!.

ON
TAXADON
ATTY. VICTORINO C. MAMALATEot
LLM. (HARVARD), Ll.B. (MLQU), MBA (UE), BBA-CPA (UM)
Bar Examfaer (2008 and 2012);
Author: Value Added Tax (2013);
Philippine Income Tax (2010);
Tax Rights and Remedies (2011);
Pre-Week Bar Reviewer: Ateneo University (2011);
San Sebastian College-Recoletos (2003-2013):
Lyceum of the Philippines (2007);
Professor of Law: University of the Philippines (1989-to 2015);
Pamantasan ng Lwigsod ng Maynila (2007);
De La Salle University/St. Benilde-CREBA (2002-2013);
Managing Head, Tax Division (1994-2001): Punongbayan & Araullo, CPAs;
Assistant Commissioner (Assessment): Bureau of Internal Revenue (1993-1994);
Managing Partner, V.C. Mamalateo & Associates (2006 to 2015).

ATTY. MARY JOY B. MAMALATEO-JUSAY, REB, REA

Ll.B. (SSCR), BSMGT (DLSU)
Member of the New York State Bar , USA (2009);
Member of the Philippine Bar (2004);
Author: Tax Rights and Remedies (2016);
Real Property: Ownership, Registration, Development,
Contracts and Taxation (2011);
Reviewer on Property Qwn.err,hip and Taxation (2011);
Partner, The Law Offices ofMamalateo, Victorino, Guevara and Mamalateo-Jusay
(Formerly: V.C. Mamalateo & Associates) (2006 to date).

Fourth Edition
2019

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f
 Philippine Copyright, 2014, 2019

by
'
~
VICTORINO C. MAMALATEO

ISBN 978-621-04-0128-8
No portion of this book may be copied or
reproduced in books, pamphlets, outlines or notes,
whether printed, mimeographed, typewritten, copied
in different electronic devices or in any other form. for
distribution or sale, without the written permission of
the authors except brief passages in books, articles,
reviews, legal papers, and judicial or other official
proceedings with proper citation.
Any copy of this book without the correspond-
ing number and the signature of the authors on this
page either proceeds from an illegitimate source or is
in po&&e88ion of one who has no authority to dispose
of the same.

ALL RIGHTS RESERVED

No. 1153

g
 FOREWORD
Many bar candidates said ''Taxation is one of the more difficult
bar subjects to pass." There could be some truth to this statement
because our tax laws are described to be complicated and highly
technical, necessitating a well-rounded knowledge thereof that is
acquired generally through years of studies, experience, and active
practice. Taxation becomes even more difficult because our tax laws
are very dynamic, particularly when the tax administration takes
extra-aggressive positions in the interpretation and application of tax
laws to be able to generate revenues. As a result thereof, numerous
deficiency tax assessments issued, which are considered by taxpayers
as without factual or legal basis, are protested, and tax refund/credit
cases are filed by taxpayers to recover taxes erroneously paid, and
necessarily, many decisions on such tax cases are promulgated by
the Supreme Court and the Court of Tax Appeals for the proper
interpretation and guidance of tax officials, taxpayers, and students
of law under their power of judicial review. The Tax Code, Supreme
Court decisions, and revenue regulations are the basic sources of tax
laws that must be studied and learned by heart by any bar candidate.
It is the object of this updated Reviewer on Taxation to help the
bar candidates acquire a strong understanding and good knowledge of
the principles of tax law, such that no bar question or problem would
be too difficult to answer. The discussions of the tax principles in the
book have been expanded to cover not only the National Internal
Revenue Code of 1997, as recently amended by Republic Act No.
10963, otherwise known as the Tax Reform for Acceleration and
Inclusion (TRAIN), Local Government Code, and Tariff and Customs
Code of the Philippines (TCCP), as amended by Republic Act No.
10863, otherwise known as the Customs Modernization and Tari.ff Act
(CMTA), other amendments by the tax laws passed by Congress of
the Philippines, but also the recent relevant decisions of the Supreme
Court and administrative issuances promulgated by the Secretary
of Finance and the Commissioner of Internal Revenue, which also
form part of the laws of the land. To inform the reader about the
areas and types of questions given in the past bar examinations
the author included too the bar examination questions in the past

iii
years up to 2017 as well as the suggested answers thereto, and the
2018 bar examination questions on taxation. For this, I am deeply
grateful to the various honorable justices and respected professors
of law who compose the Bar Examination Committee on Taxation at
the UP College of Law, for allowing me to make use of the unofficial
answers to the bar examination questions in this book.
Many bar candidates, who have used this book in the course
of their review for the bar examinations and passed the bar
examinations, spoke highly about the excellent organizations and
easy-to-understand discussions of the tax principles and have
personally thanked the original author, Atty. Vic, for writing the
book. This warm response to the book from lawyers and the fact that
law professors are using the book in their classes has inspired and
encouraged Atty. Vic to continuously improve and update it for the
myriad of future lawyers who are to follow our footsteps, practice
law, and help our fellowmen. This has been my guiding principle in
further revising this book as co-author of Atty. Vic, my father, my
mentor, my friend, and my inspiration.
To the bar candidates, always remember Atty. Vic's advise:
"There is no substitute for hard work and excellent preparations for
the tasks ahead. Believe in yourself that you will make it, and have
faith on the Lord Almighty and the powers of prayer!" Good luck!!!
 PREFACE

This humble work, originally done by Atty. Vic, was primarily

intended to help students of taxation better prepare for and pass the
bar examinations, and to assist tax practitioners and taxpayers , in
general, in improving their knowledge of taxation, whether it involves
international, national, or local taxes.
The coverage of this book was deliberately made comprehensive
in order to address the common complaint of bar reviewees of having
to buy several tax books. Thus, the book covers: (a) General Principles
in Taxation; (b) Taxes under the National Internal Revenue Code,
such as Income and Withholding Taxes, Transfer Taxes, Value Added
Tax and Other Percentage Taxes, Documentary Stamp Tax, and Tax
Remedies; (d) Jurisdiction of the Court of Tax Appeals; (e) Taxes
under the Local Government Code; and (f) Tariffs and duties under
the Tariff and Customs Code. It should be recognized, however, that
because this book is a reviewer, some important legal principles and
doctrines are not fully explained.
The original author presented the basic principles of law in
topical forms for easier understanding. Drawing from his long, varied
experience as a revenue official, tax practitioner, and professor of
law, he follows an integrated approach in analyzing tax issues and
problems. The co-author incorporates in this book the latest tax
laws, regulations, and jurisprudence, including new laws granting
tax incentives and laws with tax implications, as well as significant
decisions of the courts up to year, 2018. In order to guide bar
examinees on what are the common questions asked, and how such
questions are briefly but adequately answered, the book includes
the bar examination questions for 2018 and the bar examination
questions and suggested answers for 201 7 and the preceding years.
On topics covered by previous bar questions that has been amended,
appropriate notes have been made thereon.
The original author has expressed his heartfelt gratitude to
all his dear friends who have helped him in writing this book as
well as those who gave their valuable comments and suggestions.
Atty. Vic has always thanked his loving family - his wife, Sally;

V
children Victor, Michael, Henry, and Mary Joy; and grandchildren
Miguel, Chino, Yella, Vincent, Eroman, Jessica, Jaden, Veronica,
Enrico, Pio, an~ Nathan, for their understanding and sacrifices. The
co-author likewise expresses the same gratitude to her husband Joe
and children , J essica and Jaden, dear friends and colleagues, and all
the people who has encouraged, supported, helped, and inspired her
in revising this book. The co-author also acknowledges the assistance
of the U .P. Law Center for originally allowing Atty. Vic to use the
suggested answers to the past bar examinations which was extended
to her.
 CONTENTS

