpte04nd from trust funds and similar arrangements
(NIRC, Sec. 42 (B)(1)). Afte1 f ./ 1
Aitg •'.
Q: What are the different tax trdirriqts interest incomes?

r,
ANS: Interest income derived frorrAkto._ Withip,the Philippi es may be subject to final
tax or exempt. Interest income ,griv,e0diperazitpo.1 e Philippines are subject
to the graduated rates (for„ ''sident citizens) or normaitt p rate income tax rate (for
domestic corporations),7
Apil
Note: To determine if i erect incomalisAdome within or incg ewithout, determine first
the residence of the detoo.S,r rceris wit in if debtor is siqant of the Philippines
(NIRC, Sec. 42 (A .;;. ‘
, 6.
Q: How is th on if in,comesuvct to final fax determi ed?
ANS: Interestcomet4re • to fihal tax istaxed as MI
Pill
1. From4vy cvg n ba eposi yield, or an netary benefit from
deposits• bs i es nd froth trus nds and similar arrangements derived from
sources vtRin the ,ilippirre - 20 ;
2. From long to deposit (LTD) or nt in the form of savings, common or
individual trv. Ms, substiL, p, r anagement accounts, and-
_ other invest BntsY. evi•ertgalycrtificates in suc form prescribed by BSP -
exempt;
Note: In case i&-termination before the 5th year, a final tax shall be
imposed on the entire income, whose holding period was:
a. 4 years to less than 5 years - 5%;
b. 3 to less than 4 years - 12%;
c.- less than 3 years - 20%.
3. From foreign currency deposit units, except NRC - 7.5% (now 15%) (R.R. No.
14-2012).
Note: Under the TRAIN Law, the rate of final tax on interest income received by resident
individual taxpayer under the expanded foreign currency deposit system increased from
7.5% to 15% final tax (NIRC, as amended by TRAIN Law, Sec. 24(B)(1)).
Q: What are deposit substitutes?
ANS: Under Section 22(Y) of the NIRC, the term 'deposit substitutes' shall mean an
alternative form of obtaining funds from the public (the term 'public' means borrowing
from twenty (20) or more. individual or corporate lenders at any one time) other
than deposits, through the issuance, endorsement, or acceptance of debt instruments
for the borrower's own account, for the purpose of relending or purchasing of
receivables and other obligations, or financing their own needs or the needs of their
agent or dealer. Congress specifically defined "public" to mean "twenty (20) or more

807
 individual or corporate lenders at any one time." Hence, the number of lenders is
determinative of whether a debt instrument should be considered a deposit substitute
and consequently subject to the 20% final withholding tax. Thus, a BIR ruling which
states that all government bonds are deposit substitutes regardless of the number of
lenders is not valid because it completely disregards the "20 or more lender rule" found
under Sec. 22(Y) of the NIRC (Banco De Oro v. Republic of the Philippines, G.R. No.
198756, January 13, 2015).

Q: What is the tax implication if the debt instruments qualify as deposit

substitutes?
ANS: If the bonds are considered deposit substitutes (20 or more lenders), the interest
income is generally subject to the 20% Final Withholding Tax. If the bonds are not
considered deposit substitutes (19 or less lenders), the interest income forms part of
gross income and is subject to the regular income tax rates (Banco De Oro v. Republic
of the Philippines, G.R. No. 198756, January 13, 2015).
Q: What are the conditions that,shou d fig'ipsentto enjoy income tax exemption
of interest income derive cfriiiiilong tprni diepCrsitX1111 or investment?
ANS: The following are e-co diticins fort%comeVax'exemptign: (DISB-5-DIET)
. • s ..--- --..
1. The Deosijo g oils an inilliTaDalkcitizen
.,., (Rsigent or non-resident) or
resident lie -residentliert.44gaged .iliWade or business in the
Philippi rdirporati4; Th. ."\— "I\
2. The L entsirbertgjeatk shoikd beN'uliderri the name of the
t
lndivi nder the name of the corporateo o jc bank or the trust
depa cti hit of tile•bank; ' .\". '
3. The L vestmbntseu ,stbeno:thoAprm c f Savin b-fdtirrron or individual
I
trust unds• eposit ubsti itas,llinveMent rpanager eQ ounts and other
inves nts vi en d by cute 666'6 in suc f orrq pre,scrib by the BSP;
4. The TD *riv 5 &issued
7,-;,t1;
an bAgly nd not by other
finanA s ' tio i ,
5. The LTsD or in stn) eg t ere of not less than five ()
years;
6. The LT or inveqme e—i m ations gfi P10,000 and other
denomina ns as col b- eiabala P.
7. Only the Int rtst4r1I-pV:ro infrestme certificates are covered by
the income taxbxe 1.19 7
8. Income tax gxeml3tio does n otteincome such as gains from
trading or foreign exchan ---
9. The LTD or investments should not be :terminated by the investor before the
5th year, otherwise it shall be subjected to the graduated rates of 5%, 12%, or
20% on interest income earnings (R.M.C. No. 18-2011).
Q: Does the 20% withholding tax on passive interest income on deposits apply to
cooperatives?
ANS: No. Under the NIRC, interest from any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar
arrangements is subject to a 20% Final Withholding Tax (NIRC, Sec. 24(B)(1)). This
provision applies only to interest paid by banks and does not cover interest paid by
cooperatives. Moreover, members' deposits with the cooperatives are not currency bank
deposits nor deposit substitutes. Thus, Interest of members' savings and time deposits
with duly registered cooperatives are not subject to income and withholding tax. The
legislative intent under R.A. No. 6938 or the Cooperative Code of the Philippin'es is to
give cooperatives a preferential tax treatment and tax exemption. This tax exemption
should be construed to extend to members of cooperatives (Castillo, Dumaguete
Cathedral Credit Cooperative v. Commissioner of Internal Revenue, G.R. No. 182722,
January 22, 2010).

808
 Q: Define rental income.
ANS: It refers to the amount or compensation paid for the use or enjoyment of a thing or
a right and implies a fixed sum or property amounting to a fixed sum to be paid at a
stated time for the use of the property (MAMALATEO, Income Tax, supra at 231).

Q: What is the tax treatment of income received from lease of property?

ANS: The following is the tax treatment of income received from lease of property:

Type of Rental
Income Taxpayer Tax Rate •

' RC, NRC, RA, NRA-ETB (NIRC, Sec. Normal graduated

32(5); Sec. 42(A)(4)). income tax rates
. DC and RFC (NIRC, Sec. 32(5); Sec. Regular corporate
42(A)(4)). income tax rate
Rental income 11====11111 FWT of 25%
on prop y
N RFC (N/Regart4.98(B)) FWT of 30%
locate d in
ert
the '4 • l„*Mg .
Philippines NRFC -groa • ir ' elease and ch rter FWT of 4.5%
paid to 4T ., 4ei
fees of jgreign esqb , 'C 9c.
28(Byp
.... j .t . A
-01:'
. Alm 4
RF9' -gross rpm s, lease, and chartP FWT of 7.5%
ees of .*,=aircraft, machineries, /a
oequiorp„,c, .R.28(8)(4)). /
g.e.0,, k eys
Rental income and DC (NIR Sec. 246)(1)( ; Normal income tax
on property Iz'Se_ ,2,-g(ANpc. 32 Sec. 42PIAM:VW
. .i.kg .....sio
located
outside the k.We,,. `"r " '
...RA, NR,A-E n% , NRA-NETB, RFC, Not subject to
Philippines . CNRFIN/RD, Se 24(A)(1)(b); Sec. income tax
paid to 8 ALO ;Sec. 32( ' -4P-CP 4)).
r4-'

Q: What is the tax trea ent easehold improvements made by the lessee?
ANS: When the lessee erectedsor built permanent improvements in the leased property
which will become the property of the lessor upon the expiration of the lease contract,
the value of the improvements should be reported as income of the lessor (R.R. No. 02-
40, Sec. 49).
Note: No income accrues to the lessor if the improvements are subject to removal by
tb.e_lessee (DIZON, Outline in Taxation (2006)) [hereinafter, DIZON, Taxation).

Q: What are the methods of reporting income from improvements made by the
lessee?
ANS: In reporting income from improvements made by the lessee, the lessor may use
any of the following methods:
1. Outright Method — income is recognized at the time when such buildings or
improvements are completed at fair market value;
2. Spread-out method — the lessor spreads over the life (or remaining period) pf
the lease, the estimated depreciated value of such buildings or improvements
at the termination of the lease and report as income for each year of the lease,
an aliquot part thereof. This applies when a building is erected by a lessee in
the leased premises in the pursuance of an agreement with the lessor that the

809
 building becomes the property of the lessor at the end of the lease (R.R. No.
02-40, Sec. 49).

Q: What is the tax treatment of advance rental paid by the lessee?

ANS: Prepaid or advance rental is taxable income to the lessor in the year received, if
so received under a claim of right and without restriction as to its use, and regardless of
method of accounting employed. Security deposit applied to the rental of the terminal
month or period of contract must be recognized as income at the time it is applied
(CASASOLA, NIRC, supra at 221-222).
Note: If the security deposit is to ensure contract compliance (security deposit with
acceleration clause), it is not income to the lessor until the lessee violates any provision
of the contract (CASASOLA, NIRC, supra at 221-222).

vii. Annuities, proceeds from life insurance or other types of insurance

Q: What is annuity?
ANS: It refers to the periodic installmeDy'rdyrnents.a income or pension by insurance
companies during the life ol,„a,pe son odorI ntZbcttixed period of time, whichever
is longer, in considers on apltal pal IDA isNaid annually, monthly or
periodically, computedPirpal t e modfirraiaTead, btit,nbt e essarily for life (Peralta
V. Auditor General, e 80, - A b.29,4947

Q: What is the t a ent or th .prodeci:s7,froZInn "ti r nsurance?

ANS: The porti 1.1 of t pro eds r pre tirifrtetum of pr miumks aid is not taxable
(return of cape hile that I.' erest m unts in excess of
premiums pai .e r on ca. ital) te, taxg le,More t e tota prremi En returns exceed
the aggregate, rem s paid the e'c billillpfi Ili in uded ii t4i1
t r ss income (R.R.
Er
No. 02-40, Seg. kg. \IMO`
1 -..4
Please see di stn I ability pf needs .-/rfe r s n e and returns of
premiums from u ont 4 der* t9( o ).
Prizes and aBvards
Q: What is the mArting of rize 4lctRaigkp rpses o ncome taxation?
ANS: Prizes refers toIllose ptiRed, s a resu , filer innings are products of
chance or luck (DE LEO Nl nnotte i fy1„) It refers to the amount of
money in cash or in kind re by qa r\t ougff luck. Prizes and awards are
generally taxable except if spe'bificalLlation under the exclusions from the
computation of gross income under Sec. 32(B) of the NIRC.
Q: What prizes and winning are subject to final tax?
ANS: The following prizes and winnings are subject to final tax:
1. Prizes derived from sources within the Philippines by an individual amounting
to more than P10,000. Such prizes are taxed on a per transaction basis;
. 2. Other winnings (except winnings amounting to (P10,000) or less from
Philippine Charity. Sweepstakes and Lotto which shall be exempt), derived
from sources within the Philippines;
3. Philippine Charity Sweepstakes and Lotto winnings in excess of P10,000 shall
be subject to the 20% final tax (NIRC as amended by TRAIN Law, Sec. 24
(E)(1)).
Q: What prizes and winning shall be included in gross income to be taxed at
regular rates?
ANS: The following prizes and winnings shall be included to determine gross income:
1. Prizes derived from sources within the Philippines by an individual amounting
to P10,000 or less (NIRC, Sec. 24(A)(1)(b));

810
 2. Prizes and winnings from sources without the Philippines by a resident citizen
individual are included in the gross income. In other winnings, there is no
threshold amount (NIRC, Sec. 24 (A)(1)(a)); and
3. Prizes and winnings of corporations from whatever source are not subject final
tax but included as part of their gross income (NIRC, Sec. 24 (B)(1)).

Q. What prizes are excluded from gross income?

ANS: The following are excluded from gross income:
1. Prizes and awards made primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic achievement but only if:
a. The recipient was selected without any action on his part to enter the
contest or proceeding; and
b. The recipient is not required to render substantial future services as a
condition to receiving the prize or award; and
2. All prizes and awards granted to athletes in local and international sports
competitions and tournaments. hether held in the Philippines or abroad and
sanctioned by their nationali'd associations (NIRC, Sec. 32(B)(7)(d-e)).

ix. Pensions retirement benefit-se ar • • • on • a

• Vi r
Q: What is pension in general? :;-0 *
ANS: It refers to the amount ocinorf:00, eceiv Mum sreor on staggered basis in
consideration of servicesooldered -Or after giAn !Waal reaches the age of
retirement (Peralta v. Alai' General,p fi iNo. L-8480, Marc 9, 1957).
0
it 41..
Q: What is the tax treatment ott pensiorT
ANS: Pensions, rgrefeenaRefits, gratu es are generally tixab e to the extent of the
amount receiveo0P6Xcept if4ttietdis ki,, BIR proved penpon plan d the requisites for
exemption haOeteen rittr(NIRCSec.' 32 B (6)).
tttr .gh <,ti. •
'1W
Q: What is the 'ax trei_atmla of separab pay?
ANS: Separation• aaetyk9c may At b axable, depending on the voluntariness or
'4i11,,,,
l
involuntariness of t • e da.uselk sepdratio NIRC, Sec. 32 (B)(6)(b)). It is taxable when
voluntarily availed of. IVphall not be taxabl to (VALENCIA & ROXAS, Income
Taxation, supra at 210): 4-
x. /ncome from anysource
Q: Discuss income from n, --source whatever.
ANS: It embraces all income not expressly exempted within the class of taxable income
under the law, irrespective of the voluntary or involuntary action of the taxpayer in
producing the gains, and whether derived from legal or illegal sources (2 DOMONDON,
Taxation, supra at 185).

Q: What is the tax treatment of cancellation or forgiveness of indebtedness?

ANS: The cancellation or forgiveness of indebtedness may amount to a payment of
income, a gift, or a capital transaction, depending upon the circumstances:
1. Taxable Income — if an individual performs services to a creditor who, in
consideration thereof, cancels the debt to the extent of that amount;
2. Gift — if a creditor merely desires to benefit a creditor and without any
consideration therefore cancels the debt; the same need not be included in the
latter's income•because it is an exclusion under Sec. 32(B); or
3. Capital transaction — if the corporation forgives the debt of its stockholdeib
which has the effect of an indirect dividend (R.R. 02-40, Sec. 50).

811
 BO(
Q: Is just compensation received from the expropriation of property taxable?
ANS: Yes. The compensation or income derived from the expropriation of property
located in the Philippines is an income from sources within the Philippines and subject
to the taxing jurisdiction of the place. The acquisition by the Government of private
properties through the exercise of the power of eminent domain, said properties being
justly compensated, is embraced within the meaning of the term "sale" or "disposition of
property" (Gutierrez v. Court of Tax Appeals, G.R. Nos. L-9738 & L-9771, May 31,
1957).

Q: Are damages received considered taxable income?

ANS: Damages may or may not be considered taxable income depending on the nature
of damages. Compensation for loss of income and exemplary damages are taxable.
Moral damages, reimbursement for hospital bills, return of capital are not taxable (DE
LEON, NIRC Annotated, supra at 120).

Q: Define bad debts. ,„,..,.............0„,4

ANS: Bad debts refer to thow166t-S requltipg ltorirthe worthlessness or uncollectibility,
in whole or in part, of am4punts oke, the taxpaeWbYlot ers arising from money lent or
from uncollectible amountd
e --%aln'co e,trorn.gapds -51..òld or se ices rendered (R.R. No.
05-99, Sec. 2 (a)). / I,', ... - 4.0k4
e
1 V,o,"'''-m"7:-.".—''''''•,..
Q: When is the rico re Hof ccounts piviiiously wItoe oV.taxable?
ANS: it is taxa*w 1w
the r coven,/ of Ab0 X- - is clover
debts dg r th\Tax Benefit Rule;
otherwise, the r covery is not axable (Nika%Sec. 34(e) 1)).
k• li
(Jr)
Q: Discuss th amBenefit uleKr— ,is Iii 4<7,1
ANS: The rei ®very
lk 4f bad debts prreviNtrfipllowed s a depctior in the preceding
year or years Rak inc;112A1 as patt?of:file taxpa erP4Aitigs inco e in the year of
such recovery o,the-atentrOt income tax refit a}d delibctin (R.R. No. 05-99).
cz,l 4.fix ,
e. Exclusions and/ exemptionS:Z 5, IN
\ \ ...
Q: Define exclusItons fromoro§s 4,, corne,_—_,
ANS: It means incto'Te receiveitot",_
63irge. stota able income because it is
exempted by law or tit ty DEISQUE...4randir ted, teat 361).

L Rationale -YOir I, \
. `*•!.t., 1
Q: What is the rationale fOr diclusibris.
ANS: Some receipts are excluded from gross income because:
1. They are not income, gain or profit.
Examples: Life insurance proceeds paid to the heirs or beneficiaries upon the
death of the insured and damages received on .account of personal injuries or
sickness; • •
2. They represent return of capital. _ .. . .
Example: Amount received by the insured as return of premiums;
3. They are subject to another kind of internal revenue tax.
Examples: Gifts, bequests and devises. They are subject to donor's tax and
estate tax;
4. They are income, gain, or profits which are expressly exempt from income tax
under the constitution, tax treaty, NIRC, or general or special law.
Examples: Retirement benefits received under R.A. No. 7641, income, derived
by foreign governments and GSIS, SSS, or other contributions (MAMALATEO,
Income Tax, supra at 150).

812
 •

ii. Taxpayers who may avail

Q: Who may avail of the exclusions?
ANS: All kinds of taxpayers, whether citizens or aliens, and whether residents or non-
residents may avail of the exclusions.

Distinguished from deductions and tax credits

Q: Distinguish exclusions from deductions.

ANS: The distinctions are the following:
1. Exclusions refer to the flow of wealth to the taxpayer which is not treated as
part of gross income due to its exemption by law or because it does not come
within the definition of income; deductions are the amounts which the law
allows to be subtracted from gross income in order to arrive at net income;
2. Exclusions pertain to the computation of gross income; deductions pertain to
the computation of taxable income; and
3. Exclusions are something received or earned by the taxpayer but which do not
form part of gross income,;00clions are something spent or paid in earning
gross income (MAMALATE ,nifocne Tax, supra at 257).
M -
Q: Distinguish exclusions. . fromiLi O
Al
. rAck
ANS: Exclusion is an amount recWiv,e1V .p,e,or gain of,the taxpayer but does not
form part of the gross income; ta'ic crpLit'V,nAtionAmeresenting tax previously paid
which may be deducted from0 present tax liability fOs'afri e a the tax still due.

Exclusions under the Constitution

Please see discusti .' I Pnociples of Tax

• irojIAGe% era
to on-stock, non-profit
educational instituffans unaplag:

Exclusions uniote-Vthe.NIRC
Q: What are the,exclysiqns4from gLoss income unde fide Ete
ielillowingfrgre e eluded from gross income: (PIG-CTRM)
ANS: Under the M 0,-41
1. Proceeds ife inskancepoliciejl
2. Amounts received Insured as, eium paid;
3. Value of propsacquire;:l at visor descent;
4. Compensation'or injuriO, or sickness;
5. Income exempt ugedsahe tax Treaty;
6. Retirement bene s4ensions, gratuities, etc.; and
7. Miscellaneous items:
a. Income derived by foreign government
b. Income derived by the government or its political subdivisions
c. Prizes and awards
d. Prizes and awards in sports competition
e. 13th month pay and other benefits
f. GSIS, SSS, Medicare and other contributions
g. Gains from sale of bonds, debentures or other certificate of
indebtedness with a maturity of more than five (5) years
h. Gains from redemption of shares in mutual funds (NIRC, Sec. 32, par.
(B))•
Proceedsof Life Insurance Policies

Q: What are the conditions for exclusion from gross income of the recipient of life
insurance proceeds?
ANS: The proceeds of life insurance policies must be: (D-FIB-SO)
1. Paid by reason of the Death of the insured;

813
 2. To his Heirs or Beneficiaries; and
3. Whether in a Single sum or Otherwise (NIRC, Sec. 32, par. (B)(1)).
Note: Payments for reasons other than death are subject to tax to the extent of the
excess of the premiums paid. If there are any policy loans (borrowings made on the
policy), these are to be considered as advances deductible from the life insurance
proceeds received upon death (2 DOMONDON, Taxation, supra at 191).

Q: What is the rationale for the exclusion?

ANS: They partake more of indemnity or compensation rather than gain to the recipient.
Life insurance proceeds serve the same purpose as non-taxable inheritance (2
DOMONDON, Taxation, supra at 192).

Q; What is the tax treatment of interests paid on life insurance proceeds?

ANS: If the amount of life insurance proceeds is held by the insurer under an agreement
to pay interest thereon, the interest payments shall be included in the gross income
(NIRC, Sec. 32, par. (B)(1)). .--"—'7,.
Note: Interest do not form pa ,ortne in emnItyput drmarnings or income from the use
of capital (i.e., the insurance pixeed icy ricIN ken) which are taxable (2
DOMONDON, Taxatioyskaa 19 ...---
' A. •.‘.
.." . a ....
Q: Who may be the re iperf 91JifelffitTpre'proge se? .._..
ANS: The desig' 6 f tlfe beneficj Ty iviotAssentibl fo p 9;6es of exclusion of life
insurance proceeds ,ro the ,gross i conigaof4he recillient. The co ept of revocability.
or irrevocability f desi nation of the berAlty is metal o ermining whether
the insurance eiro>e s are do form rrf Ihesross dross state cedent or not (2
DOMONDON, axati n, sup at rg „A
11 4,- I
Q: What are pstns nas ere Ike: ,ulance R784- not excluded from
the gross incdrrieffthe ? 6 fqnt? R 1i ,,, i/ f
i
ANS: In the folr iving`itari ,,,\,,tt1 Kjoi-a4.164i,
e )f.0) ur2ace poti les shall form part
of the gross inco e of t e. reCipOht): 41.1 .--.1-' ,./
,,,,F4
1. Where tle life ifturanb9,ffo is ‘'s lits dotes cure oney obligation;
2. Where the life inOarTcoaiqcyv i raqarilste or a val ble consideration;
Note: Only ,,the a5tualQ0uatils -`lictl- nd the amount of the
premiums and °the s"subsequeriffy b transferee shall be tax-
exempt. 1,1 "
3. The recipient of the 1 stgice r e tirsiness partner of the deceased
and the insurance was taTe"n mpensate the partner-beneficiary for any
loss in income that may result as the death of the insured partner;
4. The recipient of the insurance proceeds is the partnership in which the insured
is a partner and the insurance was taken to compensate the partnership for
any loss in income that may result from the dissolution of the partnership
caused by the death of the insured partner; and
5. The recipient of the life insurance proceeds is a corporation in which the
insured was an employee or officer (R.R. No. 02-40).

Return of premium paid

Q: What are the conditions for the amounts received by the insured as return of
premiums to be excluded from gross income?
ANS: The conditions for exclusion are the following: (R-LEA-TM)
1. The amounts are received as a Return of premiums paid by insured;
2. They were under a Life insurance, Endowment, or Annuity contracts; and
3. They were received either during the Term, or at the Maturity of the term
mentioned in the contract, or upon surrender of the contract (NIRC, Sec. 32,
par. (B)(2)).

•814
Q: What is the reason for the exclusion of the return of premiums paid from gross
income?
ANS: The amounts returned are not income but return of capital. They represent
earnings which were previously taxed (2 DOMONDON, Taxation, supra at 198).

Amounts received under life insurance, endowment or annuity contracts

Q: Define endowment.
ANS: In endowment, the insurer agrees to pay a sum certain to the insured if he outlives
a designated period. If he dies before that date, the proceeds are to be paid to the
designated beneficiary (2 DOMONDON, Taxation, supra at 199).
Q: What is the tax treatment of proceeds received under endowment policies?
ANS: It depends. If the insured dies, and the beneficiary receives the life insurance
proceeds, these are not taxable income because they are excluded from gross income
of the recipient (NIRC, Sec. 32, par. (B)(1)), if the insured does not die and survives the
designated period, the amount pertaiQirixto the premiums he paid are excluded his
gross income (NIRC, Sec. 32, par. fEj)(2ig6ut the excess shall be considered part of his
gross income (NIRC, Sec. 32, pari
4 ,4
Value of Property Acquired by Gift, Beq est, Devise, or Descent
.,11
Q: What gratuitous transfers aLe e4,(artgross i 'ane?
ANS: The value of property a4lired eq , e is excluded from gross
income. The income frolsaid proper , owever, is include s part of gross income
and is subject to tax (A/NC,t,Sec. 32, -per ) (3)) .
Note: Only donated pro nty is FicluEted dom gross inconi come derived from such
donated property ap." cludettris part of grcTss income and'no excluded.
Taz •
Q: What is th, reasonloyvthe excaion gratuities from gross income?
ANS: The cont gralLon Rsedi gg. pure erality aridT%•al jest to donor's tax
(gift) or estatelax be west devigetas t ase ma here is no income
(2 DOMONDON,t1Ta atioNistpra EI1206).
/
Q: When is a gift, equest, devise or d eluded from gross income?
4,
ANS: When a person gives. wing or nigh nd it is not a legally demandable
obligation, then it is tre4ted as a ,grand`ie s income. However, if there
is a legally demandablegbligatio to give, such as for services rendered by one to the
donor or due to his menWeamount received is taxable income to the recipient (Gift
Tax Test) (2 DOMONDONTaxation, supra at 208).
,4mount received through accident or health insurance
Q: What kinds of compensation for injuries or sickness are excluded from gross
income?
ANS: The following compensation for injuries or sickness is excluded from gross
income:
1. Amounts received through Accident or Health Insurance or Workmen's
Compensation Act as compensation for personal injuries or sickness; and
2. Amounts of any damages received whether by suit or agreement on account
of such injuries or sickness (NIRC, Sec. 32, par. (B)(4)).
Q: What kind of damages arising from personal injuries and sickness are
excluded from gross income?
ANS: Damages arising from personal injuries and sickness that may be excluded from
gross income are: •
1. Actual or compensatory damages — this is the adequate compensation for
pecuniary loss suffered as may be duly proved.

815
 BEDAN RED BOOK=
2. Moral, nominal, temperate or moderate, and liquidated damages — should be
on account of physical injuries or sickness.
Note: Punitive or exemplary damages are taxable within the broad concept of gross
income (Glenshaw Glass v. Commissioner of Internal Revenue, 75 US 473 (1955)). The
personal injury exclusion does not apply because the amounts are awarded on account
of the defendant's conduct rather than the plaintiff's personal injury (US IRS Rev. Rul.
84-108, 1984-2 C.B. 32).

Q: What is the tax treatment for compensation for lost profits?

ANS: It is not excluded from gross income. Such damages are merely replacements of
income which have been subjected to tax if earned (2-A DOMONDON, supra at 221).
They do not form within the purview of return of capital.
Income exempt under the Tax Treaty
Q; What is a tax treaty?
ANS: A tax treaty is an agreement qatered,inkOetween sovereign states "for purposes
of eliminating double taxatipn"""on ingonie And, caplal, preventing fiscal evasion,
promoting mutual trade veinveNtknent,kand al ckdrdilig air, nd equitable tax treatment
to foreign residents ovfia jon le ir;.eanact 12. 0 ssio er of Internal Revenue,
G.R. No. 169507, Jaiyaw '140f ).
Example of Tax pealliTbe.... DoubleThinprcitreorwo ioll TC4), or Double Taxation
Agreement (DTA ) t dedjbetweep, VTA-Philippine ari her contracting States
or jurisdictions f r the ida be of dbublettaxdflon an ion Ofa fiscal evasion with
respect to taxe .R. No. 104149, Sec1(F)
Q: What is th fore cluadli?-4 1 4- -'21' t''''''4
ANS: Public p 0 gnize the pli4P 88,, -OfreeCipropity and omity among nations (2
DOMONDON, 4 n, sfl t 230).., L-.4f:"--- / (,...
....1 q ft
Note: Tax tre 9sier. en ,r pqre—the ' nal/fiscal' legislations of the
contracting pa esPanok into,„ 'Ye d simditan.&Jus taxations in two
different jurisdi 'ons." VIR 0 6 in o eff In/ furthet clarifies that "tax
conventions are raftedi.th a \yie '10420 llimination of international juridical
\-
double taxation, w 'ch is detted;ggt ' skimpf c,pr5Parabltaxes in two or more
states on the same xpay9fi ds0e 6-6 ersubjctinatter and for identical
periods. The apparent ipop oingawayVi oybj6 rairation is to encourage the
free flow of goods and sZ ijfd thexn9Fesir af.:e petal, technology and persons
between countries, condition dined vall-fclea obust and dynamic economies.
Foreign investments will only thrive airl edictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such
a climate" (Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,
G.R. No. 188550, August 19, 2013).
RetirementBenefits, Pensions, Gratuities, etc.
Q: What are the retirement benefits, pensions, gratuities, etc. that are excluded
from gross income?
ANS: The following are excluded from gross income:
1. Retirement benefits received under R.A. No. 4917;
2. Retirement benefits received under R.A. No. 7641;
3. Terminal Leave Benefits;
4. Separation pay due to death, sickness or other disability or any other cause
beyond the control of the employee or the official (e.g., retrenchment);
5. Foreign social security, retirement gratuities, pensions, etc.; •
6. Benefits due to residents under laws of the United States administered by the
United States Veterans Administration;
7. SSS benefits received in accordance with R.A. No. 8282; and

816
 8. GSIS benefits received under RA 8291(NIRC, Sec. 32 (B)(7)).

Retirement benefits under R.A. No. 4917 (An Act Providing that Retirement
Benefits of Employees of Private Firms Shall Not be Subject to Attachment etc.)
Q: What are the conditions for excluding retirement benefits under R.A. No. 4917
(An Act Providing that Retirement Benefits of Employees of Private Firms Shall be
Subject to Attachment, Levy, Execution, or any Tax Whatsover) from gross
income?
ANS: The following conditions for exclusion: (10-50-OA)
1. Retiree is employed by the same employer for at least ten (101 years;
2. Retiree is at least fifty (50) .years old;
3. Retiree avails of the benefit only Once (Sec. 32 (B)(6)); and
4. Benefits are given under a BIR Approved private benefit plan (R.R. No. 02-98,
Sec. 2.78.1 (B)(1)).
Note: It does not matter whether the retirement is voluntary. As long as the
requirements are met, the re.tirement4koceeds are excluded from gross income.
However, if the retirement is comppjAdVI there is no need to comply with the above
requirements before the retiremenp:OhA ould be excluded because the same would
be excluded as separation pay 1144.4a .control of the employee (2 DOMONDON,
Taxation, supra at 236). o"
If 4
The rule that retirement benefitiMayloqa al ed df-bri&To pplies only to retirement
benefit from a subsequent private employer and not to iubsestuent public employer as
the benefits are still eke iitynder R. 8291 (DE LEONI W C Annotated, supra at
363). 6, A _if" id, 1 g.
. ...ilks '
..4..
Q. What is a "rmsonablePagte benefitkan"? ii
ANS: It meartsMensio,, gratuity, stock ()opus, or profft-sharm p n maintained by an
employer forL,,,,
theibejleliVb ..poomr all his cials ol-e6pluyBas rein contributions
are made byWch employe fortAgffici or emplciya,„, or the purpose of
distributing the earnings, n prinoifig of fr,,
-4 fund thus aMirriCirdre, any part of which
shall not be usedT iik e ,jito any; urp ,&e other than for the exclusive benefit of the
said officials and empl fees NIRC, Sec. 2.4B (Va)).

Retirement benefits -de RA.No.7.764 rfiA• .Amen ing Artkle 227 of P.D. No.
442, as amended, oWierwiseViown as the Labor Code of the Philippines, by
providing for Retiremellt12#Thualified Private Sector Employees in the Absence
of any Retirement Planing'
irastablishment) • •
Q: Discuss the rules on retirement pay of qualified employees under R.A. No.
7641.
ANS: The following are the rules on retirement pay of qualified employees:
1. Where the retirement plan is established in the CBA or other applicable
employment contract — Any employee may be retired upon reaching the
retirement age established in the CBA or other applicable employment
contract;
2. In the absence of a retirement plan or agreement providing for retirement
benefits of employees in the establishment — Any employee may be retired
under the following:
a. Optional Retirement — the conditions are: (60-5-6)
i. An employee upon reaching the age of sixty ,E) ) years or more;
ii. Who has served at least five al years in the said establishment;
and
iii. May retire and shall be entitled to retirement pay equivalent to 1/2
month salary for every year of service, a fraction of at least six
1.6_1 months being considered as one whole year.

817
 SEDAN RED BOON
b. Mandatory Retirement — the conditions are: (65-5-6)
i. An employee upon reaching the age of beyond sixty-five (65)
years which is the compulsory retirement age;
ii. Who has served at least five 1_41 years in the said establishment;
and
iii. May retire and shall be entitled to retirement pay equivalent to'/
month salary for every year of service, a fraction of at least six
11 months being considered as one (1) whole year.

Terminal Leave Benefits

Q: What is terminal leave benefit?
ANS: It is the commutation or monetization of an employee's accumulated and unused
vacation leave (VL) and sick leave (SL) received by a retiring, retired, or separated
employee (SABABAN, Reviewer, supra at 93-94).

Q: What is the tax treatment o termirralieave.j enefits granted to employees of

the government?
. ,fr I\. . .i -1
ANS: Section 1 of E.O. 3911orabon_d Leal
NI,7--..,
v.ir'e;fialof Government Officials and
Employees) provide!,thdftp • cnetiiderldavecredtsioNovemment officials and
employees shall be exec" ptedirom inco tax.

Q: What is the tAC tre/

p0 en of tering!, leave ben fi iiiedito retiring official
or employee film th—e" rivet sector?irr .. zes)
ANS: It depend,s1IL c.., e of: r.'^;,
1. Opticin e rrement— SL.is tax"ble; VL up t ten (1 flays is exempt, excess
is to e• k &.'-,,-'4 ' I (7" <.,'.*P'
2. Corn I retire) ent e egpf•lifA ED, R t -e—W supra at 230).
)
Separation P y
k
Q: What are the con e excluded from
gross income?
ANS: The conditiov are thejollo ig 6.,
1. Amount isi rce ..cr 1Ye r his errs;
2. It was recei fro r
Ina en
3. It was receive ',,as-a po .peque c -o sep rp_ f such official or employee
from the service atheemployel
a, Because of deaRicktaes,soroot = r physical disability; or
b. For any cause beyond the control of such official or employee (NIRC,
_ . Sec. 32, par. (8)(6)(b)). -
Note: The phrase "any cause beyond the control of such official or employee" connotes
involuntariness on the part of the official or employee. The separation from the service
of the official or employee must not be asked or initiated by him (R.R. No. 12-86, Sec. 2,
par. (8)).

Foreign social security. retirement gratuities pensions. etc.

Q: What are the conditions for excluding foreign security, retirement gratuities,
pensions, etc. from gross income?
ANS: The conditions are the following:
1. Benefits received are social security benefits, retirement gratuities, pensions,
and other similar benefits;
2. They are received by citizens and aliens who come to reside permanently in
the Philippines; and
3. They are received from foreign government agencies and other institutions,
private, or public (NIRC, Sec. 32, par. (B)(6)(c)).

818
 USVA Benefits
Q: What are the conditions for excluding USVA benefits from gross income?
ANS: The benefits must be:
1. Payments of benefits due or to become due;
2. To any person residing in the Philippines; and
3. Under the laws of the United States administered by the US Veterans
Administration (NIRC, Sec. 32, par. (B)(6)(d)).

Miscellaneous /terns
Income Derived by the Government or its Politico/Subdivision
Q: Is the income derived by the government or its political subdivisions excluded
from gross income?
ANS: Yes. Income derived by the national government and local government units are
excluded from gross income, provided the income is derived from any public utility or
from the exercise of any essential goVernmental functions (NIRC, Sec. 32, par.
(B)(7)(b)).
Note: The Constitution does not #11 An Araly provision granting tax exemption to the
government. Obviously, the real, skis that the government's exemption from
taxes is an inherent limitation on e a xing power. Notwithstanding the immunity
of the government from taxes, ids ale° a, tlr'&-goized iple that the government
may tax itself (ABAN, Law of Basic Thxdi sup ate
4 O .

Please see "General iples (0 tion" for discus on exemption of the

govemment from taxe 6
4, ,
Winnings. PrizesiindA14%a fidk;includingkose
V%
in Sport ron
1
Q: What arettEcondifilijis for pxcludin rizes and . gross income?
ANS: The pri4 and award -t--
1. Made plimadlyt ecognitf
a. Freligio ,
b. CAtitable;-
c. gcientifc;
d. Educqt,
e. Artisttso
f. Literarrc
g. Civic actreKement;
2. Recipient was selected without any action on his part; and
3. Recipient is not required to render substantial future services (NIRC, Sec. 32,
par. (B)(7)(c)).

Q: What are the requisites for the exclusion from gross income of prizes and
awards in sports competition?
ANS: The requisites are the following:
1. Prizes and awards were granted to athletes;
2. They were granted in local and international sports tournaments and
competitions held in the Philippines or abroad; and
3. They must be sanctioned by their national sports associations (NIRC, Sec. 32,
par. (B)(7)(d)).
Note: National Sports Associations are those duly accredited by the Philippine Olympic
Committee (R.A. No. 7549, An Act Exempting All Prizes and Awards Gained from Local
and International Sports Tournaments and Competitions from the Payment of Income
Tax and Other Forms of Taxes And For Other Purposes, Sec. 2(2)).

819
 c•-`,

SEDAN RED :BD.(

Q: Discuss the tax implications of prizes and awards in sports competitions under
R.A. No. 7549.
ANS: The following are the tax implications:
1. The prizes and awards shall be exempt from income tax;
2. The prizes and awards shall be deductible in full from the gross income of the
donor; and
3. The donors of such prizes and awards shall be exempt from the payment of
donor's tax (R.A. No. 7549, Sec. 1).
Exclusions Under Special Laws
Q: Enumerate special laws granting tax exemptions.
ANS: The following are some special laws granting tax exemptions:
1. R.A. No. 7916 (Philippine Export Zone Authority Law) - PEZA-registered
enterprises are given income tax holidays for 6 or 4 years from the date of
start of commercial operation, depending on whether their activities are
considered as pioneer wton-pioneeri,494,- enjoying income tax holidays, they
are subject to the,5%tfinal tax an their dross earned, in lieu of all
national and lo9pefate9N Li ..t V t r, 1.,`%.
2. R.A. No. 957 Icorppschen6itreAgraridn FieformkProgram) - gain arising
from the transfer , agricultural plEp..!rty cpiv!.k.!_ei)Alrlder the law shall be
exempt toln, capitpl'aainsia)770r:1b yearsta
3. R.A. N9f ZVI (New/Central Ba6k Act) - tlik BS ilei ,, le pt from all national,
provincial, mVpicipaDand citytakei.fof 5 years 1
4. R.A. * A, 72 9 (Urban Devetient Housing ActCcif -1 92) - the NHA is
exem yr all fees ant:! c4rg $ ofan4kin I whettir.loca or national, such
as income rid realty, tam* /! ' -.I,:-• I
5. R.A. t4fior1502,(4 elry4Aq14ithryf)D'evelq rognt Act of 1998) - certain
incenivel,afe a 'ail& eio..Q ettilewellyi
E *pinsps; #
6. R.A. o.19.014 ( efk, t Ampsi ing-$ec f-24, 341'357 gi -and 79 of the
NIRCA?comeen s‘pgtiocyrrle Altqg- W the term sl'statutory minimum
wage" (SMIN) paid teSr' *earn rs kla xem, from i come tax.
\ r' ,1--,„
%*``..-,e/'
4. DEDUCTIONSFROAIGl ifiA
`9,.. N.,,,,,,,,. -(-C IN
Q: Define Deductions, in
ANS: Deductions are itere•e-f o 'rnTra
„ orized--"by,..la
\ o be subtracted from the
pertinent items of gross IncomArrive 4 ALe,.
‘V, (NIRC, Sec. 34).
Note: It is a governing princip161n.taxgric? Max exemptions must be construed in
strictissimi furls against the taxpayer and liberally in favor of the taxing authority; and
one who claims an exemption must be able to justify the same by the clearest grant of
organic or statute law. Since a deduction for income fix purposes partakes of the nature
of a tax exemption, then it must -also be strictly construed (Commissioner of Internal
Revenue v. Isabela Cultural Corp., G.R. No. 172231, February 12; 2007).

No deductions shall be allowed to individual taxpayers earning compensation income

arising from personal services rendered under an employer-employee relationship, and
those who opted to be taxed at 8% income tax rate on their income from
business/practite of profession (R.R. No. 8-2018, Sec. 8).
Q: What are the general rules to be observed regarding deductions?
ANS: The general rules are the following:
1. Matching Concept for Deductibility - Deductions must match the income;
deductions must be paid or incurred in connection with the taxpayer's trade,
business or profession (2 DOMONDON, Taxation, supra at 522);
Note: A taxpayer who is authorized to deduct certain expenses and other
allowable deductions for the current year but failed to do so cannot deduct the

820
 same for the next year (Commissioner of Internal Revenue v. Isabela Cultural
Corp., G.R. No. 172231, February 12, 2007).
2. Substantiation Rule — Deductions must be supported by adequate receipts or
invoices. The taxpayer has the burden of proving entitlement to a claimed
deduction or refund (Paper Industries Corp. of the PHL v. Court of Appeals,
G.R. Nos. 106949-50, December 1, 1995);
Note: Substantiation requirements are not applicable to a taxpayer claiming
deductions under the Optional Standard Deduction (05D) which is based on a
fixed percentage of deductions without regard to any actual expenditure.
3. Subject to limitation — The taxpayer is mandated to deduct amounts only
within the limits allowed by law. He could choose to avail only of a lesser
amount or even none at all (Commissioner of Internal Revenue v. Phoenix
Assurance Co., Ltd., G.R. No. L-19727, May 20, 1965).
4. Additional requirement relating to withholding — any amount paid or
payable which is otherwise deductible from, or taken into account in computing
gross income or for which depmiation or amortization may be allowed, shall
be allowed as deduction orisirigls shown that the tax required to be deducted
and withheld therefrom MIAeikpaid to the BIR (NIRC, Sec. 34, par (K);
R.R. No. 12-2013; R.M.061r6%013).
•%,
a.Concept as return of capital .? L ,r,
._$:*(f
Q: Discuss the concept ofmturn of caplii (costkges?: r services) in relation to
deductions. A ry
-0v
ANS: Income tax is *fed by law orilyro income, which rp e gross income or net
income; hence, the 404 Ifzopseriting tum of capital ighdulkbe deducted from the
proceeds from salekgesse, e' a" nd should ot be subject to in orltax (RR No. 02-40,
Sec. 65). orftay
9'11.0 ,
b.Itemizeo'cifitiofiaOptaholStaPardDecrefationTe
vira
.,44
Q: Distinguish Itgnizia.ipssluctionsifrom ptional Staridard-Deduction.
ANS: Itemized dedOt(itig*Athose !low& by the NIRC to be deducted from the gross
income before the tricome is' subjected t c, Sec. 34). On the other hand, an
optional standard dedeTkoprOOSD) is a Lei Fret -eqtage deduction without regard to
any actual expenditure4n lieu Vozitem e AVM It is merely a privilege that
may be enjoyed by cerfain taxpqrs (NIRC, Sec. 34(L)).

OSD is further tackled ba er the discussion on deductions under special laws.

Q: What are the itemized deductions allowed under the NIRC?

ANS: The following are the itemized deductions under the NIRC:
1. Ordinary and necessary trade, business, or professional expenses;
2. Interest;
3. Taxes;
4. Losses;
5. Bad debts;
6. Depreciation;
7. Depletion of oil and gas wells and mines;
8. Charitable and other contributions;
9. Research and development;
10. Pension trusts (NIRC, as amended by TRAIN Law, Sec. 34).
Note: Non-resident aliens and non-resident foreign corporations not engaged in trade or
business in the Philippines are not allowed the above deductions because they are
taxed on their gross income derived from sources within the Philippines (NIRC, as
amended by TRAIN Law, Sec. 25 (8) and Sec. 28 (8)(1)).

821
 DAN RED: BC
Q: In absence of an express selection, is a taxpayer considered to have availed of
itemized deductions?
ANS: Yes. These taxpayers shall be considered as having availed of the itemized
deductions, unless they signify in their income tax return the intention to elect the OSD.
Such election of the option, when made in the return, shall be irrevocable for the taxable
year for which the return is made (R.R. No. 8-2018, Sec. 8). However, taxpayers
earning purely compensation income arising from personal services rendered under an
employer-employee relationship cannot avail of this itemized deduction (NIRC, as
amended by TRAIN Law, Sec. 34).
Expenses
Q: What are the requisites for deductibility of expenses in general?
ANS: The requisites for deductibility of expenses are: (D-STROWN)
1. It must be paid or incurred During the taxable year;
2. It must be Substantiated with adequate proof showing:
a. amount of the exRenseteing,dectLicted; and
b. the direct conrtgEtion
.;ff fv. of reTatik oflh'&#xpense being deducted to the
developywit, rnaciagdmeht,t brie StiorNand/or conduct of trade,
businessiiptotesilonrOfffitEstaxpa,er;fr N.,
3. It must beop"aid oroirfrurred in connec ibk wiXtbk conduct of Trade or
. 4.-- .., • .
business; or t g- ( xer Iselnii-7:Faiorrby.tteqxpaye or attributable to the
develo eQt7r9sna ementpr *ration of th,e trade, siless, or profession;
4. It mu be ''Reaso able (not •j4istif,''extraVagan Tessive under the
circu sjancel); y''''...,0
5. It mu t belt' lh Ordipary.apd ne6`19'ssRry;„. 1 -..--"t
6. If subject i liVithholdin'*e'sith'e tax have bee prop rly withheld and
remittect,t0i e BA.and kr':,,, :_tliLY''' 1
-,...)
7. It mqt Rob ,ce contOry_t_b_lia_p_olicyi orals (NIRO, as amended by
TRAI 1...al%'ec.'31)\ 171 , 7:,
,
--) ;.«
44 - 4 './4'....
Q: Are expens s whicti cords te—br be, tcldzack a d othe similar payment
deductible from ross itkome? . ________"". i
ANS: No. No ded tion frattlegroskiff,q191*.b90,41 owed for any payment made,
directly or indirectly, to anil t,Cia . or-ertfldlaye-CoM e Natip /government, or •to an
official or employee oNyezIpdal)govem lirtibitl,r to official or employee of a
GOCC, or to an official or nylokOe or krtre eVati tol foreign government, or to a
private corporation, GPP, or6-%sirxdar JeTiti Irtht— a ment constitutes a bribe or
kickback. While illegal income will form pa o •gross income of the taxpayer (within the
_ concept of "income from whatever source"), expenses which constitute bribe, kickback _—
and other similar payment, being against law and public policy are not deductible from
gross income. Other expenses necessary and ordinary expenses in connection of such __ .
illegal activities are, however, allowed as deduction within the purview of expenses
under the NIRC (NIRC, Sec. 34, par. (A)(1)(c)).

Q: Are payments made in exchange for the revelation of a competitor's trade

secrets deductible? .
ANS: Payments made in exchange for the revelation of a competitor's*Fade secrets is
considered as an expense which is against law, morals, good customs or public policy,
which is not deductible (3M Philippines, Inc. v. CIR, September 26, 1988).

Q: What is an ordinary expense?

ANS: An ordinary expense Is that is normal or usual in relation to the taxpayer's
business and the surrounding circumstances. In order to be deductible as a business
expense, three conditions must concur [business test]: (1) the expense must be ordinary
and necessary; (2) it must be paid or incurred within the taxable year; and (3) it must be

822
 paid or incurred in carrying on a trade or business. Additionally, the taxpayer must
substantially prove by evidence or records the deductions claimed under the law (Atlas
Consolidated Mining & Devt. Corp. v. Commissioner of Internal Revenue, G.R. No. L-
26911, January 27, 1981).

Q: What is a necessary expense?

ANS: It is one which is appropriate and helpful in the development of the taxpayer's
business and is intended to minimize losses or to increase profits (General Electric [PI]
Inc. v. Collector of Internal Revenue, CTA Case No. 1117, July 14, 1963).
Note: If the expenses are extraordinary, the expenditures shall be capitalized for which
depreciation allowance may be claimed (VITUG & ACOSTA, Tax Law, supra at 115).

Q: What are the distinctions between an ordinary and a necessary expense?

ANS: The following are the distinctions between an ordinary and a necessary expense.
. ••
Ordinary Expense Necessary Expense

It connotes a payment, whit, . OF

here the expenditure is
normal in relation to the busine%). appropriate or helpful in the
the taxpayer and the surro4diribV development of the taxpayer's business
circumstances (General ElectricAng,,,, J`g-Valtat.. the ma e is proper for the
v. Collector, CTA Case No,1101,4 A1purposeer&Ore'alizing
,•-mle---,, " • •• a profit or
July 14, 1963). " minimizing-a.losN/bid).
.47 I 003
Q: Is media advertising xpehdes pai and incurred o Mute ordinary and
necessary expensesfullys"deductible -der the NIRC?
ANS: AdvertiVg is germally of two kinps namely:
1. Ad*Ligin-atqAT ulate,the curt sale se of services;
and 1,1
2. Advertising desk wed to ' timu a e future sa e ofn erc andise or use of
services', '
Note: The latter type Involve-I expenditu si cu d, in whole or in part, to create or
maintain some form of tor .94411 for the t e a ,,_
•acte or business. If the expenditures
are for advertising of thigfirst kindoilierVext*tiMtreTeMnableness of amount, there
,
r•-r
is no doubt that such eicp-enditureware deductible as business expense.

There are two conditioner American jurisprudence before an expense may be

treated as ordinary, hence deductible:
1. "Reasonableness" of the amount incurred; and
2. Whether the questioned advertising expenses are actually capital outlays to
create a "goodwill" to the product and/or business, and hence, considered as
capital expenditures to be spread over the life of the asset (General Foods
(Philippines), Inc. vs Commissioner of Internal Revenue, CTA Case No. 4386, ""431141
February 9, 1994).

Q: What is the Cohan Principle?

ANS: Under this principle, if there is showing that expenses have been incurred but the
exact amount thereof cannot be ascertained due to the absence of documentary
evidence, it is the duty of the SIR to make an estimate of deduction that may be allowed
in computing the taxpayer's taxable income bearing heavily against the taxpayer whose
inexactitude is of his own making (Cohan v. Commissioner of Internal Revenue, 39 r.
2d 540 (2d Cir. 1930 has cited in Pilmicu-Mauri Foods Corp., v. Commissioner of Infernal
Revenue, C.T.A. EB No. 97, August 29, 2006]).

823
 Q: In general, what are the ordinary and necessary expenses deductible from
gross income incurred in the conduct of trade, business or profession?
ANS: Sec. 34 (A)(1) of the NIRC provides the following ordinary and necessary Trade,
Business or Professional Expenses:
1. Salaries, wages, and other forms of compensation for personal
services actually rendered including Grossed-up monetary value (GMV) of
fringe benefit;
2. Travel or transportation expenses (here and abroad);
3. Rentals and/or other payments for the continued use or possession of
property;
4. Entertainment, amusement and recreation expenses.

Salaries. Wages, and Other Forms of Compensation for Personal Services Actually
Rendered
Q: What does compensation for personal services rendered Include?
ANS: It includes: , ,,2..160.4.44

1. Salaries, wages,,,,c4rnissiiis,T
(missions, p:Poressipnal fees, vacation-leave pay,

retirement pay,. d i' ). '''.t.,

2. Bonuses in goo 'fait ';•1-.....;,..•''''''''....s..
.. 4 1.,..--' .1.,.‘ .
3. Pensions,,-ad'''cot.
4., .riperfCation
.9 fojjgjuries, irndf corrij5.eh ated for by insurance
: ..---...., -,;,„_ •,o. )
or othe se; atid? ,,,,,-"'""''' ,:-: '',.., V.• ,,,,,41-,
4. GMV o nredb4ner provided Or, aVong as the,,firial4tak imposed has been
paid. ? N
e f" )
Note: Any anpat_g&en 4 the emit90.:Las_h_e_mfits tdi itp eblesloyees, whether
classified as a riiiifirsis bdnefit§,,,or_frifigein.n9fits, shall '-constitiite as deductible
expense upon tterlriployer 2-BTIOMCVDOkf-Taxa ion, sub at-8 0) [hereinafter 2-
B DOMCNO0 ..,10 Fon . kr%.,....)jii,111,1
t
Q: What are t. --;q4 Val 4.q..}sites for deduptibili ?.., cornlif ._ea
lig'ion for personal
services actua efid,ered-i); 1.1-T) litt...,-,74-'"
ANS: The requi tes aree fEil(dWi • -WI -SP ).,.:, 'N/
1. The exp nse most belaoth-brdio: 4 arirciiT6essi ;
2. The salar s musebe12AISf tthin telaxable ear;
3. The salaries, be rid±k-
ea 'nR„.oril Itpdp 9 business;
4. The expense niRsfrin, 43 alariesoth'avhiyernsation;
5. The salaries matte oePerso "al ge ,AtOally rendered; and
6. The salaries must:Ith4R ...e
.- asor ,„arricida (MAMALATEO, Income Tax,
supra at 187).
Q: When is payment for compensation deemed reasonable?
ANS: Only such amount as would ordinarily be paid for services in like enterprises in
similar circumstances (R.R. No. 02-40, Sec. 70).

Travel/Transportation Expense
Q: What are the requisites for deductibility of travel ortransportation expenses?
ANS: The requisites are the following:
1. It must be paid or incurred while away from home;
2. It was made in the pursuit of ttade or business; and
3. It must be reasonable and necessary (NIRC, Sec. 34 (A)(1)(a)(ii)).
Note: The term "away from home" means away from the location of the employee's
principal place of employment regardless of where the family residence is maintained
like business trips. It includes transportation, meals, and lodging (R.R. No. 02-40, Secs.
65 and 66). Thus:
1. Transportation expenses from main office to branch or from branch to main
office are deductible;

824
 2. Transportation expenses from office to home or from home to office are not
deductible; and
3. If company car is utilized both for business or personal use, the allowable
deduction must be in proportion to the use for business.
Q: What are travelling expenses?
ANS: Traveling expenses as ordinarily understood, include transportation expenses and
meals and lodging. If the trip is undertaken for other than business purposes, the
transportation expenses are personal expenses, and the means and lodging are living
expenses, and therefore, not deductible (R.R. No. 02-40, Sec. 66).
Rentals and/or Other Payments for Use or Possession of Property
Q: What are the requisites for deductibility of rental expenses?
ANS: The requisites are the following: (CUTTT)
1. It must be made as a condition to the Continued Use or possession of
property;
2. Taxpayer has not taken or tgAnor taking Title to the property or has no equity
other than that of a lesseeitAerkpossessor;
3. Property must be used iniT(04,k§usiness; and
4. Subjected to withholding140!,5,4(R.R. No. 02-98, Secs. 2.57.2(B) and (C)).
40744ittogic
Q: What is the composition of,rentgliP-tisii? .4 -
ANS: It includes the followtwi'r '1.1P
1. Aliquot part chtffi'amount used fo acquire leaseho Over the number of years
the lease willgiv
2. Taxes and otihrOgijiong of t )lessor paid by lief cc; and
3. Annual dfflirdbiati4pf the cost f leasehold impro is introduced by the
lesseAver thel rettiSining, te of the lease, R o er the life of the
improvementg hichevtcr period horter R. No. 02-40- Sec. 74).
Vir ....0'..,,,
Repairs and Maintenanc
gaintenance eA
,, ' .ir
Q: Discuss the dedAchm repairs e penses.
ANS: The cost of inciclentaL4j;epairs whi ' te p er materially add to the value of the
..,,,,
property nor appreciably,Whg its life, r, y-telz- l',, tAn an ordinarily efficient operating
condition, may be dedUgted as emestsa Vitt'tit or property account is not
increased by the amoukof such` penditure (R.R. No. 02-40, Sec. 68).
Note: Repairs in the natitrq o &placement, to the extent that they arrest deterioration
and appreciably prolong the' ife of the property should be charged against the
depreciation reserves if such account is kept (R.R. No. 02-40, Sec. 68).
Expenses under Lease Agreement
Q: What are the allowable deductions by a lessor?
ANS: Since the rentals are considered as income of the lessor, such lessor may deduct
all ordinary and necessary expenses paid or incurred during the taxable year which are
attributable to the earning of the income. It includes cost of repairs and maintenance,
salaries and wages of employees attendant to such lease, interest payment, property
taxes, etc. (R.R. No. 19-86, Sec. 2.01).
Q: What are the allowable deductions by a lessee?
ANS: The lessee may deduct the amount of rent paid or accrued including all expenses
which under the terms of the agreement, the lessee is reqUired to pay to, or for the
account of the lessor. If the payments are so arranged as to constitute advance rentals,
such payment will be duly apportioned over the lease term (R.R. No. 19-86, Sec. 3.01).
Note: The cost borne by the lessee in erecting buildings or making improvements on the
ground of which he is a lessee is held to be a capital investment and not deductible as a
business expense (R.R. No. 02-40, Sec. 74).
825
Expenses for Professionals
Q: What are the allowable deductions for professionals?
ANS: A professional may claim as deductions the following:
1. The cost of supplies used by him in the practice of his profession;
2. Expenses paid in the operation and repair of transportation equipment used in
making professional calls;
3. Dues to professional societies and subscriptions to professional journals;
4. The rent paid for office rooms;
5. The expenses of the fuel, light, water, telephone, etc., used in such offices;
and
6. The hire of office assistants.
Note: Amounts currently expended for books, furniture, and professional instruments
and equipment, the useful life of which is short, may be deducted. But amounts
expended for books, furniture, and professional instruments and equipment of a
permanent character are not allowable as deductions (R.R. No. 02-40, Sec. 69).

Entertainment/Amusement' e resetcjI4E ASeqfEAR)

Q: What is represents itrex
ANS: It refers to expp- ses r ed-by a twayatin.,,,,rficectio with the conduct of his
trade, business or:&e49 .„.psofessicrirt-entertarni.0 ding amusement and
recreation to or th liguest%at `-dining pla ,''ts Amusement, country
club, theater, co , fay, sporting 6ventt amilar van planes (R.R. No. 10-02,
Sec. 2).
/
Note: It shall n r o fixe epreseutdtiort-allow. Capct to withholding
NI I
tax on wages to app opriati7reye up-re- 015U° 17610-02; Sec. 2).
„e
Q: Who are g
ANS: Persons cep t brlsinest elations, such as
but not limited Vie /cu t9 cus egmer he term shall not
include employAs, offil Hers or trusses of the taxpayer
(R.R. No. 10-02, ec. 2).

Q: What are the re pwsep

ANS: The requisites fo reAtlelolleitr • PWE)
- 1. Directly connec develogrnAri Naie4ent, and operation of the
trade,- business or Kt sion1.40104 arer, or directly related to or in
furtherance of the conduct't futraderb mess, or profession (R.R. No. 10-02,
Sec: 4(B));
2. Is Reasonable;
3. Not contrary to Laws, morals, policy or public order (R.R. No. 10-02, Sec.
4(C));
4. Does not constitute as a Bribe, kickback or other similar payments (R.R. No.
10-02, Sec.4(D));
5. Substantiated with adequate proof. The official receipt, or invoices, or bills or
statements of accounts should be in the name of the taxpayer claiming the
deduction (R.R. No. 10-02, Sec. 4(E));
6. Must be Paid or incurred during the taxable year (R.R. No. 10-02, Sec. 4(A));
7. The appropriate amount of Withholding tax, if applicable, should have been
withheld therefrom and paid to the BIR (R.R. No. 10-02, Sec. 4(F)); and
8. Does not Exceed:
a. For taxpayers engaged in sale of goods/properties — one hat( of one
percent (.50%) of net sales;
b. For taxpayers engaged in sale of services — one percent (1%) of net
revenues; and

826
 c. For taxpayers engaged in both sale of goods/properties and services —
determined using an apportionment formula, taking into consideration
the percentage ceiling prescribed above (i.e., Net Sales (or Revenues)
I Total Sales and Revenues x EAR) (R.R. No. 10-02, Sec. 5).

Q: What expenses are not considered EAR expenses?

ANS: The following expenses are not considered EAR expenses:
1. Expenses treated as compensation or fringe benefits;
2. Expenses for charitable or fund-raising activities;
3. Expenses for bona fide business meeting of stockholders, partners or
directors;
4. Expenses for attending or sponsoring an employee to a business league or
professional organization;
5. Expenses for events organized for promotion, marketing and advertising
including concerts, conferences, seminars, workshops, conventions and other
similar events; and
6. Other expenses of similar natyrea-
Note: Notwithstanding the foregping„Kch items of exclusions MAY, nonetheless,
qualify as items of deductions under. Se434 of the NIRC, subject to conditions for
deductibility therein (R.R. No. 10-02 Sec
4.01
,4p.
Politica/ Campaign Expense ,•; :e .. s., ..4A
d' 't
Q: What is the incomepOr'eatmentM campaign con ribukns?
ANS: Only contributio , s'pant and utilizelduring the campAnkperiod are exempt from
tax. Any political contrAutiOns or do_ riatiop spent before or aftel the campaign period
set by the Commission on Elections are subject to both &flog tai& and income tax. Any
unspent political ,ccrntributidirgrform part ofe taxable income ,and are subject to income
tax. Income p Frients,twalie by political arties and candidates )4 local and national
elections aretfijectgrati creditable wi. :holding tdi ej Q.- 6dated March 14,
2016, emphasizing RRilgk.07-204)A '..-4- Ne.,-..4.
rir
Note: CorporationarepArbited gin ging political difithailins under Section 36
......of the Corporationti5de. Should a corporation violate this, their contributions — no
matter if they are spenVithhnhe campaioU loclIjor not — will be subject to donor's tax
(Sec 36 of B.P. 68, novt-Sea---'35(i of the130,1sq, oration Code).
v 44foraiezo' 1. :A
Expenses allowed to private cid/di-at/ono/Institutions
l t .., —
Q: What are the other e astds allowed to private educational institutions?
ANS: In addition to the eijianses allowable as deductions under the NIRC, a private
educational institution may at its option elect either:
1. To deduct expenditures otherwise considered as capital outlays of depreciable
assets incurred during the taxable year for the expansion of school facilities; or
2. To deduct allowance for depreciation (Sec. 34(A)(2), NIRC).
Interest
Q: What are the requisites for deductibility of interest expense?
ANS: Section 3 of RR. 13-2000 provides for the following requirements for deductibility
of interest expense: (TID-CROWD-TA)
1. The indebtedness must be that of the Taxpayer;
Note: The term "indebtedness" has been defined as an unconditional and
legally enforceable obligation for the payment of money (Commissioner of
Internal Revenue v. Prieto, G.R. No. L-13912, September 30, 1960).
2. Interest expense must have been paid or Incurred during the taxable year;
3. There must be an indebtedness incurred by the taxpayer based on a bona tide
Debtor-creditor relationship;

827
 Note: A bona fide debtor-creditor relationship is one based on a valid and
enforceable obligation wherein the debtor is under unconditional obligation to
repay the creditor (Philex Mining Corp. v. Commissioner, CTA Case No. 5200,
August 21, 1998).
4. The indebtedness must be Connected with the taxpayer's trade, business, or
exercise of profession;
5. The interest must NOT be between Related taxpayers;
6. The interest must NOT be incurred to finance petroleum Operations;
7. The interest must be stipulated in Writing;
8. The interest must be legally Due;
9. In case of interest incurred to acquire property used in Trade, business or
exercise of profession, the same was NOT treated as capital expenditure
(NIRC, Sec. 34, par. (B)); and
10. Interest expense is subject to interest Arbitrage rule. (Commissioner of Internal
Revenue vs Ludo & Luym Corporation, CTA EB No. 1559, June 8, 2018).
.--.t...,...„,,,
Q: What is the Interest Arbit, ragrilik T -;1/4.. ,.!'---,,„
ANS: The taxpayer's olpeUist, allowayd dechictijin ;tor interest expense shall be
reduced by 33% of the:siFit6rAt inc" e.whichllivetbeen .4.e.
sUbjected to final withholding
f .."
tax. Thus, the amotnt atAterest expense equivalent ta.,33% of interest income
subjected to finaldtgNiy lid' on-detlabli5I'C'and„orily,(6 - remaining portion of the
interest expense gie21-tgi ed asTpxpell6e-kythe i 6come,taRYi putation (R.R. No.
13-2000). ir /4 di:. \ (
Note: The limit ion on he allowable intei*kexpense s all akiy, rclless of whether
or not a tax a ilrig
... e scherrrw-as entered into 57.1h taxpayerArtregardless of the
date wheri the rakes bearin logiari5140 d_Ofilthentthe invame was made for as
I .o
long as, durin tl2Vgcable yeF, therd;i0;i.nteiest er ense i cu on one side and
an interest inc\ffiele,anedlt0 othetgkleTlfhich int ..e§, in me bi been subjected
to final withhol ibtai R. ''IN.,13-2029). ss's

Q: Are interest ,aid on&leli*Ucl.

ye\
\t
n,:taiti:
xel 4
sUlizt : t fl
iistlei lrtterest A4 bitrage Rule?
ANS: No. Interes aid o curredsbithe ay n all unpaid bitsiness-related taxes
•
shall be fully dedub.ible fro roiss5 yebe subject to the limitation on
deduction. Thus, su kinter9s xgzs ici-&-dc.-urred > Ali n6t be diminished by the
percentage of interesti cometa r ed.which.hatr VeetiNsubjethterd to final withholding tax
(R.R. No. 13-2000, Sec.

Q: What interest expenses are non edOtti e

ANS: The following are non-deductible interest expense: (APDC-SSSR)
1. Interest paid in Advance by an -individual taxpayer through discount or
otherwise who is reporting income on cash basis. The interest may only be
deductible:
a. In the year the indebtedness is paid; and
b. If the indebtedness is payable in periodic amortization, the amortized
amount of interest paid during the year shall be allowed as deduction in
such taxable year (NIRC, Sec. 34, par. (B)(2)(a));
2. If the indebtedness is incurred to finance Petroleum exploration, the interest
incurred is capitalized as "deferred exploration cost" (NIRC, Sec. 34, par.
(B)(2)(c) in relation to Sec. 34 (G));
3. Interest in the form of Dividends paid to preferred shareholders (R.R. No. 02-
40, Sec. 78; R.M.C. No. 17-71);
4. Interest for Cost keeping on account of capital or surplus invested in business
which does not represent charges arising under interest bearing obligations
(R.R. No. 02-40, Sec. 79);

828
 5. Interest paid when there is no Stipulation for the payment thereof or where
there is no indebtedness as when the obligation is unenforceable
(Commissioner of Internal Revenue v. Prieto, G.R. No. L-13912, September
30, 1960);
6. Interest paid on earned and unclaimed Salary (Kuenzle & Streiff, Inc. v.
Collector of Internal Revenue, G.R. Nos. L-12010 & L-12113, October 20,
1959);
7. Interest paid on indebtedness used to purchase Securities by one who is not a
dealer in securities, because such interest is part of the acquisition of a capital
asset (NIRC, Sec. 34, par. (B)(2)(b)); and
8. Interest paid on indebtedness between Related taxpayers (NIRC, Sec. 36(B)).

Q: What is the optional treatment of interest expense incurred to acquire property

used in trade, business or profession?
ANS: At the option of the taxpayer, the interest incurred may be allowed as:
1. Interest expense deductible fronoross income; or
2. Treated as capital expend.itOiperein the amount of interest is added to the
cost of the property (i.e.,.Oapite.114the interest as part of the acquisition cost of
the property and subseqijerniyAall of the deduction from business income in
the form of depreciatiorONTRAgt . . 34, par. (B)(3)).
Note: Should the taxpayer ele4ft0.4,-.V bktivi serest ,plyments against its gross
income, the taxpayer cannot ,at-:fhe saki ime'calsitalmtOtiterest payments (Paper
Industries Corp. of the PI-04. Court of G.R. No.4.06949-50, December 1,
1995). .,

Taxes 4c
gr.
Q: Who are egjled to de4g c \ ltaxeq,frotF. ross income?
ANS: The taxpapr upcifirom the takes imposed (re., those l&ble for direct taxes)
are the ones qtled4olidbct takes from foss inco R7Riille40;
,,,AaawoN
s„ Sec. 80).
„oriv.,
ff "~-trZ,
Q: What are theIVLuiVeZtor deditctibilt of taxes?
ANS: T_he.requisiteWe thelowing: (TPrit !ILL)
1. Payments &Ng bent:I:axes;
2. It must be Ea) rsiiicurreillkin legeext,
3. It must be incurred connec ion witiiihetaxpayers Trade, business or
profession; .
4. Tax must be. rkas on and payable by the taxpayer (indirect taxes
are not included);d
5. Taxes are not specifically excluded by law from being deducted from the
taxpayer's gross income.
Note: In the case of a NRA-ETB and a RFC, the taxes for which deduction is claimed
must be connected with income from sources within the Philippines (NIRC, Sec. 34
(C)(2); R.R. No. 02-40, Sec. 80).

Q: What are the taxes allowed as deductions from gross income?

ANS: In general, all taxes paid or incurred within the taxable year, in connection with
taxpayer's trade, business or profession shall be allowed as deduction (NIRC, Sec. 34
(C)(1)(a)). Examples are:
1. Import duties;
2. Business license, privilege, excise and stamp taxes;
3. Local government taxes (real property taxes, license taxes, professional taxes,
amusement taxes, franchise taxes);
4. Documentary stamp taxes; and
5. Excise taxes (R.R. No. 02-40, Sec. 80).

829
 Q: What are the taxes which are not allowed as deduction from gross income?
ANS: The following are non-deductible taxes: (NSEFF-SC)
1. The income tax provided for under the NIRC (Sec. 34 (C)(1)(a));
2. Special assessments and taxes assessed against local benefits of a kind that
tends to increase the value of the property assessed (NIRC, Sec. 34
(C)(1)(d));
Note: A tax is considered assessed against local benefits when the property
subject to the tax is limited to the property benefited. Special assessments are
not deductible, even though an incidental benefit may inure to the public
welfare. The taxes deductible are those levied for the general public welfare;
by the proper taxing authorities at a like rate against all property in the territory
over which such authorities have jurisdiction (R.R. No. 02-40, Sec. 83). If it
does not tend to increase the value of the property, the special assessments
are deductible as taxes.
3. Estate and donor's taxes (NIRC, Sec. 34 (C)(/)(c));
4. Foreign income tax, provigacLthe..twayer avails of the foreign tax credit;
otherwise, the otax xarre claimjd &
as adduction from gross income (NIRC,
Sec. 34 (C)(1) and' 31,,,, ‘_ . ...‘A1,41 i '".•,,
I
5. Final taxes, 1:1elga ,in VI nM,ire,ofincoide.tax; ,,.).N..,
6. Taxes on Sal; barfer15:exchange of hares ofJ4tocks listed and traded
through thcf4ystdcexctrarigar.orthrougOnitiallpulic offering (NIRC, Sec.
127 ( Ditff..0d) 5 / ir in t -v,
„ \ .r)-j .
7. Taxes aieoh Capital assets ,itipt Ore subject to, a final tax, such as real
propelty, the isposition of whiCh:is subject td the 0 (a12Pe capital gains tax
(2-B DO 0 DON, 1 axatrop, supra at 82 . j m---
Note: In the ea e-of NRA ' Ttfi'd 11.aiflf.C;Wiluct on is a lowe my if and to the
extent that th 4 taxeb for whi de uds(ary-: la)med re con dcte1 ith income from
sources within licklptpi IRC, Sep C)(2)
.,..:
Tax credit tde-falteductioa i :0'4
..,:f1);: ,1: 1
Q: Distinguish Tax Cre\ t frorf T x^laeductio
ANS: The distinctions are ttzfo
'1/4

Tax credit is defined‘6ak_aCao-fe. , x,,creclUction is a subtraction from

reduction from a taxpayer's rdxtrwarpm ,Arcislincome resulting to a lower
direct subtraction from the tax payaloreTcrt taxable income.
government.
A tax credit is used by private establishment A tax deduction is used before the
only after the tax has been computed. tax is computed. (Commissioner of
(Commissioner of Internal Revenue vs Internal Revenue vs Central Drug
Central Drug Corporation, G.R. No. 159647, Corporation, G.R. No. 159647,
April 15, 2005). April 15, 2005).
Note: Taxes withheld from the employee's salaries will not affect the former's taxable
Income because they are not allowed as tax deductions but as tax credits. Tax reduction
reduces the taxable income while tax credits reduce the tax liability (CIR v. Central Drug
Corporation, G.R. No. 159647, April 15, 2005).

Q: When is foreign tax credit allowed?

ANS: When a taxpayer has paid income taxes to a foreign country on income for which
he may also be liable for Philippine income tax, he may claim such income taxes paid to
a foreign country either as:
1. Tax credit against the Philippine income ta)cdue; or

830
 2. Deduction from gross income.
Note: Only a resident citizen, resident alien (subject to the rule on reciprocity) and
domestic corporation (including taxable partnerships) are allowed to avail of this option.
These kinds of taxpayers (except a resident alien) are liable for income tax on their
income derived from sources within and without the Philippines (MAMALATEO, Income
Tax, supra at 215).

Q: What are the limitations in claiming foreign tax credit?

ANS: The rules are:
1. The amount of the credit in respect to the tax paid or incurred to any country
shall not exceed the same proportion of the tax against which such credit is
taken, which the taxpayer's taxable income from sources within such country
bears to his entire taxable income; and
2. The total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken, which the taxpayer's income from sources
without the Philippines taxable vnder Title II of the NIRC (Tax on Income)
bears to his entire taxable irtb e for the same taxable year (NIRC, Sec. 34,
par. (C)(4)).

Treatments of Surcharges, Intekes , aikkites for Delinquency

?. •441-
Q: Are surcharges, interest, apsi le;U,4%i
ANS: No. Surcharges, interes,trandfirs re nalre'diretiiilill3.R. No. 02-40, Sec. 80).
To allow them to be deflufla defeats,ffhe rescribed punish Nit (Gutierrez v. Collector
of Internal Revenue, SfkI(o. L-19530, 20, 1965).
Note: Interest on defici taxes may be llowed as dedit No. 13-2000).

e.
Q: What are t,cifigideredl gssesin relati to deducfi a ss
eincome?
wo.)44 x,r
ANS: Losses'''. tally sti TOned dUr g t taxable yematl ,.,.mpensated for by
insurance or othe forniiva Videmat NI Sec. 34, pa-00) )-

Q: What are the req !sites for de uctib osses? (TA-CDC)

ANS: The requisites arethe allowing:
1. Loss must be at of the-Taxi:la t- •• -rsonal and not transferable to
another;
Note: The loss,parent company may not be deducted by its subsidiary.
But the loss of ffiathranch within or outside the Philippines is deductible from
the gross income of the head office located in the Philippines, since the branch
is only an extension of its head office and there is only a single entity. If the
taxpayer is engaged in several businesses, loss sustained in one line of
business cannot be deducted from the other lines of business (BIR Ruling No.
123-87, May 4, 1987).
2. Loss Actually sustained and charged off during the taxable year;
3. Evidenced by a Closed and completed transaction;
Note: The taxpayer's failure to record in his books the alleged loss proves that
the loss had not been suffered, hence, not deductible (City Lumber v.
Domingo, G.R. No. L-18611, January 30, 1964).
4. Not claimed as a Deduction for estate tax purposes (for individuals);
Note: Losses within six (6) months after the death of the decedent can be
claimed as itemized deduction of losses under Section 86 par. (A)(1)(e) of the
NIRC. However, it may be claimed as deduction in the estate tax return
provided that the same are not claimed as itemized deduction of losses under
Section 34, par. (D)).
5. Not Compensated for by insurance or other forms of indemnity;

831
 I•'s:..;P:Cligli.j'?„•,01gr:g7.5:•lii.:•"..,:,..:,2t, ,--Ti..!; • -*

Note: If the loss is compensated by insurance or otherwise, the loss is

postponed to a subsequent year in which it appears that no compensation at
all can be had, or there is a remaining net loss (or there is no full
compensation) (Plaridel Surety & Insurance Co. v. Collector of Internal
Revenue, G.R. No. L-21520, December 11, 1967);
6 Loss must be connected with his trade, business, or profession or incurred in
any transaction entered into for profit though not connected with his trade,
business, or profession; and
7. For casualty losses, notice of loss must be filed with the BIR (i.e. within forty-
five (45) days) from date of occurrence or discovery of the casualty or robbery,
theft, or embezzlement (RR No. 12-77, Sec 4(b)).

Q: What are the other types of losses?

