PART 1 A. INTRODUCTION 1. 2. 3. 4. 1.

General Principles sources of tax laws Constitution NIRC Other Tax Statutes Revenue Regulations implementing NIRC 2. Constitutional Limitations SISON V. COMMISSIONER BP 135 was enacted amending sec 21 of the NIRC1. Petitioner Sison assails the a mendment claiming it would unduly discriminate against him by the imposition of higher tax rates upon his income from the exercise of his profession vis--vis aga inst those earning a fixed income. He claims that the measure is arbitrary and violative of both the equal protection and due process clauses of the constituti on. Held: The power to tax is inherent in sovereignty. However, it is not limitles s. The constitution sets forth its limitations. Adversely affecting as it does property rights, both the due process and the equal protection clauses may prop erly be invoked to invalidate a revenue measure. However, there has to be suffi cient basis to support such a claim. The due process clause may be invoked if t he measure is so arbitrary that it finds no support in the Constitution, as when it amounts to a confiscation of property or where it beyond the authority of th e taxing authority, or is not for a public purpose. As for equal protection, it is sufficient if the law operates equally and uniformly on all persons under th e same circumstances or that all persons must be treated in the same manner, the conditions not being different, both in privileges conferred and liabilities im posed. In the case of BP 135, there is ample distinction to adopt a gross system of inc ome taxation to compensation income. In such law, the basis for classification is the susceptibility of the income to the application of generalized rules remo ving all deductible items for all tax payers whithin the class and fixing a set of reduced tax rates to be applied to all of them. 3. Classification of Income taxpayers - Individual - Corporations or others with separate juridical personality B. TAX ON INDIVIDUALS 1. Kinds of Individual Taxpayers a) Individual Citizens- Taxable on all sources of income, whether within or without the Philippines b) Non-resident Citizen- Taxable only on income from within the Philippi nes c) Individual Resident Aliens- Taxable only on income from within the Ph ilippines d) Non- Resident Aliens-taxable only on income from within the Philippin es 2. Rates of Income Tax A uniform tax rate schedule is used to determine tax liability of reside nt citizens, of non-resident citizens, and of resident aliens, subject however t o the rule set under no.1 above. 5% Not over P10,000 Over P10,000 but not over P30,000 P500 plus 10% of the excess

Over Over Over Over Over

Over P10,000 P30,000 but not over P70.000 .P2,500 plus 15% on the excess P70,000 but not over P140,000 ...P8,500 plus 20% on excess P140,000 but not over P250,000 .P22,500plus 25% on excess P250,000 but not over P500,000 .P50,000plus 30% on excess 500,000 P125,000plus 32% of excess

For married individuals, both shall compute their individual income tax b ased on their own taxable income, provided however that if they do not derive in come purely from compensation, they shall file a return for the taxable year to include the income of both spouses. If is impractical to file just one return, each spouse may file a separate return but such will be consolidated by the Bure au.2 The taxable income subject to the rates above do not include the income d erived from passive income, capital gains from sales of shares of stock not trad ed in the stock exchange and capital gains from sale of real property, the tax r ates of which are as follows: Passive income Interest of Bank deposits, deposit substitutes, from trust funds .20% Interest received by a resident under the expanded foreign Currency deposit system3 .7.5% Interest from a long-term deposit or investment . tax exempt Interest from a preterminated long term deposit or investment With a remaining maturity of 4 to less than 5yrs ..5% 3 to less than 4yrs ..12% less than 3 yrs 20% Royalties except from books, etc ...20% Royalties from books, literary works and musical compositions ..10% Prizes up to P10,000 ..taxable as income Prizes exceeding P10,000 20% Winnings other than fr sweepstakes or lotto ...20% Sweepstakes and lotto winnings exempt Cash or property dividends, actually or constructively received fr a domestic corp, joint stock co., insurance or mutual fund co and regional operating headquarters of multinationals or on the share in the distributable net income after tax of a partnership of which he is a partner, or of an association, a joint account or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer 10% Capital Gains from shares Gains from shares of stocks sold, bartered or exchanged outside the Stock market if not more than P100,000 5% If over P100,000 .10% Capital Gains from the sale of Real Property Tax rate is now 6% based on the gross selling price or current fair marke t value, whichever is higher. However, if the sale is made to the government or any of its subdivisions or to any GOCC, it may be taxed as part of the taxpayer s income ( as set forth in the fist paragraph of this part), at the option of th e taxpayer. (RR 8-98) EXCEPTION: If the sale is of the taxpayers principal residence of a nat ural person and the proceeds are used to purchase a new home, it shall be exempt provided:

- a return is filed with the Bureau within 30 days from the sale stating the intention to avail of the exemption - Proceeds are used within 18 months from sale to purchase a new residence - The historical costs of the residence sold is carried over to the new home - Exemption can only be availed of once every 10 years - If proceeds are not fully utilized, portion of the gain is taxable using this formula: Taxable gain= gsp or fmv (whichever is higher) x unutilized portion/gs p Tax on Nonresident Aliens A nonresident alien engaged in trade or business in the Philippines shal l be taxed in the same manner as an individual citizen and a resident alien indi vidual on taxable income derived from sources within the Philippines. A nonresi dent alien is one who shall come to the Philippines and stay herein for an aggre gate period of more than 180 days during a calendar year. Tax on their passive income is likewise the same. The rate of tax on income from all sources within the Philippines of a n on resident alien NOT engaged in business here shall be 25%, except for gains fr om sale of real property and sale or exchange of stocks not thru the stock marke t. An alien individual employed by the regional or area headquarters and re gional operating headquarters established in the Philippines by multinational co mpanies shall be taxed 15% on his gross income PROVIDED the same tax treatment i s given to Filipinos employed in the same position by the same multinational com panies. Those aliens employed by off shore banking units4 established in the Phi lippines shall be taxed 15% on their gross income PROVIDED the same tax treatmen t is given to Filipinos employed and occupying the same positions as aliens empl oyed by these off shore banking units. Aliens who are permanent residents of a foreign country but are employed and assigned in the Phil by a foreign service contractor or subcontractor engag ed in petroleum operations in the Philippines shall be taxed 15% on their gross income PROVIDED that the same tax treatment is given to Filipinos occupying the same positiona as aliens by the petroluem contractor or subcontractor. 3. Exemptions Resident Citizens and Resident Aliens The following personal exemptions are allowed for the purpose of determi ning the tax to be imposed upon resident citizens and resident aliens: For single individual or married individual judicially decreed as Legally separated w/ no qualified dependents P20,000 For head of the family .P25,000 For each married individual P32,000 In the case of married individuals where only one s income, only such spouse shall be allowed the personal An additional exemption of P8,000 is also allowed exceeding four. However, only one spouse may claim such f married individuals who are legally separated, the one child/ children can claim such exemption. Non-resident citizen RR 1-79 Non resident citizens are allowed the following exemptions: Personal exemptions: Single or married but legally separated $2,000 Married or head of the family ...$4,000 spouse is deriving gros exemption for each dependent not exemption and in case o who has custody of the

Also, the total amount of the national income tax actually paid to the na tional government of the foreign country of his residence shall be deducted from his taxable income. Non-resident aliens engaged in business in the Philippines or in the exe rcise of a profession These persons are entitled to personal exemptions in the amount equal to the exemptions allowed in the income tax law of the country of which he is a ci tizen, to citizens of the Philippines not residing in that country. Such amount shall not exceed the amount fixed in Sec 36 of the NIRC. However, such nonresi dent alien shall file a true and accurate return of the total income received by him from all sources within the Philippines. 4. Definitions Head of the family- An unmarried or legally separated person with one or both pa rents, or with one or more brothers or sisters, or with one or more legitimate, recognized natural or legally adopted children living with and dependent upon hi m for their chief supposrt. Such brother, sister, or child shall not be more th an 21 yrs old, unmarried and not gainfully employed. If over 21 yrs of age but incapable of self support because of mental or physical defect, they shall not b e excluded. Dependent- Means a legitimate, illegitimate or legally adopted child chiefly d ependent upon and living with the taxpayer if such dependent is not more than 21 yrs old unmarried and not gainfully employed or if such dependent, regardless o f age, is incapable of self support because of mental or physical defect. 5. Change of status If the taxpayer should change his or her status during the taxable year, he may claim the corresponding additional exemptions in full for such year. If the taxpayer dies during the taxable year, his estate may claim the p ersonal and additional exemptions for himself and his dependents as if he died a t the close of such year. If the spouse or any of his dependents dies or if any of such dependents marries, becomes 21 or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if no such change had occurred. 6. Premium payments on health and/or hospitalization insurance Premium payments of such nature paid during the taxable year, ing P2,400 per family OR P200 a month paid during the taxable year by er for himself, incld his family, shall be allowed as deductions from provided that the gross income of the family does not exceed P250,000 xable year. For married couples, only the spouse claiming deductions pendents may avail of such exemption. PART 2 C. Tax On Corporations Commissioner v. Batangas Tayabas Bus Co. (102 P 822) Issue: W/n the 2 transportation companies are liable to payment of income tax as a corporation on the theory that the Joint Emergency Operation organized & oper ated by them is a corporation w/in the meaning of the Revised Internal Revenue C ode. Held:Yes, liable as a corporation. In the present case, the 2 companies contributed money to a common fund t o pay the sole gen. manager, the accounts & office personnel attached to the off not the his for for exceed taxpay gross the ta the de

ice of said manager, as well as for maintenance & operation of a common maintena nce & repair shop. Said common fund was also used to buy spare parts, & equipme nt for both companies, including tires. Said common fund was also used to pay a ll the salaries of the personnel of both companies, & at the end of each year, t he gross income receipts of both companies were merged, & after deducting there from the gross expenses of the 2 companies, also merged, the net income was dete rmined & divided equally between them, wholly disregarding the expenses incurred in the maintenance & operation of each company & of the individual income of sa id companies. From the standpoint of income tax law, this procedure & practice of deter mining the net income of each company was arbitrary & unwarranted, disregarding as it did the real facts of the case. Considering that Batangas Transportation & the Laguna Bus operated different lines, under different franchises, w/ differe nt equipment & personnel, it cannot possibly be true & correct to say that at th e end of each year, the gross receipts & income & the gross expenses of the 2 c ompanies are exactly the same for purposes of the payment of income tax. Theref ore, the Joint Emergency Operation in this case is a corporation under the Inte rnal Revenue Code & is liable to income tax as a corporation. Ona vs CIR (25 Scra 74) Ruling:For tax purposes, the co-ownership of inherited properties is automatical ly converted into an unregistered partnership the moment the said common proper ties are used as a common fund with intent to produce profits for the heirs i n proportion to their respective shares in the inheritance. From the moment of such partition, the heirs are entitled already to their respective definite shar es of the estate & the incomes thereof, for each of them to manage & dispose of as exclusively his own w/o intervention of the heirs, & accordingly, he becomes liable individually for all taxes in connection therewith. If after such partit ion, he allows his share to be held in common with his co-heirs under a single m anagement to be used with the intent of making profit thereby in proportion to h is share, there can be no doubt that even if no document or instrument were exec uted for the purpose, for tax purposes, at least, an unregistered partnership is formed. For purposes of tax on corporations, the NIRC, includes partnerships-wit h the exception of only duly registered gen. co-partnerships within the purview of the term corporation. BIR Ruling No. 317-92 Ayala Land, Inc.(ALI) & Appleyard Properties, Inc(API) entered into a Memorandum of Agreement (MOA) for the construction of the 6750 Bldg.. Pursuant to the MOA , they will contribute equal amounts to the construction costs & ALI will own 60 % of the building while API will own 40%, while there is separate ownership, the y will share common area expenses, real estate taxes, etc in the same proportion . ALI & API now propose to enter into a another agreement, a Joint Venture Agre ement(JVA). Under the JVA,both ALI & API will contribute money as additional wo rking capital & ALI will be appointed as manager & will be responsible for leasi ng the floors. HELD: The MOA has not by itself created a taxable joint venture. However , t he joint venture to be subsequently entered into by & between ALI & API will cre ate a joint venture subject to tax. Obillos Jr. vs CIR This is about the tax liability of 4 brothers & sisters who sold 2 parcels of la nd which they had acquired from their father. In 1973, Jose Obillos Sr bought 2 parcels of land from Ortigas & Co & transferred his rights to his 4 children to enable them to build their residences. In 1974, the 4 children resold the lots to Walled City Securities Corp & earned profit. CIR assessed the 4 children wit h corporate income tax. HELD:It is error to hold that petitioners(Obillos) have formed a taxable unregis tered partnership simply because they contributed in buying the lots, resold the

same & divided the profit among themselves. They are simply co-owners. They w ere not engaged in any joint venture by reason of the isolated transaction. The original purpose was to divide the lots for residential purposes. The division of the profit was merely incidental to the dissolution of the co-ownership. Dept Order # 149-95 Non-stock, nonprofit educational institutions are exempt from taxes on all their revenues and assets used actually, directly, and exclusively for educational pu rposes. They shall, however be subject to internal revenue taxes on income from trade, business or other activity the conduct of which is not related to the ex ercise or performance by such educational institution of its educational purpose or function. BOAC v. CIR BOAC maintained a general sales agent in the Phil. The gen sales agent was engag ed in selling & issuing tickets, breaking down the whole trip into series of tri ps, receiving fare from the whole trip & allocating to the various airline compa nies the services rendered. In fact, the regular sales of ticket, its main acti vity is the very lifeblood of the airline business, the generation of sales bein g the paramount objective. There should be no doubt that BOAC was engaged in bu siness in the Phil thru a local agent. It is a resident foreign corporation sub ject to tax upon its total net income from all sources w/in the Phil. Source of income is the property, activity or service that produced the income. For the source of the income to be considered as coming from the Phil, it is sufficient that the income is derived from activity within the Phil. In B OAC s case, the sale of tickets in the Phil is the activity that produces the inco me. The tickets exchanged hands here & payments for fares were also made here i n Phil currency. The situs of the source of payment is the Phil. The absence o f the flight operations to & from the Phil is not determinative of the source of income or the situs of income taxation. CIR v Procter & Gamble(including MR) Please read the originals. This is a very important case, especially on the comp utation part. CIR v Wander Phils. (160 Scra 573) Wander Phils. Inc is a domestic corporation, a wholly-owned subsidiary of Glaro S.A. Ltd. A Swiss corp not engaged in trade or business in the Phil. In 1975&19 76, Wander remitted to Glaro dividends on which 35% was withheld & paid to the B IR. In 1977, Wander filed a claim for refund contending it is liable only to 15 % withholding tax in accordance with sec 24(b)(1) of the Tax Code. Under the said provision, dividends received from a domestic corporation liable to tax shall be 15% of the dividends received, subject to the condition that the country in which the non-resident foreign corporation is domiciled shal l allow a credit against the tax due from the non-resident foreign corporation t axes deemed to have been paid in the Philippines equivalent to 20% w/c represent s the difference between the regular tax of 35% on corporations & the tax of 15% on dividends. HELD: In the instant case, Switzerland did not impose any tax on the dividends received by Glaro. The fact that Switzerland did not impose any tax on the di vidends received by Glaro from the Philippines should be considered as a full sa tisfaction of the given condition. Wander liable only to withholding tax rate o f 15% & is therefore entitled to refund. As to the contention of the Commissioner that Wander is but a withholding agent of the government & therefore can not claim reimbursement of the alleged overpaid taxes is UNTENABLE. Wander is a wholly owned subsidiary of Glaro. The fact that it became a withholding agent of the government, which was not by cho ice, cannot be considered as an abdication of its responsibility to its mother c ompany. As the Philippine counterpart, Wander is the proper entity who should c laim for the refund or credit of overpaid withholding tax on dividends paid or r

emitted by Glaro. PART 3 PART 4 A. Inclusions and Exclusions from Gross Income Sec. 32 (see Code) Secs. 39-60 Revenue Regulations No. 2 (see RR No. 2) 1. Definition of Gross Income Sec. 32 (see Code) 2. Exclusions from Gross Income Sec. 32 (B) (see Code) Secs. 61-64 Revenue Regs. No. 2 (see RR No. 2) a. REPUBLIC ACT NO. 4917: AN ACT PROVIDING THAT RETIREMENT BENEFITS OF EMPLOYEES OF PRIVATE FIRMS SHALL NOT BE SUBJECT TO ATTACHMENT, LEVY, EXECUTI ON, OR ANY TAX WHATSOEVER The retirement benefits received by officials and employees of private firms, wh ether individual or corporate, in accordance with a reasonable private benefit p lan maintained by the employer shall be exempt from all taxes and shall not be l iable to attachment, garnishment, levy or seizure by or under any legal or equit able process whatsoever except to pay a debt of the official or employee concern ed to the private benefit plan or that arising from liability imposed in a crimi nal action: Provided, That the retiring official or employee has been in the ser vice of the same employer for at least 10 yrs and is not less than 50 yrs of age at the time of his retirement: Provided, further, That the benefits granted und er this Act shall be availed of by an official or employee only once: Provided, finally, That in case of separation of an official or employee from the service of the employer due to death, sickness or other physical disability or for any c ause beyond the control of the said official or employee, any amount received by him or by his heirs from the employer as a consequence of such separation shall likewise be exempt as hereinabove provided. The term "reasonable private benefit plan" means a pension, gratuity, stock bonu s or profit sharing plan maintained by an employer for the benefit of some or al l of his officials and employees, wherein contributions are made by such employe r or officials and employees, or both, for the purpose of distributing to such o fficials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the co rpus or income of the fund be used for, or be diverted to, any purpose other tha n for the exclusive benefit of the said officials and employees. (June 17, 1967 ) b. REPUBLIC ACT NO. 7641: AN ACT AMENDING ARTICLE 287 OF PRESIDENTI AL DECREE NO. 442, AS AMENDED, OTHERWISE KNOWN AS THE LABOR CODE OF THE PHILIPPI NES, BY PROVIDING FOR RETIREMENT PAY TO QUALIFIED PRIVATE SECTOR EMPLOYEES IN TH E ABSENCE OF ANY RETIREMENT PLAN IN THE ESTABLISHMENT Art. 287 of the Labor Code is hereby amended to read as follows: "Art. 287. Retirement. Any employee may be retired upon reaching the retirement age establi shed in the collective bargaining agreement or other applicable employment contr act. In case of retirement, the employee shall be entitled to receive such retirement benefits as he may have earned under existing laws and any collective bargaining agreement and other agreements: Provided, however, That an employee's retiremen t benefits under any collective bargaining and other agreements shall not be les s than those provided herein. "In the absence of a retirement plan or agreement providing for retirement benef its of employees in the establishment, an employee upon reaching the age of 60 y ears or more, but not beyond 65 years which is hereby declared the compulsory re tirement age, who has served at least five (5) years in the said establishment,

may retire and shall be entitled to retirement pay equivalent to at least one-ha lf (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one whole year. "Unless the parties provide for broader inclusions, the term one-half (1/2) mont h salary shall mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay and the cash equivalent of not more than five (5) days of service incentive leaves. "Retail, service and agricultural establishments or operations employing not mor e than (10) employees or workers are exempted from the coverage of this provisio n. (December 9, 1992) 3. Exclusion of 13th Month Pay

a. REPUBLIC ACT NO. 7833: AN ACT TO EXCLUDE THE BENEFITS MANDATED P URSUANT TO RA NO. 6686 AND PD NO. 851, AS AMENDED, AND OTHER BENEFITS FROM THE C OMPUTATION OF GROSS COMPENSATION INCOME FOR PURPOSES OF DETERMINING TAXABLE COMP ENSATION INCOME, AMENDING FOR THE PURPOSE SECTION 28(B)(8) OF THE NIRC, AS AMEND ED A new sub-paragraph to be known as sub-paragraph (F) is hereby inserted at the e nd of Section 28(b)(8) of the National Internal Revenue Code, as amended, which shall read as follows: "(F) 13th month pay and other benefits. "(i) Benefits received by officials and employees of the national and local g overnments pursuant to Republic Act No. 6686; "(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Presidential Memorandum Order No. 28 dated August 13, 1986 (requir ing all employers to pay all their rank-and-file employees a 13th month pay not later than December 24 of every year); (iii) Benefits received by officials and employees not covered by P.D. No. 851 , as amended; and (iv) Other benefits such as productivity incentives and Christmas bonus in an amount not exceeding P12,000.00 which shall be integrated in the 13th month pay solely for purposes of R.A. No. 7833. Provided, however, that the exclusion shall only apply to the first P30,000.00. b. REVENUE REGULATIONS NO. 2-95: Implementing Republic Act No. 783 3, An Act to Exclude the Benefits Mandated Pursuant to Republic Act No. 6686 and Presidential Decree No. 851, as Amended, and other Benefits from the Computatio n of Gross Compensation Income for the Purposes of Determining Taxable Compensat ion Income, Amending for the Purpose Section 28 (b) (8) of the National Internal Revenue Code, as Amended. (January 3, 1995) Scope. Pursuant to Section 245 and 72 of the NIRC, as amended, in relation to Se ction 3 of Republic Act No. 7833, these Regulations are hereby promulgated to im plement the provisions of Section 28 (b) (9) (6) of the NIRC, as amended, exclud ing from the computation of gross compensation income, for purposes of determini ng taxable compensation income, the 13th month pay and other benefits. Definition of Terms. For purposes of these Regulations, the following definition s of words and phrases are hereby adopted: x x x b) "Exclusions" shall mean the total benefits which are not included in the computation of gross compensation income for purposes of determining taxable co mpensation income and are, therefore, exempt from the withholding tax on wages. c) "Gross compensation income" means all remunerations for services perform ed by an employee for his employer, whether paid in cash or in kind, unless spec ifically excluded under Secs. 27 and 28 of the NIRC, as amended. x x x e) "Other benefits" refer to all benefits other than the 13th month pay, su ch as, the annual Christmas bonus given by private offices, 14th month pay, mid-