PARTI

GENERAL PRINCIPLES AND

LIMITATIONS ON THE POWER OF TAXATION

CHAPTER I
GENERAL PRINCIPLES

Page
Definition of Taxation . .... ... ...... ... .. .. .... .... ........ ..... .......... ..... ....... 1
Nature of the Power of Taxation............................................... 1
It is an attribute of sovereignty............................. ........... 2
It is legislative in character.............................................. 2
It is generally not delegated to executive
or judicial department... .................................... ....... 3
It is subject to constitutional and inherent limitations . . 5
Aspects of Taxation.............................................. ...................... 6
Theory or Underlying Basis of Taxation................................... 7
Lifeblood Theory................................................................ 7
Benefits-Protection Theory .... ....... ....... .... ... ..... .... ... ..... . .. .. 8
The Power to Tax involves the Power to Destroy...... ;.............. 9
Definition of Taxes..................................................................... 10
Attributes or Characteristics of Taxes............................. ...... ... 10
Characteristics of a Sound Tax System.,.................................. 15
Purposes and Objectives of Taxation............. ........................... 15
Taxes Distinguished from Other Impositions.......................... 18
Taxation Distinguished from Eminent Domain and
Police Power ....................................... ........ ·· ... ··· .... ··· ..... ·... 19
Tax v. Debt............................................................. ............ 21
Tax v. Toll ................................................. ············............. 22
Tax v. License Fee ................. ......... ········· ··· ······· ···· ·· ····· ... .. 22
Taxv.Penalty.................................................................... 25
Double Taxatl.on .......................... .. ...... ......... ... .. ......... .......... ... .... 25
Exemption from Taxation.......................................................... 32

Vll
Tax Laws ................................................................................... 36
Statutes levying taxes are construed against the
government................... ................ .. .......................... 36
Construction of statute by predecessors is not
binding on the successors........................................ . 37
Retroactive application.......... ............... ... .... ......... ... ......... 37
Principle of legislative approval by re-enactment.......... . 38
Regulations .............. ....... .................... .... ........... ................... 40
Classification of Regulations........ .............. ............................. .. 42
Necessity for Notice and Hearing .... .. .... .......... ........... ........... ... 43
Publication........................................... ..... .................. ................ 43
Special laws prevail over general laws... ....................... ........... 44
Tax Evasion v. Tax Avoidance....... .... ...................................... 45
Taxpayer's Suit....... ................................................... .... ............ 49
Set-off or Compensation of Taxes.............. ... .................. ........... 49

CHAPTER II
INHERENT AND CONSTITUTIONAL
LIMITATIONS

Inherent Limitations .... .... ..... .... ..... .... .. ..... ... .... .. ... .. .... .. ... ... ... .. . 51
The levy must be for a public purpose...... ....... ................. 51
Non-delegation of the legislative power to tax . .. ............. 55
Exemption from taxation of government entities...... ...... 56
International comity................ .................................... ..... . 56
Territorial jurisdiction ... ..... ... .... .. .... ... .. ... ... .. ... . .... .. .. . ... ... . 59
Constitutional Limitations........................................................ 61
No person shall be deprived of life, liberty, or property
without due process of law.............. ......................... 61
Nor shall any person be denied the equal protection
of the laws .. ... ... ... ... ... .. ... .. ... .. ... ... .. . ... . ..... . .. .... . .... ... .. . 63
The rule of taxation shall be uniform and equitable.
The Congress shall evolve a progressive
system of taxation ... . .. .. .. .. .. .. .. . .. ... . ... .... . ... .. ... .. .. ... ... . 70
No law impairing the obligation of contracts shall be
passed...................................... .................................. 76
The free exercise and enjoyment of religious
profession and worship, without discrimination
or preference, shall forever be allowed .... . ... .. ... . ... .. . 79
Freedom of the press . .. .. .. .. ... ... ... ... .. . .. . ... ... . ... .. .. .. .. ... .. .. . .... 79
Tax exemption of properties for religious, charitable,
and educational purposes............. ............................ 81
 All appropriation, revenue, or tariff bills shall
originate from the House of Representatives,
but the Senate may propose or concur with
amendments.............................................................. 86
No law granting any tax exemption shall be passed
without the concurrence of a majority of
all the members of the Congress.................. ............ 90
Every bill passed by Congress shall embrace only
one subject, which shall be expressed in
the title thereof......................................................... 92
Congress shall evolve a progressive system
of taxation.......... ....................................................... 93
Supremacy of the national government over local
governments in taxation........................................... 93

PART II

INCOME AND WITHHOLDING TAXES

CHAPTER III
INTRODUCTION

Income Tax Systems ................................................................. . 95

Global Tax System .................................................... ....... . 95
Schedular Tax System .............. ....................................... .. 97
Semi-Schedular or Semi-Global Tax System ........ .......... . 99
Features of the Income Tax Law .............................................. . 101
Direct Tax distinguished from Indirect Tax ....................... ..... . 103
Criteria in Imposing Income Tax ............................................ .. 104
. .
C1t1zens hip Pr1nc1p
. . 1e ....................................................... .. 104
Residence Principle .......................................................... . 104
Source Principle ............. ..................................... .............. . 104
When is income taxable ........................................................... .. 105

CHAPTER IV
KINDS OF TAXPAYERS

Kinds of Taxpayers....... ......................................... .................... 106

Citizens . .. ..... .... .. ... . ...... ... .. .. .... .. ...... ........... .... ...... .. ... .. .... ..... .. . 107
One tax status v. dual tax status of individuals.............. 107
Citizen v. alien individual employees of foreign
embassies and international organizations
in the Philippines....... ............................................... 107
Resident citizen v. non-resident citizen........................... 111

ix
 Engaged in trade or business or exercise of profession
v. salaried employee .................................... .......... ... 112
Types of non-resident citizens ............... .......................... . 112
Immigrant ................................................................ . 112
Permanent Employee ............................. ...... ........ ... . 112
Contract Worker .......... ....................................... ..... . 113
Overseas Contract Worker (OCW)/Seaman .............. ...... . 113
Aliens .............. ........................................................................... . 115
Definition of "residence" .................... .......... ..................... . 115
Resident Alien .... ................................... ............... ........... .. 116
Non-resident Alien Engaged in Trade or Business
in the Philippines ..................................................... . 116
Non-resident Alien Not Engaged in Trade or
Business in the Philippines ........... ...... ..... ............ ... . 118
Employees entitled to preferential tax rates .. ................ . 119
Filipino employees of multinational corporations ........... 119
Estates and Trusts ..................................... ............................... . 121
Co-ownership .... ....... ..... ....... ....... ......................... ..... ............. .. 123
Co-ownership Due to Death of a Decedent ...... ......................... 124
General Professional Partnerships (GPP) .............. ............. .... . 128
Domestic Corporations and Foreign Corporations .................. . 133
Test in determining Status of Corporations .... ...... ....... .... ... ... .. 134
Doing Business ........................ .... ....... .... .......... ......................... . 135
Partnerships ............... ... ........................ ........................... ... ... 135
Joint Ventures ............. ............... ................. .... ........ .... ...... ...... .. 136
Taxable Joint Ventures ........... ... ........ .... ........... ... ... ... .... .......... . 140
Resident Foreign Corporation ... ........ .......... .... .......... .......... .. ... . 140
Philippine branch of a foreign corporation is merely
an extension of the foreign head office ...... ......... ... .. 141
Types of Resident Foreign Corporations ....... ...... ... .... ........ ..... . 143
Non-res1"dent F ore1gn . Corporation . .... ... ... ......... ........... ... .... ...... . 146