ANS: The other types of losses are the following:
1. Capital losses - deductible only to the extent of capital gains;
Please see previous cliscustr-refflosseR. from sale or exchange of capital
assets. 1
2. Losses resulting'frorq sa#9,,pritieS1Momingwvo lass\
,i
,Nts
3. Special Lo -lbs'ses from wash salesNagerlogiosses, and abandonment
A
losses
4. Net Opp 40196 T ry d over( gLC9)
5. Casuatfy (NI C, Sec. 34Phar4D)).
f
Q: What are tiel.:41011es for aratilfty
osecun les becoOg ,worthless?
ANS: The reorifesiare the 'A 114
,
1. Ascerta' kip be w fthlesSik5f-citia0ad off ithin th taxabl year;
2. Secuti s-held anpital assa C, Sec.4;:p r. D)(4)eb ;
3. Loss tovps-ipt urrk taxrvgTHE z N bariK • r trust company
incorkalefl lindecfAili spin earelbst talipa of btigi ess is the receipt
of del) ots it (N/PtC, sq.)\3p s cite in China Banking
Corporation v.c G. di_Thr Alk,19, 2000.
Note: In the case kChina'Bkn inkt , 125508, July 19, 2000, the
Court upheld the CR enial rthe adad
tio -off rorgs i arof "securities becoming
worthless" claimed by/Ores. of.stocks.W8ulckt o iDdry assets only to a dealer
in securities or a person e-ftgaggdii the gurr..14,,elartdIs eV, or an active trader (for his
own account) in, securities. rrrthe andsc•NhoikeMe flnotherwho holds the shares of
stock by way of are investment, the s re o im would be capital assets. When the
shares held by such investor become worthless, the loss is deemed to be a loss from
the sale or exchange of capital assets. The loss sustained by the said holder of the
securities, which are capital assets (to him). is to be treated as a capital loss as if
incurred from a sale or exchange transaction. Capital losses are allowed to be deducted
only to the extent of capital gains, i.e., gains derived from the sale or exchange or capital
assets, and not from any other Income of the taxpayer
.,Securities becoming worthless are considered•as a foss from the sale of capital assets
on the last day of such taxable year (Sec. 34 (D)(4)(b) &-(E)(2)).

Q: Define Wash Sales.

ANS: It is a sale of stocks or securities where substantially identical securities are
acquired or purchased with sixty-one (61) day period, beginning thirty (30) days before
the sale and ending thirty (30) days after the sale (NIRC, Sec. 38).
Note: The term "substantially identical" means that the stock must be of the same class,
or in the case of bonds, the terms thereof must be the same. It is necessary that there
must be similarities on all important particulars (ABELLA, Taxation Law (2017))
[hereinafter ABELLA, Taxation].

832
Q: What are the requirements to constitute loss from wash sale?
ANS: The following are the requirements:
1. The sale or other disposition of the stock resulted to a loss;
2. It appears that within a period beginning thirty (30) days before the date of
such sale or disposition and ending thirty (30) days after such date, the
taxpayer has acquired or has entered into a contract or option so to acquire,
substantially identical stock or securities; and
The seller is not a dealer in securities (NIRC, Sec. 38 (A)).
Note: Losses on wash sales are not deductible as losses from sales or exchanges of
property.
Q: What is the rationale of the rules on wash sale?
ANS: To prevent taxpayers from claiming pretended losses. The law is designed to
prevent a situation where the alleged seller may try to give the impression of a loss in
such wash sale when the "loss" is actually negated by the effects of his having bought or
acquired "substantially identical stocks grgecurities" within a period very close to the
occurrence of the sale of his shares, 9pStciOjcs (ABELLA, Taxation Law (2017)).
Q: What are the instances oin21,inillic .'1k1! he provisions on wash sales are not
applicable? a NAV t,
ANS: The wash sale provisions deiingt 41)54 qe..tollowinR:
1. Individuals or corporations .. ittiph deareTWoo such as stock brokers and
banks and trust,ostfipanies,•4 ie sale or other- disposition is made in the
ordinary coursgafArade or Wsin ss; ._
2. Short sales tifoseetions;
3. Gains in wasit erucii gai are taxable ( f20-, Sc e. 38).
,014
Q: Are wash st ales stocksorsecwities deductible?
ANS: No. Tlay are no ductible uniesP e loss is incurr- dealer in stock or
securities, an elrerisa0 tqn friA:p4hic e loss Te•su ,,,
erfe" in the ordinary
course of busin of sue dealenqUe lo om wash sa eseis dedUaible in full (NIRC,
Sec. 38).
Note: Losses frorni,4as ses of stock o 'securities incurred by taxpayers other than
dealers in stock or see:1)1-We re treated me manner as other capital losses.
These losses, if consideell as capkalls,s,m0LIMotible only from capital gains not
from ordinary gains (2-4 OMO DOW1,—TaWaliciri,WITT29).
Q: Are wagering losse ‘.cbid ctible?
ANS: Yes, but they are ded c i le only to the extent of the gain from such transactions
(NIRC, Sec. 34 (D)(6)).
Note: R.A. No. 1169 (An Act Providing for Charity Sweepstakes, Horse Races, and
Lotteries) exempts sweepstakes winnings from taxation. It follows that no losses
incurred therefrom can be allowed as deductions from gross income.

Q: What is meant by "net operating loss"?

ANS: It is the excess of allowable deductions over gross income of the business in a
taxable year (NIRC, Sec. 34, par. (D)(3)).
Q: What are the requisites for deductibility of Net Operating Loss Carry Over
(NOLCO)?
ANS: The following are the requirements for deductibility: (NOCES)
1. It is from the Net • operating loss of the business for any taxable year
immediately preceding the current taxable year;
2. It has not been previously Offset as deduction from gross income;
3. It shall be Carried over as a deduction from gross income, for the next three
(3) consecutive taxable years immediately following the year of such loss only;

833
 4. The taxpayer was not Exempt from income tax in the year the loss was
incurred; and
5. There has been no Substantial change in the ownership of the business or
enterprise.
Note: In the case of oil and gas well, losses incurred in any of the first ten (10) years of
operation may be carried over as a deduction from the gross income for the next five (5)
years following such loss (NIRC, Sec. 34 (D)(3)).

Q: When is there no substantial change in the ownership of the business or

enterprise?
ANS: There is no substantial change in ownership of the business or enterprise:
1. Where at least 75% in nominal value of outstanding issued shares, if the
business is in the name of a corporation, is held by or on behalf of the same
persons; or
2. Where at least 75% of the paid up capital of the corporation, if the business is
in the name of a corpora i .n„-,is.hekl by or on behalf of the same persons
(NIRC, Sec. 34, pat:.(D j)).
1 , 4N1
,1 **'
„?'..,t, ,
p, s.
"di
Q: In case of merger, orksol- .atione,orAcorribillationl is,fhe transferee or assignee
entitled to claim thei oLco Mlle transferor? *4,,,,,,.. A'11
ANS: The transferee o Agdine .shall-hi -enti ecrto laim t p same as deduction
from gross inco a en as1 aliesult,•of till s ofpgy, consolidation or
combination, the,sha derl of thegfran6feroffassignor, or he transferor gains control
of: AA,
1. At le % r more in nominalivlatheot the o tstan i ) ed shares or paid
up c4p alhe trarisferegissig1 e"TO`:re,Orp ration;
2. At leisyr5? Ior mor interest i Oeines , of the ttphsfe ee/assignee, if not
a corpoiatipn (75%1 uity rulelRR. No. 14A Sea 2.4)
Note: The 75°7 k golp rule wners,, jplounteresyr onl hpplie to a corporation
and in cases 'ere nsf ,.4sgign f th taxp'd er's net operating
losses as a res_alt of o 'bru:4filel ear to erynerger r consolidation or
business combing ion wit i .I

Q: Who are entitle -bldigibil-Kjitisfin‘s?

ANS: The following tax ay etluct.NOLCO !fez t vey, ross income:
1. Individuals en gag ilthi l.ide ortupink kiii- eaxercise of his profession;
2. Domestic corporatio s*azitzitNntiore ti,corporations subject to the normal
income tax; ....,
......
3. Special corporations subject to preferential tax rates (e.g., private educational
institutions, hospitals, and regional operating headquarters); and
4. Estates and trusts (R.R. No. 14-2001, Sec. 4).

Q: Who are not entitled to deduct NOLCO from gross income?

ANS: The following taxpayers are not entitled to deduct NOLCO:
1. Offshore Banking Units (OBU) of foreign banking corporation, and FCDU of a
domestic or foreign banking corporation, duly authorized as such by the BSP;
2. An enterprise registered with the Board of Investment enjoying the income tax
holiday incentive;
3. PEZA registered enterprise;
4. SBMA registered enterprise;
5. Foreign corporations engaged in international shipping or air carriage business
in the Philippines;
6. Any person, natural or juridical, enjoying exemption from income tax (R.R. No.
14-2001, Sec. 4).

834
 Net Capital Loss Carry-Overs Net Operating Loss
Difference Carry-Over Sec.39(D) Carry-Over

Taxpayer must be an individual Taxpayer may be an individual

(engaged in trade or business
Taxpayer or in the exercise of
profession) or Corporation.

Involves net capital loss Losses incurred or connected

Kind of Loss with trade or business (from
operation)

Carry-over as loss from sale of Business losses not previously

capital asset in the next offset as a deduction from the
Period of
succeeding year gross income carried over as
Carry-Over
such for the next three (3)
consecutive years
Et'if'
rf

0
Bad Debts
.." la
Q: What are the requisites fVdeducpb it atad
ANS: The requisites are Allowing: (4AW)
1. Existing, valid nd legally d0,2g, dable indebtedne gi e to the taxpayer;
2. Connected wj-4thltaxpayert tr e, business, or *hie of profession;
3. Must not be;_us_ tairielin a tra action enterecrint between related parties
under A" (Tfahe NIRC;
4. ActuallY charged off in the Gtok f accounts . taxpayer as of the end of
.
the regilewoaDTfcrtlasnes
Note‘The a4 nR.L
n - f money le ust be pr2. -L C /?
&.51 0.72td$7 in the books of
the taxiDayeraireteivable and I r cancelled an . en-off (R.R. No. 05-99,
Sec. 2, eVrfigiclaby R.e. No. 5-02); and
5. Actually akegaineAto be Wo .ess=a d uncollectible as of the end of the
taxable year ppm°. 05-99, Sep ' . .„..
Note: Additionally, befose•a debtlgalirt . . - . fi ess, the taxpayer must also
Show that it is indeedrtincolleaVe even in the future. Furthermore, there are steps
outlined to be undertakte taxpayer to prove that he exerted diligent efforts to
collect the debts, viz: (1) sung of statement of accounts; (2) sending of collection
letters; (3) giving the account to a lawyer for collection; and (4) filing a collection case in
court (Philippine-Refining Company v. Court of Appeals, G.R. No. 118794, May 8,
1996).

Effect of Recovery of Bad Debts

Please see previous discussions on bad debt recovery under ll-3(d)(x).

Depredation
Q: What is depreciation expense?
ANS: It is a reasonable allowance for the exhaustion,, wear and tear (including
reasonable allowance for obsolescence) of property used in the trade or business
(NIRC, Sec. 34(1)).

835
 -7.

Q: What are the requisites for deductibility of depreciation expense?

ANS: The requisites for deductibility are the following: (RUCS)
1. The allowance for depreciation must be Reasonable;
2. It must be for property arising out of its Use in the trade or business, or out of
its not being used temporarily during the year;
3. The allowance must be Charged off within the taxable year (R.R. No. 02-40,
Sec. 113); and
4. Statement on the allowance must be attached to the return (R.R. No. 02-40,
Sec. 115).
Q: How is depreciation expense determined in case of a property held by a tenant
or a trustee?
ANS: The following rules shall be followed:
1. In the case of property held by one person for life with remainder to another
person, the deduction shall be computed as if the life tenant were the absolute
owner of the property and sfAll,be.allowed to the life tenant.
2. In the case of proel held in tithe deduction shall be
apportioned betyge'en tita4nconlpjae.r/Apiarias?:nci.the trustees in accordance
with the pertirfenfkatisivs.of-theig:,.. §trPmeht,;citating the trust, or in the
absence of such presies, on the basisiAtht-trustsfricome allowable to each
(NIRC, Sec.'43. 5) a. ).
Q: What are the, mciho s aqd rate usekk l AJompute the r'egon‘able allowance for
depreciation?/ -A
ANS: The tern owance las u,§9 in calkia paragraph shall
A .
include, but ot
of ed to, I n 'alloVv`an Han with rules and
regulations pressab'ed by th Seci rea f.:
;Piiaance, &co mendation of the
v" •
CommissionetThaeTtnyq:IR following, et6ods:
1. The trTigik 'ne 5Ft if, ."N\74
2. Declirlkeb Dance d, u`sinV4 .41e ing tIfv'ce the rate which
would ave beep uskp •tizi
3. The surnef-the:years4i1 itAl la
4. Anyothervetho hc z7pRq§p s1 - -lbpd 1:y he Secs tary of Finance upon
recommendationse
oflo
t 34(F)(1).
Depletion of Oil and Gas wellsand MinV
Q: How are intangible exploralibmaa, lie op = nt drilling costs deducted?
ANS: After production in commercial quantities has commenced, certain intangible
exploration and development drilling costs:
1. Shall be deductible in the year incurred if such expenditures are incurred for
non-producing wells and/or mines; or
2. Shall be deductible in full in the year paid or incurred or at the election of the
taxpayer, may be capitalized and amortized if such expenditures incurred are
for producing wells and/or mines in the same contract area (NIRC, Sec.
34(G)(1). -. •
Q: What are exploration expenditures?
ANS: The term 'exploration expenditures' means expenditures paid or incurred for the
purpose of ascertaining the existence, location, extent or quality of any deposit of ore or
other mineral, and paid or incurred before the beginning of the development stage of the
mine or deposit (NIRC, Sec. 34(G)(2).

836
 W;7:47;7:;::::.•,;i:i:fj ;

Q: What are development expenditures?

ANS: The term 'development expenditures' means expenditures paid or incurred during
the development stage of the mine or other natural deposits. The development stage of
a mine or other natural deposit shall begin at the time when deposits of ore or other
minerals are shown to exist in sufficient commercial quantity and quality and shall end
upon commencement of actual commercial extraction (NIRC, Sec. 34(G)(2).

Charitable and Other Contributions

Q: What are the requisites for deductibility of charitable and other contributions? •
ANS: The following are the requisites for deductibility: (ATAS)
1. The contribution or gift must be Actually paid;
2. It must be made within the Taxable year;
3. It must be evidenced by Adequate receipts or records; and
4. It must be given to organization Specified by law.
Note: Irrespective of the accounting metil2d used by the donor, donation is recognized
as a deduction only when it was actualpaid or made, not in the year the deed of
donation was perfected. The dedy4III donation is not governed by the ordinary
rules on deductibility of the 63.epeps% onation must be BOTH perfected and
consummated before it can be 41A1,01tia deduction (Philippine Stock Exchange v.
Commissioner of Internal Revenue; CT,. dre o..,5995, Ogtoper 15, 2002).
fe *4A
Q: What are the contribli 1-gfdns
.,. i whtcn are partially • d• tible or are subject to

-
limitation? ji I)
A, ,
ANS: The contributions, that are pa.ruall 1 deductible or i sib et to limitation are the
following:
4 et
P .:4•"'
1. Donations4he art, Ot in accordance s with the Na ion I Prtority Plan;
2. Donations to accVirea NGOs ,‘. en the conditions tdisassed below) are not
co pied with;
3. Dorigtionsrterthe9pverilraent
t o e Philiptiin ,.,.., agencies or any
polit4subclivisiwsxclutiitely f ublic purpogQ.
4. DonaticiliMagreAted doiliest •rporations or associations organized and
operated ke.xclusivikc for 4eligi 4 , charitable, scientific, youth and sports
development,kulAral or educa 6" 'oses or for the rehabilitation of
veterans, or tatiblarwrut, 0-vac. 34, par (H)).
Note: Amount deductiltvhall 2 2 eicceed:
1. Individuals — Itkof taxable income before contributions; and
2. Corporation — 5%72f axable income before contributions (NIRC, Sec. 34, par.
(H)).

Q: What are the contributions deductible in full?

ANS: The contributions that are deductible in full are the following:
1. Donations to the Government of the Philippines or any of its agencies or any
political subdivisions including fully-owned government corporations to be
used exclusively in undertaking priority activities in: (HEY-HECS)
a. Health;
b. Education;
c. Youth and sports development;
d. Human settlement;
e. Economic development;
1. Culture; and
g. Science; according to a National Priority Plan;
Note: Any donation not in accordance with said priority plan shall be subject to
the 5% or 10% limitation.

837
 2. Donations to foreign institutions or international organizations pursuant to
agreements, treaties or commitments by the Philippine government and such
institutions or in pursuance of special laws;
3. Donations to accredited NGOs, provided that:
a. No part of its net income inures to the benefit of any private stockholder
or individual;
b. Organized and operated exclusively for : (SEC-CHR-SC)
i. Scientific;
ii. Educational;
iii. Character building and youth and sports development;
iv. Cultural;
v. Health;
vi. Research;
vii. Social welfare;
viii. Charitable, or any combination thereof.
c. Makes utilization dir,ectlyonot,latz than the 15th day of the third month
(unless extended) "177 clbse„,,, the taxable year in which
contributiorrs aeceiv -oj
d. Its anjottralf t iniattative-exp votlxceed (30%) of its total
expenses; '4nd
e. Ityagt4 inif Aveht-67-Birsolution, qtf distributed to another
d foripjmtV purpose pta pro OR to the state for
ubli urpo e, OR would rile distkibuteq court to another
rgan tion to be use•,ki?Nsuch manlier 'n judgment of said
hall b accomp 0-the serlerd purpo esr* ich the dissolved
torga ization a itiiO4-41.&- .
Note An ,tipnation of in cdt!Iplan -with th be subject to the
5 or CI tati corporatitiYa: nd indiv* re pecti ly.
pry • awg• wathr< ,
4. Dona
have t
Note: Whether educti te in lciA • r‘
)14)-
pilbj tiof 10-e
vid he requirements

n, the recip ent NGO must be

accredited by the hilippla Co tio .(g.0. 720, April 11, 2008). •
Staajn)
Q: What is the bass',srif theA uc ion -; Idtflati other than money?
ANS: The amount of dr% chktalilgtentributiorr6f pit er than money shall be
based on the acquisition co fogs prop' Sec
' 4 (H)(3)).
.1.V
Research and Development n7 res
Q: .What are the options granted to a taxpayer on the treatment of R&D
expenditures?
ANS: The taxpayer may either treat R&D expenditures:
1. As ordinary and necessary expenses, provided that:
'a. R&D expenditures are paid or incurred by him during the taxable year;
b. R&D expenditures were incurred in connection with his trader business
or profession; and •
c. Not chargeable to capital account;
2. As deferred expenses. Provided that the deduction may be ratably distributed
over a period not less than 60 months or 5 years beginning in the year in
which the taxpayer first realizes benefit from such expenditures.
Note: The method elected shall be irrevocable, and changing to a different method may
be allowed only with the authorization of the Commissioner (NIRC, Sec. 34, par. (I)).

838
 Q: What are the limitations on deduction of R&D expenditures?
ANS: Deduction of R&D expenditures does not apply to:
1. Any expenditure for the acquisition or improvement of land or property to be
used
, in connection with R&D;
2. Any expenditure incurred for the purpose of ascertaining the existence,
lothtion, extent or quality of any deposit of minerals and oil (NIRC, Sec.
34(I)(3)).

Contributions to Pension Trust

Q: What are the requisites for deductibility of contributions to pension trust?
ANS: The requisites for deductibility are the following: (ERCA-10)
1. Employer must have established and funded a pension or retirement plan for
the payment of reasonable pension to its employees;
2. Pettsion plan is Reasonable and actuarially sound;
3. Amount contributed must no longer be subject to the Control of the employer;
4. Payment has not yet been Aljpgif,d as deduction; and
5. The amount is apportiorapiAual parts over a period of 10 consecutive
yOrs beginning with thqeViir{which the transfer or payment is made (DE
LEON, NIRC Annotatedkstrikaetr91).
sf,v
Deductions u
l rider Special Low
.11*,
Q: What are special detions? 4,4
cla
ANS: Thesedeductior slate usually alio. ed only for particul sinesses or enterprises
and not to others, or y fis
• `e• alloweS
, o II but are not aed for under NIRC but
under special laws. A gp rsevare the owing:
1. Extraordiri de dfins allowe o insurance c
2. Speqiectedu, Qns for prop4a ducational I
•
3. Special " educti ns foivroduct bonus -Re k -fining under the
Progitctivarricen es /al:419
4. Deduc 'ons for mg efrelises 2if qualified je
5. Deductiorpd er Ado9r-a-S ool Act of 1990; and
6. Deductionsw der t e Expanded lizens Act of 2003.

Q: What deductions ar allowed4hd - '*1 5..7 to Senior Citizens

Act of 2003, as amendgd?
ANS: The following are owe iulider R.A. No. 9257, Sec. 4:
1. Deduction from tosI income of private establishments for 20% sales
discounts granted to senior citizens on the sale of goods and/or services; and
2. Additional deduction from gross income of private establishments for
compensation paid to senior citizens actually employed by the taxpayer.

Q: What is the tax treatment of the 20% discount granted to senior citizens?
ANS: With the effectivity of R.A. No. 9257 on 21 March 2004, there is now a new tax
treatment for senior citizens' discount granted by all covered establishments. This
discount should be considered as a deductible expense from gross income and no
longer as taz credit as provided in R.A. No. 7432. Tax credit is defined as a peso-for-
peso reduction from a taxpayer's tax liability. It is a direct subtraction from the tax
payable to the government. On the other hand, a tax deduction is only a subtraction
from gross income resulting to a lower taxable income (Commissioner of Internal
Revenue v. Central Luzon Drug Corporation G.R. No. 159610, June 12, 2008).

839
 Q: What additional deductions are allowed to private establishments employing
senior citizens?
ANS: Private establishments employing senior citizens shall be entitled to additional
deduction from their gross income of 15% of the total amount paid as salaries and
wages to senior citizens, subject to the following conditions:
1. The employments shall have to continue for a period of at least six (6) months;
and
2. ,The annual taxable income of the senior citizen does not exceed the poverty
level as may be determined by the NEDA (R.R. No. 04-06, Sec. 9).

Q: Are there tax incentives given to private entities which employ disabled
persons?
ANS: Yes. Private entities that employ disabled persons who meet the required skills or
qualifications, either as regular employee, apprentice or learner, shall be entitled to an
additional deduction, from their gross income, equivalent to twenty-five percent (25%) of
the total amount paid as salaries arlipigages.todisabled
...,
...,,,. persons (R.A. No. 7277, Sec 8
(A)).
$0"1::: 1,,J Nt
t
Optional Standard Deli dan
„I- v.) A,
r- ii .1
N

Q: What is Optiorw Striclar °L,eclAstion..(Wr • 'N1

ANS: It is a fixed 1§E.ce ta' qedilEion without retire toealny act al expenditure, in lieu
of the itemized d Clbotio j NI C,
A
Si 3!")).-"F
AD, -Al
,t-:, .4,
Q: How Much o ed as BD IC i
.7. CP
ANS: The OS . all is an mRig\nct e ceApi
g:
1. Qual ed i vidual axpayer,4 "Ogle gro s sale4r
L rece pts;
2. Qual i d co por ti — 4194thp2,74Ass • me (MA. TEO, Reviewer,
supra at 8
A-=•,e(
id(
Q: Who may av i of t e OS ,.?)..
ANS: The followi g may vairb :th - SD: ASS-'-.
•
I'
1. Individu I (incl ding st t N'a t
except indiv duals earning pure
conipensa 'on incomqe kiajfais* liSsr„.
2. Corporation, ex!pnerkriliffligh—,c,Mi ns (R.R. No. 16-2008,
Sec. 2 and
3. General Professio alnersh Pv-‘\I tr
a. GPP and partne tiC partnership may avail OSD only
i once
1 b. Either by the GPP or the partners comprising the partnership (NIRC, as
amended by TRAIN Law, Section 34(L))).
Note: Unless the taxpayer signifies in his return his intention to elect OSD, he is
considered as having availed of the itemized deductions. Such election, when made by
the qualified taxpayer, is irrevocable for the year in which made; however, he can
change tolitemized deductions in succeeding years (R.R. No. 16-2008, Sec. 7).

Q: What IS the basis of OSD for qualified individuals?

ANS: The:basis of the OSD for qualified individuals is:
1. Under accrual basis — gross sales (total sales that are recognized, whether
Collected or not) during the taxable year without deducting cost of sales or cost
of services;
2. Under cash basis — gross receipts (total payments received for the sales
during the taxable year without deducting the cost of sales or cost of services)
(R.R. No. 16-08, Sec. 3).

840
 l'.'4V,...r.fiiti.417Fi1` :-;741:"CT
t 2^ r'::.1'''
.
,3-0,, .
e• r;?6,- . --,
01 14.:04v,,frr-fc?,:-:c.t.tr
,, ,' 2,44;..i.x??twAl..2.1:;4-ti:',17 . -.,.:.- -;• ;•vgst

Q: What is thebasis of OSD for qualified corporations?

ANS: The OSD shall be based on the gross income (gross sales less sales returns,
discounts and allowances, and cost of goods sold) during the taxable year (R.R. No. 16-
08, Sec.4).

Q: What are the rules when a GPP avails of itemized deduction?

ANS: If the GPP availed of the itemized deduction in computing its net income, the
following rules shall apply:
1. The individual partners may still claim itemized deductions from said share;
provided
2. That in claiming itemized deductions, the partner is precluded from claiming he
same: expenses already claimed by the GPP (Sec. 26, NIRC).
Note: Every general professional partnership shall file, in duplicate, a return of its
income, except income exempt under Section 32(B) of this Title, setting forth the items
of gross income and of deductions allowed by this Title, and the names, Taxpayer
Identification Numbers (TIN), addresses and shares of each of the partners (Sec. 55,
NIRC).

Q: What is the rule when a GPR4VaikroaSD?

ANS: If the GPP avails of OSD in OK:kiting its net income, the partners comprising it
can no longer ;claim further deduCtiOpti, eireare in Lth'e said net income for the
following reasons:
-tiva 1.44,
1. The partner's distribUtive shqre ID the GPP is rear as gross income not his
grosg sales/VriSts and the 0°0 OSD allowed dividuals is specifically
mandated to befdeducteak-no from his gro, tome from his gross
salestreceRarlfl
i "vox-
2. The 0SMbeing in lieu.of the ite red deductioriallowe in computing taxable
incosbridvill appvier for BOTH, the items of deductiori allowed to the GPP and
its IWO QORf612, 2-2Q10).
F A
Q: How oftencatahe•GRA'and parpers comprising su-aval he OSD?
ANS: The general, ,partn rip and the partners comprising such
partnership may eV' il of the 'Optional stark a rdgduction
d, ONLY ONCE, either by the
general professional parlers 1p or theAppeslai p isirlg the partnership : Provided,
finally, That except whefilhe Co inibteMIRtvoselie its, the said individual shall
keep such records pertaii;iing too Ls gross sales or gross receipts, or the said corporation
shall keep such records pining to his gross income as defined in Section 32 of this
Code during the taxable ear, as may be required by the rules and regulations
promulgated by the Secretary of Finance, upon, recommendation of the Commissioner
(NIRC as amended by TRAIN Law, Sec. 34 (L)).

The rules indicated above is summarized as follows:

Type of deduction
.
claimed by the Maybe claimed by the PARTNER in computing
PARTNERSHIP in his taxable_income
computing net income

Itemized deductions Itemized deductions ONLY

Optional standard Neither itemized nor optional standard deductions

deduction

841
 Deduction for Premium Payments on Health and/or Hospitalization Insurance
Note: Allowable deduction for premium payments on health and/or hospitalization
insurance of an individual is now removed (R.A. No. 10963).

c. Items not deductible

Q: What items are not deductible in computing net income?
ANS: The following items are not deductible in computing net income: (PIRPIS-N3W)
1. Personal, living, or family expenses;
2. Amount paid out for new buildings or for permanent Improvements, or
betterment made to increase the value of any property or estate (capital
expenditures);
3. Amount expended in Restoring property or in making good the exhaustion
thereof for which an allowance has been made (major repairs);
4. Premiums paid on any life insurance policy covering the life of any officer or
employee, or of any personjinancleCnterested in any trade or business
carried on by the taxAer, *ndi idualpr.dprporate, when the taxpayer is
directly or indire;t16 lag. eficia ndh suc Nile (NIRC, Sec. 36 (A));
5. Interest expensre0 ebts and,losses IR sale,s f property between related
-,,,„,...
i parties; ...„'
-4‘474 ^
6. Losses fcri p .'t 1. /fie changrd;f2yroperty4 IckSec 6 (B));
7. , Non- d9, c lb/e nter st, TD A . , 7,7
8. Non- dpduc II? tax s; Jr * .i.m.
9. Non- $teducti e los es; and 4,,?,% ( f)1
IA:
10.' Toss7sIrm ash la es orsTot ;Or secuntles
: v:7,:,,,,,
ec. 36).

Personal liyin , One mityffxpense. r(/--

- ---: jr
Q: Why are peison liv rigli4:\K-familses-no pia(
ANS: These ite (dtiatible On grol'Aln se thpl did not help earn
the income. F 0?%. Orl
ik1 i 610610t, nsider, d the theoretical
"personal, living, expe` th taxpa DO OND/N, Taxation (2016),
supra at 624).
' -
Capital Expenditure
Q: Define capital expen it IALI" ''' :1 ri'
ANS: Expenditures for repla nts, —alon-„..4 rovements, or additions which
prolong the life of the property (Alham iPIS Cigarette Mfg. Co. v.. Commissioner
of Internal Revenue, G.R. No. L-23226, November 28, 1967).

Q: Why are capital expenditures not deductible?

ANS: Capital expenditures are not deductible because they do not help earn income
when it is incurred. However, the proportion of capital expenditures which would help
earn income for. future periods are allowed as deductions for depreciation or as
amortization (2 DOMONDON, Taxation, supra at 529-530).
Example: The following are non-deductible capital expenditures:
1. Amount paid out for new buildings or for permanent improvements, or
betterment made to increase the value of any property or estate (NIRC, Sec.
136 (A)(2)); and
2. Amount expended in restoring property or in making good the exhaustion
thereof for which an allowance has been made (NIRC, Sec. 36 (A)(3))....

842
( ....W.41:i1A-, ;:fible-1, , gti: 'eV >7
:-'4. W.:',Ig•W,:fi*,

Q: What capital expenditures are deductible?

ANS: The following capital expenditures are deductible:
1. Intangible drilling and development costs in petroleum operations (NIRC, Sec.
36, par. (A)(2) in relation to Sec. 34, par. (G)(1)); and
2. Expenditures considered as capital outlays of depreciable assets incurred
during the taxable year for the expansion of school facilities, when this option
is elected by the private educational institution (NIRC, Sec. 34, par. (A)(2)).

Q: Who is a person financially interested?

ANS: A person is said to be "financially interested" in the taxpayer's business, if he is a
stockholder thereof or he is to receive as his compensation a share of the profits of the
business.
Note: The premiums may be deductible as an ordinary and necessary expense if the
insurance was taken as part of the employee's compensation package and the
designated beneficiary is not the employer (2 DOMONDON, Taxation, supra at 535).
#i)
Interest Expense. Bad Debts, and Losses from sales of property between related
,
parties
Q: Who are related taxpayers? ;
ANS: The following are related taxpa0,;„ , ., ,,,,or
1. Members of the same..familakfior.d414te Whether by the full or half
blood, spouse, ancestors andlitntal descendantsY II
2. StockholdersOicorporatibn,rhen the stockholdertholds more than 50% in
value of thecotporation't";,Witit.dtanding capital /stock, except in case of
distribution irglAuliati:ipi ' q 1 i
4/ ih
3. TwO corpor,dtirinkere than 50° n value of outttallin%capital stock of each
Aire
of it ices' ownar, pr inPectly, by or fr the same individual if either
A
one4.549.uch eorevrations, with respect to the ifaxab e year4 of the corporation
pretiding,theclatof trksRle of xchang e • gr einapiolding company
or a foreign Rersopal holdirig co fiany; h
4. GrantoNiVitteiVi in a trpst; %.
5. Fiduciary f' a trudttand fiduciary in another trust, if the same person is a
grantor with respecto each trust<rliM
.,
6. Fiduciary of tirdrand tvneSsimpAsleL
`i.'' .. C..a
tnistaRC, Sec. 36 (8)).
Note: Relatives by a pancloOteral Felaves. iDtbIr Than brothers and sisters are
not related parties. Thus,, tergItvpayments made to parents-in-law, brothers or sisters-
in-law, as well as to all laildagbousins, uncles and aunts may be deductible from gross
income (2-8 DOMONDON, Taxation, supra at 824).

Q: What losses from the sales or exchange of property are non-deductible?

ANS: These are the following:
1. Losses from sales or exchange of capital assets shall be allowed as
deductions only from capital gains — capital losses could be deducted only
from capital gains not from ordinary gains. Furthermore, if the taxpayer is an
individual, a net capital loss carry over is allowed to be deducted only from
capital gains. On the other hand, where there is a net capital gain from sale of
capital assets other than real property or shares of stock, said gain is added to
all the other income elements to form part of the gross income from which the
alloWable deductions could be made (2-B DOMONDON, Taxation, supra at
825);
2. Losses from securities considered as capital assets becoming worthless are
not allowed as direct deduction against gross income but are considered as
losses from sale or exchange of capital assets on the last day of such taxable
year (NIRC, Sec. 34, par. (E)(2)).

843
 • • 4 w: 41,3

Non-deductible Interest
Please see previous discussions on non-deductible interest under IIB-4b (Itemized
Deductions).
Non-deductible Taxes
Please see previous discussions on non-deductible taxes under IIB-4b (Itemized
Deductions).
Non-deductible Losses
Please see previous discussions on non-deductible losses under IIB-4b (Itemized
Deductions).
Losses from Wash Sales of Stock or Securities
Please see previous discussions on losses from wash sale of stock or securities under
IIB-4b (Itemized Deductions).

--,1-4A-:
i7 ;/ —
S. INCOME TAX ON INDIVIDUALS
d ,--ks r ,,,. ___ i ...,.
a. Resident citizens, non-tesklentzitizens.'airdre:sidenteliehs
;,.i".,°„,
Q: How are individudisiaxed? ..-----r-
, --- ‘N... ..". v,
*ke ,
ANS: Individuals afplaxedeon t eir: - N..
' " ''S..7
h r...../ .hr 1 10) P
1. Taxable Inc9 e - pubjectgo g. dugted rats or '9.- % fctr resident citizens,
non-resident itize s, residentga lens, and on-re" .1.e t) aliens engaged in
tradekqfpsi . ess in he Philip .0 s.
),,,,mti
2. GrossAncpme - s bjectab- fipq taxTrate o 25% forThon-ilesident alien not
engaged I grade or usingsg-inihe Rif ej- (NIRC .Sec3.4 and 25).
.1 g
Q: How is th \ income ofede PemploSed-ihdfor-pf5ifiggsio als 'fed (pursuant to
TRAIN Law)? () )1 v ,- ,,\„ g 1. l'
.A'. .1
As
c.:'i"
.
IN,
,-....i/
/...:171
ANS: Under NI .C, taxi aple irkgi'nfisidlteib ectstsv e.,.s me graduate,d rates. Under the
TRAIN Law, for Purely Self-en) toyed an or.Pt sronaly'WhoseAross sales/receipts
and other non-ope ting inbome qot-e ee e i • AT}firesholdfof P3M, the tax shall
be, at the taxpayer'svption,,thz. LIE ....,...-r>.- , ,...„ /
1: 8% income lak,oQ grelTsalgsz2 - ass,' pte(irrelicess of P250,000 in lieu
of the graduated4n 91tax rats an c t e e0e ld5e tax; OR
2. Income tax baseAnkthetgradufteek rn,e ta rates for individuals (NIRC, as
amended• by TRAIN LaTi",'Sec.2.4.(.4) —-
Note: Unless the taxpayer signifies the intention to elect the 8% Income Tax rate in the
1 Quarter Percentage and/or ITR, or on the initial quarter return of the taxable year after
the commencement of a new business/practice of profession, the taxpayer shall be
considered as having availed of the graduated rates under Section 24(A)(2)(a). Such
election shall be irrevocable, and no amendment of option shall be made for the said
taxable year (R.R. No. 8-2018).
Q: How is the Income of mixed income earners taxed (pursuant to TRAIN Law)?
ANS: Under NIRC, taxable income is subject to the same graduated rates. Under the
TRAIN Law, for mixed income earners (earning both compensation income and income
from business or practice of profession), their income taxes shall be:
1. For income from compensation - Graduated income tax rates for individuals,
AND
2. For income from business or practice of profession:
a. Gross sales/receipts which do not exceed the VAT threshold of P3M —
8% income tax on gross sales/receipts and other non-operating income
income OR graduated income tax rates on taxable income, at the
taxpayer's option

844
 b. Gross sales/receipts and other non-operating income which exceeds
the VAT threshold of P3M — graduated income tax rates for individuals
(NIRC, as amended by TRAIN Law, Sec. 24(A)).
Note: The provision under Section (24)(A)(2)(b), which allows an option of 8% Income
Tax rate on gross sales/receipts and other non-operating income in excess of P250,000
is available only to purely self-employed individuals and/or professionals. The said
P250,000 is not applicable to mixed income earners since it is already incorporated in
the first tier of the graduated income tax rates applicable to compensate income. Under
the said graduated rates, the excess of the P250,000 over the actual taxable
compensation income is not deductible against the taxable income from
business/practice of profession under the 8% Income Tax rate option (R.R. No. 8-2018).

i. Inclusions and exclusions for taxation on compensation income

This section is previously discussed in detail under 118-3e (exclusions and exemptions).

Q: Give examples of items. excludeirpf 4 : 1: etermining compensation income.

ANS: The following are items not 091444in determining compensation income:
1. Fringe Benefits Subject*Ftifittenefits Tax (otherwise, such fringe benefit
will form part of compentaWri)M. 33(B), NIRC);
2. De Minimis Benefits (Seq 33(Bg(c),INtRc ; and
3. 13th month pay and otlier 00fittoo- P904001.112reshold). The amount of
tax-exempt 13th,,..!,jsifth
-r p-ayOacTd other digfitsgt increased to P90,000
pursuant to TRAI.ITLaw. Thejtotatexclusion shall colter:
,„
a. Benenreceived ball als and employe§sldt the national and local
govertneti.purwarifto ,public Act No. 988p;
b. Berlefits r it,b
evd by em oyees pursuapt to Presidential
. Decree No.
e881, as amended 4y Memorandum Oroer No. 28, dated August 13,
r1p86;41% ' '‘`, .A
d:.._
c 4'41 ,A3enefik,"ceiv1/414by officials eTWIW9M.(fiit covered by
'1, Presidentiatbeckeello. Al, as amendegjageRafandum Order No.
28dete,Ndgust 13y198 4and
d. Otieteneirs such as •roduc ' tivity incentives and Christmas bonus.
(Sea 32(B) .-1(e), NIRC).
40L. , 1:"M
Q: Before TRAIN La 4 hat areAallowable
..._. etalons from compensation income?
What are the changebrouglif
e about by TRAIN Law as regards these deductions?
ANS: The following areka,,Vble deductions from compensation income before the
TRAIN Law:
1. Basic personal and additional exemptions (NIRC, Sec. 35, pars. (A) and (B));
and
2. Premium payments on health and/or hospitalization insurance (NIRC, Sec.
34(M)).
Note: The basic personal and additional exemptions of individual taxpayers are now
removed under the TRAIN Law.

-Premium payments on health and/or hospitalization insurance es allowable deduction is

likewise removed.

II Taxation of business income/income from practice ofprofession

This section is already discussed in detail under II8-3(d)(iii) (professional income).

iii. Taxation of passive income

This section is already discussed in detail under IIB-3(d)(vi) (passive income).

845
 iv. Taxation of capital gains
This section is already discussed in detail under IIB-3(d)(v) (income from dealings in
property).
v. Capital asset vs. ordinary asset
This section is already discussed in detail under IIB-3(d)(v) (income from dealings in
property).
b. Income tax on non-resident aliens engaged in trade or business
For the next six subsections, see IIB-1(d) (kinds of taxpayers) for a detailed discussion.

Q: How are NRA-ETBs taxed?

ANS: A nonresident alien individual engaged in trade or business in the Philippines shall
be subject to an income tax in thef:mLmaincs an individual citizen and a resident
alien individual, on taxable income received from all sources within the Philippines
(NIRC, Sec. 25 (A)(1)).
.49.##' I 1 1 .r. ik-...
c. Income tax on non-resident &lens not engage a Intl-ode or business
er'7,--'.4. .VN- '''---' - V I f N,
Q: How are NRA-NETBs-taxed?. ..),..,,,,-.0'---,,,,,,,zZ tr,)
ANS: There shall brnvjek,,ColleSted and paid for'sadh t#4151z year upon the entire
income received Irom'ilisccrces—ViffigiiZ-Philippilie0y..ge.ej nonresident alien
individual not ertgatet) in tride or ibpsirtessnwithin ke ph(Iippines as interest, cash
and/or property tlividarfds, rents, sal'arieS,TWas, pre luml., 6n i1es, compensation,
remuneration, 5 durnInts, ot other fix4,dr,determin le arlvd dr eriodic or casual
gains, profits, gri I collie, and ca‘ pipl,gaip,s, a laxequ I to twenVafiwipercent (25%) of
such income. pap tat(gains l'ealliecn#11neirire,gftlen alien ildividl not engaged in
trade or businfs ,: iri he Ph libineSliftf"file S-ale of hares 7fittd in any domestic
corporation a er al pro Fsty\i_all_120.sl 2ALgeslig4
: e'-ii
"-Tcorce tax prescribed under
Subsections ( til ) o :0 \.
iQn 24 on CaSpc. 5 B). e
\te
•)
ecs 44 4-1(:&' -\,
d. Individual ta paye exempf r my c metctx$N,
‘ \ 'N..
Q: Who are the Adividual taxpayeks_exe4c.tax?
ANS: The followingNp\ dividu;a1 elf&vit-eik Otilli cte,fax:
1. Senior citize s whcrpre ioiin :g,g esrs ''''"nder, No. 9504;
2. Minimum wag darn (V/R`cSec.Ap. VOR 'eas amended by R.A. No.
9504); and I.
3. Those exempted under IntengARIfje ents.
I. Senior citizens
Q: Who is a senior citizen?
ANS: A senior citizen refers to any resident citizen of the Philippines at least 60 years
old (R.A. No. 9994 orthe Expanded Senior Citizen's Act of 2010,-5ob73).
Q: Are senior citizens subject to income tax?
ANS: Yes, whether the income is derived from compensation or otherwise; except
1. If the senior citizen is a MWE under R.A. No. 9504; or
2. If the aggregate amount of gross income earned during the taxable year does
not exceed the amount of his personal exemptions (basic and additional) (R.R.
No. 7-2010).
ii. Minimum wage earners
Q: What is the effect if a MWE has other income other than the SMW?
ANS: MWEs receiving other income from other sources in addition to compensation
income, such as income from other concurrent employers; from the conduct of trade,
business, or practice of profession, except income subject to final tax, are subject to

846
income tax only to the extent of income OTHER THAN SMW, holiday pay, overtime pay,
night shift differential pay, and hazard pay earned during the taxable year (R.R. No. 11-
2018 dated January 31, 2018).
Q: Will the exemption of minimum wage earners from income tax be removed
when he/she receives other benefits in excess of the statutory limits of
Php90,000?
ANS: No. R.A. No. 9504 is explicit as to the coverage of the exemption: the wages that
are not in excess of the minimum wage as determined by the wage boards, including
the corresponding holiday, overtime, night differential and hazard pays. In other words,
the law exempts from income taxation- the most basic compensation an employee
receives—the amount afforded to the lowest paid employees by the mandate of law. In
a way, the legislature grants to these lowest paid employees additional income by no
longer demanding from them a contribution for the operations of government. This is the
essence of R.A. No. 9504 as a social legislation. The government, by way of the tax
exemption, affords increased purchasing power to this sector of the working class. The
treatment of bonuses and other benefiOiat an employee receives from the employer in
excess of the P30,000 ceiling caneSi.i"tfi the same as the prevailing treatment prior
to R.A. No. 9504—anything in elkeis:":1 ' 90,000 is taxable; no more, no less. The
treatment of this excess cannot operate isenfranchise the MWE from enjoying the
exemption explicitly granted by 1- . 94 (Jaime N Soriano v. Secretary of
Finance, G.R. No. 184450, January Z4a011 _-4,-
e4 5,
2 17
ill Exemptionsgrantecitm,erintemational agreements I-
i74.t .P ..":',.'
Q: What exemptions Fe„Kanted t tomer n ernational agtie nts?
ANS: The Governmeta 19.the Philippin s is a sign do o certain international
agreements and 04iirtyiiottlifferent ta --treaties whit secifi ally provide for the
exemption o "Certain persons or ergiti from taxesimpised y the Philippines.
Examples of gs; ,tax,dkemptio rTrp re th accordgd :ambassadors of
other countries; here jet px7vPhilirines.
%ii , e World QLoization is also tax
exempt upon anpintem401 ag k en ( 'Commissioner. Mal Revenue v. John
Gotamco and SonS7ifiraTf G.RANo. I,: 1004February r 27, 1987).
IA
fa
Summary of Rates of T_„ es on Individual
••• 1 .45.;:f03 Y

Individual Source Tax Rate on Income

Within and without the 20-35%

Philippines (NIRC, Section 24(A)(2),
Resident Citizen as amended by Section 2,
RA 9504, and further
amended by Section 5, RA
10963).

Non-Resident Citizens: Within the Philippines 20-35% (NIRC, Section

(NIRC, Section 22(E) 24(A)(2), as amended by
(1) A citizen of the Section 2, RA 9504, and
Philippines who further amended by
establishes to the ' Section 5, RA 10963).
satisfaction of the •
Commissioner the
fact of his physical
presence abroad with
a definite intention to
reside therein.

847
 (2) A citizen of the
Philippines who
leaves the Philippines
during the taxable
year to reside abroad,
either as an
immigrant or for
employment
. on a
permanent basis.. .
•
(3) A citizen of the
Philippines who
works and derives
income from abroad
and whose
employment thereat
requires him to be 1%
1,...\,..
1 11‘ •
-.......,' I i .
.1.. r.,.i ,.
physically present
abroad most of the • Id'? R. '
time during the
taxable year.

*Physical presence
must be more than
183 days abroad
*Overseas Contract
Workers need not
comply with the
period of requirement
as long as the
employment contract
is registered with
POEA

(4) A citizen who has

been previously
'considered as a
nonresident citizen
and who arrives in
the Philippines at any
time during the
taxable year to reside
permanently in the
Philippines shall
likewise be treated as
a nonresident citizen
for the taxable year in
which he arrives in
the Philippines with
respect tollis income
derived from sources
abroad until the date
of his arrival in the
Philippines.
•
848
 Resident Alien: Within the Philippines 20-35% (NIRC, Section
24(A)(2), as amended by
1. Not •a .mere transient Section 2, RA 9504, and
or sojourner further amended by
2. No definite intention Section 5, RA 10963).
of his stay
3. His purpose is of
such a nature that it
may be • necessary 'to
extend his 'stay for its
accomplishment

Non-Resident Alien 20-35% (NIRC, Section

Engaged in Trade or 25(A)(1)).
' Business

*Resides in the
Philippines for more
than 180 days
dint,
Non-Resident Alien Not go of gross income
Engaged in Trade or kW C, Section 25(B)).
Business

Compute
'-zsepar,,atel their
individdal acome tax
based k n thei =3
respectivealtal taxabIR
inOode: Provided, That
if arty inane cannot
be definitpa ttributed
Married Individuals to or i air"
int.0 dwer--
• a-Kvic- xc am el
=earned or realized by
e ither of the spouses,
the same shall be
divided equally
between the spouses
. (NIRC, Section 24(A),-
par. 1)).._.

Exempt from the payment

of income tax on their
taxable income: Provided,
further, That the holiday
Minimum Wage Earners pay received by such
minimum wage earner
shall likewise be exempt
from income tax. (NIRC,
Section 24(A), par. 2)).

849
Summary of Rates of Taxes on Passive Income Received by Individuals

Resident and
Pa6sive Income (Sec Non-Resident
Non-resident Resident Alien
• 24(B)) Alien
Citizen

Interest from any FT 20% (NIRC, Sec. 24(B)(1)). NRETB: 20%

currency bank deposit (NIRC, Sec.
and yield or any otlier. 25(A)(2))
monetary benefit from NRNETB: 25%
deposit substitutes and (NIRC, Sec.
from trust funds and 25(8)).
similar arrangements

NRETB: 10%
(NIRC, Sec.
Royalties on books,
25(A)(2))
literary works, and
NRNETB: 25%
• compositions
(NIRC, Sec.
25(8)).

FT 20% (NfRC;tec. 24(8)(1) .e NRETB: 20%

Royalties (others) (NIRC, Sec.
25(A)(2)).

)NRETB: 20%
Prizes (Above 10,000)' (NIRC, Sec.
25(A)(2)).
•. <1^5. (0%.,
1107
. 24(4(1)). NRETB: 20%
Prizes (10,000 and
(NIRC, Sec.
below)
S - 25(A)(2)).

Winnings . • NRETB: 20%

* Winnings that are (NIRC, Sec.
10,000 and below from 25(A)(2)).
PCSO are exempted

Interest income derived FT 15% (NIRC, Sec. 24(8)(1)). NRETB:

from a depository bank Exempt (NIRC,
under the expanded Sec. 25(A)(2)).
foreign currency NRNETB:
deposit system. Exempt

• Interest income from GR: Exempt NRETB: Same

long-term deposit or EXC: In case of pre-termination w/ citizens
investment in the form before the 5th year (NIRC, Sec.
of savings, common or 4 years to less than 5 years- 5% 25(A)(2)).
• individual trust funds, 3 years to less than 4 years- 12% NRNETB: 25%
deposit substitutes, Less than 3 years- 20% (NIRC, (NIRC, Sec.
investment Sec. 24(B)(1)). 25(B)).
management accounts
or other investments

850
 1
* •'r.

--;f1 u
CZ; V-7,4t 1744 ....,47.77liiiii.g7F,7-174.fqS..,f77;.:'....r. a/ 4.. .

From domestic corporation: FT NRETB: 20%

10% (NIRC, Sec. 24(8)(2)). (NIRC, Sec.
Cash or Property. . From foreign corporation: GI 25(A)(2)).
Dividends NRNETB: 25%
(NIRC, Sec.
25(B)).
Traded in Stock Exchange — NRETB: same
Percentage Tax 6/10 of 1% of w/ citizens
Capital Gains froth. Gross Selling Price (NIRC, Sec. (NIRC, Sec.
Sales of Shares of 127(A)). 25(A)(3)).
Stock NRNETB:
Not traded- FT 15% of Net Selling same w/
Price (NIRC, Sec. 24(C)). citizens (NIRC,
Sec. 25 B .
GR: FT .679' based on gross selling NRETB: same
price oil; fair market value, w/ citizens
whichever. higher (NIRC, Sec. (NIRC, Sec.
24.00))0$ 25(A)(3)).
• • „...
,....4rao• PA. NRNETB:
17 aotion OR the same w/
iitaxpijie tr- gainrTarai6, or citizens (NIRC,
other clisrtsitions of real prci erty Sec. 25(B)).
to therbovInment
mEXC: sale & principal rest ence Ls
k.exempt
REQUISITES:
Capital Gains from Sale tk,the prcacweds is fat 4efit ear
of Real Property acAtFing fps constructs g - ,4nea r
princfflal residence within eighteen
Note: Must be fOund in (18)fcalenFr months from the date
the PH of sale or 661Fj o
If found abroad- GI 2. Connijssitos, • giR,havp been
lisclirfitetrthe axpayer within
dirty (30) days from the date of
sale or disposition
3. Only be availed of once every
ten (10) years
4. If there is no full utilization of the
proceeds of sale or disposition, the
portion of the gain presumed to
have been realized from the sale or
disposition shall be subject to
capital gains tax (NIRC, Sec.
24(D)(2)).

CGT: 6% (NIRC, Sec. 24(D)(1)).

Tax base:
.Capital Gains on Other SHORT-TERM HOLDING PERIOD:
Property 100% of the Gain (AC-SP)
LONG TERM HOLDING PERIOD:
50% of the Gain

851
 6. INCOME TAX ON CORPORATIONS
a. Income tax on domestic corporations and resio'ent foreign corporations
Q: What taxes are imposed on domestic corporations?
ANS: The following are the classes of taxes imposed on domestic corporations:
1. Normal Corporate Income Tax (Sec. 27(A), NIRC);
2. Minimum Corporate Income Tax (Sec. 27(E), NIRC);
3. Gross Income Tax (Sec. 27(A), NIRC);
4. Improperly Accumulated Earnings Tax; and
5. Final Tax on Passive Income (Sec. 27(D), NIRC) (DOMONDON, Taxation
Volume 11-B (2018) at p. 225).
Q: What taxes are imposed on resident foreign corporations?
ANS: The following are the classes of taxes imposed on resident foreign corporations:
1. Normal Corporate Income Tax (Sec. 27(A), NIRC);
2. Minimum Corporate Income La&,(Sq,9.27(E), NIRC);
3. Gross Income Tax ("c9-24A)RN/pqr';"•14,,,
4. Final Tax on PassiVe Inbome (Sec: 27(D?, Nittg)4,,,
5. Interest from Dejafilts i'riCI-Yield.arlit Roy0.1ti4 („Seic,:‘27(A)(7)(9), NIRC);
6. Capital GainPrortvAaleof shares n'artraded in,tb.e.,,stock exchange (Sec.
27(A)(7)(c! M 0),,,,,....------:';;--- - --...., . 'N,, .`" • ' ,
7. Income 4eriys pndqf the EKpanded.foreibb CarencYllieposit System (Sec.
27(A)1(61'Aii c); and r .,:tz,,..1 .,:..L
., - 1 c-( aa
8. BranBranc Profitiiiemitfance Tax,(Sp'q 27(A)(5), NIRO (Dp ONDON, Taxation
Volu 2018) tp:-227):-L ii.fr4-----
4,.'1•
pk--....
I:. • ,••
Q. Enumeratl thJAclifferenttkinds.if- egiderd foreign co prat :, s and discuss
their tax liabil •
ANS: The folio ifne‘th *.d—ofTeltdditlAdigh rkbratio ,atleir corresponding
tax liabilities:
Type of
Resident
Foreign Tax Liabilities
*Corporation

Vm
A foreign tcn oratiNlin re.Phi ippines that is allowed by the
SEC to do business in the Philippines in such activities it
normally does in its home country. It is normally taxable in like
Philippine manner as a local corporation — 12% VAT, 30% corporate
Branch income tax, and such other applicable internal revenue taxes.
Also, repatriation of its operational income in the Philippines is
subject to 15% branch profit remittance tax (NIRC, Sec.
28(A)(1); Sec. 28(A)(5)).

A foreign corporation licensed to do business in the Philippines

to deal directly with the clients of its parent company abroad on
Representative. information dissemination, as communication center, product
'office , promotion, and quality control for exports. It is not allowed to
earn income in the Philippines, thus not subject to income tax
(IRR of R.A. No. 7042 (Foreign Investments Act), Sec. 1(c)).

852
 •

A special type of income producing foreign corporation. The

income to be generated is limited to specific services rendered to
Regional
its affiliates, branches, and subsidiaries within the Asia-Pacific
Operating Region. It is subject to a special income tax rate of 10% and
Headquarters 12% VAT in the Philippines. Repatriation of its operational
(ROHQ) income in the Philippines is subject to 15% branch profit
remittance tax (NIRC, Sec. 28(A)(6)(b); Sec. 28(A)(5)).

A non-income generating foreign corporation tasked to act as a

Regional Area supervisory, communications, or coordinating center for its
Headquarters subsidiaries, affiliates, and branches in the Asia-Pacific region. It
(RAHQ) is only a cost center and is not allowed to earn income (NIRC,
Sec. 28(A)(6)(a)).

Tax Payable
Q: How are domestic corporatior*. axect on their income?
ANS: A domestic corporation is t#41310,01 income derived from sources within and
without the Philippines at, whicheWilkarAkqr of:
1. 30% regular/normal corkor"11.4me4ax (NCIT imposed upon the taxable
income (NIRC, Sec. 2ploalgan"am4
2. 2% minimum colperaie income tax (MCIT)-impose4pon the gross income as
of the end ofj4-0fixableyea64.C, Sec. 27, par. (Epi or
3. 15% gross income-tax if thelfollo ving conditions acO Viet
a. A ta0frokalo twe percent .(20°/s) ol Goss National Product

evendprob
441
g
b. Alrratio of fogy percent 0%) of inc
'
election to total tax

VAT'ta5ifort bffo ur pnt

O (4%) sV*
d. 0.9A4gt (0:903 race& the Consolidd_fi Sector Financial
7t-SFP) to,.'GNP
Note: The option tube taxqbased on gross income shall be available only to firms
whose ratio of cost of e lesigross sales s om all sources does not exceed
•fifty-five percent (55% he electUi3ofataj n ...mpLtax option by the corporation
shall be irrevocable for ree (3, 'consecutive taxable years during which the corporation
is qualified under the sc IRC, Sec. 27).
Q: How are resident foreig corporations taxed on their income?
ANS: A resident foreign corporation shall be taxed in the same manner as domestic
corporations, with the exception that only income derived from sources within the
Philippines of such resident foreign corporations shall be taxable (MAMALATEO,
Reviewer, supra at 294).
Q: Does MCIT apply to resident foreign corporations?
ANS: Yes. A MCIT of 2% of gross income shall be imposed, under the same conditions
as domestic corporations (NIRC, Sec. 24, par. (A)(2)). MCIT is further discussed below.
Taxon certain income of resident foreign corporations
Q: How is interest income of a resident foreign corporation taxed?
ANS: The interest income and royalties of resident foreign corporations shall be taxed
as follows:
1. Interest on currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements — 20%
(NIRC, Sec. 28, par. (A)(2)(a));

853
 2. Royalties, derived from sources within the Philippines - 20% (NIRC, Sec. 28,
par. (A)(2)(a));
Interest income derived by domestic corporation from a depositary bank under FCDS -
15% (NIRC as amended by TRAIN LAW, Sec. 27 (D)(1))).

Q: How are income derived under the expanded foreign currency deposit system
taxed?
ANS: They shall be taxed in the same manner as domestic corporations. Please refer to
discussion below on FCDUs.

Note: Income of nonresidents, whether individual or corporation, from transactions with

depositary banks under the expanded foreign currency deposit system shall be exempt
from income tax.

Q: How are capital gains derived from sale of shares of stock of a domestic
corporation not traded in the stocOxchangelaxed?
ANS: They shall be taxed in tj e4'rne an eras atimestic corporations. Please refer to
previous discussions.
00,,,,„,„...........,,,,,,.
Q: How are inter-co orate, widends taxed? \
ANS: Dividends recent joyA: residenrforeigrrtormration4rom a domestic corporation
is exempt from to ' h' -6/fh
o e receityed-kom,a foreignIve ation is subject to 30%
NCIT (if conside d a •rived from 6urch.s.wittiin
,:.-.%, the Thilippirres) o exempt from tax.
Note: Dividendrecei -d from a foreigri '•rp.oration pre ca e e as derived from
sources withinitkPh' IppineI1a eas percen %) of taws income of such
foreign corpor tl8h-fo the thee-174§77pard7eiliirg th the lose o its taxable year
1
preceding the deter tion of uch idiVitbld -,.;00 . for 9 ch pa bf-sp , h period as the
corporation h q in ex nce) id4t_cf4'rived fr cspurc s withip the Philippines
(NIRC, Sec. 4 ‘ (2
,
....,,
,
1 Minimum Corporate ncom . w ‘:'-"i
N \-:
Q: To what corpotations it MCF p 1:1
ANS: It is applicabr to domZ ic‘a • I i. q n oratio s which are subject to
normal corporate inco e ta pa (E 8, par. (A)(2)).

Q: What are the instances he M9 i g

ANS: The MCIT shall be impose VIIMItte....AcIrrie lc corporation has:
1. Zero or negative taxable income; or
2. Whenever the amount of MCIT is greater than the NCIT tax rate of 30% due
on taxable income from the corporation (NIRC, Sec.27, par. (E)).

Q: Is MCIT a tax on capital?

ANS: No. The MCIT is imposed on gross income which is arrived at by deducting the
capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other
direct expenses from gross sales. Clearly, the capital is not being taxed (Chamber of
Real Estate and Builder's Associations, Inc. v. Romulo, 614 SCRA 605, 628, G.R. No.
160756. March 9, 2010).
Q: How is MCIT computed?
ANS: MCIT is computed at 2% of the gross income of the corporation as of the end of
the taxable year, beginning on the fourth taxable year immediately following thq year in
which such corporation commenced its business operations (NIRC, Sec. 27, par. (E)).
Note: MCIT shall likewise apply to the quarterly corporate income tax but the final
comparison between the NCIT due and the MCIT shall be made at the end of the
taxable year taking into consideration quarterly tax payment made (R.R. No. 12-2007).

854
 The year in which a corporation commenced its business operations is the year when
that corporation registers with the BIR and not when the corporation started commercial
operation (R.M.C. No. 4-2003).

Q: What is gross income for MCIT purposes?

ANS: Gross income shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. In case the taxpayer is engaged in the sale of
service, gross income means gross receipts less gross returns, allowances, discounts
and cost of services (NIRC, Sec. 27, par. (E)).
Note: If apart from deriving income from these core business activities, there are other
items of gross income realized or earned by the taxpayer during the taxable period
which are subject to the NCIT, the same items must be included as part of the
taxpayer's gross income for computing MCIT. This means that gross income will also
include all items of gross income enumerated under Sec. 32, par. (A) of the NIRC,
except income exempt from income tax and income subject to final withholding tax.

Q: Discuss the concept of carry-fon/Or of excess MCIT.

ANS: Any excess of MCIT over No
a4,,,e carried forward on an annual basis and be
credited against the NCIT for theriedl'ediately succeeding years (NIRC, Sec 27,
par. (E)(2)).
r
Q: What are the rules on the calfrytbrwoireIg,0019if .
ANS: The following are thsOirei on tha,aTry-forward Wilees MCIT:
1. The excess ofd' CIT over t A IT can be carried.' yard on an annual and
quarterly baslik trA
2. It can be c Off tagalngt "the CIT due in the nextl Ihree (3) immediately
succeee axab e ors;
3. Any cess not credited in the nd three (3) yedrs s forfeited;
4. Ca ofwaroirta
•aziM," ,,,,
- uall or qiiarreily) is pofi.Le o
SR
pi is greater than
,.. credited• is R. irgmount of the NCIT;
5. ande m-
6. The exces . MCIT cannot be c s a credit against the MCIT itself or
against any other gsles (NIRC, - • . _ r4E)).
,--.....:1-
...o
Q: What are the instaees wherp he imposition of MCIT may be suspended?
ANS: The Secretary fifa oan may suspend the imposition of the MCIT when the
corporation suffers substantig -I sses due to:
1. Prolonged labor dispute - losses arising from a strike by the employees for
more than 6 months within a taxable period causing temporary shutdown of
business operations;
2. Force majeure - cause due to an irresistible force as by "act of god" like
lightning, earthquake, storm, flood and the like; also include armed conflicts
like war and insurgency;
3. Legitimate business reverses - include substantial losses sustained due to
fire, robbery, theft, or embezzlement, or for other economic reasons as
determined by the Secretary of Finance (NIRC, Sec. 27, par. (E)(3);
Memorandum No. 6-2002).

Q: What are the entities exempt from the imposition of the MCIT?
ANS: The MCIT shall not be imposed upon any of the following:
1. Domestic proprietary educational institutions;
2. Domestic non-profit hospital;
Note: This is subject to the Predominance Theory. Proprietary educational
institutions and non-profit hospitals enjoy the privilege of being taxed at the

855
 rate of 10% on net income, provided, that if the gross income from unrelated
trade, business, or activity exceeds fifty percent (50%) of gross income from all
sources, the domestic proprietary educational institution or hospitals shall be
subject to 30% NCIT, and thus also to MCIT (NIRC, Sec. 27 (B)).
3. Domestic depository banks under the expanded foreign currency deposit
system-subject to final income tax of ten percent (10%) of their taxable
income;
4. Resident foreign international carrier- subject to two and one-half percent
(2.5%) of the Gross Philippine Billings;
5. Resident foreign offshore banking units-subject to final income tax at ten
percent (10%) of such income;
6. Resident foreign regional operating headquarters-subject to final income tax at
ten percent (10%) of such income;
7. Firms enjoying special income tax rate under the PEZA law, Bases Conversion
and Development Act and those enjoying income tax holiday incentives;
8. Nonresident foreign corposationsian,d ..,„
9. Real Estate InvestrgenrTrusti(RA. • o.:9856 otherwise known as the Real
Estate Investment-1ms Oct 20108)S9sc 0), .---,;‘.
Note: The entities enp4latbicl, al,,,,ve.arer-,exerzpt• fro .,. MGIT because they are not
subject to NCIT (INGJ.,ARevieWer, supra at 81). N,,4
1& . i's:
, -'*() .. --717"- N., - Al
Q: Discuss the ipp,liqatii ay/ of the, mqrr were 1r 1 Citmodo . n is governed by
0 A l'
both under the •Illgt' .. and spe ial tax itncorile tax system. '--
e tax,system
ANS: In the cq, e of stic corporation whose ol)eratkne pI are partly
covered by th Y pla Irmo e-tax-systeTrand-partly-Toverect trhclea special income
tax system, th MUTIshall apply Wop ii'peralf rib covered b fie regular income tax
system. For xaDp1 , if a 141B01-(egi0 rp51.; terpripe has a.LIIMistered" and an
"unregistered" dtl'• the- , T shall .413.100' the um'etstere j acti4i (R.R. No. 9-98,
% s Y
Sec. 2.27, par. EX 1 i'4:
f***:),
L.) il
,. \

if. Branch Profi Remittance Fa •

ti.
Q: What is brandprofiNtmitt96%-% t
ANS: The 15% b ch profiwemPaape.,,a. osed on ag profit remitted by a
branch to its head o ice bal9 4onke- - 16tal-"-pro i soalieatqr earmarked for remittance
.,•
without any deductionloVADatirren ere xce hose activities which are
registered with the PhilippM &)fitmic 414-11 .t IRC, Sec. 28(A)(5)).
Note: If it is a foreign corpora 1 n-p,t e follawm a ot included - interests, dividends,
rents, royalties, including remunera ion or technical services, salaries, wages
premiums, annuities, emoluments. or other fixed or determinable annual, periodic or
casual gains, profits, income and capital gains received by such foreign corporation from
all sources within the Philippines unless the same are effectively connected with the
conduct of its trade or business in the Philippines (NIRC, Sec. 28(A)(5)).
Q: What is the rationale of imposing Branch Profit Remittance Tax?
ANS: The remittance tax was conceived in an attempt to equalize the income tax
burden on foreign corporations maintaining, on the one hand, local branch offices and
organizing, on the other hand, subsidiary domestic corporations where at least a
majority of all the latter's shares of stock are owned by such foreign corporations (Bank
of America NT & SA v. Court of Appeals, G.R. Nos. 103092 &.103106, July 21, 1994).
Itemized deductions vs. Optional Standand Deductions
Q: What are the deductions allowable to a domestic corporation?
ANS: The taxable income of a domestic corporation, for purposes of determining its
NCIT, shall be computed by deducting from its gross income the itemized deductions
allowed under Section 34 of the NIRC, or instead of the itemized deductions, the 40%
•

856
 ‘71•1' i"P'S•;';!F

OSD; special deductions allowed to insurance companies under Section 37 of the NIRC
and to those granting sales discounts to or employing senior citizens (R.R. No. 07-2010,
Implementing R.A. No. 9994).

The allowable deductions to a domestic corporation are itemized deductions, optional

standard deductions, and special deduction.
Note: Unless the taxpayer signifies in his income tax return his intention to elect OSD,
he is considered as having availed of the itemized deductions. The taxpayer is not
allowed to use a hybrid method of claiming its deduction for one taxable year (R.R. No.
16-08, Sec. 7).

Please see previous discussions on itemized deductions and OSD under IIB-4(b).

iv. Taxation of passive income

See IIB-3(d)(vi) (passive investment income).

V. Taxation of capita/gains .,•

06,1.
Q: How are capital gains realized•fom.the sale, exchange, or disposition of lands
and/or buildings taxed? • • ni
•: • ' .30.',i
ANS: The gain presumed to have.teepliZetcMiglhe sale; exchange or disposition of
rE
lands and/or buildings which ara4lota.OthallyIllSeactreWilsaless of a corporation and
are treated as capital assets hall be idbfict to 6% capItarbills tax based on the gross
selling price or the zogaliValuation a,s;Nte ermined by the Cdtilinissioner or the FMV in
the schedule of vat:glt., loialaTeS'el ,ors, whichever iewtliehever is higher (NIRC,
Sec. 27, par. (D)). .0 .,,A .,.,,,,../. ,
L,,,- ' .az
t.
Note: The 6% •capiral gain.Otax on cord() ations cover.,specifically only lands and/or
buildings heldltapitaledSets. In the,fak, ,vf individuals, amikindvf real property held
as capital ass'qtare segeNo the 6% capital gains lr,d,,, ....
, . ,. _A4-1
• .0,11 .4; !1 21
Please see prevLous itlig:oussioneolvtaxob ity of sale oggifa s of stock and of real
property situated infRifartines under I -3(d)(v) (income from dealings in property).
W '-
b. Income tax on non-resicleHt foreign c•rporaon
.4 ,t,v5r ..4..i•. .t,. *
Q: How are non-resid4rforeizic
? torraho
P
• s ax eir income?
ANS: A foreign corporatp in nowltaged in trade or business in the Philippines shall pay
a tax equal to 30% of Vikk,g % toss income received during each taxable year from all
sources within the Philippineg, such as:
1. Interests;
2. Dividends;
3. Rents;'
4. Royalties;
5. Salaries;
6. Premiums, except reinsurance premiums;
7. Annuities;
8. Emoluments or other fixed or determinable annual, periodic or casual gains,
profits and income; and
9. Capital gains, except from sale of shares of stock in a domestic corporation
not listed and traded through a stock exchange, held as capital asset.
Note: The tax imposed is a final tax on gross income. A non-resident foreign corporation
may not avail the benefit of any deduction (NIRC, Sec. 28, par. (B)(1)).

Q: How are interests on foreign loans taxed?

ANS: Interest on foreign loans contracted on or after August 1, 1986 shall be subject to
a final withholding tax of 20% (NIRC, Sec. 28, par. App).

857
 •. '

Q: How are dividends received from a domestic corporation by a non-resident

foreign corporation taxed?
ANS: A non-resident foreign corporation will be subject to 15% preferential tax rate on
the amount of cash/property dividends received from a domestic corporation provided
that the country in which it is domiciled shall allow a tax credit against the tax due from
its taxes deemed to have been paid in the Philippines (Tax Sparing Rule). However, if
the country in which the non-resident foreign corporation is domiciled does not allow a
tax credit, the dividends received by a non-resident foreign corporation will be subject to
a final withholding tax rate of 30% (NIRC, Sec. 28, par. (B)(5)(b)).
Q: How are dividends received from a foreign corporation taxed?
ANS: Cash and/or property dividends received by a non-resident foreign corporation
from a foreign corporation are subject to 30% NCIT (if considered as derived from
sources within the Philippines) or exempt from tax (if considered as derived from
sources without the Philippines) (Sec. 24, Sec 28(B) of NIRC).
Please see previous discussiou,orra'ankirdends,received by a non-resident foreign
corporation from a foreigh48-rpozationlis delved froih-sources within or without the
Philippines. v t I • ,
fec)
Q: Is the receipt by4tie1stottholder..c?La, corAiraliqkvio • a property by way of
liquidating dividr,dsubjectto capital:gains
ANS: No. Receiptkbthrstokholdey) wAth7corplate-.0Qnaivklual, of liquidating
dividend is not bbjecti6CG The basis for ig"positi n is AdtpecaUse of the absence
of income fro bsenr-qf-saleAlOpasition_or-qonve)Oce'tnireal property, but
because such action is qubje,Vcto..crOppryjnpom4 tax orkthe-pMt of the individual
stockholders, lir co pate inaome'faxirodtcarpLigie stockholde s. NIRC provides
that any gain dived, o‘r—arly losV*1-altiedby a jockhdli rqm its receipt of
liquidating divi en Silhallated-as:1 able-incop, '-`6? desi.uSielioss, as the case
may be (Com i(s..3op r o hie al ReVe u,01, :glorerni Leisures,poirp., CTA EB No.
1702, April 15, 018).
Summary of Rates 4 Taxes on Ififfnieer Corp ration

Income Domestic Reident foreign • Nonresident

3
27(A)e
Taxabf -pa4N10, Sec. 30% of Gross
Income (NIRC,
2% Minimum Corporate Income Tax: Sec. 28(B)(1)).
Imposed beginning on the fourth taxable
year immediately following the year in
which such corporation commenced its
business operations, when the minimum
income tax is greater that the tax
computed for the taxable year (NIRC,
Business Income
Sec. 27(E)(1); Sec. 28(A)(2)).
Resident FC not subject to MCIT:
1. International Carriers (NIRC, Sec.
28(A)(3));
2. Offshore banking units (NIRC, Sec.
28(A)(4));
3. Regional Operating Headquarters
(NIRC, Sec. 28(A)(6));
4. Under PEZA

858
 Interest on FT 20% (NIRC, Sec. 27(D)(1); Sec. 30% of GI (NIRC,
currency bank 28(A)(7)(a)). Sec. 28(8)(1)).
deposit and yield
or any other
monetary benefit
from deposit
substitutes and
from trust funds
and similar
arrangements
received by
domestic
corporations,
and royalties,
derived from
sources within
theyhilippines

NOTE: Interest
income or yield
earned by DC
from sources
outside the
Philippines shall
be included in
the gross income
and subject
NCIT.
Interest from a W15% NC, TEMPT (NIRC,
depository bank 27(D)01). Sec. 28(B)).
under the
expanded foreign
currency deposit
Capital Gains Not over P100,000- 5%
from the Sale of (D)(2)). emany amount in excess of P100,000 —
Shares of Stock 10% (NIRC, Sec. 28(A)(7)(c); Sec.
Not Traded in the 28(8)(c)).
-Stock Exchange

DOMESTIC TO DOMESTIC TO FT 15% if tax

DOMESTIC: RESIDENT: sparing rule
Exempt (NIRC, Exempt (NIRC, applies: _
Sec. 27(D)(4)). Sec. 28(A)(7)(d)).
The country in
•
FOREIGN TO FOREIGN TO which the
intercorporate • - DOMESTIC: RESIDENT: nonresident
Dividends. . Gross Income Exempt foreign
corporation is
Dividend domiciled shall
received from allow a credit
foreign against the tax
corporation is due from the
subject to nonresident
Philippine foreign

859
 income tax if at corporation taxes
least 50% of the deemed to have
world (total) been paid in the
income of the Philippines
foreign equivalent to
corporation 15%
• must be derived
from the OTHERWISE:
Philippines for 30%
three years
preceding the (NIRC, Sec.
declaration of 28(B)(5)(b)).
such dividend

• FT 6% based
Capital Gains on: the,„grosr$ '—
Realized from the selliperice of i - -..
Sale, Exchange ifail-. garket- i 4. 'y r'
,") ,,,,;,....'''"-"--- 4 ,
.,

or Disposition of ,/1 /4 ,falrl

. 0- ,, -t
Lands and/or Jwhi beVer is
Buildings s‘hOtibr,,,-,(Nr/fo,7 7-----, ' <,‘. ) ,,.''
ec. 18(D)(9). 1, ''., ' N'TP
I ,, e t-4, (.. A

Dem:ft corporations • •
c. Income tax &A- •
i --->- z
i ProprietatyLdue& bonathntitutiaiiiiyhdhovitais
,
Q: What is a propy‘tcy ely tianal-gq Icillori? A:5 ,k,„,,..4/
ANS: It is anylkiltat sctiqpivainta;iii,edy0yas10st red by Priate individuals or
s
groups with an issued p rmitlp, ri ieVr rriVieiDep CITED, or TESDA as the case
may be (NIRC, Ac. 27, par. (8)

Q: How are propricsy educa to a i'rtte u i':'

ns t \ io sand itals taxed on their
income? 19 -1),_,,r.
ANS: They are subject tat.q -r,,a,,, o:110%-nAthairktAaj? e I come, except those passive
incomes subject to final tax). IJ.Virt-1 ,; 000".
Note: If the gross income from unrelated,traderbusiness or other activity exceeds 50%
of the total gross income derived from all sources, the 30% NCIT shall apply to the
entire taxable income (The Predominance Test) (NIRC, Sec. 27, par. (B)). Its gross
income from unrelated trade, business or activity does not exceed 50% of its total gross
income.

Q: What are the requisites for the applicability of the 10% tax rate?
ANS: The requisites are the following:
1. Stock and non-profit institution;
2. Private educational institution or hospital;
3. Gross income from unrelated trade, business or activity does not exceed 50%
of gross income from all sources (Commissioner of Internal Revenue v. De La
Salle University, G.R. No. 196596, November 9, 2016); and
4. For educational institutions, issued a permit to operate from DepEd, COED, or
TESDA (NIRC, Sec. 27, par. (B)).

860
 Q: What is meant by unrelated trade, business or other activity?
ANS: It means any trade, business or other activity, the conduct of which is not
substantially related to the exercise or performance by such educational institution or
hospital of its primary purpose or function (NIRC, Sec. 27, par. (B)).