year productivity incentive bonus, gifts in cash or in kind and other similar be nefits received by an official or employee for one calendar year in an amount no t exceeding Twelve Thousand Pesos (P12,000.00) as maximum limit. x x x g) "13th month pay" refers to the mandatory one month basic salary of an of ficial or employee of the National Government, Local Government Units, agencies and instrumentalities, including government-owned and -controlled corporations, and of private offices received after the 12th month pay. x x x Benefits Exempted from Income Tax. For purposes of determining the taxable compe nsation income, the following benefits shall be excluded from the gross compensa tion income, viz: a) 13th month pay equivalent to the mandatory 1 mo. basic salary of officia ls and employees of the Government (whether national or local), including goccs, and of private offices received after the 12th month pay beginning CY 1994; and b) Other benefits, such as, Christmas bonus given by, private offices to th eir officials and employees, productivity incentives bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature actually received by of ficials and employees of both Government and private offices in an amount not ex ceeding P12,000.00 for 1 calendar year. The above-stated exclusions [(a) and (b)] shall cover benefits paid or accrued b eginning January 1, 1994 but shall be limited only to an amount not exceeding P1 2,000.00 in the case of the "other benefits" contemplated under paragraph (b) ab ove, provided, however, that when added to the 13th month pay, the total amount of tax exempt benefits shall not exceed P30,000.00. (for illustrations see the original revenue regulations) Refund/Credit of Taxes Withheld from employees Separated from Employment. a) An employee separate from the service of his previous employer but is presently emp loyed by another employer shall be refunded/credited the taxes withheld on his e xempt 13th month pay and other benefits by his present employer. (b) An employee who has been separated from a previous employer but has no p resent employment shall claim his refund of excess tax withheld on his 13th mont h pay and other benefits by filing with the BIR a refundable income tax return f or CY 1994, provided that the refundable ITR for 1994 reflects the taxes withhel d on his 13th month pay and other benefits. Concurrent Multiple Employments. An employee is employed by two or more employer s at the same time during the taxable year shall be refunded/credited the taxes withheld on his 13th month pay and "other benefits" by his main employer, e.g., the employer paying the highest wage/salary. The said main employer shall determ ine the maximum allowable 13th month pay and "other benefits" received from both main and secondary employer/s in annualizing the taxable compensation income at year-end adjustment. For this purpose, the secondary employer/s shall furnish t he main employer a certification as to the amount of the 13th month pay and othe r benefits received by the employee. x x x Transitory Provision. Employers who have already given the 13th month pay and "o ther benefits" to their employees and had withheld and remitted the tax due ther eon prior to the approval of R.A. No. 7833 on December 8, 1994 shall, in annuali zing and computing the annual income and the tax due from their employees, exclu de the 13th month pay and "other benefits", which shall be limited only to an am ount not exceeding P12,000.00 in the case of the "other benefits" contemplated u nder Sec. 3, par, (b) of these Regulations and provided, further, that when the amount of these said "other benefits" is added to the "13th month pay" contempla ted under Sec. 3, par. (a) also of these Regulations, the total amount of tax ex empt benefits shall not exceed P30,000.00. c. REVENUE MEMORANDUM CIRCULAR NO. 36-94: Publishing the full text

of Republic Act No. 7833 - an Act excluding the benefits mandated pursuant to R epublic Act No. 6686 and Presidential Decree No. 851, as amended, and other bene fits from the computation of gross compensation income for purposes of determini ng taxable compensation income, amending for the purpose Section 28 (b) (8) of t he National Internal Revenue Code, as amended. (December 14, 1994 ) SALIENT FEATURES of RA 7833 1. Before the amendment of Section 28 (b) (8) of the NIRC by R.A. No. 7833, the benefits received by officials and employees of both public (national and l ocal) and private offices, viz: (F) 13th month pay and other benefits. a. Annual Christmas bonus equivalent to one (1) month basic salary and addi tional cash gift of One Thousand Pesos (P1,000.00) received by National and Loca l Government officials and employees starting CY 1988 in accordance with R.A. No . 6686; b. Benefits received by employees pursuant to P.D. No. 851 , as amended by Presidential Memorandum Order No. 28 dated August 13, 1986 requiring all employe rs to pay all their rank-and-file employees a 13th month pay not later than Dece mber 24 of every year; c. Benefits received by officials and employees not covered by P.D. No. 851 , as amended; and d. Other benefits such as productivity incentives and Christmas bonus in an amount not exceeding Twelve Thousand Pesos (P12,000.00) which shall be integrat ed in the 13th month pay solely for purposes of R.A. No. 7833. were taxable compensation income under Section 21(a) in relation to Section 72, both of the NIRC, as amended, subject to withholding tax under Revenue Regulatio ns No. 6-82, as amended by Revenue Regulations No. 4-93. 2. Under sub-paragraph (F) of Section 28 (b) (8) of the NIRC, as amended by R.A. No. 7833, the 13th month pay and other benefits aforestated, received by o fficials and employees of the National Government, LGUs and agencies, including GOCCs, as well as by officials and employees of private corporations and entitie s, are exempt from income tax, and consequently from the withholding tax on wage s. Provided, that the exclusions/exemptions from gross compensation income shall cover the 13th month pay and "other benefits" in the aggregate amount not excee ding P30,000 received by the officials and employees paid or accrued beginning J anuary 1, 1994. (April 17, 1998). d. REVENUE REGULATIONS No. 02-98

SECTION 2.78.1. Withholding of Income Tax on Compensation Income. x x x (B) Exemptions from withholding tax on compensation. The following income pa yments are exempted from the requirement of withholding tax on compensation: x x x (11) Thirteenth (13th ) month pay and other benefits. (a) Thirteenth (13th) month pay equivalent to the mandatory one (1) month ba sic salary of officials and employees of the government, (whether national or lo cal), including government-owned or controlled corporations, and or private offi ces received after the twelfth (12th) month pay; and (b) Other benefits such as Christmas bonus, productivity incentive bonus, lo yalty award, gifts in cash or in kind and other benefits of similar nature actua lly received by officials and employees of both government and private offices. The above stated exclusions (a) and (b) shall cover benefits paid or accrued dur ing the year provided that the total amount shall not exceed thirty thousand pes os (P30,000.00) which may be increased through rules and regulations issued by t he Secretary of Finance, upon recommendation of the Commissioner, after consider ing, among others, the effect on the same of the inflation rate at the end of th e taxable year. (see original for further info.)

e. REPUBLIC ACT NO. 7459: Investors and Invention Incentives Act o f the Philippines Tax Incentives. Inventors, as certified by the Filipino Inventors Society and du ly confirmed by the Screening Committee, shall be exempt from payment of license fees, permit fees and other business taxes in the development of their particul ar inventions. This is an exception to the taxing power of the local government units. The certification shall state that the manufacture of the invention is ma de on a commercial scale. Inventors shall exempt from paying any fees involved in their application for registration of their inventions. Tax Exemption. To promote, encourage, develop and accelerate commercialization o f technologies developed by local researchers or adapted locally from foreign so urces including inventions, any income derived from these technologies shall be exempted from all kinds of taxes during the first ten (10) years from the date o f the first sale, subject to the rules and regulations of the Department of Fina nce: Provided, that this tax exemption privilege pertaining to invention shall b e extended to the legal heir or assignee upon the death of the inventor. The tec hnologies, their manufacture or sale, shall also be exempt from payment of licen se, permit fees, customs duties and charges on imports. (Approved: April 28, 199 2) Inventor refers to, for purpose of this Act, any patented machine, product, proc ess including implements or tools and other related gadgets of invention, utilit y model and industrial design patents. Investor refers to the patentee/s, heir/s, assignment/s, of an Invention letters patent, Utility Model letters or Industrial Design letters patent. B. Items of Gross Income Sec. 32 (see Code) 1. Compensation for personal services a. In money b. In kind i. Convenience of the employer rule

Henderson vs. Collector (1 SCRA 649) Facts: Arthur Henderson is the President of the American Intl. Underwriters for the Phils. w/c represents a group of American cos. engaged in the business of g eneral insurance (exc. in life insurance). he receives a basic annual salary of P30,000 and allowance for house rentals and utilities. Although he and his wif e are childless and are only two in the family, they lived in a large apartment provided for by his employer. As company president, he and his wife had to ente rtain and put up houseguests for the company. The BIR now seeks to collect taxe s on the allowances for rental and utilities expenses. Held: The exigencies of Henderson's high executive position, not to mention so cial standing, demanded and compelled them to live in a more spacious and preten tious quarters like the ones they had occupied. Because they had to entertain a nd put up houseguests, the employer had to grant him allowances for rental and u tilities in addition to his annual basic salary to take care of those expenses f or rental and utilities in excess of their personal needs. Hence, the fact that the taxpayers had to live or did not have to live in the apartment chosen by th e employer is of no moment, for no part of the allowance redounded to the benefi t of the Hendersons. Neither was there an amount retained by them. Their bills for rental were paid directly by the employer to the creditor. ii.a. (A) REVENUE REGULATIONS NO. 02-98 In general, the term "compensation" means a

Compensation Income Defined.

ll remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. The name by which the remuneration for services is designated is immaterial. Thu s, salaries, wages, emoluments and honoraria, allowances, commissions (e.g. tran sportation, representation, entertainment and the like); fees including director 's fees, if the director is, at the same time, an employee of the employer/corpo ration; taxable bonuses and fringe benefits except those which are subject to th e fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. The basis upon which the remuneration is paid is immaterial in determining wheth er 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. Remuneration for services constitutes compensation even if the relationship of e mployer and employee does not exist any longer at the time when payment is made between the person in whose employ the services had been performed and the indiv idual who performed them. (1) Compensation paid in kind. Compensation may be paid in money or in some medium other than money, as for example, stocks, bonds or other forms of propert y. If services are paid for in a medium other than money, the fair market value of the thing taken in payment is the amount to be included as compensation subje ct to withholding. If the services are rendered at a stipulated price, in the ab sence of evidence to the contrary, such price will be presumed to be the fair ma rket value of the remuneration received. If a corporation transfers to its emplo yees its own stock as remuneration for services rendered by the employee, the am ount of such remuneration is the fair market value of the stock at the time the services were rendered. (2) Living quarters or meals. If a person receives a salary as remuneration for services rendered, and in addition thereto, living quarters or meals are pro vided, the value to such person of the quarters and meals so furnished shall be added to the remuneration paid for the purpose of determining the amount of comp ensation subject to withholding. However, if living quarters or meals are furnis hed to an employee for the convenience of the employer, the value thereof need n ot be included as part of compensation income. (3) Facilities and privileges of a relatively small value. Ordinarily, facil ities and privileges (such as entertainment, medical services, or so called "cou rtesy" discounts on purchases), furnished or offered by an employer to his emplo yees generally, are not considered as compensation subject to withholding if suc h facilities or privileges are of relatively small value and are offered or furn ished by the employer merely as a means of promoting the health, goodwill, conte ntment, or efficiency of his employees. Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be with held is available for payment to the Commissioner. (4) Tips and gratuities. Tips or gratuities paid directly to an employee by a customer of the employer which are not accounted for by the employee to the em ployer are considered as taxable income but not subject to withholding. (5) Pensions, retirement and separation pay. Pensions, retirement and separa tion pay constitute compensation subject to withholding, except those provided u nder Subsection B of this section. (6) Fixed or variable transportation, representation and other allowances (a) IN GENERAL, fixed or variable transportation, representation and other a llowances which are received by a public officer or employee or officer or emplo yee of a private entity, in addition to the regular compensation fixed for his p osition or office, is compensation subject to withholding. (b) Any amount paid specifically, either as advances or reimbursements for t ravelling, representation and other bonafide ordinary and necessary expenses inc urred or reasonably expected to be incurred by the employee in the performance o f his duties are not compensation subject to withholding, if the following condi

tions are satisfied: (i) It is for ordinary and necessary travelling and representation or entert ainment expenses paid or incurred by the employee in the pursuit of the trade, b usiness or profession; and (ii) The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each categor y of expenses pursuant to Sec. 34 of the Code. The excess of actual expenses ove r advances made shall constitute taxable income if such amount is not returned t o the employer. Reasonable amounts of reimbursements/ advances for travelling an d entertainment expenses which are pre-computed on a daily basis and are paid to an employee while he is on an assignment or duty need not be subject to the req uirement of substantiation and to withholding. (7) Vacation and sick leave allowances. Amounts of "vacation allowances or s ick leave credits" which are paid to an employee constitute compensation. Thus, the salary of an employee on vacation or on sick leave, which are paid notwithst anding his absence from work, constitutes compensation. However, the monetized v alue of unutilized vacation leave credits of ten (10) days or less which were pa id to the employee during the year are not subject to income tax and to the with holding tax. (8) Deductions made by employer from compensation of employee. Any amount wh ich is required by law to be deducted by the employer from the compensation of a n employee including the withheld tax is considered as part of the employee's co mpensation and is deemed to be paid to the employee as compensation at the time the deduction is made. (9) Remuneration for services as employee of a nonresident alien individual or foreign entity. The term "compensation" includes remuneration for services pe rformed by an employee of a nonresident alien individual, foreign partnership or foreign corporation, whether or not such alien individual or foreign entity is engaged in trade or business within the Philippines. Any person paying compensat ion on behalf of a non-resident alien individual, foreign partnership, or foreig n corporation which is not engaged in trade or business within the Philippines i s subject to all provisions of law and regulations applicable to an employer. (10) Compensation for services performed outside the Philippines. Remuneratio n for services performed outside the Philippines by a resident citizen for a dom estic or a resident foreign corporation or partnership, or for a non-resident co rporation or partnership, or for a non-resident individual not engaged in trade or business in the Philippines shall be treated as compensation which is subject to tax. A non-resident citizen as defined in these regulations is taxable only on income derived from sources within the Philippines. In general, the situs of the incom e whether within or without the Philippines, is determined by the place where th e service is rendered. ii.b. REVENUE REGULATION NO. 03-98: Implementing Sec tion 33 of the National Internal Revenue Code, as Amended by Republic Act No. 84 24 Relative to the Special Treatment of Fringe Benefits (January 1, 1998) SPECIAL TREATMENT OF FRINGE BENEFITS Imposition of Fringe Benefits Tax A final withholding tax is hereby imposed on t he grossed-up monetary value of fringe benefit furnished, granted or paid by the employer to the employee, except rank and file employees as defined in these Re gulations, whether such employer is an individual, professional partnership or a corporation, regardless of whether the corporation is taxable or not, or the go vernment and its instrumentalities except when: (1) the fringe benefit is requir ed by the nature of or necessary to the trade, business or profession of the emp loyer; or (2) when the fringe benefit is for the convenience or advantage of the employer. The fringe benefit tax shall be imposed at the following rates: Effective 1/1/1998 - 34%; 1/ 1/1999 - 33%; 1/1/2000 - 32%. Definition of Fringe Benefit In general, except as otherwise provided under thes

e regulations, for purposes of this Section, the term "FRINGE BENEFIT" means any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank a nd file employee as defined in these regulations) such as, but not limited to th e following: (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 differenc e between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the e mployee 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 simila r amounts in excess of what the law allows. Coverage These Regulations shall cover only those fringe benefits given or furni shed to managerial or supervisory employees and not to the rank and file. The term, "RANK AND FILE EMPLOYEES" means all employees who are holding neither managerial nor supervisory position. The Labor Code of the Philippines, as amend ed, defines "managerial employee" as one who is vested with powers or prerogativ es to lay down and execute management policies and/or to hire, transfer, suspend , lay-off, recall, discharge, assign or discipline employees. "Supervisory emplo yees" are those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. Moreover, these regulations do not cover those benefits properly forming part of compensation income subject to withholding tax on compensation in accordance wi th Revenue Regulations No. 2-98. Fringe benefits which have been paid prior to January 1, 1998 shall not be cover ed by these Regulations. The grossed-up monetary value of the fringe benefit shall be determined by divid ing the monetary value of the fringe benefit by the following percentages and in accordance with the following schedule: Effective 1/1/1998 - 66%; 1/ 1/ 1999 67%; 1/ 1/2000 - 68%. The grossed-up monetary value of the fringe benefit represents 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 plus the amount of fringe be nefit tax thereon otherwise due from the employee but paid by the employer for a nd in behalf of his employee, pursuant to the provisions of this Section. Determination of the Amount Subject to the Fringe Benefit Tax In general, the co mputation of the fringe benefits tax would entail (a) valuation of the benefit g ranted and (b) determination of the proportion or percentage of the benefit whic h is subject to the fringe benefit tax. That the Tax Code allows for the cases w here only a portion (i.e. less than 100 per cent) of the fringe benefit is subje ct to the fringe benefit tax is clearly stated in Section 33 (a) of R.A. 8424 wh ich stipulates that fringe benefits which are "required by the nature of, or nec essary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer" are not subject to the fringe benefit tax. Thus, in cases where the fringe benefits entail joint be nefits to the employer and employee, the portion which shall be subject to the f ringe benefits tax and the guidelines for the valuation of fringe benefits are d efined under these rules and regulations. Unless otherwise provided in these regulations, the valuation of fringe benefits

shall be as follows: (1) If the fringe benefit is granted in money, or is directly paid for by th e employer, then the value is the amount granted or paid for. (2) If the fringe benefit is granted or furnished by the employer in propert y other than money and ownership is transferred to the employee, then the value of the fringe benefit shall be equal to the fair market value of the property as determined in accordance with Sec. 6 (E) of the Code (Authority of the Commissi oner to Prescribe Real Property Values). (3) If the fringe benefit is granted or furnished by the employer in propert y other than money but ownership is not transferred to the employee, the value o f the fringe benefit is equal to the depreciation value of the property. Taxation of fringe benefit received by a non-resident alien individual who is no t engaged in trade or business in the Philippines A fringe benefit tax of twenty -five percent (25%) shall be imposed on the grossed-up monetary value of the fri nge benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by seventy-five per cent (75%). Taxation of fringe benefit received by (1) an alien individual employed by regio nal or area headquarters of a multinational company or by regional operating hea dquarters of a multinational company; (2) an alien individual employed by an off shore banking unit of a foreign bank established in the Philippines; (3) an alie n individual employed by a foreign service contractor or by a foreign service su bcontractor engaged in petroleum operations in the Philippines; and (4) any of t heir Filipino individual employees who are employed and occupying the same posit ion as those occupied or held by the alien employees. A fringe benefit tax of fi fteen per cent (15%) shall be imposed on the grossed-up monetary value of the fr inge benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by eighty-five per cent (85%). Taxation of fringe benefit received by employees in special economic zones Fring e benefits received by employees in special economic zones, including Clark Spec ial Economic Zone and Subic Special Economic and Free Trade Zone, are also cover ed by these regulations and subject to the normal rate of fringe benefit tax or the special rates of 25% or 15% as provided above. (For further info. see the original RR 03-98) C. Interest Income 1. Taxable 2. Not Taxable 3. Imputed interest on the inter-company loans/advances a. Sec. 50 (see Code) b. REVENUE MEMORANDUM ORDER NO. 63-99: Determination of Ta xable Income on Inter-Company Loans or Advances applying Sec. 50 of the NIRC, as amended Coverage: This paper applies to all forms of bona fide indebtedness and include s: 1. Loans or advances of money or other consideration (w/n evidenced by a writte n instrmt); 2. Indebtedness arising in the ordinary course of business out of sales, leases , or the rendition of services by or between members of the group,, or any other similar transaction; 3. But does not apply to alleged indebtedness w/c was in fact a contribution of capital or a distribution by a corporation w/ respect to its shares. This order adopts the arm's length distribution by a corporation w/ respect to i ts shares. The shall be the rate of interest w/c was charged or would have been charged at the time the indebtedness arose in independent transaction w/ or between related unrelated parties under similar circumstances. All relevant factors will be co

nsidered, incl. the amount and duration of the loan, the security involved, the credit standing of the borrower, and the interest rate prevailing at the situs o f the lender or creditor for comparable loans. For domestic transactions, the s tandard of interest rate is the Bank Reference Rate prescribed by the Central Ba nk. Sec. 50 applies to both taxable entities and tax exempt organizations. D. Income under Lease Agreements Sec. 49, Revenue Regulations No. 2 (see RR No. 2) 1. Rent 2. Obligations of lessor to 3rd parties assumed and paid by lessee 3. Advance rental 4. Leasehold improvements PART 5 PART 6 C. INTEREST 1. INTEREST DEDUCTIBLE FROM GROSS INCOME (Sec 34. B, NIRC) -The amount of interest paid or incurred within a taxable year on indebte dness in connection with the taxpayer's profession, trade or business shall be a llowed as deduction from gross income Provided, that the taxpayer's otherwise allowable deduction for interest expense shall be REDUCED by an amount equal to the following percentage s of interest income subject to final tax: 41% beginning January 1, 1998 39% beginning January 1, 1999 38% beginning January 1, 2000 2. INTEREST NOT DEDUCTIBLE No deduction is allowed in respect of interest under the following: a. ADVANCE INTEREST - if within the taxable year an individual taxpayer reportin g income on the cash basis incurs an indebtedness on which an interest is paid i n advance through discount or otherwise Provided, that such interest shall be allowed as a deduction in the year the ind ebtedness is paid. Provided furhter, that if the indebtedness is payable in periodic amortizations the amount of interest which corresponds to the amount of the principal amortize d or paid during the year shall be allowed as a deduction in such taxable year. **under this provision, the phrase "within the taxable year" assumes a modified meaning. For example, a taxpayer using the cash basis method of accounting borr ows money in which interest is paid in advance through discount. He obtains a l oan of P1,000,000 in October 1998 subject to 20% interest; hence, after paying t he advance interest of P200,000 he receives only P 800,000.00 Can the borrower/ taxpayer claim the deduction when he files his ITR in April 1999? It depends on w/n the principal obligation had been paid. ii. if the entire principal obligation had been paid, then the entire amount of interest can be claimed as itemized deduction iii. if only 1/2 of the obligation has been paid, only 1/2 interest can be claim ed as itemized deduction; iv. if no payment had been paid on the principal obligation, the advance interes t paid cannot be claimed as deduction on the year that it was paid. b. PERSONS UNDER 36b - if both the taxpayer and the person to whom the payment h as been made or is to be made are persons specified under section 36B, namely: i. between members of a family