CHAPTERV
GROSS INCOME

Gross Income ... ... .. ..... .... . .... ... ... ... ... ... ... .... .. ... ... .. ... ... .. . . .... .... . .. 148
Net Income. .... ....... ... ... ..... .... ...................................... ...... .......... 148
To Whom Income Is Taxable ................ ........... ... ....................... 149
Source Rules .. ... .. ... .. . .. .. .. . .. .. .. ... .. .... ... .. ... ... . .. . ... ... .. ... . .... . .. ... .. . 151
Interests: Residence of the debtor or obligor .. .... ............. 152
Dividends: Residence of the corporation paying
dividend ................ .... .................................. ............... 152
Services: Place of performance of the service ... . ........ ...... 152
 Rentals and royalties: Location or use of the property
or interest in such property.... .. ................................ 158
Sale of real property: Location of real property...... ......... 158
Sale of personal property.................................................. 158
Definition of Income .... ......................................................... .... .. 161
Recognition of revenue when offsetting concurrent
obligations..................................................... ...... ...... 163
Distinctions between Capital and Income................................ 167
Tests in determining Income.................. ................................... 167
Realization test.................................................................. 167
Claim of right doctrine ..... .. .. ... ...... . ... ......... ......... .. ...... .. ... 168
Income from whatever source.................... ....................... 169
Economic benefit test............... ......................................... 169
Significance of Knowing the Type or Character of Income...... 169
Compensation Income......... ....................................................... 170
Who Is an employee?................................................... ... ...... .. .... 170
Compensation Income of Philippine Nationals and
Aliens Employed by Foreign Governments and
International Organizations in the Philippines .. .. ... ...... . 172
Foreign Embassies and Diplomatic Missions... .. ................. ..... 172
Aid Agencies of For eign Governments...................................... 173
Advisory Committee on Voluntary
Foreign Aid-USA.................................................... ... 173
Aid Agencies .. .. ..... ...... .. ............ ... .... ................... .. ...... .. ..... 173
Statutory Minimu m Wage ............ ...... ............... ,...................... . 174
Backwages, Allowances, and Benefits Awarded
in Labor Dispute ................................................................ 175
Items Not Included as Compensation Income.. ........................ 176
Fringe Benefits.................................................................... ....... 179
De minimis ben efits..... .............. .. .............................................. 182
Stock Option Plans .. ...............................;....... ......................... ... 184
Trade or Business Income or Pr ofessional Income ... ...... ... ...... 189
Gross Income from business ... ..... .. ........ ........ ...... ... .. ..... .. . 190
Lease of real property ... ....... ...... ........ .. ......... .... .. .... .... .. .... 190
Sales or exchanges of real property.................................. 193
Professional Income ............................................... ·. ·· ···· ······· ···· · 194
Capital Assets ... .... ... .. ... ..... ... ....... ....... .. ....... ......... .. .... ...... .. ..... . 194
Deed of Exchange... ............. ... .................. .................................. 203
Transfer of interest on real property shall be
governed by the following rules ... .. .. .. ..... . .. .. .. ... .. ..... 203
Rules on non-redemption of property sold during
l·nvoluntary sales ....................... ........ ......... ......... ..............
.
204
Real property located outside the Philippines.......................... 205
Other cap1·tal assets ........................ .... ·. ·· ··.. ··· ········ ·.. ···· ··· ··· ··· ·.. · 208

xi
 Holding period ......... ... ..... .... .. .. ... .... ... ... ..... .. . .. ... ..... .. ... .. .... 208
Capital loss .. .... ........... ... .. ....... . ... .. ..... .. .. ...... .. ... ... .. ... .. ...... . 209
Passive Investment Income....................................................... 210
Interest Income...................... ............................................ 210
Dividend income................................................................... ...... 218
Distinctions between Cash Dividend and
Stock Dividend ............................. ..................................... 219
Stock dividends ..... ... ..... .... ... .... .... ... .... .. .. .. .. ... ... ... ... .. .... ... ..... ..... 220
Rules on Taxation of Dividends................................................ 221
Royalty income .. ..... .... .. .. . ... ..... .... ..... .. ........ ..... ....... .. .... ..... 227
Royalt y paid by a Domestic Corporation ................. 228
Royalty paid by a Foreign Corporation ............................ 230
Rental income .............. ............................................... .............. 230
Other Income .. ...... .. .... ... .. ... .. .. .. ... .... ... ...... ... .. .. .... ...... .... ... .... .. . 231
Income from any source whatever .................................... 231
Prizes and Awards. ............. ....................................................... 232

CHAPTER VI
EXCLUSIONS FROM GROSS INCOME

Categories of Exclusions from Gross Income ......................... .. 246

';r· Items of exclusion representing Return of Capital. ....... ..

Item of exclusion because it is subject to another
internal revenue tax ............................... ..... ............ .
246

247
'*i Items of exclusion because they are expressly
exempt from income tax .................... ...... ............... .. 247
Under the 2005 Tax Code ................. ... ........ .............. ... ... ...... .. .. 255
Exempt corporations and associations .................. ...... ... .. 255
Exclusions from Gross Income ... .. ..... ............................... . 256
Proceeds of life insurance policies ................. .......... . 256
Amounts received under life insurance,
endowment, or annuity contracts ................... . 257
Value of property acquired by gift, bequest ,
devise, or descent .................. .......................... . 258
Amounts received through accident or
health insurance .................... ......................... . 259
Income exempt under treaty ................................... . 262
Retirement benefits, pensions, gratuities, etc........ . 263
Miscellaneous items ..................... ..... ....................... . 274
Exempt Corporations ............................... .................................. 280
Government-owned or -controlled corporations .............. . 280
Exempt corporations and associations 280
Non-Profit, Inurement Prohibition ................ ........... ..
........................................... 282

xii
Educa tional Institutions....................... ..................................... 284
Income of non-stock, non-private educational
institution exempt from taxation under
the 1987 Constitution............................................... 285
Private education al institution that engages
in profitable undertaking is subj ect to tax.......... .... 286
Failure to observe requirement does not constitute
waiver of right to exemption ...... ..... ..... ........... .... .. . .. 286
Charitable Organizations .. ........ ................... ...... ........... ............ 289
Clubs for Pleasure, Recreation, and Other Non-Profit
Purposes ..................................... .... .................. ..... ........ ... 290
Non-Stock, Non-Profit Hospital ................................................ 290
Requirement for revalidation of tax exemption for
non-stock, non-profit corporations and associations....... 292

CHAPTER VII
RETURN OF CAPITAL AND DEDUCTIONS

Return of Capital ....... ... .. ................................... ....................... . 297

Sale of inventory of goods by manufacturers and
dealers of properties ............... ....................... .......... . 297
Sale of stock in trade by a real estate dealer and
. . .
dea1er 1n secur1t1es................................................... . 297
Sale of services.................................................................. . 298
Deductions from Gross Income ...................................... .......... . 299
Business Expenses ........... ..................... ......... ............................ 301
Conditions for deductibility of business expenses .......... . 301
Offsetting of Expenses ..... ............... .......... .. .. .................. .. 301
Additional requirements for deductibility of certain
payments ...... ......................................... .... ........ ................ 305
Interests ........ ........ ..................................... ................... ...... ........ 313
Taxes ..................................... .... .......................................... ....... . 317
Losses ............................................ ..................... ··· ··· ·· ··· ·· ······ ······· 318
.