See 1-F (General Principles - exclusions under the Constitution)

ii. Non-profit hospitals

Q: When will a charitable institution be exempt from income tax?
ANS: In order to be exempt from income tax as a charitable institution under the NIRC,
the charitable institution must be:
1. A non-stock corporation or association;
2. Organized exclusively for charitable purposes;
3. Operated exclusively for charitable purposes; and
4. No part of its net income or asst shall belong to or inure to the benefit of any
member, organizer, officer oparespecific person (NIRC, Sec. 30p).

Q: Is St. Luke's Medical Center5Itie;'4;tganized as a non-stock and non-profit

charitable institution, IPSO FAOTOVIte4 to a tax exemption?
ANS: NO. There is not dispute that th'Attike.s,is organized as a non-stock and non-
profit charitable institution. However,.
.5,cdpjagiatitonvigh y exempt St. Luke's from
paying taxes. This only refers. the organ zation of Wan' .Even if St. Luke's meets
the test of charity, a ctiOtage institutk;in i4 not ipso facto tade Cempt. To be exempt for
real property taxes, Segton428(3), Articled of the ConstitutiSrrepuires that a charitable
- --institution use the proRIN:atually, directleand exclusively'" charitable purposes. To
be exempt from in „d If ir Section 1E) of the NIFC Eeqdires that a charitable
e
institution must1Te 4orgarfizeiranckopers" tied exclusively' for \heritable purposes.
Likewise, to liKeicemptliwi the income axes, Section 0(GgoftheINIRC requires that
the institutiont "operatectkexcliasixelyn . social ,e pLk.taWieihner of Internal
Revue St. L Medic CenteVnc. R. No. 19590910,A&RA 66, September
26, 2012).
,t , • •Ikt4
See 1-F (General Principlestexclusions "-"_ co stitution)

Government-ownectOrconte rporations agencies, orinstrumentalities

V ;41 IF
See 1-F (General Princi• es -,elusions under the Constitution)

iv. Domestic depository banks (foreign currency deposit units)

Q: How are depositary banks (foreign currency deposit units) taxed on their
income?
ANS: General rule: Income derived by a depository bank under the expanded foreign
currency deposit system from foreign currency transactions with nonresidents, offshore
banking units in the Philippines, local commercial banks including branches of foreign
banks that may be authorized by the BSP to transact business with foreign currency
deposit system shall be EXEMPT from all taxes.
Exceptions:
1. Net income from such transactions as may be specified by the Secretary of
Finance, upon recommendation by the Monetary Board to be subject to the
NCIT payable by banks; and
2. Final tax of ten percent (10%) on interest income from foreign currency loans
granted by such depositary banks under said expanded system to residents
other than offshore units in the Philippines or other depositary banks under the
expanded system (NIRC, Sec. 27 (D)(3)).

861
 Note: That interest income from foreign currency loans granted by such depository
banks under said expanded system to residents other than offshore banking units in the
Philippines or other depository banks under the expanded system, shall be subject to a
final tax at the rate of ten percent (10%) (N/RC, Sec. 27(D)(3)).

Income of non-residents (individual or corporation) from transactions with depositary

banks under FCDS is exempt from final tax.

v. International carriers doing business in the Philippines

Q: Define International Carriers.
ANS: International Carriers refers to a foreign airline corporation doing business in the
Philippines having been granted landing rights in any Philippines port to perform
international air transportation services/activities or flight operations anywhere in the
world (MAMALATEO, Reviewer, supra at 294).

Q: How are International Carrisss.taxedr''',......,„,„,

ANS: An international carrierogio cg butiels in4,t e P hilip,
shall pay a tax of 2.5%
on its "Gross Philippine 'Illigs" G10) ( !RCA . 28, pa (A)(3)).
•-t
)
Q: Define Gross Pij lit Bilari;:.
ANS: Gross Philip e I .firs•-fererstgiftrThtt
ie am . n ros r venue derived from
carriage of perp 9 ce bagage, ca o, a o iginating from the
Philippines in icontiguous and u int upted flight irre p ,ctivg f the place of sale
4.-. .4-
or issue and tilt halac fof pa paenLo ds keLor...pas age d birth (NIRC, Sec. 28,
par. (A)(3)(b)). .0". ',I$ " --'7 l''''''4
.:V-Vr
_7_
Q: How may i l ca oanallyor the re erer l e or exemption
ia m
from the 2.5% Gros's ne-Billing 0)
\
ANS: Sec. 280)0 10.lR9 s .40:1-tde 4 o. • 78 provides that
international carriers
rl, d e P4fi''' - ay a ail of a referential rate or
exemption from e 2.5°a pine Bin on basis fan applicable tax
treaty or intemati nal agre o`wla e... ili..inesA s a sig tory or on the basis
of reciprocity such' kat an inter f let e ese me co try grants income tax
exemption to Philippine c alt—hkewis - ,,b from the 2.5% Gross
Philippine Billings Tax (

•Q: Air.Canada is a. foreign corpo • .. .s.g anted an authority to operate as

an offline carrier by the Civil Aeronautics Board. As an off-line carrier, Air Canada
does not have flights originating from or coming to the Philippines and does not
operate any airplane in the Philippines. Air Canada engaged the services of
Aerotel Ltd., Corp. (Aerotel) as its general sales agent in the Philippines. Aerotel
sells Air Canada's passage documents in the Philippines. May Air Canada be
subject to the 21/2% tax on Gross Philippine Billings pursuant to Section 28(A)(3)
of the Tax Code?
ANS: No, an international air carrier with no landing rights in the Philippines is a resident
foreign corporation if its local sales agent sells and issues tickets in its behalf. An offline
international carrier selling passage tickets in the Philippines, through a local general
sales agent, is considered a resident foreign corporation doing business in the
Philippines. As such, it is taxable on income derived from sources'within the Philippines,
and not on Gross Philippine Billings, subject to any applicable tax treaty (Air Canada vs.
Commissioner of Internal Revenue G.R. No. 169507. January 11, 2016).

862
 vi. Off-shore banking units
Q: How are income derived by offshore banking units (OBU) taxed?
ANS: Income derived by OBUs authorized by the Bangko Sentral ng Pilipinas (BSP)
from foreign currency transactions shall be subject to:
1. Tax exemption — if income is derived from:
a. Nonresidents;
b. Other offshore banking units;
c. Local commercial banks, including branches of foreign banks that may
be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
business with offshore banking units shall be exempt from all taxes
except net income from such transactions which shall be subject to the
regular income tax payable by banks;
2. Final tax of 10% — on any interest income derived from foreign currency loans
granted to residents other than offshore banking units or local commercial
banks, including local, branches of foreign banks that may be authorized by
the BSP to transact businessvliilj offshore banking units (NIRC, Sec. 28, par.
(A)(4)). . .
Resident foreign depositorybgh4(fail ign currency deposit units)
dra
Q: How are income derived IVaepota!w ank u der the expanded foreign
currency deposit system taxed?
ANS: Income derived by,&-alaepositary ank under t e e anded foreign currency
deposit system from foreign currency tra fictions shall be t to:
1. Tax exempti —Eincome e ed from:
a. Non-re de "
b. Q ore bane units in e Philippines-
4A:ocal commercial basics, luding bra hes f fo eign banks that may
beaukzp,d bathe B o tran a SS •reign currency
WdepositsirsTem unitt• an
d. ,Othericresitory ba ks der the expa gn currency deposit
_dt -
• sysique
2. Final tax 81,1 % — o interest i om foreign currency loans granted by
such deposito s to reside 'WEIR a offshore units in the Philippines,
or other dep ry ban sT(p//1.?G : ten

Regional or are hea quarters and regional operating headquarters of

multinational companieNVO
Q: What are regional or area headquarters?
ANS: Regional or area headquarters shall mean a branch established in the Philippines
by multinational companies and which headquarters do not earn or derive income from
the Philippines and which act as supervisory, communications and coordinating center
for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign
markets (NIRC, Sec. 22, par. (DD)).

Q: What are regional operating headquarters?

ANS: Regional operating headquarters shall mean a branch established in the
Philippines by multinational companies which are engaged in any of the following
services: general administration and planning; business planning and coordination;
sourcing and procurement of raw materials and components; corporate finance advisory
services; marketing control and sales promotion; training and personnel management;
logistic services; research and development services and product development;
technical support and maintenance; data processing and communications; and business
development (NIRC, Sec. 22, par. (EE)).

863
 .1.1,1e,y1...;:a.

Q: Discuss the taxability of regional or area headquarters and regional operating

headquarters.
ANS: Regional or area headquarters shall not be subject to income tax. Regional
operating headquarters shall pay a tax of ten percent (10%) of their taxable income
(NIRC, Sec. 28, par. (A)(6)).
Summary of Rates of Taxes for Special Corporations

Special domestic corporations

Corporation Tax
Proprietary Educational ' GR: 10% of Taxable Income (Section 27(B),
Institution NIRC).
- Any private school EXC: 30% if the gross income from "unrelated
maintained and administered trade, business or other activity" exceeds fifty
by private individuals or p,,ercents.(5.9y) of the total gross income derived
groups by such ed„ucOtiOnej institutions from all sources3
(N/R2)Seaion .i. v ,t27 (P.))N,,,,
., ..
.. .„. ,4 d 2. • ,c4.
_„,,.........t.„,4
"'Note: unrelafed.„tralle, bt(Si\ ess or other activity'
....meawany--tradeNls16eis • r other activity, the
Non-profit Hospitals ?oindit ofl.,Iyhichls not 84.0Sla • tially related to the
03terciLSe ,grA. perfikma.hcbtey tuch educational
instiNtion or hosp tal o its itimary purpose or
—fan' Vnj--- 4

arsk,..,...
;11;1
I
1111.
Corporations, agencies or ___._,3-141
instrumentalities owned or 30-WOriLiT-exable I/go
2 Iraection 27(C) as
controlled by the • --aminCiedty-Sec foe 11009_43J
' Government jeta,
.../ce
GSIS, SSS, PHC, Local c Ocemptpsil' K Sdion 27(6), as amended by
Water Districts Lit-491717C M1'09a.

( 11 -.-
Special resident foreign corporations
Corporation Tax

2.5% on Gross Philippine Billings (amount of gross

revenue derived from carriage of persons, excess
baggage, cargo, and mail originating from the
Philippines in a continuous and uninterrupted flight,
irrespective of the pace of sale or issue and the
International Carrier place of payment of the ticket or passage
doctirrient) (NIRC, Section 28(A)(3)).

Offline carriers/ no landing rights- 30% (Air Canada

vs Commissioner of Internal Revenue, G.R. No.
169607, January 11, 2016).

Branch Profit Remittance 15% based on total profits applied or earmarked

- Any profit remitted by a for remittance (NIRC, Sec. 28(A)(5)).
branch to its head office

864
 Regional or Area Exempt (NIRC, Sec. 28(A)(6)(a)).
Headquarters

Regional Operating
10% on Taxable Income (NIRC, Sec. 28(A)(6)(b)).
Headquarters

Special nonresident foreign corporations

Corporation Tax

Nonresident Owner or Lessor 4.5% of gross rentals, lease or charter fees from
of Vessels Chartered by leases or charters to Filipino citizens or
Philippine Nationals corporations, as approved by the Maritime Industry
Authority (NIRC, Section 28(8)(3)).
Nonresident Owner or Lessor
of Aircraft, Machineries and 7:59k of gross rentals or fees (NIRC,
Other Equipment Eseotto 28(3)(0. •

d Improperly Accumulated Earnin gibV7cm AErli)

44P. 8gr
Q: What is the Improperly Acthmulate farm s TAX(MET)?
ANS: It is a tax ecppalifir to 10%1 opmproperly accunpated taxable income of
corporations (NIRC, Seor-29,• par. (A)iri No. 2-2001, Sec. 2
Q: What is impropeOtacAmulated tax le income?
ANS: It refers,,tp.oprblits cfftworporationcpat are perm'A edio accumulate instead of
being distributed to itsoksbareholderslorpurpose of avoiding Vie income tax with
respect to its' ebelder atheighareho:
• eIrs of anothe gioratiol' R No. 2-2001,
Sec. 2).
'kb.,. JO
Q: What is the rabdhale beir th ,IA
Iv- N4,
ANS: If the earnings.. and pro„ its were di ibuted the shareholders would be liable for
income tax, whereas ifltdmiis
t no distil? wpuld incur no tax with respect to
the undistributed earniribrif the colp,orabo en_c_e, AM imposed:
1. In the nature ape arty to the corporation for the improper accumulation of
its earnings; anb •
2. To avoid the situi j. ri, here a corporation unduly retains its surplus earnings
instead of declaring and paying dividends to its shareholders or members who
would then have to pay the income tax due on such dividends received by
them. As a form of deterrent to the avoidance of tax upon shareholders who
are supposed to pay dividends tax on the earnings distributed to them by the
corporation (R.R. No. 2-2001, Sec. 2; Commissioner of Infernal Revenue v.
Ayala Securities Corp., G.R. No. L-29485, November 21, 1980).
Q: How is improperly accumulated income computed?
ANS: The improperly accumulated taxable income for a particular year is computed by
adding to that year's taxable income the following:
1. Income exempt from tax;
2. Income excluded from gross income;
3. Income subject to final tax; and
4. The amount of NOLCO deducted.
The taxable income as thus determined shall be reduced by the sum of:
1. Income tax paid/payable for the taxable year;

865
 •
DAN.:REDBtOK
2. Dividends actually or constructively paid/issued for the applicable year's
taxable income; and
3. Amounts reserved for the reasonable needs of the business (NIRC, Sec. 29,
par. (D)).
Q: When is the accumulation of income reasonable?
ANS: The accumulation is reasonable if it is necessary for the purpose of the business,
considering all the circumstances of the case. The term "reasonable needs of the
business" is construed to mean the immediate needs of the business, including
reasonable anticipated needs (NIRC, Sec. 29, par. (E); R.R. No. 2-2001, Sec. 3).

Q: What is the period of payment of dividend/payment of IAET?

ANS: Dividends must be declared and paid or issued not later than 1 year following the
close of taxable year. Otherwise, IAET (if any) should be paid within 15 days thereafter
(R.R. No. 2-2001, Sec. 6).
Q: What are the entities exernatedfirdir 14( ET?
ANS: The IAET shall not ap IsttiRhe foli)wirl(pB1- ER)
1. Publicly-held co oritiorS,,(Sec-.29,- ed ( (2 1) cirestic corporations NOT
falling underlie fipiti' nwcircrseTPTel or orations (R.R. No. 2-2001, Sec.
4);
2. Banks noritbarilrfilitern>lepiesy//RC, Sec. 29, par.
(B)(2));
I Pc, Ak
3. Insura (Sec. 49, Ret (B 2));
4. Taxa eemediftafave_actua y or irscdc 'vely received the
taxab
5. Gen part pt; t.....able a e partners); and
6. Non- uresri —
7. Ente istered—wirhe lint E 9a9mi, Zone Authority
(P omiqone Act of 1995),
and e terpris 6. 72/7 (Bases Conversion and
Develo eent ente rises dilly registered under
special nom njoycment of special tax
rate on th registe lieu other taxes, national or
local;
8. Resident Foreig1144,......,E,
o
e. Exemptions from taxon co rations.
Q: Enumerate the exempt corporations under NIRC.
ANS: The following organizations shall not be taxed in respect to income received by
them as such: (LMB-CNB-CNG-FF)
1. Labor, agricultural or horticultural organization not organized principally for
profit;
2. Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual
purposes and without profit;
3. A Beneficiary society, order or association, operating for the exclusive benefit
of the members such as a fraternal organization operating under the lodge
system, or mutual aid association or a nonstock corporation organized by
employees providing for the payment of life, sickness, accident, or other
benefits exclusively to the members of such society, order, or association, or
nonstock corporation or their dependents;
4. Cemetery company owned and operated exclusively for the benefit of its
members;
5. No nsto ck corporation or association organized and operated exclusively for
religious, charitable, 'scientific, athletic, or cultural purposes, or for the
866
 DA N
rehabilitation of veterans, no part of its net income or asset shall belong to or
inures to the benefit of any member, organizer, officer or any specific person;
6. Business league chamber of commerce, or board of trade, not organized for
profit and no part of the net income of which inures to the benefit of any private
stock-holder, or individual;
7. Civic league or organization not organized for profit but operated exclusively
for the promotion of social welfare;
8. A Nonstock and nonprofit educational institution;
9. Government educational institution;
10. Farmers' or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, mutual or cooperative telephone company, or like
organization of a purely local character, the income of which consists solely of
assessments, dues, and fees collected from members for the sole purpose of
meeting its expenses; and
11. Farmers', fruit growers', or like association organized and operated as a sales
agent for the purpose of markeipg the products of its members and turning
back to them the proceedsAples, less the necessary selling expenses on
the basis of the quantity dafod ge finished by them (NIRC, Sec. 30).
Note: The above organizations cebeik x-exempt on any income derived by them
of whatever kind and character free( '4% eir properties, real or personal, or from any
'of their activities conducted for pr 'fi e disp on made of such income
(NIRC, Sec. 30).

Q: Did the NIRC quad the tax emp on constitutiona ranted to non-stock,
non-profit education4igstitutionV
ANS: No. As provided in Nednstitutio II revenues id ssets of non-stock, non-
profit educationallatitutiiis.4ised actu directly, a d e vely for educational
purposes shay& exerntiom taxes%ed 'es (CONS . Art. ec.4, Par. (3)). The
last paragrapp,Sec30jolthe*IRC is thout fo respect to non-
stock, non-profit edu,cLiogal instiVion provided, onestock, non-profit
educational institenszkt tha i ass and revenues re sed actually, directly
and exclusively for`ucatiof al purposes.ff e tax-exemption constitutionally granted to
non-stock, non-profit eslucatal instituti t subject to limitations imposed by
law. The tax exemptioffgran ad by the91 . ,69iptock, non-profit educational
institutions is condition only oplhMeMelirree-,6 11idwaclusive
— use of their assets,
revenues and income fo educitio:pal purposes. To avail of the exemption, the taxpayer
must factually prove t sed actually, directly and exclusively for educational
purposes the revenues o ncelne sought to be exempted (Commissioner of Internal
Revenue v. De La Salle University, G.R. No. 196596, November 9, 2016).

Q: Is it required that the revenues and income of non-stock, non-profit

educational institutions must have been sourced from the educational activities
related to its purpose?
ANS: No. A plain reading of the Constitution would show that Art. XIV, Sec.4, Par. (3)
does not require that the revenues and income must have also been sourced from
educational activities or activities related to the purposes of an educational institution.
The phrase "all revenues" is unqualified by any reference to the source of revenues.
Thus, so long as the revenues and income are used actually, directly and exclusively for
educational purposes, then said revenues and income shall be exempt from taxes and
duties (Commissioner of Internal Revenue v. De La Salle University, G.R. No. 196596,
November 9, 2016).
Please refer to discussions on "General Principles of Income Taxation" on the
constitutionality of the above provision in relation to non-stock, non-profit educational
institutions.

867
 Q: What are proprietary educational institutions?
ANS: Proprietary educational institution is any private school maintained and
administered by private individuals or groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or the Commission on Higher
Education (CHED), or the Technical Education and Skills Development Authority
(TESDA), as the case may be, in accordance with existing laws and regulations (NIRC,
Sec. 27, par. (B)).
Q: Are proprietary educational institutions subject to tax?
ANS: Yes. The tax exemption granted to proprietary educational institutions under Sec.
4(3), Art. XIV of the 1987 Constitution requires prior legislative implementation since the
use of the permissive term "may" in the provision gives Congress discretion to
determine whether or not assets and revenues of proprietary educational institutions
should likewise enjoy exemption from taxes (ABAN, Law of Basic Taxation (2016),
supra at 89). Proprietary educagpnallfigtifiltiblis-which are nonprofit shall pay a tax of
ten percent (10%) on thgivrArble corbei(MRC:"*Spp. 27, par. (B)). Proprietary
edudational institutions yHjch,are-lipnpr tpedt4en percent (10%) on their
taxable income except" goecloverenTniRecpt,"ii.psection (D) in the Tax
Code: Provided, thatifiegroseincsw_e-from,,L inreare t dObbsiness or other activity
exceeds fifty percept ( traf of totaC b ross Vico e erivettby such educational
institutions or hoAV'mttaf ail sour es, tjAtta*Trescqbedltrgu ktion (A) in the Tax
Code shall be i pose oh th entire taxatkintome (NI C, S 2,7) par. (B)).
;----v• 1 ri ‘Wril
hi.' kJ ' 't
Q: What taxese acplimposed n an educa iong4instit
e ! :4-0. tion? ."....,li
ANS. Only portions actually, ire* and "kclugniely sed for charitable purposes are
4 ..A
exempt from rea folterty rjj
a2 s; whil4x5- Lp;SlVased, ;.p_civat? entries are not exempt
from such taxis Angele ity_au ation...v-.. f A les, 6.R. No. 189999,
June 27, 2012)V) '.wi 14-r,
P-41 .-E.,-(f.6'Y
Q: Are government o onfro led tion (GOCCs) exempt from
taxation?
ANS: A GOCC is aQerallytubject!
1. GovernmenԤervice fissuFalle am SIS);
2. Social Securrk§14t Sn''''"'"'"
3. Philippine Healtfil u e Sygte
, 0);a
11i' di,
.4. Local Water Districts Seb.
Note: Under Section 27 (C) of NIRC, is among the list of GOCCs, agencies, or
instrumentalities that are exempt from payment of corporate income tax. Under TRAIN
Law, PCSO is not anymore exempt from payment of corporate income tax.
Q: If the GOCC is not included in the above enumeration, does it follow that all of
its income is automatically subject to tax?
ANS: No. Under Section 32, par. (B)(7) of the NIRC, income derived from any public
utility or from the exercise of essential government function accruing to the government
of the Philippines or to any political subdivision are therefore exempt from income tax.
Therefore, even if the GOCC is not one Of thote enumerated under Section 27, par. (C)
it may still be exempted under Section 32, par. (B)(7) if it is performing governmental
function/s.

Q: Is PAGCOR is still exempt from corporate income tax with respect to its
income from gaming operations?
ANS: YES. Under PD. 1869, as amended, PAGCOR is subject to income tax only with
respect to its operation of related services. Accordingly, the income tax exemption
ordained under Section 27(c) of R.A. No. 8424 clearly pertains only to PAGCOR's
income from operation of related services. Such income tax exemption could not have
868
 •

been applicable to PAGCOR's income from gaming operations as it is already exempt

therefrom under P.D. 1869, as amended. Indeed, the grant of tax exemption or the
withdrawal thereof assumes that the person or entity involved is subject to tax. This is
the most sound and logical interpretation because PAGCOR could not have been
exempted from paying taxes which it was not liable to pay in the first place. This is clear
from the wordings of P.D. 1869, as amended, imposing a franchise tax of five percent
(5%) on its gross revenue or earnings derived by PAGCOR from its operation under the
Franchise in lieu of all taxes of any kind or form, as well as fees, charges or levies of
whatever nature, which necessarily include corporate income tax (PAGCOR v. BIR,
G.R. No. 215427, 744 SCRA 712, December 10, 2014, Peralta, J.J.
f Tax on other business entities: general partnerships, general professional
partnerships, co-ownerships,joint ventures, and consortia
Q: How are partnerships taxed?
ANS: Except for a general professional partnership (GPP) and an unincorporated joint
venture or consortium engaged in cong4tion or energy projects, every other type of
business partnership is subject to incgrteitax in the same manner and at the same rate
as a corporation (NIRC, Sec. 22).
• a
Please see previous discussions oh 1:1,!,s,ips, in general.
General Professional PartnersIcipsZtki
Q: How are general prglOssional paqne ships (GPPs) taxe
ANS: The GPP is not $jtAxa,ble entity0.4 ome tax purpont ice it is only acting as a
"passthrough" entity wtardtils incom'e is timately taxed lo t wpartners comprising it
(R.R. No. 8-2018 det020iterilary 2018
Note: The shazeti5116 irAtildbal partner r, the net profi- of6 hGPP pa ership
is deemed
net income
to have
been distributed to tbenirthe same t6xa le year in wti l.c.&s
h lw:
u . ,.
was earned, Tirp shallo. ,tredt'io,,them their iri vio9a teat Whether actually
distributed or not, at thp.,qpPuatedfiltr o income tax.
Q: What is the nattrtreof th-kpartner's s4re in the net profits of a GPP?
ANS: A partner's Aar( in t tr4 net profit4fga,:fflp is not compensation income (BIR
Ruling No. 008, Januaira7A89). PArgiits4mAIRMdual partners are subject to
the 10%/15% CREDITABLE witht Milaxlittsilariel'&Sec. 2.57.2(E) of R.R. No. 2-
98, as amended (R.R 11(2018Ad. 8).
Co-ownership
Q: Explain the tax liability on the income of co-owned inherited properties.
ANS: The co-ownership of inherited properties is automatically converted into an
unregistered partnership the moment the said common properties and/or the incomes
derived therefrom are used as a common fund with intent to produce profits for the heirs
in proportion to their respective shares in the inheritance as determined in a project
partition either duly executed in an extrajudicial settlement or approved by the court in
the corresponding testate or intestate proceeding. The reason for this is simple. From
the moment of such partition, the heirs are entitled already to their respective definite
shares of the estate and the incomes thereof, for each of them to manage and dispose
of as exclusively his own without the intervention of the other heirs, and, accordingly he
becomes liable individually for all taxes in connection therewith. If after such partition, he
allows his share to be held in common with his cb-heirs under a single management to
be used with the intent of making profit thereby in proportion to his share, there can, be
no doubt that, even if no document or instrument were executed for the purpose, for tax
purposes, at least, an unregistered partnership is formed (Olia v. Commissioner of
Internal Revenue, G.R. No. L-19342, May 25, 1972).

869
 AN REDfBOOK
Please see previous discussions on Co-ownership.
Joint Ventures
Q: What are taxable joint ventures?
ANS: The following are taxable joint ventures:
1. A domestic corporation jointly owned by individuals and by two or more
existing domestic corporations and/or foreign corporations or duly registered
with or licensed by the SEC is a taxable partnership even if it is engaged in the
business of construction or energy related activity; and
2. If the unincorporated joint venture or consortium is engaged in any other line of
business than construction or energy related activity with operating contract
with the government (MAMALATEO, Reviewer, supra at 47-48).

Q: What are exempt joint ventures?

ANS: The following are exempt joint ventures:
1. Those formed for the purpose of undertaking construction projects;
2. Those formed for theprposeraZfigagin in petroleum, coal, geothermal and
other energy opeoptlorlk pursilan to,
I) op. ra ing or consortium agreement
under a servic”mtractt-with tile- oVe meht ,N ,,, Sec. 22(B));
Note: The joint ventuje pa, ie) aregedrigagre'd'es4ke t rayN with regard to the joint
venture profits. Each. t e Ast re,porLas„ezt ofg;kte,tirfr mek its share in the joint
venture profit. Th eile pt.rrarhethejointventure-is valig.onl ,aupt to the completion of
the construction r6j c nd goes nt eyandR the ubg rit tale or lease of the
developed con miniu ftoor or units to customers ( ' MA MO e /ewer, v supra
, at
94). ",
.vr-,{II .---.w V24
Q: What are e re uirements in Oa or vint venture ofco rtium not to be
considered a ktgitiblepo . orati rqk
ANS: A joint vintultiqr cd • yalis.noftolisidere t a Itcsp ration if:
1. It is f pppor th- • pose ofrain ing truc,tioi7Wo ect;
2. It invajves jOtping •tN oliff3) ., "els' by "cense local contractors
(licens•N as Opera (p• r to b `-13 1 ippine Contr ctors Accreditation
Board (PCAB) o e D a , e_k_ oar e ndyustry);
3. The locaNntracto YgnliecIA t tiqp busi ss;
4. The joint venture u i sec ji,by'l e P- B f the DTI (1 DE LEON,
NIRC Annotated, 113
7. FILING OF RCTURNS OF PA EN.T
Q: What is an income tax return?
ANS: It is a report made by the taxpayer to the BIR of all gross income received during
the taxable year, the allowable deductions including exemptions, the net taxable
income, the income tax rate, the income tax due, the income tax withheld, if any, and
the income tax still to be paid or refundable.

a. Period within which to file income tax return of individuals and corporations
Q: When should an individual taxpayer file his income tax return?
ANS: The return should be filed on or before April 15 of each year covering income for
the preceding taxable year (NIRC, Sec. 51(C)).

Persons Liable to File Income Tax Return

Q: Who are required to file Income Tax Return?
ANS: The following are required to file income tax return:
1. Individuals:
a. Resident Citizens; and

870
 b. Non-resident Citizen, Resident Alien and Non-resident Alien engaged
in Trade or Business with respect to income from sources within the
Philippines.
Exceptions:
i. Individual taxpayers whose taxable income is subject to zero
percent under the new graduated tax table (i.e., does not
exceed P250,000) shall not be required to file an income tax
return;
Exception to the exception: A citizen of the Philippines and
any alien individual engaged in business or practice of
profession within the Philippines shall file an income tax return,
regardless of the amount of gross income
ii. Individual with respect to Pure compensation income derived
from sources within the Philippines the income tax on which has
been correctly withheld;
Exception to...Ahe exception: An individual deriving
compensatisOrrtly from two or more employers at any time
during the,tak6E46, ear.
Individual4140 ble incomes been subjected to Final
WithholdirV las lax;
iv. A minimum age Aper49 an in 'v dual who is exempt from
income-tax
_„ ()Tap of this Code and other
larAeneral or s cial (NIRC,Wc. A));
v. mployees d under substitu 6 iling of returns (RR 3-
200;
Note: Secti, orrfi*ttrtiduced u der TRAIN Lawi o r ifieq RR 3-2002.
67P- Scar
2. Taxablejpstate Nlidjost - The duciary shall file returnAl gross income is at
I e a stitgir, 0 0 p (NIRC, (-Sq c. t ,);
3. Genka:IFPpfesSibkaal Partnership' PPP); a
4. Corgfation.

Q; Who are thekliVi „ duals not reg o file income tax return?
ANS: The followingTndkvidua are not req edito i e income tax return:
1. An individualning purely income whose taxable income
does not exceed`two hurl* (P250,000.00);
Note: The CtificatfWithholding filed by the respective employers, duly
stamped "Rece-agh,„y the Bureau, shall be tantamount to the substituted
filing of income t7R-zretIirns by said employees.
2. An individual whose income tax has been correctly withheld by his employer,
provided that such individual has only one employer for the taxable year - the
Certificate of Withholding filed by, the respective employers, duly stamped
"Received" by the Bureau shall be tantamount to the substituted filing of
income tax returns by said employees;
- 3. -An individual whose sole income has been subjected to final withholding tax;
4. A minimum wage earner as defined in these regulations - the Certificate of
Withholding filed by the respective employers, duly stamped "Received" by the
Bureau shall be tantamount to the substituted filing of income tax returns by
said employees.
Note: In all cases, all individuals deriving compensation income, regardless of the
amount, from two (2) or more concurrent or successive employers at any time during the
taxable year are not qualified for substituted filing. Thus, they are still required to file a
return (R.R 8-2018, Sec. 9).

871
 Q: What must an ITR contain?
ANS: The income tax return (ITR) shall consist of a maximum of four (4) pages in paper
form or electronic form, and shall only contain the following information:
1. Personal profile and information;
2. Total gross sales, receipts or income from compensation for services
rendered, conduct of trade or business or the exercise of a profession, except
income subject to final tax as provided under this Code;
3. Allowable deductions under this Code;
4. Taxable income as defined in Section 31 of this Code; and
5. Income tax due and payable (NIRC, Sec. 51(A), as amended).

Corporate Taxpayers
Q: What corporations are required to file income tax returns?
ANS: Every corporation subject to tax imposed by the NIRC, except foreign
corporations not engaged in trade or business in the Philippines (NIRC, Sec. 52(A)).
00 ,,„„„„,..........,..„,,..
Q: Who shall file the income,tapx retuli 69 behailrathe corporation?
ANS: The return shall bq,,,fili byilk? Presiciegti,Vie-iO4ide,Qt, or other principal officer,
and shall be sworn to 1:4"sticligofficgt,sandtptkejreasufer.orka,ssistant
••,,,,. v- treasurer (NIRC,
Sec. 52(A)). -.%.,,:
/:(Clid>/5:--------772----,,..„ -,,,.„.--?
Where and When P -le income Tax,Reeurns,. %. .ep
-.., • \,... ..4,
Q: What is the taxable' ear ?f a corporation? e
ANS: A corpo lion m y employ eitherAlendar year r fiscaleyQr s a basis for the
Ilk
filing of its ann dfjpeo e taxtreturrrpTdVipd7tharth- orporition shall not change the
accounting pe °Tem toyed theicOrinim-diplifro the Cdr+1Frrs'onerINIRC, Sec.
52(B)). im.,,,....
7..ak,,,,:ia.:.
1
,`:))
Q: What is fis al yeQ Vc.:), ..„. ,‘,..4.4
ANS: The terrrt fad ear\':rn aRs a -,ac•da?ting peiolof elvd)( 2) months ending
a@gO, Se6 22. pat. (Q)).
on the last day o any month btql-.1 an: eiC;filieri
..."4::..y
Q: When to pay inpome tax ret rV---->-,- ---T5::5
ANS: The total amciunt of inlso 'e''‘ 6
.."-
_ gi .._
.,. time t e return is filed (NIRC,
. ..p_ai,theme
Sec. 56 par (A)). 1 ‘r.laeopmv.W.°°

Q: May the Commissioner L.r.! ixtensiel o Jfirrng returns?

ANS: Yes, the Commissioner mayp.i entor o s ses, grant a reasonable extension
of time for filing returns of income subject to the provisions of Section 56 of NIRC (NIRC,
Sec. 53).
Q: May an individual taxpayer pay his or her income tax in installment?
ANS: Yes, when a tax due is in excess of Two thousand pesos (P2,000.00), the
taxpayer other than a corporation, may elect to pay the tax in two (2) equal installments,
in which case, the first installment shall be paid at the time the return is filed and the
second installment on or before October 15 following the close of the calendar year, if
any installment is not paid on or before the date fixed for its payment, the whole amount
of the tax unpaid becomes due and payable together with the delinquency penalties
(NIRC, Sec. 56 (8)).
Q: Where to file quarterly income tax return?
ANS: The return shall be file with an authorized agent bank, Revenue District.pfficer,
Collection Agent, or Duly authorized treasurer of the municipality in which such person
has his legal residence or principal place of business in the Philippines, or where there
be no legal residence or place if business in the Philippines, with the Office of the
Commissioner, except in cases where the Commissioner otherwise permits (NIRC, Sec
77(A)).
872
 4V.S.J.I.,:...se,:;r:,;•,:iza.4--;,-;.4:i*+ thr=lgri:tt.1.,sesixt;:ilei illnA6r,O.-41.•-: qv.

Q: When to file quarterly income tax return?

ANS: The quarterly declaration shall be file within sixty (60) days following the close of
each of the first three (3) quarters of the year. The final adjustment return shall be filed
on or before the fifteenth (15th) day of the fourth (4th) month following the close of fiscal
year, as the case may be (NIRC, Sec. 77(B)).
Additional Provision under TRAIN Law: The ITR shall consist a maximum of four (4)
pages in paper OR electronic form. It shall also only contain the information as required
in ITRs of individual taxpayers. These requirements shall not affect the implementation
of TIMTA.

b. Substituted filing
Q: What is Substituted filing?
ANS: It is a mode of filing when the employer's annual information return of withholding
tax on compensation may be considered as the "substitute" ITR of the employee
inasmuch as the information provided in his, ITR would exactly be the same information
contained in the employer's annual infprOtion return (R.R. No. 03-2002, Sec. 4; R.M.0
No. 1-2003).
Substituted filing is when the ernaNeplannual return (BIR Form 1604CF) may be
considered as the "substitute Ind:orgq,keturn (ITR) of the employee inasmuch as
the information provided in his fIlIA), orm 1700) would exactly be the same
information contained in the employerlei:ap liarkrifkl?IR orm 1604-CF) (R.M.0 No.
A
1-2003). sSr

Acce .
Q: How is "Substitute„„Fiting" diffevn Srom "Non-Filing'
ANS: Under "substituticHitg", an 4,a1 taxpayer alttpugh tequired under the law
to file his income 19x,fidttf will no longepave to personally filk his own income tax
return but instevfl& emfiliiSfere araualpormation re grn fled it'll be considered as
the "substituf Acomep, return of the vploye e ina uch as information in the
employer's re uric iszexacOlhe same in relation c't5 taro y ii Tnplcyee's return.
"Non-filing" is applicable4to- ertaiac, apesf individual atte.,ii5 are not required
under the law to fileiaq,inco e tax return 4M.0 No. 1-2003).

Q: What are the conditions or Substitu4 lm to apply?

ANS: Sec. 51-A of NIRZSat amen e,clAy14 that individual taxpayers
receiving purely compekrtion income, regar• ess ora"mount, from only one employer in
the Philippines for thalenagyear,
c the income tax of which has been withheld
correctly by the said empWitax due equals tax withheld) shall not be required to file
an annual income tax return. The certificate of withholding filed by the respective
employers, duly stamped 'received' by the BIR, shall be tantamount to the substituted
filing of income tax returns by said employees.

Q: What are the conditions for Substituted filing to apply?

ANS: Based on Revenue Regulation no. 3-2002, substituted tax filing only applies to
employees who meet all the following conditions: (POES-FF)
1. The employee receives Purely compensation income (regardless of amount)
during the taxable year
2. The employee receives the income only from One employer in the Philippines
during the taxable year
3. The amount of tax due from the employee at the end of the year Equals the
amount of tax withheld by the employer
4. The employee's Spouse also complies with all three (3) conditions stated
above.
5. The employer Files the annual information return (BIR Form No. 1604- CF)
6. Employee has BIR Form 2316 or Certificate of Final Tax Withheld at Source
(BIR Form 2306) Issued by its employer (R.R. 11-2013, Sec. 2).

873
 SEDAN _:RED BO,...
c. Failure to file returns
Q: What is the effect of failure to file income tax returns?
ANS: Failure to file and/or pay any internal revenue tax at the time or times required by
law or regulation shall be punished by a fine of not less than P10,000 and imprisonment
of not less than one (1) year but not more than ten (10) years (NIRC, Sec. 255).

Q: When must the total amount of tax imposed be paid?

ANS: Pursuant to Sec. 56 of NIRC as amended by TRAIN Law,
1. In general, at the time the return is filed. In the case of tramp vessels, the
shipping agents and/or the husbanding agents, and in their absence, the
captains thereof are required to file the return herein provided and pay the tax
due thereon before their departure. Upon failure of the said agents or captains
to file the return and pay the tax, the Bureau of Customs is hereby authorized
to hold the vessel and prevent its departure until proof of payment of the tax is
presented or a sufficient bond is filed to answer for the tax due.
2. Installment of Paymerita0Wherfflardue.12. in excess of P2,000, the taxpayer
other than a corpgatiorkmay ilei tolpay tIP,ta4, in two (2) equal installments,
in which casevtire.firstLin%allment shallibe` p 'id at,lhe time the return is filed
and the secyrld inptAl ntlifigrefore ctoiyerl5-49,1lowing the close of the
calendar yipa ~'f ailristallagiitjszot pal 'ep.Ttsy'eforg. the date fixed for its
paymen Ale Vid etarhount of:the tairtIn•atObeco es due and payable
togethe ,hitbilh, .ei
deinquen0 perialti&s.;." oe•
Note: eforgimen ed of toRc14 TRAIN La , th' was on or before
July 1
3. Pay l-tilapital aireiax, 1 ,c)ri_thi e,j:1
, ate cribed therefor is
filed erson I able telgtojilf:tbsaftelle f his intention to
avail of t nefit wernmfori of pit er existing special
.laws, h nts-sha4equired
ll=1:4 'Ili,- fire to qualify for
exem der ue on the gains
2
realiz from the zbymm lately/ ecome due and
payabl subje to t Iked nder pplicaye provisions of this
Code. I he sell r,, havi g, aict,t (ta ) bmits,such i p of of intent within 6
months frbzi the regitatiaLiAti,egc "ti.ansferri g the real property, he
shall be enfitlzi toNffbncte_ Suc11:22supoetcai tt n of his compliance with
the requirementsarxern 0o ., \,)
-1',.. ‘ _. • 41P- the gain by installments
Note: In case the taxpayerNtecis and Wiled tooreport
under Section 49 of this Code, ilte.t f atfiinstallment payment shall be paid
within 30 days from the receipt of such payments.

No registration of any document transferring real property shall be effected by the

Register of Deeds unless the Commissioner or his duly authorized representative has
certified that such transfer has been reported, and the tax herein imposed, if any, has
been paid.

Q: When is the deadline for filing of declaration estimated income for the current
taxable year?
ANS: Pursuant to Sec. 74 of NIRC as amended by TRAIN Law, the deadline for filing of
declaration estimated income for the current taxable year is on or before May 15 of the
same taxable year. The payment of the four installments shall be:
• First - May 15
• Second - August 15
• Third - November 15
• Fourth - on or before May 15 of the following calendar year when the final
adjusted income tax return is due to be filed.

874
 , ::1,1;*"..1;';',":,4•••vitvi-A4- • • •f•• '71 i'S‘

8. WITHHOLDING TAXES
a. Concept
Q: Discuss the concept of withholding tax.
ANS: The practice of "withholding of taxes" which is also known as "taxation at source",
refers to the requirement that taxes imposed or prescribed by the NIRC are to be
deducted and withheld by the payor-corporations and/or persons from payments made
to payees-corporation and/or persons for the former to pay the same directly to the BIR.
Thus, the taxes are collected practically at the time the transaction is made or when the
taxable act occurs (2-8 DOMONDON, Taxation, supra at 1058).

Q: What is the nature of withholding tax?

ANS: Withholding tax is not a tax. It is a method of collecting income in advance from
the taxable income of the recipient of the income (MAMALATEO, Reviewer, supra at
264).

Q: Who are required to deduct an,d0tAhold taxes?

ANS: The following persons are cc:iiistitutgcl as withholding agents required to withhold
• #4'
income tax payments: 24,1Py° .t
1. Juridical Persons, whethe:r944e ngLY gaged in trade or business;
2. Individuals with respect AM:Jane ade in co nection with his trade or
business; 5•• , lar
3. Individual burtrufa engagOd trade or b si esst insofar as taxable sale,
exchange oritransfer
tya or reapacurty is concerned; d
4. All governmRrilt offices including GOCC S as Rs provincial, city and
municipal gpy,erriiinartte and baThngays (RR. 0- -98, Sea Z57.3 as
amende R.R016. 1,4-02).

Q: When can,' ededgiit stilLbe allo ed despite cij ilA of taxes?

ANS:, Any income tigjimeNvhiclibItheMise dedu Code, shall be
allowed as a deciuctiorlVaghe payqrs gras income only4414 flown that the income
tax required to be‘hteld-hes beerpaid the BIR in accordance with Sections 57 and
58 of the Code. NeVerthelesAa deductio 11„ba allowed in the following cases where
no withholding of tax w43rde:
1. The payee re orted t tie tax, Eal. tax due thereon and the
withholding agent pa tie tax, including the interest incident to the failure to
withhold the to d .ircharges, if applicable, at the time of audit/investigation
or reinvestigation/reconsideration;
2. The tecipient/payee failed to report the income on the due date thereof, but the
withholding agent/taxpayer pays the tax, including the interest incident to the
failure to withhold the tax, and surcharges, if applicable, at the time of
audit/investigation or reinvestigation/reconsideration; and
3. The withholding agent erroneously under withheld the tax but pays the
difference between the correct amount and the amount of tax withheld,
including the interest incident to such error and surcharges, if applicable, at the
time of audit/investigation or reinvestigation/reconsideration (R.R. No. 6-2018
issued on January 19, 2018 revoking RR No. 12-2013 relative to the
requirements for deductibility of certain expenses).
Note: Items of deduction representing return of capital, such as those pertaining to
purchases of raw materials forming pait of finished product purchases of goods for
resale, shall be allowed as deduction upon withholding agent's payment of the basic
withholding tax and penalties incident to non-withholding or under withholding (R.R. No.
6-2018).

875
 •
DAN
Q: Who are exempted from withholding?
ANS: The withholding of tax shall not apply to income payment made to the following:
1. National government and its instrumentalities, including provincial, city, or
municipal governments, as well as GOCCs;
2. Persons enjoying exemption from payment of income taxes pursuant to the
provisions of any law, general or special, such as but not limited to the
following:
a. Sales of real property by a corporation which is registered with and
certified by the Housing and Land Use Regulatory Board (HLURB) or
the Housing and Urban Development Coordinating Council (HUDCC)
as engaged in socialized housing project where the selling price of the
house and lot or only lot does not exceed the socialized housing price
applicable to the area as prescribed and certified by the said
board/council as provided under Republic Act No. 7279 and its
implementing regulations.
b. Corporations whict),pre.exemp,t from the income tax under Sec. 30 of
the Tax Cosle''as imand?Fl . ,-,1.'a'nd.,,. government-owned controlled
corporatjorrtextkrpt from lincOme fax bider Section 27(A)(C) of the
sameftode-,10 witelhe•Governdenf Se:ryjcelsurance System (GSIS),
the _tqatiOctlrity System SSS‘);,:,,the Health Insurance
CorportdVljlG)reffrfile"tocal,ft,ertiter Diskicts (LWD). However,
eel spin6 payments arising-from tf any
, activitr Which is conducted for
,4, i ,,
pro ttoVincote p derd •fi m feal or personaleproAty shall be subject
to withfioldin tax as prpic.fibed in thes1 regkatictpS.1
:Jaintpentures or consolpmTalififf or the iiiirctose of undertaking
"ebnstiruction roredti'or; 4ngaRiein etroleu , col geothermal and
other ener operatiolgpvituant fo ancrating or consortium
"adrqirne er a setiiite_e_britract wikh re governm9nt.
Ingiwctual w cX1Fn Pj25-0,p0,0i.00 i rfdtbdow arn.:, dflone income payor
WA o2mp iari• vitiiii ifollOwin Ab .„,ir'ents: N
Re 1 igidkai'l ai 6#.• f4 1-•:;a page's sv om declaration of
woks r oelpti ccofilapde wit .the ; rmat per attached
--k"-?>,)
Annex "13'-•2ki.rN T r,,T.
-
ii. - The aoria_cletratEation- a,.. .,beentsuE?initted to the lone income
,Ay‘rfihrig'ilding.agenron•or.fiefoire'edgnuary 15 of each year or
lieforl:t 4Initialincrkii,akterY4hichever is applicable (R.R.
No. 02198,Zz22. 7)2.4.20 indnded by RR 11-2018).
Q: What-is-the rate of withholding tax on items of income payable by payor-
corporations/persons?
ANS: Beginning January 1, 2019, the rate of withholding tax shall be not less than 1%
but not more than 15%. Revenue Memorandum Circular No. 1-2018 provides that the
applicable EWT rate on income payments to self-employed individuals/ professionals is
8% (Sec. 57(B) of NIRC as amended by TRAIN Law).
Note: Before the TRAIN Law Amendment, the rate shall be not less than 1% but not
more than 32%. The tax withheld shall be credited against the income tax liability of the
taxpayer.
Q: When must the return for final and creditable withholding taxes be filed and
payment made?
ANS: The return for final and creditable withholding taxes shall be filed and the payment
made not later than the last day of the month following the close of the quarter during
which the withholding was made. The provision that the Commissioner may require the
payment of the taxes withheld at more frequent intervals is removed under TRAIN Law
(Sec. 58, NIRC as amended by TRAIN Law).

876
 Note: Before the TRAIN Law Amendment, the return for FWT and the return for
creditable withholding taxes (EWT returns) shall be filed within ten (10) days after the
end of each month (Sec. 2.58 of RR No. 2-98).

Q: When does the obligation of the employer to withhold accrued bonuses arise?
ANS: If the taxpayer claims bonuses as a deduction in its income tax return, the
withholding tax on the said bonuses should be withheld and remitted to the BIR in the
year of accrual and not during the year of payment. The obligation of the payor
employer to deduct and withhold the related withholding tax on bonuses arises at the
time the income was paid or accrued or recorded as an expense in the
payor's/employer's books, whichever comes first (ING Bank N.V. v. Commissioner of
Internal Revenue, G.R. No. 167679, July 22, 2015).

Q: When will the prescriptive period for refund of final withholding taxes
commence?
ANS. Final withholding taxes are considered as full and final payment of the income tax
due, and thus, are not subject to entiadjastments. Thus, the two (2)-year prescriptive
period commences to run from thelitte,0vefund is ascertained, i.e., the date such tax
was paid, and not upon the disc04:riyi0ifte taxpayer of the erroneous or excessive
payment of taxes. In the case at liat.,1001trtidisputed
-.7 .
that Metrobank's final withholding
tax liability in March 2001 was remitteclifsx1Mtm,hpril 2012001. As such, it only had
until April 25, 2003 to file its adMinisiktOyndicittigraraTofor refund. However, while
Metrobank's administrative;im wask,fileti on December i 2 h2002, its corresponding
judicial claim was only pn September 10, 2003. There °red Metrobank's claim for
refund had clearly prescribed . (Metrtipolir Bank & TritstiCo v. Commissioner of
Internal Revenue G.Rplo.482582, April A 2017, First Damn, kerlas-Bemabe, J.J.
„tfg,447. ' d,f" A
irded of its ffxcess cre itable tax for 2006
Q: The taxpa -er Initiailyippted to tie--kreel
through . theqdribaQW,
I.,. ' 4, a tax credicertificateatigtax
- lii .4;;,. . X' • a .er., subsequently
indicated in 1 ft 2007 gM, atitclrnecmgver theld * -iel rditable pe tax and
applied the sarriqi,pgalhAlconielix diNfor 2007. ThesTaxpayer filed with the BIR
a claim for refundrardi5r iOuanc(of a ACC for the alleged excess credit for 2006.
This was later eleate4 to the s Court of fgaxAmials (CTA). Both CTA Division and
CTA En Banc ruled tit9Sotffe taxpayeri"TV ,)s1wised the carry-over option
when it included the' excess tai egiglits ofLtiovorrcthlworiginal ITR for 2007. The
....y
taxpayer, on the othert:and,,qoptended that the option to be refunded through the
issuance of a TCC islitevoCable. Thus, when it indicated in its annual ITR for
2006 the option "To be'''41ral
iss e a Tax Credit Certificate," such choice precluded the
other option to carry over. Is the taxpayer correct?
ANS: No. The irrevocability rule is limited only to the option of carry-over. There is
nothing in the law which prevents the taxpayer who originally opted for a refund or TCC
to shift to the carry-over of the excess creditable taxes to the taxable quarters of the
succeeding taxable years. However, if the taxpayer decides to shift its option to carry-
over, it may no longer revert to its original choice due to the irrevocability rule. Here, the
taxpayer is barred from recovering its excess creditable tax for 2006 through refund or
TCC since it constructively chose the option of carry-over when, despite its initial option
to refund, it subsequently indicated in its 2007 ITR that it carried over the 2006 excess
creditable tax and applied the same against income tax due for 2007 (University
Physicians Services, Inc. — Management, Inc. v. Commissioner of Internal Revenue,
G.R. No. 205955, March 7, 2018).
•

877
 1 BEDAN RED B0
Q. The BIR assessed ABC with deficiency final withholding taxes (FWT) on
interest payments on loan agreements with XYZ for the taxable year 2000. The
CTA found that ABC was not liable for the said deficiency FWT since its liability
for interest payment became due and demandable only on June 1, 2002. The BIR
contends that ABC was liable to pay the interest from the date of the execution of
the contract on January 5, 2000, not from the date of first payment on June 1,
2002. Is the BIR correct?
ANS: No. Under Section 2.57.4 of RR No. 2-98, the obligation of ABC to deduct or
withhold tax arises at the time an income is paid or payable, whichever comes first.
Further, the same Section provides that the term "payable" refers to the date the
obligation becomes due, demandable or legally enforceable (Edison (Bataan)
Cogeneration Corporation v. Commissioner of Internal Revenue, G.R. No. 201665,
August 30, 2017).

b. Creditable vs. withholding taxes

Q: What are the kinds of withhOdindlaii?'"km,,,
ANS: The two kinds of withttoldi7 taxeiari: ;\ 7 .."'N,.
1. Withholding ofifirpl.tax Ivert in-inconiesp Nkirld,,,,c0f withholding tax which is
prescribed or oktayi jneoffirRrTien -tan ii- pp creditable against the
income to • dneloo 1he'pay„ ee on,,ot income4u14jept regular rates of tax for
the taxab sn,. At ''.6.tfiabitax 40% on oyItte ); \
Note: nd, fi al witfiholdi g Wc systema ()lint of income tax
withh d by t wit oldind agn, is 8hstitut dias fug-arid final payment of
the in • rne_d e fro e_pay.en:nra.
i saidin ome. neIliAbility for payment of
the to 101primarily res s, an I, 1 n.p,aypj as the wi poldinb agent. Thus, in
casefof hi !allure o wit: old_ 1167.stalror iri case of ,._unrp f-t,withholding, the
deft en s II-b colfecWLo3.0tRe par /..withlbkliiid agent. gent.The payee
is no req lid t ,f11.?.- R-income -ferl al paiti,,,a5r a (R.R. No.
2-98, 041RA),19
, (0). p", / .— 1/1/let holding taxes on
2. Withh Iding at creq 1 thektiTt fgs teal
ordinarkbusinks inc. . 'eh s stir cllje ted jo incom tax and therefore,
it is deductible la tax cr f e. ,..inc/o 'e d lived fromthe exercise of a
professiok CIEN-il-r"
Note: Under the craikable i olclja sstem, taxbIdvith eld on certain income ----
‘.. ,,
payments are intended Tio,, o Ft lS\ tia o 'ff e3h,tax due on said income. The
income recipient is still reqair a offile ar it sVrescribed in Sections 51 and
52 of the NIRC, as amended, t epogorn and/or pay the difference between
the tax withheld and the tax due on the income. Taxes withheld on income payments
covered by the expanded withholding ..tax xxx and compensation income xxx are
creditable in nature (R.R. No. 2-98, Sec. 2.57(A), par. (1)).

c. Duties of a withholding agent

Q: Who are required to deduct and withhold taxes?
ANS: The following persons are constituted as withholding agents required to withhold
income tax payments:
1. Juridical Persons, whether or not engaged in trade or business;
2. Individuals with respect to payments made in connection with his trade or
business;
3. Individual buyers not engaged in trade or business insofar as taxable sale,
exchange or transfer or real property is concerned; and
4. All government offices including GOCC'S as well as provincial, city and
municipal governments and barangays (R.R. No. 02-98, Sec. 2.57.3 as
amended by R.R. No. 14-02).

878
 •DR:11
A
Q: What are the duties of the withholding agent?
ANS: The Tax Code imposes certain obligations upon the withholding agent to monitor
its compliance with the duty to withhold. They include:
1. The filing of the quarterly withholding tax returns;
2. The submission to the payee, in respect of his or its receipt during the
calendar quarter or year, of a written statement showing the income or other
payments made by the withholding agent during such quarter or year and the
amount of tax deducted and withheld therefrom; and
3. The filing with the BIR of a reconciliation statement of quarterly payments and
a list of payees and income payments.
The codal provisions on withholding tax are mandatory and must be complied with by
the withholding agent (Far East Bank and Trust Company v. Court of Appeals, G.R. No.
129130, December 9, 2006).
Note: A taxpayer cannot be compelled to answer for the non-performance by the
withholding agent of its legal duty to withhold unless there is collusion or bad faith.
Further, the taxpayer could not be deemed to have evaded taxes had the withholding
agent performed its duty (ibid).

Q: What are the consequences.'of!`tI e, allure of the withholding agent to collect

and remit taxes?
ANS: Any person required to withhq1.0A rkylpg) and rerrlit any tax imposed by this
Code or who willfully fails to vsligihold:SI4OhjakI4-a 401.10.Ahd remit such tax, or aids
or abets in any mannerp, ,Oade any stic itax or the paymer4thereof, shall, in addition
to other penalties prod'd for under Chapter (i.e. cfhApenalties and interests
including deficiency a01ginquencitiiife%sts), be liable thnNonviction to a penalty
&pal to—ttie total amount thd tax notrwithheld, or noeagpou ted for and remitted
(NIRC, Sec. 251) ,v rte
Q: What rg, e to anycome ,,tai` wi,tb Vd by, the income
payor/withhclOng nexcesslof w wtso, is prescr e
ANSI Any Income Tai ithheldtrY'Whe
04fr
payoraith Mg agent in excess of
what is prescribedterlfhese. regula ibris r‘e all be refunded to the payee by the said
income payor/withholdipg ag ' t. The income or/withholding agent shall reflect the
amount refunded as aditis, t to the re .019Lling tax due for the first quarter
withholding tax retum.th% 'adjusle8.Amo n -o 451401MrAhall also be reflected in the
Alphabetical List of Pay,t6s to attached in the said first (1st) quarter return. The said
list of payees, who are iakrigg,V refund either due to the change of rates of withholding
or due to the qualificatiorail of exemption from withholding tax shall likewise be
attached in the said return, which shall be filed on or before April 30, 2018 (R.R. No. 14-
2018 issued on April 5, 2018).

Q: What are the consequences of the failure of the withholding agent to refund
excess withholding tax?
ANS: Any employer/withholding agent who fails or refuses to refund excess withholding
tax shall, in addition to the penalties provided in this Title (i.e. civil penalties, interests
including deficiency and delinquency interests, and imprisonment), be liable to a penalty
to the total amount of refunds which was not refunded to the employee resulting from
any excess of the amount withheld over the tax actually due on their return (NIRC, Sec.
252).

C TRANSFER TAXES
Q: What is a transfer tax?
ANS: Transfer tax is imposed upon the privilege of passing property ownership
gratuitously without consideration (2-B DOMONDON, Taxation (2018), p. 396).

879
 4•-07'41,

REP
Q: What are the different theories regarding the purpose of transfer taxes?
ANS: The theories regarding the purpose of transfer taxes are:
1. Benefit-Received Theory — the tax is in return for the protection and services
rendered by the State in the accumulation of properties transferred
gratuitously, resulting to benefits received by the estate and the recipient (heirs
or donee).
2. Equitable Recoupment Theory — the State imposes transfer taxes to
counter-act tax evasion, or to reasonably recover the current and future
anticipated reduction of government's income tax collection.
3. Ability-to-Pay Theory — the tax is based on the act that the receipt of
inheritance and gifts creates an ability to pay and thus contribute to
governmental income.
4. Redistribution-of-Wealth Theory — the properties given for free contributes
to the unequal distribution of wealth and earnings because the recipient (heir
or donee) has not actually worked for it. Thus, the imposition of transfer taxes
helps the equitable distrib,mjign..ofmealth to attain social progress and stability.
Theory— the taxiifithe„share of the State as a passive
5. State-Partnership Theory
and silent partner in he accumMatili ofip6513qty •
(VALENCIA & ROXAS,
Transfer Taxis irsaios ccessiond . 4 -43).
.h„.„.,,,. ,,- , ,,,t‘
Estate Tax
Basic Principles arkpt, ang;efilittionN, '•1'(
,:,-- ,„
"*Y" it zirk.. 21i!.. 1 \I
Q: What is an estate tax? 1 RV', ( .t.4, -)
ANS: Estate tat tan xcise taximpose n (I le-privilege of trantfesrArttg a property upon
the death of th iol- e (CAB4NERO,"F, I lilLIVIdgito Leaving Igti18), lg. 36) [hereinafter
CABANEIROJ) It is tax based onjhe•v'elue bfithe net estatd pfAthh vdecedent (NIRC,
Sec. 84). ..istr2.24.7. i
E..--)
.
r1,';.., \ ,si d .
Q: What is the 'rage of estil tax? ri
ANS: Estate tax 's: iil I,
• fi
1. A trans tr tax i pose 4 .1 the rot16-i' r ispoi) ion of private property; and
2. A privilege or excist to go .0-jqtppp" v4a because , their imposition does not
rest upon‘generaVwz biriZikka he- I:A- ex-AT imposed. on the act of
passing own higfc_prcrerty.(340MOND q,ya eon, supra at 1).
U
Q: What are the purposes o ects okt,4\ta
ANS: The following are the genera I pted-or poses for imposing estate tax:
1. To generate additional revenue for the government;
2. To reduce concentration of wealth;
3. To provide for equal distribution of wealth;
4. It is the most appropriate method for taxing the privilege which the decedent
enjoys of controlling the disposition at death of property accumulated during
the lifetime of the decedent; and
5. It is the only method of collecting the share which is properly due to the State
as a partner in the accumulation of property which was made possible on
account of the protection given by the State (Report of the Tax Commission on
National Internal Revenue Laws, Vol. I, pp. 55-57).

Q: When does the estate tax accrue?

ANS: It accrues upon the death of the decedent. Upon the death of the decedent,
succession takes place and the right of the State to tax the privilege to transmit the
estate vests instantly upon death (R.R. No. 12-2018, Sec. 3).
Note: The accrual of the tax is distinct from the obligation to pay the same, which shall
be paid at the time the return is filed by the executor, administrator or the heirs (R.R. No.
12-2018, Sec. 3).
880
 • >1..z4 'if-9: '

BEDAN RED BOOK

Q: What law governs the imposition of estate tax?
ANS: Estate taxation is governed by the statute in force at the time of the death of the
decedent (R.R. No. 12-2018, Sec. 3).
Note: The tax rates and procedures prescribed by R. A. No. 10963, otherwise known as
the "Tax Reform for Acceleration and Inclusion Law" (TRAIN Law) and R. R. No. 12-
2018 shall govern the estate of decedent who died on or after the effectivity date of the
TRAIN Law which is January 1, 2018.

Q: Who is liable for the payment of estate tax?

ANS: Estate tax is paid by the:
1. Executor or administrator before delivery to any beneficiary of his distributive
share of the estate; or
2. Beneficiary to the extent of his distributive share of the estate - subsidiarily
liable for the payment of such portion of the estate tax as his distributive share
bears to the value of the total net estate (NIRC as amended by TRAIN Law,
Sec. 91 (0)).
• ft
Q: What is the rate of estate taxZ..
ANS: The . net estate of every 00'500;e0whether resident or non-resident of the
Philippines, shall be subject to ati .0etataite3( at the rate of six percent (6%) (NIRC, as
amended by TRAIN Law, Sec. 84y i:d:OP. ...
Note: Upon the effectivity of TRAIN •Le statdttatiatglipinow fixed at 6% and the
graduated schedule with,•Witte of 5-20°A under the Taii Reform Act of 1997 is now
repealed. ;. 11
-\
IDA . .
Q: When are the ,gropetties and rights of a depedent transferred to his
successors? ?41,- 1
,
ri!ed to the stOcessors a the time of death of
ANS: The properties arisl, rights are teksfew
the decedenC,10/11,90.64
_ ,.Art. 477).
Note: Despitelhe transfer of proteqips al rights a*timpfskath, no judge shall
authorize the execgtor optcial atmjnistta:tor to deliver a tligr 6Vive share to any party
interested in the gatei' nleAtherei'is a de' ification from the Commissioner that estate
tax has been paid ARA Sep94).

Classification of Deceaent 4.4107.4,,

Of At
Q: Who are the taxpayers liableno pay estate tax?
ANS: The estate left by f'ke4living individuals are liable to pay estate tax:
1. Resident;
a. Resident Citizen (RC)
b. Resident Alien (RA)
2. Nonresident;
a. Nonresident Citizen (NRC)
b. Nonresident Alien (NRA) (NIRC, Sec. 84).

Determination of Gross Estate and Net Estate

Q: Distinguish gross estate from net estate.
ANS: Gross estate of decedent who is a resident or citizen refers to the value of all the
property, real or personal, tangible or intangible, of the decedent wherever situated,
however for a decedent who is a nonresident alien gross estate includes only properties
situated within the Philippines provided, that, with respect to intangible personal
property, its inclusion in the gross estate is subject to the rule of reciprocity provided for
under Section 104 of the NIRC (R.R. No. 12-2018, Sec. 4). On the other hand, net
estate refers to the value of the gross estate less the deductions and exemptions
allowed under Sections 86 and 87 of the NIRC, as amended by TRAIN Law (R.R. No.
12-2018, Sec. 6).
881
 Q: How is gross estate determined?
ANS: If the decedent is:
1. Residents and citizens - all properties, real or personal, tangible or
intangible, wherever situated, plus items includible in gross estate;
2. Nonresident aliens - only properties situated in the Philippines, provided that
with respect to intangible personal property, its inclusion in the gross estate is
subject to the rule of reciprocity under Section 104 of the NIRC (R.R. No. 12-
2018, Sec. 4).
Note: Amounts withdrawn from the deposit accounts of a decedent subjected to the 6%
final withholding tax imposed under Section 97 of the NIRC, shall be excluded from the
gross estate for purposes of computing estate tax.

Q: Discuss the rule of reciprocity in relation to intangible personal property of a

non-resident alien individual.
ANS: The intangible personal property of a non-resident alien individual, if:
1. With reciprocity—shall not.b.e.includgcl in the gross estate if:
a. The laws of teloreign- ountrwt whicb the decedent was a citizen and
resident at/the IIIRe of is 'de4a4I4 d161 notknpose a transfer tax of any
charatir in espdqt,:of.intangib e-ipers,r99alloperty of citizens of the
Phili es o e'grding in that forefgr,_dnt*).
ou ok
b. T f fAhe rei u Ural! ilar exemption from transfer
xe of ern( aracter ow. ehyfeL tile s of the Philippines
of r ing is that faeigftoulitry C, S c(101)
2. With°, t reciffroci - shall bqiiileluded in the gros &td.
Note: Reciprod s be Ma . al)/ o e osa es or cou'h , the c Ilects or imposes
and does not ;et mp any try sfelOTSsttrilleg- Wor uccess oFi tax f any character,
reciprocity doe no a ply (C/n.v. Fiihisellt- 416. L-1 :622, Ja tlatyt , 1961).
a c'
Q: What is th or a uattopio grpps es
ANS: The gros eside hal "h Weeds 010 Ap:-•
1. As to teal pry e n lc eve is di:45 twe n the HMV at the time of
death:
a. A eterminesi by g i rtrlssiiQpel• (p al value; or
b. As own ip-the, af-valyee-fiVcArb • he provincial and city
asses ozs-046)§Vc4e(B)e7 •iiN);
2. As to personalNproli.erbi, theAggn6rdNite'js MV at the time of death,
except for. "NS n4fV1 ..a2,-,00,0°
a. Shares of stock, w - - --
i. Listed - FMV is the arithmetic mean between the highest and
lowest quotation at a date nearest to the death, if none is
available on the date of death itself;
ii. Unlisted -
• Common shares are valued based on their book value;
appraisal surplus shall not be considered;
• Preferred shares are valued at par value; value
assigned, if there are any, shall not be considered (R.R.
No. 12-2018, Sec. 5);
b. As to units of participation in any association, recreation, or
amusement club, shall be the bid price nearest the date of death
published in any newspaper or publication of general circulation (R.R.
No. 12-2018, Sec. 5);
c. As to the right to usufruct, use or habitation, and annuity, there
shall be taken • into account the probable life of the beneficiary in
accordance • with the latest Basic Standard Mortality Table, to be

882
 approved by the Secretary of Finance, upon recommendation of the
Insurance Commissioner (R.R. No. 12-2018, Sec. 5).
Note: Valuation of Gross Gifts (under Donor's Tax), shall also follow the rules under
valuation of gross estate, provided, that the reckoning point for valuation shall be the
date when the donation is made (R.R. No. 12-2018, Sec. 13).

Q: What items should be kncluded in. gross estate?

ANS: The following should be included as part of gross estate: (ITR-GP-PIC)
1. Decedent's Interest;
2. Transfer in contemplation of death;
3. Revocable Transfer;
4. Property passing under a General Power of Appointment;
5. Proceeds of life insurance;
6. Prior interests;
7. Transfers for Insufficient consideration; and
8. Capital of the surviving spouse,(N/RC as amended by TRAIN Law, Sec. 85).

Q: What does the decedent' s inn.Wmfjpc ude?

ANS: It includes any interest havitiONSit capable of being valued, transferred by the
decedent at the time of his deattri(eAVItionds declared by a corporation before the
death of the stockholder althougOa ge f Galt* MAMIM TEO, Reviewer, supra at
359). VVI wyjk,

Q: What is a transferdirlcontemplabon, death?

ANS: It is a transfer b2ti,(ated by :a t ought of deathl al o gh death may not be
imminent (REYES, p, Lipp a Business Taxes (0f5), Chapter 12, p. 11)
(hereinafter REYESP-Transepand Busine Taxes]. 1
Note: The coAcept of tr nsfer in contem ion of death' hasp nical meaning. It is
not the merd'agier; constitutes nsfer "n,eo death but the
retention of some type of control ove e prope 34, grip_ DOMONDON,
Taxation, supra et42,._ se a donation s made conciPli ith the execution of a
will, or where thelime4aten the of a gift and the death of the donor was
relatively close, thelagsfer vere held to Me plated, and the thought of death, as
distinguished from pu ms•I ssociated ctstibe the impelling cause of transfer
(VITUG, Tax Law and ilisprude ff0f2-014

Q: What is a revocable an2.0 r?

ANS: A revocable trans etki§4 transfer by trust or otherwise, where the enjoyment
thereof was subject at the date of his death to any change, through the exercise of
power (in whatever capacity exercisable) by the decedent alone, or by the decedent in
conjunction with any other person, to alter, amend, revoke, or terminate, or where any
such power is relinquished in contemplation of the decedent's death (NIRC, Sec. 85
(C)(1)).
Q: When is the power to alter, amend, or revoke considered to exist on the date of
the decedent's death?
ANS: The power of the decedent to alter, amend, or revoke shall be considered to exist
on the date of his death, even though:
1: The exercise of the power is subject to a precedent giving of notice; or
2. The alteration, amendment, or revocation takes effect only on the expiration of
a stated period after the exercise of the power.
Note: Whether or not, on or before the decedent's death, notice has been given, or 'the
power has been exercised, proper adjustment shall be made representing the interest
which would have been excluded from the power if the decedent had lived. However, if
notice has not been given, or the power has not been exercised on or before the date of

883
 his death, such notice shall be considered to have been given, or the power exercised,
on the date of his death (NIRC, Sec. 85 (C)(2)).

Q: What is a General Power of Appointment (GPA)?

ANS: General power of appointment is the right to designate the person who will
succeed to the decedent's property which may be exercised in favor of any person
(CABANEIRO, supra at 131).
Note: A power is specific, hence NOT general:
1. If it can be exercised only in favor of one or more designated persons or
classes of persons exclusive of the decedent, his estate, his creditors or
creditors of his estate; or
2. If it is expressly not exercisable in favor of the decedent, his estate, his
creditors or creditors of his estate (34 Am. Jur. 2d, 791).

Q: How is the power of appointment exercised by the decedent?

ANS: The power of appointment maJ?e,exerojpglby the decedent:
1. By will; „0", T -Ti 1.A i. .7-',,
2. By deed executedin c emplation 9 , .9 ntendecLto i take effect in possession
or enjoymentg-or 61te . h - „death;•=or.,... ` I ..,..N
3. By deed uo4er?Whic he retained for hiPlife-dr aNDeriod not ascertainable
without revere o•ir c "dt his...deattrbrforany,Retio<Whic
, does not in fact end
before Is(' , 1 )61 lc -,'•,... ,,f,:'
a. ilrhe-`p , session or, tenjcimerit•s,of, o `g ht to i ncome from, the
- eropes6f; or i i'V\ cr)
b. T rght, ei era a one ordlin conjunctionwith rmgarpri, to designate
e-i •person hacV,Pri4)1:: ' ::: sOSP.P7Or enjoy • aiLpjoberty or income
there rom (NIRC, S‘6,--f) om-rA
,,,..1,51,,., i
" ..--1- t ,..,1 —der . ,3
Q: When may npier :.c Vemp ap 5 9 , ea ,/ eyocable4ra sfer, or property
passing under, 'PAloe e ' cl ded from h,', e,itoss(s 'te? N't
ANS: Such transfers mkt be )citi qifio o'bs',estat only en they are in the
nature of bona fide sale for ari\adeqba e and, Jli money or money's
worth (NIRC, Sec.-8 ('Be), (b) on f
61t1?.'
Q: When do proceeds ci gurance4dr e gross estate of the
decedent?
ANS: Proceeds of lifei nsuranc all fortia\AAf rocs estate when:
1. The insurance policy is taken rbythe decedent upon his own life; and
2. The proceeds are receivable by:
a. Estate of the deceased, his executor, or administrator, irrespective of
designation; or
b. Any beneficiary designated in the policy of insurance as revocable
beneficiary (NIRC, Sec. 85 (E)).
Note: Under the Insurance Code of the Philippines, a designation of beneficiary is
generally revocable, unless stated expressly in the policy that the designation is
irrevocable. In such cases, the proceeds are not considered as part of the decedent's
estate (INGLES, Tax Made Less Taxing, page 264).

Q: When is the rule on prior interests applicable?

ANS: The rule on prior interest shall apply to the transfers, trusts, estates, interests,
rights, powers, and relinquishment of powers in:
1. Transfer in contemplation of death;
2. Revocable transfer; and
3. Proceeds of life insurance, whether made, created, arising, existing, exercised,
or relinquished before or after the effectivity of this Code (NIRC, Sec. 85 (F)).

884
Q: When is the rule on transfers for insufficient consideration applicable?
ANS: The rule is applicable only in the following cases, when it is made, created,
exercised or relinquished for a consideration in money, or money's worth, but is not a
bona fide sale for an adequate and full consideration in money of money's worth:
1. Transfer in contemplation of death;
2. Revocable transfer; and
3. Property passing under general power of appointment (NIRC, Sec. 85 (G)).

Q: What shall be included in the gross estate in cases of transfers for insufficient
consideration?
ANS: The value to be included in the gross estate is only the excess of the fair market
value of the property at the time of the decedent's death over the consideration received
(NIRC, Sec. 85 (G)).
Note: Based on the foregoing, the formula to be used is:
FMV of the property at the time of death
Less: Actual value of.cdtisideration received
Amount includibleiede,"" dent's gross estate
i,•%rb .•

Q: How is net estate determined?'.., ,

ANS: If the decedent is: 1: l'fie- 4,
1. Citizen or resident - nal e4tketkl sEeterugd byff. Aducting from the value of
the gross estate thpftiliowiriaite .'s: (SC2:iillaTAVAN)
a. Standxfclgduction; ..
b. ClairriOninst the et..t
c. Claimstigainst iosolfent &rsons;
.1,S, 1,"'w-sti,
d. Ugegia mOgages, taxesprid casualty lases;
e. ..,BUperty preVratisly Ved ii
TransfeWor public use;
g -starnilVt.i3V; ' .... ' 4*-7'.. ..o7
h. AmourklieCeived,bReirs der R.A. -491103d- .
i. 'NeWljerettlf the urvi spouse in 'the conjugal partnership or
colprinity Oroperti(N/R as amended by TRAIN Law, Sec. 86).
2. .. Nonresident4alien-
.. net estate fined by deducting from the value of
. • .,,61
the part of h toss estates hic Ittne,,94his death is situated in the
Philippines the ollowirOms o e uc ion: rePio2TraN)
a. Standerg. edNtibn;
b. Proportie fee total losses and indebtedness;
i. Claims against the estate;
ii. Claims against insolvent persons;
iii. Unpaid mortgages, taxes and casualty losses;

The allowable deduction under this subsection shall be computed using

the following formula:
Phil Gross Estate Allowable
X Item (b) =
World Gross Estate Deduction

c. Property previously taxed;

d. Transfers for public use;
e. Net share of surviving spouse in the conjugal property or community
property (NIRC, as amended by TRAIN Law, Sec. 86 (B)).
Note: Prior to TRAIN Law net estate is equal to gross estate less ordinary and special
deductions and exduions allowed by law (INGLES, Tax Made Less Taxing, page 267-
268). With the effectivity of TRAIN Law, the concept of ordinary and special deductions
is abandoned.

885
 BEDAN R
Q: What are the steps in determining the gross estate, net estate, and estate tax?
ANS: The following are the steps in determining the gross estate, net estate and estate
tax:
1. Determine the nationality and residence of the decedent.
2. Determine the nature and location of the properties of the decedent.
3. Determine the composition and value of the gross estate.
4. Determine the nature and value of the allowable deductions and subtract from
the gross estate in order to arrive at the net estate.
5. Apply the rate of estate tax to the net estate.
6. Determine the applicable penalties and surcharge, if any (2-B DOMONDON,
Taxation, p. 405).

Deductions and Exclusions from Estate

Deductions from Estate
Q: What may be deducted from themoss,q§tate
, of citizens and resident aliens?
ANS: The deductions allowed..s equei a Tilrior4o TRAIN Law are as follows:
(NIRC, Sec. 86)
TRAIN Law (RA No. 10963)
. Tax Reform Act (RA No. 8424)
(SC2-UP-TraFAN)
ZC, -,,,,,,
AN,
Standard Dedtl16
ti '1'
0../
(PY, 0( )0) 10
1,0'
1 Ataiyard Deidu i?n4i(R1,o1
00,000)
..,
xxx REMOVID- itt • 4111-T,—Eune al l' lel and Judicial
\ ....,r - IlExperpes i
I I
i I . ::: -.1d 1 '''"1
Claims agairst‘ e qstata\ ',‘..:::L§J5.ims ag,IftAtile eistate i
y. g 11 i 5, h. A\ -II
Claims againkirrsdAnt l:--c 11 ql:00sa;gqgsf insilvent irsons
._,
it. . . .., , .,9., -`-i
Unpaid mortg ges, `taxes, Unpfiro m rtgages, taxed; losses
casualty losses CI ,N1W,./
. /
.3.
.9
Property previously tax‘l eig00d [(taxed
O'74'71:' if:/° :
Transfers for public use 'LliTrans7;ril;ipublic use

Family Home (P10,000,000) Family Home (P1,000,000)

xxx REMOVED xxx Medical Expenses

Amount received by heirs under RA Amount received by heirs under RA No.