ii. between an individual and a corporation more than 50% in value of the outsta nding stock of which is owned, directly or indirectly, by or for such individual ; and iii. between two corporations more than 50% in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual; iv. between the grantor and a fiduciary of any trust; or v. between the fiduciary of a trust and the fiduciary of another trust if the sa me person is a grantor with respect to each trust vi. between a fiduciary or a trust and a beneficiary c. PETROLEUM OPERATION - if the indebtedness is incurred to finance petroleum op eration. 3. PREPAID INTEREST OF INDIVIDUAL ON CASH METHOD OF ACCOUNTING COMM. V. VDA DE PRIETO (L-13912, Sept. 30, 1960, 109 Phils 592) The respondents, V.E. Lednicky and Maria Valero Lednicky, are husband and wife, both American citizens residing in the Philippines, and have derived all their i ncome from Philippine sources for the taxable years in question. In compliance with Phil tax law, they filed their income tax return for 1955 and 1956. In 195 6, they filed an amended income tax return claiming a tax deduction for federal income taxes which they paid to the United States in the year 1955. In 1959, th ey likewise claimed a similar tax deduction for the 1956 return. Comm of IR f ailed to answer the claim for refund, thus they filed a petition with the Tax Co urt. Issue: whether a US citizen residing in the Philippines who derives income whol ly from sources within the Republic of the Philippines, may deduct from his gros s income the income taxes he has paid to the US government for the taxable year on the strength of sec 30 (c-1) of the Phil Internal Revenue Code?5 SC: 1. The wording of Sec 30 shows the code's intent that the right to deduct income taxes paid to foreign government from the taxpayer's gross income is given only as an ALTERNATIVE to his right to claim a tax credit for such foreign income ta xes under Sec 30 so that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income taxe s from his gross income. The law provides that the deduction shall be allowed i f the taxpayer in his return does not signify his desire to have the benefits of tax credits for taxes paid to foreign countries. Thus, the statutes assumes th at the taxpayer in question may also signify his desire to claim a tax credit an d waive the deduction. 2. No double credit (i.e, for claiming twice the benefits of his payment of fore ign taxes, by deduction from gross income and by tax credit) exists here. This danger cannot exist if the taxpayer cannot claim benefit under either of these headings at his option, so that he must be entitled to a tax credit (respondent here are NOT entitled to tax credit because all their income is derived from Phi l sources), or the option to deduct from gross income disappears altogether. 3. No double taxation exists. Double taxation become obnoxious only when the ta xpayer is taxed twice for the benefit of the same governmental entity. In the p resent case, although the taxpayer would have to pay two taxes on the same incom e but the Philippine government only receives the proceeds of one tax, there is no obnoxious double taxation. D. TAXES (Sec. 34, C, NIRC, Sec. 80-82, RR-2) 1. DEDUCTIBLE FROM GROSS INCOME GENERAL RULE: Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction.

** Import duties paid to the proper customs officers and business, occupation, license, privilege, excise and stamp taxes and any other taxes of every name or nature paid directly to the Government of the Philippines or to any political su bdivision thereof, are deductible. The word "taxes" means taxes proper and no d eduction shall be allowed for amounts representing interest, surcharge, or penal ties incident to delinquency. Postage is not a tax. Automobile registration fe es are considered taxes. Taxes are deductible as such only by the person upon w hom they are imposed. Thus the merchants sales tax imposed by law upon sales is not deductible by the individual purchasers even though the tax may be billed t o him as a separate item. EXCEPTIONS: a. Income tax b. Income taxes imposed by authority of any foreign country (but this deduction shall be allowed in the case of a taxpayer who does not signify in his return hi s desire to have to any extent the benefits of tax credits paid to foreign count ries) c. Estate and donor's taxes d. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. Provided, that the taxes allowed under this subsection, when refunded or credite d shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. Others (under Sec 80-82, RR2): e. Taxes paid by a nonresident alien individual and a foreign corporation - taxe s are deductible only if and to the extent that the taxes for which deduction is claimed are connected with income from sources within the Philippines; f. Income tax imposed by the Philippine government - the law does not allow the deduction of the income tax paid to or accrued in favor of the government and in no case may the taxpayer avail of such deduction; g. income, war profits, and excess profits taxes imposed by the authority of a f oreign country - allowed as deductions only if the taxpayer does not signify in his return his desire to have to any extent the benefits of the provisions of la w allowing credits against the tax for taxes of foreign countries. In the case of a citizen of a foreign country residing in the Philippines whose income from sources within such foreign country is not subject to income tax, only that port ion of the taxes paid to such foreign country which corresponds to his net incom e subject to the Philippine income tax shall be allowed as deduction. ** In computing the net income of an individual, no deduction is allowed for th e tax is imposed upon his interest as shareholder of a bank or other corporation , which are paid by the corps w/o reimbursements from the taxpayer. The amount so paid should not be included in the income of the shareholder. ** In case of corporate bonds or other obligations containing a tax-free covenan t clause, the corporation paying a tax or any part of it for someone else pursua nt to its agreement is not entitled to deduct such payment from gross income on any ground. 3. TAX CREDITS vs. TAX DEDUCTIONS CIR vs. LEDNICKY Gr l-18169, July 31, 1964) 4. FINES AND PENALTIES GUTIERREZ vs. COLLECTOR 14 SCRA 33 E. LOSSES (Sec. 93-101, RR-2)

1. KINDS OF TAXPAYERS AND THEIR LOSSES a. INDIVIDUALS - losses sustained by individuals during the year not compensated for by insurance or otherwise are FULLY deductible (except by nonresident alien s):a.1. If incurred in a taxpayer's trade or a.2. if incurred in any transaction entered into for profit; or a.3. of property not connected with the trade or business if arising from fires , storm, shipwreck, or other casualty, or from robbery, theft or embezzlement. No loss shall, however, be allowed as a deduction if at the time of filing of th e return, such loss has been claimed as deduction for estate or inheritance tax purposes in the estate or inheritance tax return. b. CORPORATIONS - Domestic corporations may deduct losses actually sustained and charged off w/i the year and not compensated for by insurance or otherwise. c. NONRESIDENT ALIENS and FOREIGN CORPORATIONS - are only allowed: c.1. losses sustained in business or trade conducted within the Philippines c.2. losses of property within the Philippines arising from fires, storms, ship wrecks, or other casualty and from robbery, theft or embezzlement, and c.3. losses actually sustained in transactions entered into for profit in the P hilippines, although not connected with their trade or business, not compensated by insurance or otherwise. ***LOSSES IN GENERAL (SEC 34 d, NIRC, Sec. 96, RR2): must be: a. actually sustained during the taxable year b. not compensated for by insurance or other forms of indemnity c. if incurred in trade, profession or business; or of property connected with t rade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. d. evidenced by closed and completed transactions - proper adjustment must be made in each case for expenditures or itmes of loss properly chargeable to capital account, and for depreciation, obsolescence, amor tization or depletion. - The amount of loss must be reduced by the amount of any insurance or other com pensation involved, and by the salvage value, if any of the property - A loss on the sale of residential property is NOT deductible unless the proper ty was purchased or constructed by the taxpayer with a view to its subsequent sa le for pecuniary profit - No loss is sustained by the transfer or property by gift or death - Loss sustained in illegal transactions are not deductible 2. COMPLETED TRANSACTIONS FERNANDEZ HERMANOS vs. CIR 29 SCRA 552 3. SPECIAL RULES ON LOSSES A. VOLUNTARY REMOVAL OF BUILDINGS (Sec. 97. RR-2) Loss due to the voluntary removal or demolition of old buildings, the scrapping of old machinery, equipment, etc. incident to renewals and placements will be de ductible from gross income. When a taxpayer buys real estate upon which is loca ted a building, w/c he proceeds to raze with a view to erecting thereon another building, it will be considered that the taxpayer has sustained no deductible ex pense on account of the cost of such removal, the value of the real estate, excl usive of old improvements, being presumably equal to the purchase price of the l and and building plus the cost of removing the useless building. B. LOSS OF USEFUL VALUE OF ASSETS (Sec. 98, RR-2) When, through some change in business conditions, the usefulness in the busi ness of some or all of the capital assets is suddenly terminated, so that the ta xpayer discontinues the business or discards such assets permanently from use in such business, hey may claim as deduction, the actual loss sustained.

In determining the amount of the loss, adjustment must be made for impro vements, depreciation, the salvage value of the property. This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of some unforseen cause by reason of which the property has been prematurely discarded, as for example, 1. where any increase in the cost or change in the manufacture of any product ma kes it necessary to abandon such manufacture, to which special machinery is excl usively devoted, or 2. where legislation directly or indirectly makes the continued profitable use o f the property impossible. This exception DOES NOT APPLY: 1. to a case where the useful life of property terminates solely as a result of those gradual process for which depreciation allowance are authorized. 2. To inventories other than capital assets This exception APPLIES to buildings only when they are permanently abandoned or permanently devoted to a radically different use, and to machinery only when its use as such is permanently abandoned. C. SHRINKAGE IN VALUE OF STOCKS (Sec. 99, RR-2) A person possessing stock of a corporation cannot subtract from gross income any amount claimed as a loss merely on account of shrinkage in value of a stock thr ough fluctuation of the market or otherwise. The loss allowable in such case is that wholly suffered when the stock is disposed of. If stock of a corporation becomes worthless, its cost or other basis determined in accordance with these r egulations may be deducted by the owner in the taxable year in which the stock b ecame worthless, provided a satisfactory showing of its worthlessness is made, a s in the case of bad debts. 4.WAGERING LOSSES - allowed only to the extent of the gains from such transactio ns. 5. SUBSTANTATION OF LOSSES (Rev Reg 12-77) 6. FOREIGN EXCHANGE LOSSES a. BIR Ruling 144-85, August 26, 1985 Issue: w/n foreign exchange losses which have accrued by reason of devaluation are deductible for income tax purposes? Ruling: foreign exchange losses which have accrued by reason of devaluation but where remittances have not yet been made are not deductible for income tax purp oses. - the annual decrease in the value of property is not normally allowable as a lo ss. To be allowable, the loss must be realized - when foreign currency acquired in connection with a transaction in the regular course of business is disposed of, ordinary gain or loss results from the fluct uations. The loss is deductible only for the year it is actually sustained. It is sustained during the year in which the loss occurs as evidenced by closed an d completed transaction and as fixed by identifiable events occurring in that ye ar. A closed transaction is a taxable event which has been consummated. No tax able event has as yet been consummated prior to the remittance of the scheduled amortization. Accordingly, foreign exchange losses sustained as a result of dev aluation of the peso vis--vis the foreign currency, e.g., US Dollar, but which re mittance of scheduled amortization consisting of principal and interests payment s on a foreign loan has not actually been made are not deductible from gross inc ome for income tax purposes. b. Rev. Memo Circ 26-85, July 15, 1985, Interbank guiding rate - Beginning Jan 1, 1985, the conversion rate to be applied shall be the prevaili ng interbank reference rate for the day of the transaction. - In the event that the foreign exchange rate as stated in the above paragraph ( a) is impractical or not feasible, the average interbank reference during the ye

ar shall apply. - For the purpose of converting the tax liability in US dollar to Philippine pes o, the prevailing interbank rate at the time of payment shall be applied when pa id before the due date of the tax or the prevailing interbank reference rate at the due date of tax when paid on or after the due date of the tax. - When currency involved is other than US Dollar, the foreign currency shall fir st be converted to US dollar at the prevailing exchanges rate between the two cu rrencies. - This circular does not apply to transaction covered by RMC 30-84 dated October 19, 1984, regarding the imposition of additional 1% gross receipt tax on buying and selling of foreign exchange of peso by bank, non-bank financial intermediar ies and other authorized foreign exchange dealers or agents and RMC 32-854 dated Nov 7, 1984, in determining (for income tax purposes) the cost basis of certain commodities imported beginning Jan 1, 1984, the value and prices thereof are qu oted in the foreign currency. 7. ABANDONMENT LOSSES A. If a contract area where petroleum operations are undertaken is partially or wholly abandoned, ALL accumulated exploration and development expenditures perta ining thereto shall be allowed as a deduction: Provided, that accumulated expen ditures incurred in that area prior to Jan 1, 1979 shall be allowed as a deducti on only form any income derived from the same contract area. In all cases, noti ces of abandonment shall be filed with the Commissioner. B. If a producing well is subsequently abandoned, the unamortized costs and the undepreciated costs of equipment directly used therein, shall be allowed as a de duction in the year such well, equipment or facility is abandoned by the contrac tor: Provided, that if such abandoned well is registered and production is resu med, or if such equipment or facility is restored into service, the said costs s hall be included as part of gross income in the year of resumption or restoratio n and shall be amortized or depreciated, as the case may be. 8. NET OPERATING LOSS CARRY-OVER: A. THREE YEAR PERIOD: The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three consecutive taxable years immedi ately following the year of such loss. Provided, that any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this subse ction. B. NO SUBSTANTIAL CHANGE IN OWNERSHIP (75% rule) Provided, further, that a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterp rise in that -i. not less than 75% in nominal value of outstanding issued shares, if the busin ess is in the name of a corporation, is held by or on behalf of the same persons ; or ii. not less than 75% of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. ** "net operating loss" = excess of allowable deduction over gross income of the business in a taxable year Fernandez v CIR FERNANDEZ HERMANOS, INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE and C OURT OF TAX APPEALS, respondents. Facts: Fernandez Hermanos, Inc., is a domestic-corporation organized for the pr incipal purpose of engaging in business as an "investment company". The CIR disa llowed the following deductions (most were sustained by the CTA): 1. losses in Mati Lumber Co. in 1950 2. losses or bad debts in Palawan Manganese Mines, I.nc. in 1951

3. losses in Balamban Coal Mines in 1950 and 1951 4. losses in Hacienda Dalupiri and Hacienda Samal from 1950-1954 Held: The Supreme Court discussed the allowance or disallowance of each in the following manner: 1. Allowed. These losses represent the shares of stock (worth P8,050) pe t. acquired from Mati Lumber Co. in Jan. 1, 1948. The pet. was correct in writin g off and claiming as a deduction in 1950 the amount on the ground that the lumb er company had ceased operations and became insolvent in that year. The CIR was incorrect in arguing that since the company still owned a sawmill and some equip ment, the shares of stock still had value. The proper assessment would be to tre at as income for the year the proceeds the pet. would get from the liquidation o f those assets. 2. Disallowed. These losses represent part of the loans extended by the pet. to its 100% owned subsidiary. Pet. advanced financial assistance to Palawan Manganese Mines, Inc. from 1945 to 1952. By way of payment, Palawan was to give pet. 15% of its net profits. Whether Palawan was able to pay the loans or not b ecause it continued to operate at a loss is immaterial. Pet. cannot properly cla im as a loss the advances given to Palawan in 1951 for that year. There can be n o partial writing off as a loss or bad debt under the Tax Code. Those losses or bad debts ascertained within the taxable year are deductible in full or not at a ll. Pet. continued to give Palawan advances even beyond 1951. It was only in 195 6 when Palawan decided to cease operations. 3. Disallowed. These losses represent sums spent by the pet. for the ope ration of its Balamban coal mines in 1950 and 1951. The pet. should have treated them as losses in 1952 when the mines were abandoned, and not in 1950 and 1951 on the ground that the mines made no sales of coal during those years. 4. Allowed. These losses represent sums spent by the pet. for the operat ion of the 2 Haciendas. The amounts were properly reported as deductions for the correct years. The only reason why the CIR disallowed them was on the ground th at the farms were operated solely for pleasure or as a hobby and not for profit. But the Supreme Court is not convinced, and being for business, the pet. may pr operly deduct the same. (no factual details were mentioned to explain why) Gutierrez vs CIR The late LINO GUTIERREZ substituted by ANDREA C. VDA. DE GUTIERREZ, ANTONIO D. G UTIERREZ, GUILLERMO D. GUTIERREZ, SANTIAGO D. GUTIERREZ and TOMAS D. GUTIERREZ, petitioners, vs. COLLECTOR OF INTERNAL REVENUE, respondent. Facts: Lino Gutierrez was primarily engaged in the business of leasing real prop erty for which he paid real estate broker's privilege tax. He filed his income t ax returns for the years 1951, 1952, 1953 and 1954. He claimed as deductions, among others the ff: transportation expenses wh ich petitioner incurred to attend the funeral of his friends and the cost of adm ission tickets to operas, the cost of furniture given as commission, expenses in curred in attending the National Convention of Filipino Businessmen, luncheon me eting and cruise to Corregidor of the Homeowners' Association, car expenses, sal ary of his driver and car depreciation, ordinary repairs for the maintenance of rental apartments, litigation expenses to collect apartment rentals, fines and p enalties for late payment of taxes, and contributions to an indigent family and various individuals. On July 10, 1956 the Commissioner (formerly Collector) of Internal Revenu e assessed against Gutierrez the following deficiency income tax: 1951(P1,400.00),1952(672.00),1953(5,161.00),1954(4,608.00) or a Total of P11,841.00. Held: To be deductible, an expense must be (1) ordinary and necessary; (2) pai d or incurred within the taxable year; and, (3) paid or incurred in carrying on a trade or business. The transportation expenses which petitioner incurred to attend the funer al of his friends and the cost of admission tickets to operas were expenses rela tive to his personal and social activities rather than to his business of leasin

g real estate, thus not deductible. According to the evidence, the taxpayer's car was utilized both for perso nal and business needs. We therefore find it reasonable to allow as deduction on e-half of the driver's salary, car expenses and depreciation. The electrical supplies, paint, lumber, plumbing, cement, tiles, gravel, masonry and labor used to repair the taxpayer's rental apartments, did not incre ase the value of such apartments, or prolong their life. They merely kept the ap artments in an ordinary operating condition. Hence, the expenses incurred theref ore are deductible as necessary expenditures for the maintenance of the taxpayer 's business. Similarly, the litigation expenses defrayed by Gutierrez to collect apart ment rentals and to eject delinquent tenants are ordinary and necessary expenses in pursuing his business. It is routinary and necessary for one in the leasing business to collect rentals and to eject tenants who refuse to pay their account s. Gutierrez also claimed for deduction the fines and penalties which he pai d for late payment of taxes. While Section 30 of the Tax Code allows taxes to be deducted from gross income, it does not specifically allow fines and penalties to be so deducted. As regards the alms to an indigent family and various individuals, contri butions to Lydia Yamson and G. Trinidad and a donation consisting of officers' j ewels and aprons to Biak-na-Bato Lodge No. 7, the same are not deductible from g ross income inasmuch as their recipients have hot been shown to be among those s pecified by law. Contributions are deductible when given to the Government of th e Philippines, or any of its political subdivisions for exclusively public purpo ses, to domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, athletic, cultural or educational purpos es, or for the rehabilitation of veterans, or to societies for the prevention of cruelty to children or animals, no part of the net income of which inures to th e benefit of any private stockholder or individual. PART 7 PART 8 Calasanz vs. CIR Petitioners assail their liabilities as "real estate dealers" and seek t o bring the profits from the sale of the lots under Section 34 [b] [2] 3 of the Tax Code. The theory advanced by the petitioners is that inherited land is a capit al asset within the meaning of Section 34[a] [1] of the Tax Code and that an hei r who liquidated his inheritance cannot be said to have engaged in the real esta te business and may not be denied the preferential tax treatment given to gains from sale of capital assets, merely because he disposed of it in the only possib le and advantageous way. Petitioners averred that the tract of land subject of the controversy wa s sold because of their intention to effect a liquidation. They claimed that it was parcelled out into smaller lots because its size proved difficult, if not im possible, of disposition in one single transaction. They pointed out that once s ubdivided, certainly, the lots cannot be sold in one isolated transaction, Petit ioners, however, admitted that roads and other improvements were introduced to f acilitate its sale. On the other hand, respondent Commissioner maintained that the impositio n of the taxes in question is in accordance with law since petitioners are deeme d to be in the real estate business for having been involved in a series of real estate transactions pursued for profit. Respondent argued that property acquire d by inheritance may be converted from an investment property to a business prop erty if, as in the present case, it was subdivided, improved, and subsequently s old and the number, continuity and frequency of the sales were such as to consti tute "doing business." Respondent likewise contended that inherited property is by itself neutral and the fact that the ultimate purpose is to liquidate is of n o moment for the important inquiry is what the taxpayer did with the property. R