Bad Debt Theory ... ..... ... ........... .··· ······ ··· ····.. ··················· ··· .... ··· ·· 319
Losses must be Evidenced by Closed and Completed
Trans action ...... .................... ··· ···· ········ ··· ·· ···· ···· .. · ··· ···.. ······· 319
Bad Debts .... ........... .. ...... .......... .................. ............................... . 322
Tax Benefit Rule ...... ........ ,. ··.· ···· ... ··· ··· ············· .. ················ 324
Deprec1·at1·on ................ ...... .... ..... .... .. ··· ····· ··········.. · ······ ··· ·· .. ··.. · ·· 326
. .
Conditions for Deductibility of Depreciation .......................... . 328
Charitable contributions .... ........···· .. ·.... ·... ······· .. ·· ... ······· .. ··· ...... . 329
Optional Standard Deduction (OSD) ···.......... ...... · .................. .. 332
OSD for General Professional Partnerships and
332
P art ners of Gpps ... ..................... .. ............................

xiii
 Basic Personal Exemptions and Deduction.............................. 333
Status-at-the-end-of-the-year rule..... ....... ............................. ... 336
Non-Deductible Expenses.......................................................... 338
Tax Credit....................... ........... ............ ..................................... 340
Distinguished from Tax Deduction .... .......... ................... . 340
Irrevocability Rule ...... ............... .... ....... . ................... ... ..... ... .. .... 341

CHAPTER VIII
TAX BASES AND RATES

Tax base ....... ...... ..... ....................... ,... ....... ............... ................ 344
Global tax system.................................................. .... ........ 344
Individuals. ............................................... .................................. 345
Tax Reform for Acceleration and Inclusion (TRAIN) ...... 345
Optional 8% flat rate............................... ............ .............. 346
Certain Individuals are subject to 15% preferential tax . 347
Domestic Corporations ... . .. ............ .. ............. ..... .................... .... 348
Foreign Corporations ... . ... ....... ... ............................... .. .... ...... ..... 349
Resident Foreign Corporation........................................ .. 349
Non-resident Foreign Corporation................................... 349
Resident Foreign Corporations ...... .. ... ........... .. .... . .... ... .......... ... 350
Resident Foreign Corporations that are Subject to
Preferential Tax Rates...................................................... 352
Branch Profit Remittance Tax on Philippine branch
of Foreign Corporations .......................... ........................ . 355
,i
Income of Non-resident Foreign Corporation Subject
;
to Preferential Tax Rates ................................... ............ .. 355
,;1.... Improperly Accumulated Earnings Tax (IAET) ...................... . 359
Gain from Sale of Property ....................................................... . 362
Basis of property....................... .... ...... ... ........................... . 362
Transfer for inadequate consideration ............ ................ . 362
Nature of Asset or Property .................................. ................... . 364
0 r dinary asset ............ ...................................................... . 365
Capital asset ...................................................... ........ ........ 365
Passive Investment Incomes ......... ............................................ 366

CHAPTER IX
ORDINARY ASSETS AND CAPITAL ASSETS

Importance of Knowing Nature of Asset ................................. . 367

Sale or Exchange .......... .............. ............................................... . 367
Capital Assets ............................................................................. 370

xiv
 CHAPTERX
TAX-FREE EXCHANGES

Tax-free Exchanges.................................... ................................ 376

Exchange of Property...... ........................................................... 379
Original Basis of Property to be Transferred ....... .............. .. .... 382
Sale of Principal Residence ... ... ......... ............... ..... ....... .......... ... 383
Requisites for Exemption from Tax of Sale of
Principal Residence ..................................... .. ................. .. . 384

CHAPTER XI
ACCOUNTING METHODS AND PERIODS

Methods of Accounting.............................................................. . 389

In case of conflict, tax rule prevails over accounting
pr1nc1ple ............................................... ..................... . 390
Cash method ...................................................................... . 390
Accrual method ................................................................. . 390
Installment method ................................... ....................... . 391 •;
. •i·
Percentage of completion method .................................... . 392
Crop method ..................................... ......... ................. ... ... . 394
When Included in Gross Income .................. ............................ .
Income Constructively Received ......................... ...................... .
When Expense is to be Claimed as Deduction from
Gross Income ............ ........................................................ .
394
395

395
l
Transactions between Related Parties and Transfer
Pr1c1ng ........................ ....................................................... . 397
Filing of Tax Returns ... .............................................................. . 397
Individuals deriving purely compensation income ......... . 397
Filipino Employees of Foreign Embassies and
International Organizations in the Philippines,
including .AD B ... .. . ..... ... .. ... .. ...... ... ... ... .. ....... .... ... .. ..... ........ 399
Individual deriving purely trade, business or
professional income, or mixed income .................. ... 402
Domestic corporation and resident foreign
corporation ................................. ............................... 403
Cumulative computation of quarterly and
annual tax liabilities........................... .. .................... 403
Capital Gains Tax Returns........................................................ 405
Shares of stock of a domestic corporation..................... ... 405
Real property located in the Philippines.......................... 405
Passive Investment Income....................................................... 406

xv
 CHAPTER XII
WITHHOLDING TAXES

Importance of Withholding Taxes............................................. 407

Remittance of withheld taxes is the responsibility
of the withholding agent-payor of income............... 407
Final Withholding Tax.... .................................. .............. ........... 408
Creditable Withholding Tax................ ...................................... 410
Expanded Withholding Tax ....................................................... 410
Persons exempt from withholding tax ............................. 411
The income is fixed or determinable at the time
of payment........ .... ........................ ... ............... ......... .. 412
The income payment is listed in the regulations
as subject to withholding.......................................... 412
The recipient of income is a resident of the
Phil1pp1nes ................................................................ 413
The payor-withholding agent is resident of the
Philippines........................................... ..................... 413
Withholding Agent................... .................................................. 414
Time to Withhold and Remit Tax.............................................. 415
Time to Credit Expanded Withholding Tax From
t· Income T~......................................................................... 415

I
Consequences of Non-Withholding of Tax By the
Payor of Income................................................... .............. 416
Consequences of Non-Remittance of Tax Withheld by the
Withholding Agent With Respect to the Payee
of Income ...... .............. ................................ ..... .......... ........ 416
Bases of Withholding Tax..................................................... ..... 41 7
Withholding Tax Rates ... . ...... .. . ... ..... .. .. .. .. .. .... .. ....... ......... .. ....... 419
Venue for filing withholding tax returns and time
for payment of tax............................................................. 421

PART Ill

TRANSFER TAXES

CHAPTER XIII
ESTATE TAX

Transfer Taxes ........................................................................... 423

Estate tax . ........ . .. . ................ ...... . . & ...................................... . 423
Donor's tax ...................... .............................................. .... . 423
Distinctions between Donation inter vivos and
Donation mortis causa ..................... .......................... .. ... .. 423

xvi
 Estate Tax ................................................................................. . 425
Nature and Object of Estate Tax .................................... .. 425
Rates of Estate Tax ................................. ......................... . 425
Justification of Estate Tax ............................... ......................... . 426
Reasons for Taxability of Transfers of Property ..................... . 427
Death Is the Generating Source of Power ............................... . 427
Law and Market Value at the Time of Death Is Applied ....... . 428
Residence .................. ................................................................. 428
Gross Estate ............ .................................................................. . 428
Settlement of Estate .................. .... ........................................ ... . 430
Partition and Distribution of Estate ........................................ . 431
Decedent's Gross Estate ........................................................... . 433
Kinds of Property Embraced Under Decedent's
Interest .... ......... ................................ ............................. . 433
Exclusions from Decedent's Gross Estate ................................. 433
Exempt Acquisitions and Transfers from
Estate Tax ............... .................................................................. . 434
Intangible personal property ...... ..... ........ ................................. . 437
Reciprocal Exemption as to Intangible
Personal Property ............................................................. . 437
Transfer in Contemplation of Death ........................................ . 438
Circumstances taken into account .... ................................ ....... . 439
Revocable Transfers ... .................................. .................... .......... 440
Transfer of Property Under General Power of .,