No.4917 4917

Net share of the surviving spouse Net share of the surviving spouse

Q: What is meant by standard deduction?

ANS: It is a deduction without need of substantiation in the amount of:
1. Citizens and residents — five million pesos (P5,000,000); or
2. Nonresident aliens — five hundred thousand pesos (P500,000).
3. The full amount of either P5,000,000 or P500,000 shall be allowed as
deduction for the benefit of the decedent (R.R. No. 12-2018, Sec. 6 (1) and
Sec. 7 (1)).

886
 EDAN:=:RED BC
Q: How are claims against the estate construed?
ANS: The word "claims" is generally construed to mean debts or demands of a
pecuniary nature which could have been enforced against the deceased in his lifetime
and could have been reduced to simple money judgments (R. R. No. 12-2018, Sec. 6
(2)).
Note: Claims against the estate or indebtedness in respect of property may arise out of
contract, tort, or operation of law (id.).

Q: What are the requisites for the claims against the estate to be allowed as
deduction?
ANS: The following requisites should be present: (PGVC)
1. The liability represents a Personal obligation of the deceased existing at the
time of his death;
2. The claims must be contracted in Good faith and for adequate and full
consideration in money or money's worth;
3. The claims must be a debt or claim which is Valid in law and enforceable in
court; and
4. The indebtedness must .jjei"Fe.tieyeteen Condoned by the creditor or the action
to collect from the decedettrfilfStigot have prescribed (RR. No. 12-2018, Sec.
' I
6 (2.1)).
Note: The date-of-death valuatiofpr dATARglied - net value of the property
transferred should be ascertaigdd, yr4-trds.titile,
4s- f the instance of death.
This means that post-death developments, hould NOT brEd tdered in determining the
net value of the estatelebriory v. CouctioN fix Appeals, G.R fo 140944, April 30, 2008,
agreeing with the (lt. tSupremi s `Co' rt in Ithaca T sst Co. v. United States,
279 U.S. 151, 49 S. Cth9 Zee. 647 929).

Q: What are thesubstAtiation reqtikeme is for claims againslthe estate?

ANS: The folrearg aceothiVbstggiationP uiremer,
-te4 `Vbvlas'
rrarg:se fr9A,a si le loan Inc
If the unpaid qpligatio_, ad' antes):
1. The debtAsirtFA_ ent muEffe du otarized ailhe ime e indebtedness was
incurred ex" organs grantek y financial institutions where notarization is
not part °Pits kusinOs practice/ .
2. Duly notarized pertillcation fry ditor as to the unpaid balance,
including inte r of,lt tilffor
Note: The s 45:rn cergation should be signed by the President, or Vice-
President or ofter.,mcipal officer in case of a corporation, or by any of the
general partnersScase of a partnership, or by the branch manager in case of
bank or other financial institutions.
3. Proof of financial capacity of the creditor to lend the amount at the time the
loan was granted; and
4. A statement under oath executed by the administrator or executor of the estate
reflecting the disposition of the proceeds of the loan if said loan was
contracted within three (3) years prior to the death of the decedent (R.R. No.
12-2018, Sec. 6 (2.2.1)).

If the unpaid obligation arose from purchase of goods or services:

1. Pertinent documents evidencing the purchase of goods or services such as:
a. For sales of goods — invoice or delivery receipt;
b. For sale of service — contract for the services agreed to be rendered;
2. Duly notarized certification from the creditor as to the unpaid balance of the
debt, including interest as of the time of death;
3. Certified true copy of the latest audited balance 'sheer of the creditor with a
detailed schedule of its receivable showing the unpaid balance of the
decedent-debtor (R.R. No. 12-2018, Sec. 6 (2.2.2)).

887
 I.‘,.1.;..•:'.: - '''", t."'4:'*'‘'g.Fp1.7-0-7- ;,ifAt.31`1,:i,.YF.i.::iiit..trti.S...e.rits?:':-.41-" ,('^1 .; •
. ,' ,-t.;`,..'f
S,- q.
1..1 ":,:?e-li•;,0fre4siSik*,..,:;;;,...;.;,....p....*,,j,:,,,,,..1 ...

Note: When the lender, or the President/Vice-President/principal officer of the creditor-

corporation, or the general partner of the creditor-partnership is a relative of the debtor
within the fourth civil degree, either by consanguinity or affinity, a copy of the promissory
note or other evidence of the indebtedness must be filed with the RDO having
jurisdiction over the borrower within fifteen days from the execution thereof (R.R. No.
12-2018, Sec. 6 (2.2)).

Q: What are the requisites for claims against insolvent persons to be deductible?
ANS: The requisites are:
1. The amount thereof has been initially included as part of the gross estate of
the decedent (NIRC, Sec. 86 (A)(3)); and
2. The incapacity of the debtors to pay their obligation is proven (Monserrat v.
Collector of Internal Revenue, CTA Case No. 11, December 28, 1955).
Note: The claims against insolvent persons are required to be included in the gross
estate only if the same are claimed as deductions in computing the amount of the gross
estate (R.R. No. 12-2018, Sec. 6 (3)).,„„„,
T i t 1, •:'"440
Q: What are the requisitesAor paid mo gageso ae,.deductible?
ANS: The requisites areZc ..f
N‘
1. The value o e dece erirrirSZTifiere nai9Vq,hed by such mortgage
or indebt94 '531ircl5legLin.the.value,,of th rosp estate; and
2. Limited o,t e nt.that they we're contracted nVielltond for an adequate
and ful e do in moFey i‘lna(ey's worth qi8c, Sec. 86 (A)(4)).
1 %(
Q: What are tble-reguifites orainpaidts Os.to-be_ddsductittle?)
ANS: The reqy iteg a e: -
1. TaxeE whi have accrued, q(:0 e the death oTitejetedent; and
2. Unpaidtherti kof his &gala gardlesdAwhetber od t it was incurred
in ctec wit de-or-buSIWT-(NIR (A
,M4
Note: This wil k e tarumilkcc fvOralef eath, or property
taxes not accrub 401 eK4r 6e fr m the transmission of his
estate (R.R. No.4,

Q: When are losses,‘deduc rble corgliagrif&N e?

ANS: Losses are dediVible
1. Incurred dunng rlienrirth estate
2. Arising from fires, o o e casualties, or from robbery,
theft, or embezzlemen ,
3. Not compensated for by insurance or otherwise;
4. At the filing of the estate tax return, such losses have not been claimed as a
deduction for income tax purposes in an income tax return; and
5. Incurred not later than the last day for the payment of the estate tax as
prescribed by law (NIRC, Sec. 86 (A)(4)).
Note: Casualty losses can be allowed as deduction in one instance only, either for
income tax purposes or estate tax purposes (NIRC, Sec. 86 (A)(4)).

Q: What is meant by property previously taxed?

ANS: A property previously taxed is a property forming part of the gross estate situated
in the Philippines of any person who died within five (5) years prior to the death of the
decedent, or transferred to the decedent by gift within five (5) years prior to his death
(NIRC, Sec. 86 (A)(5)).
Note: In case of property previously taxed, there are two (2) transfers of the property, in
which an estate tax or donor's tax is imposed upon the first transfer. The deduction is
called a vanishing deduction (VD) because the deduction allowed diminishes over a
period of five (5) years. This is considered as allowable deduction to prevent double
taxation of property (CABANEIRO, supra at 137).

888
Q: When may a property previously taxed be claimed by a taxpayer as deduction?
ANS: Property previously taxed or vanishing deductions may be claimed when the
following requisites are present: (DIPIN)
1. Death — the present decedent died within five (5) years from the receipt of the
property from a prior decedent or donor;
2. Identity — the property sought to be deducted is the one received from a prior
decedent or donor;
3. Previously determined and paid — the donor's tax on the gift or estate tax on
the prior succession was finally determined and paid;
4. Inclusion — the property must have formed part of the gross estate situated in
the Philippines of the prior decedent, or the total amount of the gifts of the
donor; and
5. No previous deduction — no vanishing deduction on the property was allowed
to the estate of the prior decedent NIRC, Sec. 86 (A)(5)).

Q: Give the formula for computing vanishing deduction.

ANS: The amount of vanishing dedp_cti_dripay be computed as follows:
.1•4.12r
Step 1: Computation of Initial B,$)S70. -r.
Value of the property subject to'vVD,0
Less: Any:Mortqaqe paid on thatdro4 ., 10X4,14
Initial Basis woAams404
•
‘1 rt
afr
Step 2: Computationt2--peductiol n•
Initial Basis
pars. (7), (3), (4),
Value of the GrosOilt
(6) of I86(A)*
Sc.
Estate

*The sum of t(j'6ffitillowjpg- s,the n ulttplier: clUTra)

:m4t
1. Claims againsAtestat4
2. Claimstagairth:t2I]golvent. persons
3. Unpaid ii0agealaxes, and ca. tialty losses;
4. Transfers forpubliAse;
Note: Prior to train laNt, „ whLtrefers to Expenses, Losses,
Indebtedness, Taxes, dTd Trans et-trcr'p jirctitrp seiLIZM'

ttep 3: Computation ofIF,inaL asis

Initial Basis
Less: 2nd Deduction
Final Basis

Step 4: Computation of Vanishing Deduction

Final Percentage provided under
= Vanishing Deduction
Basis x Section 86 (A) (5) of NIRC

Note: The following are the percentages:

If prior decedent died within 1 year prior to the 100%
death of the decedent
If prior decedent died more than 1 year but not 80%
more than 2 years prior to the death of the
decedent
If prior decedent died more than 2 years but not 60%
more than 3 years prior to the death of the
decedent

889
 If prior decedent died more than 3 year but not 40%
more than 4 years prior to the death of the
decedent
If prior decedent died more than 4 year but not 20%
more than 5 years prior to the death of the
decedent

Q: What are the requisites for transfers for public use to be deductible?
ANS: The requisites are: (LAGPI)
1. The disposition is in a Last will and testament;
2. To take effect After death;
3. In favor of the Government of the Philippines or any political subdivision
thereof;
4. For exclusive Public purpose; and
5. The value of the property given is Included in the gross estate (REYES,
Transfer and Business
Note: The inclusion in the 9c,oatp.state . ndithk19.dvtioQ from gross estate shall result
in a net taxable estate f-pfMhe i'plwerty,of Rbp40.90 REYES, Transfer and Business
Taxes).

Q: Up to what am6 f!,ter sfer

s for p ,blic"Tuse>rr a ucted from the gross
estate?
ANS: The amount depctibl Ilequests, legacies,
devises or trans s to or thRepublic of the
Philippines or Ay. olitical s )publi purpose (NIRC,
Sec. 86 (A)(6)

Q: What is family ogle

ANS: Family fior the ling ha-as ich it is situated,
where the husband wife, eadi heir family reside,
as certified to Bar way . home is deemed
constituted on th house-Nind t . ro tually o cupied as a family
residence and is c 0.:_ej ny of it beneficiaries-actually
resides therein (FA Y COP
Note:. Family home is en Iychara hcy, that is, the place to
which, whenever absent fo ikess ill intends to return (R.R. No.
12-2018, Sec. 6 (7) (7.1)).

Q: What are the conditions for the deductibility of family home from the gross
estate?
ANS: The conditions are:
1. The family home must be the actual residential home of the decedent and his
family at the time of his death, as certified by the barangay captain of the
locality where the family home is situated;
2. The total value of the family home must be included as part of the gross estate
of the decedent; and
3. Allowable deduction must be an amount equivalent to:
a. The current fair market value of the decedent's family home as
declared or included in the gross estate; or
b.. The extent of the decedent's interest (whether conjugal/community or
exclusive property), whichever is lower, but not exceeding P10,000,000
(R.R. No. 12-2018, Sec. 6 (7) (7.2)).
Note: The family home is deemed constituted on the house and lot from the time it is
actually occupied as a family residence and considered as such for as long as any of its
beneficiaries actually resides therein. Actual occupant of the house or house and lot as

890 .
 a'•

the family residence shall not be considered interrupted or abandoned in such cases as
the temporary absence from the constituted family home due to travel or studies or work
abroad, etc. (R.R. No. 12-2018, Sec. 6 (7) (7.2)).

Q: When may the amounts received by the heirs under R.A. No. 4917 be
deductible from gross estate?
ANS: Any amount received by the heirs from the decedent's employer as a
consequence of the death of the decedent-employee as retirement benefits under R.A.
No. 4917 (An Act Providing that Retirement Benefits of Employees of Private Firms shall
not be Subject to Any Tax Whatsoever) is allowed as deduction from gross estate,
provided the amount of benefit is included as part of the gross estate of the decedent
(NIRC, Seca 86 (A)(8)).
Note: The amount received by the heirs under R.A. No. 4917 is required to be included
in the gross estate only if the same is claimed as a deduction in computing the amount
of the net estate (R.R. No. 12-2018, Sec. 6 (8)).
4
Q: How is the amount dedg,.7112 2,.,1.:,enas net share of the surviving spouse
determined?
ANS: The amount deductible shaltpget ned as follows:
1. The conjugal property stibirftA4 etermined;
2. Then all obligations prope,,, h' .gea,ble, to it (ordRary deduction under Sec.
86(A)(1)) shall be d9FILICteckt e rom;- n
3. From the bald ,ceAtiet conj g estate), the riete (1/2 thereof) of the
surviving spoti§rshall be &alit d from the net ,gal estate for purposes
of imposing the net estateOPVE LEON, NIRC A otated, supra at 778).
a *0'
Q: Discuss the concept qtatpAtax credukt
ANS: The esjat ?lax imOed by the'ist41 shall be cr„ dite he amounts of any
estate tax impLeellt&itfelat.thori of a fo gn county, 4/RC 6 p)(1)).

Q: How is the anKLunfligvable4;4 ax cr dit determln

ANS: The amountZfittierit takeryshalr subject to each of the following limitations:
1. Per count . basis —{The amount exredit in respect to the tax paid to any
country shall Pocilsprxleed the sa—' ortion of the tax against which such
credit is take' which hp , Qee-e e Affiraituated within such country
taxable under the N RO bears to his entire net estate (NIRC, Sec. 86
(D)(2)(a));
Note: The form In computing this limitation is: (1 DE LEON, NIRC
Annotated, supra at 779).

Decedent's net estate

Phil.
situated in foreign country = Tax credit limit
estate tax
Entire net estate

2. Overall basis — 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 NIRC bears to his
entire net estate (NIRC, Sec. 86, (D)(2)(b)).
Note: The formula in computing this limitation is: (1 DE LEON, NIRC
Annotated, supra at 779).

Decedent's net estate Phil.

situated outside the Phil. X = Tax credit limit
estate tax
Entire net estate

891
 ..., ' ' •': '..' ! s''.'"?'.,4.",:t.-;',1 :4`•::M,•'......:
,.......'..1.•";.,....t.,,,:,.-..., *: . ,..
•:''...-
;/.1,$ •
t..,w
„. RED
..:41\) ...:::.A.. ,:. ,,,,,

Exclusions from Estate

Q: What are the exclusions from the gross estate?
ANS: The following are exclusions from the gross estate:
1. The capital (exclusive property) of the surviving spouse is considered as
exclusion in the gross estate under Sec. 85(H) of the NIRC;
Note: In Sec. 86 (C), the share of the surviving spouse in the absolute
community/conjugal partnership is considered as a deduction.
2. Other items which are excluded from the gross estate are the following:
a. GSIS proceeds/benefits;
b. Accruals from SSS;
c. Proceeds of life insurance where the beneficiary is irrevocably
appointed;
d. Proceeds of life insurance under a group insurance taken by employer
(not taken out upon his life);
War damage payments;
f. Transfer by wa thorfairdetales;,
g. Transfer 91,4 ro erty to ttielgtive0hri nt or to any of its political
subdiviskipsN ip . '34
t>.
h. Merg i eror ustfrructArrtfiniMITh
l e rOkedlitip;
i. Prope s heldli.tr„ ustD.y.lbehitceenti and \
j. Ad" uisi Arnd/criiinsferitexpregly.dealdred as hot taxable.
-1r s rr
„A•
Exemption of rtain cquisitions and rransitiissions
Q: What are exerptacquisliarrs-andir' ssians?
ANS: The follopingar exemptedtgireAte,taMMIFft)
1. TheW TI- f usufn5ct in ierAger-eil fitre naked title;
Illus Awl: A gacreAo B thg:ki -ruftibt of a of land - oo B to gather the
fruits ourid trte*acar idtb s4 and' ufr ctkeve s to A, the value
of the stifrackdo snrm1P.0 1.4t„IPig atetf
11
2. The transmission orsieivTAif thd•Iii or)egacy b r the fiduciary heir
or lega4 to thhdeic • rn,qt
RationareitTlittslereiszl tr,9%s. from tV decedent to the final
heir throught he fi tic a smission from the fiduciary
heir or legatekt tcomMiss.arris_pif\ta, ."The fideicommissary heir
merely holds thftrOp or trvsinipsiNnAVII,,uffimate heir.
3. Transmission fror.;NtleFirst tipllatgeoNir donee in favor of another
beneficiary, in accordancittrihe,d6g-rof the predecessor; and
4. All bequests, devises, legacies or transfers to social welfare, cultural and--
charitable institutions, no part of the net income of which inures to the benefit
of any individual: Provided, however, that not more than 30% of the said
bequests, devises, legacies or transfers shall be used by such institutions for
administration purposes (NIRC, Sec. 87).

Period of Filing Estate Tax Returns

Q: In what cases is estate tax return required?
ANS: The return is required:
1. In all cases of transfers subject to estate tax; or
2. Regardless of the value of the gross estate, where the estate consists of
registered or registrable properties such as real property, motor vehicle,
shares of stock or other similar properties for which a clearance frofri BIR is
required as a condition precedent for the transfer of ownership thereof in the
name of the transferee (R.R. No. 12-2018, Sec. 9 (1)).
Note: Prior to TRAIN Law, the filing of estate tax return is required only if the gross
value of the estate exceeds Php. 200, 000.00.

892
 Q: In what cases is filing of notice of death required?
ANS: Under the TRAIN Law, notice of death is no longer required (NIRC as amended
by TRAIN Law, Sec. 89).
Note: Prior to TRAIN, notice of death is required to be filed:
1. When the transfer is subject to estate tax; or
2. Although exempt, the gross value of the estate exceeds P20,000.

Q: When must the estate tax return be filed?

ANS: The return must be filed within one (1) year from the decedent's death. But the
period may be extended by the Commissioner for another thirty (30) days on meritorious
cases (NIRC, Sec. 90, pars. (B) and (C)).
Note: Prior to the effectivity of the TRAIN Law the filing of tax return must be made
within six (6) months from the death of the decedent.

Q: When must the estate tax be paid?

ANS: As a general rule, the estate tax immsed under the Code shall be paid at the time
the return is filed by the executor, adepjtfigrator or the heirs (R.R. No. 12-2018, Sec. 9
(4)). ''W` ..,l'i,
i
,.44.,.,..:0„..,.•
Q: May the Commissioner grantexsens o. ,for the payment of the estate tax?
ANS: Yes. As an exception, the;::CA. /owner ay gra • '3.an extension of time if it
would impose undue hardshil?,,upontlfe: too 'elm. He may extend the
time for payment of suchMlit any part h reof:
1. Not to exceetfiCte (5) years4t6,, se the estate is seott el d through courts.
2. Not to exceeNtwq:(2) yeassim case the estate ispe le extrajudicially (NIRC,
as amended , SITAN , IV:taw, Sec (8)).
Note: Where th94erifensionAbygeason o egligence, in intio al disregard of rules and
regulations, oefi-aud 9p. the part ofMa aver, no e nsio e granted by the
Commissionerlphy,WiTent paq. after statutow,, tax,
1, but within the
Seension petd, shall brbbjecl;f9tintere t but not R.R.
R No. 12-2018,
c. Air
V ii.Vir
Q: When must the estate ta2clieturn be duty..certi ied by a CPA?
ANS: The estate tax P tur gshowing as& v u exceeding P5,000,000 shall be
supported with a statement duly.StifiEset iifr EPT11 5 is Accountant containing the
following:
1. Itemized item oyz... al decedent with their corresponding gross value at the time
of his death;
2. Itemized deductions from gross estate allowed in Sec. 86; and
3. The amount of tax due whether paid or still due and outstanding (NIRC, as
amended by TRAIN Law, Sec. 90 (A) (3)).
Note: Prior to the effectivity of TRAIN Law, estate with gross value exceeding
P2,000,000 must be duly certified by a CPA.

Q: When is payment by installment allowed?

ANS: In case the available cash of the estate is insufficient to pay the total estate tax
due, payment by installment shall be allowed within two (2) years from the statutory date
for its payment without civil penalty and interest (NIRC, as amended by TRAIN Law,
Sec. 91 (C)).

Q: What are the requisites of payment by installment?

ANS: The requisites are:
1. The cash installments shall be made within two (2) years from the date of filing
of the estate tax return;

893
 2. The estate tax return shall be filed within one year from the date of decedent's
death;
3. The frequency (i.e., monthly, quarterly, semi-annually or annually), deadline
and amount of each installment shall be indicated in the estate tax return,
subject to the prior approval by the BIR;
4. In case of lapse of two years without the payment of the entire tax due, the
remaining balance thereof shall be due and demandable subject to the
applicable penalties and interest reckoned from the prescribed deadline for
filing the return and payment of the estate tax; and
5. No civil penalties or interest may be imposed on estates permitted to pay the
estate tax due by installment (R.R. No. 12-2018, Sec. 9 (6.1)).

Q: May the bank allow withdrawal of deposits upon knowledge of the death of a
person who maintained a bank deposit account alone or jointly with another?
ANS: Yes. Upon the effectivity of TRAIN Law, banks shall now allow any withdrawal
from the said deposit account, suagct,toza.,,ftgot withholding tax of six percent (6%)
(NIRC, as amended by TRAINAtitif, Sec( 97).
Note: Prior to TRAIN Law rie bihk shall alle0 any withdrawal from the said deposit
account, unless the Dfotrup.iigiotierItas.certifie04 the takes imposed thereon have
been paid: Providecyloweil9ri,,,TtEdi the administrator4-the,eate or any one (1) of the
heirs of the decegeriiNtay, upprp-atIffiliTintiOn-.by th4.bm '''Issioner, withdraw an
amount not excedding)T gntylhousanclgesos,-;(P26,006wit p ti fie said certification
(NIRC, Sec. 97)/ estl.

$
Donor's Tax f
Basic Principles. concept. add defiiiiticth;-'•
'';%7,7rril
Q: What is a cf obe
ANS: It is an 4cisp•Ox imesgra-th-e"T:if
f RftWo-j- prppekty by way of gift inter
vivos based on144ndeiact oftbkralityjhit sidt,'4ny/0 {bps than adeti6ate consideration
and without anylegal coknpul give ' N, Taxation, iupra at 156).

Q: What is the nature of do,Ror',g

ANS: It is not a prOlperty tax
i,. buianSzekdiS6it edm.theftransfer of property by
way of gift inter vivosilJadoo.,Commissioberwof teva.V. Oenue, G.R. No. L-19201,
June 16, 1965).
s ..Pf g
't /1 A
IL
ck
Q: What are the purposes of donoet.tax?
ANS: They are:
1. Donor's tax supplements the estate tax by preventing the avoidance of the
latter through the device of donating the property during the lifetime of the
deceased (donor); and
2. It also prevents the avoidance of income taxes. Without the donor's tax, the
donor may escape the progressive rates of income taxation through the simple
expedient of splitting his income among numerous donees (1 DE LEON, NIRC
Annotated, supra at 800).

Q: What transfers are subject to donor's tax?

ANS: The donor's tax is imposed on donations inter vivos or those made between living
persons to take effect during the lifetime of the donor (CIVIL CODE, Arts. 729 and 734).
The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct
or indirect, and whether the property is real or personal, tangible or intangible (NIRC,
Sec. 98).

894
 :.^g-:.'.•1',.%;.••• • • ‘.4.:Kf:••••,:;',.i;:%ti-loli:4,:,-•°:',:k4;•:•*--.

Q: When is donor's tax imposed?

ANS: Donor's tax is imposed upon the transfer by any person, resident or non-resident,
of any property by gift. The tax shall apply whether the transfer is by trust or otherwise
and whether the gift is direct or indirect, and whether the property is real or personal,
tangible or intangible (NIRC, Sec. 98).
Note: The donor's tax shall not apply unless and until there is a completed gift. The
transfer of property by gift is perfected from the moment the donor knows of the
acceptance by the donee; it is completed by the delivery, either actually or
constructively, of the donated property to the donee (R.R. No. 12-2018, Sec. 12).
Q: Who are liable to pay the donor's tax?
ANS: The following shall be liable to pay donor's tax:
1. Resident Citizens (RC);
2. Non-Resident Citizens (NRC);
3. Resident Alien (RA);
4. Non-Resident Alien (NRA);
5. Domestic Corporation (DQ);,andW
6. Foreign Corporation (FC)10,9ifig,4-Sec.98).
„
Note: A corporation, whether dcitif6n9r oreign, is included since it is capable of
entering into a contract of donatiotiphititig Board Resolution.
:•• *.g
Q: In a donation made by the Visb,ppg-a,n0 Ifeallo.pa•••the donor's tax?
ANS: Husband and wife ar,F49;cinsideretPa' separate andYdigt ct taxpayers for purposes
of the donor's tax. Howe, -4r, if what vas kionated is a conj al or community property
and only the husbandligned the de-ai!Ebritlonation, there i jirk one donor for donor's
tax purposes, without Ice to grie rig of the wife tdiqueglion the validity of the
donation without her cOnsirittpursuant to gp vistns of the Civil Code and
pertinent prOl
the Family Coclor.R. No.0 2;2018, Sec.
1
141
Q: What lawit al goVetriuttr inippsition -of donor's
ANS: The laWln forc9tie tir04f th etfectio OIM, he donation shall
t, —
govern the imposition of t donor's tax (R No. 12-2018, Sec 12).
' Vet f
Date of Donation Law Applicable Rate of Tax
TRXIMM ed rate of 6%
On or after January 1, 2018
(RA No. 10963)

On or after January 1, 1998 NIRC of 1997 Graduated rate of 2-15%

until December 31, 2017 (RA No. 8424) and 30% for strangers

Donations made before NIRC of 1977 Graduated rate of 1.5-20%

January 1, 1998 (RA No. 7499) and 10% for strangers
•

Q: What donations are covered by the donor's tax?

ANS: The donor's tax is imposed only on donations inter vivos. The donor's tax is not a
property tax, but is a tax imposed on the transfer of property (R.R. No. 12-2018, Sec.
12).
Q: What is the rate of donor's tax?
ANS: The donor's tax for each calendar year shall be six percent (6%) computed on the
basis of the total gifts in excess of two hundred fifty thousand pesos (P250,000) exempt
gifts made during the year, regardless of whether the donation is made to a relative of to
a stranger (NIRC, as amended by TRAIN Law, Sec. 99).
Note: The application of the rate is imposed on donations made on or after the
effectivity date of the TRAIN Law which is January 1, 2018 (R.R. No. 12-2018, Sec. 11).

895
 N•

Q: What is the rate of donor's tax for strangers?

ANS: Six percent (6%). The rate of donor's tax after the effectivity of TRAIN Law is fixed
at six percent (6%) regardless of whether the donation is made to a relative or to a
stranger.
Note: Upon the effectivity of TRAIN Law the donor's tax rate is now fixed at 6% and the
graduated schedule with a rate of 2-15% under the Tax Reform Act of 1997 is now
repealed.
Q: When is the return of the donor filed and when is the donor's tax paid?
ANS: The return of the donor shall be filed within thirty (30) days after the date the gift is
made and the tax due thereon shall be paid at the time of filing (NIRC, Sec. 103 (B)).
Q: What is the basis in computing donor's tax?
ANS: The basis shall be the total net gifts made during the calendar year (NIRC, Sec.
99).
Q: What is meant by net gifts/00''7771,''..
ANS: Net gift means the get economic b nefit fro'''''tht transfer that accrues to the
donee (R.R. No. 12-201VSec, 1t2X. r
Note: Accordingly, if Kfrovage,g1xproTiWirtransferrpd'as gift, but imposing upon
the donee the obligaiiciVo pallih5mprigagelabiliNthe e Feet gift is measured by
deducting from th 17,41fie,pfoperty amount' moltga 5atsumed by the done
(R.R. No. 12-201 , S /2). I
e
Q: What is the umyl‘tive ethod forpyrgoses of d ieterm (Km ihv tax base?
ANS: The co utatioA of they don,Ks tax0 on„,g =nu ative basis,•oVer a period of one
calendar year ko. 2-20103, gdc7,441 A s.64rat return tshoul ibe filed for-each
donation mad eren dates darriffateara ng t ny previous gifts
made on the same end?aelbaCABIRIEIED,su 6).
Note:
1. Only (V ret rp shakbe. lefjAo .0.1t,ey)( ft.s• o_n_theisame date by the
donor rqgardle oft -eCtilirtik9r of clspp49/..).
2. Under tfit cumu tive e‘. odNbelax- -falft foi?tee prey donation will be .- -
considerectak,s, tax edit,foc: on trons. Fie e, there is no double
taxation. s
Requisites of a VadDonatio :1
-90
Q: What are the requisites ;;PgValid,, g_ ton?
ANS: The following are the requisites of a valid donation: (CD2AF)
1. Capacity of the donor;
2. Donative intent (intention to donate);
3. Delivery, whether actual or constructive, of the subject gift;
4. Acceptance by the donee (CIVIL CODE, Art. 746); and
5. Form prescribed by law (CIVIL CODE, Art. 749).
Q: Who may donate?
ANS: All persons who may contract and dispose of their property may make a donation
(CIVIL CODE, Ad. 735). The donor's capacity shall be determined as of the time of the
making of the donation (CIVIL CODE, Art. 737).

Q: When is donative intent or the intention to donate necessary?

ANS: Donative intent is necessary only in cases of direct gift.
Note:
1. If the gift is indirectly taking place by way of sale, exchange or other transfer of
property as contemplated in cases of transfers for less than adequate and full
consideration (NIRC, Sec. 100), donative intent is not necessary to constitute

896
 a gift. Even if there is no actual donation, the difference in price is considered
a donation by fiction of law (Philippine American Life and General Insurance
Co. v. Secretary of Finance, G.R. No. 210987, November 24, 2014).
2. However, even if the sale, exchange, or other transfer of property is for an
insufficient consideration, the same will be considered as made for an
adequate and full consideration in money or money's worth if made in the
ordinary course of business (NIRC as amended by TRAIN Law, Sec. 100).
Q: When is a subject property considered delivered?
ANS: There is delivery if the subject matter is within the dominion and control of the
donee.
Q: Why is acceptance of the gift necessary?
ANS: Acceptance is necessary because nobody is obliged to receive a gift against his
will. The wills of the donor and of the donee having concurred, the donation, as a mode
of transferring ownership, becomes perfect (Osorio V. Osorio, G.R. No. 16544, March
,,g
30, 1921).
Q: What are the formal requiremeptsSof•a valid donation of movable or personal
property? WX1441
ANS: The donation of a movable Kir jtiq'Spnal property may ,e made orally or in writing.
An oral donation requires the slriitettiV, crtat th ing or of the document
44,
representing the right donapellowever, Tthe v5reao G1 roperty donated exceeds
P5,000, the donation ar atteptance sha be in writing. Oth ise, the donations shall
be void (CIVIL CODEV. 7448). sr
,
Q: What are the fopnal itg.'irrements of a valid do of immovable or real
property? 'V.
ANS: The donation of an immovae br real prope shall be made in a public
cvl M
document, sperfyingsthneta ththp ope mated Ma' charges which
the donee must, satis ,./Ze2ccept !ice ay be made ged of donation or
in a separate pUb *c, ocanwt, but sh fl'hot take effect unless it is done during the
lifetime of the dono e aTeptan5e is de in a separate instrument, the donor shall
be notified thereof in an authentic form, age. • t p shall be noted in both-instruments -
(CIVIL CODE, Art. 749,43-A7No. .12-2924
Transfers which maybe Constituted as Donation
',:
WI
Q: What transfers may De4castituted as donation?
ANS: The following transfers may be constituted as donation:
1. Sale, exchange or transfer of property for insufficient consideration (NIRC,
Sec. 100);
2. Condonation or remission of debt;
3. Renunciation of share in the conjugal partnership or community property by
surviving spouse; and
4. Renunciation of share in the hereditary estate by an heir in favor of specific
heir/s.
Note:
1. Renunciation by the surviving spouse of his/her share in the conjugal
partnership or absolute community after the dissolution of the marriage in favor
of the heirs of the deceased spouse or any other person/s is subject to donor's
tax (R.R. No.12-2018, Sec. 12).
2. General renunciation by an heir, including the surviving spouse, of his/her
share in the hereditary estate left by the decedent is not subject to donor's tax,
unless specifically and categorically done in favor of identified heir/s to the
exclusion or disadvantage of the other co-heirs in the hereditary estate (R.R.
No. 12-2018, Sec. 12).

897
 Transfer of Property for Insufficient Consideration and Bona fide arms-length
transfers
Q: Up to what amount may the sale, exchange, or transfer for insufficient
consideration be subject to donor's tax?
ANS: A transfer for less than adequate and full consideration be deemed a gift, to the
extent of the amount by which the FMV of the property exceeds the value of the
consideration (NIRC, Sec. 100).
Note: The rule does not apply to real property held as a capital asset, under Section 24
(D) of the NIRC, since regardless of the amount paid for, the basis for determining the
capital gains tax therein would be the FMV or gross selling price, whichever is higher
(NIRC, Section 24 (D) in relation to R.R. No.12-2018, Sec. 12).
Q: What are the requisites in order that the excess of FMV over the value of
consideration be considered as donation?
ANS: In order that the amount by which the FMV of the property exceeded the value of
consideration be constituted avlonatiahnh-efollallying .. ..,,. requisites must be observed:
(PLI) ,>040 k / " .N,
1. Property transp(ed4s ?Apt or‘..t92t.,
-/ hproperiy, except real property referred
to in Sec. 24(D) ottl.pc;....---- ,,,
,._ -4, / ,
--, P- N
2. Transfer i L4s than4li ade, uate.aad till! COCISlyerratioq n money or money's
,.5f:, \ .,,,,, ,
worth; ap V.
3. Transf f is,leet ivos (NIRC; asiisreWled by TRA , Sec. 100).
Note: Based on he foe 'oing the formula'l a be used isc
Personal Property.
I Nti7o1
FMV of the grope i at the me566..At!
-.... . ,,,,--•
- p gi ,,,, ,,-;-
..,, ,.
Less: Actuallvalue f consicteratioi.-eceived
Amount congtitiftedlc ail ,Ton ;117_ _ _. c _-,

Real Property
FMV whicheverqs hig4r, of t ‘,zo ky,zue,o
Less: Actual value of corisider.itiontrecer‘d-'
Amount constitute as dona l

Transfers made bona fide in 'Ordinary courge.:1;WinAs and free from donative
intent, even if the considers 'on i§ inadealateN6- accd6nt, is excluded. They are not
considered as donations (e.g., a Bad.,BargairP)rThii is also provided in Section 100 of
the NIRC, as amended by TRAIN Law, which state that a sale, exchange, or other
transfer of property made in the ordinary course of business (a transaction which is a
bona fide, at arm's length, and free from any donative intent), will be considered as
made for an adequate and full consideration in money or money's worth.
Q: When is a transaction considered done at arm's length?
ANS: Transaction was done at arm's length if:
1. The parties are unrelated (whether in the familial or business sense);
2. They have equal bargaining power; and
3. They are acting in their own self-interest (DASCIL, NIRC ANNOTATED, supra
at 253).

898
 ...•...•.•
DAN:RE,b-,5
•••••1 1',/, ?•;.

Condonation/Remission of Debt
Q: What are the rules applicable in cases of condonation or remission of debt?
ANS: If the creditor condones the indebtedness of the debtor the following rules shall
apply:
1. If an individual performs services for a creditor, who, in consideration thereof
cancels the debt, income to that amount is realized by the debtor as
compensation for his services.
2. If a creditor merely desires to benefit the debtor and without any consideration
therefor cancels the debt, the amount of the debt is a gift from the creditor
3. If a corporation to which a stockholder is indebted forgives the debt, the
transaction has the effect of payment of dividend (1 DE LEON, NIRC
Annotated, supra at 804).

Determination of Gross Gift

Q: How is gross gift determined?
ANS: In case of a: t,
1. Resident donor — gross,,gfOnc ludes real properties, tangible and intangible
personal properties whew d;
2. Non-resident donor — rfgrOs g includes real properties, tangible and
intangible properties loc9:tedm - • ipiines (NIR6 Sec 104).
.,401
Q: What is the situs of dopor's taxajo
ANS: The situs of dorieraxation isgs the transfer too p ipe. Thus, only transfers
that take place within qt,PAillippineSpresubject to donor's a es unless the donors are
N are in the nature of
Filipino citizens or a reW_dettigleri. This is so because dortor tabs
taxes imposed 9p4911the.Nilege to do something, which i th case is to transfer
property (3 DOVIONDON. supra at 174).

Q: What is incjuded asipa of thevrosd.: ift?

ANS: As a generCrulegVi sp giftate jud-''4Z%-al and person ItPro erty, whether tangible
or intangible, or me' esP• er sibfated
f
Sec. 104).
i"Cx
Q: What propertiesartco didered situ -
Q: aft- -4,
iilippines?
ANS: The following properties ar,Mnsi9 1.9 s I ua earrithe Philippines:
1. Real, intangt andiNgible personal properties, or mixed, located in the
Philippines an4u.tside of the Philippines, depending on the kind of donor;
2. Franchise whichlultiloe exercised in the Philippines;
3. Shares, oblig_ations or bonds issued by any corporation or partnership,
organized in the Philippines in accordance with our laws;
4. Shares, obligations or bonds issued by any foreign corporation, 85% of which
is located in the Philippines;
5. Shares, obligations or bonds issued by any foreign corporation if such shares,
obligations or bonds have acquired a business situs in the Philippines; and -"mg
6. Shares or rights in any partnership, business or industry established in the
Philippines (NIRC, Sec. 104).

Q: How are gifts subject to donor's tax valued?

ANS: In case of: •
1. Real property — it shall be valued at the FMV as determined by the
Commissioner of Internal Revenue (Zonal Value) or the FMV as shown in the
latest schedule of values of the provincial and city assessor (MV per Tax
Declaration), whichever is higher (R.R. No. 12-2018 Sec. 5).

899
 DAN RED`.
Note:
a. If there is no zonal value, the taxable base is the fair market value that
appears in the latest tax declaration.
b. If there is an improvement, the value of improvement is the construction
cost per building permit and or occupancy permit plus 10% per year
after year of construction, or the market value per latest tax declaration.
2. All other property — it shall be valued at the FMV of the property at the time of
the gift (NIRC, Sec. 102).

Q: Discuss the concept of foreign tax credit in relation to donor's tax.

ANS: The donor's tax imposed upon a citizen or resident at the time of the donation
shall be credited with the amount of any donor's tax, of any character and description,
imposed by the authority of a foreign country (NIRC, Sec. 101, par. (C)).

Q: Is the whole amount of tax payment made in a foreign country creditable?

ANS: No. The tax credit is subject to tit limitations:
1. Per country basis —,„..T-ti6 amountrofff it-0,zespect to the tax paid to any
country shall not4ic'ceg,the keje_prvoVion,et,the tax against which such
credit is takeoff is thepetsgifts--,sitgae4 wifhlo, such country taxable under
the NIRC bArs to it enure net gifts (NIRONSIC . 1p0c)(2)(a)); .
Note: Mg lb la' i ,comffulgirthisAinnitettoPis: xi DE LEON, NIRC
Annotateckuprat 0) ,o) 7 ,..7 .)
i1 *.,. ;./.z,
..,:,
Net gi situated .''..,"-x Ph I. fax credit limit
in a foi;ti- o
Entire It '''-':.'5. ; ::' 727/ t
EH.,,,....17; .;14,,i-ii
i
2. .0ver Iota' amotitit of cr9 ,t4hall not 'e ceed the same
.
propoitpn-q ainst peat! sicch cre eisltals;er*vrtii , h the donor's net
gifts srthaleti hiligleetoalIel. Ar t 'e NIR ears to his entire
net gifts (NIR ,,Sec.;,0„.0"ril )(4(pf4::',./ '
Note: T.te forrlya inidotitiputibg, Thj ritati DE LEON, NIRC
Annotate supra a 820.S r,,,t t t,.. Fe
4
Net gifts situate = Tax credit limit
outside the Phil.
Entire net gifts

Exemption of Gifts from Donor's Taxes

Q: Enumerate gifts which are exempt from donor's tax.
ANS: The following gifts are exempted from donor's tax:
1. 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;
2. Gifts in favor of an educational institution, charitable, religious, cultural, social
welfare corporation, institution, accredited non-government organization, trust,
philanthropic organization, or research institution or organization (NIRC, Sec.
101 (A));
3. Athlete's Prizes and Awards; (R.A. No. 7549)
4. Encumbrances on the property donated, if assumed by the donee;
5. Donations to entities exempted under Special Law; and
6. Those specifically provided by the donor as diminution of the property
donated.
Note: TRAIN law removed the exemption of dowries or gifts made on account of
marriage.

900
Q: Are all donors entitled to the above-stated exemptions?
ANS: No. A non-resident alien and a foreign corporation donor are exempt from donor's
tax only with respect to:
1. Gifts made to the national government or any entity created by any of its
agencies which is not conducted for profit, or to any political subdivision of said
government; and
2. Gifts in favor of an educational and/or charitable, religious, cultural or social
welfare corporation, institution, accredited non-government organization or
philanthropic organization or research institution (NIRC, Sec. 101 (B)).

Q: When are gifts made in favor of an educational and/or charitable, religious,

cultural or social welfare corporation, institution, accredited non-government
organization, trust or philanthropic organization, and/or research institution or
organization be exempt from donor's tax?
ANS: The gifts shall be exempt from donor's tax if the donee is:
1. A non-stock, non-profit organizaMn or institution;
2. Not be authorized to pay diviOnds;
3. Governed by trustees wh.0:46ceive any compensation;
4. Devotes all of its incomdjOttlg*kqmplishment and promotion of its purposes;
and
5. Not more than 30% of tfta ft:amid •e uses" administrative purposes
(NIRC, Sec. 101(A)(4)P Rir
Q: What are the requiShes in ordepAa:Pthe donation gien to athletes as prize or
award be exempted (audonors tale?
ANS: The donation mEt ba:3pri±e or awag-19)1 given to athletes.,
1. In local an sports tonrnaments
• ancr co petitions;
2. HelOn'the PhjlOines or aftada d
3. Sartcres,1„1:ii.sitt'Cr respective national spo soc p-A. No. 7549).
Note: In relation to Secgo0
2 2 (B710 (d)P f the NIR ,Y II n n• wards granted to
athletes in local-andirite " • tional sciF7rts mpetitions and.tt ment, whether held in
the Philippines orittlfdad, •Ond sanctioned by their national sports associations are
excluded from grosnn9ome.

What entities are exe pted fr,o,;ifilon uriddr%special laws?

ANS: The list below consists oWntities exempt from donor's tax under special laws
including, but not limiteaktteloltwing:
1. Aquaculture Departffent of the Southeast Asian Fisheries Development
Center (P.D. 292, Sec. 2);
2. Aurora Pacific Economic Zone and Freeport Authority (R.A. No. 10083, Sec.
7);
3. Development Academy of the Philippines (P.D. 205, Sec. 12);
4. Girl Scouts of the Philippines (R.A. No. 10073, Sec. 11);
5. Integrated Bar of the Philippines (P.D. 181, Sec. 3);
6. International Rice Research Institute (P.D. 1620, Art. 5(2));
7. National Commission for Culture and the Arts (R.A. No. 10066, Sec. 35);
8. National Social Action Council (P.D. 294, Sec. 4);
9. National Water Quality Management Fund (R.A. No. 9275, Sec. 9);
10. People's Survival Fund (R.A. No. 10174, Sec. 13);
11. People's Television Network, Incorporated (R.A. No. 10390, Sec. 15);
12. Philippine Investors Commission (R.A. No. 3850, Sec. 9);
13. Philippine Normal University (R.A. No. 9647, Sec. 7);
14. Philippine Red Cross (R.A. No. 10072, Sec. 5);
15. Philippine-American Cultural Foundation (P.D. 3062, Sec. 4);
16. Ramon Magsaysay Award Foundation (R.A. 3676, Sec. 2);

901
 AN RED BO
17. Rural Farm School (R.A. No. 10618, Sec. 14);
18. Task Force on Human Settlements (E.O. 419, Sec. 3(b)(8));
19. Tubbataha Reefs Natural Park (R.A. No. 10067, Sec. 17);
20. University of the Philippines (R.A. No. 9500, Sec. 25).

Q: Are donations for campaign purposes exempt from donor's tax?

ANS: Any contribution, in cash or in kind, to any candidate, political party, or coalition of
parties for campaign purposes shall be governed by the Election code. Hence, if the
donation has complied with the requisites under the Election Code, the donation is
exempt from donor's tax (NIRC, Sec. 99 (B)).
Note:
1. Sec. 13 of R.A. No. 7166 provides that "any provision of law to the contrary
notwithstanding, any contribution in cash or in kind to any candidate or political
party or coalition of parties for campaign purposes, duly reported to the
Commission on Elections, shall not be subject to payment of any gift tax".
2. Sec. 36 (9) of the Corporatjp.A.Code.mayjdes that, "no corporation, domestic or
foreign, shall give nations ip aid VhINpaiitical party or candidate or for
purposes of pa 'seri Teti al aktiyjty.1 r tf
,...-*
Q: Are gratuitous dp o, orneov
ern;;;;Itociafio9S-,subject to donor's tax?
ANS: Gifts, don do ....other- 61p.,:tib-Ution.Q-eqfM ti , the homeowners'
associations (asOcT i aje subject V the;payrrient,i5.a, s tax pursuant to
Section 98 and/9 o Tax `Code, bs artiende.d. Endowm6Qttor gifts received by such
associations ar not e mpt rom dono,04.ac considering th ik lot ti), associations are
not qualified f eprn •er ec io 2)-6 ' the Tax Code (R.M.C. No. 53-
2013, Pain°. 14.-1 v7---, -7-/
i --
" -'
ia ?flzi
D. VALUE-AD f"
Conce t and Etege-A
Q: Define Valu
ANS: It is a tax o arter lexchange, or lease of goods
or properties and Thifi pin, po ) on importation of goods into the
Philippines (R.R. No. 6-05, ,Sec,

Q: What are the character:atm:p./3f VAT/

ANS: The characteristics ofNTQA:z: ,t,„0"-
.
1. It is an indirect tax;
2. It is a tax imposed on the value added to goods, properties, or services of a
taxpayer;
3. It is a transparent form of sales tax imposed on the taxable sale, barter, or
exchange of goods, properties or services;
4. It is a broad-based tax on consumption imposed on all stages of taxable sale
but the tax burden rests with the final consumer who consumes the goods,
properties, or services;'
5. It is computed through "tax credit method" or "invoice method" wherein the
input tax shifted by the sellers to the buyer is credited against the buyer's
output taxes .when he in turn sells the taxable goods, properties, or services
(NIRC, Sec. 105 and Sec. 110 (A));
6. It adopts the "tax inclusive method". Unless otherwise stated, any price
charged by a VAT-registered person shall be deemed to include the VAT
charged (MAMALATEO, Reviewer, supra at 404);
7. It follows the "destination principle/cross-border doctrine" (MAMALATEO,
Reviewer, supra at 402-403);
8. There is no tax cascading/tax pyramiding (tax on tax);

902
 9. VAT foregone in a prior exempt transaction may be recovered from the
succeeding customer liable to VAT under the "catching-up principle" or
"recoupment principle" (MAMALATEO, Reviewer, supra at 405); and
10. It is a regressive tax. By its very nature, it is regressive. VAT paid eats the
same portion of an income, whether big or small. The disparity lies in the
income earned by a person or profit margin marked by a business, such that
the higher the income or profit margin, the smaller the portion of the income or
profit that is eaten by VAT (ABAKADA Guro Party List v. Executive Secretary,
G.R. No. 168056, September 1, 2005).

Q: Who are persons liable for VAT?

ANS: Any person who, in the course of his trade or business, sells, barters, exchanges,
leases goods or properties, renders services and any person who imports goods shall
be subject to VAT (NIRC, Sec. 105).
Q: When is a person characterized as Maxable person for VAT purposes?
ANS: A person is characterized as a to914e person, if:
1. He undertakes taxable tri2OgliPas in goods, properties or services consumed
or destined for consumpkkinte Philippines;
2. Such transactions are eritdr&kinL cilp the course of his trade or business; and
3. The amount of his grossItakesiregOttUs over ttie threshold fixed by law or
regulation (MAMALATE6,1,3t4,0 1'10444 4, 4 06
Note: A taxable person rgeregisterto value adablax-p • rposes (NIRC, Sec. 236
(A)). However, his failure'' register asAT taxable persoci does not exculpate him
from his liability to paji; t e galue added on his taxable sal 4of goods, properties or
services (NIRC, SecsA06$041;ancr 108 Any person To required to register but
failed to do so, sheaLlt TlialteftyAT, as if .,‘ e were a VAT, egistertil person, but without
the benefit Ocoptit tax credits or the, pdqpd in which e w4s no properly registered
(NIRC, Sec. 236 ,G) (2 N
...5..--. Nit

Q: What is meant by siase,irg he urse of hietrA business"?

ANS: In the coursWislcti . e or litisin s means the regular conduct or pursuit of a
commercial or an ecodomeactivitji; inclding transactions incidental thereto, by any
person regardless of pett:ispor not the - n . aged therein is a non-stock, non-
profit private organizatdpirrespeptive.ofi „.i3-f,-Wil its net income and whether
or not it -sells exclusively to rine b'ers or eir blies , or government entity (Rule of
Regularity) (NIRC, Sec . No. 16-05, Sec. 4.105-3).
Q: What is meant by "regular?
ANS: Regular means more than one isolated transaction. It requires repetition and
continuity of action (INGLES, Reviewer, supra at 277).

Q: What is meant by "incidental"?

ANS: The term "incidental" means something necessary, appertaining to, or depending
upon another, which is termed the principal, something incident to the main purpose
(Magsaysay Lines, Inc. v. Commissioner of Internal Revenue, CTA Case No. 4353, April
27, 1992).
Note: The Rule of Regularity does not apply to the following transactions which means
that they shall be subject to VAT although not made in the course of trade or business:
1. Services rendered in the Philippines by non-resident foreign persons (NIRC,
Sec. 105);
2. Importation of goods (NIRC, Sec. 105). There shall be levied, assessed and
collected on every importation of goods a VAT equivalent to 12%. The
importation of goods herein contemplated refers to importation by any person,
who may or may not be engaged in trade or business in the Philippines (NIRC,
Sec. 107 (A)).

903
 -4:

DAN..a
Q: When is VAT imposed?
ANS: There is VAT imposed whenever there is:
1. Sale of Goods or Properties (NIRC, Sec. 106);
2. Importation of Goods (NIRC, Sec. 107);
3. Sale of Services and Use or Leases of Properties (NIRC, Sec. 108).

Q: What goods or properties are subject to VAT?

ANS: The goods or properties subject to VAT are as follows: (RP-EMT)
1. Real properties held primarily for sale to customers or held for lease in the
ordinary course of trade or business;
2. The right or privilege to use Patent, copyright, design or model, plan, secret
formula or process, goodwill, trademark, trade brand, or other like property or
right;
3. The right or privilege to use in the Philippines of any industrial, commercial, or
scientific Equipment;
4. The right or privilege to use ilotion.,pictures films, tapes, and discs; and
5. Radio, television, sa ellitrTransmissionlhrIkcable television time (NIRC, Sec.
106 (A)(1)). I ;t- ;"N„
Note: "Goods or Prope ref hbli pan.alkangibte apCintangible objects which are
capable of pecuniaryktpl atio S4cr:/. 06 Et!qc %

Q: What is the taX*as VIon sale goods or propectieV

ANS: The 12AT'Itt rbe based cathegrogt selling pria‘'t'iComputed as follows:
1. For real pro erty -f the consideferon stated in the Sales }l or the fair
markval (whichever is higheyp e z -Oirallvalue or:MO r market value as
shower-1-d e sch dulka-vaitilpsTclfie rovinciarand city assessors),
whiclieverA higher (R.R. /14-00iSec. 4.196-4); arld,,-
2. For ia;reiof oo s r propeiitgeatier tha ea proper y = the total amount
of mdn9ygoe'ts u alent w t g-.purc, ayslandeobligated to pay to
the Alter hi one e.talion heig*,13' or 9xchangp of the goads or
proper"es, ex udingr fie tisyp41 ny, gn such goods or properties
shall fonv part of the r *Mc, S6C. 106 0)); R.R. No. 16-05,
Sec. 4.10 -4 c
)
Q: What are the allo le,de iffns.from.ttle gross selling price?
ANS: The following shall e.,,,Costv as dMictibn fr4p\...0tc selling price:
1. Discounts determinethar&I grantedlatih 'reed the sale, which are expressly
indicated in the invoice, the ereof forming part of the gross sales
duly recorded in the books of accounts;
Note: The grant of the sales discount must not be dependent upon the
happening of a future event in order to be excluded from the gross income
from the same month or quarter it was given (NIRC, Sec. 106 (D); R.R. No.
16-05, Sec. 4.106-9);
2. Sales returns and allowances for which proper credit or refund was made
during the month or quarter to the buyer for sales previously recorded as
taxable sales (NIRC, Sec. 106 (D); R.R. No. 16-05, Sec. 4.106-9).

Q: What are the requisites for the taxability of goods or properties?

ANS: The requisites are:
1. For goods or properties other than real property: (SCPN)
a. There is an actual or deemed Sale, barter or exchange of goods or
properties for a valuable consideration;
b. The sale is undertaken in the Course of trade or business or exercise
of profession in the Philippines;

904
 c. The goods or properties are located within the Philippines and are for
use or consumption therein; and
d. The sale is Not exempt from VAT under Sec. 109 of the NIRC, special
law, or international agreement binding upon the government of the
Philippines (MAMALATEO, Value Added Tax in the Philippines (2013),
p. 74) [hereinafter MAMALATEO, VAT];
2. For real property: (SPR-PN)
a. The seller executes a deed of Sale, including dacion en pago, barter or
exchange, assignment, transfer, or conveyance, or merely contract to
sell involving real property;
b. The real property is located within the Philippines;
c. The seller or transferor is engaged in Real estate business either as a
real estate dealer, developer, or lessor;
d. The real property is held Primarily for sale or for lease in the ordinary
course of his trade or business; and
e. The sale is Not exemptagm VAT under Sec. 109 of the NIRC, special
law, or internatioripAreiement binding upon the government of the
Philippines (Id.). ,1040
,„,ora.
Note: Absence of any of the akontro*ites exempts the transaction from VAT.
However, percentage taxes may apple •

Q: What is the tax base of imperrtatici

ANS: The 12% VAT is bassaVn: •11
1. Total value OW0 the Bq;ea, of Customs (608 In determining tariff and
customs dutiaji„Rys custo„. ''S'll! ties, excise taxes, zany, and other charges
prior to thegeadk'agifio
ds fro phe customs; co'
2. Landect,01 in ettate valuati used by thep0 is based % on volume and
quart . Landed ost conesl,s o he invoice amour, customs duties, freight,
angrer charges an also ex • et if
inseiVee.....-- R,p, Sec. 107 (A);
R.R. _a 16-05 c. 4.16- ).
..g.t
Q: Who pays foriftelak on mporterd goLids?
ANS: The VAT on Apgrtatio shall be pa ,l prior to the release of such
goods from customs custody R.R. No. 1.01750:rgi07.1 (b)).
otgEt.;..;• ,,.. , r-4
- ,7,,b
Q: Who is an Importe
ANS: Importer refers to g, rson who brings goods into the Philippines, whether or
not made in the course o rade or business. It includes non-exempt persons or entities
who acquire tax-free imported goods from exempt persons, entities or agencies (NIRC,
Sec. 107 (B); R.R No. 16-05, Sec. 4.107.1(b) and (c)).

Q: What is meant by sale or exchange of services?

ANS: The term "sale or exchange of services" means the performance of all kinds of
services in the Philippines for a fee, remuneration or consideration, whether in kind or in
cash (NIRC, Sec. 108). It shall likewise include:
1. The lease or the use of or the right or privilege to use any:
a. Copyright;
b. Patent;
c. Design or model plan;
d. Secret formula or process;
e. Goodwill;
f. Trademark;
g. Trade brand; or
h. Other like property or right;

905
 2. The lease or the use of, or the right to use of any:
a. Industrial;
b. Commercial; or
c. Scientific equipment;
3. The supply of:
a. Scientific;
b. Technical;
c. Industrial; or
d. Commercial knowledge or information;
4. The supply of any assistance that is ancillary and subsidiary to and is
furnished as a means of enabling the application or enjoyment of any such
property, or right as mentioned in number (2) or any such knowledge or
information as is mentioned in number (3);
5. The supply of services by a non-resident person or his employee in connection
with the use of property or rights belonging to, or the installation or operation of
any brand, machinery or oltter.appareims purchased from such non-resident
person;
T T
6. The supply of tschnicaLadviceisisLeQf epr bervices rendered in connection
with technical, mgagetime ,>ofradmigis,Vtio gVaqy scientific, industrial or
commerciaindeAakt o gVventure, project drksc
7. The !easy° rt4ib epic ure-filtris7filNisriap craiscs' nd
8. The le9s,,Cos se o(plor'Alle .right t8 u jp, television, satellite
trans issiort.A. le telekrisioqiimeyN/RSec. ).
eAA
Q: What is m
ANS: Service s-be ed "6-6ftlie,10
attalflifig
• methi use, I for a person or
company for a fe&..
' borici6vokrOderedir to be thdde l to another for a
fee (Commiss endr..4 Revehl.ILV.z?Americ pre s Intl Inc., G.R. • No.
152609, June

Q: When is the ease ofkproperti sNsjij c to

ANS: The lease properfigs 41)11k1 subjwc irrespective o the place where the
contract of lease o icensingq•gr eythe pro rty is leased or used
in the Philippines (NI, C, Segy10

Q: What is the tax brie Lthe VATk of fsalekvf, efvice and use or lease of
properties?
ANS: The 12% VAT is based orrthre derived pisfrom the sale or exchange of
services, including the use or lease of properties (NIRC, Sec. 108). -
Note: Absence of profit or margin does not make the performance of taxable services
for a fee exempt from VAT. It is immaterial whether the primary purpose of a corporation
indicates that it receives payments for services rendered to its affiliates on a
reimbursement-of-cost basis only, without realizing profit, for purposes of determining
liability for VAT on services rendered. As long as the entity provides services for a fee,
remuneration or consideration, then. the service rendered is subject to VAT
(Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 125355, March 30,
2000).

Q: What is meant by gross receipts?

ANS: It refers to the total amount of money or its equivalent representing the contract
price, compensation, service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits applied as payments for services
rendered and advance payments actually or constructively received during the taxable
period for the services performed or to be performed for another person, excluding VAT
(NIRC, Sec. 108; R.R. No. 16-05, Sec. 4.108-4).

906
 BEDAN RED BOC
Q: When is there constructive receipt?
ANS: Constructive receipt occurs when the money consideration or its equivalent is
placed at the control of the person who rendered the service without restrictions by the
payor. The following are examples of constructive receipt:
1. Depcisit in banks which are made available to the seller of services without
restrictions;
2. Issuance by the debtor of a notice to offset any debt or obligation and
acceptance thereof by the seller as payment for services rendered; and
3. Transfer of the amounts retained by the payor to the account of the contractor
(R. R. No. 16-05, Sec. 4.108-4).

Q: What are the requisites for taxability of sale of service and use or lease of
properties?
ANS: The requisites for taxability are the following: (SP-CoVaN)
1. There is a Sale or exchange of service or lease or use of property enumerated
in the law or other similar services;
,
2. Theservice is performed org; performed in the Philippines, and in case of
lease, property leased or tjp-Od 'fist be located in the Philippines;
a The service is in the Co9r00,_ 04 , xpayer's trade or business or profession;
4. The service is for a Valuable. aderation actually or constructively received;
and
5. The service is Not eOrnptRlhder-
4' •'Cile-Oecial law or international
agreement (MA/g6M TEO, lin, upra at 160
Note Absence of anyof e requisites re ders the transac EXEMPT from VAT but
may be subject to otheOereentage tail'
.,410
Q: Are advance.paymentripade by th essee for lease of properties subject to
VAT? t,,
ANS: It depq. si lllOckanceRaymen& actually4 opn -des or, or an option
money for theibropertyAP secaSty deposit for tli prmance of certain
obligations of theOsse"041adflarlOe p& ent is not suojectqI5' AT. Security deposit
that is applied to relitakth'alllt subjk_to IAT at the time of its application. On the other
hand, if the adVancetpymenV constitutes ER
-pre aid rental, then such payment is taxable
to the lessor .in the cutlAvhen recer pective of the accounting method
G e _,.
employed by the lessor,'12.R. No dfk-t75gSecs tiVfM
" p
Q: Are lawyers liable fq,yador legal services rendered?
ANS: Yes. R.A. No. 9337""dleaily provided that sale of legal services by a lawyer or a
law firm shall be subject to VAT effective November 1, 2005.

Impact and Incidence of Tax

Q: What is impact of taxation in relation to VAT?
ANS: The impact of taxation is the point where the tax is originally imposed or the one
on whom the tax is formally assessed (INGLES, Reviewer, supra at 6). In VAT, the
seller is the one directly and legally liable for payment of indirect tax (Commissioner of
Internal ReveOue v. Philippine Long Distance Company, G.R. No. 140230, December
15, 2005).

Q: What is incidence of taxation in relation to VAT?

ANS: The incidence of taxation is the point on whom the tax burden finally rests
(INGLES, Reviewer, supra at 6). In VAT, it is the final purchaser or end-user of such
goods or services who, although not directly and legally liable for the payment thereof,
ultimately bears the burden of the tax (Commissioner of Internal Revenue v. Philippine
Long Distance Company, G.R. No. 140230, December 15, 2005).

907
 Q: Discuss the impact and incidence of taxation in relation to indirect taxation.
ANS: In indirect taxation, there is a need to distinguish between the liability for the tax
(impact) and the burden of the tax (incidence). The amount of tax paid may be shifted or
passed on by the seller to the buyer. What is transferred in such instances is not the
liability for the tax, but the tax burden. In adding or including the VAT due to the selling
price, the seller remains the person primarily and legally liable for the payment of the
tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is
the burden of the tax. Stated differently, a seller who is directly and legally liable for
payment of an indirect tax, such as the VAT on goods or services is not necessarily the
person who ultimately bears the burden of the same tax. It is the final purchaser or
consumer of such goods or services who, although not directly and legally liable for the
payment thereof, ultimately bears the burden of the tax (Contex v. Commissioner of
Internal Revenue, G.R. No. 151135, July Z 2004).

Destination Principle /Cross Border Doctnne

Q: What is Destination Principl wrglalibletotVAZZ
ANS: This principle provides goods j ncill
tm•rviFe's are taxed only in the country
where these are consumed (Affe5, Cogslidatkid g nd Development Corp. v.
Commissioner of Inteaf4F?e G7rNi3§:".44, 0 ,k).1482 63, June 8, 2007). It is
also knCwn as "cro sorrlaepi octrine" Jerbg ein de ti atiprpAthe goods determines
taxation or exemp g froni,taxeExport sares of go o zero percent (0%)
rate, while imp s',•k rood are Objea toNlfie 12 e'k rts are zero-rated
because the co sump &n of uch gbodAT 1 04 mad outs ttie hilippines; on the
other fiend, im 9 o f good are_subjed ollthe_regula VAT atev b'e ause they are for
consumption thi e Philippines40/11/ T.B9,,,,Rev ewer, pra-et 02-403).
Note: In the cises'ervices, condiftti felsei dlilac where e se ice is performed,
following the situ& IltiCO-D "ncipg1(41,1MALAYEO, R f 403).

The Philippine 5 ate cording to which,

no VAT shall b Impoe d t for consumption
outside of the erritoria sioner of Internal
Revenue v. Tosh ba Info afio uo L Inc. R. Ng 150154, August 9,
2005).

Imposition of VAT on traneegagoo ytaxexg pt pie4ons

Q: Who is tax-exempt person -/,e M
ANS: An exempt party is a per7sOntr" entitrg ed VAT exemption under the NIRC, a --• -
special law or an international agreement. to which the Philippines is a signatory
(Commissioner of Internal Revenue v. Seagate Technology, G.R. No. 153866, February
11, 2005).

Q: What is the effect of transfer of goods by tax exempt persons?

ANS: In .the case of tax-free importation of goods into the Philippines by persons,
entities or agencies exempt from tax where such goods are subsequently sold,
transferred or exchanged in the Philippines to non-exempt persons or entities, the
purchasers, transferees or recipients shall be considered the importers thereof, who
shall be liable for any internal revenue tax on such importation. The tax due on such
importation shall constitute a lien on the goods superior to all charges or liens on the
goods, irrespective of the possessor thereof (NIRC, Sec. 107 (B)).

908
 Transactions Deemed Sale subject to VAT
Q: What is meant by transactions deemed sale?
ANS: Under Section 106 (B) of the Tax Code, certain transactions which are not
actually sales because of the absence of actual exchange between the buyer and seller,
are considered or included in the term "sale" for value added tax purposes (TABAG &
GARCIA, TranSfer and Business Taxation (2018), p. 270).
Note: In a transaction deemed sale, the input vat was already used by the seller as a
credit against the output VAT. However, since there is no actual sale, no output vat is
actually charged to customers (Supra. p. 271).

Q: What are the instances of "Deemed Sale" transaction?

ANS: The specific instances are as follows: (TDCR)
1. Transfer, use, or consumption not in the course of business of goods or
properties originally intended for sale or for use in the course of business;
2. Distribution or transfer to: 44%
a. Shareholders or investorwas share in the profits the of VAT-registered
person; or 4V•
b. Creditors in payrdeleciftiat or obligation;
v,z493,
3. Consignment of goods itactua sq e is not made within 60 days from the date
of such consignment; anci b 3 '
4. Retirement from or ces5aticgto: to inventories on hand:
a. Change ofownershiVot business,
b. DissolOkif a party ip and creation __ a new partnership which
takes Dver the business NIRC, Sec. 106(B 1 R.R. No. 16-05, Sec.
4.1060 . i "46'
1
Note: -Before consl iAterik figther the saction is ee ed . ale it must first be
determined whVel- the sae ag in th ordinary course tra e orbus'iness. Even if the
transaction was‘'deeme'doale," if it Was i of done in e or ina course of trade or
r
business, stilt trandaik is ricktobje o VAT om(l foie A' ntemal Revenue
v. Magsaysay n o
N.N
.,.... jet y 0,1I
es, Inp..44P. No:34:4698Puly 28, 2

Q: What is the tax raseof VAT on'transtions deemed sale? .

vh
ANS: For transaction s deeniel sale, the at ki: shall be based on the market value
of the goods !deemed' rti as of the ..:4 --,.g...„.
.1 ,.,a,c,urrence
--e of the transactions
enumerated. Howeve retirement or cessa ion o •usiness, the tax base shall be the
acquisition cost or th uenrinarket price of the goods of the goods or properties,
whichever is lower. In the sElof a sale where the gross selling price is unreasonably
lower than the fair market value, the actual market value shall be the tax base (NIRC,
Sec. 106 (B); R.R. No. 16-05, Sec. 4.106-7).

Q: When is a change in or cessation of status of a VAT-registered person subject

to VAT?
ANS: The goods or properties originally intended for sale or use in business, and capital
goods which are existing as of the occurrence of the following changes are subject to
12% VAT:
1. Change of business activity from VATable status to VAT-exempt status
(e.g. ;when a VAT-registered person engaged in a VATable activity like a
wholesaler or retailer of goods subject to VAT decides to discontinue such
activity and engages instead in a non-VAT business activity);
2. Approval of a request for cancellation of a registration due to reversion
to exempt status (e.g. when a person commenced a business with the
expeCtation of gross sales or receipts exceeding P3,000,000 (R.R. No. 16-11),
but who failed to exceed this amount during the first 12 months of operation);

909
 VOL 1.
2019

Approval of request for cancellation of a registration due to desire to

revert to exempt status after lapse of three consecutive years (e.g. when
a person who is VAT exempt and not required to register for VAT opted to
register as a VAT taxpayer and after the lapse of three years' desires to revert
to exempt status) (R.R. No. 16-05, Sec. 4.106-8).

Q: When is a change in or cessation of status of a VAT-registered person not

subjeCtto VAT?
ANS: The goods or properties existing as of the occurrence of the following are not
subject to 12% VAT:
1. Change or control of a corporation by the acquisition of the controlling
interest of such corporation by another stockholder or group of
stockholders - the goods or properties used in the business or those
comprising the stock-in-trade of the corporation will not be considered sold,
bartered or exchanged despite the change in the ownership interest since the
; same corporation still owoijberni...,„,
Note: The following prett.
-bjeq tolVAT:
, a. Exchangp,tif prOerty b!y,soirp,or@poyfac3016ng control for the shares of
stockso5f-t6elprgehorporaticin,kgbj‘ to`VA,T.
b. Frooi thg Point4titiew of the person4hoeiqry the corporation, who
e dhAge.VicssopertieTreIdlor-salpN ftleaee for shares of stocks,
dthelesuifing torisorAiate.coontrolkor ote, crlexchange is subject
"An 1041,
°
2. Change in thfi trade or corpor44ame;
3. Merge4,cinsolichior a Thirecif,'"Idoratirifil/ R. No. WA ec. 4.106-8).
;$13111 -

Zero-Rctted and Effectively aro-Retied alga-:of Go dsorPrciper4i s

.
Q: What is th17 24 of ies?
ANS: A zero-r tOisp of 14o s̀ ir prppeitie§V 9 .p 7 egg ered erson is a taxable
14oAsi:•
transaction for 'AT purloosg;bdt e s'Ale cr6e4Aor s If in atly outp Hex (R.R. No. 16-
05, Sec. 4.108-5X \

Q: Distinguish a z1T-rate*hale-kgAbLdtAfir t.1;:? t transaction.

ANS: The differencevare a ol ow •
1. Under the zeros-callag, ee from VAT because the
tax rate applied N4 exemption only removes the
VAT at the exempt sta -,
2. A VAT payer who is subject to zero-rate of tax on his taxable sales can claim
and enjoy a credit or refund for the excess input tax invoiced to him on his
purchases directly attributable to the zero-rated sales; such privilege is not
given to exempt taxpayers;
3. Although zero-rated sales are not subject to actual tax charge since the tax
levied is at 0%, they are nevertheless taxable sales for the purpose of
measuring turnover sales to determine whether VAT registration is required. In
contrast, exempt sales are not taxable sales;
4. In zero-rating, the VAT-registered taxpayer has the following remedies with
respect to unused input taxes:
a. file a claim for refund;
b. file a claim for tax credit; or
• c. carry-over of excess input taxes attributable to zero-rated sales.
On the other hand, in exempt sales, the seller does not have the same remedies
because the input taxes passed on to him become part of his cost of asset or expense
(MAMALATEO, VAT, supra at 131-132).

910
Q: What are the types of zero-rated transactions?
ANS: A zero-rated transaction may be:
1. Automatically zero-rated sale - refers to export sale of goods, properties
and supply of services to a Freeport Zone-registered enterprise by a VAT-
registered person;
2. Effectively zero-rated sale - refers to the local sale of goods and properties
by,a VAT-registered person to a person or entity who was granted direct and
indirect tax exemption under special laws or international agreements (R.M.C.
No. 50-07, Sec. 3).

Q: Distinguish an automatically zero-rated sale from an effectively zero-rated sale.

ANS: The distinctions are the following:
1. As to nature, automatically zero-rated sale generally refers to the export sale
of goods, properties and supply of services by a VAT-registered person; while
effectively zero-rated sale refers to the local sale of goods, properties and
supply of services by a VAT-regi stered person to a person or entity who was
grPnted indirect tax exemptIONDder special laws or international agreements
(i.e.,; sale of VAT-regetlierson p to Asian Development Bank or
Inteational
rn Rice Rese#104);
2. As to for whose bendfitigeOtended, automatically zero-rated sale is
primarily intended to bp*enjo9,09W;spitpr whop, and legally liable
for the VAT, makingAdigteiterniferlifiditall.„, -111petitive by allowing the
refund or crediteinput taOskat are attnbinb e to export sales; while
effectively zerrated sale ip!trit ded to benefit thd rchaser who, not being
dirpctly and le94 liable f9 .ayment of the PA. \yin ultimately bear the
burden of theta shifted by the uppliers (CIR legate Technology (PHL),
N970518664rehtuary 11, 5);
3. AS tigThe need or applicition d approval of the BIRD- no such is required
in arOomitielly,zero-rated s le.; while i eaivel -J.-rated sale, an
app14tion for zerli5rating, filed an l - 6.24,;;S)- ecessary before
the transactiorfafibe don as such (MA Alf i= 0, Reviewer, supra at
460; and
4. As to theNprgsenC'e of the wo E 0-RATED" on the face of the VAT
invoice or to be is,z:b4t, no such requirement is
necessary fo n autpattgai y.ktroir teiteffhile in an effectively zero-
rated sale, the word " ,ERO-RATED" must be stamped on the face of the VAT
invoice or rece"t, reason for this requirement is that the buyer of the
goods or services-TS located within the Philippines, or he is located outside the
Philippines merely by fiction of law (Id.).

Q: What are the instances of zero-rated export sales?

ANS: The following are considered as zero-rated export sales: (SR-R01)
1. The sale and actual Shipment of goods from the Philippines to a foreign
country irrespective of any shipping arrangement that may be agreed upon
which may influence or determine the transfer of ownership of the goods so
exported, paid for in acceptable foreign currency or its equivalent in goods or
services, and accounted for in accordance with the rules and regulations of the
BSP;
2. The sale of Raw materials or packaging materials to a non-resident buyer for
delivery to a resident local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of the said
buyer's goods, paid for in acceptable foreign currency, and accounted for in
accordance with the rules and regulations of the BSP;

911
 •.,•• • Nr" z,Y;P14:54>-•

3. The sale of Raw materials or packaging materials to an export-oriented

enterprise whose export sales exceed seventy percent (70%) of total annual
production;
Note: Any enterprise whose export sales exceed 70% of the total annual
production of the preceding taxable year shall be considered an export-
oriented enterprise.
4 Transactions considered export sales under E.O. No. 226, otherwise known as
the Omnibus Investments Code of 1987, and other special laws; and
Note: Considered export sales under E.O. 226 even without actual exportation
the following shall be considered constructively exported for purposes of these
provisions:
a. sales to bonded manufacturing warehouses of export-oriented
manufacturers;
-b. sales to export processing zones;
c. sales to registered export traders operating bonded trading
warehouses supplying.raw,..m.a4Fials in the manufacture of export
products undeprgaideliqesito be fetkhy the Board in consultation with
the Bure eof IhternakRdveh e oiR apd the Bureau of Customs
(B0C1., 1 „0;swg.C5
d. sa10," to iplomatic mission an11 Aher agencies and/or
insfra unitip:C:onically manufactured,
as e bled4or repacised Pm/ducts whe o foreign currency or
.1not. A. A
The le of oods supplies,Quipment aqd fu fo pe°csons engaged in
Interria hippirgorii7teTI— m9onal trap port o 90119 s: Provided, That
the gdodsl supplie , /shall be used exclusively for
inter atio shippin or airili.‘nOorfibPeratiins (NI Os.Sdc 106 (A)(2);
No. 'I'D 7.:

Q: What are th ce1). #•te .g. ‘ rKqp

ANS: The folio g are ero- to '01r - of seNkei4 R)
1. ProcesdV, mahufac ucil0Brqipapija§veof gooas for /her persons doing
business • utsidelh d re subsequently exported and
paid for in cept*1 reign e untelfor in accordance with
the rules anduraiap; 9 e43SP,
2. Services other tilaWhbd.qimentiprifid ing paragraph.edered to a
person engaged inIu —ess cthlidixted Ou ide the Philippines or to a non-
resident person not engage neta ess who is outside the Philippines when
the services are performed and paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP;
3. Services rendered to persons or entities whose exemption under Special laws
or international agreements to which the Philippines is a signatory effectively
subjects the supply of such services to 0% rate;
4. • Services rendered to persons engaged exclusively in International` shipping or
air transport operations, inclUding ledies of property for use thereof. Provided,
that these services shall be exclusively
.- for international shipping or air
transport operations;
5. Services performed by Subcontractors and/or contractors in processing,
converting, or manufacturing goods for an enterprise whose export sales
exceed 70% of the total annual production;
6. ; Transport of passengers and cargo by domestic air or sea vessels from the
; Philippines to a foreign country; and
7. Sale of power or fuel generated through Renewable sources of energy such
as, but not limited to, biomass, solar, wind, hydropower, geothermal and

912
 ;DAN``1RED' BOOK
steam, ocean energy, and other emerging sources using technologies such as
fuel cells and hydrogen fuels.
Note: The sale of power or fuel is the one being subject to 0% and not the sale of
services related to the maintenance or operation of the plants generating said power
(NIRC, Sec. 108 (B); R.R. No. 13-18, Sec. 2).