espondent concluded that since the lots are ordinary assets, the profits realize d therefrom are ordinary gains, hence taxable in full. We agree with the respondent. The assets of a taxpayer are classified for income tax purposes into ord inary assets and capital assets. Section 34]a] [1] of the National Internal Reve nue Code broadly defines capital assets as follows: "[1] Capital assets. - The term 'capital assets' means property held by the t axpayer [whether or not connected with his trade or business], but does not incl ude, stock in trade of the taxpayer or other property of a kind which would prop erly be included, in the inventory of the taxpayer if on hand at the close of th e taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business of a character which is subject to the allowance for depreciation pr ovided in subsection [f] of section thirty; or real property used in the trade o r business of the taxpayer." The statutory definition of capital assets is negative in nature. If the asset is not among the exceptions, it is a capital asset; conversely, assets fa lling within the exceptions are ordinary assets. And necessarily, any gain resul ting from the sale or exchange of an asset is a capital gain or an ordinary gain depending on the kind of asset involved in the transaction. However, there is no rigid rule or fixed formula by which it can be dete rmined with finality whether property sold by a taxpayer was held primarily for sale to customers in the ordinary course of his trade or business or whether it was sold as a capital asset. Although several factors or indices have been recognized as helpful guid es in making a determination, none of these is decisive; neither is the presence nor the absence of these factors conclusive. Each case must in the last analysi s rest upon its own peculiar facts and circumstances. Also a property initially classified as a capital asset may thereafter b e treated as an ordinary asset if a combination of the factors indubitably tend to show that the activity was in furtherance of or in the course of the taxpayer 's trade or business. Thus, a sale of inherited real property usually gives capi tal gain or loss even though the property has to be subdivided or improved or bo th to make it salable. However, if the inherited property is substantially impro ved or very actively sold or both it may be treated as held primarily for sale t o customers in the ordinary course of the heir's business. Upon an examination of the facts on record, We are convinced that the ac tivities of petitioners are indistinguishable from those invariably employed by one engaged in the business of selling real estate. One strong factor against petitioners' contention is the business elemen t of development which is very much in evidence. Petitioners did not sell the la nd in the condition in which they acquired it. While the land was originally dev oted to rice and fruit trees, it was subdivided into small lots and in the proce ss converted into a residential subdivision and given the name Don Mariano Subdi vision. Extensive improvements like the laying out of streets, construction of c oncrete gutters and installation of lighting system and drainage facilities, amo ng others, were undertaken to enhance the value of the lots and make them more a ttractive to prospective buyers. The audited financial statements submitted toge ther with the tax return in question disclosed that a considerable amount was ex pended to cover the cost of improvements. As a matter of fact, the estimated imp rovements of the lots sold reached P170,028.60 whereas the cost of the land is o nly P4,742.66. There is authority that a property ceases to be a capital asset i f the amount expended to improve it is double its original cost, for the extensi ve improvement indicates that the seller held the property primarily for sale to customers in the ordinary course of his business. Another distinctive feature of the real estate business discernible from the records is the existence of contracts receivables, which stood at P395,693. 35 as of the year ended December 31, 1957. The sizable amount of receivables in comparison with the sales volume of P446,407.00 during the same period signifies that the lots were sold on installment basis and suggests the number, continuit

y and frequency of the sales. Also of significance is the circumstance that the lots were advertised for sale to the public and that sales and collection commis sions were paid out during the period in question. Petitioners, likewise, urge t hat the lots were sold solely for the purpose of liquidation. In Ehrman vs. Commissioner, the American court in clear and categorical terms rejected the liquidation test in determining whether or not a taxpayer is carrying on a trade or business. The court observed that the fact that property is sold for purposes of liquidation does not foreclose a determination that a "t rade or business" is being conducted by the seller. The court enunciated further : "We fail to see that the reasons behind a person's entering into a business - wh ether it is to make money or whether it is to liquidate - should be determinativ e of the question of whether or not the gains resulting from the sales are ordin ary gains or capital gains. The sole question is - were the taxpayers in the bus iness of subdividing real estate? If they were, then it seems indisputable that the property sold falls within the exception in the definition of capital assets . that is, that it constituted `property held by the taxpayer primarily for sal e to customers in the ordinary course of his trade or business.'" Additionally, in Home Co., Inc. vs. Commissioner, the court articulated on the matter in this wise: "One may, of course, liquidate a capital asset. To do so, it is necessary to sel l. The sale may be conducted in the most advantageous manner to the seller and h e will not lose the benefits of the capital gain provision of the statute unless he enters the real estate business and carries on the sale in the manner in whi ch such a business is ordinarily conducted. In that event, the liquidation const itutes a business and a sale in the ordinary course of such a business and the p referred tax status is lost." In view of the foregoing, We hold that in the course of selling the subd ivided lots, petitioners engaged in the real estate business and accordingly, th e gains from the sale of the lots are ordinary income taxable in full. BIR Riling No. 383-87 The above reorganization is a merger within the contemplation of Section 35(c)(2) and (5(b) of the Tax Code because a corporation (DFI) acquired all of the properties of another corporation (EFI) solely for stocks, the transaction u ndertaken being for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. Accordingly, the transfer by EFI of all its assets and liabilities to DF I solely, in exchange for the latter's shares of stock shall not give rise to th e recognition of gain or loss pursuant to Section 35(c)(2) of the Tax Code. No g ain or loss shall be recognized to EFI upon the distribution of DFI shares to EF I stockholders in complete redemption of their stocks under Section 35(c)(2) of the Tax Code. No gain or loss shall be recognized to EFI stockholders upon the e xchange of their stocks solely for DFI stocks under Section 35(c)(2) of the Tax Code. The basis of the assets received by DFI shall be the same as it would be in the hands of EFI. The basis of DFI stocks received by the stockholders of EF I shall be the same as the basis of the EFI stocks surrendered in exchange there for. If the total liabilities to be assumed by DFI upon effective merger date exceed the historical or original acquisition cost (cost basis) of the assets t ransferred by EFI, the excess shall be recognized as gain of EFI. (Sec. 35(c)(4) (b), Tax Code, as amended by P.D. No. 1773) It is understood, however, that upon the subsequent sale or exchange of the asse ts or shares of stocks acquired by the parties, the gain derived from such sale or exchange shall be subject to income tax. The abovementioned transactions shall not be subject to the gift tax as there is no intention to donate on the part of any of the parties. However, in order that the above-described reorganization can be considered a me rger under Section 35(c)(2) of the Tax Code, the parties to the merger should co

mply with the following requirements: A. The plan of reorganization should be adopted by each of the corporations , parties thereto, the adoption being shown by the acts of its duly constituted responsible officers and appearing upon the official records of the corporation. Each corporation, which is a party to the reorganization, shall file, as part o f its return for the taxable year within which the reorganization occurred, a co mplete statement of all facts pertinent to the non-recognition of gain or loss i n connection with the reorganization, including: (1) A copy of the plan of reorganization, together with a statement executed under the penalties of perjury showing in full the purposes thereof and in deta il all transactions incident to or pursuant to the Plan. (2) A complete statement of the cost or other basis of all property, includ ing all stocks or securities, transferred incident to the plan. (3) A statement of the amount of stock or securities and other property or m oney received from the exchange, including a statement of all distributions or o ther disposition made thereof. The amount of each kind of stock or securities an d other property received shall be stated on the basis of the fair market value thereof at the date of the exchange. (4) A statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the prop erty acquired in the exchange is subject. B. Every taxpayer, other than a corporation a party to the reorganization, who received stock or securities and other property or money upon a tax-free exc hange in connection with a corporate reorganization shall incorporate in his inc ome tax return for the taxable year in which the exchange takes place a complete statement of all facts pertinent to the non-recognition of gain or loss upon su ch exchange including: (1) A statement of the cost or other basis of the stock or securities transf erred in the exchange; and (2) A statement in full of the amount of stock or securities and other prope rty or money received from the exchange, including any liabilities assumed upon the exchange, and any liabilities to which property received is subject. The amo unt of each kind of stock or securities and other property (other liabilities as sumed upon the exchange) received shall be set forth upon the basis of the fair market value thereto at the date of the exchange. C. Permanent records in substantial form shall be kept by every taxpayer wh o participates in a tax-free exchange in connection with a corporate reorganizat ion showing the cost or other basis of the transferred property or money receive d (including any liabilities assumed on the exchange, or any liabilities to whic h any of the properties received were subject), in order to facilitate the deter mination of gain or loss from a subsequent disposition of such stock or securiti es and other property received from the exchange. (par. 9803-B, P-H 1963 ed., p. 9611) In addition to the foregoing requirements, permanent records in substantial form must be kept by the corporations participating in the merger showing the inform ation listed above in order to facilitate the determination of gain or loss from a subsequent disposition of the stock received as a consequence of the merger. CIR vs. Rufino We hold that the Court of Tax Appeals did not err in finding that no tax able gain was derived by the private respondents from the questioned transaction . Contrary to the claim of the petitioner, there was a valid merger although the actual transfer of the properties subject of the Deed of Assignment was not mad e on the date of the merger. The Court finds no impediment to the exchange of p roperty for stock between the two corporations being considered to have been eff ected on the date of the merger. That, in fact, was the intention, and the reaso

n why the Deed of Assignment was made retroactive to January 1, 1959. Such retro action provided in effect that all transactions set forth in the merger agreemen t shall be deemed to be taking place simultaneously on January 1. 1959, when the Deed of Assignment became operative. The certificates of stock subsequently del ivered by the New Corporation to the private respondents were only evidence of t he ownership of such stocks. Although these certificates could be issued to them only after the approval by the SEC of the increase in capitalization of the New Corporation, the title thereto, legally speaking, was transferred to them on th e date the merger took effect, in accordance with the Deed of Assignment. Our ru ling then is that the merger in question involved a pooling of resources aimed a t the continuation and expansion of business and so came under the latter and in tendment of the National Internal Revenue code, as amended by the above-cited la w, exempting from the capital gains tax exchanges of property effected under la wful corporate combinations. The basis consideration, of course, is the purpose of the merger, as thi s would determine whether the exchange of properties involved therein shall be s ubject or not to the capital gains tax. The criterion laid down by the law is th at the merger "must be undertaken for a bona fide" business purpose and not sole ly for the purpose of escaping the burden of taxation." The procedure for merger in question was prescribed in Section 28-1/2 of the old Corporation Law which, although not expressly authorizing a merger by n ame (as the new Corporation Code now does in its Section 77), provided that "a c orporation may, be action taken at any meeting of its board of directors, sell, lease, exchange, or otherwise dispose of all or substantially all of its propert y and assets, including its goodwill, upon such terms and conditions and for suc h considerations, which may be money, stocks, bonds, or other instruments for th e payment of money or other property or other considerations, as its board of di rectors deem expedient." The transaction contemplated in the old law covered the second type of merger defined by Section 35 of the Tax Code as "the acquisition by one corporation of all or substantially all of the properties of another cor poration solely for stock." which is precisely what happened in the present case . The merger had merely deferred the clam for taxes, which may be asserted by the government later, when gains are realized and benefits are distributed a mong the stockholders as a result of the merger. In other words, the correspondi ng taxes are not forever foreclosed or forfeited but may at the proper time and without prejudice to the government still be imposed upon the private respondent s, in accordance with Section 35(c) (4) of the Tax Code. Then, in assessing the tax, "the basis of the property transferred in the hands of the transferee shall be the same as it would be in the hands of the transferor, increased by the amo unt of gain recognized to the transferor on the transfer." the only inhibition n ow is that time has not yet come. The reason for this conclusion is traceable to the purpose of the legisl ature in adopting the provision of law in question.. The basic idea was to corre ct the Tax Code which, by imposing taxes on corporate combinations and expansion s, discouraged the same to the detriment of economic progress, particularly the promotion of local industry. Speaking of this problem, H.B. No. 7233, which was subsequently enacted into R.A. No. 1921 embodying Section 35 as now worded, decl ared in the Explanatory Note: "The exemption from the tax of the gain derived fr om exchanges of stock solely for stock of another corporation resulting from cor porate mergers or consolidations under the above provisions, as amended, was int ended to encourage corporations in pooling, combining or expanding their resourc es conducive to the economic development of the country." BIR Ruling No. 274-87 Pursuant to Section 35, paragraph (c)(2)(c) of the Tax Code as amended b y Republic Act No. 4522 and Presidential Decree Nos. 1705 and 1773, no gain or l oss shall be recognized if property is transferred to a corporation by a person in exchange for stock in such a corporation of which as a result of such exchang e, said person alone or together with others, not exceeding four persons, gains

control of said corporation. The term "control" shall mean ownership of stocks i n a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stock receiv ed i.e., subscribed and paid-up, whether for property or for services by the tra nsferor or transferors. In determining the 51% stock ownership, only those perso ns who transferred property for stock in the same transaction may be counted up to a maximum of five. Accordingly, no gain or loss shall be recognized to each of the six (6) transferors, Messrs. Nestor D. de Rivera, Alfredo V. Asuncion, Pastor B. Esguerr a, Jr., Benjamin T. Madlangsacay, Eric A. Cruz and Mrs. Josefina Ablan Mendoza a nd the transferee corporation, Maray Maray Farms, Inc., considering that after t he exchange and as a result of the said exchange not more than five (5) of the t ransferors will gain control of the transferee corporation. It should be emphasized, however, that Section 35 (c)(2)(c) of the Tax Co de merely defers recognition of gain or loss from such transaction, for in deter mining the gain or loss from a subsequent transaction of the properties or of th e stocks involved in the exchange, the original or historical cost of the proper ties or the stock is considered. Thus, if the transferors later sell or exchange the shares of stock acquired by them in exchange, they shall be subject to inco me tax on gains derived from such sale or exchange taking into consideration tha t the cost basis of the shares of stock shall be the same as the original acquis ition cost or adjusted cost basis to the transferors of the properties exchange therefor; and that the cost basis to the transferee of the properties exchanged for stocks shall be the same as it would be in the hands, of the transferors [Se ction 35 (c)(5)(a) and (b), Tax Code, as amended by Presidential Decree No. 1773 ]. In this connection, you are further advised that in order that the partie s to the exchange can avail of the non-recognition of gains provided for in Sect ion 35 (c)(2)(c) of the Tax Code, as amended, they should comply with the requir ements hereunder mentioned: (a) The transferors must file with their income tax return for the taxable y ear in which the exchange was consummated, a complete statement of all facts per tinent to the exchange, including: 1. A description of the properties transferred, or of their interest in suc h properties, together with a statement of the original acquisition cost or othe r basis thereof and the adjusted cost basis at the time of the transfer; 2. The kind of stock received and preferences if any; 3. The number of shares of each class received; and 4. The fair market value per share of each class at the date of the exchang e. (b) On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the exchange was consummated the follow ing: 1. A complete description of all properties received from the transferors; 2. A statement of the original acquisition cost or other basis of the prope rties in the hands of the transferors and the adjusted cost basis thereof at the time of the transfer; and 3. Information with respect to the capital stock of that corporation includ ing: a. The total issued and outstanding capital stock immediately prior to and immediately after the exchange with a complete description of each class of stoc ks; b. The classes of stock and number of shares issued to the transferors in t he exchange, and c. The fair market value as of the date of exchange of the capital stock is sued to the transferors. In addition to the foregoing requirements, permanent records in substant

ial form must be kept by the taxpayers participating in the exchange, showing th e information listed above in order to facilitate the determination of gain or l oss from a subsequent disposition of stock/properties received in the exchange. Moreover, pursuant to Section 245 of the Tax Code, as amended, a conveya nce or deed whereby land is assigned or transferred to the purchaser is subject to documentary stamp tax based on the consideration or value received or contrac ted to be paid for such realty. A stock in a corporation is a valuable considera tion for transfer of real property (Section 177 Documentary Stamp Tax Regulation s). Accordingly, if a parcel of land is exchanged with stocks in a corporation a s in this case, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the aforesaid deed. BIR Ruling No. 203-85 Pursuant to Section 35, paragraph (c)(2)(c) of the Tax Code as amended b y Republic Act No. 4522 and Presidential Decree Nos. 1705 and 1773, no gain or l oss shall be recognized if property is transferred to a corporation by a person in exchange for stock in such a corporation of which as a result of such exchang e said person, alone or together with others, not exceeding four persons, gains control of said corporation. The term "control" shall mean ownership of stocks i n a corporation possessing at least 51% of the total voting power of all classes of stock entitled to vote. Control is determined by the amount of stock receive d, i.e., subscribed and paid-up, whether for property or for services by the tra nsferor or transferors. In determining the 51% stock ownership, only those perso ns who transferred property for stock in the same transaction may be counted up to a maximum of five. Accordingly, no gain or loss shall be recognized both to transferors and the transferee corporation on the transfer by the spouses Demetrio A. Muoz and R osalina L. Muoz of their real properties in payment of their subscription for sha res of stock of the Muoz Land Development Corporation considering that after the contemplated exchange of properties and as a result of the said exchange the tra nsferors will gain control of the said corporation. It should be emphasized, however, that Section 35(c)(2)(c) of the Tax Co de merely defers recognition of gain or loss from such transaction, for in deter mining the gain or loss from a subsequent transaction of the properties or of th e stocks involved in the exchange, the original or historical cost of the proper ties or the stocks is considered. Thus, if the transferors later sell or exchang e the shares of stock acquired by them in the exchange, they shall be subject to income tax on the gains derived from such sale or exchange, taking into conside ration that the cost basis of the shares of- stock shall be the same as the orig inal acquisition cost of adjusted cost basis to the transferors of the propertie s exchanged therefor; and that the cost basis to the transferee of the propertie s exchanged for stocks shall be the same as it would be in the hands of the tran sferors. (Section 35(c)(5)(a) and (b), Tax Code, as amended by Presidential Decr ee No. 1773) In this connection, you are further advised that in order that the parti es to the exchange can avail of the non-recognition of gains provided for in Sec tion 35(c)(2)(c) of the Tax Code, as amended, they should comply with the requir ements hereunder mentioned. (a) The transferors must with their income tax return for the taxable year i n which the exchange was consummated a complete statement of all facts pertinent to the exchange, including: 1. A description of the properties transferred, or of their interest in suc h properties, together with a statement of the original acquisition cost or othe r basis thereof and the adjusted cost basis at the time of the transfer; 2. The kind of stock received and preference if any; 3. The number of shares of each class received; and 4. The fair market value per share of each class at the date of the exchang e.

(b) On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the exchange was consummated the follow ing: 1. A complete description of all properties received from the transferors; 2. A statement of the original acquisition cost or other basis of the prope rties in the hands of the transferors and the adjusted cost basis thereof at the time of the transfer; and 3. Information with respect to the capital stock of the corporation includi ng: a. The total issued and outstanding capital stock immediately prior to and immediately after the exchange, with a complete description of each class of sto ck; b. The classes of stock and number of shares issued to the transferors in t he exchange; and c. The fair market value as of the date of exchange of the capital stock is sued to the transferors. In addition to the foregoing requirements, permanent records in substant ial form must be kept by the taxpayers participating in the exchange, showing th e information listed above in order to facilitate the determination of gain or l oss from a subsequent disposition of stocks/properties received in the exchange. Moreover, pursuant to Section 245 of the Tax Code, as amended, a conveya nce or deed whereby land is assigned or transferred to the purchaser is subject to documentary stamp tax based on the consideration or value received or contrac ted to be paid for such realty. A stock in corporation is a valuable considerati on for transfer of real properties (Section 177 Documentary Stamp Tax Regulation s). Accordingly, if a parcel of land is exchanged with stocks in a corporation a s in this case, the latter is the consideration, the value of which shall be the basis of the documentary stamp tax on the aforesaid deed. REVENUE MEMORANDUM ORDER NO. 26-92 Subject : Prescribing the Requirements and Conditions precedent to the Non -Recognition of Gain in transactions involving Transfer of Properties in Exchang e for Shares of Stock under Section 34(c) (2) of the Tax Code, and the Procedure to be observed in monitoring compliance with said conditions. To : All Internal Revenue Officers and Others Concerned. In order to facilitate the determination of whether transfer of properties by in dividual or corporation in exchange for shares of stock of another corporation f alls under Section 34(c) (2) of the National Internal Revenue Code, the followin g requirements must be met, and the conditions complied with by both transferor and transferee corporation. The procedures outlined hereunder shall be observed in the monitoring and invest igation of tax-free exchange to ascertain compliance with the conditions set for th in the adjudication letter/ruling issued by this Office, and in the consequen t assessment of tax liabilities if any, due upon subsequent disposition of the p roperties involved in the exchange. I. DOCUMENTATION REQUIREMENTS. A. BIR Adjudication letter/ruling Any written request to be filed with the Legislative, Ruling and Research Divisi on for a BIR Ruling on the tax consequence of the transfer/exchange of propertie s described hereunder must be accompanied by the following documents. 1) In the case of Merger or Consolidation (a) Plan of Corporate Merger or Consolidation; (b) Statement of the amount and nature of any liabilities assumed upon the e xchange, and the amount and nature of any liabilities to which any of the proper ty acquired in the exchange is subject; (c) Articles of Incorporation duly registered with SEC of the merging or con solidating corporations; and

(d)

Other pertinent documents.