Appointment ................... ...................... ............................ . 441

I
Proceeds of Life Insurance .............................. ........................... 443
Exclusive Property ......... .................................... ..................... ... 445
Deductions ................................................................................ .. 446
Funeral Expenses ................. ..................................... .............. .. 449
Claims against the Estate ... .................................................... .. 451
Claims against Insolvent Persons ............. ............................... . 452
Unpaid Mortgages and Taxes ..... ......... ,.................................... . 452
Losses ................................................... .......... ............................. 453
Family home ........... ................................................ ···················· 453
Standard Deduction .. ........................................... ······················ 454
Medical Expenses ........................ ................................. ·· .... ········ 454
Property Previously Taxed (or Vanishing Deduction) .. .......... . 455
Assunta ............................................. ..................... .............. ..... . 459
Valuation of Property ............................................ ·........ .......... . 460
Estate Tax Returns ... .................... ....... ··· .... ·················· ... ··....... · 465
Time of Filing ............. ......... ... ............ ................. .................... . 465
Payment of Estate Tax ..................... ..... ······ ···... · ·· .. ····· .... ···· .. ···· 466
Bank Withdrawal Limit .......................................................... .. 466

xvii
 CHAPTER XIV
DONOR'S TAX

Donation ...... .......... .. ....... ........... ... ........ ........ .. ......... .. .............. . 467
Nature of gift tax........................... ............................................. 467
Purposes of Donor's Tax............................................................ 468
Rate of Donor's Tax.................................................................... 468
Valuation of Gifts Made............................................................. 469
Taxable Transfers ...... .. .. ............... .............. .. ............. ............ .... 4 70
Essentials of a Taxable Donation.............................................. 472
Donative Intent.......................................................................... 4 73
Consideration ........................... ..................... .......................... . 473
Donation of Conjugal Property.................................................. 4 73
Right of Accretion....................................................................... 4 74
Transfer for Insufficient Consideration.................................... 4 77
Exempt Donations.............................. ........................................ 4 78
Dowries or Gifts on Account of Marriage .... .. .. .. .. ........ ... ..... . .... 4 79
Exemptions under Special Laws............................................... 481
Procedure for computing net gifts............................................. 484

PART IV
VALUE-ADDED TAX (VAT)

CHAPTERXV
INTRODUCTION

Characteristics of Value-Added Tax......................................... 488

Tax on value added .. ....... ... ... ..... ..... ...... .. .. ......... ... .... .. ....... . ..... .. 488
Tax Credit Method..................................................................... 489
Sales Tax ................................................................................... 491
Taxable Transactions........................ ......................................... 491
Broad-based tax on consumption in the Philippines .... .... ....... 492
Destination Principle ............. :................................................... 492
Indirect Tax ... ........ .... .............. ...... ... ........... .......... .... .... .. ..... . 492
Cumulative through the chain of distribution of goods and
performance of services..................................................... 493
Tax-inclusive method/separate indication of VAT................... 494
Value added tax does not cascade........... ......... ......................... 494
Principle of Recoupment of Tax ...... ........ ..... .... ...... ...... ......... ... . 495

CHAPTERXVI
PERSONS LIABLE TO TAX
Taxable Persons......................................................................... 496
Husband and wife.............................................................. 498

XV1ll
 Joint venture .. ... ......... ... ... .......... ... .............. .... ......... ......... 498
Government.......................................................... ..... ........ 499
Non-stock, non-profit association or organization........... 499
Condominium corporation .... .... .. .... ... ........ ....... .. ... ........... 500
Subdivisions or Villages Homeowners Associations........ 501
Recreational or sports club .................. ............................. 503
Importer ... ........ .... ............ ............. ............ ... .. ........ .. ..... .. . 504

CHAPTER XVII
OUTPUT TAX ON SALE
OF GOODS OR PROPERTIES

Elements of Taxable Sale of Goods or Properties ........ ........ ... . 507

Sale of Goods or Properties................................ ........................ 507
'I'ypes of Sales ...................................................... ........... .......... 508
Actual sale . ... . .... ... ................ . .. .... ............................ ....... ... 508
Deemed sale ....................................................................... 508
Export sale......................................................................... 509
Goods or Properties................... ................................................. 512
For valuable consideration........................................................ 513
In the course of trade or business............................................. 513
Incidental. .......................................................................... 513
Goods are consumed or for consumption in the
Philippines........................................................... .. ............ 514
VAT on imported goods..................................................... 515
Absence of Profit or Margin Does Not Make the
Performance of Taxable Services for a Fee
Exempt from VAT...................................... ........................ 516

CHAPTER XVIII
OUTPUT TAX ON SALE OF SERVICES

Sale or exchange of services............ ..................................... .... . 518

Categories of services................................................................. 519
Professional/technical consultancy................................... 519
Transfer of technology....................................................... 520
Lease or use of intangible property.................................. 520
Lease or use of tangible property ..... .. . ....................... ...... 520
Supply of services by a non-resident................................ 520
Requisites for Taxability of Services......................................... 521
Sale of Services.............. ............................................................. 521
Service in the course of trade or business ............. .... ....... ........ 522
Lease of Properties Owned by Non-residents........................... 523

xix
Actual or Constructive Receipt ...... .... ... ........ .... ...... .......... ...... .. 523
Dealer in Securities ....... ... .. ... .. .............. ..... ......... .. ............... .. ... 524
Franchise Grantees.... ........ .... .................................................... 524
Lending Investor .... ................................................ .. .................. 526
Categories of Exemptions.......................................................... 528
Exempt Persons vs. Exempt Transactions .... .... .......... .... ....... .. 528
Transactions with exempt persons ..... ... ... ................... .......... ... 529
Scope of exemption.... .... .... ...... ... ................................................ 529
Effectively zero-rated transaction.................................. ........... 532
Differentiated from Automatically zero-rated
transaction ... ... .... .. ... .... .... .. .. ... ............ .. .. ........ .. ...... . . 532
Application for effective zero-rating................................. 533
Constructive Export Sale of Goods and
Properties ............................................... .......... 533
Sale of Services ........... ... ......... ... ... ...... ...................... 534
Export Sale of Goods and Properties under
Executive Order No. 226 ... ............ ... .. ...... ...... ..... .... .... ...... 535
Constructive export sales to Ecozones ........... ... .. ............ 536
Extent of PAGCOR's exemption ...................................... 540
Exemption based on location. ............ ....... ................................. 541

CHAPTERXIX
TAX BASES

Actual sale of goods or pr operties ..... .... .. .. ..... .. .. .. .. ......... .... ...... 542
Sale of goods ... ....... ........ .... ..... ......... .... ........ ... .. .. .. .... .............. 542
Sale of real property................................................................... 542
Sales discounts, r eturns, and allowances .............. .... ........ ....... 544
Transactions deemed sale.......................................................... 544
Commissioner's power to deter mine tax base ... .. ..... ........ ... ..... 545
Sale of services .. ............. ... .. ...... ........ ..... ... .. .......... ........... ........ .. 545
Advance rental payments.......................................................... 549
Reimbursement of expenses ..... ....... .. .. ............... ... ..... ...... ... ... ... 550
Tax implications and recording of deposits/advances
made by clients to GPP for expenses ...................... .......... 550
Tax implications and recording of deposits/advances
for expenses received by taxpayers not covered
by RMC 89-2012 ......................................... ............... ....... 551
Customs broker....................... ................................................... 553
Media advertising .......... ............ ........ ....... .............. .. .. ............. .. 553
Travel agency ......... .. ..... .. ......... ... ...... .... ... ............ ... ... ...... ... ..... 553
Hotel, restaurant, and caterer ....... ........... ................... ............. 553
Non-life insurance company. ..................................................... 557

xx
Dealer in securities 55 7
Security agencies ...:::: :::::::: ::: :: ::::: :: ::::: :::::: :: ::: ::: ::::: ::::: ::: :::::::::::: 558
Movie and Cinema Houses .. .. . .. .. . ... . .. . .. . .. .. . ... .. .. .. .. ... .. . . . .. .. . . .. . . .. 558