VAT-Exempt Transactions
Q: What are VAT exempt transactions?
ANS: It refers to the sale of goods or properties and/or services and the use or lease of
properties that is not subject to VAT and the person making the exempt sale of goods,
properties or services (seller) shall not bill or pass on any output tax to his customers.
Note: The f011owing are the features of VAT exempt transactions:
1. The seller is NOT allowed to credit the VAT (input tax) passed to him on his
purchases of taxable goods, properties or services, because he has no output
tax to deduct it from;
2. VAT-exempt transactions shap t be liable for VAT or the 3% percentage tax;
and
3. VAT-exempt transaction:Ole dll:Mt be included in determining the general
threshold prescribed byttai iiitdfiaTriount of which is P3,000,000 (RR No. 13-
18).
5•
Q: Distinguish exempt tramAtion fro xemp pa
ANS: An exempt tranNtidn involvek9yeds or services 0, by their nature, are
specifically listed in and expressly eprn ted from the V4Twiader the NIRC, without
regard to the tax statir 0g-exempt or ot) of the party t41 HIV transaction. Indeed,
such transaction's li 11*e/tithe VAT d the seller isgnoriallowed any tax refund of
or credit forl a yginput taxerrata. Apmex pt party, on jhe olheAand, is a person or
entity granted T elm tion under t NIRC, a specia law ior an international
agreement tomicht4h-e_Olippihts is a gnatory, d i ezpr:Thich its taxable
transactions bebome i exert frorupt e Such pa 444..11 . 0,0 ubject to the VAT
but may be, alloVadoOkefund 8- or dit for input taxes paid, depending on its
registration as a itT or nip-VATS taxpa er (Commissioner of Internal Revenue v.
Seagate Technology (1;',gos, GOR. No. 153 5Wrnia 11, 2005).
49— ard11
Q: What are the transactions exempt from
ANS: The following traftsa tio shall be exempt from-VAT:
1. Sale or Importiii &AB)
a. Agricultura and marine food products in their original state; livestock
and poultry of a kind generally used as, or yielding or producing foods
for human consumption; and breeding stock and genetic materials
therefore;
Note: The following are the conditions for exemption from VAT:
i. Considered in their original state - even if they have undergone
the simple process (not a physical or chemical process which
would alter the exterior or inner substance of a product in such a
manner as to prepare it for special use to which it could not
have been put in its original form or condition; like the addition
of preservatives or anti-oxidants) of preparation or preservation
for the market such as freezing, drying, salting, broiling,
roasting, smoking or stripping. Advanced technological means
of packaging such as shrink wrapping in plastics, vacuum
packing, or tetra-pack, in itself does not make the products
liable to VAT. Polished and/or husked rice, corn grits, raw cane
sugar and molasses, ordinary salt and copra shall be
considered in their original state by express provision of law.

913
 .4.,•:••••••(°:,.•
1

ii. Not included in the exemption: non-food products; fighting

cocks, race horses, zoo animals, and other animals generally
considered as pets; bagasse.
Note: The sale of Andok's roasted chicken is exempt from VAT.
However, should Andok's maintain a facility by which the roasted
chicken will be offered as a menu to customers who would dine-in, then
it will be subject to the VAT on sale of service which is similarly
imposed on restaurants and other eateries (VAT Ruling No. 009-07,
June 21, 2007). The sale of marinated boneless milkfish (bangus) by a
tuna canning corporation is not considered in its original state (BIR
Ruling No. 348-2011, September 28, 2011).
b. Fertilizers; seeds, seedlings, and fingerlings; fish, prawn, livestock and
poultry feeds, including ingredients, whether locally produced or
imported, used in the manufacture of finished feeds;
Note: Excluded are those specially made feeds for Race horses,
Fighting cocks, A. Zoo animals and Other animals
generally consideredaq pets (IFAZO),
c. Or lease,,orpasgeoger pr dargo,,estelagd Aircraft, including engine,
equipr,p4nt: Irrt. tare.parti;elhereof; far' -ctomestic or international
transfiort op,datioTis: ,,,„:„, 1.,- ,,,A,
Note:4T-tfolrOying.artr tWolinditiodIocezeriAr from VAT:
41.Q.--1 ,easd of ex triptitkp lap VATrnimpoption:
, Yi 1. i The vessellinciOding the en''n and‘vpare parts of said
vessels, trust at i4ast o e(1 .2ftliFed fifty (150) tons;
2. t"Te ACTISTWArted s co ply with the age
( 1..r...:
1•
Ye-f:,1 1 liniitl4irOiefitAtrtheitime of cquisi on counted from
*1the
.. date:44-01:ot
s.7,10.... ' vessOl's 1f orig rithiormissioning, as
i Tows: •......1::-..: i )2:,,D
-
1 CD le), a. ki:as "engers aps//or) cargtkvesels — fifteen (15)
(...)\\ Mr ,104,?/ ;/,-1L,
‘c,cb Tan ers4tAt) yea?: old;‘‘-il
,,,,,, . •--
g -speedlla seng6r crafts five (5) years old;
4,1 1 1
\/„,,, 3.7 "Sec ion eptij)lit e No. 9295, The Domestic
— t ll rig.Devel . me A t pr 2004, must have been
c.o plied 4t1.f tk _.„."."
ii. In cas 4o. exemOonifroYkron local purchase - the vessel
must weigh, iric ErdirigIFe engine and spare parts, at least 150
tons;
d. Printing or publication of Books and any newspaper, magazine, review,
or bulletin which appears at regular intervals with fixed prices for
subscription and sale and which is not devoted principally to the
publication of paid advertisements;
Note: The printing and manufacturing of posters, novelty items,
supplementary educational books and tutorial items for children, such
as bilingual books, jigsaw puzzles, memory games, flashcards and
telling time posters fall under this exemption (BIR Ruling DA-378-2005,
July 7, 2004). The terms "book", "newspaper", "magazine", "review",
and "bulletin" shall refer to printed materials in hard copies, and do not
include those in digital or electronic format or computerized versions,
including but not limited to the following: e-books, e-joumals, electronic
copies, online library sources, CDs and software (R.M.C. No. 75-2012,
November 22, 2012).

914
 ,

2. Sale (REC2-SGD)
a. Real properties:
i. Not primarily held for sale to customers or held for lease in the
ordinary course of trade or business;
ii. Utilized for low-cost housing;
iii. Utilized for socialized housing;
iv. Residential lot valued at P1,500,000 and below;
v. House and lot and other residential dwellings valued at
P2,500,000 (R.R. No. 16-2011) and below; or
vi. Two (2) or more adjacent residential lots where the aggregate
value do not exceed P1,500,000 (R.R. No. 13-18).
Note: Even if the real property is not primarily held for sale to
customers or held for lease in the ordinary course of trade or business
BUT the same is used in the trade or business of the seller, the sale
thereof shall be subject to VAT being a transaction incidental to the
taxpayer's main busineIR.R. No. 04-07, Sec. 14).
b. Export sales by pe,r,pgi fio are NOT VAT-registered;
Note: If the taxpay4ISRM-registered, his export sales are zero-rated
c By agricultural Cqnesatk of food and non-food products (whether in
original or proce'S)ed*Iduly registered and in good standing with
the Cooperative DeNt,ict Metlizity (CD% to:
i. Their members A- A 'W'eilipthefilv or not the cooperative is
thevtducer oith goods; or
fi4 on-membersil AT-exempt only if the cooperative is the
gEpdeucer;
Note, mribtaticfn of dir farm inputs, paRhinpries and equipment,
i ing *g
qp.,parts thereof, o to be userdirehctly and exclusively in the
ireproducttonl and/or pillpe g of theirprodirce s all also be exempt
rom 1
"3k"
4rvr. 1 "t" 1/4
By noncagncultur:4 non-elctrical an gritcrOceliooperatives duly
°regist in ta,d stall mg with the OPP vided that:
IMShal.tkcapitil co t bution of each member does not exceed
P15,0g0; and
iLtriLeggi9less of ateavapital and net surplus ratably
digtribute MiTIViVarrga
Note: Impo tign by these cooperatives of machineries and
equipment, i eluding spare parts thereof, to be used by them are
subject t617A11:4
e. Lease of goods and services to Senior citizens and persons with
disabilities under R.A. No. 9994 and R.A. No. 10754.
f. Gold to the BSP
g. Drugs and medicines prescribed for diabetes, high cholesterol, and
hypertension to beginning January 1, 2019 as determined by the
Department of Health.
3. Importation (PPF)
a. Personal and household effects belonging to residents of the
Philippines returning from abroad and non-resident citizens coming to
resettle in the Philippines: PROVIDED, that such goods are exempt
from customs duties under the Tariff and Customs Code of the
Philippines;
b. Professional instruments and implements, tools of trade, occupation or
employment, wearing apparel, domestic animals, and personal
household effects;

915
 Note: The following are the requisites to be exempt from VAT:
i. The items must belong to persons coming to settle in the
Philippines or Filipinos or their families and descendants who
are now residents or citizens of other countries in quantities and
of the class suitable to the profession, rank or position of the
persons importing said items, for their own use and not for
barter or sale, accompanying such persons, or arriving within a
reasonable time;
ii. That the Bureau of Customs may, upon the production of
satisfactory evidence that such persons are actually coming to
settle in the Philippines and that the goods are brought from
their former place of abode, exempt such goods from payment
of duties and taxes; and
iii. The exemption does not apply to any vehicle, vessel, aircraft,
machinery, other goods for use in the manufacture and
merchandise,,,ptany.kinsjLn commercial quantity;
c. Fuel, goodssudtUpplies 14y pgrrftstengaged in international shipping
or air traps ort keratickpiditiec I td-a 4breign port without stopping at
any orKpo e .4f61-4.15jek..4,1iat the fuel, goods and
suppligs) 1- used for inte tiOnalAtiipping or air transport
oagralov,;)./ .f_
4. SerViCef7gERr "Ar
a. iSubje • th Percehlagel.axaunder Sec 11 6 to 17 of the NIRC;
b. By Ag cultural contracktOwers and millingo of palay into rice,
grits sugarcane into rawbugarN
c 'Medical, denial, it6.1pitpl #19d.:Fielaffnan si servi excr t those rendered
biAtifessio als. tfrabor,kop,tat &vice are e tript9 because it is a
itcsp al e
potq. Th p.y,R o me • ci t ac spitel or clinic to
its° irf- tie (s..fswqrsi:Fr-d.,. i 'mice, ence, AT exempt. If the
ale of ediei ade o ent, uch sage is subject to VAT
AMA/AM°, d 27, .
d. ENcationdl e • •riv.afe educational institutions duly
accklited by e ep o_onzt nd those rendered by
gover'arzerif e Onal.institutf6rik;S:(
Note: Edbea I013 servitgophip-I.itidu eminars, in-service training,
review class- d othI firgla e ices rendered by persons not
accredited by Dep E , and/or TESDA (R.R. No. 16-2005, Sec.
4.109-1). The exemption does not extend to the institution's other
activities involving sale of goods and services. Thus, gross
sales/receipts from the sale of school uniforms by a proprietary
educational institution and from rental of parking areas in the school
premises are subject to VAT (BIR Ruling DA-531-2004, October 19,
2004).
e Rendered by individuals pursuant to an Employer-employee
relationship;
f. Rendered by Regional or area headquarters established in the
Philippines by multinational corporitions;
g. Of Banks, non-bank financial intermediaries performing quasi-banking
functions, and other non-bank financial intermediaries such as money
changers and pawnshops;
Note: Pawnshops are considered non-bank financial intermediaries,
thus exempted from VAT but liable to percentage tax (Tambunting
Pawnshop, Inc. v. Commissioner of Internal Revenue, G.R. No.
179085, January 21, 2010).

916
 5. Others (01TO-MAS):
a. Lease of residential units, if the monthly rent:
i. Does not exceed P15,000/unit, regardless of the amount of
aggregate rentals received by the lessor for the year;
ii. If it exceeds P15,000/unit but the aggregate rentals received by
the lessor do not exceed P3,000,000, the same shall be subject
to 3% percentage tax;
Note: "Residential Units" shall refer to apartments and houses & lots
used for residential purposes, and buildings or parts or units thereof
used solely as dwelling places (e.g., dormitories, rooms and bed
spaces) except motels, motel rooms, hotels and hotel rooms, lodging
houses, inns and pension houses. 'Unit' shall mean an apartment unit
in the case of apartments, house in the case of residential houses; per
person in the case of dormitories, boarding houses and bed spaces;
and per room in case of rooms for rent.
b. Gross receipts from Lvding activities of credit or multi-purpose
cooperatives duly regiggled and in good standing with the CDA;
Transactions whiVrpaexempt under International agreements to
which the PhilipitoWaggnatory or under special laws except those
under P.D. No. 529":0:1Vg../m Exploration Concessionaires under the
Petroleum Act of.i,19' §44Nrost,
d. Transport of gaged% irlfrrifatittuaa,Irs (R.A. No. 10378);
el. Sale orAgse of goods he performance of services
properties or the
Other., the trartsVo s mentioned in preceding paragraphs,
the ges Annual sObs- a d/or receipts do OT exceed the amount of
P3,0.0,0'i000(80. No. 13 .8).
[tote: Therare exempt fm VAT but stj6jecy to Vo percentage tax.
f. -9'Transfer of Property'purspspt to Merge jor consolMation of corporation
tindeS041 .0(0)),(3 of NI os
Associatiowdues*.limem 'e hip fees ssessments and
c prgapilacted o iiV a purely reimbursemen basis by homeowners'
AM-.
• 0,
associations and cond minium' corporations established under
Rake Act No. 99 Ma•na Carta for Homeowners and
Homewfs 1P Associati e ublic Act No. 4726 (The
Condominium
h. Self-ems iridividuals and professionals availing of the 8% tax on
gross alexand/or receipts and other non-operating income, under
Sections '24(42)(b) and 24(A)(2)(c)(2)(a) of the NIRC.
Note: A VAT-registered person may elect that the above exempt transactions shall not
apply to his sales of goods or properties or services. Once the election is made, it shall
be irrevocable for a period of three (3) years counted from the quarter when the election
was made except for franchise grantees of radio and TV broadcasting whose annual
gross receipts• for the preceding year do not exceed P10,000,000 where the option
becomes perpetually irrevocable (R.R. No. 04-07).

Input and Output Tax

Q: Define output tax.
ANS: It refers to the VAT due or paid on the taxable sale, barter or exchange of goods,
properties or services by a seller or transferor (NIRC, Sec. 110 (A)(3)).

Q: Define input tax.

ANS: It refers to the VAT due from or paid by a VAT-registered person on importation of
taxable goods, or on local purchase of taxable goods, properties, or services, including
lease or use of properties, in the course of his trade or business. It includes the
transitional input tax and the presumptive input tax, It likewise includes input taxes,

917
 ED BO
which can be directly attributed to transactions subject to VAT plus a ratable portion of
any input tax, which cannot be directly attributed to either the taxable transaction or
exempt activity (NIRC, Sec.110 (A); R.R. No. 16-05, Sec. 4.110-1).

Q: What are the sources of input tax?

ANS: The input tax evidenced by a VAT Invoice or Official Receipt issued in accordance
with Sec. 113 of the Tax Code (Invoicing and Accounting Requirements for VAT-
registered persons) on the following transactions shall be creditable against the output
tax: (GRS-DPT)
1. Purchase or Importation of Goods
a. For sale;
b. For conversion into or intended to form part of a finished product for
sale, including packaging materials;
c. For use as supplies in the course of business;
d. For use as materials supplied in the sale of service; or
e. For use in trade or business,fk!i which deduction for depreciation or
amortization is,ellbwed'undrr epx‘Code.
2. Purchase of RepyProp r ies foi,,whicp vq170 ectually been paid
3. Purchase of Sei-vice vi ich.VAlha ctuatpebrt paid
4.i TransactioulDge?gectfsge
5. Presump leihkuttA N-"\ (...",
6. Transitio Vnp t a NIRCii,Sed;(11( ,,R.R. o. h15-954'pec. 4.110-1).

Q: What is pre e in 't tax credit?A

ANS: It is an in t redit ql1Fw—Ed-to persons offir7n—siengag
1. Proc f: (MMS) %!§.: e
a. rel; re
b.
c. s;
2.' Manu@stu
a. 1Qookin oil;
b. necked Aoodle- nstasit mpai4 br
, c. Refined Bulbar( ji-VB)) ,o.e-
Note: The term "pFackessingnii eaio::VasteSization anni9' Or
g and activities which
through, physical or aherrifig ro ss—alterih crdexture or form or inner
substance of a product irNuch runner Is e erspecial use to which it could
not have been put in its origialla or co?Klition IR , Sec.111 (8)).

Q: What is the allowed presumptive input tax credit?

ANS: VAT-registered persons are entitled to presumptive input taxes equivalent to 4%
of the gross value in money of their purchases of primary agricultural food products
which are used as inputs in their production (NIRC, Sec. 111(8)).

Q: What is transitional input tax credit?

ANS: It is an input tax credit allowed to a person who:
1. Became liable to VAT (exceeds the minimum turnover of P3,000,000 in any
12-month period),
2. Elects to be a VAT-registered (even if the turnover does not exceed
P3,000,000 (NIRC, Sec. 111 (A)), or
3. Is already a VAT-registered person and also deals in goods or properties, the
sale of which is exempt, but it becomes a taxable transaction under a:new or
amendatory law (Fort Bonifacio Dev't. Corp. v. Commissioner of Internal
Revenue, G.R. No. 173425, January 22, 2013).

918
 DAN RED BOO
Q: What is the allowed transitional input tax credit?
ANS: The allbwed transitional input tax credit is whichever is higher between:
1. 2%iot the value of the beginning inventory on hand; or
2. Actual VAT paid on such goods, materials and supplies (NIRC, Sec. 111 (A)).
Note: The Supreme Court held that prior payment of taxes is not required to avail of the
8% (now 2%) transitional input tax credit. There is nothing in the provisions of Sec. 105
(now 111) of the Tax Code which indicate that prior payment of taxes is necessary for
the availment of the 8% (now 2%) transitional input tax. All that is required under Sec.
105 (now 111)1of the Tax Code is for the taxpayer to file a beginning inventory with the
BIR (Fort Bonifacio Dev'f. Corp. v. Commissioner of Internal Revenue, supra).

Q: Who may'ayail of input tax credit?

ANS: The input tax credit on importation of goods or local purchase of goods, properties
or services by a VAT-registered person shall be creditable:
1. To tile importer upon payment of VAT prior to the release of goods from
customs custody;
)
2. To the purchaser of the Oiliest( goods or properties upon consummation of
the sale; or
3. To ',the purchaser of s''414ro
. the lessee or licensee upon payment of
compensation, rental, re i7.14 ' (R.R No. 16-05, Sec 4.110-2).
7,
Q: Flow is output tax determined?
ANS: The output tax is sqmptited by:
1. Multiplying they sellinkbee" (for sellers of -gods or properties) or the
"grossreceiptA(for sellerspfse ices) by 12%; o
2. Where theArTiotflpfoVAT is e neously bille invoice or receipt, by
multiply he tairattjavoice am 4,nt by a fracti n the rate of VAT as
flume-War arah,100% plus the of VAT a/the deno inator (i.e., 12/112)
(R. i3 4g10-6).
Note: In all carps whereiffalasiefo :4zorrip ing the o aitttp
: her • the gross selling
price or the gross.recei dtut the anou f VAT is erroneously billed in the invoice,
the total invoice itall be kreamed to be comprised of the gross selling
price/gross receipts lu the correct amouip e

Q: How will the inputda es on depreea. r -r00i m p ted?

AWL
ANS: When a VAT r teredvirson purchases or imports capital goods, which are
depreciable assets fors ritoo
_ tax purposes, the aggregate acquisition of which
(exclusive of VAT) in a careti6at month exceeds P1 M regardless of the acquisition cost
of each capital 'good:
1. Estimated useful life is 5 years or more — Input tax shall be spread evenly over
a period of 60 months to commence in the calendar month when the capital
good 's acquired;
2. Estimated useful life is less than 5 years — Input tax shall be spread evenly on
a monthly basis by dividing the input tax by the actual number of months "w11/4
comprising the estimated useful life. Such claim for input tax credit shall
commence in the calendar month the capital good is acquired.
Note:
1. Where the aggregate acquisition cost (exclusive of VAT) of the. existing or
finished depreciable capital goods purchased or imported during any calendar
month does not exceed PIM, the total amount of input taxes will be allowable
as credit against output tax in the month of acquisition.
2. An asset acquired in installment for an acquisition cost of more than P1M,
excluding VAT, will be subject to amortization of input tax despite the fact that
the monthly payments or installments may not exceed P1 M (R.R. No. 16-05,
Sec. 4.110-3).

919
 DAN R • • •

3. F The amortization of the input VAT shall only be allowed until December 31,
2021 after which taxpayers with unutilized input VAT on capital goods
purchased or imported shall be allowed to apply the same as scheduled until
fully utilized (R.R. No. 13-18, Sec.2).
For purchase made on January 2022, no amortization shall be made and the
input VAT shall be claimed on the month of purchase or January 2022 (R.R.
No. 13-18, Sec.2).
Q: What are capital goods or properties?
ANS: It refers to goods or properties with estimated useful life greater than one year and
which ',ere treated as depreciable assets under the Tax Code, used directly or indirectly
in the production or sale of taxable goods or services (R.R. No.13-18).

Q: What is aggregate acquisition cost?

ANS: It refers to the total price, excluding VAT, agreed upon for one or more assets
acquired and not on the payments ac ually..ma e during the calendar month (R.R. No.
16-05, Sec 4.110-3). ,
1 1
N. ....,, v/ ,
Q: What is the effect4f4a pr.ottansfer-offteprectabje goods within a period of
five years prior to theiexhlu ion of the amortriebleelhpuft)x?
ANS:'In,Icase of sale 6? a sfer„..of,dep-i-alpiegoo4ithint per:O'd of five years or prior
to the eXl-laustionta h; a orfizableimpdtctaxp the en ireNn9 lied input tax on the
capital, goods s rd or • dsfer ed canibe CI(Nirn, ed-as in ,ut to redit during the month or
quarter when s e or transfer as made.M.A No. 16-0 Sec. 0,3).
1
, •
/---a•
K: ,,,,-.• I
CI: What is Construction in Prodr,lary? 'ft”
• o,
ANS: H It! is•the
t cost of constructiori*ork;i-Whith
.,..:w., ,.,;••
isjnot ye Completed. CIP is not
deprecieted u 'Ige4 ssecitced in serVice.. NormglIg?.6- on fomple ion, a CIP item is
reclasSified an thel clag)ft a assetAs capi,tqlize epreCiatleed (R.R. No. 13-18,
Sea 2).. U1 1":")
. Enl, ,r(--'J-
iii"..ii "-•-: V
Q: What are the ,'ales on npu tC P I
ANS: Input tax on GIP shall d cf-a rte.co as folloiiis:
1. i CIP is consi ered, os' Y1 161 ing x, agra purchase of service,
1,
I the value of Fb eterminedtls,e' he/progress billings;
‘
2. , Until such time e goli tructi Mak. Ae6.01, pleted, it will not qualify as
1 capital goods as liereirLdefin d'Aili :Whjeti case, input tax credit on such
1 , transaction can be recogniie'dIffltiellinth the payment was made; and
3.1 Provided, that an official receipt of payment has been issued on the progress
I billings.
Note: Once the input tax has already been claimed while the construction is still in
progress no additional input tax can be claimed upon Cdttipletioh—Of the asset when it
has been reclassified as a depreciable capital asset and depreciated (R.R. No. 13-18,
Sec. 2)'.
Q: How is Input tax on mixed transactions allocated?
ANS: A VAT-registered person who is also engaged in transactions not subject to VAT
shall be allowed to recognize inptit tax credit on transactions subject to VAT as follows:
1.: , All input taxes that can be directly attributed to transactions subject to VAT
, may be recognized for input tax credit;
' Note: Input taxes that can be directly attributable to VAT taxable sales of
goods and services to the Government or any of its political subdivisions,
instrumentalities or agencies, including GOCC's, shall not be credited against
output taxes arising from sales to non-government or private entities. Claims
for VAT refund/tax credit certificate with the BIR, BOI and DOF Center should

920
 be deducted from the allowable input tax that are attributable to zero-rated
sales.
2. The input tax attributable to VAT-exempt sales shall not be allowed as credit
against the output tax, but should be treated as part of cost of asset or
operating expense; and
3. If any input tax cannot be directly attributed to either a vatable or VAT-exempt
transaction, the input tax shall be pro-rated to the vatable and VAT-exempt
transactions and only the ratable portion pertaining to transactions subject to
VAT may be recognized for input tax credit. The allocation of input taxes shall
be done proportionately to each category of transaction (R.R. No. 16-05, Sec.
4.110-4).

Q: How is input tax creditable determined?

ANS: The amount of input taxes creditable during a month or quarter shall be
determined by:
1. Adding all creditable input taxes; rising from the transactions during the month
or qOarter plus any amount OnOtit tax carried over from the preceding month
or quarter; - .:.
,.'h,t,,,t,
..t.;:;f -t/fet •

4
2. RedUced by the amountgiopi:4or VAT refund or tax credit certificate and
other adjustments, sudii'ls ,jrip Chase returns or allowances, input tax
attributable or allocated iip iOgirfig ales,,s,, nd inpuqpx attributable to sales to
goVernment subject to final ItiShiedi, g(g.TRA 16-2005, Sea 4.110-5).
•
, 440
Q: How is VAT payabjeldetermineci
ANS: Therashall be 48'weil as a decictti n from the outp • tax\the amount of input tax
deductible to arrive atWAVRayeble on t monthly VAT . edlarAtion and the quarterly
VAT returns: , ,00 4A6s,
1. If, akile end of taxablg'qua er, the outptitax exceeds the input tax, the
exceT041140bid byte VAT isteredterson•
2. If thqinput ta2equsivftinp, ax carne revious quarter,
exceeds the eft tax; Ve e ss input tax the carried over to the
succeeding dile ;Or qua0ers AR No. 16-05, Sec. 4.110-7).
Note: The 70°A, calVon creditable input tai sfia eady been removed (R.A. No. 9361
4 ao r',01 ,4
- ,...„
amended NIRC, Sec. 110,1ag,
NIRC, Ay' Iggorietizr:
4. ,
Q: What are the subs tiatiou vequirements of input tax credits?
ANS: The following are eutl-stantiation requirements of input tax credits:
1. Input taxes on dc5irfe" is purchases of goods or properties — VAT invoice;
2. Input tax on purchase of real property under cash/deferred payment basis —
public Instrument (i.e., deed of absolute sale, deed of conditional sale,
contract/agreement to sell, etc.) together with the VAT invoice for the entire
•selling price and Non-VAT official receipt (OR) for the initial and succeeding
payments;
3. Input tax on purchase of real property under installment basis — public
Instrument and VAT official receipt for every payment;
4. Input tax on domestic purchases of services — VAT official receipt;
5. Input tax on importation of goods — import entry or other equivalent document
showing actual payment of VAT on the imported goods;
6. Transitional input tax — inventory of goods as shown in a detailed list to be
submitted to the BIR;
7. Input tax on "deemed sale" transactions — required invoices;
8. Input tax from payments made to non-residents (such as for services, rentals,
or, royalties) — 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; and

921
 7Te

'DAN
9. Advance VAT on sugar — payment order showing payment of the advance
VAT (R.R. No. 16-2005, Sec. 4.110-8).
Note: Before a VAT-registered person can claim input taxes, the input tax should be
supported by an Invoice or Official Receipt showing the information as required under
Sections 113(A) and 237 of the Tax Code.

Q: What is the information that must be contained in the VAT Invoice or VAT
Official Receipt?
ANS: The following information shall be indicated in the VAT invoice or VAT OR:
1. Statement that the seller is a VAT-registered person followed by his TIN;
2. The total amount paid by the purchaser with the indication that such amount
includes VAT; provided that:
a. Amount of tax must be shown separately on the receipt.
b. If the sale is exempt, the term VAT-exempt sale must be written or
printed prominently on the invoice or receipt.
c. If the sale is subject to.,12/orthe,,tv "zero-rated" sale must be written or
printed pro* ea? on tpe InvqiceArrek ? ipt.
d. If the saleornvoOks ,r
ppperties .or.:§ervices some of which are
subject4gAT and:§,ome.areextmpt zero;, the "breakdown" of
the sale pricel'''between the Iaxere,/eicenpt, and zero-rated
compo'rfe 'tsdrnust-be-ghWrTtin'the..lnrice'cir relt;
A
'Date of) cti n, quantity',-,p,hit•Fost antic desErjr4lop f goods; and
In casecof s ei in e amckint4P1-ri000 orlmore and th‘ sale is made to a
VAT-r ister per on, the na1:66;, businesst style, addrU.,,s and TIN of the
pure R. No SecrqFr(S)):1
Q: What ar t e4 nvoici and-f-,recOychg re• iremerttsfs3 lri deemed sales
transactions? ‘ C;
...e, • 5 )
ANS: The invo dna e ng reqiiiip 1 9nAs.i or ee d saLtranjsictions are:
1. Trans 'rli s or bTptio cropriA c~odrse 4bf busipess of goods or
prope es on I ally\
\ tat_QA-i d- for sal. s in e couTe of business — a
memo nflum e try i Itiktidi s jou al to record withdrawal of
goods foNersona se s k*V
2 Distribution\2r trans e o ir bffdbr vetlorrs share in the profits of
the VAT-re sre'icloej- o creAtols,,1-94ayment of debt; and
consignment of ctua sateAs, o m.Xiiewithin 60 days following the
date such goods were.otnsign pie b shall be prepared at the time of
the occurrence of the triratfito , ich should include all the information
prescribed above (Invoicing requirements in general). The data appearing in
the invoice shall be duly recorded in the subsidiary sales journal. The total
amount of "deemed sale" shall be included in the return to be filed for the
month or quarter; -
3. Retirement from or cessation of business with respect to inventories on hand —
an inventory shall be prepared and submitted to the RDO Who has-jurisdiction
over the taxpayer's principal place of business not later than 30 days after
retirement or cessation form business. An invoice shall also 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, but it must show the total amount. It is sufficient to just make a
reference to the inventory, regarding the description of the goods. However,
the sales invoice number should be indicated in the inventory filed andta copy
thereof shall form part of this invoice:
a. 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;

922
 •-• • •• • •
VOL 1.
2019

If the business is to be liquidated and the goods in the inventory are

sold or disposed of to VAT-registered buyers, an invoice or instrument
of sale or transfer shall be prepared, citing the invoice number wherein
the tax was imposed on the deemed sale. At the same time, the tax
paid corresponding to the goods sold should be separately indicated in
the instrument of sale (R.R. No. 16-05, Sec. 4.113-2).

Q: What are the consequences of issuing erroneous VAT Invoice or VAT OR?
ANS: If a person who is not VAT-registered issues an invoice or receipt showing his
TIN, followed by the word "VAT", the erroneous issuance shall result to the following:
1. The issuer shall, in addition to any liability to other percentage tax, be liable to:
a. The 12% VAT without the benefit of any input tax credit; and
b. , A 50% surcharge;
2. The VAT shall be recognized as an input tax credit to the purchaser, if the
requisite information is shown on the receipt or invoice;

If a VAT-registered person issues a'VAT invoice or VAT OR for a VAT-exempt

transaction, but fails to display promihe' 1kkY.on
. the invoice or receipt the term "VAT-
exempt sale" the issuer shall be liable to .account for the 12% VAT as if the transaction
is not an exempt transaction. The be entitled to claim an input tax credit
on his purchase if the requisite infornidOt *rpm, on theipceipt or invoice (RR No.
, ; . fy gV:17.414r,4..
1605, Sea 4.1134). me f,04-,41
Note: Failure or refusatted,. ply with' the
- ra requiremen Kai e amount of tax shall be
shown as a separate item in the invoipp:,.orreceipt, shall, up cqnviction, for each act or
omission, be piinishedj`by a fine of not s than P1, 000 but not more than P50, 000
and suffer imprisonmeill o6sot.i:les Than years but not,friore than 4 years (RR No.
, 1,005''' f$1":1i r.,
k
18-2011).
00-- q .,,., .,

Q: Are the mympirmrequirements unde0

i
,4
lle Tax Code-mn4q,t3Ey
ANS: Yes. strict compt@ce it.h su s antiationN Cairketrig requirements is
necessary. consideAr!glSfs nature and ,, T system's- a Errkdit method, where tax
payments are ba6dtbrt oatput and inp . taxes and where the- seller's output tax
becomes the buyel; input (a) that is 444ablees tax credit or refund in the same
transaction. It ensurett0„eforoper colLealbittaxes at all stages of distribution,
facilitates computationIttax croitolii-aegvISCGRe audit trail or evidence for
BIR monitoring purpote's_(741 Energy Corporation v. Commissioner of Internal
Revenue, G.R. No. 197‘660,4ch 14, 2018).
Note: If the claim for refundktax credit certificate) is based on the existence of zero-
rated sales by' the taxpayer but it fails to comply with the invoicing requirements in the
issuance of sales invoices (e.g. failure to indicate the TIN), its claim for tax credit/refund
of VAT on its -purchases shall be denied considering that the invoice it is issuing to its
customers does not depict its being a VAT-registered taxpayer whose sales are
classified as zero-rated sales. Nonetheless, this treatment is without prejudice to the
right of the taxpayer to charge the input taxes to the appropriate expense account or .."41111
asset account subject to depreciation, whichever is applicable. Moreover, the case shall
be referred by the processing office to the concerned BIR office for verification of other
tax liabilities of the taxpayer (R.M.C. No. 42-03, A13).
Ir,
Refund or Tax Credit
I
Q: Who may claim for refund or apply for the issuance of tax credit certificate
(TCC)?
ANS: A VAT-registered person whose sales of goods, properties or services are zero-
rated or effectively zero-rated may apply for the issuance of a TCC or refund of input tax
attributable to such sales (R.R. No. 16-05, Sec. 4.112-1).

1: 923
 Q: May a taxpayer who has pending claims for input VAT credit or refund, set off
said claims against his other tax liabilities? Explain your answer (2001 Bar
Question).
ANS: No. Set-off is available only if both obligations are liquidated and demandable.
Liquidated debts are those where the exact amounts have already been determined. In
the instant case, a claim of the taxpayer for VAT refund is still pending and the amount
has still to be determined. A fortiori, the liquidated obligation of the taxpayer to the
government cannot, therefore, be set-off against the unliquidated claim which the
taxpayer conceived to exist in his favor (Philex Mining Corp. v. Commissioner of Internal
Revenue, G.R. No. 125704, August 29, 1998).

Q: When should the application for the issuance of TCC or refund made?
ANS: The written application for the issuance of a TCC or refund must be filed with the
BIR within two (2) years after the close of the taxable quarter when the sales were made
(R.R. No. 16-05, Sec. 4.112-1).
Note: A VAT-registered person whos,e„registratio..khas been cancelled due to retirement
from or cessation of businesgoot16 e to cliari9e ni,telt.cessation of status under Sec.
106 (C) of the Tax Code _y, Oin tdoS) ye s litr e date of cancellation, apply
for the issuance of tax "t Ikate.for.an.x. nitsecf.ppattax which he may use in
payment of his otherte cyegirie taxes: Prow ecl„.fioweleNhat he shall be entitled
to a refund
, if he has fes 14eVairrplar-liablities4:gainst‘which the tax credit
certificate may befplijizg ided futtlf#,,' thgt-the deteV Ilation being referred
hereto is the da 6 ofits' of tax.dearaceOy the ItR, 1 qrr full ettlement of all tax
liabilities relativ to ce f businessf9- hange of tatus t e c o ncerned taxpayer
(R.R. No. 13-1 ,.-6-0:23.
x...i1
4 1
-1:-.4. • ii.-1/:itV'' i
Q: Where sho 1_d .thei claim for reffin Tp\cinade
I
ANS: It must d'fire4 twit tppropri e-BIWOffice- payersi Service (LTS) or
RDO having jutVictipp o e,pnncippl the,ta
, payer. Claims for
input tax refun efidfract e kts shall ith thIVAT Credit Audit
Division (VCADy.R. Ng 13 ps g2).
Note: The filing tthe claim with ,69 "ba the filin of the same claim
with another office .R. No. .,(Sec

Q: What is the perk) 'thi ,hic fund=o ade?

ANS: The Commissioner h I .§1.6,t a TOchr ditable input taxes within 90
days (previously 120 days) the claret ssion of the official receipts or
invoices and other documents in supporrt3f'tttapplication filed (R.R. No. 13-18).
Note: That all claims for refund/tax credit certificate filed prior to January 1, 2018 will be
governed by the one hundred twenty (120)-day processing period (R.R. No. 13-18, Sec.
2).

Q: What is the recourse of the taxpayer in case of denial of refund by the BIR?
ANS: In' case of full or partial denial of the claim for tax refund, the taxpayer affected
may, within thirty (30) days from the receipt of the decision denying the claim, appeal
the decision with-the Court of Tax Appeals (NIRC, Sec.112 (C)).

Q: What is the effect of BIR's failure to act upon the claim for refund within 90
days?
ANS: Failure
.1! on the part of any official, agent, or employee of the BIR to act on the
applicabon within the ninety (90)- day period shall be punishable under Section 269 of
the Tax Code, as amended (NIRC, Sec. 112 (c)).
Note: Punished by a fine of not less than Fifty thousand pesos (P50, 000) but not more
than One, hundred thousand pesos (P100, 000) and suffer imprisonment of not less than
ten (10) years but not more than fifteen (15) years and shall likewise suffer an additional

924
penalty of perpetual disqualification to hold public office, to vote, and to participate in
any public election (NIRC, Sec. 269).

Q: What is the manner of giving refund?

ANS: Refunds shall be made upon warrants drawn by the Commissioner or by his duly
authorized representative without the necessity of being countersigned by the Chairman
of the Commission of Audit (R.R. No. 16-05, Sec. 4.112-1).

Q: What is required from a VAT-registered person to issue?

ANS: A VAT-registered person shall issue:
1. VAT Invoice — for every sale, barter or exchange of goods or properties; and
2. VAT Official Receipt (OR) — for every lease of goods or properties and for
every sale, barter or exchange of services.
Note: Only VAT-registered persons are required to print their Tax Identification Number
(TIN) followed by the word "VAT" in their invoice or OR, which shall be considered the
"VAT invoice" or "VAT OR". All purchas_emot covered by invoices/receipts other than
the VAT invoiceNAT OR shall not giveliSpo any input tax (R.R. No. 16-05, Sec. 4.113-
1(A)).

San Roque Doctrine

01%.
Q: What is the periOd to file a tuclic!pIRII inicasei pfAcnon of BIR to refund?
ANS: In case of full or paggIvElenil iitttke clairriaM(gaddnd, the taxpayer affected
may, within :thirty (30) oalrefrom the receipt of the decisionAnying the claim, appeal
the decision with the Court of Tax Appea NIRC, Section 1,12 G)).
Note: I • '"
1. Prior to the •TRAIN law, Secti h 112(C) states tha "incase of full or partial
denilptaf tax refUrfer or (laxdit, or the faildre on the party of the
COmmissionetotact on the app tion within e period prescribed above, the
taxpayer may tHilik30) froml '767-6710We'pecision denying
the crap or aftentthe extfira ion Ofahe one hun a4Wigeday period, appeal
the decgiodontlinnacteAlainfirvith the Court of Tax Appeals."
2. However,ti el-RATIO omissio f CIR's inaction does not bar the filing of a
judicial claimATheATA Charter ovie rn at CTA shall exercise an exclusive
appellate juri talon to jegely42R - N -Alactiqn by the Commissioner of
Internal-Reve,k, e in cases involving disputed assessments, refunds of internal
revenue taxes? fees ,1 .15ther charges, penalties-in relations thereto, or other
matters arising itacto the National Internal Revenue Code or other laws
adrpinistered by the Bureau of Internal Revenue, where the National Internal
Revenue Code provides a specific period of action, in which case the inaction
shall be deemed a denial (R.A. No. 9282, Sec. 7(a) (2)).
3. The Commissioner's inaction on the claim during the 120-day period is
"deemed a denial," pursuant to Section 7(a)(2)[63] of Republic Act No. 1125,
as amended by Section 7 of Republic Act No. 9282. Team Energy had 30
days from the expiration of the 120-day period to file its judicial claim with the
Court of Tax Appeals. Its failure to do so rendered the Commissioner's
"deemed a denial" decision as final and unappealable (Team Energy
CorpPration v. Commissioner of Internal Revenue, G.R. No. 197663 & G.R.
No 197770, March 14, 2018).

925
Q: What is the effect for failure to comply with the period of filing the judicial
claim?
ANS: It bars the taxpayer's claim for tax refund or credit.
Note:
1. It is indisputable that compliance with the 120-day [now 90 days] waiting
period is mandatory and jurisdictional;
2. Failure to comply with the 120-day waiting period violates a mandatory
provision of law. It violates the doctrine of exhaustion of administrative
remedies and renders the petition premature and thus without a cause of
action, with the effect that the CTA does not acquire jurisdiction over the
11 taxpayer's petition;
3.: Strict compliance with the mandatory and jurisdictional conditions prescribed
by law to claim such tax refund or credit is essential and necessary for such
claim to prosper. Well-settled is the rule that tax refunds or credits, just like tax
exemptions, are strictly construed against the taxpayer. The burden is on the
taxpayer to show that he has,strictly,gozplied
_,,_ with the conditions for the grant
of the tax refund or c dilr
Non-compliance ith r andakoj per dsas on-observance of prescriptive
periods, and -a hirente.to-exhaustion o Vstrative remedies bar a
taxpayersbe p-tix4grund or credit issiokkof Internal Revenue v.
San Roqq5 0 ratiorf,7R7Wa.-1,8748k bru*N12, 2013).

Enhanced VATIefu n7 P 41t

Q: Wha,t is th Enh T-RefundVsfem? cr)
ANS: VAT re t gr,,ags-arOleamrefunils of cta.ditd6le input tax within
ninety (90) da he filing of thg-000 appl" tion Wit t ureau (R.R. No.
13-18,, Sec.2). • „m-,It.IFT2V

Q: What is tikeCcffe stalift entation of the

Enhanced VATI efun Sys e4-(c't
ANS: The followi sale ubj s al
Zero Ra ed Sale f Goods e Lqs.
" a. Thkpale °SR b mate als to a non-resident
buye , or 14e 1 cAex dented enterprise to be
used in an durin plopept,_\ ae mg or repacking in the
Philippines ef. said t.tf4.0 6srfaid for in acceptable foreign
currency, and a coup eciaor-,oin .accordance_ with the rules and
regulations of the BSP;
b. The sale of Raw materials or packaging materials to an export-oriented
enterprise whose export sales exceed seventy percent (70%) of total
annual production; and
c. Transactions considered export sales under E.O. No. 226, otherwise
known as the Omnibus Investments Code of 1987, and other special
laws.
Zero-Rated Sale of Service:
a. Processing, manufacturing or repacking of goods for other persons
doing business outside the Philippines, which goods are subsequently
exported and paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the BSP; and
b. Services performed by Subcontractors and/or contractors in
processing, converting, or manufacturing goods for an enterprise
whose export sales exceed 70% of the total annual production (R.R.
No. 13-18, Sec. 2).

926
Note: In addition to the establishment of Enhance VAT Refund System, to subject to
12% VAT, all pending VAT refund claims as of December 31, 2017 shall be fully paid in
cash by December 31, 2019 (R.R. No. 13-18, Sec. 2).

Filing of Returns and Payment

Q: Who are required to file a VAT return?
ANS: Every person liable to pay VAT shall be required to file a return (NIRC, Sec. 114).
I
Q: What are the rules regarding the time for filing a return?
ANS: The rules are as follows:
1. Even) person liable to pay VAT shall file a:
a Monthly VAT declaration not later than the 20th day following the end of
each month;
Quarterly VAT return of the amount of his quarterly gross sales or
receipts within twenty-five (25) days following the close of the taxable
quarter;
2. A VAT-registered person!) TK•II ay the VAT on a monthly basis. Amounts
reflected in the monthly( ttl n for the first 2 months of the quarter shall
still be included in the?' g AT return which reflects the cumulative
figures for the taxable gua , er a vents in the monthly returns shall be
credited in the quarterigetill t
GA payable or excess input
tax as of the end of rie'quarte
3. Taxable quagtiihall mean he uarter that is synctir nized to the income tax
quarter of thVtax ayer (LWc ea ender or fiscal y ar (R.R. No. 16-05, Sec.
4.114-1)•
Note: That beginni g , 2023, tV2, filing and pa meRt reguired under the Tax
Code shall be diihe within faity-fiye (2.5j days folio g t e crose of each taxable
quarter (R.R. /1.181i7,2).

Q: Discuss
Discuss the rule on wit holdiii• of fi 1 VAT on slesaa.,_ ernment.
ANS: The GoVemom1 gy,of itsjpolif e:- subdivisions, instrumentalities or agencies,
including GOCCs, sha l befo% making p- ent on account of each purchase of goods
and/or services taxed a 12° 'deduct an nal VAT due at the rate of 5% of
the gross payitient ther4go.f R.R. No 164 , - 7V ,
Note:
1. The 5% final 1irtthhol ing VAT rate shall represent the net VAT payable to the
seller. The rem in4g % effectively accounts for the standard input VAT for
I of goods or services to government or any of its political subdivisions,
sale's
instrumentalities or agencies including GOCCs, in lieu of the actual input VAT
dire9tly attributable or ratably apportioned to such sales. If actual input VAT
attributable to sale to government exceeds 7% of gross payments, the excess
may form part of the seller's expense or cost. On the other hand, if actual input
VAT :attributable to sale to government is less than 7% of gross payments, the
difference must be closed (deducted) to expense or cost (R.R. No. 16-05, Sec.

2. That beginning January 1, 2021, the VAT withholding system under this
subsection shall shift from final to a creditable system: Provided, That the
payment for lease or use of properties or property rights to nonresident owners
shall be subject to twelve percent (12%) withholding tax at the time of payment
(R.R.1No. 13-18, Sec. 2).

927
 2019

Summary of Changes in Value Added Tax under the TRAIN Law

Topic NIRC TRAIN
Value Added Tax
Gross sales or receipts for Gross sales or receipts for the
• the past twelve (12) months, past twelve (12) months, other
1. VAT other than those that are than those that are exempt, have
Threshold exempt, have exceeded exceeded P3,000,000 (R.A. No.
P1,919,500 (NIRC, Sec. 236 10963, Sec. 72).
(G)( 1))•

Anyperson who is not Retained with additional

required to register for VAT provision:
may elect to register for VAT
2. Option to (NIRC, Sec. 2.0„,(17)1-,,.......„, Provided, That any person taxed
.-7''' 1,1 4. '-urider Section 24(A)(2)(b) and
register mss'N.,, t ) piol 4 A)(2)(c)(2)(a) of the NIRC
under VAT -) .1...„
-'-:
.,„..„„,„,.:-.- -__ whpeftle,cted to pay the eight
system " 4. per erp(1804) tax on gross sales
. 0,
.-----17------, oTtTecelpt'S
.,.._ -,‘, ., •,,shall not be allowed
•/ ,
• ,<Ly ,, ,‘,. ..,,
- is avail. ors option (R.A. No.
• if . --, 10963 ec. 7b.
. -... - " 1 t
1 L u
?Sale of olTto -13 S 47) , 1-<G,• -R1 qmove Si zero-rated
--4c. 106 )(2)(F)(4))11,11
o
,-7'; ' tansactio Firip transferred to
at,„ -::i ' Vkr-exe pt.irp sactions under
; .:pai
..:..-`-`2-̀? Serp,;- ,0i109 Z) of the NIRC, as
.. ' . • ---- .,:) Arnei hded (R. (No. 10963, Sec.

Sale ,‘'\-,,I
goad J4:14r0".0'r .4"
,<" etved ith additional
3. Zero-rated quipm t i e;. ) pr fusion:
ar,r ue f•--
sale of goods ‘sonsy,.., d IN )- n ,,,' ,,,,,I,
and • irate afidall 1"PPing'ircf>i civli,90 That the goods,
properties intern ti Al/ air t ft .0 res, equipment and fuel
operations . IR ,„ ' .o.s all be used for international
d-
106(A)(2)(a)(6)). -- ..-.•--- shipping or air transport
operations (R.A. No. 10963,
Sec. 31).
• .
Foreign Currency Repealed (R.A. No. 10963, Sec.
Denominated Sales (NIRC, 31).
Sec. 106(A)(2)(b)).

- (2) Sale and delivery of goods to:

(i) Registered enterprises within
4. Additional a separate customs territory
zero-rated as provided under special
sale of laws; and .
goods and (ii)Registered enterprises within
properties- Tourism Enterprise Zones as
declared by the TIEZA (R.A.
No. 10963, Sec.31).
-• •

928
 A system that grants refunds of
creditable input tax within ninety
(90) days from the filing of the
VAT refund application with the
Bureau and all pending VAT
refund claims as of December
31, 2017 are fully paid in cash
bay December 31, 2019 (R.A.
No. 10963, Sec.31).
Effect of Successful
Establishment of Enhanced VAT
Refund System: The following
zero-rated sales will be subject
to VAT:
Goods or Properties:
1. The sale of Raw materials or
packaging materials to a non-
resident buyer for delivery to
a Isident local export-
*. ed enterprise to be used
in manufacturing, processing,
pacV or repacking in the
inRs of the said buyer's
gOd p id for in acceptable
5. Enhanced foreig currency, and
VAT Refund iccou ted or in accordance
System bit %DA nd regulations
.4:Titr%
2. Tfie e of Raw materials or
packaging materials to an
export -oriented enterprise
whose export sales exceed
-sev nty percent (70%) of total
annual production; and
3. Transactions considered
export sales under E.O. No.
226, otherwise known as the
Omnibus Investments Code
of 1987, and other special
laws (NIRC, Sec.
106(A)(2)(a)).
Service:
1. Processing, manufacturing or
repacking of goods for other
persons doing business
outside the Philippines, which
goods are subsequently
exported and paid for in
acceptable foreign currency
and accounted for in
accordance with the rules and
regulations of the BSP; and

929
 , ,c,:,..„:.,„„..::„.,,,,ny.,,,„7.3.,,,,,,„,,,,......,.....„,
fo:11.7L ,...A
•

2. Services performed by
Subcontractors and/or
contractors in processing,
converting, or manufacturing
goods for an enterprise
whose export sales exceed
70% of the total annual
production (NIRC, Sec.
108(B)).

Sale or exchange of Sale or exchange of services

services includes "sales of includes "sales of electricity by
6. Definition electricity by generation generation companies,
of sale or companies, transmission, transmission by any entity,
exchange of and distributiw companies":, and distribution companies,
service (NIRC, Sfic:1 08(A)). T X r 'Iiitluding electric cooperatives"
• f f , --,
oc,
e, N
-4,, ;At, i•
b, --/ -, $4, (R.A.'No. 10963, Sec. 33).
-,%,,, ,c) ‘;
tiSe'rtlic)7 rehlrere- drliff"---..Retaified with additional
, Z6' ors rengggere -.in Plevrdion!
,:
international shipping "or
7. Zero-rated 1
intematiotilal air ,:transport Provid)i(Tgat‘these 'services -
sales of
services
operations, i F-4-...<
cludinglilleases
- I. • -,- /,-,'-Sil
i all Iire,,,....4q•xclusive for
-II propeky or-1•upedtpereof-- iniernatio al lipping or air
AIIRCc. 108. OD 751.7 " - - '''' tr !wort 'pergtibns (R.A. No.
\''';)', ‘
. - k \4,-
'\, " 'J'"(N5eivices rendered to:
' s
''(iii) Registered enterprises
ts )with) a 'separate customs
8. Additional ',SClE1\11 . \. r"'01drnto .4,
---...._,_---- „as provided under
zero-rated
/ ..000% ke, es; and
cip aw
sale of goods
Registered enterprises
and services
I I\AP\.) .-..wit in Tourism Enterprise Zones
as declared by the TIEZA (R.A.
No. 10963, Sec.33). -

Lease of a residential unit Lease of a residential unit with a

with a monthly rental not monthly rental not exceeding
exceeding P12,800 (R.R. P15,000 (R.A. No. 10963,
No. 16-2011). Sec.34).

9. VAT Importation of fuel, goods Retained with additional

Exempt and supplies by persons provision:
Transactions: engaged in international
shipping or air transport Provided, That the fuel, goods,
operations (NIRC, and supplies shall be used for
• Sec.109(U)). international shipping or . air
transport operations (R.A. No.
10963, .Sec.34).

930
 VOLT.
2019
Il
Sale of real properties not Sale of real properties not
primarily held for sale to primarily held for sale to
customers or held for lease customers or held for lease in
in the ordinary course of the ordinary course of trade or
trade or business, or real business, or real property utilized
property utilized for low-cost for low-cost and socialized
and socialized housing housing residential lot valued at
residential lot valued at P1,500,000 and below, and
P1,919,500 and below, and house and lot, and other
house and lot, and other residential dwellings valued at
residential dwellings P2,500,000 and below.
valued at P3,199,200 and
below (NIRC, Sec. 109(P) Provided, That beginning
and R.R. No. 16-2011). January 1, 2021, the VAT
exemption shall only apply to
sale of real properties not
primarily held for sale to
customers or held for lease in
the ordinary course of trade or
business, sale of real property
Potilizeaaor socialized housing
to la ouse and lot, and
other r s dential dwellings with
d
selling ice of not more than
P2,000,090- Provided, further,
That ev qry years thereafter,
the nt erein stated shall
be sadjus • its present value
0,, r Price Index,
a Kt_ 'ay the Philippine
Statistics Authority (PSA) (R.A.
No. 10963, Sec. 34).
..V
Imgartation 9 tarp mpo ation of professional
JmentsaticrAplemen s,
inaffi ins ruments and implements,
widfirig qpIrel, domestic tools of trade, occupation or
anim ' and personal
*aM, employment, wearing apparel,
househZId effects belonging domestic animals, and personal
to persons coming to settle and household effects belonging
in the Philippines, for their to persons coming to settle in the
own use and not for sale Philippines or Filipinos or their
within ninety (90) days families and descendants who
before or after their arrival, are now residents or citizens of
upon the production of other countries, for their own use
'evidence satisfactory to the and not for barter or sale,
Commissioner (NIRC, Sec. accompanying such persons, or
109(D)). arriving within a reasonable
time (R.A. No. 10963, Sec. 34).

Additional VAT-exempt
transactions:
(w) Sale or lease of goods and
services to senior citizens
and •ersons with disabili ;

931
 (x) Transfer of property pursuant
to Section 40(C)(2) of the
NIRC, as amended (Tax-free
exchange);
(y) Association dues,
membership fees, and other
assessments and charges
collected by homeowners'
associations and
condominium corporations;
(z) Sale of gold to the BSP;
(aa) Sale of drugs and
medicines prescribed for
diabetes, high cholesterol,
and hypertension beginning
*,•, January 1, 2019; and
Xb11)\,,, Sale or lease of goods
of c7.4. ,
v
f orproperties or the
1 e o( ance of services
o r'th n the transactions
en oh in the preceding
1: irks dih pa _tg, aph the gross
anntgcs61 and/or receipts
do n t the amount of
• P3,01 ,TWO' A. No. 10963,
Sec. 4)

• ri 'at p tax glon rtiza nput VAT shall

pur has <p
a be until December
with exceed npx , 2021.
10. P1,00 000 II-
• Amortization ate, taxpayers with
mortize
of input VAT
• from
tFhefulA input VAT on capital
whIb2v.e qsh7err/C/ , purchased or imported
purchase of
Sec.110( (g).fb))• Kt l- be allowed to apply the
capital goods ame as scheduled until fully
utilized (R.A. No. 10963, Sec.
35).

Within 120 days from the Within 90 days from the date of
11.Period of date of submission of submission of the official receipts
VAT complete documents in or invoices and other documents
Refund/Tax support of the application in support of the application filed
Credit filed (NIRC, Sec. 112(C)). (R.A. No. 10963, Sec. 36).

That failure on the part of any

12.Criminal official, agent, or employee • of
Liability of the BIR to act on the application
BIR's failure within the 90-day period shall be
to act upon punishable under Section 269 of
VAT Refund this Code. (R.A. No. 10963, Sec.
36).

932
 -;:':;'_•`;.cs'''',..:1-A;f•• *:. ',.. : r•:''''.. ftt%'1:4,!,.;,-:
,::;• P.,.r.i .:'.'4.'
`BED
k,:w:.,,tr:,
- '—',.:•:14:-,,,-;-• ':ic!,14,
:;: r. 1 •

VAT taxpayers shall file a Retained with additional

quarterly return of the provision:
amount of his gross sales or
receipts within 25 days That beginning January 1, 2023,
13. VAT
following the close of each the filing and payment required
Filing and ' under this Subsection shall be
taxable quarter prescribed
payment for each taxpayer and shall done within 25 days following the
pay the value-added tax on close of each taxable quarter
a monthly basis (NIRC, Sec. (R.A. No. 10963, Sec. 37).
114(A)).

The Government shall Retained with additional

deduct and withhold a final provision:
value-added tax at the rate
14. of five percent (5y2) pf the That beginning January 1, 2021,
Withholding gross payment, (NIRC, Sec. the VAT withholding system
of VAT 114(C)). under this Subsection shall shift
from final to a creditable
system (R.A. No. 10963, Sec.

aftlyznatiP
11
E OTHER TAXES
I ..
Other Percentage Tcoec ..,,, P
li ,AfriP
Q: Define OtherigercentageliTaxes (OPT
ANS: It refetjvlecificallyA the busiNess xes. covered/ y Ti le V f the NIRC of 1997,
-4,1 ..-zn ii.
as amendedr ayable.,,bra „A, y
,, paug. n or en ity whose al services is not
covered by thin syst-04(2 CAS S O
, IRC, stir:4:149A
. •:,,,_,
'4.
Q: What are, the tra sictio A covegd b. 4OPT?
ANS: The following risactipis are subjegtiV9p4Tknfanunder the NIRC:
i
• 1. Sale of goods sAloes ol.peerf, -,-La e pt from VAT under Section
109 (1)(BB) eil the Tax , 5" ZIPaTia finFHO 4a-4VAT-registered person and
whdse gross 'tat alai or receipts do not exceed P3,000,000.00;
2: Other kinds of'6t subject to the other percentage taxes under Title V of
the NIRC of 199r'aramended, regardless of whether or not the gross annual
receipts exceed P3,000,000, such as:
a. Domestic carriers by land and keepers of garages (Sec. 117);
b. International carriers (Sec. 118);
4. Franchise grantees (Sec. 119);
Cl. Overseas dispatch, message or conversation originating from the
Philippines (Sec. 120);
e. Banks and non-bank financial intermediaries (Sec. 121);
f Other non-banking financial intermediaries (Sec. 122);
6. Life insurance companies (Sec. 123);
h. Agents of foreign insurance companies (Sec. 124);
Proprietors of amusement places (Sec. 125);
.1; Winnings (Sec. 126); and
I. Sale, barter or exchange of shares of stock listed and traded through
the local stock exchange or through initial public offerings (Sec. 127) (2
CASASOLA, NIRC, supra p. 936).

933
 VOL
2019

Q: What is the nature of OPT?

ANS: The nature of OPT is essentially a tax on the transaction and not on the articles
sold, 1:.rtered or exchanged. It is an indirect tax which can be passed on to the buyer
(Philippine Acetylene v. Commissioner of Internal Revenue, G.R. L-19707, August 17,
1967).
Q: Whet is the tax rate for transactions subject to OPT?
ANS: Any person whose sales or receipts are exempt under Section 109(V) of this
Code from the payment of value-added tax and who is not a VAT-registered person
shall pay a tax equivalent to three percent (3%) of his gross quarterly sales or receipts
(NIRC, 'Sec. 116).
Q: Who are exempt from payment of OPT?
ANS: dooperatives shall be exempt from the 3% gross receipts tax (NIRC, Sec. 116).
I;
Excise Tax
Q: Define excise tax I
ANS: is a tax levied an-a specificrti9le ragerphankone upon the performance,
carrying on, of the exerceotari,raBtiyity-xctS,Ogrefirs Ntaxes applicable to certain
specified or selected/ oods•-).,prticles manufactured of rod4c.xd in the Philippines for
domestic sale or q n rigption or nrottterdispo*Nrtto t tugs imported into the
Philippines, which/a3tssp ll b ad 'oriAi the,valLiataddecc,ta (VAT) (2 CASASOLA,
NIRC, supra at 04).
Note: In com tang e gr ss sellingAp)-iqe, the e cise tait ay be included in
determining th a subje titrIATISN-o71-6:05 Sec. 4./
i I
Q: What is th nature of excse- se tax?('
ANS: *ise tt fakielftducti are llected only from
manufacturers ap asica *ndirec Ir ctly levied upon
manufacturer o, rrn qr u rOq ovarof tiONsabr m i Brace of production
or from the cuss cu stody Ae tree actually passed on to the
end consumer apart of goods sold, bartered or
exchanged (Silkarrk4Pte. Lt Revenge, G.R. No. 184398,
February 25, 2010).N

Q: What''J ere the kinds o cI$ at

ANS: There are two kinds o xzsl taxe 4. '\ILv ode:
1. 1 Specific tax — refers to theaeX. x,
irbTaosed which is based on weight or
(volume capacity or any other physical unit of measurement; and
2. / 4c1 valorem tax — refers to the excise tax which is based on selling price or
'other specified value of the goods (NIRC, Sec. 129).
Summary of Changes in OPT under the TRAIN Law
Topic NIRC TRAIN -
Other Percentage Tax
Cooperatives are exempt Cooperatives shall be exempt
1. Exemption
from the 3% gross receipts from the 3% gross receipts tax
from OPT
tax (NIRC, Sec. 116). (R.A. No. 10963, Sec.. 38).

Subject to 1/2 of 1% OPT Subject to 6/10 of 1% OPT on

on the gross selling price or the gross selling price or the
2. Sale of the gross value in money of
Listed Shares gross value in money of the
the shares sold (NIRC, Sec. shares sold (R.A. No. 10963,
127(A)). Sec. 39).

934
 VOL 1.
2019

Documentary Stamp Tax

11
Q: Define documentary stamp tax (DST)
ANS: It is a Itax on documents, instruments, loan agreements, and papers evidencing
the acceptance, assignment, sale, or transfer of an obligation, right or property incident
thereto (2 CASASOLA, NIRC, supra at 1077).

Q: What is the nature of DST?

ANS: A DST is in the nature of an excise tax levied on the exercise by persons of
certain privilOes conferred by law for the creation, revision, or termination of specific
legal relationships through the execution of specific instruments such as leases of lands,
mortgages, pledges, and trust and conveyances of real property (Commissioner of
Internal Revenue v. Frist Express Pawnshop Co., Inc., G.R. Nos. 172045-46, June 16,
2009). Henc0, in imposing DST, the Court considers not only the document but also the
nature and character of the transaction (Philippine Banking Corp. v. Commissioner of
Internal Revenue, G.R. No. 170574, January 30, 2009).
11
Q: What documents are subject.046?
ANS: It 14 applicable on alltid.641 efts not otherwise expressly exempted,
notwithstanding the fact that they42100 stronic form (2 CASASOLA, NIRC, supra at
1077). 71 1
MN,
Q: When DST ir should be paid?
ANS: Documentary s tri ptaxes arOgyled independentlyeoj the legal status of the
transactions giving riregteto. They -rr @st be paid uporr fh issuance of the said
instruments, without tegardiA,/,whelher pe contracts viic ye rise to them are
rescissible, rid, ylfSdable,grzitAiqenforcea e (Jake Investments C rp. v. Commissioner
of Internal Reveffue, G.R. IVo.117,,629idu 8, 2010). if
il
,,
t,
Q: Who are 14, e forDST N f'1 pgii
ANS: The DST,,tis a.otS- 4.-64) certai ctions. It is'uttfiph, gainst "the person
making, signing, itr uin pa epting,br tr n ferring" the document or facility evidencing
the transaction. Thttfjn general, it may b m.osed on the transaction itself or upon the
document underlying such acy(R.R. 9-20
6 )
Q: What is the effect ffailuiZcystamp a taxable document?
ANS: An instrument, duffle or paper which is required by law to be stamped and
which has been signed, • sitIe ; accepted or transferred without being duly stamped,
shall not be'i.ecorded, nor shall it or any copy thereof or any record of transfer of the
same be adMitted or used in evidence in any court until the requisite stamp or stamps
are affixed th'ereto and cancelled(N/RC, Sec. 201).
f
No notary public or other office authorized to administer oaths shall add this jurat or
acknowledgMent to any document subject to documentary stamp tax unless the proper
documentary, stamps are affixed thereto and cancelled (NIRC, Sec. 201).

935
 AN VOL 1.
2019

Summary of Changes in DST under the TRAIN Law

Topic I - NIRC. TRAIN
Documentary Stamp Tax

All transactions subject to DST shall have 100%

increase in DST Rates
1. DST Except:
Rates 1.All debt instruments — 50% increase in DST rate; and
2. Deed of Sale and Conveyances of Real Property —
No increase in DST rate (R.A. No. 10963, Sec.69).

Not Subject to DST except the following donations made by

subject a Resident or Nonresident not a Citizen of the
to DST Philippines:,--,„ ..
2.
,teGovernment lk
Donations
2.gclucatkpil iricl/orich4titable, religious, cultural or
of Real
IsoW...welfareZcolpo(atjerilk, institution, accredited
Property
..priongovernment argarliiatiRn,Nrust or philanthropic
J. r,p rganiaflpirbr-Tese'a'rch(ipsi9tion or organization
(R.A4Vd1R1095.3, Sec6§NRJR• NN4-2018, Sec. 20).
it 0-,
ii-- ,.... :;•,..
,r yr 'i...
F TA X REMEDI011 DER T EIVIRnr
1 ZI4'..1 1 !ii :,
GeneralConce is
..f.' '!11. • -
, , „ .„7 -) ri
i &-
RequIsItesofaVal) Asse ent k ;1 1 ALJ&*
t \ ,,,N..\
Q: What is a tiNaggissnien P
--1.- I
4

ANS: It is an oAl action o mittratAftti 126%4 • determining the amount of tax

due from a taxpayer, or office Ito effe that jhe amotant therein stated is
due from a taxpr as a ,,,,x, 't abrila fifp, ymeprof the .tax or any deficiency
stated therein (ABAk Law of,IFIak v..xjarci up 44).7.12. It als/refers to the notice to
the effect that the amount tlpiitpte t- uerroxnq taxpaye as a tax with a demand
AO"
for payhient of the sa 6<w fi arate. rtodAotVe Commissioner of Internal
Revenue vs. Pascor Rea
1999).
Oelop V ukatic,i, G.R. No. 128315, June 29,

Q: What are the requisites for a valid tax assessment?

ANS: The requisites for a valid tax assessment are as follows:
1. The Final Assessment Notice (FAN) (BIR Form 17.08) contains the name,
address, and TIN of the taxpayer; the kind of tax, period covered, basic tax
and penalties; signed by the authorized BIR official, and the date of payment
of the tax. The demand letter (DL) contains the computation of the deficiency
tax, including penalties, if any, the factual and legal bases of the assessment,
and the demand for payment of the tax. Thus, the FAN and DL must always go
together (RR 18-2013, Sec. 3.1.3).
2. The FAN/ DL must be issued on account of or covered by a validly issued
letter of authority (RMC No. 75-2018);
3. The FAN/ DL must state the factual and legal bases of the assessment and
jurisprudence o which it is based; otherwise, the assessment is void (RR 18-
2013, Section 3.1.3);
4. The FAN/ DL must be signed by the Commissioner of his duly authorized
representative (RR 18-2013, Section 3.1.3);

936
 VOL 1.
2019

5. The FAN/ DL must be issued within the original prescriptive period as validly
agreed between the BIR and the taxpayer; and served by personal delivery or
by; registered mail (RR 18-2013, Section 3.1.6); and
6. The FAN/ DL must be addressed and served to correct person in his/ its
registered or duly notified address (RR18-2013 Section 3.1.6).

Q: What are the kinds of assessment?

ANS: Asseasments may be classified as follows:
1. Self-Assessment — The tax is assessed by the taxpayer himself, reflected in
the return filed by him, and paid,Qn the day of filing of the return (pay-as-you-
file system) (ABAN, Law of Basic Taxation, supra at 176);
2. Deficiency
,, Assessment — Made by the assessor himself whereby the correct
amount of the tax is determined after an examination or investigation
conducted.
i. This assessment is made for the following reasons:
a. The amount ascertained exceeds that which is shown as the tax by the
f! taxpayer in his return;
b. No amount of tax is sAkiik in the return; or
1[
c. The taxpayer did fl return at all (NIRC, Sec. 56 (b));
3. Illegal and Void Asse4en. ‘4 An assessment wherein the tax assessor
has no power to act at allTyrclOpAs Milling Co., Inc. v. Court of Tax Appeals,
G.R. . No. L-24213, Marcli,131464perrth
: ;, ,..1;,,,, ,. 4.,, AI
4. Erroneous
1 Assessment n‘,990 fibre' Wessor has the power to
assess but errs.,• ifre exercise ofsuch power B N Law of Basic Taxation,
supra at 176)( '
011
,.= - I' k
Q: What are.the Impomen principles governing - tax assessin
s' efts?
g
ANS: The principle, governinghtax assess nts are:
1. AesegKents a ef prima fad-ie, p med correg,t anc! mad'in good faith. The
taxpa ,•% uty ()Waving erwise Ils • resu •.,19Aplie in favor of tax
1, ...,..•er,hpl,the
assessments (in a rovirrdial obus Co., - Irebtor of Internal
Reventre4,20..,__ Ro,L-674,an 31, 1956);
2. Aaaessmcqtalioaknot b based on presumptions but on actual facts;
k
3. Assessment discjigtionary on f the Commissioner. Mandamus will
not lie to comeajAnd to assess ....,.,::01,..e.vestigation, he finds no ground to
assess (MERi.00 Sep, es-Co , ano, G.R. Nos. L-36181 & L-
36747,
li Octobar23, la9 , .
Exception: TriNcemissioner of Internal Revenue may be compelled to
r
assess by man a" if in the exercise of his discretion, there is evidence of
arbitrariness and grave abuse of discretion as to go beyond statutory authority
(Maceda v. Macaralg, Jr., G.R. No. 88291, June 8, 1993);
4. Ttie authority vested in the Commissioner to assess taxes may be delegated.
However, the power to make final assessments cannot be delegated based on
the principle of Delegatus Non Potest Delegari (City Lumber, Inc. v. Domingo,
G.R. No. L-18611, January 30, 1964); and
5. Msessments must be directed to the right party (Republic v. De la Rama, G.R.
NO. L-21108, November 29, 1966).
I
Q: What are the means employed by the Commissioner in the assessment of
taxes? •
ANS: The commissioner or his duly authorized representatives are authorized to use
the following powers to make assessments and prescribe additional requirements in .tax
administration:
1. Examination of returns and determination of the tax due (NIRC, Sec. 6 (a));
2. Assess the proper tax based on the best evidence obtainable (NIRC, Sec. 6
(b));

937
 3.i Conduct inventory-taking, surveillance and prescribe presumptive gross sales
and receipts (NIRC, Sec. 6 (c));
4. Issue jeopardy assessments and terminate the taxable period (NIRC, Sec. 6
(d));
5. Prescribe real property values (NIRC, Sec. 6 (e)));
6. Inquire into bank deposit accounts of:
a. a decedent to determine his gross estate;
b. any taxpayer who has filed an application for compromise of his tax
liability under Sec. 204(A)(2) by reason of financial inability to pay his
tax liability (NIRC, Sec. 6 (f)); and
c. A specific taxpayer or taxpayers subject of a request for the supply of
tax information from a foreign tax authority pursuant to an international
convention or agreement on tax matters to which the Philippines is a
signatory or a party of: provided, that the information obtained from the
banks and other financial institutions may be used by the Bureau of
Internal Revenue ,for.tax assessment, verification, audit and
enforcement.purines (R.A. NR. .10024 Sec. 3).
7. Accredit and regIsOr tagentb ORA eq.'61grk
8. , Prescribe addifio arlicoceXurar;or.dO ments (NIRC, Sec 6
(h)). ) 6-\
Tax Delinquency4Vel?susVa: Deficiency' 4 -,‘,7
Q: What is theOiffere ee between Ittaaefigency aid ata delAquency?
ANS: Tax Deficiency is thetamount-ISjahich-the-talc duely teed the sums of tax
shown 'n the tax a r's realm, *lies. priRountql5r ; evivsly absesSed or collected as
deficiency, les pa nts, crbdits 6411-100o p g(tyqc, Sec. 56 (b)).
On the other tart,i Tax Delipquenc ste-ferSlo e state-oaf a perso9 upon whom the
persona obligbtiorita pAr et-tax-ha? en-fixel•fWjawf I assessment and who
thereafter fails V9(13 t 'I in the e.litrAecriefg::101v /theft], G.R. L-
A • .4--
12362, August 1917

Q: Whatls a jeop rdy assessm no _bon- itsstled?

ANS: A jeopardy a Vssmen14.1,vanV4sWeliNA -Co Cnr *ssione(if he believes that the
collection of taxes is Irk jeopi rddue4o.j.2yprodf sestflt may be issued when
the taxpayer is:
I A' .
1. :Retiring from busiu.s subject t2,4a;
a„ts,,
2. Intending to:
a. Leave the Philippines;
b. Remove his property therefrom; or
c. Hide or conceal his property;
3. Performing any act tending to obstruct the proceedings for the collection of the
tax for the past or current quarter or year or to render the same ineffective
(NIRC, Sec. 6 (d)).
Note: The same grounds are applicable in the exercise of the Commissioner's power to
terminatela taxable period (NIRC, Sec. 6 (d)).

Prescriptive Petiod for Assessment

Q: What is the prescriptive period for the assessment of taxes?
ANS: Asa General Rule, the period for assessment prescribes within three (3) years:
1. After the last day prescribed by law for the filing of the return; or
2. After the day the return was filed, if the return was filed beyond the period
prescribed by law, whichever is later (NIRC, Sec. 203).

938
 •

Exceptions:
1. False, fraudulent return with intent to evade taxes: within 10 years from date of
discovery of the falsity or fraud; and
2. Failure to file a return, at any time within ten (10) years after the discovery of
the omission of the return (NIRC, Sec. 222 (a)).
Note:
1. A return filed before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day (NIRC, Sec. 203).
2. Befo!'e the expiration of the 3-year prescriptive period, both the Commissioner
and the taxpayer may agree in writing to extend the period of assessment. The
peri9d so agreed upon may be further extended by subsequent written
agreement made before the expiration of the period previously agreed upon
(NIRC, Sec. 222 (b)).
3. For the 10-year prescriptive period to apply based on fraud, such must be
proved as a fact by BIR (ARAN, Law of Basic Taxation, supra at 274).

False Returns vs. Fraudulent Return:swig Non-Filing of Returns

itni.r 44
Q: Distinguish False returns frcrifFrabdujent returns.
m,--,tyei•,Npl4,1
ANS: A false 1,return contains wrOtig`Information whether due to mistake, carelessness
... , pwg
or ignorance. pn the other hand,s3•WrmAptAleturn implies intentional or deceitful
entry with intent to evade the takes kceogia,V
- corro %.
g er of Internal Revenue,
G.R. No. L-20569, August .00§74).' W :
.
Or ,14.1.r`
Q: Give examples ail stances con:sla ed as failure toffie return aside from the
non-filing itself. 1 1
ANS: The follOwinwin a,gg,4 4vere considered by the Stipreme Court as constituting
failure to file r,elufn which Werra& theq-ypr prescriptiv pea
1. A deficient rertito which preven E4 the CIR f taxes due. Such
defeeve 'retilroM he taw as no retir ommissioner of
Intern-e0,everiu, v- Gonteres,Gr No. L-19 90NOVein er 24, 1966);
2. Failure toolgtt me injthe e, ms which were not clearly exempted from
tax. The 0-Rita did treat this. s a simple omission as the same involved
substantial st't s 'dtandard C`14,04V:eqk v. Commissioner of Internal
Revenue, cTA,p6, Case 910:41 - gfo rd-Ng012); and
3. Undeclared VAT-able1 s more than 30% of that declared in the VAT returns
(Commissioner of In err al Revenue v. Asalus Corporation, G.R. No. 22159,
February 22, 20.
Note: False returns, fraudulent returns, non-filing, and failure to file returns have
corresponding penalties such as interests and surcharges under the NIRC. See section
on civil penalties for a detailed discussion.

Suspension of the Running of Statute of Limitations

Q: What is the rationale behind the statute of limitations in the collection of taxes
and how is it construed?
ANS: Our tax aw provides a statute of limitations in the collection of taxes to safeguard
taxpayers from any unreasonable examination, investigation or assessment. Thus, it
should be liberally construed in order to afford protection to the taxpayers (INGLES,
Reviewer, supra at 345). As a corollary, the exceptions to the law on prescription should
perforce be strictly construed (Commissioner of Internal Revenue v. BF Goodrich PHL,
Inc., G.R. No, 104171, February 24, 1999).