2) In the case of transfer of property to a controlled corporation. (a) Deed of Transfer/Assignment/Exchange; (b) Articles of Incorporation duly registered with SEC of a corporate transf eror and transferee corporation; (c) Copy of the corresponding Transfer Certificate of Titles; (d) Copy of the corresponding Tax Declaration; (e) Certification as to the original or historical cost of acquisition/adjus ted cost basis of the properties transferred; acd (f) Certification of the fair market value or zonal value of the property in volved in the exchange; (g) Certification by the corporate secretary of the transferee corporation o f its authorized capitalization and the par value of the shares of stock; (h) Certification of percentage of ownership of the shares of stock by the t ransferor as a result of the transaction; and (i) Other pertinent documents. B. Records to be kept and information to be filed. In order that the parties to the exchange can avail of the non-recognition of ga ins under Section 34(c) (2) of the Tax Code, the following requirements must be complied with: 1) In the case of Merger or Consolidation. (a) The plan of reorganization should be adopted by each of the corporations , parties thereto, the adoption being shown by the acts of its duly constituted responsible officers and appearing upon the official records of the corporation. Each corporation, which is a party to the reorganization, shall file, as part o f its return for the taxable year within which the reorganization occurred a com plete statement of all facts pertinent to the non-recognition of gain or loss in connection with the reorganization, including: (1) A copy of the plan of reorganization, together with a statement, execute d under the penalties of perjury, showing in full the purposes thereof and in de tail all transactions incident to, or pursuant to the plan. (2) A complete statement of the cost or other basis of all property, includi ng all stocks or securities, transferred incident to the plan. (3) A statement of the amount of stock or securities and other property or m oney received from the exchange, including a statement of all distribution or ot her disposition made thereof. The amount of each kind of stock or securities and other property received shall be stated on the basis of the fair market value t hereof at the date of the exchange. (4) A statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the prop erty acquired in the exchange is subject. (b) Every taxpayer, other than a corporation, a party to the reorganization, who received stock or securities and other property or money upon a tax-free ex change in connection with a corporate reorganization shall incorporate in his in come tax return for the taxable year in which the exchange takes place a complet e statement of all facts pertinent to the non-recognition of gain or loss upon s uch exchange including: (1) A statement of the cost or other basis of the stock or securities transf erred in the exchange; and (2) A statement in full of the amount of stock or securities and other prope rty or money received from the exchange, including any liabilities assumed upon the exchange, and any liabilities to which property received is subject. The amo unt of each kind of stock or securities and other property (other liabilities as sumed upon the exchange) received shall be set forth upon the basis of the fair

market value thereof at the date of the exchange. (c) Permanent records in substantial form shall be kept by every taxpayer wh o participates in a tax-free exchange in connection with a corporate reorganizat ion showing the cost or other basis of the transferred property or money receive d (including any liabilities assumed on the exchange, or any liabilities to whic h any of the properties received were subject), in order to facilitate the deter mination of gain or loss from a subsequent disposition of such stock or securiti es and other property received from the exchange. In addition to the foregoing requirements, permanent records in substantial form must be kept by the corporation participating in the merger showing the informa tion listed above in order to facilitate the determination of gain or loss from a subsequent disposition of the stock received as a consequence of the merger. In a merger or consolidation, one (1) of the corporations would necessarily be d issolved so that, under Section 235 of the Tax Code, it should be subjected to a n investigation for all tax purposes. Proof should be submitted by any of the tw o (2) entities to the Legislative, Ruling and Research Division that there was s uch an investigation conducted or is being conducted by the BIR. 2) In the case of transfer of property to a controlled corporation. (a) The transferor/s must file with his/their income tax return for the taxa ble year in which the exchange was consummated, a complete statement of all fact s pertinent to the exchange, including: (1) A Sworn Statement as to how the property was acquired; (2) A description of the properties transferred, or of their interest in suc h properties, with a statement of the original acquisition cost or other basis t hereof and the adjusted cost basis at the time of the transfer; (3) The kind of stock received and preference, if any; (4) The numbers of shares of each class received, and (5) The fair market value per share of each class at the date of the exchang e. (b) On the other hand, the transferee corporation must file with its income tax return for the taxable year in which the exchange was consummated the follow ing: (1) A complete description of all properties received from the transferor/s;

(2) A statement of the original acquisition cost or other basis of the prope rties in the hands of the transferors and the adjusted cost basis thereof at the time of the transfer; and (3) Information with respect to the capital stock of the corporation includi ng: (i) The total issued and outstanding capital stock immediately prior to and immediately after the exchange with a complete description of each class of stoc k; (ii) The classes of stocks and number of shares issued to the transferors in the exchange; and (iii) The fair market value as of the date of the exchange of the capital stoc k issued to the transferors. (c) Permanent records in substantial form must be kept by the taxpayers part icipating in the exchange, showing the information listed above in order to faci litate the determination of gain or loss from a subsequent disposition of stocks /properties received in the exchange. (d) The parties shall cause to be annotated on the Transfer Certificates of

Titles (in the case of real property) or at the back of the Certificate of Stock s (in the case of shares of stock), the date the deed of exchange was executed, the original or historical cost of acquisition of the properties or shares of st ock involved, and the fact that no gain or loss was recognized as a result of th e exchange. II. CONDITIONS FOR THE ISSUANCE OF CERTIFICATE AUTHORIZING REGISTRATION (CAR ). No CAR for the real property involved in the exchange shall be issued by the Rev enue District Officer/Authorized Internal Revenue Officer concerned unless a det ermination letter/ruling has been issued by the Commissioner to the effect that the transaction qualifies as a tax-free exchange or corporate reorganization und er Section 34(c) (2) of the Tax Code. The CAR to be issued shall specify among others that the transaction involved is a tax-free exchange under Section 34(c) (2) of the Tax Code; the date of exchan ge; and the original or historical cost of acquisition of the properties as veri fied. Documentary stamp tax imposed under Section 196 of the Tax Code shall be determi ned and collected based on the consideration received or contracted for such rea lty exchanged, i.e. the corresponding value of the shares of stock; the original issues of Certificates of Stocks by the transferee corporation shall be subject to documentary stamp tax imposed by Section 175 of the same Code. III. REQUIREMENTS FOR THE REGISTRATION OR PROPERTIES. -

A. The Register of Deeds having jurisdiction of the place where the propert y exchanged is located shall cause the registration/transfer of the Transfer Cer tificate of Title (TCT) in the name of the transferee corporation only upon pres entation of the CAR duly issued by the Revenue District Officer/Authorized Inter nal Revenue Officer. The Register of Deeds shall cause the annotation at the back of the TCT to be is sued the statement that the transfer of properties is a Tax-Free Exchange under Section 34(c) (2) of the Tax Code or the fact that no gain or loss was recognize d as a result of such exchange; the original or historical cost of acquisition t hereof, and the date of execution of the Deed of Transfer/Exchange. B. The Corporate Secretary of the Transferee Corporation shall cause the re gistration in its stock transfer book the name/names of the stockholders whose p roperties were exchanged for shares of stock; Documentary Stamp Tax imposed under Section 175 of the Tax Code shall be paid to and collected by the Revenue District Officer concerned on the Certificate of s tocks which are original issues by the transferee corporation in exchange for th e property of the transferor. IV. MONITORING/INVESTIGATION OF TAX-FREE EXCHANGES. -

A. The Legislative, Ruling and Research Division shall every now and then r efer copy/copies of adjudication letters/rulings issued in connection with tax-f ree exchange of properties to the respective Revenue District Officers having ju risdiction of the place where the real property is located, for verification and monitoring if the conditions set forth therein have been complied with. B. Since under Section 34(c) (2) of the Tax Code there is merely a defermen t of recognition of gain or loss on the transfer/exchange of properties, any sub sequent disposition of the properties involved in the exchange shall be subject to the corresponding income tax on the gain or income derived by the transferor or transferee corporation. C. In determining the income and documentary stamp taxes due on subsequent

disposition of the properties involved in the exchange, the basis of the computa tion shall be the difference between the original/historical or adjusted cost of acquisition of the property and the consideration of sale or the fair market va lue/zonal value of the property, whichever is higher. On the other hand, the cos t basis of the shares of stock shall be the same as the original acquisition cos t or adjusted cost basis to the transferor of the properties exchanged therefor. V. REPEALING CLAUSE. All regulations, rules, orders or portions thereof contrary to or inconsistent w ith the provisions of this Order are hereby modified and/or repealed accordingly . VI. EFFECTIVITY. This Order shall take effect immediately. Gregory vs. Helvering Section 112 of the Revenue Act of 1928 (26 USCA 2112) deals with the sub ject of gain or loss resulting from the sale or exchange of property. Such gain or loss is to be recognized in computing the tax, except as provided in that sec tion. The provisions of the section, so far as they are pertinent to the questio n here presented, follow: 'Sec. 112. ... (g) Distribution of Stock on Reorganization. If there is distribu ted, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in an other corporation a party to the reorganization, without the surrender by such s hareholder of stock or securities in such a corporation, no gain to the distribu tee from the receipt of such stock of securities shall be recognized. ... '(i) Definition of Reorganization. As used in this section ... '(1) The term 'reorganization' means ... (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred. ... ' 26 USCA 2112(g), (i) (1). It is earnestly contended on behalf of the taxpayer that since every ele ment required by the foregoing subdivision (B) is to be found in what was done, a statutory reorganization was effected; and that the motive of the taxpayer the reby to escape payment of a tax will not alter the result or make unlawful what the statute allows. It is quite true that if a reorganization in reality was ef fected within the meaning of subdivision ( B), the ulterior purpose mentioned wi ll be disregarded. The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law p ermits, cannot be doubted. But the question for determination is whether what wa s done, apart from the tax motive, was the thing which the statute intended. The reasoning of the court below in justification of a negative answer leaves littl e to be said. When subdivision (B) speaks of a transfer of assets by one corporation t o another, it means a transfer made 'in pursuance of a plan of reorganization' ( section 112(g) of corporate business; and not a transfer of assets by one corpor ation to another in pursuance of a plan having no relation to the business of ei ther, as plainly is the case here. Putting aside, then, the question of motive i n respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose-a mere device which put on the form of a corporate reorgani zation as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reor ganize a business or any part of a business, but to transfer a parcel of corpora te shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last describ ed. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limi

ted function had been exercised, it immediately was put to death. In these circumstances, the facts speak for themselves and are susceptib le of but one interpretation. The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of co nveyance masquerading as a corporate reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent t o the situation, because the transaction upon its face lies outside the plain in tent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose. REVENUE REGULATIONS NO. 04-99 SUBJECT : Further Amending Revenue Memorandum Order No. 29-86 dated Septem ber 3, 1986, as Amended by Revenue Memorandum Order No. 16-88 dated April 18, 19 88, as Further Amended by Revenue Memorandum Order No. 27-89 dated April 18, 198 9, and as Last Amended by Revenue Memorandum Order No. 6-92 dated January 15, 19 92 Relative to the Payment of Capital Gains Tax and Documentary Stamp Tax on Ext ra-Judicial Foreclosure Sale of Capital Assets Initiated by Banks, Finance and I nsurance Companies TO : All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. Pursuant to Section 244 of the Tax Code of 1997, in relat ion to Sections 24(D)(1) and 27(D)(5) of the same Code, these Regulations are he reby promulgated amending Revenue Memorandum Order No. 29-86, as last amended by Revenue Memorandum Order No. 6-92 and other relevant revenue regulations and is suances regarding the payment of capital gains tax and documentary stamp tax on extrajudicial foreclosure sale of capital assets initiated by banks, finance and insurance companies. cda SECTION 2. Foreclosure of Mortgage Provision Under Presidential Decree No. 1529, Otherwise Known as "Property Registration Decree". Section 63 of P.D. No. 1529, otherwise known as the "Property Registration Decree" provides as follows: "SECTION 63. Foreclosure of Mortgage. (a) If the mortgage was foreclosed judi cially, a certified copy of the final order of the court confirming the sale sha ll be registered with the Register of Deeds. If no right of redemption exists, t he certificate of title of the mortgagor shall be cancelled, and a new certifica te issued in the name of the purchaser. "Where the right of redemption exists, the certificate of title of the mortgagor SHALL NOT BE CANCELLED, but the certificate of sale and the order confirming th e sale shall be registered by a BRIEF MEMORANDUM thereof made by the Register of Deeds upon the certificate of title. In the event the property is redeemed, the certificate or deed of redemption shall be filed with the Register of Deeds, an d a brief memorandum thereof shall be made by the Register of Deeds on the certi ficate of title of the mortgagor. "If the property is not redeemed, the final deed of sale executed by the sheriff in favor of the purchaser at a foreclosure sale shall be registered with the Re gister of Deeds; whereupon the title of the mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser. "(b) If the mortgage was foreclosed extrajudicially, a certificate of sale ex ecuted by the officer who conducted the sale shall be filed with the Register of Deeds who shall make a brief memorandum thereof on the certificate of title. "In the event of redemption by the mortgagor, the same rule provided for in the second paragraph of this section shall apply. "In case of non-redemption, the purchaser at foreclosure sale shall file with th e Register of Deeds, either a final deed of sale executed by the person authoriz ed by virtue of the power of attorney embodied in the deed of mortgage, or his s worn statement attesting to the fact of non-redemption; whereupon, the Register

of Deeds shall issue a new certificate in favor of the purchaser after the owner 's duplicate of the certificate has been previously delivered and cancelled." It is clear from the above provision of the "Property Registration Decree" that where the right of redemption of the mortgagor exists, the certificate of title of the mortgagor shall not be cancelled yet even if the property had already bee n subjected to foreclosure sale, BUT INSTEAD only a brief memorandum shall be an notated at the back of the certificate of title, and the cancellation of the tit le and the subsequent issuance of a new title in favor of the purchaser/highest bidder depends on whether the mortgagor shall redeem or not the mortgaged proper ty within one year from the issuance of the certificate of sale. Thus, no transf er of title to the highest bidder can be effected yet until and after the lapse of the one-year period from the issuance of the said certificate of sale. SECTION 3. Capital Gains Tax. (1) In case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale, no capital gains tax shall be impo sed because no capital gains has been derived by the mortgagor and no sale or tr ansfer of real property was realized. A certification to that effect or the deed of redemption shall be filed with the Revenue District Office having jurisdicti on over the place where the property is located which certification or deed shal l likewise be filed with the Register of Deeds and a brief memorandum thereof sh all be made by the Register of Deeds on the Certificate of Title of the mortgago r. (2) In case of non-redemption, the capital gains tax on the foreclosure sale imposed under Secs. 24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall become due based on the bid price of the highest bidder but only upon the expiration of the one-year period of redemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118, and shall be paid within thirty (30) days from the exp iration of the said one-year redemption period. SECTION 4. Documentary Stamp Tax. (1) In case the mortgagor exercises his right of redemption, the transaction shall only be subject to the P15.00 documentary stamp tax imposed under Sec. 18 8 of the Tax Code of 1997 because no land or realty was sold or transferred for a consideration. (2) In case of non-redemption, the corresponding documentary stamp tax shall be levied, collected and paid by the person making, signing, issuing, accepting , or transferring the real property wherever the document is made, signed, issue d, accepted or transferred where the property is situated in the Philippines; Pr ovided, That whenever one party to the taxable document enjoys exemption from th e tax, the other party thereto who is not exempt shall be the one directly liabl e for the tax. The tax return prescribed under the Code shall be filed within te n (10) days after the close of the month following the lapse of the one-year red emption period, and the tax due under Sec. 196 of the Tax Code of 1997 shall be paid based on the bid price at the same time the aforesaid return is filed. SECTION 5. Tax Clearance Certificate/Certificate Authorizing Registration. In case of non-redemption, a tax clearance certificate (TCC) or Certificate Auth orizing Registration (CAR) in favor of the purchaser/highest bidder shall only b e issued upon presentation of the capital gains and documentary stamp taxes retu rns duly validated by an authorized agent bank (AAB) evidencing full payment of the capital gains and documentary stamp taxes due imposed under Secs. 3 and 4 of these Regulations on the sale of the property classified as capital asset. The AAB must be located at the Revenue District Office having jurisdiction over the place where the property is located. SECTION 6. Repealing Clause. The provisions of any revenue regulations, rev enue memorandum order, revenue memorandum circular or any other revenue issuance inconsistent with these Regulations are hereby repealed, amended, or modified a

ccordingly. SECTION 7. Effectivity Clause. These Regulations shall take effect fifteen (15) days after publication in any newspaper of general circulation. PART 9 PART VII II. SITUS OF TAXATION Section 42 SOURCES FROM WITHIN AND WITHOUT THE PHILIPPINES

Income from Sources Within the Philippines

(A) Gross Income from Sources Within the Philippines. The following items of gro ss income shall be treated as gross income from sources within the Philippines: (1) Interests. Interests derived from sources within the Philippines, and intere sts on bonds, notes or other interest-bearing obligations of RESIDENTS, corporat e or otherwise; (2) Dividends. The amount received as dividends: a. From a domestic corporation; and b. From a foreign corporation, UNLESS less than 50% of the gross income of such foreign corporation for the 3-year period ending with the close of its taxable y ear 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 as determined under the provisions of this section; BUT only in an a mount which bears the same ratio to such dividends as the gross income of the co rporation for such period derived from sources within the Philippines bears to i ts gross income from all sources. (3) Services. Compensation for labor or personal services performed in the Phili ppines; (4) Rentals & Royalties. From property located in the Philippines or from any in terest in such property, including rentals or royalties for a. The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; b. The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment; c. The supply or scientific, technical, industrial or commercial knowledge or in formation; d. The supply of any assistance that is ancillary and subsidiary to, and is furn ished as a means of enabling the application or enjoyment or, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); e. The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operatio n of any brand, machinery, or other apparatus purchased from such nonresident pe rson; f. Technical advice, assistance or services rendered in connection with technica l management or administration of any scientific, industrial or commercial under taking, venture, project or scheme; and g. The use of or the right to use: (i) Motion picture films; (ii) Films or video tapes for use in connection with television; and (iii) Tapes for use in connection with radio broadcasting. (5) Sale of Real Property. Gains, profits and income from the sale of real prope rty located in the Philippines; and (6) Sale of Personal Property. Gains, profits and income from the sale of person al property, as determined in subsection (E) of this section. (B) Taxable Income From Sources Within the Philippines.

(1) General Rule. From the items of gross income specified in subsection (A) of this section, there shall be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effectively connected with the business or trade conducted exc lusively within the Philippines which cannot definitely be allocated to some ite ms or class of gross income; PROVIDED, that such items of deductions shall be al lowed only if fully substantiated by all the information necessary for its calcu lation. The remainder, if any, shall be treated in full as taxable income from sources within the Philippines. (2) Exception. No deductions for interest paid or incurred abroad shall be allow ed from the item of gross income specified in subsection (A) UNLESS indebtedness was actually incurred to provide funds for use in connection with the conduct o r operation of trade or business in the Philippines. (C) Gross Income From Sources Without the Philippines. The following items of gr oss income shall be treated as income from sources without the Philippines: (1) Interests other than those derived from sources within the Philippines as pr ovided in paragraph (1) of subsection (A) of this section; (2) Dividends other than those derived from sources within the Philippines as pr ovided in paragraph (2) of subsection (A) of this section; (3) Compensation for labor or personal services performed without the Philippine s; (4) Rentals or royalties from property located without the Philippines or from a ny interest in such property including rentals or royalties for the use of or fo r the privilege of using without the Philippines, patents, copyrights, secret pr ocesses and formulas, goodwill, trademarks, trade brands, franchises and other l ike properties; and (5) Gains, profits and income from the sale of real property located without the Philippines. (D) Taxable Income From Sources Without the Philippines. From the items of gross income specified in subsection (C) of this section, there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated theret o and a ratable part of any expense, loss, or other deduction which cannot defin itely be allocated to some items or classes of gross income. The remainder, if any, shall be treated in full as taxable income from sources without the Philipp ines. (E) Income From Sources Partly Within and Partly Without the Philippines. Items of gross income, expenses, losses and deductions, other than those specified in subsections (A) and (C) of this section, shall be allocated or apportioned to so urces within or without the Philippines, under the rules and regulations prescri bed by the Secretary of Finance, upon recommendation of the Commissioner. Where items of gross income are separately allocated to sources within the Philippine s, there shall be deducted (for the purpose of computing the taxable income ther efrom) the expenses, losses and other deductions which cannot definitely be allo cated to some items or classes of gross income. The remainder, if any, shall be included in full as taxable income from sources within the Philippines. In the case of gross income derived from sources partly within and partly without the Philippines, the taxable income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income; and the portion of such taxable income at tributable to sources within the Philippines may be determined by processes or f ormulas 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 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 withou t the Philippines.

Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely from sources within the country in which sold: PROVIDED HOWEVER, that gain from the sale of shares of stock in a domestic corporation shall be treated as deriv ed entirely from sources within the Philippines regardless of where the said sha res are sold. The transfer by a nonresident alien or a foreign corporation to a nyone of any share of stock issued by a domestic corporation shall not be effect ed or made in its book UNLESS: (1) the transferor has filed with the Commissione r a bond conditioned upon the future payment by him of any income tax that may b e due on the gains derived from such transfer, or (2) the Commissioner has certi fied that the taxes, if any, imposed on this title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transfer or and the corporation the shares of which are sold or transferred, to advise th e transferee of this requirement. (F) Definitions. As used in this section, the words sale or sold include exchange o r exchanged; and the word produced includes created, fabricated, manufactured, ext racted, processed, cured or aged. READ ALSO: Sections 152-165, Revenue Regulation-2 1. Gross Income From Sources Within the Philippines CASE: CIR vs. British Overseas Airways Corporation (BOAC), 149 SCRA 395 (1987). FACTS: BOAC is a 100% British government-owned corporation organized under the U.K. laws. It is engaged in the international airline business and is a membersignatory of the Interline Air Transport Association (IATA). It operates air tr ansportation service and sells transportation tickets over routes of the other a irline members. During the periods covered by the disputed assessment, BOAC had no landing rights for traffic purposes in the Philippines and was not granted a certificate of public convenience and necessity to operate in the Philippines b y the Civil Aeronautics Board (CAB), except for a 9-month period, when it was gr anted a temporary landing permit by the CAB. Thus, it did not carry passengers and/or cargo to or from the Philippines but it maintained a general sales agent in the Philippines Warner Barnes and Company, Ltd., and later Qantas Airways res ponsible for selling BOAC tickets covering passengers and cargoes. (First CTA case) On 7 May 1968, CIR assessed BOAC for deficiency income taxes covering the years 1959 to 1963. BOAC protested. After subsequent invest igation, a new assessment was issued for the years 1959 to 1967 amounting to P85 8K+, which BOAC paid under protest. On 7 October 1970, BOAC filed a claim for r efund of the P858K, which claim was denied by the CIR. But before said denial, BOAC had already filed a Petition for Review with the Tax Court, assailing the a ssessment and praying for the refund of the amount paid. (Second CTA case) On 17 November 1971, BOAC was assessed deficiency inco me taxes, interests, penalty and compromise penalties. On 25 November 1971, BOA C requested that the assessment be set aside, which the CIR denied. This prompt ed BOAC to file the 2nd case before the Tax Court. The Tax Court reversed the CIR. It held that the proceeds of the sales of BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd., a nd later by Qantas Airways, during the period in question, do not constitute BOA C income from Philippine sources since no service of carriage of passengers or f reight was performed by BOAC within the Philippines and thus, said income is not subject to Philippine income tax. The CTA s position was that the income from tr ansportation is income from services so that the place where the services are re ndered determines the source. Hence, the CIR filed a petition for review on cer tiorari. ISSUE: 1) W/N the revenue derived by BOAC from sales of tickets in the Philippi nes for air transportation, while having no landing rights here, constitute inco me from Philippine sources, and thus, taxable YES

2) W/N the revenue sales by BOAC in the Philippines constitute income fr om Philippine sources YES HELD: 1) Under Section 20 of the 1977 Tax Code: The term resident foreign corporation applies to a foreign corporation enga ged in trade or business within the Philippines or having an office or place of business therein, while The term non-resident foreign corporation applies to a foreign corporation not engaged in trade or business within the Philippines and not having any offic e or place of business therein. BOAC is a resident foreign corporation. There is no specific criterion a s to what constitutes doing or engaging in or transacting business. Each case must b judged in the light of its peculiar environmental circumstances. The term impl ies a continuity of commercial dealings and arrangements, and contemplates, to t hat extent, the performance of acts or works or the exercise of some of the func tions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. In order that a forei gn corporation may be regarded as doing business within a State, there must be c ontinuity of conduct and intention to establish a continuous business, such as t he appointment of a local agent, and not one of a temporary character. BOAC maintained a general sales agent in the Philippines. That general s ales agent was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips each trip in the series corresponding to a diff erent airline company; (3) receiving the fare from the whole trip; and (4) conse quently allocating to the various airline companies on the basis of their partic ipation in the services rendered through the mode of interline settlement. Thos e activities were in the exercise of the functions, which are normally incident to, and are in progressive pursuit of, the purpose and object of its organizatio n as an international air carrier. In fact, the regular sale of tickets, its ma in activity, is the very lifeblood of the airline business, the generation of sa les being the paramount objective. There should be no doubt then that BOAC was engaged in business in the Philippines through a local agent. Thus, it is a res ident foreign corporation subject to tax upon its total net income received in t he preceding taxable year from all sources within the Philippines. 2) The source of an income is the property, activity or service that pro duced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within th e Philippines. In BOAC s case, the sale of tickets in the Philippines is the acti vity that produces the income. The tickets exchanged hands here and payments fo r fares were also made here in the Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurre d within, Philippine territory, enjoying the protection accorded by the Philippi ne government. In consideration of such protection, the flow of wealth should s hare the burden of supporting the government. A transportation ticket is not a mere piece of paper. When issued by a c ommon carrier, it constitutes the contract between the ticket-holder and the car rier. It gives rise to the obligation of the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set forth. Section 37 (A) of the Tax Code, which enumerates items of gross income fr om sources within the Philippines, does not mention income from the sale of tick ets for international transportation. However, that does not render it less an income from sources within the Philippines. Section 37, by its language, does n ot intend the enumeration to be exclusive. The absence of flight operations to and from the Philippines is not deter minative of the source of income or the situs of income taxation. BOAC was an o ff-line international airline at the time of the case. The test of taxability i s the SOURCE and the source of the income is that activity xxx which produced the income. The passage documentations were sold in the Philippines and the revenue was derived from a business activity regularly pursued within the Philippines. Even if the BOAC tickets sold covered the transport of passengers and cargo to

and from foreign cities, it cannot alter the fact that income from the sale of t ickets was derived from the Philippines. The word SOURCE conveys one essential id ea, that of origin, and the origin of the income here is the Philippines. 2. Taxable Income From Sources Within the Philippines CASE: CIR vs. CTA and Smith Kline & French Overseas Co. (Philippine Branch), 12 7 SCRA 9 (1984) FACTS: This is a case about the refund of a 1971 income tax amounting to P324K+ . Smith Kline and French Overseas Company, a multinational firm domiciled in Ph iladelphia, Pennsylvania, is licensed to do business in the Philippines. It is engaged in the importation, manufacture and sale of pharmaceuticals, drugs and c hemicals. In its 1971 original ITR, Smith Kline declared a net taxable income of P 1.4M+ and paid P500K+ as tax due. Among the deductions claimed from GI was P501 K+ as its share of the head office overhead expenses. However, in its amended r eturn filed on 1 March 1973, there was an overpayment of P324K+ arising from und erdeduction of home office overhead. Smith Kline made a formal claim for the re fund of the alleged overpayment. In October 1972, Smith Kline received from its international independent auditors an authenticated certification to the effect that the Philippine share in the unallocated overhead expenses of the main office for the year ended Dece mber 1971 was actually P1.4M+. On 2 April 1974, without awaiting the action of the CIR on its claim, Sm ith Kline filed a petition for review with the CTA. The CTA ordered the commiss ioner to refund the overpayment or grant a tax credit to Smith Kline. The Commi ssioner appealed to the SC. HELD: The governing law is found in section 37 of the old NIRC, which reads: xxx (b) Net income from sources in the Philippines. From the items of the gross income specified in subsection (a) of this section there shall be deducted the e xpenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses or other deductions which cannot defi nitely be allocated to some item or class of gross income. The remainder, if na y, shall be included in full as net income from sources within the Philippines. Revenue Regulation NO. 2 of the Department of Finance contains the follo wing provisions on the deductions to be made to determine the net income from Ph ilippine sources: Section 160. Apportionment of Deductions. From the items specified in section 37 (a), as being derived specifically from sources within the Philippines, there shall be deducted the expenses, losses and other deductions properly apportione d or allocated thereto and a ratable part of any other expenses, losses or deduc tions which cannot definitely be allocated to some item or class of gross income . The remainder shall be included in full as net income from sources within the Philippines. The ratable part is based upon the ratio of gross income from sou rces within the Philippines to the total gross income. Example: A non-resident alien individual whose taxable year is the cale ndar year, derived gross income from all sources for 1939 of P180K, including th erein: Interest on bonds of a domestic corporation P9,000 Dividends on stock of a domestic corporation .4,000 Royalty for the use of patents within the Philippines ..12,000 Gain from the sale of real property located within the Philippines 11,000 TOTAL P36,000 ===== that is, 1/5 of the total gross income was from sources within the Philippines. The remainder of the gross income was from sources without the Philippines, det ermined under section 37 (c). The expenses of the taxpayer for the year amounted to P78K. Of the expe nses, the amount of P8K is properly allocated to income from sources within the Philippines and the amount of P40K is properly allocated to income from sources

without the Philippines. The remainder of the expense, P30K, cannot be definitely allocated to an y class of income. A ratable part thereof, based upon the relation of gross inc ome from sources within the Philippines to the total gross income, shall be dedu cted in computing net income from sources within the Philippines. Thus, there a re deducted from the P36K of gross income from sources within the Philippines ex penses amounting to P14K [representing P8K properly apportioned to the income fr om sources within the Philippines and P6K, a ratable part (1/5) of the expenses which could not be allocated to any item or class of gross income]. The remaind er, P22K, is the net income from sources within the Philippines. Thus, it is manifest from the foregoing that where an expense is clearly related to the production of Philippine-derived income or to Philippine operati ons (e.g. salaries of Philippine personnel, rental of office building in the Phi lippines ), that expense can be deducted from the gross income acquired in the P hilippines without resorting to apportionment. The overhead expenses incurred by the parent company in connection with finance, administration, and research and development, all of which directly ben efit its branches all over the world, including the Philippines, fall under a di fferent category however. These are items, which cannot be definitely allocated or identified with the operations of the Philippine branch. For 1971, the pare nt company of Smith Kline spent $1,077,739. Under Section 37 (b) of the Revenue Code and section 160 of the regulations, Smith Kline can claim as its deductibl e share a ratable part of such expenses based upon the ratio of the local branch s gross income to the total gross the ratio of the local branch s gross income to t he total gross income, worldwide, of the multinational corporation. The weight of evidence bolsters its position that the amount of P1.4M+ r epresents the correct ratable share, the same having been computed pursuant to s ection 37 (b) and section 160. The refund or credit of the resulting overpayment is in order. PLEASE READ ATTACHED HARD COPIES OF THE FF: Revenue Audit Memo Order No. 1-86. Procedure for Tax Audit of Philippine Branche s of Foreign Corporations On: Income from constructive trading of multinationals Revenue Regulations No. 16-86. Amendment to Section 160 of the Income Tax Regula tions (Revenue Regulations NO. 2) regarding the basis of determining ratable par t of overseas overhead expenses apportioned under Section 37 (b) of the NIRC. Revenue Audit Memo Order 4-86. Audit Guidelines in the Allocation of Home Offic e Overhead Expenses Under Section 37 (b) of the NIRC On: Allocation of head office overhead expenses Revenue Audit Memo Order 1-95. Audit Guidelines and Procedures on the Proper De termination of the Income Tax Liability of Philippine Branches and Liaison Offic es of Multi-National Enterprises (MNEs) Engaged in Soliciting Orders, Purchaser, Service Contracts, Trading, Construction and Other Activities in the Philippine s On: Audit guidelines on determination of income tax of branches of multinationa ls 3. Gross Income From Sources Without the Philippines 4. Income From Sources Partly Within or Without the Philippines 5. Situs of sale of stocks in a domestic corporation 6. Definition of Royalties Philamlife CA-GR Sp. NO. 31283, April 25, 1995 (NOT AVAILABLE) - Includes services to investment, training and education accounting) PART 10 PART 11

BPI v. CIR RR 2-98 (read original) RR 12-98 -This merely amends Section 2.57.2 of RR 2-98 (in order to streamline and make m ore efficient the collection of the creditable withholding tax on income payment s to medical practitioners) * The old rule had no procedure laid down for these medical practitioners, the n ew procedure is now as follows: 1. It shall be the DUTY and RESPONSIBILITY of the hospital/clinic to collect fro m any patient admitted by such hospital/clinic, the professional fee of the atte nding medical practitioner and to withhold the tax herein prescribed (10%) 2. It is the intent of this RR that the hospital/clinic shall, at all times, col lect the professional fee for and in behalf of the medical practitioner and to w ithhold there from the tax herein prescribed. 3. All these rules apply also to rendering of medical services by medical practi tioners through a duly registered professional partnership, however, the rate if 5%. A. IN GENERAL it shall be presumed that the hospital/clinic has collected the pr ofessional fee of the said medical practitioner and shall, accordingly, be liabl e for the withholding of the tax vis--vis each and every patient admitted into th e hospital or clinic under the care of the said medical practitioner. B. EXCEPTION the withholding tax does NOT apply whenever there is proof that no professional fee has in fact been charged and paid by his patient, PROVIDED, thi s fact is in a sworn declaration jointly executed by the medical practitioner, t he patient or his duly authorized rep., and the administrator of the hospital/cl inic. This sworn declaration shall form part of the records of the hospital/cli nic and made readily available to any authorized CIR officer for tax audit purpo ses, PROVIDED further, the administrator should inform the Revenue District Offi ce having jurisdiction over such hospital/clinic about any medical practitioner who fails or refuses to execute the sworn statement within 10 days from such eve nt. FILSYN v. CA FACTS: this involves 2 consolidated cases---in both cases 2 corps received deman d letters from the CIR demanding payment of deficiency withholding tax. The two corporations say that the liability to withhold and pay income tax withheld at s ource from certain payments due to a foreign corporation is at the time of accru al and not at the time of the actual payment or remittance thereof (that for the 2 corporations, it is to be paid to the government when it is due, not when it was actually paid to them [a later due date, parang ganon]). But the CIR and CTA say otherwise: that the liability of a taxpayer to withhold and pay the income tax withheld at source from certain payments due to a non-resident foreign corp attaches at the time of accrual payment or remittance thereof and the withholdin g agent/corp is obliged to remit the tax to the govt since it already and proper ly belongs to the govt. ISSUE: whether withholding tax due on payments to foreign corporations accrue on the date of actual remittance or earlier, when the amount is paid to the corpor ation? HELD: when it was first paid to the corporation, especially in the case at bar w here the corporation has already written-off the amounts as business expense in it s books (it already took advantage of the benefit allowing for deductions therefor e, you cannot now claim that the withholding tax is due later (when you actually remit it) when you have already used its benefits *the corp which is to withhold is considered both the agent of the taxpayer (whe n he files the papers) and of the governement (when he actually withholds) *the law sets no condition for the liability of the corp/govt agent to attach wh en the corp doesn t withhold what he s supposed to withhold, reason is to compel the

withholding agent to withhold under all circumstances!! So he is no ordinary ag ent of the govt, his duty is utmost! CIR vs. PROCTOR AND GAMBLE (both cases, where the former was later on reversed) *this was taken up already in Part II, so I ll just take up what s important re with holding tax. * Here it was said the PG-Phils has no bearing to pay the taxes on the dividends of PG to be paid to PG-USA, because they are different corporations. In the re versed version, PG-Phils has capacity to pay because when they remit the money t o USA, and USA pays here, it is the same when they themselves pay for it. * Anent that is the issue above, is whether PG-Phils is a taxpayer who can withhol d tax? Yes, since the corp/withholding agent is directly and independently liab le for the correct amount of the tax that should be withheld from the dividend r emittances. Ergo, a person liable for tax has been held to be a person subject to tax * Now as to the withholding issue under the syllabus: TAX DEEMED PAID ON Dividends --- the parent corp PG-USA is deemed to have paid a portion of the phil corp incom e tax although the tax was actually paid by its phils subsidiary, pg-phils, Not PG-USA. This deemed paid concept merely reflects economic reality, since the phil corp income tax was in fact paid and deducted from revenues earned in the phils, THUS REDUCING THE AMOUNT REMITTABLE as dividends to PG-USA. In other words, US tax law treats the phil corp income tax as if it came out of the pocket of PG-US A as a part of the economic cost of carrying on business in the phils through it s medium, PG-phils. What is, under US LAW, DEEMED PAID by PG-USA are not phantom taxes but instead phil corp income taxes actually paid here by PG-phils, which a re very real indeed. * Now, re the deemed paid tax credit: there is no statutory provision nor RR issue d by the secretary of finance requiring the ACTUAL grant of the deemed paid tax cr edit by the US internal revenue service to PG-usa BEFORE the preferential 15% d ividend rate becomes applicable (as opposed to the 35% rate). CIR vs. PROCTOR & GAMBLE (204S377) MARUBENI CORP vs. CIR (Withholding tax on dividends) FACTS: marubeni is a foreign corp, it has equity investments in AG&P, and so AG& P declared dividends to marubeni and so was taxed on it. Because they asked for a ruling from the BIR on whether or not the dividends marubeni received from AG &P are effectively connected with its conduct or business in the phils as to be considered branch profits subject to 15% profit remittance tax (sec24bNIRC). So the CIR replied: that the dividends received by marubeni are NOT income arising from the business activity in which marubeni is engaged, therefore not branch pr ofits subject to the 15% profit remittance tax because only profits remitted abr oad by a branch office to its head office which are effectively connected with i ts trade or business in the phils; and effectively connected means it is not neces sary that the income be derived from the actual operation of taxpayer s trade or b usiness; it is sufficient that the income arises from the business activity in w hich the corporation is engaged. So since it s not subject to the tax, it asked f or a refund. Which of course the CIR denied saying although it s not subject to th e 15%, it is subject to 25% by virtue to a tax treaty between Japan and the phil s. And since 25% less 10% withholding = 15%, Na credit na offset! CTA affirmed thi s. Appeal to SC. ISSUE: is marubeni a resident or non-resident foreign corp? HELD: A resident foreign corp is one that is engaged in trade or business in the p hils. Marubeni says they are one and the same as AG&P, on the principal agent th eory. SOLGEN says otherwise: that theory does not apply here. SC says marubeni is NOT resident foreign corp because marubeni s independent investment is attribut able only to the head office. It was marubeni s own investment, where it got its profits which was remitted by AG&P. BUT even if that is the case, the CIR & CA w

ere wrong in setting off the tax rates it goes against basic rules in taxation. CIR vs. CA, JOHNSON & SONS (And the MfR) PART 12 Estate Taxation- Reciprocity of Exemption Collector vs. Fisher ( decided in 1961) Facts: Stevenson is a resident California, U.S.A. He had real and personal prop erties (shares of stock in 2 RP corporations and cash in bank) in the Republic o f the Philippines. He died in the US leaving his wife Beatrice as his sole heire ss. Ancillary administration proceedings were instituted in Manila for the settl ement of the estate in RP. Beatrice assigned all her rights to her husband s estat e to the Fishers. The Fishers claim exemption from the payment of estate and inh eritance taxes on the RP corporation shares of stock owned by the estate. The ba sis of the Fishers claim is the reciprocity proviso of Sec. 122 of the NIRC. CIR denied the claim. The CTA allowed the claim hence this petition. Issue: to reciprocate or not to reciprocate, that is the question Held: Sec. 122 of the NIRC does not apply therefore, no reciprocity Section 122 of our National Internal Revenue Code, in pertinent part, pro vides: ". . . And, provided, further, That no tax shall be collected under this Title i n respect of intangible personal property (a) if the decedent at the time of his death was a resident of a foreign country which at the time of his death did no t impose a transfer tax or death tax of any character in respect of intangible p ersonal property of citizens of the Philippines not residing in that foreign cou ntry or (b) if the laws of the foreign country of which the decedent was a resid ent at the time of his death allow a similar exemption from transfer taxes or de ath taxes of every character in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country." (Emphasis su pplied.) On the other hand, section 13851 of the California Inheritance Tax Law, i nsofar as pertinent, reads: "SEC. 13851, Intangibles of nonresident: Conditions. Intangible personal propert y is exempt from the tax imposed by this part if the decedent at the time of his death was a resident of a Territory or another State of the United States or of a foreign state or country which then imposed a legacy, succession, or death ta x in respect to intangible personal property of its own residents, but either: "(a) did not impose a legacy, succession, or death tax of any character in re spect to intangible personal property of residents of this State, or "(b) Had in its laws a reciprocal provision under which intangible personal p roperty of a non-resident was exempt from legacy, succession, or death taxes of every character if the Territory or other State of the United States or foreign state or country in which the non-resident resided allowed a similar exemption i n respect to intangible personal property of residents of the Territory or State of the United States or foreign state or country of residence of the decedent." (Id.) It is clear from both these quoted provisions that the reciprocity must b e total, that is, with respect to transfer or death taxes of any and every chara cter, in the case of the Philippine law, and to legacy, succession, or death tax of any and every character, in the case of the California law. Therefore, if an y of the two states collects or imposes and does not exempt any transfer, death, legacy, or succession tax of any character, the reciprocity does not work. This is the underlying principle of the reciprocity clauses in both laws. In the Philippines, upon the death of any citizen or resident, or non-resident w ith properties therein, there are imposed upon his estate and its settlement, bo th an estate and an inheritance tax. Under the laws of California, only inherita nce tax is imposed. On the other hand, the Federal Internal Revenue Code imposes an estate tax on non-residents not citizens of the United States, but does not

provide for any exemption on the basis of reciprocity. Applying these laws in t he manner the Court of Tax Appeals did in the instant case, we will have a situa tion where a Californian, who is non-resident in the Philippines but has intangi ble personal properties here, will be subject to the payment of an estate tax, a lthough exempt from the payment of the inheritance tax. This being the case, wil l a Filipino, non-resident of California, but with intangible personal propertie s there, be entitled to the exemption clause of the California law, since the Ca lifornian has not been exempted from every character of legacy, succession, or d eath tax because he is, under our law, under obligation to pay an estate tax? Up on the other hand, if we exempt the Californian from paying the estate tax, we d o not thereby entitle a Filipino to be exempt from a similar estate tax in Calif ornia because under the Federal Law, which is equally enforceable in California, he is bound to pay the same, there being no reciprocity recognized in respect t hereto. In both instances, the Filipino citizen is always at a disadvantage. We do not believe that our legislature has intended such an unfair situation to the detriment of our own government and people. We, therefore, find and declare tha t the lower court erred in exempting the estate in question from payment of the inheritance tax. We now declare that in view of the express provisions of both the Philipp ine and California laws that the exemption would apply only if the law of the ot her grants an exemption from legacy, succession, or death taxes of every charact er, there could not be partial reciprocity. It would have to be total or none at all. VAT Tolentino v. Sec. of Finance- Legality of Evat Facts: We all read the case. No need to go through all the details. Anyways, th is is a consolidation of 9 cases attacking the validity of RA 7716 which widened the tax base of the VAT. Issues: 1. Wh the Evat is regressive 2. Wh Evat impairs contractual obligations 3. Wh Evat violates the due process and equal protection clause Held: EVAT constitutional. 1. Petitioners claim that the Evat contravenes the mandate of Congress to p rovide for a progressive system of taxation because it imposes a flat rate of 10 % and thus places the tax burden on all taxpayers without regard to their indivi dual ability to pay. SC held that the Constitution does not prevent the imposition of indirec t taxes which, like the VAT are regressive. What it provides is that the Congres s shall evolve a progressive system of taxation. This provision has been interpret ed to mean simply that direct taxes are to be preferred and indirect taxes shoul d be minimized. Indeed, the mandate to Congress is not to prescribe but to evolv e a progressive system of taxation. Resort to indirect taxes should be minimized but not avoided entirely because it is difficult to avoid them. Evat minimizes the regressive effects of this imposition by providing for zero rating in certai n transactions while granting exemptions to other transactions. 2. 2. CREBA contends that since VAT is retroactive, it would impair lease cont racts entered into prior the effectivity of the law. SC held that not only are existing laws read into contracts in order to fix obli gations as between the parties, but the reservation of essential attributes of s overeign power is also read into contracts as a basic postulate if the legal ord er. The Contract Clause has never been thought of as a limitation on the exercis e of the State s power of taxation save only where a tax exemption has been grante d for a valid consideration. 3. 3. VAT is equitable. Equality and uniformity of taxation means that all tax able articles or kinds or property of the same class be taxed at the same rate. The taxing power has reasonable authority to make reasonable classification for purposes of taxation. To satisfy the statute, it is enough that the statute or o