CHAPTER XX
RATES OF VAT

Output Tax ...................................................................... ;.......... 564

Input Tax . . . .. . . .. . .. . .. . . ... .. .. .. . . .. .. .. . .. . ... . .. . ... .. .. .. . .. . .. . .. . .. .. .. . .. . ... .. .. .. 564
Sale of goods . . . .. . . .. .. . . .. . .. . .. .. .. . .. . .. .. . .. .. . .. .. . . .. .. . .. .. .. . .. .. .. . . .. .. . .. .. . . .. . 564
Zero Percent VAT on sale of services........ ................................ 571
Distinctions between automatically zero-rated and
effectively zero-rated transactions.... ............................... 576
Foreign embassies in the Philippines........................ ............... 577

CHAPTERXXI
EXEMPT TRANSACTIONS

Tax due on transaction -VAT or OPT.................................... 584

Theater operators are exempt from VAT.................................. 586
Services subject to percentage taxes......................................... 586

CHAPTER XXII
INP UT TAXES

Categories of input taxes .......................................................... . 588

Sources of input tax credits ............................. ... ...................... . 588
Refund or Tax Credit of Excess Input Tax .............................. . 590
Enhanced VAT Refund System under
R.A. No. 10963 (TRAIN) ................................................... . 591
Categories of Refunds or Tax Credits ...................................... . 591
Zero-rated or effectively zero-rated sales ................................ . 592
Unused input tax after the cancellation of VAT
.
registrat'10n ........................................................ ............... . 594
Requirements for claims for refund or tax credit arising
from zero-rated or effectively zero-rated sales ................ . 595
Transitional input tax............................................................... . 598
Input taxes that may be refunded or credited ......................... . 600
Allocation of input tax .............................................................. . 602
Claim for refund or tax credit .................................................. . 603
Deadline for submission of claim ............................. ................ . 603
Changes introduced by R.A. 10963 (TRAIN) .................. . 603
Prior to R.A. No. 10963 (TRAIN) ..................................... . 604
Atlas Consolidated Mining Case (SC - 2007) ................. . 605

xxi
 Mirant Pagbilao Case (SC - 2008) ... ... .. ........... .......... ...... 606
Aichi Forging Company (SC - 2010) ......................... ....... 606
Taganito Mining Case (CTA EB - 2011).......................... 608
San Roque, Taganito, and Philex Cases (SC - 2013) ............... 609
Premature or late filing of the claim for refund
or credit .. ....... ....... . .... ... .. .. ... .. .. .. .... .. ...... ....... .... ... ...... 609
Prescriptive periods under Section l 12(A) and (C) ......... 613
Excess input VAT and excessively collected tax.............. 614
Effectivity and scope of Atlas, Mirant, and Aichi
doctrines......... ...... ............. .. ...................................... 616
Aichi Forging Company (SC - 2017) ................................ 617
Generally, the 120-day waiting period is both
mandatory and jurisdictional .......................................... 617

CHAPTER XXIII
COMPLIANCE REQUIREMENTS

Administrative requirements ................ ................................... . 623

Regis. t ra t·10n Requiremen
. t s ........................................... .......... .. 623
Separate or distinct establishment ......... ................. ,..... .. 623
Head Office ........................................................ ............... . 624
Branch ..................................... ..................................... . 624
Facility ...... .................................................................... . 624
Principal place of business .............................................. .. 624
Warehouse ........................................................................ . 624
VAT-registered person ..................................................... . 625
VAT-registrable person ................................................... .. 625
Secondary registration ..................................................... . 627
Mandatory Registration ........................................................... . 627
When to Register as Non-VAT Taxpayer................................. . 629
Optional VAT Registration .... .................................................. .. 630
VAT Books of Accounts .. ..... ..................................................... .. 632
. . R equrremen
I nvo1c1ng . t s ... ......................................................... . 633
Sales invoice v. Official receipt ..................................... ............ . 635
Principal v. Supplementary invoices and receipts ................. .. 635
Information in VAT invoice or official receipt ......................... . 637
Additional information in VAT invoice or receipt ....... ,.......... .. 639
Issuance of VAT Invoice or Receipt for Non-VAT
or Exempt Sales ................................................................ . 639
Penalties ..................................................................... 640
Consequences of issuing erroneous VAT invoice
or official receipt .............................................. ................. . 641
Filing of Return and Payment of Tax ..................................... .. 642

xxii
 642
VAT returns and declarations ............. ···· ·· ········ ··· ·········· ··
643
Payment of tax .......................................... .... ·...... ··············
645
Final Withholding Tax ............................................ ... '. .............. .

PARTV

DOCUMENTARY STAMP TAX

CHAPTER XXIV
Nature of the Documentary Stamp Tax

Taxable Documents.................................................................... 648

Exempt Documents................... ............................... ................. . 655
Effect of Failure to Stamp a Taxable Document...................... 656

PART VI

TAX REMEDIES

CHAPTERXXV
INTRODUCTION

BIR Organizational Structure .................................................. . 658

Agents in the Collection of National Internal Revenue
Taxes .......................... ....................................................... . 658
Powers and Duties of BIR......................................................... . 659
Power to interpret tax laws and to decide tax cases ...... . 660
Petitions involving validity or constitutionality
of law or regulations ....................................... . 661
Power to decide disputed assessments, refunds of
taxes, fees, or other charges, penalties ................... . 663
Power to examine books and other accounting records
and obtain information ........... ..... .................... ....... .. 663
Power to inquire into banks deposits of taxpayers ........ .. 665
Garnishment of bank deposits ...................... ........................... . 666
Power to assess and collect the correct
amount of tax ........................................................... . 669
Power not to allow withdrawal of any return,
statement, or declaration, although the
same may be amended ............................................. . 671
Power to delegate powers to subordinate officials .......... . 672
Definition of remedies ............................................................... . 672
Types of Remedies under the 1997 Tax Code ......... .·················
substantive 673
Remedies ...................... ........................................ . 673