939
 VOL 1.
2019

Q: What, are the rules to consider in the prescription of the period to assess?
ANS: The rules are:
1. The fact that the assessment notice was mailed before prescription period sets
in must be proved with substantial evidence by the CIR. In determining if
prescription to assess has indeed set in, the important date to remember is the
date when the demand letter or notice is released, mailed or sent by the
Collector of Internal Revenue to the taxpayer, and it is not required that the
notice be received by the taxpayer (Basilan Estates, Inc. v. Commissioner of
Internal Revenue, G.R. No. L-22492; September 25, 1967);
If the taxpayer makes a direct denial of receipt of a mailed demand letter, such
denial shifts the burden to the Government to prove that such letter was
indeed received by the taxpayer (Republic v. Court of Appeals, G.R. No. L-
38549, April 30, 1987);
If the date on which assessment is due to prescribe falls on a Saturday, the
following day being a Sunday, it is understood that the Government has until
the next succeeding businegs.day.nalcnday within which to assess the tax
(Commissioner of I ternal Reyjuew.44 -Weslem Pacific Corp., G.R. No, L-
18804, May 27,) 65); 1 .""1,
In order that ,ttib-nftliThg f veturmay
n- s p as pe, starting point of the period
for making 'kagesi ant, the return m kbk-as si4slantially complete as to
include t e need tails-bn44wffith,4 NI, a sesknent may be made
(Republic Ma ma Dev'toCo:AG.RyNo. L 8g ,t,A-01X7, 1972);
If the t xpa les n amehdeOpturiiC-which 's s stantially different from the
origlretu , the eriod of prOcription of e ri KtPskue the deficiency
assesFfrit hould Is e coun e• rpm e ling of thelawd d return, and not
the canal eturn ( ommi Vorfeif o(nefnal Reven e v. oenix Assurance
Co., ,tc1. G. . No. L-1972. 4-119,0mi 65);
If thefaxbq r wrong telLinifit is as Leh h filed o return at all. In
situa thik,,tt e 0-yep p scriptive p dtv ivi Pap* (Butuan Sawmill,
Inc. v. Cold 6 . f Ap* .RtNo 0 Ara 28, 19 6); and
7.' It is i cumbek upb lay4.= o avail f the defense of
prescrip on to p ve t aritp214d u um. If e fails to do so, the
conclusio shout: •e ttLgt- urn file which case the
Govemme has, e the 'COtrespOtiding
assessments ifigumber ommissioner of Internal
Revenue, G.R. -(57t16, Ma yk

Q: Wha are the grounds for e ension of running of the statute of

limitations in case of assessments?
ANS: The running of the statute of limitations on the making of assessment and the
beginning bf distraint or levy or a proceeding in court for collection, in respect of any
deficiency, shall be suspended: (PRC-DO)
1.1 For the Period during which the Commissioner is prohibited from making the
assessment or beginning distraint or levy or a proceeding in court and for sixty
(60) days' thereafter,
2. When the taxpayer requests for Reinvestigation which is granted by the
Commissioner;
3. Nhen the taxpayer Cannot be located in the address given by him in the return
filed upon which a tax is being assessed or collected; except if the taxpayer
Informs the Commissioner of any change in address;
4 When the warrant of Distraint or levy is duly served upon the taxpayer, his
authorized representative, or a member or his household with sufficient
discretion, and no property could be located; and
5 When the taxpayer is Out of the Philippines (NIRC, Sec. 223).

940
Note: Revepuel Memorandum Order (R.M.0) No. 14-2016 issued on April 18, 2016
revises the Guidelines for the Execution of Waivers from the Defense of Prescription
pursuant to Section 222 of the NIRC of 1997.
1 I
The waiver mayi be, but not necessarily, in the form prescribed by R.M.O. No. 20-90 or
Revenue Delegption Authority Order (R.D.A.O.) No. 05-01. The taxpayer's failure to
follow the aforeraid forms does not invalidate the executed waiver for as long as the
following are Complied with:
1. The Waiver of the Statute of Limitations under Section 222 (b) and (d) shall be
executed before the expiration of the period to assess or to collect taxes. The
date of execution shall be specifically indicated in the waiver;
2. The waiver shall be signed by the taxpayer himself or his duly authorized
I
representative. In the case of a corporation, the waiver must be signed by any
of its responsible officials;
3. The expiry date of the period agreed upon to assess/collect the tax after the
regula three-year period of prescription should be indicated (R.M.O. No. 14-
2016). Aft ,

The two (2) m

aterial dates that nee resent on the waiver are:
1. The dlate
i
of executiohr aiver by the taxpayer or its authorized
representative; and
2. Thel , expiry date of4fhep lexpayeamaives the statute of
limitations (RM.04No. 14-20'

Before the expiration fettthg period se the previouslyec ted waiver, the period
earlier set may exteridepby subseque written waiver rage in accordance with this
Order (R.M.O. No. 1 42616);
Q: What are i e requirements of theNia aiver of the statute k limitations?
ANS: The BI @ issued V.O.Vo. 20 and -;§ ,85-yl, outlining the
procedures Mr prorAexecutiqi a v d waiver, vi
1. The waiver mu_sin in the •-,‘„ orm prescribe. .y -.M.O. No. 20- 90. The
phrse "b Tiekafte 119[20] ", which indicates the expiry date of
the ,pe!riod greed on to ass- /co the tax after the regular three-year
periodiof presori tiOnesh uld 112.-1
2. The waiver Lst be e -by \I
-'page
W -i l. self or his duly authorized
representativ-r For corporation, the waiver must be signed by any of its
respo9sible offiria ...4 case the authority is delegated by the taxpayer to a
representative, such elegation should be in writing and duly notarized.
3. The waiver should be duly notarized.
4. The CIR or the revenue official authorized by him must sign the waiver
indicating that the BIR has accepted and agreed to the waiver. The date of
such acceptance by the BIR should be indicated. However, before signing the
waiver, the CIR or the revenue official authorized by him must make sure that
the'waiver is in the prescribed form, duly notarized, and executed by the
taxpayer or his duly authorized representative.
5. Both the date of execution by the taxpayer and date of acceptance by the
Bureau should be before the expiration of the period of prescription or before
the,lapse of the period agreed upon in case a subsequent agreement is
executed.
6. The waiver must be executed in three copies, the original copy to be attached
to the docket of the case, the second copy for the taxpayer and the third copy
for the Office accepting the waiver. The fact of receipt by the taxpayer of
his/her file copy must be indicated in the original copy to show that the
taxpayer was notified of. the acceptance of the BIR and the perfection of the
agreement.

941
 VOL 1.
2019

Q. What is the effect of failure of the waiver to strictly conform to the

requirements of a waiver of the statute of limitations under R.M.O. No. 20-90?
ANS: Te requirements are mandatory and must strictly be followed. Defective and
invalid *aivers of Statute of Limitations do not extend the CIR's period to issue
assessments. Thus, the right of the government to assess or collect the alleged
deficinCy taxes is already barred by prescription. Assessments issued by the BIR
beyond the three-year prescriptive, are considered void and of no legal effect
(Commissioner of Internal Revenue v. Systems Technology Institute, G.R. No. 220835,
July 26, 2017).
II
Civil Penalties
I,
Q: Is the Commissioner of Internal Revenue authorized to prescribe penalties?
ANS:' NCi. The CIR has no power to prescribe penalties since it is the Secretary of
FinanCe Who issues rules and regulations (NIRC, Secs. 7 and 244).
I
Q: What;is the purpose behind effnliqiiirrof.,p,pnalties?
ANS: To; discourage delapinq ?,,payrn:entiofifaxOs di:le4c the government and in this
sense, the penalty and;triterest aratflot pe
en alp buikeortipe:ns'atqry for the concomitant use
of the funds by the ta3pi
gydrpfyilindlifgViieribe
date"v ikstippb ed to have paid them to
the Government alining.Ca-K-Court ol'Ap e No. 118794, May 8,
1996),I
1 110
Delinquencyln erestandDeficiencylnterest
I
Q: What are t e cias es of i terest an r, en are t 9y imp sp,?,,A
.et" 0
ANS: Interest n gen'eral is colnpaqtiasy,,Cizig.frif unpaid an?ount gtax at the rate of
double the leg I i test rate r loarislOrbe,drance of any molibriq fie absence of an
.
express stipul e Ban `1(62dgifiral ne47115ras from the date prescribed
for payment ur il(thej moully pptcl.ineifSPi CKlar 146.6,79g1Ser. of 2013, the
interest rate is 6,70,Tfie efor'e e teAg'prierg;,ipte(v is 12% (N) C, as amended by
TRAIN law, Sec: 49 (A Thessa's s s--of lytesrefitartas foil s:
1. Deficient lnte 4: Impp d the taV due. Any deficiency
,n the taxue e ublectitccitNekibtdes ,rate abo e, which interest shall
be assessekand 5,o ecL ed-6-6M-ithe-da-fe- escirkd r its payment until the
full paymentlt ere 9r-ffrpon.issti nce-bfv,ce and demand by the
Commissioner fNIsi erri I Re eflu vhltche,,v F comes earlier (NIRC as
amended by TRAINTaw:. 24 Via)).
2. Delinquency interest: Impodi se of failure to pay:
a. The amount of tax due on any return required to be filed;
b. The amount of tax due for which no return is required to be filed; or
c. A deficiency tax or any surcharge or interest on the issue date
appearing in the notice and demand (NIRC as amended by TRAIN law,
Sec. 249 (C));
3. Interest on Extended Payment: Imposed when the taxpayer has opted to pay
by installment but fails to pay the tax or any installment on the date prescribed
for payment and also in cases where the Commissioner has authorized the
extension of the time for the payment of the tax (NIRC as amended by TRAIN
law, Sec. 249 (0)).
Note: In no case shall the deficiency and delinquency interest be simultaneously
imposed (NIRC as amended by TRAIN law, Sec. 249 (A)).

942
 1;1

Surcharge
Q: What are the additions or increments to the basic tax?
ANS: The! fo lowing are the additions to the basic tax imposed by reason of the
taxpayer's refusal to comply with the legal requirements or due to refusal or failure to
pay taxes on t me, or for violations of the tax laws:
Civil penalty or surcharge:
1. 25% (NIRC, Sec. 248 (a)):
a. Failure to file any return and pay the tax due thereon as required by the
NIRC or the rules;
b. Filing a return with an internal revenue officer other than those with
whom the return is required to be filed;
c. Failure to pay the deficiency tax within the time prescribed for the
payment of the same in the notice of assessment;
d. Failure to pay the full or part of the amount of tax shown on any return,
or the full amount of the ax due for which no return is required to be
filed, on or before the4pOrcribed date for its payment.
2. 50% (NIRC, Sec. 248 (b)).:".=4:?:
a. Willful neglect to fgliArdilirn within the period prescribed by the NIRC
. or the rules; ,.. ! .' `it;
b. Willful filing of a fejs0:,,i'Aitra
1 dulent return.
:, .v,tyrfr
Note: Substantial under-declaralicifiF# i , pb easaats income or substantial
overstatement of deductions: 'shall ' dihetute pnmaVfacie evidence of a false or
fraudulent - return. Failgregco report sales, receipts or incom, an amount exceeding
30% of that declared return and anccial , of deductions in mount exceeding 30%
of the actual deductionsolttcenderfthe taxpayer liable forAubstkitial under-declaration
of sales, receipts or<irfebmefbnbr overstate'. ent of the deductions (NIRC, Sec. 248 fb)).
-7.' II k •
Q: Is the paytent andl atillection of sur arge man ?I
ANS: Yes. Tkelayrtfatotturchkg, is rag' , datory All, e:go'nalifier is not vested
with any authOrity to wai egr disrarise the collec iorrtoR heA'ame, however, such
rule is not absoluta and-. is Object to .4- &cep ons (ARAN, Law of Basic Taxation, supra at
208).

Q: What are the excep ions to th gt.tte aboyme.ntftsurcharge and interest is

mandatory? it
ANS: Surcharge and intepst maybe deleted in the following instances:
1. When there is gOSAhltaith
t and honest belief that one is not subject to tax on the
basis of previous interpretation of government agencies (Michel J. Lhuillier
Pawnshop, Inc. v. Commissioner of Internal Revenue, G.R. No. 166786,
September 11, 2006); or
2. Whe9 the imposition of a tax statute was controversial (Cagayan Electric
Power & Light Co., Inc., v. Commissioner of Internal Revenue, G.R. No. L-
60126, September 25, 1985).

Compromise Penalty
Q: What is h-Compromise Penalty?
ANS: These are amounts collected by the BIR in lieu of criminal prosecution for
violations committed by taxpayers, the payment of which is based on the compromise
agreement between the taxpayer and the BIR (DIMAAMPAO, Tax Principles and
Remedies, 2015, p. 190).
•

943
 'VOL. 1.
2019
I
Q: What is the effect of the taxpayer's failure to comply with the compromise
1, 1
agreement?
ANS:' If 'the taxpayer reneges to pay the suggested compromise, the CIR may NOT
collect the compromise penalty through a court action or by distraint/levy. This is
because: a compromise penalty is neither a tax nor an administrative penalty for tax
delinquency. The remedy of the CIR is to file a criminal action against the taxpayer for
the tax tiolation (R.M.O No. 19-2007, III (5); Commissioner of Internal Revenue v.
Philippine Daily Inquirer, Inc., C.TA. E.B. Case No. 905, November 4, 2013).

Assessment Process ant/ Reglementory Periods

Q: Discuss the assessment process of internal revenue taxes.

ANS: The steps in the assessment process of internal revenue taxes are:
1. Letter of Authority
a. A Letter of Authority (LOA) must be served within thirty (30) days
from the date of issuance, otherwise, it shall become null and void. The
LOA shall bellquedf6Tizpqiue,,Qtficer (RO) by the:
i. Commissipner qr his auttiorlNd,representative after a return
hafbepri.filed; 01-- ' -,- V / f \..
1 ''
ii. ,Feri,en,ue,,Re'diona 7tr"Bt• ire or„fpr• gil•Audi
` ' t-cases within his regional
4 'urisCrotibn ecept,in;—. ,., ,
, 'eases invokiing ciZtiror criminal a‘ fraud falling under
,-.)/ the jesdidtionpf theTait'''. etau Division of the
Enforcement-Seri/ice; orli
Rolicy—caOplunder—a dit bj 4Speci I Teams in the
1 Natiqpal P ce-RA40. ko. 36-
4 ,...,, .,-,1 , ,
,„-e g......da ....;,.-
b. -,qt ..4e
_ . enpe• tficeriROJT.Prall cond %this atli it
__ tc..-,) ..,
1.-4
, \With' c1pe-hundre enty ,i, Otdays from date of issuance
(.1 ) andexice ofNie 105 ,1110`.541/co Eluc audit and submit
is repdAtafttn.: t0tisy,::,\7•
.ii. I# the iif**ort is not q-fpl ted ithin q 120-day period, a
‘, progress(re,borOtha-V's(ibm* to t e head of the audit
officeN"-1, -)
,
iii. Ng t4eT,„, 0 fincts,„.....,
• ,,,,,,0 ,.,-
1.---Ngeficieycy qmdilerl , 51,k, '
2. ny:deficiegt thaviiflidn
em orm the taxpayer and writes in
his pow erihe taxpayer is amenable with his
findings. If the taxpayer is:
a. Amenable with his findings, the taxpayer pays the -
tax;
b. Not amenable with his findings, the RO shall state
in his audit report that the taxpayer does not
agree with his findings. Such report is submitted
to the Revenue District Officer or the Special
Investigation Division (in case of Revenue
Regional Office) or to the Chief of Division (in
case of the BIR National Office) for review
(R.M.O. No. 36-99).
Note: A LOA is the authority given to the appropriate revenue officer to
ekamine the books of account and other accounting records of the taxpayer in
order to determine the taxpayer's correct internal revenue liabilities and for the
purpose of collecting the correct amount of tax (Commissioner of Internal
Revenue v. De La Salle University, Inc., G.R. Nos. 196596, 198841 & 198941,
November 9, 2016).

944
 VOL 1.
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2. Issua ce of Notice of Informal Conference

a The Revenue Officer who audited the taxpayer's records shall state in
his report whether or not the taxpayer agrees with his findings that the
taxpayer is liable for deficiency tax or taxes (R.R. No. 7-2018).
bl If the taxpayer is not amenable, based on the said Officer's submitted
report of investigation, the taxpayer shall be informed, in writing, by the
Revenue District Office or by the Special Investigation Division, as the
case may be (in the case of Revenue Regional Offices) or by the Chief
of Division concerned (in the case of the BIR National Office) of the
discrepancy or discrepancies in the taxpayer's payment of his internal
revenue taxes, for the purpose of "Informal Conference," in order to
afford the taxpayer with an opportunity to present his side of the case
(R.R. No. 7-2018).
3. Informal Conference
The Informal Conference shall in no case extend beyond thirty (30) days from
receipt of the notice for inforrrOgonference. If it is found that the taxpayer is
still liable for deficiency tax 5iktAkes after presenting his side, and the taxpayer
is not amenable, the ReviiudVDistrict Officer or the Chief of the Special
4;:giott
Investigation Division ofittie;;Ree ue Regional Office, or the Chief of Division
in the National Office, as411 . 43* ay be, shall endorse the case within seven
(7) days from the conclu'satir @RIElpfprjria1 Con9sence to the Assessment
Division of the Revenue Re of K.)ffic.MOVIittip-Itommissioner or his duly
authorized reprpritative forls ance of a deficie y tax assessment (R.R.
No.1! 7-2018).0, .-. e-.4„.
4-itz7Zei
4. Issuance of Preliriiinary AsSe-ss ent Notice (P)
ai WherttEeklimrffisiloner his duly authatriz re resentative finds that
ArOirar ta#S1.4tould be a essed, a PAWshll be 'ssued, except in the
I tPfollowing,instances: (iVie ET)
' ...„WfieT the
• itet•- .4.-
the findin or any4
,
• the result of
Piratke m a tiAlkgrrd the corn6 ax as appearing
.. qw-8-/tke
.,4 • face 'oiDthe urn; or
hdriea discrep y has been determined between the tax
Withireld and the actually remitted by the withholding
4v
-agen - or
iii. :a/hen
-y,
a taxpayer-'ottipted O.cfatm a refund or tax Credit of
.Lexcess,r,pditable withholding tax for a taxable period was
VeteEErifned to have carried over and automatically applied the
same amount claimed against the estimated tax liabilities for the
taxable quarter or quarters of the succeeding taxable year; or
iv. When the Excise tax due on excisable articles has not been
paid; or
v. When the article locally purchased or imported by an exempt
person has been sold, traded or Transferred to non-exempt
persons (R.R. No. 18-2013).
Note: In the above-cited cases, a FLDIFAN shall be issued outright
(R.R. No. 18-2013, Secs. 3.1.1 and 3.1.2);
b. The PAN shall be issued by the Commissioner of Internal Revenue or
his duly authorized representative. The term "duly authorized
representative" refers to Revenue Regional Directors, Assistant
Commissioner-Large Taxpayers Service, and Assistant Commissioner-
Enforcement and Advocacy Service (R.R. No. 18-2013, Sec. 3.1.1;
R.M.C. No. 11-2014, February 19, 2014);
C. The PAN shall show in detail the facts and the law, rules and
regulations, or jurisprudence on which the proposed assessment is
based (Sec. 3.1.1, R.R. No. 18-2013)

945
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ED /VOL
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1.

5. Reply to PAN by the taxpayer within fifteen (15) days from the date of receipt
with the duly authorized representative of the Commissioner who signed the
PAN (R.R. No. 18-2013, Sec. 3.1.1; R.M.C. No. 39-2013, May 7, 2013; R.M.C.
No. 11-2014, February 19, 2014);
Issuance of a Formal Letter of Demand and Final Assessment Notice
(FLD/FAN)
a. After the issuance of PAN, FLD/FAN shall be issued in any of the
following instances:
i. If the taxpayer fails to respond to the PAN within the said 15-day
period in which case he shall be considered in default (R.R. No.
18-2013, Sec. 3.1.1);
ii. If the taxpayer responds within the said period but he/it
disagrees with the findings of deficiency taxes in which case the
FLD/FAN shall be issued within fifteen (15) days from
filing/submission of the taxpayer's response or even beyond
fifteen (15) days.proxidgtthat it is issued within the period of
limitaijorK) assesslintimarretenue taxes (R.R. No. 18-2013,
kl2(04,crekruary 19, 2014); or
iii. vBe or the tgpse.Of=perip4 td fill3epiy,to PAN and the taxpayer
2has\n
.4S yi
etoliel filed his/its441 pons,q0akwood Management
See es A—GoThrrifftroner.oflp e aiePe Pnue C.T.A. Case No.
9. 9, ugusg 2-04:3);v7
ote. amp in ME'TERigtheitendin of a P N to' taxpayer is part of
he dire pr ess reqqi414,nt in th issu efA a deficiency tax
settment, as prescribed in . 12-9p, th, absence of which
end rs nu tot4Ralist,?psOtifirent made 114 tax authorities
mission r of Mfg 111R,zeiVenue
, v,Metro Superatna, Inc., G.R. No.
ber 8, Mr(
Cortim[stipner or his duly
e IPANVR.R. No. 18-2013,

„Al s arld-regulatins or jurisprudence

e adbessme t shall be VOID (R.R.
No.
7. Protest agal AN.within't (3iAays from receipt thereof
(R.R. No. 18-20 >dC .1.4);
Note: Failure to fire'b&re to th PAN_Vicfrear the taxpayer from protesting
the FAN of the BIR because Vi not the final assessment contemplated
by the NIRC which can be protested. The only effect of failure to respond to
the PAN is that the Commissioner or his duly authorized representative shall
*ssue an assessment (which is final that can be the subject of protest) based
pn his findings (NIRC, Sec. 228 (e)).
8. ssuance of Final Decision on a Disputed Assessment (FDDA)
The decision of the Commissioner or his duly authorized representative on the protest,
which shall be appealable to the CTA shall:
a. State the facts, the applicable law, rules and regulations, or jurisprudence on
which such decision is based, otherwise, the decision shall be void; and
b. State that the same is his final decision (NIRC, Sec. 228; R.R. No. 18-2013,
. Sec. 3.1.4).

Q: What is a Disputed Assessment?

ANS: It is when the taxpayer indicates its protest against the delinquent assessment of
the Revenue Officer for reconsideration, through a letter. After the request is filed and
received by the BIR, the assessment becomes a disputed assessment (CIR v. Isabela
Cultural Corp., G.R. No. 135210, July 11, 2001).
946
 .• . f r VOL1.
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Q: What is the effect of issuance of Final Assessment Notice (FAN) without prior
issuance of a Preliminary Assessment Notice (PAN)?
ANS: As a general rule, the absence of a PAN is fatal in the assessment of a taxpayer.
A PAN is a due process requirement in the issuance of a deficiency tax assessment and
cannot be dispensed with (Commissioner of Internal Revenue v. Metro Star Superama,
G.R. No. 18,p1 , December 8, 2010).
Exceptions: Instances (MeW-CET) when a PAN is not required as provided in R.R. No.
18-2013, Sed. 3.1.1 and 3.1.2.
1
Q; What isithe due process requirement for FLD/FAN?
ANS: Under Section
g 228 of the NIRC, a taxpayer shall be informed in writing of the
law and the facts on which the assessment is made, otherwise, the assessment shall
be void. 1!,
The requirement of providing the taxpayer with written notice of the factual and legal
bases applies both to the FLD/FAN and the FDDA. Section 228 of the NIRC should not
be read restrictively as to limit the wrilah notice only to the assessment itself. As
implemented by R.R. No. 12-99, the Oritte4.notice requirement for both the FLD and the
FAN is in observance
IL of due propeas4tpalford the taxpayer adequate opportunity to
file a protest
ri on the assessment lai4tiieeOfter file an appeal in case of an adverse
decision (Conimissioner of Internal 1,30gq,,.9
leyoksurgaz
• i pines Corporation, G.R.
Nos 215534 and 215557, April 16, 2Q6):•rMeg,
I
Q: Is the assessmentyAlifif •it coversatberiod outside thes e cope of the LOA?
ANS: No, the taxable Var covered bf,brOssessment outspdiat the period specified in
the LOA is (void (Comnitsic ” perof InTemarkRevenue v. Ladbastee Philippines, Inc. G.R.
No. 183408, July /002b/Orider Sec.16,(A) of the NIFC, he e must be a grant of
authority before, reveapej6fficer,,canfinduct
, examyiatioi°Assessment. Equally
important Item regerwe officer so a4orized must not beyond the authority
given. In th alo'sencelAych authority,, asse4 „nation is a nullity
(CommissiOnerbf Intei 1#6venue,70 Soh PHL, Inc., GR 8697, November 17,
2010). "P7
f

514
Q: What is the rule b%the Best Evidenceetthable?
ANS: Best Evidence Obtain' ale refers,toratigdeflikgrd papers, documents, or any
agr,e4irt
other evidence gathered the4ternat revenue o icers trom the government offices,
corporationS, Clients, laeyrrif)loyers, patients, tenants, vendees, and all sources,
with whom the taxpayerlei,,frvious transactions or from whom he received income.
The law authdrizes the Corrimissioner to assess taxes on the basis of the best evidence
obtainable in the following cases:
1. If is person fails to file a return or other document at the time prescribed by law;
or
2. He 411fully or otherwise files a false or fraudulent return or other document
(ABAN, Law of Basic Taxation, supra 181).
Note: The best evidence obtainable does not include mere photocopies of records/
documents The BIR, in making a preliminary and final tax deficiency assessment
against a taxpayer, cannot anchor the assessment on mere machine copies of records/
documents'(Commissioner of Internal Revenue v. Hantex Trading, G.R. No. 136975,
March 31, 2005).
Q: Is the issuance of a subpoena duces tecum a condition sine qua non before
resorting to best evidence obtainable?
ANS: No. the issuance of subpoena duces tecum is not a condition before resorting to
the best evidence obtainable. Said issuance is merely one of the powers that the CIR
may exercise in ascertaining the proper tax based on the best evidence obtainable. In
the absence of a subpoena, the CIR may still exercise the power prescribed by the

947
 •,,.;'''-''''''t . .' .-: ';' •:' :',.1. ' . 4 l';.:1-..,T..!1..:.;g1;',71;,.4''Z':•ite;' '7,;Y:--;'' -',',•••••
...,... t 4::.) VOL t.
,...,. 2019
.4.,;),,;

NIRC tp determine the taxpayer's liability (Mendez v. People, C.T.A. E.B. Crim. No. 014,
Decemberll , 2012).
Q: When is the Commissioner authorized to Conduct Inventory-taking and
Surveillance?
ANS: The Commissioner may, at any time, during the taxable year, order inventory-
taking 'of goods of any taxpayer as a basis for determining his internal revenue tax
liabilities, or may place the business operations under observation or surveillance if
there is reason to believe that such person is not declaring his correct income, sales or
receiptalor internal revenue tax purposes (NIRC, Sec. 6(c)).
Q: When is the Commissioner authorized to prescribe presumptive gross sales
and receipts as a basis for determining tax liabilities?
ANS: The Commissioner, after taking into account the sales, receipts, income or other
taxableI.base of other persons engaged in similar businesses under similar situations, or
after cons derin
g other relevant information may prescribe a minimum amount of such
gross receipts, sales and taxablebaggir ,
1. It is found that a petgankbas falled)toMie ebipts and invoices in violation of
Sections 113 .prid-23 (3flhe._CO'd,g; or- V Al
2. If there is reaaon'to b'ereffthat the bobla:0 pcdouts, or other records do not
correctly sefielt e9191;ationsinade • r tot ta'cl ii.t‘the return required to
be filed u de t ' e (NIRC,
15) 4, Sec. 6,(o)).
•<„,,,, "1.06
Collection Ji- ;Ill. Zeils e', ,e.‘
Q: When colle taxesi's-allowea— , )
IIIII, .
ANS: Collecti y allowpd wttel-thejp is-already final ags-eltnent made for the
determinat on tf the x due ( R. NL64.84:3)::::-c,
- -e'r
..,:' 1 ,---(1 - 71,
Q: When Ass nferkts amfti med-fina
ANS: It s dee in 1whe \t \ ri'Y
.4,
1. The to payerlails tcli *pro_._g ai: (Op recsipt of th assessment;
2. •After % 180-hy p it 4`,„: 414.th CI !Sot y$1 acted on the protest, the
taxpayer ails to fil apiliAl • , .;
3. After 30 s from eiVMpfEfttgArebi io f the CIR the taxpayer fails to
appeal (R. .lif1
:40
Requisites'I .
Q: What are the requisites for colksioxof.t xes?
ANS: The requisites are:
1. For Delinquency Tax — can be immediately collected administratively through
issuance of warrant of distraint or levy and/or through judicial action (NIRC,
Sec. 205); and
2. Fin- Deficiency Tax — can be collected also through administrative and/or
judicial remedies but has to go through the process of filing the protest by the
taxpayer against the assessment and the denial of such protest by the BIR
(R.R. No. 18-2013).
Prescriptive Periods
Q: Discu'ss the rules on the prescriptive period for the collection of taxes.
ANS: As a general rule, where an assessment was made, the prescriptive period to
collect the taxes due is five (5) years from the date of assessment. The following are the
exceptions.
1. False or fraudulent return with intent to evade taxes: within ten (10) years
from the discovery without need for prior assessment;
2. Fa lure or omission to file a return: within ten (10) years from the discovery
without need for assessment; and

948
 /VOL 1.
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3. Waiver in writing executed before the five (5) year period expires: within
the;period agreed upon (INGLES, Reviewer, supra at 392).
Note: When it comes to self-assess taxes where a return is filed by the taxpayer. The
taxpayer is the one to assess himself and such assessment is deemed to be adopted by
the goverrirnegt. Thus, the filing of the return would also be the date of assessment.
Taxes are ; generally self-assessed. They are initially computed and voluntarily paid by
the taxpayei. The government does not have to demand it. If the tax payments are
correct, thel; BIR need not make an assessment (SMI-ED Phil. Technology, Inc. v.
Commissioner of Internal Revenue, G.R. No. 175410, November 12, 2014).

Q: What are the grounds for the suspension of the running of statute of
limitations?
ANS: The
The; running of the statute of limitations shall be suspended in the following
instances:
1. Commissioner is Prohibited from making the assessment or beginning distraint
or levy or a proceeding in court,nd for sixty days thereafter;
2. Wilie9 the taxpayer Reques*fgc a reinvestigation which is granted by the
Comiiiissioner; iPk
Note: A request for a teirAtig-,Apon alone will not suspend the statute of
limita ions. Two things rftOsitlictiegto stop the running of the period: (1) there
must be a request for ceirlyegtger asEU2) th IR must have granted it
(China Banking Corgfratioire Oommtssiongof h emal Revenue, G.R. No.
172509, Februawle2015). TIO
3. When the to aver Cannot be located in the Acicless given by him in the
return filed upon Which theetax lekeing assessed of eloffected;
4. Warrant ofdi&ratigprfwiy is dg ' served upothitalipayer, his authorized
reOre;eragfe orPinember of his household wi h s - trident discretion and no
Property coulpje located; and ill_ IS
5. Wkietitielapaster is Ott of the lippines,( 1E?.ex. 22:31
.40 ' 'I--
( ile.V1P
IN .0.z •41iIii&.'
G. TAXPAYERSRgMeff&k "
It . trath130-
Protesting an Assessment

Q: What is Rrotestingt a"s"sessment?

,.,-ivr
ANS: The act by the axpayealfra s fo ing-tne v is of the imposition of the
corresponding Oelinquegy, increments for internal revenue taxes as shown in the notice
of assessment and letterotee and (CEBALLOS, Reviewer, supra at 37).

Q: Give the procedure to be followed in protesting an assessment.

ANS: The procedure shall be as follows:
1. BIR issues assessment notice;
2. The taxpayer files an administrative protest against the assessment. Such
prOtet may either be a request for reconsideration or for reinvestigation. The
protest must be filed within thirty (30) days from receipt of assessment.
3. All relevant documents must be submitted within 60 days from filing of protest;
only if taxpayer request for reinvestigation unless a waiver of prescriptive
period is executed otherwise, the assessment shall become final and
unappealable;
4. In case the CIR decides adversely or if no decision yet at the lapse of one
hundred eighty (180) days, the taxpayer may appeal to the CTA Division, thirty
(30) days from the receipt of the decision or from the lapse of the one hundred
eighty (180) days otherwise the decision shall become final, executory and
demandable (RCBC v. Commissioner of Internal Revenue, G.R. No. 168498,
April. 24, 2007);

949
 . .e.---tty•-•• .•.::"'..Ts-i,1%,: i;•f ':,-,f::..v( ,, q.,-.A... •
(r.
..Z,liA1 •
4 7 '! .Z.1 , .

5 If the decision is adverse to the taxpayer, he may file a motion for

reconsideration or new trial before the same Division of the CTA within fifteen
(15) days from notice thereof;
6 In case the resolution of a Division of the CTA on a motion for reconsideration
or new trial is adverse to the taxpayer, he may file a petition for review with the
CTA en banc; and The ruling or decision of the CTA en banc may be appealed
with the Supreme Court, through a verified petition for review on certiorari
pursuant to Rule 45 of the 1997 Rules of Civil Procedure (R.R. No. 18-2013,
Sec. 3.1.4).
Q: VVhat are the forms of protest that a taxpayer may file?
ANS: The protest may be a:
1 " Request for Reconsideration which is a plea of re-evaluation of an assessment
1 . on the basis of existing records without need of additional evidence. It may
involve a question of fact or of law or both; or
2 Request for Reinvestigatiora.vvhichj§,a plea of re-evaluation of the assessment
on the basis of newly,disd'overed oar adartionat.evidence that a taxpayer intends
to present in thepinve049atioUtimNIsTinkblye a question of fact or of law
or both (R.R. o =20 31-SeQ...T.,1„.4),. 1 1 ). "\
$,--
..
Q: What are the cqntegts d'va_Lid„protest?.....„ S., yy. \
-„
ANS: The taxpayefrs r teirrhis protegiA .s.,.p. \ i \
1. The ni tre ,prot bt wheinerAcorqderation o r investigation, specifying
newly iscove ed o additional evidence he intends (Sor t if it is a request
for re'n(fAig
t tion; -•V'n i
ii , • ),,,.....-4
2. Date f issess entnotice; a;n, di--".,,, Z,-,"
1 The ppfiRaple law, rules'andltreOlations,
ay k, ,,„ .. . fe on which his
protestA‘aseds; ..--411.w.A.t.7 Cn
,. r_ __. .....
Otherw se, his &at ha If effect (R.R. No.
18-2013, Sec. 331.4).
Period to We Protest
rrk
Q: When should Aq2cpaye5filvprotestwit13.1 e issio er?
ANS: The taxpayerNrjpapiutitori4KLrepresentatiye o,lax agent may protest
administratively against 1h liTsWrrce of, t.Rweo 6` Commissioneror his duly
authorized, representative wi Dirty (3Waggsfro ate of receipt thereof (R.R. No.
18-2013, Sec. 3.1.4).
Submission ofSupporting Documents
Q: What are supporting documents which are required to be submitted?
ANS: The term "relevant supporting documents" should be understood as those
documents necessary to support the legal basis in disputing a tax assessment as
determineCI by the taxpayer. The BIR can only inform the taxpayer to submit additional
documents. The BIR cannot demand what type of supporting documents should be
submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which may require the
producfion of documents that a taxpayer cannot submit (Commissioner of Internal
Revenue v. First Express Pawnshop Company, Inc., G.R. Nos. 172045-46, June 16,
2009).11

Q: When should the taxpayer submit the relevant supporting documents after the
filing of protest?
ANS: The taxpayer should submit such documents as follows:
1. If the protest is a request for reinvestigation, the taxpayer shall submit all
relevant supporting documents in support of his protest within sixty (60)
days from the date of filing of his letter of protest; •
950
 r2019
• • BEDAN .;RED` BO
VOL 1.
i
2. If the'protest is a request for reconsideration, the 60-day period shall not apply
(RJR. No. 18-2013, Sec. 3.1.4).

Q: What isi,,the effect of failure to submit the relevant supporting documents

within the prescriptive period?
ANS: The assessment shall become "final" by operation of law and the taxpayer shall
be barred frorri disputing the correctness of the issued assessment by introduction of
newly discoliered or additional evidence because he/it is deemed to have lost his/its
chance to present this evidence. The BIR shall then deny the request for reinvestigation
through the issuance of FDDA (R.R. No. 18-2013, Sec. 3.1.4; R.M.C. No. 11-2014,
February 19;12014).

Effect of f-allure to File Protest

Q: What is the effect of failure to file a protest against FLD/FAN?
ANS: The assessment shall become finCexecutory and demandable and no request
for reconsideration or reinvestigation snallOe granted (R.R. No. 18-2013, Sec. 3.1.4).
,i4e 4.44
Decision of the Commissioner o,1 the Pkitest Filed
; ..;,
47,
11iraq
.11 -g;
Q: What is the period for the Comn1 spjoryer or his duly authorized representative
to act upon!a valid protest agaiMil'afilD/FXN% trig0
ANS: The Commissioners choffuthonzedlepresen auigapat act upon a valid protest
within one, hundred eighty days Anted from the d IR of filing of the protest
in case of al request figiecpnsideratie* r from date of submission by the taxpayer of
the required documen within sjxtyi(60) edays from the dfieloh,,filing of the protest in
case of a request fo reinvestigation (RR. a 18-2013, Sec. 331.4).
'tys
Q: How ma e Comissioner eci a on the p otesj adversely against the
taxpayer?
ANS: The Ccmmissio er, :
1. Deny t et 94
2. Not act upkn ir(R.RA18-2013, Sep 3.1.4).

Q: What is the remedy".4 f.4he tax pl&g 4.51

eltr,WAsttnied?
ANS: Underl!Sec. al*R.R. 9,X118-29 e taxpayer may:
1. If the protests ~derfied, in•whole or in part, by the Commissioner's duly
authorized repte,sen bye:
a. Appeal to the CTA within thirty (30) days from date of receipt of the said
1, decision; otherwise, the assessment will become final and executory; or
b: File an administrative appeal to the Commissioner through request for
reconsideration within thirty (30) days from date of receipt of the
decision but only issues raised in the decision of the duly authorized
representative shall be entertained (Commissioner of Internal Revenue
v. International Pharmaceuticals, Inc., CTA E.B. No. 608, October 25,
2011). However, if the taxpayer elevates his protest to the CIR, such
decision will not be final and executory (CEBALLOS, supra at 38).
2. If the administrative appeal is denied by the Commissioner:
a: File a motion for reconsideration with the Commissioner; or
b. Appeal to the CTA within thirty (30) days from date of receipt of the said
decision (R.R. No. 18-2013, Sec. 3.1.4)
3. If the protest is denied, in whole or In part, by the Commissioner:
a. Appeal to the CTA Within thirty (30) days from date of receipt of the said
decision; or
b. File a motion for reconsideration of the denial of the administrative
protest with the Commissioner (Fishwealth Canning Corp. v.

951
 4-7-7--el'i•.4-•"4:::'s•S::::"';•"':••••.••••;•:r.-• ,,:,:•. • •••• •
AN RED BOOK /VOL 1.
2019

Commissioner of Internal Revenue, G.R. No. 179343, January 21,

2010).
Note: A motion for reconsideration of the Commissioner's denial of the
protest or of the Commissioner's denial of the administrative appeal
shall not toll the 30-day period to appeal to the CTA (R.R. No. 18-2013,
Sec. 3.1.4; Fishwealth Canning Corp. v. Commissioner of Internal
Revenue, supra). On the other hand, a motion for reconsideration filed
with the Commissioner against the decision of his duly authorized
representative did toll the period for the filing of a judicial appeal
(Commissioner of Internal Revenue v. International Pharmaceuticals,
Inc., supra).

Q: What actions of the Commissioner are equivalent to denial of the protest of a

taxpayer?
ANS: These include:
1. s Filing of criminal action aggiost.the...tax a er;
2. ssuance of warranjA•rdistraipt ands le to enforce collection of deficiency
assessment witbott st.sequdol f civil . -tion for collection (Hilado v.
OommissionspOririterneLVevenueiX,11A..cas po. 256, February 25, 1964;
' Commissioner o forty! Revenue v.'In(e,criaticni Pharmaceuticals, Inc.,
supra);
• Note: T he d thatitthe`011eplion ofi ta k_gh summaryremedies
during e pe enc of the prcitestAlid not ns tte a ecision for lack of
finali and t t the appealablAecision was the s 145$ t action taken by
the he it fild a civil action tor co e tion (gam spioner of Internal
Rev -vr nion S ipP7OTtp I .1f4N6. 6.160, M 21 $990).
3. Civil of n (Yab s v. Flo .gn• O. 469,54, July 0;4 2; Commissioner
of In rnAL4 u Uniontilb-•rng Cor' pra Adv sing Associates,
!pc. fA s .R o 9,.58, De , • er ); and
4. efe reqd repi .atio to t Solicitor General
(Repubk v. 1..1 77a A G:R' • \ 173 ; Marc 31, 1966).
Q: What is the rpedy (the LOx eop Inactio of the protest or
administrative apeal - L. 1: from submission of
documents/filing off* test . - —6"Vase.ma
ANS: Under Sec. 3.1.4 of 18-2Uags as 'er either:
File a petition for rev ew .4fth thdtTA days from the lapse of the 180-
day period; or
2.1 Await the final decision of the Commissioner or his duly authorized
u representative on the disputed assessments and appeal such final decision to
the CTA within 30 days after receipt of a copy of such decision (Rizal
Commercial Banking Corp. v. Commissioner of Internal Revenue, G.R. No.
168498, April 24, 2007).
Note: The aforementioned remedies are mutually exclusive (R.R. No. 18-2013, Sec.
3.1.1). The failure of the taxpayer to appeal the inaction on the disputed assessment by
the Commissioner or his representative within 30 days after the lapse of 180 days from
the submission of supporting documents will result in the finality of the FAN (A.M. No.
05-11-07-CTA, Rule 4, Sec. 3 (A)(2); Rizal Commercial Banking Corp. v. CIR, supra).

Q: What s the effect of a failure of a taxpayer to appeal a decision of the

Commissioner with regard to a protest?
ANS: The final assessment notice shall become final and executory (R.R. No. 18-2013,
Sec. 344)

952
 BOOK: VOL 1.
2019

Compromise and Abatement of Taxes

Q: Whatisla compromise?
ANS: ComPromise is a contract whereby the parties, by making reciprocal concessions,
avoid litigation or put an end to one already commenced (CIVIL CODE, Art. 2028).

Q: What is fa tax compromise?

ANS: A tak compromise involves the reduction of the taxpayer's liability (ABAN, Law of
Basic Taxation,
l supra at 235).
Note: A tax compromise is possible at any stage of the litigation, even during appeal,
although legal propriety demands that prior leave of court should be obtained
(PampangaiSugar Dev't. Corp. v. Court of Industrial Relations, G.R. No. L-13178, March
25, 1961). But a compromise can never be entered into after final judgment, because by
virtue of such final judgment, the Government had already acquired a vested right
(Roviro v 'Anwar°, G.R. No. L-5482, May 5, 1982).

Q: What are the requisites for the comabmise of taxes?

ANS: The requisites are:
1. The ' taxpayer has a tax Alt
2. There must be an offer WA ayer or Commissioner) of an amount to be
paid by the taxpayer; k
3. A reasonable doubt aso,t6 t 4o Re laim,ainst the taxpayer exists;
or, the financial posn
jA t 'xpayer eM013s ra es a clear inability to pay
the, assessed t4 and
4. there must % 4acceptarrAb the taxpayer orhargmissioner, as the case
maybe) of t gaffer in settlemen Al the original clal (NRC, Sec. 204).

Q: Who may com

ANS: The Co missioWs the onIkicial vested with owes and discretion to
compromiSe wandgtiimigal uses aris from ARC (NIRC, Sec
204). Courts have no jx
,"? to cqmtl hi o exercise 'al one way or the
other. HoWever,IftqleyLonfivalua "on Ward may enter into a compromise on:
1. Assessments issue by th6 reg. al offices involving basic deficiency taxes of
P500,000 or less; and
2. Minpr crimina legions disco a. and district officials (NIRC,
Sec. 7 (C)).

Q: When may the CommitSjoer enter into a compromise of taxes?

ANS: The Ccimmissioner may compromise any national internal revenue tax when:
1. A reasonable doubt as to the validity of the claim against the taxpayer exists
(minimum compromise rate: 40% of the basic tax assessed); or
2. The financial position -of the taxpayer demonstrates a clear inability to pay the
assessed tax (minimum compromise rate: 10%, 20% or 40% of the basic tax
assessed, depending upon the condition of the taxpayer) (R.R. Nos. 30-2002
and 8-2004).
Note: The Compromise must be approved by the Evaluation Board when:
1. The basic tax involved exceeds P1 million; or
2. The settlement offered is less than the prescribed minimum rates (NIRC, Sec.
204).

Q: What are the cases which may be compromised?

ANS: The following cases may be compromised:
1. Delinquent accounts;
2. Cases under administrative protest after issuance of FAN to the taxpayer
which are still pending in the Regional Offices, Revenue District Offices, Legal

953
 ' `-= -""i•

2019
Ya.

I Service, Large Taxpayer Service (LTS), Collection Service, Enforcement

Service, and other offices in the National Office;
3. Civil tax cases being disputed before the courts;
4. Collection cases filed in courts;
5. Criminal violations, other than those already filed in court or those involving
i .
criminal tax frauds; and
6. Cases covered by pre-assessment notices but taxpayer is not aggreable to the
findings of the audit office as confirmed by the review office (DIMAAMPAO,
Taxation, .supra at 190-91).
I
Q: What are the cases that cannot be the subject of a tax compromise?
ANS: The, following cannot be the subject of a compromise:
1. Withholding tax cases, unless the applicant taxpayer invokes provisions of law
that cast doubt on the taxpayer's obligation to withhold;
2. Criminal tax fraud cases confirmed as such by the Commissioner or his duly
authorized representative; ,...,.,,„,„
,
3. Criminal violations alcefilectin
aW -cou(t; • —
4. Delinquent acco_urifs:wilihduly app)oh`dit4c0bd .1e,p,f installment payments;
5. Cases wherwfin'arrppori ',of.reinvesigdon or: reconsideration have been
issued
1
resulting tO1,,reeciiib
,,,,,ion in the , or.igilia
, ,,Ltes...7),
grn. nt and the taxpayer is
6greeable," 44' ..--------,..,
6. Cases '6'6 -4 m final aqd 6.)seculory a fte fi naliudAment of a court, where
.,
compr mise s, equ sted oii thavrourrd of do btfalkv lidi 'of the assessment;
aind 6 ::
,f • ,1
7. Estat 57t c.ises w ere co*niFigrZir , tilted o Bound of financial
incapacity-ofthe taxpay6W.R.: I:o.c30.P002, pec. 2).
o •
I ‘ rmil tv
Q: May criming "v of 1 -147ccompro:mised?
ANS: Yes,1 excbpft:r \,-c.-\ ;, CPs. i-:\
1. Thos alreddy fileclInjRczurt; 6N1 ''4--
'- ".
,.:,
tc.7
2. Those volviii cnrni 4>t ffau s (R:

Q: What is a compromise eitila tYsliNTENrckil"-

ANS: A r cOmpromi4 enalty40 c rtairimaaunt of.smone h the taxpayer pays in
lieu of criminal prosecution,(-2C,/ MP-AOrTaXgqesu radoe 180).
Note: Asa compromisCitkiizee6 n agiyegg IN ecrie rty cannot impose it upon the
other. If ap offer of compromise is reje - axpayer, the Commissioner of
Internal ;Revenue should file a cnmiffa on if he believes that the taxpayer is
criminal y liable for violation of the tax law as the only way to enforce a penalty
(Commissioner of Internal Revenue v. Abad, G.R. No. L-19627, June 27, 1968).
I
Q: What is tax abatement?
ANS: T6x abatement is the cancellation of the entire tax liability of the taxpayer (ABAN,
Law of Badic Taxation, supra at 235). , • .

I
Q: When may the Commissioner abate or cancel tax liability?
ANS: The :Commissioner has the authority to abate or cancel internal revenue taxes,
penalties and/or interest pursuant to Sec. 204(B) in relation to Sec. 7(c) of the NIRC in
the folloWinig•cases:
1. The tax or any portion thereof appears to be unjustly or excessively assessed;
or
2. The administration and collection costs involved do not justify the collection of
th6 amount due.

954
( 4..7...
, s. ,
„ :-.1.:::.?.13:f-4,::7-.4;:•:,)., "-
-4,....);., ,.. VOL 1.
t--.4 k.,,•,,,,„ 1 2019
‘'., ,,,,....f,1,.1 -,Aii,,:-, • /-8 '

Recovery of Tax Erroneously or Illegally Collected

I
Q: What is a tax refund?
ANS: A tax refund refers to actual reimbursement of the tax. A "refund" is a written claim
for the payment of cash for taxes erroneously or illegally paid by the taxpayer to the
government (ARAN, Law of Basic Taxation, supra at 325).

Q: What is the statutory basis for a tax refund under the NIRC?
ANS: The statutory bases are:
1. The Commissioner has the authority to credit or refund taxes erroneously or
illegally received or penalties imposed without authority, refund the value of
internal revenue stamps when they are returned in good condition by the
purchaser, and, in his discretion, redeem or change unused stamps that have
been !rendered unfit for use and refund their value upon proof of destruction
(NOG, Sec. 204(C)); and
2. Any national internal revenue tax lleged to have been erroneously or illegally
assessed or collected, or of taDy penalty claimed to have been collected
without authority, of any etifft alleged to have been excessively or in any
maInnler wrongfully colleCf t authority, or of any sum alleged to have
been excessively or in agyinanrielvrongfully collected may be filed as a claim
fori refund or credit with ttieiar mitsion,er (NIRC, Sec. 229).
Ast"
Q: Why is proof I fora clairo,drrefundiliecessaryr1
ANS: Tax refund is in pnature of aax exemption and mu Nherefore, be construed
strictly against I the taxpayer (ComrtfigSto er of Internal RANO v. Fortune Tobacco
Corporation,I G.R. Noie1647427b75/Sep wther 11, 2011 311 encie, before recovery is
allowed, it must beAbiLdWeTthat they -44as an actua Col ection and receipt by the
Government ;ofilketax soughtto be r,e,co ed and this requires fatal proof (Collector
of Internal Reefue v. dip°, G.R. No. '861, Decernter 21, 196
I: . "
Q: Who has, tlitp,burdpripAPfoofOo' cl Q1 of refunds
ANS: The CourVitcovizeg• as it lwalohas, that the burden of proof to establish
entitlement to refund is on le claimant , xpayer. Being in the nature of a claim for
exemption, refund is construe in strictissWds- a gainst the entity claiming the refund
and in favor of the taxiapoliver.3hiptisiret.hlaimant must positively show
compliance with the stelutory4ep(oirerfients provided for under the NIRC in order to
successfully', pursue ort's. cla ref (Winebrenner & Iiiigo Insurance Brokers, Inc. v.
Commissioner ol f IntemaMIV ue, G.R. No.206526, January 28, 2015).

Q. In a claim for refund of excess income tax payments resulting from unutilized
creditable withholding taxes, is the taxpayer required to present in evidence its
quarterly income tax return of the subsequent year to prove that excess income
tax payment was indeed not carried over to the succeeding year?
ANS. No. According to the Supreme Court, subsequent quarterly income tax returns are
not indispensaOle. What Sec. 76 of the Tax Code requires is to prove the prima facie
entitlement:to 4 claim, including the fact of not having carried over the excess credits to
the subsequent quarters or taxable year. It does not say that to prove such a fact,
succeeding quarterly ITRs are absolutely needed. This simply underscores the rule that
any document, {other than quarterly ITRs may be used to establish that indeed the non-
carry over clause has been complied with, provided that such is competent, relevant and
part of therecords (Winebrenner & Iiiigo Insurance Brokers, Inc. v. Commissioner of
Internal Revenae, supra).

955
Q: Discuss the nature of an erroneously paid or illegally assessed or collected
tax.
ANS: There is a mistake of fact when a taxpayer erroneously pays a tax, as for instance
in a case where he is not aware of an existing exemption in his favor at the time the
payment was made (51 Am. Jur. 1023, cited in UST Cooperative Store v. City of Manila,
G.R. No. L-17133, December 31, 1965).

Q: Distinguish tax refund from tax credit.

ANS: In tax refund, there is actual reimbursement of the tax while in tax credit, the
reimbursable amount is applied against the sum that may be due or collectible from the
taxpayer (DIMAAMPAO, supra at 227). On the practical side, the taxpayer to whom the
tax is refunded would have the option, among others, to invest for profit the returned
sum, an option not proximately available if the taxpayer chooses instead to receive a tax
credit (Commissioner of Customs v. Philippine Phosphate Fertilizer Corp., G.R. No.
144440, September 1, 2004).

Note: .4k
1. The options of Cref or tax 6reffikareYelte ative and the choice of one
precludes the errfailur dirtflicite oice by the taxpayer will
not bar a v fe e eF a refund, show d e chosen later on. The
indicatio jrbsep-optroirgrdrily-k(liN of tax administration
(Philam ana emenbln . Gpmmislio al Revenue, G.R.
Nos. 1 62 04, Debem14*005)
21 rrevo ule ec. 76) iri no applicabl to t er who originally
opte fund rove xcess creditable
taxe e tax cceedi ble -years. The
rrev rule. is on of r, hence, if the
taxp e ides carry y no'I nger revert to its
origi oe(`I aryq Se 4Ma agement, Inc. v.
Com ione of , Mall 7, 2018).

Grounds. Requlites. a Perio efundir Issuance of Tax

Credit Certificate
C'I CrE1\1-0>)
Q: When may a taxp yer aim4941 tax efuncl-qr 4:ro dit?
ANS: 'A claim for tax refliko edit a by rp4)013 . (EPS)
1. Tax is colleptpclgrront9 sly or
2. Penalty is collected with tea =V44
3. Sum collected is excessive or in any manner wrongfully collected (NIRC, Sec.
229).

Q: What arelhe requisites for a claim of a tax refund or tax credit?

ANS: The, requisites are: (ErCla-Cat-2-Proof)
1. There is a tax collected Erroneously or illegally, penalty is collected without
authority, or a sum collected is excessive or in any manner wrongfully
Collected (NIRC, Sec. 229);
2. There must be a written Claim for refund filed by the taxpayer to the
Commissioner (Vda. de Aguinaldo v. Commissioner of Internal Revenue, G.R.
No. L-19927, February 26, 1965);
Note: The following are exceptions to the filing of a written claim for refund:
a. A return filed showing an overpayment shall be considered as a written
claim for credit or refund (NIRC, Sec. 204 (C));
b. The Commissioner may, even without the written claim therefore,
refund or credit any tax where on the face of the return upon which the
payment was made, such payment appears clearly to have been
erroneously paid (NIRC, Sec. 229).

956
 3. The claim for refund must be a Categorical demand for reimbursement. The
idea probably, is first, to afford the collector an opportunity to correct the action
of subordinate officers; and second, to notify the Government that such taxes
haNie been questioned, and the notice should then be borne in mind in
estimating the revenue available for expenditure (Bermejo v. Collector of
Internal Revenue, G.R. No. L-3029, July 25, 1950);
4. The claim for refund must be filed within two 21 years from the date of
1 1
payment of the tax or penalty regardless of any supervening cause (NIRC,
SeC. 229); and
Note:
. A claimant for refund must first file an administrative claim for refund
before the CIR, prior to filing a judicial claim before the CTA. Both the
administrative and judicial claims for refund should be filed within the
two (2)-year prescriptive period indicated therein, is allowed to file the
latter even without waiting for the resolution of the former in order to
prevent the forfeiture offits claim through prescription (Metropolitan
Bank & Trust Cos tAldEilnmissioner of Internal Revenue, G.R. No.
182582, April 17„40
b. It should be poinfgaro tf l er that while the prescriptive period of two
1 (2) years com5 Pferi run from the time that the refund is
ascertained, the, r -p erphis dete fined by law (in this case,
from the data,goT pa la - o ) 1, o on the discovery by the
taxpaye lit% erron ou or excessive pay pt of taxes. The issuance
by thgAIR of the RJja. declaring the t7 empt status, if at all, is
mereffAco firmato.vki n ature, hence, asis that the subject
exem s)*.provide nd ascertained nlj through BIR Ruling
(,gamissiongsAf Intern evenue v. ani ctric Company, G.R.
No. 18,1_ 451, June 9,W,1
fc
5. The' At' nararliTs show proof payme p!, must.be actual-
co leclon and t pt bflP, ,e G.', - rnment o o ' to be recovered
1 . -.1
and this4e.9dires ctuarMof iillector of Intern enue v. Li Yao, G.R.
NC. 11-11861gbece ber 27, 1961
I I ‘ i, k, ..-1,
: .
Q: What are the essetial basic conditi e or a taxpayer to be entitled to
a refund claim or issw nce of ta-F-CIA presenting any excess or
unutilized creditable wifhholdm income tax?
ANS: The co n ditions are
1. The claim is fileditli the Commissioner of Internal Revenue within the two-
year 'period from the date of payment of the tax;
2. It is shown on the return of the recipient that the income payment received was
declared as part of the gross income; and
3. The fact of withholding is established by a copy of a statement duly issued by
the payor to the payee showing the amount paid and the amount of the tax
withheld therefrom (Commissioner of Internal Revenue v. Team (Philippines)
dperations Corporation (formerly Mirant Phils., Operation Corporation), G.R.
N9..17.9260 April 2, 2014).
I
Q: When will the prescriptive period for refund of final withholding taxes
commence? I
ANS: The Claim for refund must be filed within two (2) years from- the date of payment of
the tax or Penalty regardless of any supervening cause (NIRC, Sec. 229).
Note: ' I
1. In case of corporate income tax, in which the corporate taxpayer is required to
i
fi e and pay income tax on a quarterly basis. Quarterly income tax payments
are treated as mere "advance payments" of the annual corporate income tax,
,
I
957
 .r14

there may arise certain situations where such "advance payments" would
cover more than said corporate taxpayer's entire income tax liability for a
specific taxable year. Thus, it is only logical to reckon the two (2)-year
prescriptive period from the time the Final Adjustment Return or the Annual
Income Tax Return was filed, since it is only at that time that it would be
possible to determine whether the corporate taxpayer had paid an amount
exceeding its annual income tax liability (Metropolitan Bank & Trust Co. v.
Commissioner of Internal Revenue, G.R. No. 182582, April 17, 2017).
2 For Final withholding taxes are considered as full and final payment of the
income tax due, and thus, are not subject to any adjustments. Thus, the two
(2)-year prescriptive period commences to run from the time the refund is
ascertained, i.e., the date such tax was paid, and not upon the discovery by
the taxpayer of the erroneous or excessive payment of taxes (Metropolitan
Bank & Trust Co. v. Commissioner of Internal Revenue, supra.).
3. The payment of the DST and the filing of the DST Declaration Return upon
loading/reloading of the D§,ritetering„Rachine must not be considered as the
"date of payment",,,,wren the Rrewrytive..q.eriod to file a claim for a
refund/credit musr6om nce since it is me:talt'a advance payment for future
application. Thilalilit 9,:Lthewpayrnek(if the,,D falls due only upon the
occurrence/of-,a tax13It
.04 transaction, hehcefhe mencement of 2-year
period pi:I-4V s-Ny. "ssioner of Internal
Revenue, yo. $065-ronek2040/6).
4. n casOf eclafin for refunetf Input VAT attqutablei o zero-rated sales under
2 (A) f the the hnio,,Year prescriptive peEdE)s liould be reckoned
from he—1b e of thr to
Sec.y guider WWI I PO relOral s or transactions
were of from? thAi§te:ot!,6a100tifolthe taxorbenal, (Commissioner
of I evenue v. AlC4isr eAr,g0giCo. of Asia, Inc; R. No. 184823,
Octo e 01.0A • ComnitYSIO'br of Inte Re enu tfifi Mirant Pagbilao
. Corp1Q.R. o. 1, Ail 9, Septe(n • er_.1,?, 20 8
•{' ‘. --.. .1., i
Proper Party ta_File Claim forlisetbndor ax` edit
y°,4...rt
Q: Who may claika tax re[uncOrv fax
a;(-
ANS: ,The proper pakty to citrelin`i.„., ififfint,ci6n indirect tax is the statutory
taxpayer, the person an,whjorohett is im os d%111aw n paid the same even if
he shifts the burden thereof to Roller 1 air/ S(rgapo0
-N Pte. Ltd. v. Commissioner of
Internal Revenue, supra).

Q: May a withholding agent claim or apply for tax refund or tax credit?
ANS: Yes The withholding agent has a legal right to file a claim for refund because:
t He is considered a "taxpayer" under the NIRC as he is personally liable for the
Withholding taxes should it be found to be less than the amount that should
have been withheld under the law; and
2. As an agent of the taxpayer, his authority to file the necessary income tax
return and to remit the tax withheld impliedly includes the authority to file a
claim for refund and to bring an action for recovery of such claim. While the
withholding agent has the right to recover the taxes erroneously or illegally
collected, he nevertheless has the obligation to remit the same to the principal
taxpayer (Commissioner of Internal Revenue v. Smart Communication Inc.,
G.R. Nos. 179045-46, August 25, 2010).

Q: Is payment under protest necessary in order to obtain refund to internal

revenue taxes?
ANS: No. 'payment under protest is not necessary in order to obtain refund to internal
revenue taxes (NIRC, Sec. 229).

958
 I.4,-77, U.
1-,,;171,::::,;;iirirl:e;It'l.:!- '., ligef-,1>;jii:•:).c"," ? . 7;44:,,,12;,,',;57.4;;Tcfir,;;:i
3 iif1,..t7-'
R
-.,.\.,.16, ..:.„.....,,,,..,...,..„..Aatt:,..V3,-.15..Af-''/:,,!-r.t.. ..:::•!:..V...e41:4,1.k 1!ilf,::7?..,:,' .

Q: Is partial payment of a tax sufficient basis for a tax refund?

ANS: No. The partial payment of a tax cannot be the basis for a tax refund (Collector of
Internal Revenue v. Prieto, G.R. No. L-11976, August 29, 1961).

H. GOVERNMENT REMEDIES
Kinds
Q: What are the remedies of the Government?
ANS: The Government has the following remedies:
1. Administrative remedies:
a. Tax lien (NIRC, Sec. 219);
b. Distraint and levy (NIRC, Sec. 205);
c. Forfeiture of real property (NIRC, Sec. 224);
d. Further distraint and levy (NIRC, Sec. 217);
e. Suspension of business operations (NIRC, Sec. 115); and
f Non-availability of injunction to restrain collection of tax (NIRC, Sec.
218). hi
2. Ale& remedies
a. Civil; and (N/RC,.Sete,04
6. I Criminal. (NIRC, 40305):
Administrative Remedies

Tax Lien 1
Q: What is te,natureprptextent of;a1a4len?
ANS: Tax lien is a legel ortkcif charge. n property, real oipereonal, established by
law as securitaiegfault*ihe paymen f taxes (Ho 'gkon and Shanghai Banking
Corp. v. RafferirG.R. Novejibier 15, 1918
• ' 1,
Q: Discuss itiqnattire of Aux
ANS: When a taxpapye?1,i0 cts or refusgilo pay his infernal-revenue tax liability after
demand (issuanceir&FFX*, e arribuntreo demanded shall be a lien in favor of the
IPA —
government from the time thej assessme as made by the Commissioner until paid
with interest penaltiesgappeosts that ma :imddition thereto upon all property
and rights to propertyz btfiging togael9a .,11/4//
I I
Q: When does the lierrintgy* of the Government arise?
ANS: Tax lien attaches:
1. With "respect to personal property — from the time the tax became due and
demandable; or
2. With respect to real property — from the time of registration with Register of
Deeds (Commissioner of Internal Revenue v. National Labor Relations
COminission G.R. No. 74965, November 9, 1994).
Note: The lienishall not be valid against any mortgagee purchaser or judgment creditor
until notice of such lien shall be filed by the Commissioner in the Office of the Register
of Deeds of the province or city where the property of the taxpayer is situated or located
(NIRC, Sec. 2)9).

Q: Which is superior — a tax lien or a claim based•on a judgment? •

ANS: It is settled that the claim of the government predicated on a tax lien is superior to
the claim ofd a private litigant predicated on a judgment. Execution sales affect the rights
of the judgment debtor only, and the purchaser in an auction sale acquires only such
rights as the judgment debtor has at the the of sale. It is also well-settled that the
sheriff is net authorized to attach or levy on property not belonging to the judgment
debtor (CoMmissioner of Internal Revenue v. National Labor Relations Commission,
supra).
959
 B EDAN RED BO( VOL 1.
2019

DistraintandLevy
Q: What is distraint?
ANS: Ibistraint is the seizure by the government of personal property, tangible or
intangible, to enforce the payment of taxes, to be followed by its public sale, if the taxes
are nof voluntarily paid (1 DE LEON, NIRC Annotated, supra at 475).

Q: Wh'pt is garnishment?
ANS: Garnishment is the taking of personal properties, usually cash or sums of money,
owned!by a delinquent taxpayer which is in the possession of a third party.
Note: Bank accounts may be distrained notwithstanding the Bank Secrecy Act (R.A. No.
1405) which prohibits inquiry into bank accounts, since in the case of distraint, no inquiry
is madO. The BIR simply seizes so much of the deposit as is sufficient to discharge the
obligation, without having to know how much the deposits are, or where the money or
any pailit Of it came from (1 DE LEON, NIRC Annotated, supra at 481, citing Op. of Sec.
of Justicej No. 54, s. 1956).

Q: Discuss the procedurajoilli(Etrainfoflpe o-al pro erty.

ANS: They procedure is alollorp.'$.
1. Distraint prime' comrrienn,cedAr:
c.~~edAr:
a. The omplissItin__ er or....hii .duly au *z,,eVe sentative where the
unt rf 61-vpdie in exd s of P1 mil io cor
b. Theenu? OocelaRDO) wtie mount involved is
million or less;
-,."
2. A Wa ano Dislaint-shall-b i'a-served-wh re the I property of the
iiil
PR
taxpa ,erS YsicalY takeRby,t4 distraping , fficer;
3. The istrai g officer shIlli q_CibbittiA the R 0 and tp venue Regional
Dire o port-q the' cligffarritrwit in pc 0) days m receipt of the
warra t, ptide Ai 4he-Gemmissioner-or I' ly Nuth d representative
hall tth po $1NE ift thMorp,V9"&lis r f nd hat nsolidated report
by the Reverke Reggir) by the Commissioner as
often a necesgary; ‘k..1 • I
4. The Not ce of S'atp iRtcaing_ Styr p sted in not less than
two (2) placaqa_lh"iaeittiqni
a -'p ll distraint is made. The
time of sale% all 8. 6"les an e er notice to the owner or
possessor of Voile ncypubl`a lo or,p , uch notice; and
5. At the time and Ol'acqfiied in 04 otiR4j1e evenue officer shall sell the
goods subject of thedistrain -91,Publ c auction, to the highest bidder for
sash, or with the approval of the Commissioner, through duly licensed
commodity or stock exchanges (NIRC, Secs. 207-209).
Note: Any' residue over and above what is required to pay the entire claim, including
expenses, shall be returned to the owner of the property sold (NIRC, Sec. 209)..
Moreover, if at any time prior to the consummation of the sale, all proper charges are
paid to the officer conducting the sale, all distrained properties shall be restored to
owner (Right of Pre-emption) (NIRC, Sec. 210).

Q: When may the Government purchase the goods subject of the distraint?
ANS: The Commissioner or his deputies, in behalf of the National Government, may
purchase the goods subject of the distraint when the amount bid for the distrained
property is not equal to the amount of tax or very much less than the actual market
value o0he property (NIRC, Sec. 212).
Note: Property so purchased may be resold by the Commissioner or his deputy, subject
to the rules and regulations prescribed by the Secretary of Finance, the net proceeds
therefrom ,shall be remitted to the National Treasury and accounted for as internal
revenue (NIRC, Sec. 212).

960
Q: What is the' duty of the distraining officer with respect to the sale?
ANS: The Officer making the sale shall make a written report of the proceeding of the
sale to the COrrimissioner within two (2) days after the sale (NIRC, Sec. 211).
t:
Q: When cap tuere be constructive distraint?
ANS: To pr9tect the interest of the Government, the Commissioner may place under
constructiveldistraint the property of a delinquent taxpayer or any taxpayer, who in his
opinion is: (RLR-HO)
1. Retiring from any business subject to tax;
2. Is riteriding to Leave the Philippines;
3. Is tending to Remove his properties therefrom;
4. Is ntending to Hide or conceal his property; or
5. Is intending to perform any act tending to Obstruct the proceedings for
co iecting the tax due or which may be due from him (NIRC, Sec. 206).

Q: What is evy?
ANS: It refet,s to the seizure of real,p penes and interest in or rights to such properties
the satisfaction of taxes due frog inquent taxpayer (2 DIMAAMPAO, Taxation,
supra at 158).

Q: When may levy be effected?,

ANS: Levy can be made:: el ' .i.
1. Before, simulta_MOSiy, or after straint of personal operty; or
2. In case the wdtant of levy is
'4, ar dalT;
a. not issAtoefore 9,-,simu aneously with th aront of distraint, and
O. the egsonlgtrdberty of e taxpayer is uffi lent to satisfy his tax
d51Thquenpfte Comm s oner or his a tho .representative shall,
..-.
v
''within a ays after The cution of th distr oceed with the levy
Ildhaxprybr's read grope NIRC, eogi2g

Q: Discuss the plinet:,_ or le ryon reel property.

ANS: The procedureM
1. A idUly auTheuticatel certificate Of Levy) shall be prepared by the
Commissioneq909duly author! se tative.
Note: The celficate stakOritat
• a. DescriWon ofipproperty levied;
b. Name of6thm e taxpayer; and
C. Amount cletWind penalty due from him.

The certificate shall operate with the force of a legal execution throughout the

2. Levy shall be effected by writing upon the certificate a description of the

property upon which levy is made. At the same time, written notice of the levy
shal be mailed to or served upon:
a. The Register of Deeds of the province or city where the property is
located; and
b. The delinquent taxpayer, or if he is absent from the Philippines, to his
agent or the manager of the business in respect to which the liability
arose, or if there be none, to the occupant of the property in question.
3. Within ten (10) days after receipt of the warrant, a report on any levy shall be
submitted by the levying officer to the Commissioner or his duly authorized
representative, provided that a consolidated report by the Revenue Regional
Director may be required by the Commissioner and that the Commissioner or
s duly authorized representative shall have the authority to lift warrants of
levy issued;

961
 VOL 1.
2019

!The officer conducting the proceedings shall proceed to advertise the sale
6.
mithin twenty (20) days after the levy, and the same shall be for a period of at
least thirty (30) days. The advertisement shall contain: (ANTS)
a. Amount of tax and penalties due;
1.• b. Name of the taxpayer against whom taxes are levied;
! c. Time and place of sale; and
d. Short description of the property to be sold.
Note: Advertisement shall be effectuated by: (Po-Pu)
i. Posting a notice at the main entrance of the municipal building
or city hall and in a public and conspicuous place in the barrio or
district in which the real property lies; and
ii. Publication once a week for three weeks in a newspaper of
general circulation in the municipality or city where the property
is located (NIRC, Sec. 213).
A public sale of the property under levy shall be held either at the main
entrance of the municipal Pailidingax,citx hall, or on the premises to be sold, as
the officer conducti3glie propeedinns .shalt determine and as the notice of
pale shall spec' cIttfficat.429 saleAll' bpdplivered to the purchaser. If
the proceedsOf tlfe—Sple eXceed.the,clairmandlcosebtsale, the excess shall be
turned overAo`the ger Of the propertylVf 0,"Sect\210).
Note: 44'
1. The tanOa'yer,
. .
iay a iscontreiall -41,1e pr ceediqg ) paying the taxes,
Wait] s arrolnterept at any tirile• before th dayNti ed fors the sale (Right of
Pre-e pli_o_n)h(WIRCI Sec. 213),AA ‘Wl!I for less than its
Real pro ertf place under evyi way, e so t public
cnark6tt vvalud (NIRC Sk7415).tnc61115tthxpayer is iVienre•right to redeem
(NIR , 214). 'th rat! t diStrain d prop rty-t rule is different
(NIR ,'Sbq. 12
.SC) 5")
Q: What is the ( eat ettonA gie-Opf eyy?
ANS: Thelieal p perty iay betelleeined citgn,o entjt xpayef or anyone for him,
within One 'year film the to tli141)e_.:0Figo theReventre District Officer the
amount of: ,
1. Public Tax in SCIE1\101%),"
• 2. Penalties;
3. Interests thereontWitime of e to the date of sale, and
4. Interest on purchase e at 1d% (a from the date of purchase to the
date of redemption (NIRC,er2111).
Note: In case of natural persons, for purposes of reckoning the one-year period on the
foreclosedrasset of natural persons and the period within which to pay Capital Gains
Tax or Creditable Withholding Tax and Documentary Stamp Tax on the foreclosure of
Real Estate Mortgage, the period shall be reckoned from the date of registration of the
sale in the0ffice of the Register of Deeds. For juridical persons in an extrajudicial
foreclosure, Section 47 of The General Banking Law of 2000 (R.A. No. 8791) provides
that its right of redemption shall be until, but not after, the registration of the certificate of
foreclosure sale with the applicable Register of Deeds, which in no case shall be more
than threelmonths after foreclosure, whichever is earlier. The right of redemption shall
be reckoned from the date of approval by the executive judge (R.M.C. No. 55-2011).

Q: When is a Final Deed of Sale issued to the purchaser?

ANS: It Shall be given to the purchaser only after the failure of the taxpayer to redeem
the property after the expiration of redemption period (NIRC, Sec. 202).

962
 r,q 7;114.4

Q: What is the remedy of the Government when there is still tax delinquency after
initial distraint or levy?
ANS: Distraint and levy may be repeated if necessary until the full amount of the tax
delinquency due, including all expenses, is collected from the taxpayer (NIRC, Sec.
217). Further distraint and levy is necessary because a clever taxpayer may able to
conceal most, of the valuable part of his property from the revenue officers to escape
payment of his tax liability by sacrificing an insignificant portion of his holdings (Castro v.
Collector of IPternal Revenue, G.R. No. L-12174, April 26, 1962).
I 1.
Forfeiture or Real Property
,;
Q: May the real property subject of a levy be forfeited to the Government?
ANS: Yes. The ,Internal Revenue Officer conducting the sale shall declare the property
forfeited to the Government in satisfaction of the claim for taxes in case:
1. There is no bidder for real property exposed for sale; or
2. Thei highest bid is for an amouJt insufficient to pay the taxes, penalties and
costs (NIRC, Sec. 215)
Note: Within .lone (1) year from tke,,ci ifillt.such forfeiture, the taxpayer or any one for
him may redeerri said property bymOymathe Commissioner or the latter's Revenue
Collection Officer the full amourittOleejteTes and penalties, together with the interest
thereon and the costs of sale, btif ifiltielT • ertyJpe
Cl
not thusredeemed, the forfeiture
shall become absolute (NIRC, Sec. 2;f50 ., . " t
, l* '
. . , de
Q: How is thle remedy4ofilorfeiture 1)7,k the Government en ?iced?
ANS: ForfeitUre 40-
„.1,is enlarged?
1. In came of pirsA.ao* ,,prfipertY — seizure and s e destruction of specific
forfeited fope-rtyipfi : , /
2. In case of real property — ,b,y, j dgment of co dem ationend sale in a legal
-4-,9.- prodgeging, civil orc !nal, as the case troy require (NIRC, Sea
actiono
von; .7,- t..,
224;4 '"' 1'1 T, k% 4
;1
'tk., .4;41' 4,
Q: When is the P 49074 ° ekritest th
, f elture
. of chattel?
ANS: The owner deting to eintestihe va ity of forfeiture may:
1. At enje, time tgforAthe sale or o of the property, bring an action
again6t the gerT8h seizLngAgttie• eying possession thereof to
recover the same, and,"' on- giving proper bond, may enjoin the sale; or
2. After the saleidizd w” n six months, he may bring an action to recover the net
ti ,
preeds
of realized - e sale (NIRC, Sec. 231).
11
Q: What arelthe modes of resale of real estate taken for taxes?
i
ANS: The Commssioner
i may:
1. Sell and dispose of the same at a public auction upon giving of not less than
twenty. (20) days of notice; or
2. Dispoee the same at a private sale with the approval of the Secretary of
Finance.
Note: In either' case, the proceeds of the sale shall be deposited with the National
Treasury, and len accounting of the same shall be rendered to the Chairman of the
Commission on Audit (NIRC, Sec. 216).
; 1!
Q: How are`•111e forfeited goods or articles disposed of?
ANS: The goods or articles are:
1. Soldli ;' — in case of forfeited chattels and removable fixtures, so far as
practicable, in the same manner and under the same conditions as the public
notice
, , and the time and manner of sale as are prescribed for sales of personal
property distrained for non-payment of taxes;

963
 "VOL 1.
2019

2. C Destroyed - in case of distilled spirits, liquors, cigarettes, other manufactured

products of tobacco and all apparatus used in or about the illicit production of
such articles, by the order of Commissioner, when the sale of the same for
L consumption or use would be injurious to public health or prejudicial to the
, enforcement of law;
3. r Sold or destroyed - in cases of all other articles subject to excise tax, which
,have been manufactured or removed in violation of the NIRC, dies for printing
or making of internal revenue stamps and labels which are in imitation of or
purport to be lawful stamps, or labels, in the discretion of the Commissioner
(NIRC, Sec. 225).
Note: Forfeited property shall not be destroyed until at least 20 days after seizure.
(NIRC, Sec. 225).
Q: How care funds recovered in legal proceedings or obtained from forfeitures
disposed?
ANS: All, judgments and monies recovered and received for taxes, costs, forfeitures,
fines and penalties shall be paid to the.,Comrnieloner or his authorized deputies as the
taxes themselves are requireWre pad, ante;i0eptAs specifically provided, shall be
accounted for and dealt VA'k thatsame
'- lea§ (N
0/RC, $ec.'226).
V
ate'
Suspension of Busine‘ '' -. 17) .'tk
"Nt ' t .1.. \
Q: Discuts the poliverof;Commissioner to s spend hejoUs" ness operations of
a taxpayer. 1 i i "i A -•:,--
ir 4 `ti
ANS: The Conirnissio er or is authorize: represent tive rsuf end the business
a
operations anditemgo rily dpse-the-bilsras-establishment -an person for the any
of the folloiwin 'yiefq ns: ) `t'ifc-*
—•1111 i -1.7,"1
1. Ip th cas%I f a VArgis ierefi ,0492.L.,
a. -FAlu e tocisl e receipte.Ori.invoices;
b. Fai 6 to\file\\> T-return ay-tax.
i c. tate dle,s li y ,0/0 or more of his
.correc , dififrfds e quarter; or
2. Failure f Valu kddekT ct 19 regi er (R.14.0. No. 3-2009).
Note: The tempo pry closure oft R,eitdilis m nt\shallibe for thlduration of not less
than five (5) days 'A ticl shall lift lity'lla-o • 5plia ce of *hatever requirements
prescribed by the CoirOssoct5r osure osderlIR , .115). The 5-Day VCN
shall likewise state the Orlicul the__-NI
, , a was /were violated by the
taxpayer, and for which rellif 9_13.
"m e,o' cldding payment of the required
deficiency taxes and penalties du he- M447No. 3-2009, Sec. 3.3.2).
Non-Availability of Injunction to Restrain Collection of Tax
Q: Is injunction available as a remedy to restrain the collection of taxes?
ANS: No, as a general rule. Section 218 of the NIRC provides that "no court shall have
the authority to grant an injunction to restrain the collection of any national internal
revenue tax, fee or charge. However, when in the opinion of the CTA the collection of
the tax may jeopardize the interest of the Government and/or the taxpayer, the CTA at
any stage, of the proceeding may suspend the said collection and require the taxpayer
either to deposit the amount claimed or to file a surety bond for not more than double
the amount with the CTA (R.A. No. 1125, Sec. 11, as amended).