rdinance applies equally to all persons, forms, and corporations placed in simil ar situation. VAT does not violate due process clause. The harshness and arbitrariness and the confiscatory nature of a tax law to show that it violates due process must be e stablished by sufficient facts. In this case, the petitioners failed to present empirical data to show the harshness and oppressiveness of the tax measure. PART 13 PART 14 EXCISE TAX RA 8240 is the basis of Secs. 141, 142, 143, 145 (same provisions) RA 7654. This is already inconsistent with Sec. 145. REPUBLIC ACT NO. 7654 AN ACT REVISING THE EXCISE TAX BASE, ALLOCATING A PORTION OF THE INCREMENTAL REV ENUE COLLECTED FOR THE EMERGENCY EMPLOYMENT PROGRAM FOR CERTAIN WORKERS, AMENDIN G FOR THE PURPOSE SECTION 142 OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES Sec. 1. Section 142 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows: "Sec. 142. Cigars and cigarettes. "(a) Cigars. - There shall be levied, assessed and collected on cigars a tax of ten (10%) of the constructive manufacturer's or importer's wholesale price or the actual manufacturer's or importer's wholesale price, whichever is higher. "(b) Cigarettes packed by hand. - There shall be levied, assessed and collect ed on cigarettes packed by hand a tax of fifteen percent (15%) of the constructi ve manufacturer's wholesale price or the actual manufacturer's wholesale price, whichever is higher. "(c) Cigarettes packed by machine. - There shall be levied, assessed and coll ected on cigarettes packed by machine a tax at the rates prescribed below based on the constructive manufacturer's wholesale price or the actual manufacturer's wholesale price, whichever is higher: "(1) On locally manufactured cigarettes which are currently classified and ta xed at fifty-five percent (55%) or the exportation of which is not authorized by contract or otherwise, fifty-five percent (55%) provided that the minimum tax s hall not be less than Five pesos (P5.00) per pack. "(2) On other locally manufactured cigarettes, forty-five percent (45%) provi ded that the minimum tax shall not be less than Three pesos (P3.00) per pack. cdtai Duly registered or existing brands of cigarettes or new brands thereof packed by machine shall only be packed in twenties. When the registered manufacturer's wholesale price or the actual manufacturer's wholesale price whichever is higher of existing brands of cigarettes, including the amounts intended to cover the taxes, of cigarettes packed in twenties does n ot exceed Four pesos and eighty centavos (P4.80) per pack, the rate shall be twe nty percent (20%). "(d) Imported cigarettes. - If the cigarettes are of foreign manufacture, reg ardless of the contents per pack, there shall be levied, assessed and collected a tax of fifty-five percent (55%) of the constructive importer's wholesale price or the actual importer's wholesale price, whichever is higher. "For purposes of this section, the term "constructive manufacturer's or importer 's wholesale price" shall mean the price including the amount intended to cover the tax imposed in paragraphs (a), (b), (c) or (d) hereof and the amount intende d to cover the value-added tax imposed under Title IV of this Code at which loca lly manufactured or imported cigars or cigarettes are offered for sale to the wh olesalers or distributors as fixed by the manufacturer or importer and registere d with the Bureau of Internal Revenue plus a mark up of twenty percent (20%) of such price. The term "actual manufacturer's or importer's wholesale price" shal l mean the price at which the purchaser actually pays or is obligated to pay to the manufacturer or importer in consideration of the sale, barter, or exchange o

f cigars and cigarettes. "The twenty percent (20%) mark up and the minimum taxes provided in this section shall be automatically increased in 1996 by ten percent (10%). "Manufacturers and importers of cigars and cigarettes shall, within thirty (30) days from the effectivity of this Act, submit to the Commissioner of Internal Re venue a sworn statement of the manufacturer's or importer's wholesale price of e ach particular brand of their products, and periodically thereafter, a sworn wri tten notification of any change thereof. "Any downward reclassification of present categories, for tax purposes, of exist ing brands of cigars or cigarettes duly registered with the Bureau of Internal R evenue at the time of the effectivity of this Act or any reduction or undervalua tion of the manufacturer's or importer's registered wholesale price or any viola tion of this section which will reduce the tax imposed herein, or the payment th ereof, shall be prohibited. "Any manufacturer or importer who, in violation of this section, knowingly misde clares or misrepresents in his or its sworn statement herein required any pertin ent data or information or reduces or undervalues or downgrades the classificati on of any existing brand of cigars and cigarettes duly registered with the Burea u of Internal Revenue at the time of the effectivity of this Act shall, upon dis covery, be penalized by a summary cancellation or withdrawal of his or its permi t to engage in business as manufacturer or importer of cigars or cigarettes. "Any corporation, association, or partnership liable for any of the acts or omis sions in violation of this section shall be fined treble the amount of deficienc y taxes, surcharges, and interests which may be assessed pursuant to this sectio n. "Any person liable for any of the acts or omissions prohibited under this sectio n shall be criminally liable and penalized under Section 253 of this Code. Any person who willfully aids or abets in the commission of any such act or omission shall be criminally liable in the same manner as the principal. "If the offender is not a citizen of the Philippines, he shall be deported immed iately after serving the sentence without further proceedings for deportation." Sec. 2. The wholesale price of cigars and cigarettes at which they are offered f or sale to the wholesalers or distributors and registered with the Bureau of Int ernal Revenue as of December 31, 1992 shall be deemed the manufacturer's or impo rter's registered wholesale price until the submission by the manufacturer or im porter of the sworn statement as required under Section 1 of this Act: Provided, That a variant of an existing brand of cigars or cigarettes that shall be manuf actured after the effectivity of this Act shall be taxed at the same level as th e main brand regardless of its declared wholesale price: Provided, further, That to prevent any underpayment of taxes, any new brand of cigars or cigarettes wit h comparable quality, blend, cost of production and other relevant facts as bran ds with a registered wholesale price of Three pesos (P3.00) or more per pack, an d which shall be manufactured after the effectivity of this Act, shall be taxed at the highest rate regardless of its declared wholesale price. For the purpose of this section, cigars or cigarettes registered with the Bureau of Internal Re venue after May 31, 1993 shall be treated as new brands. Sec. 3. Fifty percent (50%) of the increment in total revenue collected under th is Act for a period of one (1) year from its effectivity shall be allocated and disbursed solely for purposes of providing emergency productive employment to wo rkers displaced by the present electricity power crisis. For this purpose, the Secretary of Labor and Employment, in consultation with the Secretary of Finance , shall promulgate the necessary rules and regulations for the effective impleme ntation of this section. cdt Provided, likewise, That twenty-five percent (25%) of the increment in total rev enue collected under this Act in 1995 shall be collected and segregated as a tru st fund to be disbursed solely for funding the national health insurance program as may be hereafter mandated by law. Sec. 4. The incremental revenue collected under this Act shall be excluded from the revenue bases as provided under Republic Act No. 7171. Sec. 5. The Secretary of Finance shall, upon the recommendation of the Commissio

ner of Internal Revenue, promulgate the necessary rules and regulations within s ix (6) months from the effectivity of this Act. Sec. 6. The Bureau of Internal Revenue shall adopt any or all of the following m easures: (1) Affixture of internal revenue fuson stamps. - Internal revenue fuson sta mps without denomination or class, shall be firmly and conspicuously affixed on any part of the packages containing the cigarettes as the manufacturer may deem it fit before said packages are packed in cases for removal from the factory. T he affixture must be done in such a manner that will prevent said fuson stamps f rom being removed and re-used by washing or any other means and from covering an y warning that may be hereafter required by law to be printed on cigarette packa ges. (2) Control of cigarette paper. (a) No person shall be permitted to import or manufacture cigarette paper wi thout first securing the required permit therefor from the Commissioner of Inter nal Revenue; cdasia (b) Only duly registered cigarette manufacturers are authorized to buy from a permittee for use in their factories, but before effecting a sale, it shall be obligatory upon the seller of the cigarette paper to secure a written authority from the Commissioner of Internal Revenue, accompanied by a written confirmatio n of the buyer; (c) All cigarette manufacturers shall keep a manufacturer's cigarette paper registry book showing the following information: (1) Debit Entries: (i) The date the cigarette paper is received; (ii) The date of the authority issued by the Commissioner of Internal Revenue ; (iii) name and address of the person from whom received; and (iv) The number, brand, and color of bobbins or rolls received, showing also the length in meters of each. (2) Credit Entries: (i) The date of disposal or use; and (ii) The number, brand, and color of bobbins or rolls disposed of or used, sh owing also the length in meters of each. (3) Keeping of subsidiary books. - Local manufacturers of cigars and cigaret tes shall keep and maintain subsidiary books covering the following: cdtai (a) Inventories of imported leaf tobacco showing its volume and value; (b) Inventories of local leaf tobacco showing its volume and value; (c) Cost of manufacture for each brand of cigarettes; and (d) Inventories of cigarettes produced on a per brand basis showing their re spective volumes and values. The amount that may be needed to implement this provision relative to the monito ring of production and volume of removals of cigarette paper and the printing of fuson stamps shall be included in the General Appropriations Act. Sec. 7. Separability Clause. - If any provision of this Act is subsequently decl ared unconstitutional, the validity of the remaining provisions hereof shall rem ain in full force and effect. Sec. 8. Repealing Clause. - All laws, decrees, executive orders, rules and regul ations, and other issuances inconsistent with this Act are hereby repealed or mo dified accordingly. Sec. 9. Effectivity Clause. - This Act shall take effect after fifteen (15) days from its publication in the Official Gazette or in at least two (2) national ne wspapers of general circulation whichever comes earlier. cda Approved: June 14, 1993 RA 7729 has been the basis of Sec. 151 RR 1-97 SECTION 5. Computation of Excise Tax. 1. Manner of Computing the Specific Tax.

(a) For cigars, multiply the number of cigars by P1.00 to arrive at the spec ific tax due. (b) For cigarettes packed by hand, multiply the number of packs by P0.40 to arrive at the specific tax due. (c) For cigarettes packed by machine i) Existing Brands: 1) If an existing brand with a net retail price of over P10.00 per pack (ex cluding VAT and excise tax), multiply the number of packs by P12.00 to arrive at the specific tax due. However, if the amount of specific tax due from one pack of cigarettes is lower than the ad valorem tax due from such brand as shown in t he above list, the latter amount is the specific tax per pack for such brand; 2) If an existing brand with a net retail price of over P6.50 but not over P10.00 per pack (excluding VAT and excise tax) multiply the number of packs by P 8.00 to arrive at the specific tax due. However, if the amount of specific tax d ue from one pack of cigarettes is lower than the ad valorem tax due from such br and as shown in the above list, the latter amount is the specific tax per pack f or such brand. 3) If an existing brand with a net retail price of P5.00 but not over P6.50 per pack (excluding VAT and excise tax), multiply the number of packs by P5.00 to arrive at the specific tax due. However, if the amount of specific tax due fr om one pack of cigarettes is lower than the ad valorem tax due from such brands as shown in the above list, the latter amount is the specific tax per pack for s uch brand. 4) If an existing brand with a net retail price of below P5.00 per pack (ex cluding VAT and excise tax), multiply the number of packs by Pl.00 to arrive at the specific tax due. However, if the amount of specific tax due from one pack i s lower than the ad valorem tax due from such brand as shown. in the above list, the latter amount is the specific tax per pack for such brand. ii) New Brands 1) If marketed nationwide, determine the current net retail price of such b rands in 20 major supermarkets or retail outlets in Metro Manila and applying th e tax classification and rates indicated in Section 3 of these regulations, mult iply the appropriate tax rates depending on the net retail price per pack (exclu sive of VAT and excise tax) by the number of packs to arrive at the specific tax due; 2) If marketed only in the region. determine the current net retail price p er pack of such brands in five (5) major supermarkets located in that region and applying the tax classification indicated in Section 4 of these regulations, mu ltiply the appropriate tax rates depending on the price per pack (exclusive of V AT and excise tax) by the number of packs to arrive at the specific tax due. In the meantime that the current net retail price has not yet been established, the suggested net retail price shall be used within the three (3) months survey period. 2. Illustrations 5.2.1 ON DULY REGISTERED EXISTING BRAND OF CIGARS AND CIGARETTES. ILLUSTRATION NO. 1 Specific tax due per Pack is lower than the ad valorem tax du e Per Pack as of October 1, 1996. A manufacturer will remove 100 cases of "AAA Cigarettes" from his place of produ ction. Each case contains 500 packs of cigarettes. These are locally manufacture d cigarettes packed by machine. As of October 1, 1996, the ad valorem tax due pe r pack is P5.85 and the net retail price set forth herein is P5.55. The excise t ax due shall be computed as follows: Step 1. Determine the tax classification of the subject brand of cigaret tes. The tax classification falls under the P5.00 specific tax category, since the ne t retail price of P 5.55 is higher than P5.00 but lower that P6.50. Step 2. Compare the ad valorem tax due per pack as of October 1, 1996 to the specific tax due, prescribed under R.A. 8240 whichever is higher and apply the higher tax in the computation of excise tax due. Then determine the percenta ge (70%) of excise tax due per pack and if the result is more than seventy perce

nt (70%) of the increase, then the increase shall take effect in two tranches. Ad valorem tax due per pack as of October 1, 1996 P5.85 Specific tax due per pack prescribed under R.A. 8240 5.00 Increase none Percent of increase none Step 3. Compute the excise tax due. In as much as the prescribed specific tax due per pack is lower than the existin g ad valorem tax due per pack, the latter shall apply. Volume of Removals (100 cases x 500 packs) P50,000 Multiplied by applicable new specific tax rate per pack x P5.85 EXCISE TAX DUE P292,500 ========= ILLUSTRATION NO. 2 Specific tax due per pack is higher than the ad valorem tax d ue per pack as of October 1, 1996. A manufacturer will remove 100 cases of "BBB Cigarettes" from his place of produ ction. Each case contains 500 packs of cigarettes. There are locally manufacture d cigarettes packed by machine. As of October 1, 1996, the ad valorem tax due pe r pack is P6.51 and the net retail price set forth therein is P6.78. The excise tax due shall be computed as follows: Solution: Follow the same procedures in Illustration 1. 1) The tax classification of the subject brand of cigarettes falls under P8 .00 specific tax category, since the net retail price of P6.78 is higher than P6 .50 but lower than P10.00. 2) Ad valorem tax due per pack as of October 1, 1996 P6.51 Specific tax due per pack prescribed under R.A. 8240 8.00 Increase P1.49 Percent of Increase 22.89% ====== 3) Compute the excise tax due. In as much as the prescribed specific tax due per pack is higher than the existi ng ad valorem tax due per pack, the former shall apply. Volume of Removals (100 cases x 500 packs) 50,000 Multiplied by Specifics tax due per pack x P8.00 EXCISE TAX DUE P 400,000 ======== ILLUSTRATION NO. 3 Increase in excise tax due per pack is more than seventy percent (70%). A manufacturer will remove 100 cases of "CCC Cigarettes" from his place of produ ction. Each case contains 500 packs of cigarettes. These are locally manufacture d cigarettes packed by machine. As of October 1, 1996, the ad valorem tax due pe r pack is P2.54 and the net retail price set forth herein in P7.00. The excise t ax due shall be computed as follows: Solution. Follow the same procedure in Illustration 1. 1) The tax classification of the subject brand of cigarettes falls under P8 .00 specific tax category, since the net retail price of P7.00 is higher than P6 .50 but lower than P10.00. 2) Ad valorem tax due per pack as of October 1, 1996 P2.54 Specific tax due per pack prescribed under R.A. 8240 8.00 Increase P5.46 Percent of Increase 214.96% ======= 3) Determine the effective tax rate. In as much as the increase in excise tax is more than seventy percent (70%), fif ty percent (50%) of the increase in excise tax rate shall be affected in 1997 an d one hundred percent (100%) of the increase in excise tax rate shall be effecte d in 1998.

a) 1st Tranche 1997 Amount of increase per pack Multiplied by effective rate

P5.46 x .05

Specific tax due 2.73 Add: Ad valorem tax due per pack as of October 1, 1996 2.54 Total effective specific tax rate P5.27 ===== b). 2nd Tranche 1998 Amount of increase per pack P5.46 Multiplied by effective rate x 100% Specific tax due 5.46 Add: Ad valorem tax due per pack as of October 1, 1996 + 2.54 Total effective specific tax rate P8.00 ===== 4) Compute the excise tax due. a). 1st Tranche 1997 Volume of removals (100 cases x 500 packs) Multiplied by effective specific tax due

50,000 x P5.27

EXCISE TAX DUE P263,500 ======= b). 2nd Tranche 1998 Note: Assuming same volume removed by the subject manufacturer in 1998. the ex cise tax will be computed as follows: Volume of removals (100 cases x 500 packs) 50,000 Multiplied by effective rate (100%) x P8.00 EXCISE TAX DUE P400,000 ======= 5.2.2 On New Brands of Cigarettes ILLUSTRATION A manufacturer or importer will remove from place of production or cause of the release from customs custody 100 cases of "EEE Menthol 100". Each c ase contains 500 packs of cigarettes. These are the cigarettes packed by machine to be introduced in the market. The suggested net retail price declared by the manufacturer or importer is P5.50. The excise tax shall be computed as follows: Solution. Follow the same procedures in Illustration 1. 1) The tax classification of the subject cigarettes falls under P5.00 speci fic tax category, since the suggested net retail price is higher that P5.00 but lower than P6.50. 2) Compute the excise tax due. Volume Removals/Customs Releases 50,000 Multiplied by specific tax rate x P5.00 EXCISE TAX DUE P250,000 ======== Three (3) months after date of introduction in the market the survey was conduct ed with the following results determined; Case I The Current Net Retail Price of P7.00 is higher than the Suggested Net Re tail Price of P5.50. The excise tax due shall be computed as follows: Solution: 1. Compare the Suggested Net Retail Price to the Current Net Retail Price, whichever is higher and apply the higher amount in the determination of tax clas sification. Suggested Net Retail Price P5.50 Current Net Retail Price 4.95

2. Determine the tax classification of the subject brand of cigarette. In as much as the Suggested Net Retail Price is higher than the Current Net Reta il Price, the former shall apply. 3. The tax classification of the subject brand falls under P8.00 specific t ax category, since the Current Net Retail Price of P7.00 is more than P6.50. 4. Compute the excise tax due: Volume of Removals/Customs Releases 50,000 Multiplied by specific tax rate P8.00 Excise Tax Due P400,000 Less: Excise tax paid based on Suggested Net Retail Price (P50,000 x P5.00) 250,000 Deficiency Excise Tax Due Add: Surcharge 25% xxx Interest P.A. 20% xx. Compromise xxx 150,000

TOTAL DEFICIENCY EXCISE TAX DUE P150,000 ======= Case II The Current Net Retail Price if P4.95 per pack is lower than the Suggest ed Net Retail Price per pack of P5.50. The excise tax due shall be computed as f ollows: Solution: 1. Compare the Suggested Net Retail Price to the Current Net Retail Price w hichever is higher and apply the higher amount in the determination of tax class ification. Suggested Net Retail Price P 5.50 Current Net Retail Price 4.95 2. In as much as the Suggested Net Retail Price is higher than the Current Net Retail Price, the former shall apply. The tax classification of the subject brand falls under P5.00 specific tax categ ory, since the Suggested Net Retail Price of P5.50 is higher than P5.00 but lowe r than P6.50. 3. Compute the excise tax due: Volume of Removals/Customs Releases 100 cases x 500 packs) 50,000 Multiplied by specific tax rate P5.00 EXCISE TAX DUE P250,000 ======= RR 2-97 has been the basis of Secs. 141 and 142 SECTION 3. Rates and Bases of Tax. There shall be levied, assessed and coll ected on alcohol products excise tax as follows: I. Distilled Spirits (a) If produced from sap of nipa, coconut, cassava, camote, or buri palm or from the juice, syrup, or sugar of the cane, provided such materials are produce d commercially in the country where they are processed into distilled spirits, p roof liter, Eight pesos (P 8.00); Provided, That if produced in a pot still or o ther similar primary distilling apparatus by a distiller producing not more than 100 liters a day, containing not more than fifty percent (50%) of alcohol by vo lume, PER PROOF LITER, FOUR PESOS (P 4.00); (b) If produced from raw materials other than those enumerated in the preced ing paragraph, the tax shall be in accordance with the net retail price per bott le of seven hundred fifty milliliter (750 ml.) volume capacity (excluding the ex cise tax and the value-added tax) as follows: (1) Less than two hundred and fifty pesos (P250.00) SEVENTY-FIVE PESOS (P75. 00), per proof liter;