xxiii
 CHAPTER XXVI
ADMINISTRATIVE REMEDIES
OF GOVERNMENT
Power to Assess.......................................................... ............ .... 677
Presumption of Correctness ................................................ ..... . 677
Basis of Assessment................................................................... 678
Question of Fact................................................................. 678
Question of Law.... ................ ........ ..................................... 678
Assessment Process..... ........................................ ................ ...... 679
Examination of books of accounts and other accounting
records of taxpayers by revenue officers to
determine correct tax liability ..... ............ ... .. ........... 679
Best evidence obtainable .. .. .. .. ... ... .. ..... ........ . .. .. ... .. ... .. ... . .. ... .. ... . 680
Net worth method of investigation........................................... 681
Preparation of tentative findings and holding
of informal conference .. ..... .. .. ....... ..... .. . ...... .. .. ... .. .. . .. 681
Administrative due process....................................................... 682
Principle of estoppel............ ... .. . ........ ..... ... .. .. ... .. ...... . ... .. ... .. ...... . 682
Power to allocate income and deduction among
affiliated taxpayers...................... ...................................... 683
Issuance of Preliminary Assessment Notice (PAN) ....... .......... 683
Reply .......................... ................................................................. 683
Tax amnesty as a defense............. ................................. .......... .. 685
Issuance of Formal Assessment Notice (FAN)
and letter of demand...... ........................................... 685
Legal effects of issuance of F AN/DL. ... .. .. .. .. .. ..... .. ........ .... 688
Filing of administrative protest by the taxpayer
against the assessment .... .. .. .... .. ..... .. . .. ... ... .. ...... ..... . 689
Submission of documentary evidence and arguments .... 690
Denial of protest by the Commissioner or his
authorized representative........................................ 691
Appeal by the taxpayer of the final decision of the
Commissioner or his authorized representative
on the disputed assessment to the Court
of Tax Appeals.................. ......................................... 691
Power to Collect Taxes.............. .................... ........................ ..... 691
Delinquency tax v. Deficiency tax .. .. .. .. ...... .. ...... .. ... .. .. .. ... 691
Distinction between remedies in the collection of
deficiency tax and delinquency tax.......................... 692
Administrative remedies of the government to
collect assessed truces................................................ 692
Tax lien ... ...... .... .. ... ..... ... . .... ...... ... .. .. ..... ..... .. .. ............... .. 693
Distraint, levy, or garnishment ..................... .,................. 695
Distraint of personal property ..................... .. ...... .. .. 695

xxiv
 Levy of real property .. .. .. .... .. .......... . .... ... .... ......... .... . 696
Sale of property................. ............................... ......... 697
Forfeiture....................... ........................ ............................ 699
Compromise and abatement............................................. 699
Compromise.............................................................. 699
Abatement .. ..... ... .. ... ...... ... .. .................. ... .. ..... .. ............. .... 706
Penalties and fines ... ................ ... ...... ... ..... .. ....... ... .... ...... .. 707

CHAPTER XXVII
JUDICIAL REMEDIES OF GOVERNMENT

c·1v1·1 action
· ...... ... ....................................................................... . 709
Jurisdiction over civil actions ................................................... . 710
When collectibility of tax liability arises ................. ................ . 710
Self.assessed tax shown in the return was not paid
within the date prescribed by law ........................... . 710
Final assessment is not protested administratively
within 30 days from date of receipt ....................... .. 711
Non.compliance with the condition laid in the
approval of protest ........................................... ........ . 711
Failure to file a timely appeal to the CTA on the final
decision of the Commissioner or his authorized
representative on the disputed assessment ....... ... . 713
When to go to court? .......................... .................... ............... .... .. 714
Who approves the filing of civil action? ................................... . 715
Respondents in a civil action for the collection of tax ............ . 715
. . al . 716
Cnm1n actions ....................................................... ............. .... .
Under the 1997 Tax Code ..................................... ........... . 716
Attempt to evade or defeat tax ................................ . 716
Failure to file return, supply correct and
accurate information, pay tax, withhold and
remit tax, and refund excess taxes withheld
on compensation .............................................. . 717
Important principles on criminal actions ......................... 720
Under the Tariff and Customs Code ............................... . 733
Filing of criminal action under the Tax Code during
the pendency of protest ......................... .................. . 735
Persons liable for criminal prosecution ........................... . 740

CHAPTER XXVIII
CML PENALTIES

Surcharges ............................. ············································.·,...... 7 42

Deficiency and delinquency interests ··............ ............ ............. 7 45
Compromise penalties ....... ···...... ··· ·......... ·· ······ ········ ·........... ... . .. 7 48
XXV
 CHAPTER XXIX
REMEDIES OF TAXPAYERS

Administrative remedies .................. ........................................ . 750

Judicial remedies ...................................... ........................ ........ . 750
Substantive remedies .............. ................................................. . 752
Procedural remedies .................................................. ............... . 759
Types of taxes .......................... ......................................... ...... .. 767
Self-assessing taxes which do not require issuance
of assessment ......... .................................................. . 767
Taxes which require assessment to establish liability .... 767
Tax period of a taxpayer is t erminated .................. . 767
Deficiency tax liability arising from a tax
audit conducted by the BIR ..... ...................... .. 768
Tax lien ................................................................. . 769
. Iv1ng
D1sso . corpora · t10n
· ............................................. . 769

CHAPTER XXX
ASSESSMENT AND PROTEST

What is an assessment? .................................................... ... .. ... . 770

Essential requirements for valid assessment .................. .... .. .. 770
Assessment based on Presumption .................. ............ ............ . 772
Issuance of LA for discrepancy noted in LN ...... ....... ............... . 780
Issuance of valid LA .............................................. ............ ........ . 781
Forms of assessment ......... ................................. ...................... .. 782
Significance of assessment ....................................................... . 783
When must an assessment be made? .......................... ............ . 784
Basis of assessment ................ .......................................... . 785
When is a tax assessment made or deemed made? .................. 787
Issue date ......... ...... ........ ................... ....... ........................ .. 787
Date of service or mailing ... ....................................... ..... .. 787
Date of receipt.......................... ............ .................. ........... . 789
Who may sign. an assessment notice . ?........................... ............. 789
Revised assessment ..................... .. ................. .. ......... ........... .... . 789
Forms of protest ........................................ .. .... ......................... .. 791
When to file administrative protest? ...................................... .. 796
Administrative appeal to the Commissioner ........................... . 800
Motion for reconsideration on the Final Decision
on Disputed Assessment ................. .. .................. .... . 801
Meaning of CIR "decisions" appealable to CTA ........ ...... . 802
Denial of protest .. ................ ............................. ............... .......... . 804
Direct denial of protest ............... .. ................... ... ............... 804

xxvi
 Indirect Denial of Protest................................................. · 806
Modes of Service of Notice......................................................... 812
Personal service................................................ ................ 812
Substituted service................................ ........................... 812
Mail ···························································· ·················· ····· 813
Constructive service......................................................... 813

CHAPTER XXXI
PRESCRIPTION

Purpose of Statute of Limitations ................................. ........... . 815

Tax Code provisions prevail over Civil Code
provisions on prescription ............. ................................... . 816
Construction of law on prescription ............. ............................ . 816
Prescriptive periods under the Tax Code ................................ . 819
Period to assess the tax ..................................................... 820
Period to collect the assessed tax ..................................... 823
. a tax return?...................................... .... ........................
What is 824
Effect of filing an amended return .... ................ ........ .. .... . 825
False or fraudulent tax return ............................. .................... . 827
When must fraud be raised by government? ....................... ..... 832
Consequence of failure to prove fraud ..................................... . 833
Prescription ........................................................... .. ........ .. ......... 835
.
When must issue on prescription. . be raise ·d?............................ . 836
Waiver of the defense of prescription ....................................... . 836
Prescription in relation to acts or delays of taxpayer ............. . 843
Exception to the requirement of faithful compliance
for a valid waiver ............................ ................................. . 844
Effect of fraud assessments which are final
and executory ............................... ............... ........ .............. . 846
Extension of the prescriptive period ..................... ..... .............. . 846
Rules in cases of more than one waiver signed .......... ..... .. ...... . 850
Interruption of the prescriptive period ......... ......................... ... 852
Prescriptive period is not suspended ............................ .... ....... . 854
Request for Reinvestigation is granted by BIR ............. .. 857
Period to file criminal action ............................................ . 859

CHAPTER XXXII
TAX CREDIT OR REFUND

All national internal revenue taxes, except VAT........... .......... 862

Value Added Tax (VAT) ... ······················ .. ····· .. ······· ········ .. ·····..... 864
Tax Credit v. Tax Dedu ction .. ·· ·.. ··.. ···.. ········· ······ ··· ·· ···· .. ··......... 868

xxvii
 Options of Taxpayers for Excess Quarterly Tax
Payments and Creditable Withholding Taxes................. 872
Option to carry over excess quarterly income tax is
irrevocable for that taxable year, once the taxpayer
has exercised such option under 1997 Tax Code............. 873
Election to file claim for refund is not final and prior

l verification and approval by CIR is required...................