Judicial Remedies
Q: What are the kinds of Judicial Remedies?
ANS: The judicial remedies include:
1. Ordinary civil action
2. Criminal action

964
 Note: No civil or criminal action for the recovery of taxes or the enforcement or any fine,
penalty or forfeiture under the NIRC shall be filed in court without the approval of the
Commissioner of Internal Revenue (NIRC, Sec. 220).
003
Q: What is they form and mode of the judicial proceedings for the collection of
taxes?
ANS: Civil and Criminal actions and proceedings instituted in behalf of the Government
shall:
1. Be broUght in the name of the Government of the Philippines; and
2. Be conducted by legal officers of the Bureau of Internal Revenue (NIRC, Sec.
220).
Note: Section 7 of the NIRC authorizes the Commissioner to delegate the powers,
subject to certain exceptions, vested in him by the NIRC to any subordinate officials with
the rank equivalent to a division chief or higher. None of the exceptions relate to the
Commissioner's! power to approve the filing of tax collection cases (Republic v. Hizon,
G.R. No. 130430, December 13, 1999). dpM

ay/Met/on
Q: When civil action, as a tax rdrvi RIWssorted to?
ANS: A civil action is resorted tap*, lax 'ability becorn?s collectible, that is, the
assessment becomes final andltnaPpe D.P. 9n of commissioner has
become final,executory
executory 4'-'''' dshr
anan deman a e DIMAA PAQ p at 183).

Q: How is a civil actinJopthe calls0 to of taxes institute

ANS: There ard two waysol,entlrce'civil I bility through 41actions:
. ' ,
1. By•filiqg se or collectio f a sum of move wall proper regular court
(NIR ecs. 20 An 22p-or A I
2. By Mg? an ig-swer9 0 to the i-,,ii
: it,
for reviec fil xpayer with CTA
(FelideVtreurf os,l'Ingo,v. CO missiorg- ue, G.R. No. L-
,-,:A
21551 Septe,m1030, 196V.
' ,A
Q: Can the BIR file a Ilyil attionor collection pending decision of the
administrative,protesf?
I
ANS: Yes. It was hel of the TARA.. and reconsideration was in
effect consider4d deniedby ft when the latter filed a civil suit for collection
of deficiency income (C idler of Internal Revenue v. Union Shipping, G.R. No. L-
66160, May 21,11990).
t
Cr/mina/Act/on,
Q: When criminal action is resorted to? ._
ANS: The remedy of criminal action is resorted not only for collection of taxes but also
for enforcement of statutory penalties of all sorts (NIRC, Sec 221). The judgment in the
criminal case shall not only impose the penalty but shall also order the payment of the
taxes subject ot: the criminal case as finally decided by the Commissioner (NIRC, Sec.
205).

Q: What are the crimes punishable under the NIRC?

ANS: Two common crimes punishable under the NIRC are:
1. Attempt to evade or defeat tax (NIRC, Sec. 254); and
2. Failure to file return, supply correct and accurate information, pay tax, withhold
and remit tax and refund excess taxes withheld on compensation (NIRC, Sec.
255).
Note: The judgment in the criminal case shall not only impose the penalty but shall also
order the payrrient of taxes subject of the criminal case as finally decided by the
Commissioner'(NIRC, Sec. 205).
965
 Q: DoeS the acquittal of the taxpayer from the criminal action affect his liability to
pay the tax?
ANS: No. The acquittal of the taxpayer from the criminal action does NOT necessarily
result in the exoneration of said taxpayer from his civil liability to pay taxes. The duty to
pay tax is imposed by statute prior to and independent of any attempt on the part of the
taxpayer to evade payment. It is neither a mere consequence of the felonious acts
charged nor is it a mere civil liability derived from a crime (Republic v. Patanao, G.R.
No. L-14142, May 30, 1961).

Q. Is the civil action filed by to question the Final Decision on Disputed

Assessment is deemed instituted with the criminal case for tax evasion?
ANS.. No, Rule 111, Section 1 (a) (44) of the Rules of Court provides that what is
deemed instituted with the criminal action is only the action to recover civil liability
arisinglfrOm the crime. Civil liability arising from a different source of obligation, such as
when the obligation is created by law, f,u ,,,cfl,ftitli!ility is not deemed instituted with the
criminal action.
Note: It is' well-settled that th9„taXiiAyer's obligartfto,p,Ay the tax is an obligation that is
created by law and does adariti,trom tne_offe i fe gf.ta?evesion, as such, the same is
not deemed instituted,Alie''critnigal„case.(Mgcarto Lim}Gaw, Jr v. Commisioner of
Internal Revenue, G.R "No. ' 2.2 0377..luly 23, 2010,'-• .,1)• 4 =
1 " Nk
.
Q: Is a previous-h-tsessmept nerss'ary before a crimma stk
action may be filed
againSt a taxpayer? i
ANS: No .Undef Sectiofis 254 and 255 of file NIRC,4 gov rOja can .file a criminal
case f6r tax ev sh- pa§ainst qnffai— ct.-9Steripho 011ffilly ttemp s manner to evade
or defed, ann ax -im osed 9 th6lax coda"driffe. pa ment *mot he crime of tax
evasion co mitten by the ere faCt.ttiat,tife-Aaxpa ,tile- taxpayer knovdrigly-ppd willfully filed a
fraudulen't retunrwith me vade afidrdeteat a pa pl of jhe tax:ilt is therefore not
required that a atxhde cie *as‘essmept ust, first isgedidne-eriminal prosecution
for tax :evasion ores er (Aca47q\ kL,i,..(1-aG,a 17„ Jry Imisi6nerbfpntemal Revenue,
G.R. No. 222837k July 28, 20 I \
Note: For criminal„proseattion to.pto eeds.tlefoyA essnrnt, therlmust be prima facie
showing of a willfur yttempfto,evadka,?s,-(Cpertml , sio br of Internal Revenue v. Court
of Appeals, G.R. NoN(19322-30 . 6":;/;-.1-Pga

Q: Is the filing of a csimlba

( p7 an
_
p by the Commissioner?
ANS: No. The filing 7:if criminal action. is implied assessment by the
Commissioner. An assessment conra.Writirbffiy a computation of tax liabilities, but also
a demand for payment within a prescribed period. It also signals the time when penalties
and interests begin to accrue against the taxpayer. To enable the taxpayer to determine
his remedies thereon, due process requires that it must be served on and received by
the taxpayer. Accordingly, an affidavit, which was executed by revenue officers stating
the_tax liabilities of a taxpayer and attached to a criminal complaint for tax-evasion,
cannot be' deemed an assessment that can -be questioned before the Court of Tax
Appeals (Commissioner of Internal Revenue v. Pascor Realty, G.R. No. 128315, June
29, 1999),

Q: What is the effect of satisfaction of the civil liability to criminal liability in tax
cases?
ANS: The subsequent satisfaction of civil liability by payment or prescription DOES NOT
extinguish the taxpayer's criminal liability (People v. Tierra, G.R. No. L-17177-80,
December 29, 1959).

966
 ga":-.ct-te.:1•0;I•sz •

'

Q: Can subsidiary imprisonment be imposed on the tax which the taxpayer is

sentenced to pay?
ANS: No. In case of insolvency on the part of the taxpayer, subsidiary imprisonment
cannot be imposed as regards the tax which he is sentenced to pay. However, it may be
imposed in cases of failure to pay the fine imposed (NIRC, Sec. 280).

111. LOCAL TAXATION

[LocAL.06VERNNIENT CODE OF 1991, AS AMENDED]
A. LOCAL GOVERNMENT TAXATION
Q: Define local government taxation.
ANS: It is the,power of the Local Government Units (LGU) to impose and collect taxes
on their constituents in order to raise revenues to enable them to perform the functions
for which theyheye been organized (DOOONDON, Vol. 5 Taxation (2013), page 1).
a,
a
Fundamenta/Principles
t
:.,
7. ' . . A
Q: What are the fundamental pn9Ct`pjel ejlocal government taxation?
ANS: The following fundamental .drih4jesphaMavern therre ercise of the taxing and
other revenue4raiSing powers ofikkaelfelirrrigriPU '
1. Taxation shall beittiltrm in eectillocal govemment it;
2. Taxes, fees,44ges and ottterqippositions shall:
a.1! Be eattabre and bastitiel far as practicable iiinl he taxpayer's ability to
1,..c.
: pay
b.: ,_beneviedVdt.collected on_I'l for
A public mrposes•
c. not uniust!excessiveoppkssive and cernfisc '
da:
I • libt_to;eaontrary to lawrablic polio :ratio remic policy, or in
restrairOttfiade• -11,
.,-4,- 4,3. 'eAko}
3. The ;collectionRiggxes, fees, charges, es, and other mp•si ions shall in no case
be let to OfilieVoeRonz I
4. The revenue collecip pursuant o,thgmavisions of this Code shall inure solely
to the benefitikohtt be subjecy01 R:splOtion by, the LGU levying the tax,
fee, charge onther iryOsirciPan es provided therein;.
and , ' "' 7
5. Each LGU sha 1,,, k#,Les as practicable, evolve a progressive system of taxation
(LGC, Sec. 130):4kr4''

Q: Discuss the nature of local taxing power of the LGUs.

ANS: The natUrOf the local taxing power may be described are as follows:
1.. Diret -! the power of the LGU to impose taxes although not an inherent power
is granted by a direct mandate from the Constitution;
Note: The authority to tax of LGUs within the Autonomous Regions (ARMM
and CAR) is delegated by the Organic Act creating them which provides that
the Regional Government shall have the power to create its own sources of
revenues and to levy taxes, fees, and charges, subject to the provisions of the
ConStitytion and the Organic Act (R.A. No. 6766, Organic Act for the Cordillera
AutonoMous Region, October 23, 1989; R.A. No. 9054, Organic Act for the
Autonomous Region of Muslim Mindanao, March 31, 2001).
2. Limited,- although directly expressed by the Constitution, the power is subject
to such limitations and guidelines as the legislature may deem necessary to
imp6se;
3. Legislative in nature - the power to impose taxes is vested solely in the
legislative body in each respective LGU;

967
 11 . .
4 Territorial — the same can only be exercised within the territorial jurisdiction of
the LGU (CONST., Art. X, Sec. 5).

Q: What are the sources of local taxing power of the government?

ANS: The following are the sources of local taxing power of the government:
I. Sec. 5, Article X of the 1987 Philippine Constitution — Each local government
unit shall have the power to create its own sources of revenues and to levy
taxes, fees, and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy.
Such taxes, fees and charges shall accrue exclusively to the local
governments; and
Sec. 129, Chapter I, Title I, Book ll of R.A. No. 7160 (Local Government Code)
Each local government unit shall exercise its power to create its own sources
of revenue and to levy taxes, fees, and charges subject to the provisions
herein, consistent with the basic policy of local autonomy. Such taxes, fees,
and charges shall aco,e..nolusivelgo the local government units.

I'' --. --.- - ,.-;

-j'
Th_) 444.
Q: May Congress, undeOre ?SU C4,ituk,,obo isk the power to tax of local
governments? 1
,
ANS: ,Congress ca !rifle local goverlirkent s pb el to tax as it cannot
abrogate what is7 pra9ted-byltigyektamenta!lac!:The only authority conferred
to Congress is e t guid9line4:an cHimitaVo ootle t local government's
exercise of the weax IMAAMPAk TakPrinct lesailqf Re edies (2015), page
,.•-
132). "i-'
lid .•"`"-4
Q: What'is th scop of taxipg posiverxi ilGUs1 2,
ANS: The po er is prirrbrily h-led6il.pongr e'ver4 our jurisdictions,
it may be exe I gislativtb s, no I rely b virtue of a valid
delegation as t to dispc ?Lij ,onty y'd on 5, Article X of
the Constitutio the`----5, 00;•0 subject tc such
uidelines and on r ss-- hich, owever, must be
cmayl
onsistent with t l uto Cebuilntemational Airport
Authority V. Marco G.R. 12080Fin 6). i

Q: What is the Principlvfl tion.or. _ qtp ary Doctrine?

ANS: Pre-emption in taxation ;Vs to knAnsetarlt4,1v ,re'cl the National Government
elects to tax a particular are liedlWifithIor ' from the local government the
deleRted power to tax the same fie l'7111 c nne principally rests on the intention of
the Congress. Conversely, should the Congress allow municipal corporations to cover
fields ,of *taxation it already occupies then the doctrine of pre-emption will not
apply tyictorias Milling Co., Inc. v. Municipality of Victorias, Province_ of Negros
... _
Occidental, G.R. No. L-21183, September 27, 1968):
il .. ..
Q: When is the principle of pre-emption applicable?
ANS: the principle of pre-emption applies to the following:
1: Taxes
, levied under the NIRC;
2. Taxes imposed under the Tariff and Customs Code; and
3: Taxes under special laws (DIZON, Taxation (2006), p. 130).

Q: Who exercises the local taxing authority?

ANS: The power to impose a tax, fee, or charge or to generate revenue shall be
exercised by the Sanggunian of the LGU concerned through an appropriate ordinance
(LGC, Sec. 132).

968
Q: Who may grant local tax exemptions?
ANS: LGUs may, through ordinances duly approved, grant tax exemptions, incentives
or reliefs under such terms and conditions, as they may deem necessary (LGC, Sec.
192).
Note: While Sanggunians may grant tax exemption, tax incentive, or tax relief, such
grant shall not apply to regulatory fees which are levied under the police power of LGUs
(IRR of LGC, Att. 282).

Q: Flow is tax exemption conferred?

ANS: Tax exemptions shall be conferred through the issuance of a non-transferable tax
exemption certificate (IRR of LGC, Arts. 282 and 283).

Q: Distinguish real property tax and local business tax in terms of the power of
the LGU to grant exemptions:
ANS: For real property tax, the LGUs cannot add on to the exemptions stated in the
LGC. On the other hand, for local business
, tax, the LGUs are free to grant exemptions
(INGLES, Tax Made Less Taxing..,A0Zwer with Codals and Cases (2015), pages
532-533). I! I

Q: Prior to the enactment of the' .0"calt4fernment Code, several taxpayers enjoy

tax exemption. Are these tax exempt ,s'ii ective dfter the enactment of the
LGC? Mtpr•=e4,
ANS: No. Section 193 of th.,4C provide that, "unless ofhe se provided by the LGC,
tax exemptions or inceAtives granteslack r presently enjoy, y all persons, whether
natural or juridiCal, governtfienitwned or controle rporations are hereby
withdrawn upon the effectip(id, Janua , 1992) of thri ."
4410- ,
.1„40,,x4 imav
The grantee of legislative franchiserte,st lable to payi the lotal fr•nchise tax, unless it
is expressly rkgaPreally exempted 4m the Baer its legislative
franchise (S CommriffiationsMg., e City o 155491, July 21,
2009). The in lieq4of aft" clatiseyn a islative franc Id categorically state
that the exernptionL k both focal a d national taxes; otherwise, the exemption
claimed should be c strued aga taxpayer and liberally in favor of the
taxing authority (Id.).

Q: What entities are s 111 exemp. d from local taxes?

ANS: The fdlldwing is e exc sive list of entities which are still exempted from local
taxes (W-CoNE-Co-BooksY.
1. Local Water districts;
2. Cooperatives duly registered under R.A. No. 6938 or the Cooperative Code of
the Philippines;
3. Non-stock and non-profit hospitals and Educational institutions
4. Business Enterprises certified by BOI as pioneer or non-pioneer for a period of
six.(6);and four (4) years, respectively, from the date of registration;
5. Business entity, association, or Cooperatives registered under R.A. No. 6810
or Countryside and Barangay Business Enterprises; and
6. Printei and/or publisher of Books or other reading materials prescribed by the
Department of Education as school texts or references, insofar as receipts
from the printing and/or publishing thereof are concerned (IRR of LGC, Art.
283).
Note: Unless otherwise repealed by law, business and economic enterprises operating
within export processing zones administered by the Export Processing Zone Authority
shall continue to enjoy the tax exemption privileges and tax incentives granted in P.D.
No. 66, as amended (IRR of LGC, Art. 283).

969
Q: May the government grant tax exemption to taxpayers whose previous
exemption has been withdrawn?
ANS: Yes. Withdrawal of a tax exemption does not prohibit future grants of tax
exemptions. The grant of taxing powers to local government units under the Constitution
and the LGC does not affect the power of Congress to grant exemptions to certain
persons, pursuant to a declared national policy (Philippine Long Distance Telephone
Co. v. City of Davao, G.R. No. 143867, August 22, 2001).

Q: How often may the tax rates be adjusted?

ANS: LGUs shall have the authority to adjust the tax rates as prescribed in the LGC not
oftener than once every five (5) years, but in no case shall such adjustment exceed ten
percent (10%) of the rates fixed under the LGC' (LGC, Sec. 191).

Q: Whatis the residual taxing power of LGUs?

ANS: LGUs may exercise the power to levy taxes, fees or charges on any base or
subject, provided,the taxes, fees, schargesAriz
1. Not specifically enuperaTed in/..Gc; •
2, Not taxed undeplfe prc4ionsiofiheIN'IRC.ias Omended; and
3.'' Not taxed underothe dpp pable4aw14( GC, Beq.2i80.

the/on 1,1b • that-m-03t7b—ecompiktkAthip ,the exercise of the

Q: What are the/on
residual taxing po
ANS: The folio 'rig re the Fonditi ris tiist must be com in exercising the
residual taxing ower ofthe L U:
1.! That noiagains any of the runoarpentar nncipl spafj9ca l taxation (LGC,
Sec. a6s,
2. That t is one of the proftitft impositions under tir,coryrrion limitations on
the tla weks o kGUs (LW,:relc. 133);
3. Thatt s, fee for charges shallno e.3.1 justAaxee sive, oppressive,
confis • to contra \deClar shatio (dGC, geE 186); and
4. That ordinbnce 1 WI 468h 6Xe'M , cilSrges s)all not be enacted
withoutITy prioN ublib, irrag,c.49pduc O. or thelairpos ,-(LGC, Sec. 186).
Sr EN \.N
Q: Who has the aulhoritylsyppsc. pena h 5for lobactax. iolations?
ANS: The. Sangguniarikof-Eallpieatithorizectio prlee}ries or other penalties for
violation of tax ordinanceetptecribe;d fipek"4,,c11 e, Penalties shall in no case shall
be less than P1,000 nor more hag P5,00oincti glaVAlle imprisonment be less than one
(1) month nor more than six (6) monlfte'StittrfFie or other penalty shall be imposed at
the discretion of the court. The Saagguniang Barangay may prescribe a fine of not less
than P100 nor more than P1,000 (LGC, Sec. 516).

Specific Taxing Powers Of LGUs (Exclude Rates)

Q: What taxes, charges and fees may be levied by the province?
ANS: The 'province may only levy thefollowing taxes, charges and fees:
1.. Tax on Transfer of Real Property Ownership (LGC, Sec 135;)
2.! Tax on Business of Printing and Publication (LGC, Sec 136);
Franchise Tax (LGC, Sec 137);
4. Tax on Sand, Gravel and Other Quarry Resources (LGC, Sec 138);
5. Professional Tax (LGC, Sec 139);
6. Amusement Tax (LGC, Sec 140); and
7. Annual Fixed Tax for Every Delivery Truck or Van of Manufacturers or
Producers, Wholesalers of, Dealers, or Retailers in, Certain Products (LGC,
Sec 141).

970
Tax on Transfer of Real Property Ownership
Q: Can a province impose a tax on transfer of real property within its territory?
ANS: Yes. The province may impose a tax on the sale, donation, barter, or any other
mode of transferring ownership or title of real property (LGC, Sec. 135).

Q: What properties or entities are exempt from transfer tax levied by the
province?
ANS: The follOwing are exempted from payment of transfer tax levied by the province:
1. The sale, transfer or other disposition of real property pursuant to Republic Act
No. 6657, otherwise known as the Comprehensive Agrarian Reform Law
(LGC, Sec 135).
2. The National Housing Authority, being the primary government agency in
charge of providing housing for the underprivileged and homeless, shall be
exempted from the payment of all fees and charges of any kinds, whether local
or national, such as income,,, and real taxes (R.A. No. 7279, Urban
Development and Housing A 5041992, Sec.19).
3. Private developers partiCipati294n the development of socialized housing
projects are given the exOrinigkr the payment of the following:
a., Project-related incOhiltaxe
b., Capital gains tax On T.,411V;16ntds
Vr.""rir1;. PA:-
used
..,0,
for thesiproject;
project;
c. i' , Value-added tax.,for,t(tproompAra,.ptor co cemed;
d.' Transfer to p& both raw bampletecPajects, nd
e.' , bonor!sok for landsiceHified by the local g • vemment units to have
beentanatedtosocedigahousingpurposrNo. 7279, Sec.20).
.,A.,,,i
,4. L ., ..,--
'
ta
-
Q: What are the pfillitisc#at 5;th must be complied w' ii h by p ivate developers to
claim the tax incentives u:hatiR.A3io. Hp? ii
ANS: Upon I .. t,p_licatidgdor exemption,r ivate deve opera mus comply with the
following: 4' 4 !..
.. •, x.0',,,6!:4 %'N-,-,
'
1. A lien on thefititifahe latiiiihal e annotate • by egibter of Deeds;
2. That the'Vialgslip eousing• development plan has already been approved by
the approgreaTe govOnmerit ageCies concerned;
3. That all the sqvinggpcquired byr• ei “.'i '' h's provision shall accrue in favor of
, •••,1
the beneficiapesysubjecgoogamag eme.,:ti48uidelines to be issued by the
Housing andiPrban ,,lievelopment Coordinating Council (R.A. No. 7279,
SeC,20). . 't, . 1

Q: What lands ire covered by R.A. No. 6657?

ANS: The following lands are covered by R.A. No. 6657:
1. All alienable and disposable lands of the public domain devoted to or suitable
for agriculture;
Note: No reclassification of forest or mineral lands to agricultural lands shall be
undertaken after the approval of R.A. No. 6657 until Congress, taking into
account ecological, developmental, and equity considerations, shall have
determined by law, the specific limits of the public domain.
2. Alf lands of the public domain in excess of the specific limits as determined by
Congress in the preceding paragraph;
3. All other lands owned by the Government devoted to or suitable for agriculture;
and'
4. All private lands devoted to or suitable for agriculture regardless of the
agricultural products raised or that can be raised thereon (R.A. No. 6657, Sec.
4).

971
 Q: Is the zonal value prescribed by BIR the basis of transfer tax levied by the
province?
ANS: No.. Transfer tax is based on the total consideration of the property or of the fair
market value in case the monetary consideration involved in the transfer is not
substantial, whichever is higher (LGC, Sec. 135).

Q: Who are liable for local transfer tax of real property?

ANS: The seller, donor, transferor, executor, or administrator (LGC, Sec. 135).

Q: When should the tax be paid?

ANS: The seller, donor, transferor, executor, or administrator shall pay the tax within
sixty (60)': days from the date of the execution of the deed or from the date of the
decedent's death (LGC, Sec. 135).

Tax on Business of Printing and Publication

Q: DisCuss the power of the pvinc.erialmpose tax on business of printing and

ANS:
publtion.
h province may poibv. taloj the business Hof persons engaged in the
business of printingAnd u KgtiorrarblinksZcargpc'p seers, leaflets, handbills,
certificates; receipts/parpph o Band othesimil
es ture, C, Sec. 136).

Q: What printin s I not cialVerF4

, bRhe to oesu4 u iness?
ANS: The rec pts r th printing 9fild
/d'publis tbopk or other reading
materials Ares ib d b the D partmenttbrucation (4 HED EWA) s school texts or
references sh I be mpt fr • m Osysin rbs tqx„(LGC, Sec. 1 6),-.4

Franchise To •
<41
Q: Discuss th sgoyligr of a• rose fia gra se px
ANS: The prchiecd ‘rna ose 5 sse en o ing a franchise,
notwithStanding exe pti r er s ecial la (LGC, Sec. 137).

Q: What is the diffsTrence tweeR Ne r_: _A , ite, x referred t 4n the NIRC and the
franchise tax under4he LGgsk `4
\---...IEN1.1-
__. <
ANS: In Section 131 Tnii) nkfttr4201-2a&un 'stet( efined a franchise in the
sense of a secondary oApzeid f pchisV Lig9 s4 y.Oid y confusion when the word
franchise is used in the conr-e>tVaxatio inagnITused, a franchise tax is "a tax
on the privilege of transacting business.inliaeztatnnd exercising corporate franchises
granted by the state." It is not levied on the corporation simply for existing as a
corporation, upon its property or its income, but on its exercise of the rights or privileges
granted to it by the government. Hence, a corporation need not pay franchise tax from
the time it ceased to do business and exercise its franchise. It is within this context that
the phrase "tax on businesses enjoying a franchise" in Section 137 of the LGC should
be interpreted and-understood. To stress, a franchise tax is imposed based not on the
ownership but on the exercise by the corporation of a privilege to do business. The
taxable' entity is the corporation which exercises the franchise, and not the individual
stockholders (National Power Corporation v. City of Cabanatuan, G.R. No. 149110, April
9, 2003).

Q: What are the requirements before a taxpayer may be held liable to a franchise
tax levied by the province?
ANS: The requirements before a taxpayer may be held liable to a franchise tax levied by
the province are as follows:
1. It has a "franchise" in the sense of a secondary or special franchise; and
2. It is exercising its rights or privileges under this franchise within the territory of
the LGU (National Power Corporation v. City of Cabanatuan, supra).

972
 Tax on sand, grave/ and other quarry resources
Q: Discuss the power of the province to impose tax on sand, gravel, and other
quarry services.
ANS: The province may levy and collect tax on ordinary stones, sand, gravel, earth, and
other quarry resources, as defined under the NIRC, as amended, extracted from public
lands or from the beds of seas, lakes, river, streams, creeks, and other public waters
within its territorial jurisdiction (LGC, Sec. 138).
Note: The authority to impose taxes and fees for extraction of sand and gravel belongs
to the province, and not to the municipality where they are found (Municipality of San
Fernando, La 'Onion v. Sta. Romana, G.R. No. L-30159, March 31, 1987).
'I
Q: How shall the proceeds from this tax be distributed among the LGUs?
ANS: The proceeds of the tax on sand, gravel and other quarry resources shall be
distributed as follows:
1. Province — 30%;
2. Component city or municipality, ere resources extracted — 30%;
3. Barangay where resource?;' ed — 40% (LGC, Sec. 138).
Note: The proceeds of the tax Aap,sicl navel and other quarry resources in highly
urbanized cities shall be distributegaealows:
atn, .4:4.
1. Highly urbanized city — 6 %* '7.-'t
2. Barangay where resourc sr„%ef'a deP4', 001% (I I:< of LGC, Art 239).
4

Q: May the province/ loke the 110• an Doctrine to 4 nd the imposition of

taxes on sand, grave nd Dther quay, sources extrale It rom private lands?
ANS: No. The province;a ot *nvo e theiRegalian doctrine o idend the coverage of
-their ordinance toq arryftmources e acted from pr ate la •s, for taxes, being
burdens, are;119,0 o be V00-filed b_qr what the ap • lica le s P:tute expressly and
clearly dec§m1 to statute bei construe.. strictrssimi ' juris against the
government krin-Mli
~ ulacamvt 9ou Appea ' '',,.‘*o ,',:t . g3 , November 27,
1998). fr --t .."-r_''..., 711_
,-0,P'
Section 151 of th
g-f
C le,Aed a tax c' all quarry resources, regardless of origin,
whether extracted fro p bi or private -4,51 s a province may not ordinarily
impose taxes on stone n gra eleR.,..,,: v--1• •g
p ..12 craw resources, as the same as
'Dt
already taxed under C. Thy stoliince can, however, impose a tax on stones, sand,
• esources extracted from public land because it is
gravel, earth and othe guar —
expressly empowered to o o under the LGC. As to stones, sand, gravel, earth and
other quarry resources extracted from private land, however, it may not do so, because
of the limitation provided by Section 133 under LGC in relation to Section 151 of the
NIRC (ProVince of Bulacan v. Court of Appeals, supra).

Professional Tax
Q: Discuss the power of the province to impose professional tax.
ANS: The province may levy an annual professional tax on each person engaged in the
exercise or practice of his profession requiring government examination at such amount
and reasonable classification as the Sangguniang Panlalawigan may determine but
shall in no case exceed P300 (LGC, Sec. 139).

Q: When shOuld the professional tax be paid?

ANS: ProfesSional tax is payable annually, on or before January 31st Any person first
beginning to practice a profession after the month of January must, however, pay the full
tax before engaging therein (LGC, Sec. 139).

973
 •n

Q: Where'should the professional tax be paid?

ANS: Professional tax is payable in the province where taxpayer practices his
profession or where the principal office is located in case he practices his profession in
several places (LGC, Sec. 139(b)).
Note: The professional tax is to be paid only once. A person who has paid the
corresponding professional tax shall be entitled to practice his profession in any part of
the Philippines without being subjected to any other national or local tax, license, or fee
for the practice of such profession (LGC, Sec. 139).

Q: Is there any exemption from payment of this tax?

ANS: F,?rofessionals exclusively employed in the government shall be exempt from the
payment of professional tax (LGC, Sec. 139 (d)).

Q: Where should a professional pay his/her professional tax?

ANS: The ,Situs of the professional tax is the city where the professional practices his
profession 'or where he maintains his principaLo ice in case he practices his profession
in several.places (LGC, Sec. 1 9(b) •
0,1
Q: In case a profession f'ip en •aged.inzine.practiice.,.of4,two professions in two
different cities, an `e% ats,to,drie city where Ire% aint 'Petis principle office his
professional taxfor o prifiessiorirffi aylhe.ottLer where he also practices
the same profegsi n Auk; him. tO4oay.„This proiepsidglal tax for the same
profession? Ex/lain. / r
ANS: No. Eve person legally authoriqd4 to practice his pfdasion shall pay the
professional to o 1 e$rovin "fTfittlracifEEPThislrofess now ere he maintains
his principal case e n in +era laces: Provided,
however, Tha erson ho h s Akdilheydorres onding peofe nal tax shall be
entitled to'pra prd on in an 1:41:Rof the P ipp neslwithou being subjected
to any other n , qp.,ifee pr "dtiee'so such profession
(LGC, Sec. 13 k 7,
Amusement Tau
Q: What is meantkamuse es uncler the LGC?
ANS: Amusement isNh,ple via Tefrit. It is synonymous to
relaxation, avocation, Prastme(:)}1un.
, poInclude theatres, cinemas,
concert halls, circuses anntlaa_ Paces here one seeks admission to
entertain oneself by seeing or welding performances (LGC, Sec. 131 (b)
and (c)):

What activities or places are exempt from amusement tax?

ANS: The ;holding of operas, concerts, dramas, recitals, painting and art exhibitions,
flower shows, musical programs, literary, and oratorical presentations, except pop; rock,
or similar Concerts shall be exempt from the payment of the amusement tax-(LGC, Sec.
140 (c)).
Note: It is the intent of the Legislature to not to impose VAT on persons already covered
by the amusement tax. Thus, in Commissioner of Internal Revenue v. SM Prime
Holdings, Inc. (G.R. No. 183505, February 26, 2010), the Supreme Court held that the
gross receipts derived from admission tickets in showing motion pictures, films, or
movies are subject to the amusement tax and not to VAT under the NIRC.

Q: What are the entities upon which provinces cannot impose amusement tax?
ANS: Subject to Section 133(o), LGC in relation to Sec: 125; •NIRC, the entities upon
which provinces cannot impose amusement tax are as follows:
1. Cockpits;
2. Cabarets;

974
 3. Night or day clubs;
4. Boxing exhibitions;
5. Professional basketball games;
6. Jai-Alai;
7. Racetracks.

Q: Why are the above-mentioned entities not subject to amusement tax?

ANS: Under the principle of pre-emption, they are not subject to amusement tax
because they are already subject to Other Percentage Tax under Sec. 125 of the NIRC
(LGC, Sec. /33(o) in relation to NIRC, Sec. 125).

Q: Who pays for the amusement tax?

ANS: Proprietors, lessees, or operators of theatres, cinemas, concert halls, circuses,
boxing stadia, and other places of amusement (LGC, Sec. 140).

Tax on delivery truck/van

•'•
014
irfato4mpose
Q: Discuss the power of the prov..1`1‘.ty ,i .= tax on delivery truck/van.
ANS: The province may levy an# ugl d tax for every truck van, or any vehicle
used by manufacturers, producersNolesers, dealers, or retailers in the delivery or
a ,t
distribution of distilled spirits, fen+ ors oft drinks, cigars, and cigarettes, and
, , 1,
other products'as may be determip e..kpatigaia
' , Panlalawigan, to sales
outlets, or consumers, wh l eitirect or directly, WithifiAtie rovince in an amount not
exceeding P500 (LGC, pCri41). I
Note: Once taxed, theitanpfacturersoro users, wholesale's,T , alers, or retailers shall
be exempt from the to o t rs,prescrr ed elsewhere hi' t e LGC (LGC, Sec. 141).
• Powe
Taxing m.e:
o Caes 4 0._tt-P
, e4z, '>.
Q: What aregotaxesofeel, and4Chargesfithat may b le,fteili ties?
ANS: The-citytmay levy,Irp4axes,faqs, a 'at charges tilddik-p76,iliEe or municipality
may impose (LGC,,Ade:.:7: ,i 3'3, Rf
AQ
i,-g
Note: Under the Ldt J -ffre gr,a three (3) kto es of cities: Component Cities, Independent
Component Cities (lCGs) a teof Highly U gl-:.jze..%, ities (HUCs). ICCs and HUCs are
independent of the prdL in LGC Seca...±1p • 4.1 W_s_means that taxes, fees and
charges levied.; and colleted by wand va6,sotely to them (LGC, Sea 151).
Taxing Powers ofMun at/0 .
Q: What are the taxes, fees, and charges that may be levied by municipalities?
ANS: A municipality may levy hose taxes, fees, and charges not otherwise levied by
provinces (LGC, Sec. 142).
r1
Q: What are the types of businesses upon which taxes may be imposed by
municipalities?
ANS: The Municipality may impose taxes on the following businesses (M-WER-CF-PA):
1. On Manufacturers, assemblers, re-packers, processors, brewers, distillers,
rectifiers, and compounders of liquors, distilled spirits, and wines or
manufacturers of any article of commerce of whatever kind or nature;
2. On Wholesalers, distributors, or dealers in any article of commerce of
whatever kind or nature;
3. On Exporters and on manufacturers, millers, producers, wholesalers,
distributors, dealers or retailers of essential commodities enumerated in the
LGC;
4. On Retailers;
5. On Contractors and other independent contractors;
6. On banks and other Financial institutions;

975
 •
IDA VOL 1.
2019

7. On Peddlers engaged in the sale of any merchandise or article of commerce;

or
8. On Any business, not otherwise specified in the preceding paragraphs, which
the Sanggunian concerned may deem proper to tax (LGC, Sec. 143).
Note: When a municipality or city has already imposed a business tax on
manufacturers, etc. of liquors, distilled spirits, wines, and any other article of commerce,
pursuant to Section 143(a) of the LGC, said municipality or city may no longer subject
the same i rnanufacturers, etc. to a business tax under Section 143(h) of the same Code.
Section 143(h) may be imposed only on businesses that are subject to excise tax, VAT,
or percentage tax under the NIRC, and that are "not otherwise specified in preceding
paragraphs (City of Manila v. Coca-Cola Bottlers PHL, Inc., G.R. No. 181845, August 4,
2009).

Q: What is meant by wholesale?

ANS: A wholesale is a sale where the purchaser buys or imports the commodities for
resale to Persons other than the end„use6regardless of the quantity of the transaction
(LGC, Sec. 131 (z)). .0,P°'*" -%
T ...
Q: What is meant by reta ?
ANS: Retail refers s 1,e,wIlgrel;7142 s , ommodity for his own
consumption, irres cti f th'e quantiffreom oal C, Sec. 131 (w)).

Q: Who is a co rac o P zai, X

ANS: Contract& inckl es p ons, natliar,r juridical not professional tax
under Sec: 13 GC, ose ac ivi fonsta s ess, ntiallo t ale of all kinds of
services fOr a etT-re ardless of Ikliffit 8 rrof pperiorman of th service calls for
the exercise r use of the •hysi etal fac 'ties of auch.1 ontractor or his
employees' (L 1
S/j
Q: Who IS de reP r.‘-':), is....
ANS: One who busi .e.i as isf) y d - dis ,goods and chattels as a
merchant. He stands mrpedi t9I e oduc r or nanufacturer and the
consume( and de ends fb his o th labor 6 bestows upon his
commodities but upck the sja a-ror 1 1 h itch w tales the market (LGC,
Sec. 131(k)). (LGC, Sac 14 )-

Q: Who isa peddler?

ANS: Any:person who, either for him I commission, travels from place to place
and sells his goods or offers to sell and deliver the same (LGC, Sec. 131 (t)).

Q: What are essential commodities?

ANS: The following are considered as essential commodities:
1. Rice and corn;
2. Wheat or cassava flour, meat, dairy products, locally manufactured, processed
or preserved food, sugar, salt and other agricultural, marine, and fresh water
products, whether in their original state or not;
3. . Cooking oil and cooking gas;
4. Laundry soap, detergents, and medicine;
5. Agricultural implements, equipment, and post-harvest facilities, fertilizers,
pesticides, insecticides, herbicides, and other farm inputs;
6. Poultry feeds and other animal feeds;
7. . School supplies; and
8. Cement (LGC, Sec. 143(c)).

976
Q: What is the coverage of the municipalities' taxing power on retailers?
ANS: The municipalities have the power to levy taxes on retailers if gross sales exceed
P30,000 (LGC, $[ ec. 143 (d)).
Note: Barangays, however, shall have the exclusive power to levy taxes on retailers if
gross sales or receipts do not exceed P50,000 in the case of cities and P30,000 in the
case of municipalities (LGC, Sec. 143 (d)).
Q: What is the!scope of the LGU's taxing authority over banks and other financial
institutions?
ANS: The LGU's taxing authority over banks and other financial institutions is limited to
the gross receipts derived from interest, commissions and discounts from lending
activities, income from financial leasing, dividends, rentals on property and profit from
exchange or sale of property, insurance premium (LGC, Sec. 143 (f)).
Note: All other income and receipts of banks and financial institutions not otherwise
enumerated above shall be excluded from the taxing authority of the LGU (IRR of LGC,
Art. 232 p.
Q: What is the maximum rate NO ay be imposed by municipalities within
Metro Manila? •
ANS: The municipalities in Metro levy taxes at rates which shall not exceed
by 50% the maximum rates prescri 43 of the GC (LGC, Sec. 144).
ffr
Q: What are the requiremmteon thefre remen oftusi s subject to taxes, fees,
and charges levied byAgfficipalitie0
ANS: A bush* subjrttogtaxes, fe charges levied ntunicipalities shall, upon
termination thereof, sbtna syo ent of its gro, s safes or receipts for the
current year. If thealeioi Wring the yea e less than Ve tdk dile on said gross sales
or receipts of ;t. t'SrrenTflar; the if nce shall be' pai• bel•re the business is
considered o a ly retire"•,ILGC, Sec."14
,,hir. kastN,
Q: How do entities pay.'' hez usige* to levied b• . a ity?
ANS: The taxesIirresoLedWider Section , LGC shall be payable for every separate
or distinct establishrif or Ice where siness subject to the tax is conducted and
one line of business does O become being conducted with some other
business for Which suc as bgea, a .business must be paid by the
person conducting theta (LG&M.
Q: How is business t*gimputed when a person operates two or more
businesses?:
ANS: In cases where a person conducts or operates two or more of the businesses
mentioned in Sec. 143 of LGC, the following rules must be complied with:
1. If bOth businesses are subject to the same rate of tax — the tax shall be
computed on the combined total gross sales or receipts of the said two or
more related businesses; or
2. If bOth businesses are subject to different rates of tax — the gross sales or
receipts of each business shall be separately reported for the purpose of
computing the tax due from each business (LGC, Sec. 146).
Q: What are the fees and charges for regulation and, licensing which a
municipality may impose?
ANS: The following are fees and charges which may be imposed by a municipality:
1. The municipality may impose and collect such reasonable fees and charges
on business and occupation except professional taxes reserved for provinces
(LGC, Sec. 147);
2. Fees for sealing and licensing of weights and measures (LGC, Sec. 148); and
3. Fishery rentals, fees and charges (LGC, Sec. 149).

977
 g'':•-•Ir.4.V•01:.o471.7,0;•;••••`• • .;:•:•••••IIi • ii•••••••'..• . :••• •i•• vf,•••i 43 •4•

Q: What are the scenarios for situs of municipal taxation?

ANS: The following scenarios are:
1. With branch or sales outlet (LGC, Sec. 150 (a));
2. Where there is no branch or sales outlet (LGC, Sec. 150 (a));
3. Where there is a factory, project office, plants, or plantation in pursuit of
brusiness (LGC, Sec. 150 (b));
4. Where there are two or more factories, project offices, plants or plantations
bicated in different localities (LGC, Sec. 150 (c) & (d));
5. Sales made by route trucks, vans, or vehicles (IRR of LGC, Art. 243 (d)).

Q: What is a principal office?

ANS: A principal office is the head or main office of the business appearing in pertinent
documents` submitted to the SEC, or DTI, or other appropriate agencies, as the case
may be ORR of the LGC, Art. 243 (a) (1)).

Q: What is the duty of the ow_ip,,r,„:cepere or manager of the business after

relocation tof the principal Vic_e was iffetteFl?
ANS: In case of transfeEAhe optrjtoai. ana er of the business shall give
notice of such transf9r orNocation.to—the.gca f c ?ewe cutives of the cities or
municipalities concepTpd Wiqiih,p4'5nays after su'ehNra sfeyb elocation was effected
(IRR of thelLGC, 24 eri)
w
Q: What is'ea
in t b b anch or salds offi?,
ceA.\
..
ANS: A branc office s a fi ed place,itiAlocality w ich c'b d operations of the
business as a e rrs on of t • e princea ice o e LG& ft 3 (a) (2)).

Q: Are displar eat of the procliid‘p

." vei;
.r-ertitie classi dd-ey ranch or sales
offices? 1r
ANS: No. OffiopF useo isp ay,ar t - • . ct herd"?' o stocks or items
are stored for gale! At Doug fh~e'ttlu y be/ receK d thereat, are not
branch or sales Mims ' her &plated -.Rq) e LOC, Art. 43 (a) (2)).

Q: What is e warehouse?
ANS: A warehouse Is a build g.0 SralcgagiVN
Utz' e 59 .49 cpro" ucts for sale and from
which goods or mercilqfisre ptithdrawn4or'dery iy culiomers or dealers, or by
persons acting in behalf athe bugrss (MN ff. 243 (a) (3)).
.
Q: What is! the classification of a a e which accepts orders and/or issues
sales invoices?
ANS: A warehouse which accepts orders and/or issues sales invoices independent of a
branch with,' sales office shall be considered as a sales office (IRR of the LGC, Art. 243
(a) (2)).

Q: Discusa the situs of tax collected when there is a branch, sales office, or
warehouse.
ANS: The taxpayer shall record the sale in the branch or sales outlet making the sale or
transaction, and the tax thereon shall accrue and shall be paid to the municipality where
such branch or sales outlet is located (LGC, Sec. 150(a)).

Q: Discuss the situs of tax collected when there is no branch, sales office, or
warehouse'. •
ANS: The sale shall be duly recorded in the principal office along with the sales made
by said principal office. The taxes due shall accrue to the city or municipality where said
principal office is located (LGC, Sec. 150(a)).
•

978
 VOL 1.
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Q: Discuss the Situs of tax collected where there is a factory, project office, or
plantation.
ANS: The following sales allocation shall apply:
1. 30%!of Ian sales recorded in the principal office — taxable by the city or
municipality where the principal office is located;
2. 70%of !all sales recorded in the principal office — taxable by the city or
muniCipality where the factory, project office, plant, or plantation is located
(LGC, Sec. 150(b));
3. If plantation is located in a locality other than that where the factory is
located the seventy percent (70%) sales allocation shall be divided as

a. 60% — city or municipality where the factory is located;

b. 40% — city or municipality where the plantation is located (LGC, Sec.
150(c)).
Note:
1. In cases: where there are two ) or more factories, project offices, plants or
plantatiOns located in differebt ocalities, the seventy percent (70%) sales
alloCation shall be proratep.,. o the localities where such factories, project
offices, plants, and plablattole„ re located in proportion to their respective
Ji I- 1. s
volumes:of production Abet enod for which the tax is due (IRR of LGC,
Sec. 240 (b)(5)). .1F
At-
2. In case:of manufacturers'. o 'age the services of an
independent dzOtor to prod ce -or manu ac ure some of their products,
these rules ogsiius of taxaSlokii,hall apply except the factory or plant and
warehoUse Orthel contrastOrufilized for the pr tiction and storage of the
manUfaCture pVclucte 671 considered s actory or plant and
wareh uSe(Of theirbeaufacturerRR
k
Q: Discussdlie situs 'of tax collecte&n sales
( of LGC, S. 2
de43
7)).
rucks, vans, or
vehicles.
ANS: The followe ruins"
rui apfihvhergoute sales a An the locality where a
manufacturer; priidtP1,4 hci_esaler,letaileur dealer
1. has:a branc or sa tes office okr0eSise - the sales are recorded in the
branchalesafice r warehougelarrOMeivex due thereon is paid to the LGU
where such biffigh;•sa!eaffibtiizf eliateetsTetcated.
2. has no brancliy salesAffice or warehouse - the sales are recorded in the
g
brabch; sales'o&ce warehouse from where the route trucks withdraw their
products for sae an the tax due on such sales is paid to the LGU where
such branch, sales office or warehouse is located (IRR of LGC, Art. 243(d)).

Taxing Poweriof Barangays

•
Q: What are the. taxes, fees, and charges that may be levied by barangays?
ANS: Barangay may levy the following taxes, fees, and charges which shall exclusively
accrue to them: r
1. Takesion small business establishments;
2. Service fees or charges;
3. Baranbay clearance; and
4. Other fees and charges (LGC, Sec. 152);
Q: Discuss the power of the barangay to impose taxes on small business
establishments.
ANS: Bamngays may levy taxes on stores or retailers with fixed business
establishments with gross sales or receipts for the preceding calendar year of P50,000
or less (for barangays in cities) and P30,000 or less (for barangays in municipalities)
(LGC, Sec. 152).

979
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IAN fRED •: BOO.T i2019

Q: DiSCrus the power of the barangay to impose service fees or charges.

ANS: Baiangays may collect reasonable fees or charges for services rendered in
connection with the regulations or the use of barangay-owned properties or service
facilities such as palay, copra, or tobacco dryers (LGC, Sec. 152).

Q: DisCuss the power of the barangay to impose fee for the issuance of barangay
clearance.
ANS: No city or municipality may issue any license or permit for any business or activity
unlessie clearance is first obtained from the barangay where such business or activity is
located oil'conducted. For such clearance, the Sangguniang Barangay may impose a
reasonable fee (LGC, Sec. 152).

Q: What businesses or entities may the barangay charge reasonable fees and
charges?
ANS: The, barangay may levy reasonable fees and charges:
1.1, On commercial breeding of fighting cocks, cockfights and cockpits;
On places of recreationxhieeidmission fees; and
3 On billboards, si neci rds, neon s aTh'outdoor advertisements (LGC,
Sec. 152). .r.

Common Revenue. ce;In O‘rS

Q: What are theF9 o re enue Taistrvifpapers o alljlo~ai go ernment units?

ANS: All local g9Vern t un s maylimpcfsb thelfollowing:
1; Service fees d ch rges;
Publi t i harge , an .
3: Toll f es-ori harges Ld655 -- 53=V5f.
ill
Q: What are s 11 es or ch:Ed
ANS: Toll feety ge o ffirifate
i -Tf blic4 d, pier or wharf,
waterway; bridgpi er rm )1-:. nde ands 11.5 nstructed by the
mPAI, 11(104 N's
local gOvernme%nit
1'
Q: Who are exemated fro to 611-f- es..r c rges?
ANS: No such toll fa s or_cha es .re'din•
fficers an en cer of the Philippines and
Omembers of th NationakPRIi Skii6 ton;
2; Post office personn ering
3. Physically-handicapped;
4.f. Disabled citizens who are sixty-five (65) years or older (LGC, Sec. 155).
Note: Sanggunian concerned may discontinue the collection of the tolls when
public'safety and welfare so requires. Thereafter, the said facility shall be free and open
for public,'use (LGC, Sec. 155).

Community Tax
Q: What is a poll or capitation tax?
ANS: Poll or capitation tax, is a tax of a fixed amount upon all persons, or upon all
persons of a certain class, resident within a-specified territory, without regard to their
property or the occupations in which they may be engaged (Villanueva v. City of Iloilo,
G.R. No. L-26521, December 28, 1968).

Q: Who are liable for community tax?

ANS: The following are liable for community tax:
1. Individuals—
a. every inhabitant of the Philippines, 18 years of age or over and
b. who has been regularly employed for at least 30 consecutive days; or
engaged in a business or occupation; or owns a real property with an

980
 aggregate value of P1,000 or more; or who is required by law to file an
income tax return (LGC, Sec. 157).
2. Corporations — whether domestic or resident foreign, engaged in or doing
business in the Philippines (LGC, Sec. 158).

Q: Who are exempt from paying community tax?

ANS: The following are exempt from paying community tax:
1. Diplomatic and consular representatives; and
2. Transient visitors when their stay in the Philippines does not exceed three (3)
months (LGC, Sec. 159).
Q. Who are the persons not subject to pay the community tax for the rest of the
current taxable year?
ANS: The following persons are not subjected to pay the community tax for the rest of
the current taxable year
1. Persons who come to reside in e Philippines on or after the first (1st) day of
July of any year;
2. Persons who reach the age teen (18) years on or after the first (1st) day
of July of any year; and 0
3. Persons who cease to bar exempt class or after the first (1st) day of
July early year (LGC, Sic.
Q: Where is community taxi id?
ANS: Community tax is iiTat the r3 g.,ce of the individual r in the place where the
principal office of the jqt:11 I entity is ed (LGC, Sec. /6/5)

Q: When is the,pay ntScignimunity ?

ANS: CommueVax accipe&h thf,1s gay of Janua o ach ear which shall be
paid before Peery 1stVch year (MC e c 161).
...rootO
Q: May the'city org altrea rer putize th asurer to collect
community taxfi
ANS: Yes. The cityfii'mu r may deputize the barangay treasurer to
collect the community tax in n *sdictions, provided, however, that said
barangay treasurer sha sing laws (LGC, Sec. 164).
Q: How are the proce community tax collected through the barangay
treasurer apportioned?
ANS: Proceeds of the comm tax collected through the barangay treasurers shall be
apportioned as follows:
1. 50% accrues to the general fund of the city or municipality concerned; and
2. 50% accrues to the barangay where the tax is collected (LGC, Sec. 164).
Note: If the community tax is directly collected by the city or municipal treasurer, it shall
accrue entirely to the general fund of the city or municipality concerned (LGC, Sec. 164).
r
Common Limitations On The Taxing Powers Of LGUS

Q: What impositions may not be exercised by the Local Government Units?

ANS: The exercise of the taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following : (IDEC-PAPi-Ex-PeT-RMEBG) •
1. Income tax, except when levied on banks and other financial institutions;
2. bocumentary stamp tax;
3. TaxeS on Estates, inheritance, gifts, legacies and other acquisitions mortis
causa, except as otherwise provided herein;
4. Customs duties, registration fees of vessel and wharfage on wharves, tonnage
dues, and all other kinds of customs fees, charges and dues except wharfage

981
 :ik‘Ar:):1•••.rny-,•!..... ..,.
•••,•:;.i..,...,•,,,••••-•:•:r:-.•*:-..'4::k•4•;1.4,:-.rt-1.,

" • B
••••
O
• ••• ••••••-••
VOL 1.
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on wharves constructed and maintained by the local government unit

concerned;
Taxes, fees and charges and other impositions upon goods carried into or out
Of, or Passing through, the territorial jurisdictions of local government units in
the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes,
fees or charges in any form whatsoever upon such goods or merchandise;
6. Taxes, fees or charges on Agricultural and aquatic products when sold by
Marginal farmers or fishermen;
Taxes on business enterprises certified to by the Board of Investments as
Pioneer or non-pioneer for a period of six (6) and four (4) years, respectively
from the date of registration;
8. Excise taxes on articles enumerated under the National Internal Revenue
Code, as amended, and taxes, fees or charges on petroleum products;
Percentage or value-added tax (VAT) on sales, barters or exchanges or similar
transactions on goods or services except as otherwise provided herein;
10. Taxes on the gross recejpts....of.lransportation contractors and persons
engaged in the trarwtraiorr of-passenders or freight by hire and common
pr, carriers by air, lf,ptf or tik,ater, e ce t#13rovIdefillthis Code;
It Taxes on pre urns "old By,way,offtemsutrande prletrocession;
12T Taxes, feesxor c agerfor the regist7itio r$6.f Kok vehicles and for the
issuance fllOti d-s f,liceVerdt-permits he
driving thereof, except
tricycles, r
13. Taxesjfees, other charges on,.,.hilippine product ctu a lz Exported, except
‘A.A
as of rovidgd herein; Or)
14. Taxe ,9es, or charges, on p an Baran atgil jness Enterprises
and ooper, fi ves diuly`ciFebitprOiitiriger R. • . No.010, d Republic Act
Num Sixty-ninehundidglirtoOlgbt (R. . No. 6938)4 erwise known as
the "peAtiv s oIle of thkEhilippines" r- Fdetivegf; and
15. Taxe , eest r c tr goverriTent, its agencies
and IA ,rife taliti locaPrg r( the • (L C, Seal 133).
Procedure For..Ipprova And ffectrvity f'To'Ocdinanges
Q: What are the requisites o VitiLLOAR'apteP".:
ANS: The requisites arkq, v4Ii4or fit ce are as IlOye:
1. If must not conirvenet9ercon4 u o oci,:tOta ute
It must not be unfaihocofpress.i2
3.'`It must not be partial or discrimmalm
4.: It must not prohibit but may regulate trade.
5. It must be general and consistent with public policy.
6. It, must not be unreasonable (Magtajas v. Pryce Properties Corp., Inc., G.R.
_No. 111097, July 20, 1994).

Q:: How de LGUs exercise the power to impose tax, fees, and charges or to
generate revenues? • • .1
ANS: The poWer:to'impose a tax, fee, or charge or to generate revenue under the LGC
shall be exerbled by•the Sahggunian of the local govemment unit concerned through
an appropriate-ordiriance (LGC, Sec. 132).
•
Q: What is, the procedure for the enactment of local tax ordinances and revenue
measures?
ANS: The following are the steps for the enactment of local tax ordinances and revenue
measures:
1. Filing of proposal. The proposed tax or revenue ordinance is prepared. The
sponsor explains the rationale for the enactment of the proposed ordifiance;

982
 1,

ZVOL 1.
2019

2. Publication or posting. Within the ten (10) days from filing the same, it shall be
posted for three consecutive days in a newspaper of local circulation or shall
be posted simultaneously in at least four conspicuous places within the
territorial jurisdiction of the LGU;
3. Noiification. The Sanggunian shall cause the sending of written notices of the
proposed ordinance enclosing a copy to interested or affected parties
omating or doing business within the territorial jurisdiction of the LGU. The
notice(s) shall specify the date(s) and venue of the public hearing;
4. Mehdatory public hearing. The public hearing shall be held no less than 10
days from the time notices were sent out, posted or published. All affected or
interested parties shall be accorded an opportunity to appear and present or
express their views, comments and recommendations, and such public
hearing or hearings shall continue until all issues have been presented and
fully deliberated upon and/or consensus is obtained, whether for or against the
enactment of the proposed tax ordinance or revenue measure. The secretary
of the sanggunian concerned sh JI prepare the minutes of such public hearing
and shall attach to the migpfet he position papers, memoranda, and other
documents submitted by:Iffibtel participated;
Note: iPier ' 74.
1411141A
a. No tax ordinanc on lie ud measure shall be enacted or approved in
the absence of utibnibaaringrauly condu :ted in the manner provided
r I in this Articlei.OR
•
AGGlia?-276kr.
-9:9
b. While tlx0P/ggunians arse required to coedt public hearings prior to
I, 'the eqament of tadorpti ances and reveremeasures (LGC, Secs.
186 d' sdls '67) the Nai al Legislature, on other hand, has the
.4 disc (bpkt3ethr or not y would poncict ic hearings before the
enbc menOfttax laws (SA ABAN, Tax Lion raw review (2008), page

5. Apkgival path ordinance an venue vAessm r-•

6. Publiqation of, pp vedly:Vrdirence and rBradthi en (10) days after
their apjapar,1;tified *tot coils of all provincidlly, and municipal tax
ordinances hl revenue , easuF shall be published in full for three (3)
consecutive. days an a newspa er.. of local circulation provided that in
prOvinges, cities Vaii municipals emv e, ere are no newspapers of local
circulation, the same Ilabe pos ecki tall as two (2) conspicuous and
publicly accekble plaks; and
Note:1 .....
1. If the tax ordi ance or revenue measure contains penal provisions as
authorized in Article 280, IRR of LGC, the gist of such tax ordinance or
revenue measure shall be published in a newspaper of general
circulation within the province where the Sanggunian concerned
belongs. In the absence of any newspaper of general circulation within
the province, posting of such ordinance or measure shall be made in
accessible and conspicuous public places in all municipalities and cities
of the province to which the Sanggunian enacting the ordinance or
revenue measure belongs (IRR of LGC, Art. 276).
2. The tax ordinance will be null and void if it fails to comply with such
publication requirement (Coca-Cola Bottlers Philippines, Inc. v. City of
Manila, G.R. No. 156252, June 27, 2006). •
7. FurniShing of copies of tax ordinance and revenue measure. Copies of all
prOvincial, city, municipal, and barangay tax ordinances and revenue
measures shall be furnished the respective local treasurers concerned for
public` dissemination (IRR of LGC, Art. 276 in relation to LGC, Secs. 48-59).

983
 )AN [.RED
ED BO
Q: 1.IVhen will a tax ordinance or revenue take effect?
ANS: The effectivity of the tax ordinance or revenue may be outlined as follows:
1. Unless otherwise stated in the ordinance, the same shall take effect after ten
(10) days from the date a copy thereof is posted in a bulletin board at the
entrance of the provincial capital or city, municipal, or barangay hall, as the
case may be, and in at least two (2) other conspicuous places in the local
government unit concerned;
The gist of all ordinances with penal sanctions shall be published in a
newspaper of general circulation within the province where the local legislative
body concerned belongs. In the absence of any newspaper of general
circulation within the province, posting of such ordinances shall be made in all
municipalities and cities of the province where the sanggunian of origin is
situated;
In the case of highly urbanized and independent component cities, the main
features of the ordinance or resolution duly enacted or adopted shall, in
addition to being posted, lap,publisliecl once in a local newspaper of general
circulation within the . rovidell, TO *the absence thereof the ordinance
or resolution shpll e p bpshekialar w,paer of general circulation (LGC,
Sec. 59). ..,.>;,„,,....,,,,,,..
Note: In case the ey rtf.tax ordinance ‘1‘riL'; asure falls on any date
..z.
other than the beakini uarterlFr , n ered as falling at the
19
beg nning of the " uarterhandffie ,taxes, es, rNo a g s due shall begin to
accrue therefro Art. 276 ( , A
•rA• ,--
-t..
.t .
Q: An Ordina ea pass • y iovincia :o rd of ro lir in the North,
increasing they ate/ reatfir i;aK h vreo m .006% to 1°4 f the assessed
li . .
value of the 101 prope ee — anuary 1, 20 0:-.43e idents of the
4,,,,
municipalitieiattke sal • vince p ed the Or fn on th ground that no
pub is hearin\jwas , on • 5t' 9,,y cr 6 b the rate of real
property tax is °fel the 1 i "th s iOtes fain rower. (Bar 2002)
ANS: The prote t is de 'd '..0 o • bii6' fired beore the enactment
of a local tax ordinance le R ofii
L pC, Art. 324).
Periods forAssessmentand •olle lokgkIrD es. Fees, am/ Charges
Q: What is the tax perio loPgat
ANS: Unless otherwise pro i LG to of all local taxes, fees, and
charbes shall be the calendar yea 6G.C,e5ss,46

Q: How'may taxes be paid?

ANS. Such taxes, fees and charges may be paid in quarterly installments as may be
provided in the tax ordinance (1RR of LGC, Art. 253).

Q: When do local taxes accrue?

ANS All local taxes, fees, and charges shall accrue on the first (1st) day of January of
each year (LGC, Sec. 166).
Note. In case of new taxes, fees or charges, or changes in the rate thereof, the same
shall accrue on the first (1st) day of the quarter next following the effectivity of the
ordinance imposing such new levies or rates (LGC, Sec. 166).

Q: When should local taxes be paid?

ANS: Unless otherwise provided in the LGC, all local taxes, fees, and charges shall be
made:within the first twenty (20) days of January or of each subsequent quarter, as the
case may be (LGC, Sec. 167).

984
 4NRED ..B

Q: Is the time for payment extendible?

ANS: Yes. The Sanggunian concerned may, for a justifiable reason or cause, extend
the time for payment of such taxes, fees, or charges without surcharges or penalties, but
only for a period not exceeding six (6) months (LGC, Sec. 167).

Q: What penalties may be imposed on unpaid taxes, fees, or charges?

ANS: The Sanggunian may impose:
1. Surcharge — not exceeding 25% of the amount of taxes, fees or charges not
paid on time; and
2. Interest — not exceeding 2% per month of the unpaid taxes, fees or charges
including surcharges, until such amount is fully paid.
Note: In no case shall the total interest on the unpaid amount or portion thereof exceed
thirty-six (36) months (LGC, Sec. 168).

Q: Who has the authority to collect local taxes, fees, and charges?
ANS: All local taxes, fees, and charges shell be collected by:
1. The provincial, city, municippy4arangay treasurer; or
2. Their duly authorized deppiKAG,C, Sec. 170).
Note: The 'provincial, city, or murltiklagurer may designate the barangay treasurer
as his dep6ty to collect local taxe4r6,610arges (LGC, Sec 170).

Q: Who may inspect or examine the w.,OR s,o peedris.fs 1.5 ct to local taxes?
ANS: The provincial, citybffigicipal, or b rangay treasurer any, by himself or through
any of his deputies duirtaithorizedring,
J examine the oks, accounts, and other
pertinent records of arerton
- partriers corporation, o association subject to local
taxes, fees;andharge 40CuSec. 171).
,"
Q: What are the`requisites
,14 for a valid,exa ination of • ook ?
ANS: The ford) nasIg.,thearequiVes:
1. The xaminatioff f bookTAis ssary in awl, assess, and
collectlhe corr.L4amount aithe x, fee, or chase;
2. During gatlailffuitess ho6rs;
WI
3. Only once4fortfverygr period;
4. Shall be certiVoloy the exammag, .o crtzend
5. Such certificate shall be ifircrego riAig books of accounts of the
it
taxpayer exa f4.ed (L Sec. 171).

Taxpayer's Remedies f
Q: What are the remedies available to taxpayers?
ANS: In !coal taxation, the taxpayer's remedies are as follows:
1. To question the constitutionality or legality of tax ordinances or revenue
measures (LGC, Sec. 187);
2. Protest against an assessment (LGC, Sec. 195);
3. Claim for refund or tax credit (LGC, Sec. 196).

Q: What is the procedure to be followed in questioning the constitutionality of an

ordinance?
ANS: The' procedure in questioning the constitutionality or legality of a tax ordinance
may be outlined as follows:
1. Appeal to the Secretary of Justice within 30 days from the effectivity of such
ordinance or revenue measure;
2. The Secretary of Justice shall render a decision within 60 days from the date
of the receipt of the appeal;
3. Within thirty (30) days after the receipt of the decision or after the lapse of the
60-day period without the Secretary of Justice acting upon the appeal, the

985
 •••

aggrieved party may file appropriate proceedings with a court of competent

i jurisdiction (LGC, Sec. 187).
Note: Court of competent jurisdiction refers to the Regional Trial Court (RTC) when
case is resolved to determine any question or construction or validity of a tax law and for
the declaration of the taxpayer's liability thereunder (V/TUG & ACOSTA, Tax Law and
Juri4pruclence (2014 Edition), p. 490; Rules of Court, Rule 63, Sec. 1). The method of
judicial recourse has not been specified in the LGC, although it might be said that such
proceedings could include, but certainly will not exclude, the special civil actions of
certiorari, mandamus, or prohibition (VITUG & ACOSTA, supra at 489).

Q: May the appeal made to the Secretary of Justice suspend the effectivity of the
ordinance in question?
ANS: No. The appeal made to the Secretary of Justice shall not have the effect of
suspending the effectivity of the ordinance and the accrual and payment of the tax, fee,
charge levied therein (Sec. 187, LGC).

Q: What is the prescriptive periolforiasse sstmffitqlocal taxes, fees, or charges?

ANS: 'Local taxes, fees, bsicliargkshalltejalisqsse?iwiihin five (5) years from the date
they became due. Howells( W qn t4gre.is-frauc14- idtent tpAade the payment of taxes,
fees pr charges, the 9. beIssessed withiiikte 1(10),,O'Nr, from discovery of the
fraud or intent to evades ent-(1..-GC;rS'etr-1,94) .rx

Q: What is the prescriptive period forTMi7collection of local a es?

ANS. Local tax s, feels.,` or charges maytbftollected vklIthin figs from the date
of adsessmentibyegdyninistr4fivs or Judicql—atiliTiThTd such 7,19A hall be instituted
after the expiraliOn-ofsuch pe iod YLOC,::.§Pi!ce §74)?"/

Q: What are he roundrik the stiVgiVon of S mr)71 he prescriptive

periods?
ANS: The folio rou ,sustipndiotib the unnin of the prescriptive
periods: (PRO)
1. The treasurer he " asses ment o collection of the tax;
.<
2. The taxpyer
' requests (t96`a- p iga)on ark executes a waiver in writing
before thebriratiojitif, ithin whia% ttpape(s or collect-and-
3. The taxpayer Country.prodflre rfOt be located (LGC, Sec.
194).

Protest of Assessment -

Q: What is the procedure in case of protesting an assessment?

ANS:
1. Within sixty (60) days from the receipt of the notice of assessment, the
taxpayer may file a written protest with the local treasurer contesting the
assessment; otherwise, the assessment shall become final and executory.
2, The treasurer has to decide within 60 days from the time of its filing. If the
treasurer finds the protest meritorious, he will cancel the assessment; if not, he
I will deny the protest. _ - -• •
31 The taxpayer shall have thirty (30) days from the receipt of the denial of the
protest or from the lapse of the 60-day period within which to appeal with the
t court of competent jurisdiction, otherwise the assessment becomes conclusive
and unappealable (LGC, Sec. 195).
Note: If appeal is denied, the taxpayer may file a Petition for review to the CTA Division
under Rule 42 (appeal from RTC acting in its original jurisdiction) or Petition for review
to the CTA En Banc under Rule 43 (appeal from RTC acting in its appellate jurisdiction)
(INGLES, Tax Made Less Taxing: A Reviewer with Codals and Cases (2015), p. 539).

986
 BOOK
Q: Can injunctions be issued in the case of local taxes?
' VOL 1.
2019

ANS: Yes. The prohibition on the issuance of a writ of injunction to enjoin the collection
of taxes applies only to national internal revenue taxes, and not to local taxes. There is
no expresslprovision in the LGC prohibiting courts from issuing an injunction to restrain
local governments from collecting taxes (Angeles City v. Angeles Electric Corp., G.R.
No. 166134, June 29, 2010).

Claim for Refund of Tax Credit for Erroneously or illegally Collected Taxes, Fees, or
Charges
I ,
Q: When may erroneously or illegally collected tax, fee or charge be claimed for
refund or credit?
ANS: The tpxpayer entitled to a refund or tax credit shall file with the local treasurer a
claim in writing duly supported by evidence of payment (e.g., official receipts, tax
clearance, ;and 'such other proof evidencing overpayment within two (2) years from
payment ofthe tax, fee, or charge (IRR of GC, Sec. 286).
,401
Q: If the tax credit is granted, is qr103f ayer entitled to a cash refund?
ANS: The tax credit granted a taxtge haAnot be refundable in cash but shall only be
applied to future tax obligationsVo'f5,q4aTe taxpayer for the same business. If a
taxpayer has paid in full the tax ertellstir ear and e shall have no other tax
obligation payable to the LGU cq,rihear41 • urin at eyeartits ax credits, if any, shall be
applied in full during the first carter otah next ca en argea on the tax due from him
for the same business OA calendqwe (Sec. 252, LGC)
Exception:; Any unacklied,•balance ifat tax credit stiall funded in cash in the
event that he terminatls'"0 ration of the b siness involve hi the locality (Sec. 145,
isp•
LGC).
4.
Remedies ofit eLGUsl'or‘Collection of Re
' ienues
Local Govern'ment's Lien for Definquentnxes. FeeorACtiarkes
t#70, r'fil
Q: What is the n'Thre,oigorrnment's I en for delinquent taxes?
ANS: Local taxes, Ve;,̀ chk§es, and ot r revenues constitute a lien, superior to all
liens, charges, or encuktmips in favor LaS es , enforceable by any appropriate
administrative or judictaction, 94,201.40' ,au z ,or rights therein which may
p
be subject the lien but also upon property used in business, occupation, practice of
profession or calling, o erc se f privilege with respect to which the lien is imposed .
(LGC, Sec.I173).
1
Q: How is the lien extinguished?
.ANS: The lien may only be extinguished upon full payment of the delinquent local taxes,
fees, and charges, including related surcharges and interest (LGC, Sec. 173).

Q: What ace the civil remedies available to the LGU for collection of revenues?
ANS: The remedies available to the LGU are:
1. Administrative action:
a. Distraint of personal property;
b. Levy upon real property (LGC, Sec. 174);
c. Compromise (LGC, Sec. 148(6) in relation to Sec. 142); and
2. Judicial action (LGC, Sec. 174).

Administrative Action
Q: How is the administrative remedy of distraint or levy exercised?
ANS: By administrative action through distraint of goods, chattels, or effects, and other
personal property of whatever character, including stocks and other securities, debts,

987
 credits, bank accounts, and interest in and rights to personal property, and by levy upon
rea0property and interest in or rights to real property (LGC, Sec. 174).

Q: May the LGU purchase real property advertised for sale?

ANS: Yes. The LGU may purchase the real property when:
cl.
M , There is no bidder; or
2. The highest bid is for an amount insufficient to pay the real property tax, fees,
charges, surcharges, interests or penalties (LGC, Sec. 181).
1
Q: Is the remedy of distraint or levy available only once?
ANS: ,No. The remedies of distraint and levy may be repeated if necessary until the full
amount due including all expenses is collected (LGC, Sec. 184).

Q: Are the remedies of distraint and levy applicable to all properties of a

delinquent taxpayer?
ANS: No. The following properties ara„exempt,fw distraint or levy:
1 Tools and implemer tshrfecessarilylusad 'the delinquent taxpayer in his trade
or employmenti,- t Jfk ',•'N,,,
1 k ‘.
Z 'One (1) horser4, a atiao,mr-othK,b a$t of buragn, such as the delinquent
taxpayer m*spleat,antrnecessarily Uaat iffinurrk• -).• lis,ordinary occupation;
3. His necesgaNidtpihg,„andlhlrOrall'his.fami
,i, yi4\::>•
' '
4. Househpid urnere nd utensilszfor-housek epihgNa5g4 sed for that purpose
' by thellelin 4T-it to payernuchlaszife may elgt pf a 'slue not exceeding
P10,00 .h.. •j )
5. Provi ions, i(cludin crops, actUall
suffice
r./"--7:•rovl
for four m ptQf'Z',•'''.zs Oil e:\ : 01 j
'— r --,
ed for n id al 'or family use
1
6. The Orofesbi nal librbries Ofifoc,piripebbinee lawye gran udges;
Notes ertilkither,R, of Cotrtf(Rd/0 39, Se t g)) • rofe s onal libraries and
equip7rit-lof pi06 Iona s a 1 pfemp ro e audio not exceeding
P300, 0'. ' .'
s) \I
,i''./
7. One fishing b at an No e?ccetcr gS,t tot value f P10,000, by the
• lawful li1,1 of wh h a s a "art.‘ e:arng KJ' eliho ; and
8. Any mat al or a cle o. o e or im rovement of any real
t>"a
property (L O, Sec- 85).
.<91 ,1 1
Summary of Procedure foKik,.. eainfof Peiuiftrcp,p

DELINQUENCY OF TAXPAYER

ASSESSMENT

Assessment within 5/10 years from the date the taxes, feesLor charges became due
(LGC, Sec. 194).

SEIZURE

a. The local treasurer or his deputy shall issue a duly authenticated certificate
(serves as a warrant) showing the fact of delinquency and the amounts of the tax,
fee, or charge and penalty due;
b. The local treasurer or his deputy may, upon written notice, seize or confiscate any
personal property belonging to that person or any personal property subject to the
lien in sufficient quantity to satisfy the tax (LGC, Sec. 175(a)).

988
 yS

•• ED 1
1•';:7-ef,:s.'1:-..4•14'..tto7
O
TO K

ACCOUNTING OF DISTRAINED GOODS

a. The Officer executing the distraint shall make or cause to be made an account of
the Oods, chattels, or effects distrained;
b. A Gorily of which signed by himself shall be left either:
1. with the owner; or •
2. person from whose possession the goods, chattels, or effects are taken; or
3. at; the dwelling or place or business of that person and with someone of
suitable age and discretion;

c. to wych list shall be added a statement of the sum demanded and a note of the
time and place of sale (LGC, Sec. 175(b)).

PUBLICATION AND POSTING OF NOTICE OF SALE OF DISTRAINED GOODS

I. . , 14 ..,A.A .
The officerShall forthwith causgadyftcaon to be exhibited in not less than three
(3) publip'and conspicuous placts15 h'territory of the local government unit where
the distraint is made, specifyingh qoa • d place sale, and the articles
4. tk 4
distrained. ;r; -
.i.,
I
. •-• .
The time of sale sh It tige less than .enty (20) days a pte notice to the owner
••;..,:qtgl
or posseSsor of the prql_p‘rty as ab9yes ecified and the A 'dation or posting of the
notice. 1 ev,

One plaCe fop e postin&orge notioe s all be at the o ice f th 4chief executive of
the loca goimmentSV which the prs)berty is distrtined1/..q&te2 175(c)).

SALE AT PUBLIC AUCTION

At any time p rior o; the consummation igth sale, the taxpayer may pay the proper
chargesl(LGC, Sec. 1( ,5(difF

Should the property istraintk a not disposed of within 120 days, the same shall be
Considered as sold to G concerned for the amount of the assessment made
thereontby the Committee or?Appraisal and to the extent of the same amount, the
tax delinquencies shall be cancelled (LGC, Sec. 175(e)).

REPORT TO THE LOCAL CHIEF EXECUTIVE

Within five (5) days after the sale, the local treasurer shall make a report of the
proceedingsin writing to the local chief executive concerned (LGC, Sec. 175(e)).
11
DISPOSITION OF PROCEEDS
I '
The prolbeeds of the sale shall be applied to satisfy the tax, including the surcharged,
interest: and other penalties incident to delinquency, and ,.t.he exp.erised.:911.1he
distrain(and sale. The balance over and above what is recitiired4O:liaV'the'
claim shall be returned to the owner of the property sold (LGC, Sec. 175(f)).

(LGC, Sec. 175)

989
 ;44.
11,
3 if47a;514'*V31
111
,6 11t:f.0 : Wf'+)WY

.0“

/.

Summary of Procedure for Levy of Real Property

DELINQUENCY OF TAXPAYER
ii
ASSESSMENT

Aesessmenrwithin 5/10 years from the date the taxes, fees or charges became due
(LOC,1Sec. 194).

LEVY

a. The treasurer shall prepare a duly authenticated certificate showing the name of
The taxpayer and the amount of the tax, fee, or charge, and penalty due from him.
Said certificate shall operate with the force of a legal execution throughout the
Philippines.
,p4.00s1. 1 ,.
b. ,Levy
. shall be effecte,pby Ar,vriting:lupon /paid certificate the description of the
property upon.hicylevy,ts rrOide: :- , , ,,.. ',.
V jt i
, . i, , ' 11., • ..,,,.• • -...„,t,z, , s N.,....
C. At the same time;'Written'tiotice of leyy shall be made` to-,'"t: 51/4
...e ,...-
! c.1 Assesstir antthe , Registe?
. Deelre'Who,shIll
, apnotare the levy on the
1 tax declafaticirrend certificate;pf title of the propertyi arrst)
. s' -.. , .4) e 1 4
; 62 Delitiquent/taxpayer or adent.d0heThanager of t dbusiri ss or occupant
e
l' . Of the pi-ppertgn question
ti '
(LGC,"Soc. 176). CP
I,..., ••+-4.,;:;,- • ...• I
ADVERTISEMENT .
I IIC..") 1 - R. . •
.
AdvertiSeme t of:Iskle if-,.p}.1‘h-postili9 rikpublieap,99 of nojice7(within thirty (30)
days after th 164.And forp,a,Orlod of:po de"A„., ii/gc:" I
,: ‘ <sr .„..):/;‘k'7' i
The adVertisemrt shaltson iri ttz.t.amotunt,ofetpxeS, fee5,or char es, and penalties
due thereon, and,the time and Gsge.31'sble:,..the:''Ame9flhe taxpayer against whom
the taxes, fees, b'kcharges‘a e leXer'frepd:',4kport.,;Idscriptiory8f the property to be
sold (LGC, Sec. 171) in f,„.1,,

PUBLIC SALE

At any' , time before the date fixed for the sale, the taxpayer may stay they
proceedings by paying the taxes, fees, charges, penalties and interests.

If he fails to do so, the sale shall proceed and shall be held either at the main
10
....entrance of the provincial, city or municipal building, or on the property to be sold, or
r:at,.any other place as determined by the local treasurer conducting the sale and
s*ifieei in the notice of sale (LGC, Sec. 178).

The owner shall not, however, be deprived of the possession of said property
(f ie entitled to the rentals and other income thereof until the expiration of
Mm Ie~Ein 'stowed for its redemption (LGC, Sec. 179).
IS
REPORT:TO THE SANGGUNIAN.:
Within thirty. (30Rayg-after the sale, the local treasurer or his deputy shall make a
-- report -of-thesale -to -the-Sanggunian concerned, and which shall form part of his
records.

990
 DELIVERY TO THE PURCHASER OF THE CERTIFICATE OF SALE
11
DISPOSITION OF PROCEEDS
Any excess in the proceeds of the sale over the claim and cost of sales shall be
turned oi),er to; the owner of the property (LGC, Sec. 178).

FINAL DEED OF PURCHASE,

In case the taxpayer fails to redeem the property within one (1) year from the date of
sale, the;local treasurer shall execute a deed conveying to the purchaser so much of
the property as has been sold, free from liens of any taxes, fees, charges, related
surcharges, interests, and penalties (LGC, Sec. 180).
(LGC, Seca. 476-180).
I
Compromise
pi
Q: What offense(s) may be cornprolM9OR
ANS: Thel Sa0guniang bayan corlOARAkmaftuthoriz 'the municipal treasurer to
settle an offense not involving The cofriMissikgrfar beforgre case therefore is filed in
court, upon payment bT,,j-compromiqe penalty of not less .t an Two Hundred Pesos
(P200) (LGC, Sec. 148,;(1$)).

Judicia/Aition
Q: How is thepmedy of judicial action eXercised?
ANS: The ...qalkspriceriplimay enforce t ollection delinquent taxes, fees, charges
or other revenues liniviVkC;tion cc:: of compqsz within five years
from the date taxes,. fers!ka,chatdes7bedb e due (LGT04Sebablig3 in relation to Sec.
194). ! ', op' .14
Note: The1Ocei government%ay file an or, ina suit for the collection of sum of money
before the MTC, RTC, torel Cepending nArikjsglictional.amount (LGC, Sea 183
in relation 0, Sec. 194)#ither olAteRrentetliaabroAratIminisfrative action or judicial
action or all may be pu_ped cor4irrently or simultaneously at the discretion of the local
government unit conceffedt(La,Sec. 174).
4
111A4*
Q: Which court has jurisdiction over the action filed?
ANS: The court having jurisdiction over the action filed shall be:

If principal amount 'of taxes, fees, exclusive of charges and

Original
penalties does not exceed P300,000 or P400,000 in Metro Manila

If principal amount of taxes, fees, exclusive of charges and

penalties exceeds P300,000 or P400,000 in Metro Manila
Provided: The amount is less than P1,000,000

The RTC shall exercise appellate jurisdiction over all cases decided
by MeTCs, MTCs, and MCTCs in their respective territorial
jurisdiction

991
 •
)VOL
2 019

CTA Division

If principal amount of taxes, fees, exclusive of charges and

penalties is P1,000,000 or above

Over appeals from judgments, resolutions or orders of the RTCs in

Appellate tax collection cases originally decided by them in their respective
jurisdiction

1. Decisions or resolutions over petitions for review of the CTA

Division in theJ.xercise,.ofats appellate jurisdiction over local
taxes decided by the ,RTC esezercise of their original
juriscligionrAV 1\1
Appellate 2. OffeK,Pelitio.r,Vapreview.ofihdjud:ggients, resolutions or orders
,6fAbegTps in the exercise oillNirappelOte jurisdiction over tax
c:blIgeficinsaseroltyplirdeckled'We NI&s, FMTCs, and
y ~C s,fi
n theirgsPfctivc, territoValltrisdiaidg

B. RE.1L. IROPE:A7*TifIXAT ON
i i • c•i:•-- „•
Q: Define rea property taxes. t„...,....
ANS A real e tate* isca-direct tax Irp.it e!. wnersymnf Ian uildings or other
v.”,
imprOvernentsther,e,tk, not-aecially-,e3fetite f ,ciran yalg ej.eg fdless of whether
the property is ,tEl . kiot,-Aargh thglv lie-#4,ge rcr.;.in acdordAq with such factor.
It is a fixed pioportiekof tIK-Msete'd VeliI5,,, ql, property t ed, and requires,
therefore, the inkrventick of as.7,sors. I Vejjed oayable t appointed times,
and it constitutes a supent) lien
3 011,, al'ik:enfpitCeable against the property subject to
such taxation, andligt by i *sorinfz0fNitigoirv,r4 City of Iloilo, G.R.
No. L-26521, Decembec28 e91:,,,,,„„,,...,„,,,,
1 .)
Q: What are the kinds of rialxpzopertycla,ipt .„,....0' ..,a
ANS: Real property tax may be craSsifie atp.
1. Basic Real Property Tax (LGC, Sec. 232); and
2. Special Levies
I a. for Special Education Fund (LGC, Sec. 235);
i b. on Idle Lands (LGC, Sec. 236); and
c. by LGUs (LGC, Sec. 240).. _
.
Q: What is real property?
ANS:I, The LGC does not carry a definition of "real property". The Supreme Court,
however in several decisions, suggested that in understanding what "real property" is,
reference 'pay be made to Art. 415 of the Civil Code (ABAN, Law of Basic Taxation in
the Philippines (Revised 2001 Edition), pages 444-445). Art. 415 of the Civil Code
provides:
The follow ng are immovable property:
1, Land, buildings, roads and constructions of all kinds adhered to the soil; •
2 Trees, plants, and growing fruits, while they are attached to the land or form an
integral part of an immovable;

992
 dr
VOL 1.
AN RED.: 2019
i
3. EvetrythingI attached to an immovable in a fixed manner, in such a way that it
cannot be separated therefrom without breaking the material or deterioration of
the Object;
4. Statues;, reliefs, paintings or other objects for use or ornamentation, placed in
building's or on lands by the owner of the immovable in such a manner that it
reveals the intention to attach them permanently to the tenements;
5. Maohinery, receptacles, instruments or implements intended by the owner of
the ,'tenement for an industry or works which may be carried on in a building or
on a piece of land, and which tend directly to meet the needs of the said
industry or works;
6. Animal houses, pigeon-houses, beehives, fish ponds or breeding places of
similar nature, in case their owner has placed them or preserves them with the
intention to have them permanently attached to the land, and forming a
pednanent part of it; the animals in these places are included;
7. FOilizer actually used on a piece of land;
8. Miaes, quarries, and slag dumps while the matter thereof forms part of the
bed, and waters either runniOgOO stagnant;
9. DoCks and structures wh@liTho, h floating, are intended by their nature and
object to remain at a fixel,i§ ei river, lake, or coast;
10. COtraCts for public Worl(0. 4 ky servitudes and other real rights over
immovable property. ;

, .',,.
Q: May personal prgegties be CiSstified as rea property for purposes of
taxation? i' tr I:
.04
ANS: Yes. It is, 'a farnAtariphenorr_terro st see things ss as real property for
Psid
• red personal property
purposes of It Oflic 'Ortgeneral
-,. pareiple might be
(Standard Oil Co,10,0ew • IltageJamarillr .R. No. 203 16, 1923).
For example*lachinemiid equipmN c nsisting of urr rgr and anks, elevated tank,
4
elevated watefffefilss w.arei tanks gasolih umps, coN j 6 ,gsaater pumps, car
. 4.1.7:v - uz-- hoists, at_,
r, ploppr ors andTe Mrtenances to the
gas station building or-Wly.vnet1 by Ca (as to which s 1.1 s Act to realty tax) and
which fixtures areRee'esark the 9perat a of the gas station, for without them the gas
station would be useless, ang4which hay seert ached or affixed permanently to the
gas station site or emti3OclgedJtherein, ar gmments and machinery within
the meaning of the -A'S-sessmer1011 n RealeRroperty Tax Code (Caltex
(Philippines), Inc,v. Ce4i-al BORof Assessment Appeals, G.R. No. L-50466, May 31,
1982). '

Q: What LG,Ils are responsible for the administration of real property tax?
ANS: The LGUs primarily responsible for the proper, efficient, and effective
administratien of real property tax are:
1. PrOvinces;
2. Cities; 'and
3. MUniciPalities within Metro Manila (LGC, Sec. 200).

Fundamental Principles
r -
Q: What are`. thefundamental principles of real property taxation?
ANS: The appraisal, assessment, levy, and, collection of real property tax shall be
guided by the following fundamental principles (ACUPE):
1. Real property shall be Appraised at its current and fair market value;
2. Real property shall be Classified for assessmeht purposes on the basis of its
actual fuse;
3. Real property shall be assessed on the basis of a Uniform classification within
each local government unit;

993
 ...!••2.••• •

The appraisal, assessment, levy and collection of real property tax shall not be
let to any Private person; and
The appraisal and assessment of real property shall be Equitable (LGC, Sec.
198).

Q: What are the characteristics of real property tax?

ANS: Real property tax is a(n):
1 Direct tax on the ownership of real property where the impact and incidence of
taxation devolves on the same person;
al It creates a single, indivisible obligation;
3.1 Ad valorem tax where the value of the property is the tax base;
44 Local tax;
5; It Is proportionate because the tax is calculated on the basis of a certain
percentage of the value assessed (ABAN, Law of Basic Taxation in the
Philippines, supra at 436-437);
4 1 ..,,,_....•....,,t,,,,,
Q: Who may levy real proppylli c? 1 I •
ANS: A province, city, or unicT lity 4ithin t 4troi:Mapila may levy an annual ad
valorem tax on real pr soh agriandrbuil ingtmach,inery, and other improvement
not specifically exem eti,(L S.g232). f p,"
Note: ,MuniCipalitieio sffle ejr.o.Matillplid-bardayslre devoid of power to levy
real prOperty tax ".,( ' eci232 inglarO k n to+Sec. 200 ) %f,
IL 1/0. ,/,%.,.. ,,,
l•
Q: What lithe gent f the' i poW6A or)
\
ANS: The LG sTrY,n only INTelliwr 3646.„ Fro- evy. re I estatklax ut they may also
fix real testatefrat . How verNlytiagri•tinifieal state t rat does not extend
to municipalities o thlie Metr ManildiziktWonly oval bo ies-apporized to fix tax
rates are the I Bp" Q the cfat'se_aprovince rid' 1 Coun I in the case of a
city (ABAN,' La is 11,, 8sitAPi ipp,ines 3'
I ; NrA .-t.",0 .1
,
\,•,(\
Q: A city hire a private enkty „sake clid• ciiIlectiop of real property
taxes on the gr and thattlx), *Qatese , _yak e Tore capible of the efficient
and sound colletion. Is itk? manceXhht dye effe • to this procedure
valid? Expiain. 1.\11."
ANS: No. A city ordin ccit
taxes tO'a private entity i
ffitle tres.the-i
t WO. It viplates\t
'V ollection of real property
undarriental principles laid down in
Section198 'of the Local Gove rikettCodlqvhich terihat the appraisal, assessment,
levy and collection of real property tax snlrefar e let to any private person.

Q: What are the rates of basic real property tax?

ANS: The rates for basic real property tax are the following:
1. i Province - Not exceeding 1% of assessed value;
2. City - Not exceeding 2% of assessed value; and
3. Municipality within Metro Manila - Not exceeding 2% of assessed value
(LGC, Sec. 233).
1
Q: What are special levies on real property?
ANS: The following are special levies: •
1. l Special Education Fund (SEF) - 1% on assessed value in addition to the basic
RPT to finance the special education fund (LGC, Sec. 235);
2. Additional Ad Valorem on Idle Lands - not exceeding 5% of the assessed
' value of the property which shall be in addition to the basic RPT (LGC, Sec.
236);

994
 DAN BRED BOOaK AlVOL 1.
2019
;
3. Speciaf Assessments (for public works) — on lands specially benefited by
public works, projects or improvements funded by the local government unit
(LGC, Sec. 240).
Note: Special leVy by LGUs shall not exceed 60% of the actual cost of such projects
and improverhents, including the costs of acquiring land and such other real property in
connection therewith (LGC, Sec. 240).

Q: What lands are considered idle?

ANS: For purposes of real property taxation, idle lands shall include the following:
1. Agricultural lands more than 1 hectare in area if more than % of which remain
undultivated or unimproved by the owner of the property or person having legal
inte'rest,therein;
2. Non-Agricultural Lands more than 1,000 sq. m. in area if more than % of which
remain unutilized or unimproved by the owner of the property or person having
le6l-interest therein; and
3. Residential lots in subdivisiorl,Aly approved by proper authorities regardless
of area. If ownership is transferee", the individual owners shall be liable for the
tax OR the other hand, if I- podlthip of individual lots is not transferred, the
subdiviSion owner or opeSat0004)e liable (LGC, Sea 237).
Note: The following are not considered' lb lands:
1. Agricultural lands planteti AM 6 anent perenfilal crops with at least 50
trees to' a hectare; agd.:
2. Lands actually usetifor grazing p„ rposes (LGC,-Set4237).
I '
Q: When may idle landpe exempp 1 fr m tax?
ANS: The LGUs mayiemakidldlands fr the additional'eu b reason of:
1. For'pe riojetre;
2. Civil;tlarbance
3. NattVCalarnity704;
4. Any` use whNhiphysicay or ally prev ef the property or
personApvirepgdl,interestheir from improvihing or cultivating the
same (LG`011'Sdb..28). 1 1
14‘

Q: May local governmopirmpose an an [Wax in addition to the basic real

property tax on; ,idle qracantdidiefoc tere tirgal subdivisions within their
respective territorial jupsdictik?
ANS: Only provinces, ;fie's, gnd municipalities within Metro Manila area may levy an
annual tax on idle lands 'htlife rate not exceeding five percent (5%) of the assessed
value of the property which shall be in addition to the basic real property tax (LGC, Sec.
236).
-..
Q: What real properties are exempt from'spe ci al levy by LGUs?
ANS: The sPecial levy shWI not apply to lands exempt from basic real property tax and
the remainder of the land portions donated to the local government unit concerned for
the construction of said projects (LGC, Sec. 240).
1
Q: What are the conditions for the validity of a tax ordinance imposing special
levy for public works?
ANS: The following are the conditions:
1. The ordinance shall describe the nature, extent, and location of the project,
state estimated cost, and specify metes and bounds by monuments and lines
(LGC, Sec. 241);
2. It Must state the number of annual instalments, not less than five (5) years nor
more than ten (10) years (LGC, Sec. 241); and
3. Notice ,'to the owners and public hearing (LGC, Sec. 242).

995
Note

Exemption from Real Property Tax

Q. What properties are exempt from real property tax? (RCW- CP)

ANS

C
P

Note

Q:

ANS:

Collection of Real Property Taxes

Date of Accrual of Real Property Tax and Special Levies

ANS

Q:

ANS
 Q: How is real property appraised?
ANS: All real property, whether taxable or exempt, shall be appraised at the current and
fair market value prevailing in the locality where the property is situated (LGC, Sec.
201).

Q: What is fair market value in relation to real property tax?

ANS: Fair m:arket value is the price at which a property may be sold by a seller who is
not compelled to sell and bought by a buyer who is not compelled to buy (LGC, Sec.
199 (I)).

Q: Who has,the4uty to declare real property?

ANS: It shall be the duty of all persons, natural or juridical, owning or administering real
property, including the improvements therein, within a city or municipality, or their duly
authorized representative, to prepare, or cause to be prepared, and file with the
provincial, city or municipal assessor, a sworn statement declaring the true value of their
property, whether previously declared or Qdeclared, taxable or exempt, which shall be
the current and fair market value of thft perty, as determined by the declarant (LGC,
Sec. 202.) j irV •
.
ad
Note: The sworn declaration sh pe once every three years from January 1 to
June 30 commencing with the caleneare 992 (LGC, Sec. 202).

Q: What is ,thelduty of a pe, n act, I eao rirtir

•-.5 making improvement
thereon? xF
ANS: Any person, or, s authorize • .>•i sentative, acquig tat any time or making
improvement thereon Ile a sw
,dhn s ement containisig hb fair market value and
description of the prip,,rty rthattie ssess within 60 days ailerlpe acquisition of such
property or upon tOrripleti Aoccupanc f the improve en wh hever comes earlier
(LGC, Sec.

Q: When may e Provincial/City al Asses ec are the property

for tax purpiose'sk
ANS: When any son, Or rural ouridi I, by whom real property is required to be
declared under Seal° 202 LGC refus: , ais to make a declaration within the
prescribed time the ro • dal, city or• g ri i.as essor shall himself declare the
property in the name o e defautiljT6Wher; •nainst an unknown owner, as
the case may be, and s II assts the property for taxation (LGC, Sec 204).
by
Note: No oath the as ko s required (LGC, Sec. 204).

Q: Discuss; how real property is listed in the assessment rolls.

ANS: The listing, of real property in the assessment rolls may be outlined as follows:
1. 1:29al property shall be liSted, valued and assessed in the name of the owner,
—• administrator, or anyone having legal interest in the property. The exceptions
are:
a. 'Undivided real property of a deceased person— in the name of the
lestate or heirs or devisees without designating them individually;
b. In case of undivided real property other than that owned by a
deceased — in the name of one or more co-owners;
c. Corporation, partnership, and association — same as individuals;
and
d. Owned by Republic of the Philippines, its instrumentalities,
political subdivision, beneficial use is transferred to a taxable
person — in the name of the possessor, grantee or of the public entity if
such property has been acquired or held for resale or lease (LGC, Sec.
205).

997
 2. All declarations shall be kept and filed under a uniform classification system to
be established by the provincial, city or municipal assessor (LGC, Sec. 207).

Q: When is the schedule of fair market values prepared?

ANS: A schedule of fair market value shall be prepared before any general revision of
property assessment is made (LGC, Sec. 212).

Q: Who prepares the schedule of fair market values?

ANS:I The, provincial, city and the municipal assessors of the municipalities within Metro
Manila area prepares the schedule of FMV for the different classes of real property
situated in their respective local government units for enactment by ordinance of the
Sanggunian concerned (LGC, Sec. 212).
Note: The said schedule shall be published in a newspaper of general circulation in the
province, city or municipality concerned, or in the absence thereof, shall be posted in the
provincial capitol, city or municipal hall and in two other conspicuous public places
therein (LGC, Sec. 212). _,,,,,,.„.,.-.......,.,,_
.
,o,- 11
Q: Discuss the authorit
/ 9of thOsses Rs °flse X NI Old ce.
ANS: The 'assessor of eqiroVinca-- ' • 'NpOlity it deputy may summon the
owners of ;the prop es tkli ected or perso sh '4.t> vinVa'gal interest therein and
witnedses, admini5ter b ketarptitin- cerntn., g.. e›pc9perty, its ownership,
amou9t, nature, an, he pu ostlif o tainin ink) nlatliklion which to base the
marketvalue of A y r rty (L , S/4, 2 ). 1 r \
, i 4ls '
Q: When may e?a ggumpn amen ie sc e 4 f fair OA alues?
ANS: , Upon the mmenclatiolijhprigircial, ity or uni I assessor, the
Sanggunian cn,pied shall, by ordirfaqc, ,,coirebt errprs in va 'atio the schedule of
fair market vale sitf in dajOrlecelpt thrR9 GC, S?. 214).

Q: Wliat are thOses ozop,pl y ickrfq

a in rpose ?
\i
ANS: Real prop shal be c Is 4,-?6-( ti e
1. Reside
22 Agricultu
. 3., Commercia
4.' Industrial,
5. Mineral,
6. Timbffarld or
74 Special (LGC, Sec. 21%.
Note: The city or municipality within the Metro Manila Area, through their respective
Sanggunian, shall have the power to classify lands as residential, agricultural,
commercial, industrial, mineral, timberland, or special in accordance with their zoning
ordinances (LGC, Sec. 215).

Q: What are classified as special classes of real property?

ANS: All lands, buildings, and other improvements thereon
1.i Actually, directly and exclusively used for . hospitals, cultural, or scientific
t. purposes, and
2.; • Those owned and used by local water districts, and GOCCs rendering
' essential public services in the supply and distribution of water and/or
generation and transmission of electric power (LGC, Sec. 216).

Q: VV.hat is meant by actual use? . .

ANS: Actual use refers to the purpose for which: the property is principally or
predominantly utilized by the person in possession thereof (LGC, Sec. 199 (b)).

998
 DAN: VOL 1.
2019

Note: Real !property shall be classified, valued and assessed on the basis of its actual
use regardless of where located, whoever owns it, and whoever uses it (LGC, Sec.
217).

Q: How are lands located in areas of mixed land uses classified?

ANS: For', lands located in areas of mixed land uses, such as residential with
commercial or industrial, the predominant use of the lands in that area shall govern the
classification, valuation, and assessment thereof. If the predominant use is residential,
all lands in that area shall be assessed as residential; if the predominant use is
commercial, or industrial, all lands in that area shall be assessed as such (Manual on
Real Property Appraisal and Assessment Operations by the DOF Bureau of Local
Government Finance, January 2006, p. 138).

Q: What is the classification of a land occupied by a building and used for a

purpose different from which it is classified?
ANS: A lot or .parcel of land classifigdpnd appraised as commercial or industrial
occupied by the.building used for 130000I dential and commercial or industrial purposes
shall be assessed on the basis of.tiO"trike: 6minant use of the building or buildings. If the
predominant use of the building WI p''' Sal, the assessment level fixed thereon for
residential land shall be applied db 00t value of the lot or parcel determined on
the basis of the schedule of bAe, IttoOue%if indtrial.or commercial; the
' lsr Am* iweE.
assessment leyel for industriWOr ttri ems, .'steal -119,42ied on the basis of the
schedule of. the base= valugs Manual on Realgroperty Appraisal and
Assessmeht OperatiohgAy the DOM.? au of Local Go *Vent Finance, January
2006, p. 138).
!! !

proportion fifieb
1,„0
as
la,-
Q: Define asse,ment. '',rikw.
. ,
10. !'
.43Pj

r
ANS: Assessm6nt is ge act or process of determini g the vale of a property, or
40,1 ,pubjeo tax, includib the discdveryiistin Xclassification, and
.. -r-V- --r
appraisal of properties (LOOSec.1,99(f)).
.14,1 .11"-q
"l''L4';4— -1.214 ;"'
Q: Define assess I e
ANS: Assesiment Evel is thlpercentagekaRlieskto the fair market value to determine
the taxable value (asse's,peOalue) of the,paktypg§2c. 199 (g)).
Note: The, assessmetrievels40611656Wxela 7i-2irrdrances of the Sangguniang
Panlalawigan,anggufildng POILlngsod or Sangguniang Bayan of a municipality within
theMetro Manila Area (L V,,„ec. 218).

Q: How is the assessed value determined?

ANS: The folloWing are the steps in determining the assessed value:
1. '6Ice the schedule of FMV; and then
2. Multiply the FMV by the assessment level to get the assessed value
(LGC, Sec. 199(h)).
Assessment Levels
On Lands:
Class i Assessment Levels
Residential 20%
Agricultural 40%
Commercial' 50%
Industrial i ' 50%
Mineral . 50%
Timberland 20%
Example: Residential Land with FMV of P100,000
P100,000 (FMV) x 20% (Assessment Level) = P20,000 (Assessed Value)

999
 Q: What are the instances where the assessor shall make a valuation of real
property?
ANS: The, provincial, city or municipal assessor or his duly authorized deputy shall make
a clasification, appraisal and assessment of the real property listed and described in
the declaration irrespective of any previous assessment or taxpayer's valuation thereon
in cases where:
1. The real property is declared and listed for taxation purposes for the first time;
2. There is an ongoing general revision of property classification and
assessment; or
3. A request is made by the person in whose name the property is declared
(LGC, Sec. 220).
Q: When shall general revision of real property assessment takes place?
ANS: The provincial, city or municipal assessor shall undertake a general revision of
real property assessments within two (2) years after the effectivity of the LGC and every
three ,(3) years thereafter (LGC, Sec. )..,
Q: What are the purposes1 of )
ANS:1The following ary.gefilp seg,pfm=geneta re,Stisigby
1'. Equalizes an atisAratations;
2. Brings to igh disc• verraTinrOpertias that een "lost" from the tax
1 "i7.1
roll; an
a`z?(7
3,, Enabl th sse sor to pump horn hi sment roll the double
assescnent d as essment •s 'roperties th e'fa estroyed that has
accu ul ed throu• 146, citing J.G.
Cast! I s-R port to on Property Tax
Admi 1.,setti8n in the

Q: How often i yit111 a a‘:1?

ANS: The iasses .meny ased ofteetef than once every
three (3) years, e' xcept' ca ubstktially i/creasing the value
of said property, N.,ny ch 20).

Q: Define reassess enty

ANS: Reassessment ed values to property,
particularly, real estate, as findividual reappraisal of the
property (LGC, Sec. 199 (q)).

Q: When shall assessments or reassessments take effect?

ANS: All assessments or reassessments made after the first day of January of any year
shall take effect on the first day of January of the succeeding year. Reassessments shall
take effect at the beginning of the quarter next following the reassessment if made due
to:
1. Its partial or total destruction;
2. Major change in its actual use;
3. Great and sudden inflation or deflation of real property values;
4. Gross illegality of the assessment; and
5. Any other abnormal cause (LGC, Sec. 221).
Note: Section 221 of the LGC merely lays down the general rule that assessments are
to be given prospective application. It cannot be construed in such a manner as to
eliminate the imposition of back taxes (Sesbrelio v. Central Board of Assessment
Appeals, GR. No. 106588, March 24, 1997).

1000
 'VOL 1.
2019

Q: When the assessment of property subject to back taxes made?

ANS: Real property declared for the first time shall be assessed for taxes (back taxes)
for the period during which it would have been liable but in no case of more than ten 10
years prior to the date of initial assessment: Provided, however, that such taxes shall be
computed on the basis of the applicable schedule of values in force during the
corresponding period (LGC, Sec. 222).
Note: If such taxes are paid on or before the end of the quarter following the date the
notice of assessment was received by the owner, no interest for delinquency shall be
imposed thereon; otherwise, taxes shall be subject to interest at the rate of two percent
(2%) per month or a fraction thereof from the date of the receipt of the assessment until
such taxes are fully paid (LGC, Sec. 222).

Q: When should the assessor give notice of new or revised assessment?

ANS: When real property is assessed for the first time or when an existing assessment
is increased or decreased, the provincial, city or municipal assessor shall within thirty
(30) days give written notice of such newsy revised assessment to the person in whose
name the property is declared (LGc 066. 23).
•
Collection O f Teixes
Q: Who collectS real property tdilepf ,
ANS: The 9olle9tion of the real Volpe la). ,.Mtlf, teresghabn and related expenses,
and the enforcement of th,,e rofriediegproej , ed by th-ellteiir ny applicable laws, shall
be the responsibility of Wfty or murfaio "itreasurer concern, • (LGC, Sec. 247).
114
er
Q: May a barangay tress ter coiled roperty taxes? $.
ANS: Generally,VrovLeter_the_bara ay treasurer corliect all taxes on real
property locaten the ba- rabgiy oily a he is dep,,,tize ' by tir city or municipal
treasurer ande)s prcfegy bonded for s purpose. he p emium on the bond shall
be paid by thCcity orritnictc; al g oncern • .
Note: Provinciktreasvemte obylo 'eyed of the ci,dollect real property
tax. However, it gi3pea540Wsuch o issi s only a typographical error:
1. Section 17,9 of the LGC provides that all local taxes, fees, and charges shall
be collected by the provincial, c barangay treasurer or their duly
aUthorized depN`ds;
2. Section 470 (6) of e eGC provides that the provincial treasurer shall
exercise tech kcal s drvision over all treasury officials of component cities
and municipala.'sj
3. Real property tax is a shared tax where the proceeds thereof are distributed:
35% to the province which shall accrue to the geheral fund; 40% to the general
fund of the municipality where the property is located; and 25% to the
brangay where the property is located (Cabaluna, Jr., (2002), pp. 245-246).
4. Property owners, however, at their option or convenience, may pay their real
property taxes to the provincial treasurer of the province to which the
municipality where the subject property is located belongs (IRR of the LGC,
Art 338).
1
Q: Who has the obligation to pay real property taxes?
ANS: For purposes of real property taxation, the registered owner of the property is
deemed the taxpayer (Spouses Hu v. Spouses Unico, G.R. No. 146534, September 18,
2009).

1001
 Q: Who submits the assessment rolls to the local treasurer?
ANS: The provincial, city or municipal assessor shall prepare and submit to the
treasurer of the local government unit, on or before the thirty-first (31st) day of
December each year, an assessment roll containing a list of all persons whose real
properties have been newly assessed or reassessed and the values of such properties
(LGC, 'Sec. 248).

Q: How is notice of time for collection of real property taxes made?

ANS: The notice of the dates when the tax may be paid without interest shall:
1•t Be posted by the city or municipal treasurer in conspicuous and publicly
accessible place at the city of municipal hall
a. On or before the thirty-first (31st) day of January each year, in the case
of the basic real property tax and the additional tax for the SEF, or
b. On any other date to be prescribed by the Sanggunian concerned in
the case of any other tax levied upon; and
2. Published in a newspaper oLgeneral4culation in the locality for once a week
for two (2) consecutly,e4easILGC, Se'?:249).

Q: When are real propaltira'sfeNd.specral " ‘44.

k iesI d
ANS: The city or mu kip Il tfg post and'publish Otice of the dates when the
reasshall
tax maybe paid without cle ersyLG0,-Sg7249):-...,
T TT
Q: What is the press tve penod for collection of real pkopeaxes?
ANS: The basi real prbpert /tax and any other tax leJ'ed r be
d collected within five
(5) years from heAate theybecame due.Then Cher is frabd914n .e ent to evade the
y
payment of to es7-sucn actiort maVQ•insRutelflerfthe collect! n of t same within ten
(10) years fro disco ery of te fraualar.,Issintpe•evad the pa ent LGC, Sec. 270).
Note: No acti 'oil c i i of the tax,fiether atirjiffstra ive or1judicial, shall be
instituted after Tux? atio ch p rio .0p, Se 2t ).

_ Q: When is the pr for of real property taxes

suspended?
ANS: The period prescnp spended for the time
during which: (PRO)
1. The local treasure revented ro cpjlpc ing the tax;
2. l The owner of theNproirerty or thp ppgrl'"h ing,,leSal interest therein requests
for Reinvestigationd.kecuteli bfivai0' irwriting before the expiration of
the period within which to 7c1
)
3. The owner of the property or the persori having legal interest therein is Out of
the country or otherwise cannot be located (LGC, See. 270).

Q: May real property taxes be paid in installment?

ANS: Yes. Basic real property tax and additional tax for SEF due may be paid in four
equal installments (on or before March 31/June 30/September 30/December 31) without
interest thereon (LGC, Sec. 250).
Note: Other special levies and any other real property tax are governed by ordinance
passed by the Sanggunian concerned (LGC, Sec. 250).
r.
Q: How is payment of real property taxes applied? .
ANS: Payments of real property taxes shall first be applied to prior years' delinquencies,
interests, and penalties, if any, and only after said delinquencies are settled may tax
payments be credited for the current period (LGC, Sec. 250).

1002
 AN RED BOOT
Q: Is there any discount for advanced or prompt payment?
ANS: Yes. If the basic real property tax and the additional tax accruing to the SEF are
paid in advance, the Sanggunian may grant a discount not exceeding twenty percent
(20%) of the annual tax due (LGC, Sec. 251).
Note: For prompt payment, a discount not exceeding 10% of annual tax due may be
granted (IRR of the LGC, Art. 342).

Q: What is the interest rate on unpaid real property tax?

ANS: In case of failure to pay the basic real property tax or any other tax levied upon
the expiration of the periods provided, or when due, as the case may be, shall subject
the taxpayer to the payment of interest at the rate of two percent (2%) per month on the
unpaid amount or a fraction thereof, until the delinquent tax shall have been fully paid.
Note: In no case shall the total interest on the unpaid tax or portion thereof exceed
thirty-six (36) months (LGC, Sec. 255).

Q: May real property tax condoned orisOuced?

ANS: Yes. The Sanggunian concegiaA., ordinance passed prior to the first (1st) day
of January of any year and uportrago4ritendation of the Local Disaster Coordinating
Council, may condone or reduce,: b rikr partially, the taxes or interest for the
succeeding years in the city or milOiepeli ected in cases of:
1. General failure of crop:" j4,-.+.1
2. Substantial decrease/th4, .:, Tgric t ri-based product% or
3. Calamity in anyn;hince, city unicipality (C 3C, gec. 276).

Q: In what instance
(i
ma ..the PresVen condone or reduse eel property tax?
ANS: The Presidenc,thdbiliffpines ma , when publicinte est,so requires, condone
or reduce the r al rope -talc,,,and- irate At for any ye;er in any rovince or city or a
municipality within the ,,,Metro Manila Area. C, Sec. 271).
a.
Taxpayer's Remedies
Q: What are the remedi the ta,„ pay in real property taxation?
ANS: The rernedie4 the tax ayerfn rela on to real property taxation are:
1. Administrativk
a. Prates C, S5L25211,
C,
b. Claim refun, thd credit LGC, Sec. 253); or
c. Redem n of4A1 property (LGC, Sec. 261).
2. Judicial: ,
a Question legality of a tax ordinance (LGC, Sec. 187);
b. Court action; or
c, Suit assailing validity of the tax sale (LGC, Sec. 267).

Contesting an assessment
File Protest with Local Treasurer
Q: When is protest made?
ANS: The protest in writing must be filed within thirty (30) days from payment of the tax
to the provincial, city treasurer or municipal treasurer, in the case of a municipality within
Metro Manila Area, who shall decide the protest within sixty (60) days from receipt
(LGC, Sec. 252).
Note: Protest is required where there is a question of reasonableness of the amount
assessed, not when the question raised is on the very authority and power of the
assessor to impose the assessment and of the treasurer to collect the tax (Ty v.
Trampe, G.R. No. 117577, December 1, 1995).

1003
Q: Is the taxpayer required to pay the tax first before protest is entertained?
ANS: Yes. Sec. 252 of the LGC requires that the taxpayer first pays the tax. This is
referred to as "payment under protest". The protest may only be filed within 30 days
from the payment of the tax. Thereafter, the words "paid under protest" shall be
annotated on the tax receipt. The tax or a portion thereof paid under protest, shall be
held in trust by the treasurer concerned.

Q: What happens when the protest is decided in favor of the taxpayer?

ANS: In the event that the protest is finally decided in favor of the taxpayer, the amount
or portion of the tax protested shall be refunded to the protestant, or applied as tax
credit against his existing or future tax liability (LGC, Sec. 252).

Q: When may the taxpayer appeal to the LBAA?

ANS: In case of denial of the protest, or upon the lapse of the 60-day period for the
treasurer to decide, the taxpayer may appeal to the LBAA within sixty (60) days from
receipt, who shall decide the appeal fibia,o1341rdred twenty (120) days from receipt
(LGC, Sec. 252(d)).

Q: When may the taxp y r a ,e.?:00,the.OB

ANS: If the taxpayer 's t pti fled with the decirhp
ga e , he may appeal to the
CBAA within thirty 0 aof's o receircifFetisie otth BAA !GC, Sec. 229).
il.a
Q: When may t e tax p(e'r appeal Eith,.., TWen ba c?
ANS: If CBAA lects Votest owner m4y4ppeal to C e 't in thirty (30) days
from receipt of Eck (R.A. o. 2t12 Aru, c pan g the us ic on of the Court of
Tax Appeals, F^-17i( )(5), in litilorriV41Y8 Rqr stif C urt, Rue43)..

Q: When may t e'er aygli eal to I'll dpreme u

ANS: Any acivir isip c mq m, pe e Supreme Court
within fifteen ( 4 fromc i t o e si:o.)-(y':,_. 92232 All ct Expanding the
Jurisdiction of tit Cou of Te ppe , C.•=- tion o the les of Court, Rule
45). N... •
Tzt,
Contesting theAssassmen loh!.oflZ 'ro .Tax
"k. .4f -,( V X..
Q: Outline the steps iMprotig ease in o vi y 'essment or collection of
real property tax.
ANS: The protest on assessment/ eal property tax may involve the
following steps .
1. The local assessor submits an assessment roll to the local treasurer;
2. The local treasurer informs the public when the tax shall be paid by posting of
notice at conspicuous place and publication in a newspaper of general
circulation in the locality once a week for two (2) consecutive weeks;
3. The local treasurer assesses and collects the real property tax starting
January 1;
4. The aggrieved taxpayer pays the tax under protest;
5. The aggrieved taxpayer may file a written protest within 30 days from the date
of payment before the local treasurer
6. The local treasurer decides the case within 60 days from filing of the protest;
7. In the even the local treasurer denies the protest of fails to act within 60-day
periOd, the aggrieved taxpayer may appeal the denial within 60 days from the
receipt thereof or from the lapse of the 60-day period in case or inaction to the
Local Board of Assessment Appeals (LBAA);
8. The LBAA decides the case 120 days from the filing thereof;

1004
 9. If LBAA's decision is adverse; the real property owner may appeal to the
Central Board of Assessment Appeals (CBAA) within 30 days from the receipt
of the adverse decision;
10. If CBAA decision is adverse, the real property owner may file a petition for
review before the Court of Tax Appeals (CTA) en banc within 30 days from the
receipt thereof;
11. If the CTA en banc decision is adverse, the real property owner may file a
motion for reconsideration or new trial within 15 days from the receipt thereof;
and
12. Thei real property owner adversely affected by the decision or resolution, as
the case may be, of the CTA en banc may file a petition for review on certiorari
before the Supreme Court within 15 days from the receipt thereof (LGC, Sec.
252 in relation to Secs. 226, 229, 230, 246, 247,248, 249; R.A. No. 9282,
Sec'.7 and 11; Revised Rules of CTA, Rules 4 and 16; Rules of Court, Rules
43 and 45).
Note: Remember that there are two difkrer procedures for contesting the assessment
or collection of the real property ta)&atdrle contesting the assessment of the VALUE of
the property for real property tax perasp
•
Contesting theAssessmentof • ueoP. ealPropertv
Q: Outline the steps in protest) ag.es j he.. sitsment of land value for
real property tax ?,.
ANS: The protest onpiessment value for real pry ! rty tax may involve the
following steps
1. The local a praisal on the I operty based on the
current ma
2. The lo operty accor ctual use;
3. Th essment le fixes he assessed value
oft ,e4ra-Auit*:t.str.-
4. The gal avess ,giveszTptice assessme - -on in whose name
the rearillm is Aeclaret
5. The real property owper wfio is grieved by the assessment may protest the
assessment _'thin -M.0 days fro &. t thereof to the Local Board of
Assessment a s (LB .1.16a3r
6. The LBAA de es the, a 120 days from the filing of the protest;
7. If LBAA's de si n i Averse, the real property owner may appeal to the
Central Board of1/404 sment Appeals (CBAA) within 30 days from the receipt
of the adverse decision;
8. If .CBAA decision is adverse, the real property owner may file a petition for
review before the Court of Tax Appeals (CTA) en banc within 30 days from the
receipt thereof;
9. If the CTA en banc decision is adverse, the real property owner may file a
motion for reconsideration or new trial within 15 days from the receipt thereof;
and
10. The real property owner adversely affected by the decision or resolution, as
the case may be, of the CTA en banc may file a petition for review on certiorari
before the Supreme Court within 15 days from the receipt thereof (LGC, Sec.
212 in, relation to Secs. 217,218, 219, 223 226,229 and 230; R.A No. 9282,
Sec.7 and 11; Revised Rules of CTA, Rules 4 and 16; Rules of Court, Rules
43 and 45).

1005
 Q: X made a sworn declaration that the value of his real property is P5000 per
square meter. The City Assessor assessed the said property at P2000 per square
meter. What is the remedy of X if we would like to maintain his declared value?
Explain.
ANS: X may protest the assessment within 60 days from the receipt of the written notice
to the Local Board of Assessment Appeals (LBAA), which is given 120 days to decide
on the protest. If LBAA's decision is adverse, X may appeal to the Central Board of
Assessment Appeals (CBAA) within 30 days from the receipt of the notice of denial. If
CBAA decision is adverse, X may file a petition for review before the Court of Tax
Appeals (CTA) en banc within 30 days from the receipt thereof. If the CTA en banc
decision is adverse, the real property owner may file a motion for reconsideration or new
trial within 15 days from the receipt thereof, or X may file a petition for review on
certiorari before the Supreme Court within 15 days from the receipt thereof (LGC, Secs.
226 and 230; Revised Rules CTA, Rules 4 and 16).

Effect ofpayment of tax p;.:

r ., ,ie
:s,
ini
‘ ,uv....
Q: What is the remedy of the ax,. a ‘ icc sivee collections?
ANS: When an assessmerit-o asic real tax, Is r , riy other tax levied, is found
to be illegal or erron2,9sIzi theAaris according* refluce Col adjusted, the taxpayer
may file a written.cialm,tor re clici or credit4alwsIn iptepit with the provincial or
city treasurer withip/tv/2 (2) eirslrom thejdate thelax dr-is eAti ‘d to such reduction
or adjustment (LGQkSeci253 . ip) A x r -.1`
Note: The treas6rer slidil decide the clal.0.„oriax refu ryitiiin sixty (60) days
from receipt tlirec& ' cas4of-denialAte , ltaxpayer- ay a ealIe:(1the LBAA (as in
protest cases) ' pp.c134
' e CB if4BAA..giVe.artpdverse decisjonl A Sec. 253).
P-\,-1,
____, '
Remedies of AGIej s f- r Calle ion offfeetPiropertyTa
.....„.__:;.„ ,.,/,,.-0
Q: What are t eemedie J 'ate 's.. LGU/oe
-+ .1., cgffpctioil,ofleal rieopell-t/ tax?
. \ 1
ANS: The LGUbracer ed m ( Ilect V a progenyigx.0 by.
,/ ‘.../
1. 'Ad min I trative ctio & - ,:\"\j,
a. Distraint okper offal., (L4(Sec.;54);
b. Lih on propk, argG 257);
c. Levhon rearop..,e IR fl..-GL,Art. o
. 2. Judicial actio.6" r4 Seck`266.and.270). \)-11-

,...rest
issuance of Notice of Delinquencylz 1?Dcflif O axPayment
Q: When is notice of delinquency issued?
ANS: When the real property tax or any _other tax becomes delinquent, the provincial,
city or municipal treasurer shall immediately cause a notice of delinquency (LGC, Sec.
254).

Q: How is notice of delinquency given?

ANS: The treasurer concerned will cause a notice of delinquency:
1. Posted at the main entrance of the provincial capitol, or city or municipal hall
_ ._ and in a publicly accessible and conspicuous place in each barangay of the
local government unit concerned; and
2 Published once a week for two (2) consecutive weeks, in a newspaper of
general circulation in the province, city, or municipality (LGC, Sec. 254).
Note: Formal demand for the payment of the delinquent taxes and penalties due is not a
pre-requisite to avail of administrative and judicial remedies. The notice of delinquency
shall be sufficient for the purpose (IRR of LGC, Art. 347).

1006
 em-, 4'.14;f:iP,••,7.4,•• •

Q: What should be contained in the notice of delinquency?

ANS: The notice of delinquency shall specify:
1. The date upon which the tax became delinquent;
2. That personal property may be distrained to effect payment;
3. That at any time before the distraint of personal property, payment of the tax
with surcharges, interests and penalties may be made; and
4. Unless the tax, surcharges and penalties are paid before the expiration of the
year for which the tax is due (except when the notice of assessment or special
levy is contested administratively or judicially), the delinquent real property will
be sold at public auction, and the title to the property will be vested in the
purchaser subject, however, to the right of redemption within one year from the
date of sale (LGC, Sec. 254).
Note: The owner shall not be deprived of possession and to rentals/income thereof until
the expiration of the time allowed for its redemption (LGC, Sec. 261).
Local Government's Lien
Q: Define local government's lien ,.“0
ANS: It is a legal claim on the pro .7". ir ., 'Lib
-IV
ect of the real property tax as security for the
payment of the tax obligation. It 0...4s to any lien, mortgage, or encumbrance of
any kind whatsoever in favor ofg.fin‘ on, irrespective of the owner or possessor
thereof (LGC, Sec. 257). 1'
,•,''
Levy on Rea/ Property,4,09
V'
Q: When is there levtiv Oa! proitrti?
ANS: After the expiratiah o theArree wit which the tax evwdvshall be paid, the real
tlg,, .42"
property subject to.t aLmay, be levied on (LGC, Sec . 25 - 262).
I s.
a -,
•4:147
V "46•••
'6
Procedure foe!, on 54.1prop?rty
.4-"Atf
pmvernmcBt's
.~tw- " Ms- I
Time for pEme of real prodlaxpires (LGC, Sec. 258).

kr,tr
Warrant of try isigeo oy Local Treasurer (LT) (LGC, Sec. 258).

Warrant mailed to or served upon the delinquent owner. Written notice of levy and
warrant is mailed/served upon the assessor and the Register of Deeds of the LGU
(LGC, Sec. 258).
11
30 days from service of warrant, LT shall advertise sale of property by (a) posting
notice at main entrance of LGU hall/ building and in a conspicuous place in the
barangay where the property is located; AND (b) publication once a week for two
weeks (LGC, Sec. 260).
J1
Before the date of sale the owner may stay the proceedings by paying the delinquent
tax, interest, and expenses of sale (LGC, Sec. 260).

Sale is held (a) at the. main entrance of the LGU building, OR (b) on the property to
be sold, OR (c) any other place specified in. the notice (LGC, Sec. 260).

1007
 If there is a bidder and the highest bid is sufficient to pay real property tax and related
interests and costs, bidder pays and treasurer reports sale to Sanggunian 30 days
after the sale. The LT will deliver to purchaser the certificate of sale. Proceeds of sale
in excess of delinquent tax, interest, expenses of sale remitted to owner (LGC, Sec.
260).

Within one year from sale, owner may redeem upon payment of the delinquent tax,
interest due, expenses of sale (from date of delinquency to date of sale), and
additional interest of 2% per month on the purchase price from date of sale to date of
redemption. Delinquent owner retains possession and right to the fruits. Price paid
plus interest of 2% per month shall be returned to the buyer (LGC, Sec. 261).

If not redeemed, deed of conveyance shall be issued to the purchaser (LGC, Sec.
262).

1,
If there is no bidder OR, esNd is kstiffilleiVpaN property tax and related
interests and costs, peL alsmrchMeltiel) rty iyb If of the LGU. Registrar
of Deeds shall t r t itre of forfeited • roperty hout need of court
o der.

Within onf (1) ye r fro forfeitl re, On

, eflihay re eem o by paying to
Treasurer full1 oun
.. of to interest costs of sale of erwis hip shall vest to
LGU L G Sec, 2 3).

Sanggunianr ed by oftig., npe I appr. - d an ice of not less

than 20 day , sell/ vt, . . • a • • 1111 - 7 ailed rfeiture (LGC,
,e
X .".<1.\S*4 74' 4).'

Levy may be epeaA, ntil din expegses, is collected

• ..ti'Vg 5)
OFEs 7
9n,
Q: To whom should the notte-OVsale 44:IAt?
ANS: In determining to whom'ffi ticetbf al h d have been sent, settled is the
rule that, for purposes of real property axa ion, the registered owner of the property is
deemed the taxpayer. Thus, in identifying the real delinquent taxpayer, a local treasurer
cannot rely solely on the tax declaration but must verify with the Register of Deeds who
the registered owner of the particular property is (Spouses Hu v. Spouses Unico, G.R.
No. 146534, September 18, 2009).

Q: Is notice and publication of sale mandatory?

ANS: Yes. Notices and publication for sale, as well as the legal requirements for a tax
delinquency sale, are mandatory, and the failure to comply therewith can invalidate the
sale. The prescribed notices must be sent to comply with the requirements of due
process (De Knecht v. Court of Appeals, G.R. No. 108015, May 20, 1998; De Knecht v.
Sayo, G.R. No. 109234, May 20, 1998).

Q: May levy be repeated?

ANS: Yes. Levy may be repeated if necessary, until the full amount due, including all
expenses, is collected (LGC, Sec. 265).

1008
 DAN ,';RE I
Q: When may the Sanggunian dispose of the real property acquired?
ANS: The Sanggunian concerned may sell and dispose of the real property acquired by
the LGU at public auction provided it is made by ordinance duly approved, and upon
notice of not less than twenty (20) days.
Note: The proceeds of the sale shall accrue to the general fund of the local government
unit concerned (LGC, Sec. 264).

JudicicilAction
Q: Discuss the remedy of civil action for collection of real property tax.
ANS: The civil action for the collection of basic real property tax and any other tax levied
under LGC on real property shall be filed by the local treasurer in any court of
competent jurisdiction within 5 years or 10 years in case of fraud wherein real property
taxes may be collected (LGC, Sec. 266 in relation to Sec. 270).

mg

4iew,
24.341kG....- .,,," I 70
A. COURT OF TAX APPE.411.5 (CTA)
,
. •
Q: Which rule of ttr.bee u r govern ac ns filed befo e the C A?
s

ANS: Actions( ie before e T - A are g timed by th evised ules of the Court of

Tax Appeals kR,CTA).5 M. No. 05, 11 CTA whit effe on December 15,
2005. The Ru eyoteourt erf ly otilpsuppl ily.
.,, 6-441rM .

Q: What is the can't ositio Hof the TA

ANS: )
1. The CTA cortsteS 'a Presiding u I eight (8) Associate Justices
a: Each &Om appotqadb. -;~ sieen -lord
b. Upon iforninatiky the udicial and Bar Council;
2. It may sit en ram o n hree (3) Divisions, each Division composed of three
(3) Justices; and
3. The Presiding Justice and the two (2) most Senior Associate Justices shall
serve as Chairpersons of the three (3) Divisions (R.A. No. 9503, Sec. 1).

Q: Discuss the rules on quorum and voting of the CTA.

ANS: The following constitutes quorum:

En banc: The affirmative votes of five (5) members of the court en banc shall be
necessary to reverse a decision of a division; and only a simple majority of the justices
present is needed to promulgate a resolution or decisions in all other cases (R.A. No.
9503, Sec. 2).

1009
 The Court shall sit en banc in the exercise of administrative, ceremonial and non-
adjudicative functions (RRCTA, Rule 2, Sec. 2).
Division: When the required quorum cannot be constituted due to any vacancy,
disqualification, inhibition, disability, or any other lawful cause, the Presiding Justice
shall designate any Justice of other Divisions to sit temporarily therein (R.A. No. 9503,
Sec. 2).
Where the necessary majority vote cannot be had, the petition shall be dismissed; in
appealed cases, the judgement or order appealed from shall stand affirmed; and on all
incidental matters, the petition or motion shall be denied (RRCTA, Rule 2, Sec. 3).

Q: What are the powers of the CTA?

ANS: The following are the powers of the CTA: (PCS2O2-RED2)
1. Required the Production of papers or documents by subpoena duces tecum
(R.A. No. 1125, as amended, Sec. 10);
2. To punish Contempt (R.A. No. 1125, as amended, Sec. 10);
3: To Summon witnesses by subpoenalti.A. No. 1125, as amended, Sec. 10);
era e-a7pTiing,pppeal (RRCTA, Rule 10, Sec.
tti To Suspend the col eti?
I); • I Jr"..'N
5. To issue Order ain „s4f .person31 p operty and levy of real
property; .,..":"/,, P
6. To admirysteek0A ,,Nor/ , 5ras-am2nd‘d ,, );
7. To pronAet9 Vie and rripula kinktor thOcon s business (R.A. No.
1125, Id's. arneVed, ec. 8);r 4 ,
8. To receive Etdenc (RRCTA,Sqle,12, Sec. \
9: To asskalamage agains aptiellalirif appeal to C is fol
6); an :,„,..1 nd to be frivolous
, or dilepar);-( A. No. 112574ra 110hcteleSbc.
10. To r nder cisions n case"- ,r3efore t (RRC A-Ral 14, Sec. 1).
,:,_--,:z: .1 i
Q: In what canes rya the •-c rrreuehte-evIde
ANS: The courVapr eiv erica filt1-01 (tqwino \s, i
1. In all vases filling Ititkeit i-ijfrxo
th of th Court in Division
pursuant to Sec ion .0:..._4 of _,...).., V ules 9 the Court of Tax
Appeals; rid 1
2. In .appealet both, VI trli€ft eckthegourt grants a new trial
pursuant to SeVign 0 e.53,antt,Se kV, tfire,e124 of the Rules of Court
(R.R. C.T.A., RD! /2, 5I. 2). x \:\I
Q: Who are authorized to take evidenc,e2
ANS: The following are authorized to take evidence:
1. Any Justice of the court when ._
a. the determination of a question of fact arises at any stage of the
proceedings, or
b. the taking of an account is necessary, or
c. the determination of an issue of fact requires the examination of along
account; and
. Any court official for the sole purpose of marking comparison with the original
... and -identification by witnesses of the received documentary evidence (R.R.
C.TA., Rule 12, Secs. 3 and 4).

Exclusive Original and Appellate Jurisdiction over civil Cases

Q: What are the civil cases within the exclusive original jurisdiction of the CTA
Division?
ANS: The Court in Divisions shall exercise exclusive original jurisdiction over tax
collection cases involving final and executory assessments for taxes, fees, charges and
penalties, where the principal amount of taxes and fees, exclusive of charges and

1010
penalties, claimed is one million pesos (Php. 1,000,000.00) or more (RRCTA, Rule 4,
Sec. 3(c)).

Q: What are the civil cases within the exclusive appellate jurisdiction of the CTA
Division?
ANS: The Court in Divisions shall exercise exclusive appellate jurisdiction over:
1. Decisions of the CIR
a. in cases involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relation thereto; or
b. other matters arising under the NIRC or other laws administered by the
BIR;
2. Inaction by the CIR where the NIRC provides a specific period of action
a. in cases involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relation thereto; or
b. other matters arising under the NIRC or other laws administered by the
BIR;
3. Decisions, orders or resolutton
resolution of the RTCs in local tax cases decided or
resolved by them in the.Wasepitheir original jurisdiction;
4. Decisions of the Commipitiffeeustoms
a. in cases involving hatifimfor custom duties, fees or other money
charges, seizurffl tialeal'tatope ease %property affected, fines,
forfeitures of pother p a t pAlre a CI or
.52
b. other otters arisi nder the us of s Law or other laws
admi issi red by thel) ire u of Customs;
5. Decisions of efiSecreta nance on custo bases elevated to him
.
automaticap or rev VP from de ions of the Co mpsioper of Customs which
are ad ers o th";Goy,ernment er Section q15 f taTariff Code;
6. Dec' ecretaryikth se of non-bgric Itura roduct, commodity
Or Nmzth pA Secretary „the cas osluct, commodity
or ar le, involVin dumpilb,an.• .untervailin ections 301 and
302 ofikApOiTaf Code, and feguard measu nder the Safeguard
Measures e R.1; 81900) Caere either party may appeal the decision to
impose or o to impbse said du wfr.- C.T.A., Rule 4, Sec. 3 (A)).
7. Over appealsif p Afie judgnneri do or orders of the Regional Trial
Courts in tax 9 lectiorvast'sVibt y `i7ecr t*
Il C1 • them within their respective
territorial juris'dttion R,CTA, Rule 4, Sec. 3(c)).

Q: What are the civil cas =s ithin the exclusive appellate jurisdiction of the CTA
en banc?
ANS: The Court en banc shall exercise exclusive appellate jurisdiction over:
1. Decisions or resolutions on motions for reconsideration or new trial of the
Court in Divisions in the exercise of its exclusive appellate jurisdiction over:
a. Cases arising from administrative agencies — Bureau of Internal
Revenue, Bureau of Customs, Department of Finance, Department of
Trade and Industry, Department of Agriculture;
b Local tax cases decided by the Regional Trial Courts in the exercise of
their original jurisdiction; and
c. Tax collection cases decided by the Regional Trial Courts in the
exercise of their original jurisdiction involving final and executory
assessments for taxes, fees, charges and penalties, where the
principal amount of taxes and penalties claimed is less than one million
pesos;
2. Decisions, resolutions or orders of the Regional Trial Courts in local tax cases
decided or resolved by them in the exercise of their appellate jurisdiction;

1011
 SEDAN=RED BOON
3. Decisions, resolutions or orders of the Regional Trial Courts in tax collection
cases decided or resolved by them in the exercise of their appellate
jurisdiction;
4. Decisions, resolutions or orders on motions for reconsideration or new trial of
the Court in Division in the exercise of its exclusive original jurisdiction over tax
collection cases; and
5 Decisions of the Central Board of Assessment Appeals (CBAA) in the exercise
of its appellate jurisdiction over cases involving the assessment and taxation of
real property originally decided by the provincial or city board of assessment
appeals (RRCTA., Rule 4, Sec. 2(a to e)).

Q: Does the CTA have jurisdiction over cases asking for the cancellation and
withdrawal of a warrant of distraint and/or levy?
ANS: Yes. Section 7 of R.A. No. 9282 provides that the CTA has jurisdiction over other
matters arising under the National Internal Revenue Code or other laws administered by
the Bureau of Internal Revenue (Qp_mmissipner of Internal Revenue v. Bank of the
Philippine Islands, G.R. No.2432i Ju I abl
t 1
11.
1 1
Q: Does the CTA haveegragye juris mho to4ietrTinche constitutionality or
validity of tax lawaules*Aaricloredillations, and'-other ader istrative issuances of
the CIR? ' .1
ANS: Yes. The
1,iusiveouns,dictip,p
--"r--7-7_7"-- ; \
to ete'r 'b constitutionality or
. t .
validity of tax lAs, mil regutaiion4anitotherad trative issuances of the
Commissipner f Inte al Re enue. Tha,,, yik has not only ju to pass upon the
constitutionalitity of tart ii 0 tatratrw en rat e taxpayer as a
defense in di ng or conitestinTan. ,isalbitant r clai efund, but also
jurisdiction to tali:44 ii gnizance of irc(ketiqucifirpctly ch Ilengin nstitutionality or
validity of a to 'Thkio r Ion or ad ittjative is ice ( orders, revenue
memorandum rya rarrgs e law IpAagists UV to I) si lusive jurisdiction
to resolve all to loco orpatr le.V4(3u a Cu toms Bureau of Internal
Revenue, G.R. o. 220 li',1 bUY .,..„.
\-csC

Exclusive Onylnd A ellat Jteis i io ove Cri 'micas

Q: What are the criminal Zases4 w1 . __.. pclug!„v
Tort Ilia/ jurisdiction of the
CTA Division? YY
.77
ANS: The CTA shall exercibe,.e "ci over all criminal cases where
the principal amount involvalrbf ole claimed is P1,000,000 or more,
exclusive of charges and penalties, arising from violations of:
1. . NIRC;
2. Tariff Code;
3. Other laws administered by the BOC or the BIR.
Note: The regular courts shall have original jurisdiction in offenses or felonies where:
1. The principal amount of taxes and fees, exclusive of charges and penalties
claimed, is less than P1,000,000; or
2. No specified amount is claimed (as to which court shall exercise jurisdiction —
follow the rules on jurisdiction of criminal cases) (RRCTA, Rule 4, Sec. 3(b)).

Q: What are the criminal cases within the exclusive appellate jurisdiction of the
CTA Division?
ANS: The Court in Divisions shall exercise exclusive appellate jurisdiction over appeals
from the judgments, resolutions or orders of the Regional Trial Courts in their original
jurisdiction in criminal offenses arising from violations of the National Internal Revenue
Code or Tariff and Customs Code and other laws administered by the Bureau of Internal
Revenue or Bureau of Customs, where the principal amount of taxes and fees,

1012
 exclusive of charges and penalties, claimed is less than one million pesos or where
there is no specified amount claimed RRCTA, Rule 4, Sec. 3(b)).

Q: What are the criminal cases within the exclusive appellate jurisdiction of the
CTA en banc?
ANS: The Court en banc shall exercise exclusive appellate jurisdiction over:
1. Decisions, resolutions or orders on motions for reconsideration or new trial of
the Court in Division in the exercise of its exclusive original jurisdiction over
cases involving criminal offenses arising from violations of the National Internal
Revenue Code or the Tariff and Customs Code and other laws administered
by the Bureau of Internal Revenue or Bureau of Customs;
2. Decisions, resolutions or orders on motions for reconsideration or new trial of
the Court in Division in the exercise of its exclusive appellate jurisdiction over
criminal offenses mentioned in the preceding subparagraph; and
3. Decisions, resolutions or orders of the Regional trial Courts in the exercise of
their appellate jurisdiction ov- i,criminal offenses mentioned in number 1
(RRCTA., Rule 4, Sec. 2(f toll

B. PROCEDURES
Filing of an Action For Collection ofMre
Internal Revenue Taxes
Q: How may the Goya ent enforde Ilection of intern evenue taxes through
judicial action?
ANS: The Govemme axes by:
1. Civil action
a. 4By filing civi case for lection of a um f m ney with the proper
regular urt (NtC, Sec 03 and 22 , or
b g n nswea9 th tition fo payer with CTA
;(Femand "s, I v. Commis to on mal Revenue, G.R.
riaWf65 Septe ber , 1969);
2. Criminal action.
Note: The judgment in inal case s mpose the penalty but shall also
order the payment of s subject-of as finally decided by the
Commissioner (NIRC, Sic. 205,'

Q: What is the prescripti.pgiGiod for the assessment of national tax?

ANS: As a General Rule, the period for assessment prescribes within three (3) years:
1. After the last day prescribed by law for the filing of the retum; or
2. After the day the return was filed, if the return was filed beyond the period
prescribed by law, whichever is later.
Exceptions:
1. False, fraudulent return with intent to evade taxes: within 10 years from date of
discovery of the falsity or fraud; and
2. Failure to file a return, at any time within ten (10) years after the discovery of
the omission of the return (NIRC, Sec. 222 (a)).
Note: A return filed before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day (NIRC, Sec. 203).

Before the expiration of the 3-year prescriptive period, both the Commissioner and the
taxpayer may agree in writing to extend the period of assessment. The period so agreed
upon may be further extended by subsequent written agreement made before the
expiration of the period previously agreed upon (NIRC, Sec. 222 (b)).

1013
For the 10-year prescriptive period to apply based on fraud, such must be proved as a
fact by BIR (ABAN, supra at 274).

Refer to the discussion on assessment and collection under Il-F (Tax Remedies under
the NIRC) for a detailed discussion.

Loca/ Taxes
Q: How does the LGU concerned enforce the collection of local taxes through
judicial action?
ANS: The LGU concerned may enforce the collection of delinquent taxes, fees, charges
or other revenues by civil action in any court of competent jurisdiction within five years
from the date taxes, fees or charges become due (LGC, Sec. 183 in relation to Sec.
194).
Note: The local government may file an ordinary suit for the collection of sum of money
before the MTC, RTC, or CA depending upon the jurisdictional amount (LGC, Sec. 183
in relation to Sec. 194). Either °father e'reethro, gh administrative action or judicial
action or all may be pursued)ebn, urrentl ot si ulteneousiv at the discretion of the local
government unit concerpecIL9 , $ec. V
A.
Q: What is the prepcnAti ernod for assessmettt Fffi9cal tax?
ANS: The assess nt‘q jocakterifiallfgrescn ithirkivee‘q years from the date
taxes, fees, or Oa ssib. .erconfe due1,171Gq\SeW/94 (V). o?ver, in fraud or intent to
evade the paynlent oFtaxes, fees, ch.4;geS1,:the sa sessed within ten
(10) years fro Rh datg of th _Atwater/M*1k( ec. 1 4,( )).
Q: What is thq pre-sbnptive ericid;riii:14.661:14iion Lf loca
ANS: The colCeggrsi 1)floc l.lax 7 -1,4splifFewithi ive (5) from the date of
assessment
. (4.G , ep. 194 0).
Note: Refer tollteppuse rt nder III-A5 to A7
fora detailed disprfssio‘
Civil Cases c,
Who may Appeal. ode o ,A,plANOlgrercl.q.Opea
Q: Who can file an afilatali4Zt:FAa--- -k•c
ANS: The following maydOpelf,teqhe MLA j111:40piOnl-
1. Any party adversely affect ed bylikfecIstrtifing or inaction of:
a. The Commissionenrifftertraltevenue on disputes, assessments, or
claims for refund Of internal revenue taxes erroneously or illegally
collected;
b. The Commissioner of Customs;
c. The Secretary of Finance;
d. The Secretary of Trade and Industry;
e. The Secretary of Agriculture; and
f. The Regional Trial Courts, in the exercise of their original jurisdiction
within thirty (30) days after receipt of such decision or ruling or after the
expiration of the period fixed by law for action referred to (DIMAAMPAO
(2015), supra at 250).
The following may appeal to the CTA in Division:
Any party adversely affected by a decision or ruling of:
a. The CTA in Division in a motion for reconsideration or new trial; •
b. Central Board of Assessment Appeals (CBAA); and
c. Regional Trial Court, in the exercise of their appellate jurisdiction within
thirty (30) days from receipt of a copy of the questioned decision or
ruling (R.R. C.T.A., Rule 8, Sec. 4).

1014
 •

-5•::•itd•

Note: The right to appeal under Sec. 11 of R.A. No. 1125 is impliedly denied to the
government or any of its agencies, instrumentalities or officials (Collector of Customs v.
Court of Tax Appeals, G.R. No. L-8811, October 31, 1957). When a situation arises
where the taxpayer neither pays the tax assessed against him nor contests its validity
before the CTA, the only remedy left to the government, aside from distraint and levy, is
to enforce the collection by judicial action in the ordinary courts of justice (Republic v. Dy
Chay, G.R. No. L-15705, April 15, 1961) or the CTA, as the case may be (R.R. C.T.A.,
Rule 4, Sec. 3 (C)).

Q: What are the different modes of appeal?

ANS: An appeal.May be made by:
1. Filing a petition for review under Rule 42 of the 1997 Rules of Court, with
respect to a decision, ruling, or inaction of the:
a. • Commissioner of Internal Revenue;
b. Commissioner of Customs;
c: Secretary of Finance; •
d. Secretary of TradernVustry; or
e. Secretary of Agrictilteeaprk
f. RTCs in the exerp10„Welrioriginal jurisdiction.
Note: This appeal shall brkgdaa Division of the CTA.
2. Filing a petition for reVieW' GrpaiterpRittle143 of th:et1997 Rules of Court with
respect to the decisteor
a. The CTVDivision in:a o M tion for reconsi ,ation or new trial;
b.: CBAVErr
c; RTC4thd exercise f t eir appellate juris„didtio
.
Note: This allpee b Ae-hear y the CTA en can9.
3. Filing a43el ikiontorkpriew on mtiorari and :Rule 455of the 1997 Rules of
Court rew..0 . to a decigiqn uling of the= TA en balic.
Nofeltiejupret, Co rt shall oe • on the p,ppe41 ,A, Rule 8, Sec 4
r- •
and Rule 16, Sec. ).
:017c
Suspension of colono tax
Q: Doet the perfectio‘of an appeal sus Fifie collection of taxes?
ANS: As a general ruNgtgr colleaga, 'Utrl turing
. appeal. However, the
CTA is 'empowered top.uspen,dflpe collection of internal revenue taxes and custom
duties or grant injunctio M.Wth 05-11-07-CTA, Rule 10, Sec. 1).

Injunction not available to restrain collection

Q: May the collection of taxes be enjoined?
ANS: As a general rule, no court shall have the authority to grant injunction to restrain
the collection of any national internal revenue tax, fee, or charge (NIRC, Sec. 218).
However, the no injunction rule does not apply to the CTA when in its opinion the
collection of tax by the BIR may jeopardize the interest of the government and/or the
taxpayer (R.A. No. 1125, Sec. 11).

Q: What are the' requisites for the suspension of collection of taxes?

ANS: The requisites are the following:
1. When there is an appeal to the CTA from a decision of the CIR;
2. In the opinion of the CTA, the collection may jeopardize the interest of the
Government and/or the taxpayer, and
3. The taxpayer may be required to deposit the amount claimed or to file a surety
bond for not more than double the amount with the Court (R.A. No. 1125, Sec.
11).

1015
 Criminal Cases
Institution andprosecution of criminal actions
Q: How are criminal actions instituted?
ANS: All criminal actions before the Court in Division in the exercise of its original
jurisdiction shall be instituted by the filing of an information in the name of the People of
the Philippines. The institution of the criminal action shall interrupt the running of the
period of prescription (R.R.C.T.A., Rule 9, Sec. 2).
Note: In criminal actions involving violations of the NIRC and other laws enforced by the
BIR, the CIR must approve their filing. Those that involve violations of the Tariff Code
and other laws enforced by the BOC, the Commissioner of Customs must approve their
filing (R.R.C.T.A., Rule 9, Sec. 2).
Institution of civil action in criminal action
Q: What is the rule on inclusion of civil action in criminal action?
ANS: The criminal action and the wasp= civil action for the recovery of civil
liability for taxes and penalti,efrs be 0e-- tituted in the same proceeding.
The filing of the criminal 3ction s ell neoles 'tar fi the filing of the civil action.
No right to reserve th5,,filinco c . vil.actiomse ratel rtm the criminal action shall
be allowed or recogy et1(R‘l OF COURT, R 1, Sec. (a)(1))•
Period to appeal/40,1
Q: What are th rule)/9 ap • eal of ri 'ases?
ANS: An appe be mad b filin • ef''N 1' 41
1. Notic eal thin)fte,tn l5)s1,942 fro the eiceipt f a copy of the
deci nal ord r — plae.anrodi\prfftfinal ases d cide y the RTC in the
exec juristh-4 %-t0.10.T.A le 9, a)).
Note T 11 • 1 e. . • 1 I R.C.J ., Rule 9, Sec. 9
(a)).
2. Petitio 'for reiew within fifteen (15)
days from thegceip om with respect to
criminal Lases depide al cases decided by
the RTCs the eicer .R.CT.A., Rule 9, Sec.
9 (b)).
Note: The Co -10,9 .R.C.T.A., Rule 9, Sec. 9
(b)).
Motion for Reconsideration or New na
Q: Who may file a motion for reconsideration or new trial?
ANS: Any aggrieved party may seek a reconsideration or new trial of any decision,
resolution or order of the court (R.R. C.T.A., Rule 15, Sec. 1).

Q: What are the grounds for filing a motion for reconsideration or new trial?
ANS: The grounds are as follows:
1. Fraud, Accident, Mistake, or Excusable negligence (FAME) which ordinary
prudence could not have guarded against and by reason of which such
aggrieved party has probably been impaired in his rights; or
2 Newly discovered evidence, which he could not, with reasonable diligence,
have discovered and produced at the trial and which, if presented, would
probably alter the result (R.R. C.TA., Rule 15, Sec. 5).

Q: To which courts may a motion for reconsideration or new trial be filed?

ANS: A party adversely affected by a ruling, order or decision of a Division of the CTA
may file a motion for reconsideration or new trial before the same Division of the CTA

1016
 (R.A. No. 1125, Sec. 11 (3). A motion for reconsideration or new trial can also be filed
before the CTA en banc (R.R. C.T.A., Rule 16, Sec. 1).

Q: When shall the motion be filed?

ANS: The aggrieved party shall file a motion for reconsideration or new trial within
fifteen (15) days from the date he received notice of the decision, resolution or order of
the court in question (R.R. C.T.A., Rule 15, Sec. 1).

Q: What is the effect of filing the motion?

ANS: The filing of a motion for reconsideration or new trial shall suspend the running of
the period within which an appeal may be perfected (R.R. C.T.A., Rule 15, Sec. 4).

Appeal to the CTA En Banc

Q: Who may file appeal to the CTA en banc and what is the mode of appeal?
ANS: A party, adversely affected by a decision or resolution of a Division of the Court on
a motion for reconsideration or new trialfay appeal to the CTA en banc by filing before
it a petition for review under Rule440111ffin fifteen days from receipt of a copy of the
questioned decision or resolution (AtC1., Rule 8, Secs. 3 and 4 (B)).
.4-41,t& 3t4'' •
1
Q: May a decision or order of a Diets on of the CTA 13_,_ e directly appealed to the
CTA en banC in the exercise cliifs kV*,Agligplefe tfigdiction?
ANS: No. The petition for reyjeiiii of al6deCiT(in or reMitt f he Court in Division must
be preceded by the filing (timely m9tio for reconsideratio
Rule 8, Sec. 1). The figg ccif a motiVii reconsideration
Division is
t new trial (R.R. C.T.A.,
w trial before the CTA
indispenaebleeeqyirernent or filing an appeal ef9re the CTA En Banc.
Failure to file such ,ttibritrieconsidera on or new tri is gauk for dismissal of the
appeal before TA EllBarc (City of anila v. Cos os bottling Corporation, G.R.
No. 196681, ne-27, 234p
AkVzh
Q: Who shall act as veRE,Oentativeof People a o emment?
ANS: The 8olieitaGoiiaral shal rep vent the People of the Philippines and
government officialqW1inl'ieir official capacity in all cases brought to the Court in the
exercise of its appefiatelurisjotion Sec 10).
„le
Petition for Review om'L.ertforct.gfge
"
15r&
Q: Who may file a Petition forI" Review on Certiorari to the Supreme Court in Civil
Cases? , VA"all
ANS: Any party adversely affected by a decision or ruling of the CTA en banc may file
with the Supreme Court a verified petition for review on certiorari within fifteen (15) days
from receipt thereof pursuant to Rule 45 of the 1997 Rules of Court (R.R. C.T.A., Rule
16, Sec. 1).

Q: Who may file a Petition for Review on Certiorari to the Supreme Court in --in44
Criminal Cases?
ANS: A party adversely affected by a decision or ruling of the Court en banc may appeal
therefrom by filing with the Supreme Court a verified petition for review on certiorari
within fifteen (15) days from receipt of a copy of the decision or resolution, as provided
in Rule 45 of the Rules of Court. If such party has filed a motion for reconsideration or
for new trial, the period herein fixed shall run from the party's receipt of a copy of the
resolution denying the motion for reconsideration or for new trial (R.R. C.T.A., Rule 16,
Sec. 1).

1017