Under Section 76, the exercise of an option is irrevocable
and a decision to carry-over and apply tax overpayment
continues until the overpayment has been fully
applied to tax liabilities ... .. ... .. ..... .. ... ... ... .. .. .. .. .. .. .... ..... ... ..
873

873
Refunds are in the nature of tax exemptions and are
construed strictly against the taxpayer claiming
the same .. ....... .... . .... ... ..... .......... ... ... ....... ... .......... .. ... ..... .. . 877
Principle of Exhaustion of Administrative Remedies.............. 883
Inaction of the Commissioner on a claim for refund or tax
credit must be construed as a denial of the claim .. ........ 884
Starting date for counting the two-year period........................ 885
Income Tax ......... .... ......... ..... ................ ..... .......... ... .... .. ...... .. 885
Withholding Tax ...................................... .................................. 891
Value-Added Tax............................................... ......................... 892
Interpretation of phrase "regardless of any supervening
cause that may have arisen after payment"............. ....... 894
Filing of written claim is mandatory ..... .. .... .. ... ......... ............... 896

PART VII

COURT OF TAX APPEALS

CHAPTER XXXIII
JURISDICTION

Creation of the Court of Tax Appeals .... ......... ....... ........ .. ..... ... . 903
Jurisdiction of the Court of Tax Appeals.................................. 904
Court of Tax Appeals En Banc .. .. ..... . .. ........ ... ... ... ... ....... ......... .. 904
Court of Tax Appeals in Divisions ................. ........................... 905
Exclusive original or appellate jurisdiction
to review by appeal................................................... 905
Exclusive jurisdiction over cases involving
criminal offenses ... ... ... .... ... .. .......... ......... .................. 906
Exclusive jurisdiction over tax collection cases ... ............ 907
Mediation in the Court of Tax Appeals....... .............................. 920
Authority to Enter into a Compromise Agreement
with the Taxpayer .. ............... ....... ........................ ........ .. ... 920

xxviii
 Commissioner of Internal Revenue.................................. 921
Bureau of Customs Commissioner................................... 923
Interim Guidelines for Implementing Mediation............ 923
Cases covered for Mediation in the CTA .................................. 925
Cases which may be referred to mediation...................... 925
Cases not covered by mediation........................................ 926

PART VIII
LOCAL GOVERNMENT CODE
CHAPTERXXXIV
LOCAL BUSINESS TAXES

Constitutional basis................................................................... 928

Local Government Code (R.A. 7160) ............ ........ .. .. ................. 929
Scope of Taxing Power of LGUs ...... ...... ..... ........ .. .. ..... .............. 930
Fundamental Principles ........... .. .... .......... .......... .......... .. ....... .. . . 931
Common Limitations................................................................. 932
Excise tax on petroleum products ...... .... ... .. ..... ....... ..... .. ..... .. . ... 934
Taxes that may be imposed by provinces ... ......... .. ... .... .. .. ........ 939
Press........................... ..... ............... .................................... 939
Franchise tax........................................................ ............. 939
Tax on quarry resources ............... ....... ...... .............. .... .. ....... .. ... 941
Tax on amusement places......................................................... 941
Taxes that may be imposed by municipalities and cities .. .. .... 942
Tax on business ........ .. ...... ........ ... ...... ...... ......... ... ........... . .. 942
Fees and charges............................................................... 942
Double Taxation..... .................................................................... 942
Accrual and payment of tax....................................................... 949
Situs of Taxes ...... .. .......... ... .............. ....... .. ...... ... .. .. .... ...... .. ...... 950
Principal office v. Branch........................................................... 951
Tax Ordinances .... ....... ..... .. .. ... .................... ....... .. ....... .. ............. 953
Effectivity of ordinances.................................................... 954
Appeal to Secretary of Justice.......................................... 955
Review of tax ordinances . .. ...... .. .. .. ..... .. .. .. ... .. ....... ..... ... ........ ..... 956
Appeal of ordinances to Secretary of Justice............................ 958
Remedies of Taxpayers Against Tax Ordinance.............. 959
Remedies for the collection of tax.............................................. 961
Prescriptive Periods.... ............................................................... 962
Period to assess local taxes and fees .. ... ...... .. .. ......... ........ 962
Period to Collect the Assessed Tax ...... ·... ·.. ···........................... 964
Remedies of Taxpayers ..................... ·.... ··· ··········· ·.. ··-.. ...... .... .... 965
Prior to assessment................................................. .. ........ 965

xxix
 After an assessment .................. ........................................ 965
Protest of assessment...................................... .................. 965
Injunction available against collection of taxes .. .... .. .... ... .... .... 965
Protest ................................................ ........... ... .......................... 967
Claim for refund......................................................................... 968

CHAPTER XXXV
REAL PROPERTY TAX

Nature of Real Property Tax ....................................... ..... ........ . 970

Accrual and Payment of Tax ............................................ ......... 970
Types of Real Property Tax ........................ .... ........ .................. . 971
Real Property Subject to Tax ................... ................................. . 974
BOT Agreement is not merely a Financing Scheme ................ 975
Real Property Tax on Machinery ....... .......... ...................... ...... . 977
Fundamental Principles ...................... ............... ............ ...... .... . 979
Classes of Real Property .......... ..................................... ............ . 982
Exemptions from Real Property Tax ....................................... . 983
Supreme Court decisions on real property taxes .................... . 986
Civil remedies for the collection of tax .......... ................... ....... .. 991
Power to subpoena does not include contempt power .............. 995
. . . d
Prescr1pt1ve per10 s ............................................................... ... . 995
Taxpayer's Remedies ......................................................... ....... . 996
Exhaustion of Administrative Remedies .................................. 997
No Motion for Reconsideration is Allowed Before
the Assessor's Office ....... ....... ............... ............................ . 998
Payment of tax under protest .................................................... 1002

PART IX

TARIFF AND CUSTOMS CODE

CHAPTER XXXVI
FUNDAMENTAL PRINCIPLES

Customs Duties..... .... ................ .................................. ............... 1007

Customs Modernization and Tariff Act (CMTA) ....... .............. . 1007
Imported Articles Subject to Duty................ ............................ 1008
Prohibited Importations and Exportations................. ............. 1008
Restricted Importations and Exportations ............................... 1009
Conditionally Free and/or Duty-Exempt Importations ..... " .. 1009
De Minimis Importations ...... ... .. .... ...... ... .. ...... ....... ...... .. ... ........ 1022
When importation begins and ends.......................................... 1024
Bases of Assessment of Duty..... ................ .............. ............. ..... 1025

XXX
 Entry, Withdrawal from Warehouse, for Consumption........... 1029
Due Process ................................................................. ............... 1032
Automatic Review...................................................................... 1033
Publication...................................................................................... 1035
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Claim for Refund. 1036
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Seizure and forfeiture proceedings ············H········no·················· 1036

Remedies under the Tariff and Customs Code......................... 1047
Smuggling.................................................................................... 1055
Refund of customs duties........................................................... 1060
ANNEX A- 2018 BAR EXAMINATIONS-
Taxation IAw . ...................................................................... 1061

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