(2) Two hundred and fifty pesos (P250.00) up to Six hundred and seventy-five pesos (P675.00) ONE HUNDRED AND FIFTY PESOS (P150.00), per proof liter; and (3) More than Six hundred and seventy-five pesos (P675.00) THREE HUNDRED PES OS (P300.00), per proof liter. (c) Medicinal preparations, flavoring extracts, and all other preparations, except toilet preparations, of which, excluding water, distilled spirits form th e chief ingredient, shall be subject to the same tax as such chief ingredient. This tax shall be proportionally increased for any strength of the spirits taxed over proof spirits, and the tax shall attach to this substance as soon as it is in existence as such, whether it be subsequently separated as pure or impure sp irits, or transformed into any other substance either in the process of original production or by any subsequent process. II. Wines On wines, there shall be collected per liter of volume capacity, t he following taxes: (a) Sparkling wines/champagnes regardless of proof, if the net retail price per bottle (excluding the excise tax and the value-added tax) is: (1) Five hundred pesos (P500.00) or less ONE HUNDRED PESOS (P100.000; and (2) More than Five hundred pesos (P500.00) THREE HUNDRED PESOS (P300.00); (b) Still Wines containing fourteen percent (14%) of alcohol by volume or le ss, TWELVE PESOS (P12.00); (c) Still Wines containing more than fourteen percent (14%) but not more tha n twenty-five percent (25%) of alcohol by volume, TWENTY-FOUR PESOS (P24.00). "Fortified wines containing more than twenty-five percent (20%) of alcohol by vo lume shall be taxed as distilled spirits. Fortified wines shall me natural wines to which distilled spirits are added to increase their a alcoholic strength. III. Fermented Liquor On beer, lager, beer, ale, porter and other fermented l iquors except tuba, basi, tapuy and similar domestic fermented liquors in accord ance with the following schedule: (a) If the net retail price (excluding the specific tax and value-added tax) per liter of volume capacity is less than Fourteen pesos and fifty centavos (P1 4.50), tax shall be SIX PESOS AND FIFTEEN CENTAVOS (P6.15) per liter; (b) Still Wines containing fourteen percent (14%) of alcohol by volume or le ss, TWELVE PESOS (P12.00); (c) If the net retail price (excluding the specific tax and the value-added tax) per liter of volume capacity is more than twenty-two pesos (P22.00), the ta x shall be TWELVE PESOS FIFTEEN CENTAVOS (P12.15) per liter. (d) For fermented liquor which are brewed and sold at micro-breweries or mic ro-breweries or micro brew pubs, the tax shall be TWELVE PESOS AND FIFTEEN CENTA VOS (P12.15) per liter: IV. Beginning January 1,2000, the rates of specific tax on distilled spirits , wine and fermented liquor under paragraphs (I) (II) and (III) hereof shall be increased by twelve percent (12%). REVENUE REGULATIONS NO. 14-99 SUBJECT : Amending Section 2 of Revenue Regulations No. 14-97, Otherwise K nown as Revenue Regulations Governing the Imposition of Excise Taxes on Automobi les and Other Motor Vehicles SECTION 1. Scope. Pursuant to the provisions of Section 244, in relation to Section 243 of the National Internal Revenue Code of 1997, these regulations ar e hereby promulgated to implement the provisions of Section 149 of Title VI, Cha pter VI of the said Code, imposing excise taxes on automobiles and other motor v ehicles. LexLib SECTION 2. Amended provisions. Section 2 of Revenue Regulations No. 14-97 i s hereby amended and shall now read as follows: a. AUTOMOBILE shall be defined as a four (4) or more wheeled vehicle other than trucks or passenger jeepneys, as defined under R.A. 4136 and R.A. 1138, whi ch is propelled by gasoline, diesel, electricity or any other motive power, and specially designed to transport persons and not primarily to transport freight o r merchandise. It shall include utility or light commercial vehicles designed fo r passenger use with seats for less than ten (10) passengers, including the driv

er. The number of seats shall be determined in accordance with the rules stated in the fifth paragraph below. Provided, that the manufacturer's technical specifications as stated in the manu facturer's certification and manufacturer's catalogue or brochure must show that the vehicle has met the requirements of these regulations on the number of seat s, seatbelts, seat and feet space measurements and must likewise contain the mod el code of the vehicle. Vehicles that do not have manufacturer's certification a nd manufacturer's catalogues or brochures or whose manufacturer's certification and manufacturer's catalogues or brochures do not contain the required informati on, or show that the vehicle do not meet the requirements of this regulation sha ll be subject to tax under Section 149 of the Tax Code as an automobile. Provided, further, that ocular inspection must be conducted in all cases, taking careful consideration of several factors, particularly the seat and feet space measurement, for the proper determination as to whether said vehicle is an autom obile. A written report of each ocular inspection must be prepared by the inspec ting officer to enable the reviewing officer to determine whether the vehicle in spected meets the criteria of an automobile as defined in these regulations. LexLib Provided, further, that notwithstanding any contrary rule, closed or covered fou r-wheel drive vehicles, primarily designed to carry passengers, regardless of th e number of seats, shall he considered and taxed as an automobile for purposes o f these regulations starting February 1, 2000. For the uniform application of the number of seats criterion, the passenger seat s must conform to the following rules and area specifications: 1. Each seat shall be a horizontal rectangular area with seat and feet spac e of not less than thirty-five centimeters (35 cm.) wide and sixty centimeters ( 60 cm.) long for each passenger and fifty centimeters (50 cm.) wide and sixty ce ntimeters (60 cm.) long for the driver or operator. 2. The requirements of the Seatbelts Use Act of 1999 (R.A. 8753) must be co mplied with for a seat to be counted as such for purposes of these regulations. 3. In all cases where there is a variance in the determination of the corre ct number of seats, the number of seats shown in the manufacturer's certificatio n and catalogue or brochure shall prevail. DOCUMENTARY STAMP TAX CIR v. Construction Resources of Asia 145 SCRA 673 On the question of whether or not the certificate of stocks, to be subject to th e documentary stamp tax, must be delivered to the respective stockholders. the S upreme Court ruled that delivery, either actual or constructive, is not necessar y. The certificates of stocks only need to be issued but not delivered. A docume ntary stamp tax is in the nature of an excise tax because it is levied upon the privilege. It may be levied only once upon the original issue of the certificate . Ordinarily, when a corporation issues a certificate of stock (representing the o wnership of stocks in the corporation to fully paid subscription) the certificat e of stock can be utilized for the exercise of the attributes of ownership over the stocks mentioned on its face. The stocks can be alienated; the dividends or fruits derived therefrom can be enjoyed, and they can be conveyed, pledged or en cumbered. The certificate as issued by the corporation, irrespective of whether or not it is in the actual or constructive possession of the stockholder, is con sidered issued because it is with value and hence the documentary stamp tax must be paid. Phil. Consolidated Coconut Ind. v. CIR 70 SCRA 22 Petitioner is registered with the Securities and Exchange Commission (SEC) with an authorized capital of P70,000,000 of which P14,375,000 was subscribed. Of thi s worth of shares of stock, upon suggestion of the Secretary of Justice to prote ct the investing public, petitioner deposited P14,000,000 with the SEC, on condi tion that no sale or transfers shall be made from said deposited shares until su

ch time as the Commission may deem such release justisfied. Later, under a permi t granted by the SEC, shares of stock worth P791,400.00 were transferred to vari ous persons. The Collector of Internal Revenue assessed and imposed documentary stamp tax not only on the transfer issues but on the certificate or stock held o n mandatory deposit by the Securities and Exchange Commission. The Court of Tax Appeals sustained the assessment. On appeal, the Supreme Court reversed the deci sion of the Court of Tax Appeals holding that the certificate of stocks deposite d with the Securities and Exchange Commission and temporarily subject to the sus pensive conditions imposed by the Commission shall be liable to said tax only wh en released from said conditions, for then and only then shall they truly acquir e any practical value for their owners. It is the Government itself, thru the SEC, which required the petitioner's incor porators-subscribers to deposit with said Commission P14,000.000 worth of shares of stock out of the P14,375,000 shares outstanding in their names (Certificates of Stock Nos. 1 to 15) with the aforestated condition. It is very manifest that in so far as the fifteen (15) certificates of stocks are concerned, they nomina lly appear in the names of the incorporators-subscribers appearing therein but a ctually none among them can exercise any attribute of ownership over said stocks until the SEC decides otherwise. If it is an act of the Government that tempora rily deprived these fifteen (15) certificates of stocks of any value in favor of their owners, We cannot see Our way clear as to why that same Government shall consider said certificates issued and with practical value for the purpose of im posing the documentary stamp tax. Certainly, the Government cannot declare those fifteen (15) certificates of stocks without value to their owners temporarily t o protect the investing public and in the same breath claim that they have value for purposes of taxation. We do agree, however, that at any time those fifteen (15) certificates of stock are released by the Securities and Exchange Commissio n from the condition imposed which deprives their owners momentarily of the righ ts of ownership over the stocks appearing therein, then they shall be considered as originally issued and subject to the documentary stamp tax. REVENUE MEMORANDUM CIRCULAR NO. 44-86 Subject : Documentary stamp tax on instrument of sale or conveyance of rea l property. To : All Internal Revenue Officers and others concerned. Stamp taxes on taxable documents, including instrument of sa 1. Background. le or conveyance of real property, shall be paid by any of the parties to the ta xable document at the time the act is done or transaction had. Whenever one of t he parties enjoys exemption from the tax, the other party who is not exempt shal l be the one directly liable (Sec. 186, NIRC, as amended). Section 2 of Presiden tial Decree No. 1045, as implemented by Section 6 of Revenue Regulations No. 9-7 6, requires that if the amount of the stamp tax due is ten pesos (P10.00) or mor e, the stamp tax shall be paid to the Bureau of Internal Revenue or through its authorized agent bank, after which a corresponding official receipt evidencing p ayment shall be issued and a notation of such payment shall be made on the origi nal and every copy of the document, as follows: (a) Amount of stamp tax paid; (b ) Official receipt number; (c) Date of payment; and (d) Name and signature of th e payor. If the amount of stamp tax due is below ten pesos (below P10.00), rathe r than the said official receipt, actual stamp shall be issued by the BIR - the stamp shall be affixed in the taxable document and after affixture shall be canc elled in order that payment of the tax may be effected. Section 214 of the Tax C ode provides that a taxable document shall not be recorded nor shall it or any c opy thereof or any record of transfer of the same be admitted or used in evidenc e in any court unless the corresponding stamp tax due thereon had been paid and that a notary public is prohibited from adding his jurat or acknowledgment to an y taxable document unless the proper documentary stamp tax had been paid. aisa dc 2. Stamp tax on instrument of sale/conveyance of real property. Section 209 of the Tax Code imposes a documentary stamp tax on all conveyances, deeds, inst ruments or writings bearing on the sale or other disposition of real property fo

r a consideration. The tax shall be based on the amount of consideration, or val ue received or contracted to be paid or the fair market value of the real proper ty, whichever is higher. 3. Procedure for determination and collection of stamp tax on instrument of sale or conveyance of real property. 3.1 The stamp tax on the said document shall be paid through the Revenue Dis trict Office having jurisdiction over the locality where the real property sold/ disposed is located. 3.2 The stamp tax referred hereunder applies only if the instrument is a sal e or other conveyance of real property for a consideration in money or money's w orth. 3.3 Since the basis of the tax is either (a) the consideration as shown in t he said document or (b) the fair market value of the real property, whichever is higher, the taxpayer shall present to the Revenue District Officer for verifica tion (a) the original and every other copy/ies of the said document and (b) a tr ue copy of the latest Tax Declaration of the said real property, duly certified by the corresponding City/Municipal Assessor. aisa dc From the said documents, the Revenue District Officer shall determine the actual amount of stamp tax due on the said taxable document. 3.4 Payment Order shall be issued by the said Revenue District Officer to ef fect payment of the stamp tax due. 3.5 After payment, the Revenue District Officer shall cause the notation on the taxable document of the following information: (a) Amount of stamp tax paid; (b) Official Receipt number; (c) Date of payment; and (d) Name and signature of the payor. At the bottom of the foregoing notations, the following shall also be shown: "AMOUNT OF STAMP TAX PAID ON THIS DOCUMENT CERTIFIED CORRECT: __________________ Revenue District Officer 3.6 A notary public shall not add his jurat or acknowledgment on the taxable document unless evidence of payment of the tax as provided in paragraph 3.5 her eof is shown on the said document. 3.7 The Register of Deeds shall not record the transaction and cause transfe r of title to the real property unless the evidence of payment of the tax as pro vided in paragraph 3.5 hereof is shown on the said document. This requirement shall be in addition to the certification of the Revenue Distri ct Officer in case of a sale, exchange or other disposition of real property, cl assified as capital asset, made by an individual, estate or trust, pursuant to t he provisions of Batas Pambansa Blg. 37, as amended. cdt 3.8 The stamp tax referred herein shall be due and payable on every instrume nt of sale or conveyance of real property, regardless of the parties to the taxa ble document, whether an individual, estate, trust, a corporation or a partnersh ip and regardless of the class of the real property, whether capital or ordinary business asset in the hands of the vendor/transferor. RA 7690 is the basis for most of the Sections for the DST. Same provisions as wi th the NIRC. RR No. 9-94 Sec. 12. PENALTY CLAUSE. - (a) In case of late payment of the documentary stamp tax due, there shall be imposed a surcharge equivalent to twenty-five percent (25%) of the basic tax due. In case of failure to pay the ba sic tax and twenty-five percent (25%) surcharge within the time prescribed in th e notice and demand, there shall be further assessed and collected a twenty perc ent (20%) interest per annum, computed on the basis of the aforesaid basic tax a nd surcharge. (b) Any other violation of the provisions of these regulations shall be puni shable under the pertinent provisions of Title X, Chapter II of the Tax Code, as amended.

PART 15 Ty vs. Trampe G.R. No. 117577. December 1, 1995 (250 SCRA 500) FACTS: Ty is a resident of and registered owner of lands and buildings in Pasig City. In January 1994, the Assessor sent him a notice of assessment concerning his real properties in Pasig. In response, Ty filed a Petition for Prohibition with prayer for TRO and/or writ of preliminary injunction at the sala of Judge Trampe to declare void the new tax assessments and to enjoin the collection of r ealty tax based on such assessments. Ty argued that the assessments were void b ecause it did not conform to P.D. 921 which requires that the schedule of assess ments shall be prepared JOINTLY by the city assessors of the District. The Asse ssor argued that P.D. 921 has been repealed by R.A. 7160 (the Local Government C ode) because P.D. 921 is merely an implementing law of P.D. 464, which was expre ssly repealed by R.A. 7160 in Section 534. Judge Trampe denied Ty's petition fo r lack of merit and ruled that the assessments were correct. Thus Ty filed this petition with the Supreme Court. HELD: The Supreme Court ruled in favor of Ty. It held that RA 7160 has a repea ling provision and if the intention of the legislature was to repeal PD 921, it would have expressly included PD 921 in such repealing clause. The SC then comp ared the aims of the PD 921 and RA 7160 to determine if they were so incompatibl e as to constitute an implied repeal. After comparison, the SC found that the t wo laws are not co-extensive and mutually inclusive in their scope and purpose. While RA 7160 covers almost all governmental functions delegated to local gover nment units all over the country, PD 921 embraces only the Metro Manila are and is limited to the administration of financial services therein, especially the a ssessment and collection of real estate and some other local taxes. Thus, there was no implied repeal. PD 921 remains effective. Trampe's decision was set as ide. The Schedule of Market Values for Pasig and the assessments based thereon were declared null and void. Ty won. Drilon vs. Lim G.R. No. 112497, August 4, 1994 (235 SCRA 135) FACTS: An ordinance of the City of Manila known as the Manila Revenue Code was enacted by the council of Manila and Mayor Lim. Four oil companies and a taxpay er who were affected by the Manila Revenue Code questioned the legality of its e nactment with Drilon, then the Secretary of Justice. They alleged that the ordi nance was void for non-compliance with the prescribed procedure in Section 187 o f the Local Government Code for the enactment of ordinances and for containing c ertain provisions contrary to law and public policy. Drilon declared the ordina nce void. The City of Manila filed a petition for certiorari with the RTC of Ma nila which revoked Drilon's resolution and sustained the ordinance. The RTC jud ge also declared Sec. 187 of the LGC unconstitutional insofar as it empowered th e Secretary of Justice to review tax ordinances and, inferentially, to annul the m. He cited the distinction between control and supervision, the first being "t he power of an officer to alter or modify or set aside what a subordinate had do ne in the performance of duties and to substitute the judgment of the former for the latter," while the second is "the power of a superior officer to see to it that the lower officers perform their functions in accordance with law." Hence Drilon filed this petition for review on certiorari. HELD: The SC held in favor of Drilon. The SC explained that Sec. 187 authorize s the Secretary of Justice to review only the constitutionality or legality of t he tax ordinance and, if warranted, to revoke it on either or both these grounds . When he alters or modifies or sets aside a tax ordinance, he is not also perm itted to substitute his own judgment for the judgment of the local government th at enacted the measure. Secretary Drilon DID set aside the Manila Regulation Co de, but he DID NOT REPLACE it with his own version of what the Code should be. He did not pronounce the ordinance unwise or unreasonable as basis for its annul ment. He did not say that in his judgment it was a bad law. What he found only was that it was illegal. All he did in reviewing the said measure was determin e if the petitioners were performing their functions in accordance with law, tha t is, with the prescribed procedure for the enactment of tax ordinances and the

grant of powers to the city government under the LGC. The SC held that this was an act of mere supervision, not control. The SC reversed the judgment finding Sec. 187 of the LGC unconstitional but affirmed the RTC's finding that there was proper observance of procedure in enacting the Manila Revenue Code. Philippine Match Co., Ltd. vs. City of Cebu G.R. No. L-30745, January 18, 197 8 (81 SCRA 99) FACTS: The Philippine Match Co., Ltd., whose principal office is in Manila, is engaged in the manufacture of matches. Its factory is located at Punta, Sta. An a, Manila. It ships cases or cartons of matches from Manila to its branch offic e in Cebu City for storage, sale, and distribution within the territories and di stricts under its Cebu-branch or the whole Visayas-Mindanao region. Cebu City i tself is just one of the eleven districts under the company's Cebu City branch o ffice. Pursuant to an ordinance, the Cebu City Assessor assessed taxes on the c ompany's out-of-town deliveries of matches, to wit: (1) sales of matches booked and paid for in Cebu City but shipped directly to customers outside of the city; (2) transfers of matches to salesmen assigned to different agencies outside of the city; and (3) shipments of matches to provincial customers pursuant to sales men's instructions. The company paid under protest and filed a complaint with t he Court of First Instance seeking refund of the taxes. The trial court sustain ed the tax on #(1) and held that the sales were consummated in Cebu city because delivery to the carrier in the city is deemed to be a delivery to the customers outside of the city. However, it ordered a refund of #(2) and #(3). The trial court characterized the tax on #(2) and #(3) as "storage tax" and not sales tax. It assumed the the sales were consummated outside of the city and hence, beyon d the city's taxing power. The company appealed the portion of the decision reg arding #(1) to the Supreme Court. HELD: The SC held that the appeal is devoid of merit because the city can valid ly tax the sales of matches to customers outside of the city as long as the orde rs were booked and paid for in the company's branch office in the city. Those m atches can be regarded as sold in the city, as contemplated in the ordinance, be cause the matches were delivered to the carrier in Cebu City. Generally, delive ry to the carrier is delivery to the buyer (Art. 1523, Civil Code; Behn, Meyer & Co. vs. Yangco, 38 Phil. 602). A different interpretation would defeat the tax ordinance in question or encourage tax evasion through the simple expedient of arranging for the delivery of the matches at the outskirts of the city though th e purchases were effected and paid for in the company's branch office in the cit y. Moreover, the municipal board of Cebu City is empowered to provide for the l evy and collection of taxes for general and special purposes in accordance with law. The taxing power validly delegated to cities and municipalities is defined in the Local Autonomy Act (now Local Government Code). Local Finance Circular No. 1-93, June 16, 1993 Subject : Prescribing the guidelines governing the power of municipalities and cities to impose a business tax on banks and other banking institutions pu rsuant to Sections 143 (f) and 151 of Republic Act No. 7160 of 1991, and its Imp lementing Rules and Regulations (IRR) To : All Regional Directors, Bureau of Local Government Finance; Dist rict Treasurers of Metropolitan Manila; Provincial, City and Municipal Treasure rs; and Others Concerned. Pursuant to the provisions of Sections 143 (f) and 151 of the Republic Act No. 7 160, otherwise known as the Local Government Code of 1991 (LGC), as implemented by Article 232 (f) and 237 of the Implementing Rules and Regulations (IRR), muni cipalities and cities may impose taxes on businesses, including banks and bankin g institutions. aisa dc Accordingly, the following guidelines are hereby prescribed in accordance with A rticle 287 of the IRR, to ensure the proper and effective exercises by cities an d municipalities of their taxing powers under the LGC, as implemented under Rule XXX of the IRR, for guidance and compliance of all concerned. Sec. 1. Coverage. (a) As used herein, the term "banks and other banking institut

ions" shall refer to persons or entities engaged in the lending of funds obtaine d from the public through the receipt of deposits or the sale of bonds, securiti es or obligations of any kind and all entities regularly conducting such operati ons. The terms "banks" and "banking institutions" are synonymous and interchange able. For purposes of this Circular, banks shall be classified as follows: (1) Commercial banks; (2) Thrift banks composed of (i) Savings and Mortgage banks; (ii) Stock savings and loan associations; (iii) Private development banks (3) Regional unit banks consisting of rural banks; (4) Specialized and unique Government banks like the Development Bank of the Philippines, which are governed by their respective charters. (5) Other classes of banks as may be authorized by the Monetary Board of the Central Bank of the Philippines; and (6) Branches of the above-cited banks which have been authorized to be estab lished nationwide by the Monetary Board of the Central Bank of the Philippines. Banking institutions include the following: (1) Entities regularly engaged in the lending of funds or purchasing of rece ivables or other obligations with funds obtained from the public through the iss uance, endorsement or acceptance of debt instruments of any kind for their own a ccount, or through the issuance of certificates of assignments or similar instru ments with recourse, trust certificates, or of reproaches agreements, whether an y of these means of obtaining funds from the public is done on a regular basis o r only occasionally; (2) Entities regularly engaged in the lending of funds which receive deposit s only occasionally; and (3) Trust, companies, building and loan associations, non-stock savings and loan associations. acd shall refer to the main office of the banking institution in (b) Head Office dicated in the pertinent documents submitted to the Securities and Exchange Comm ission (SEC) and to other appropriate agencies; the city or municipality specifi cally mentioned in the Articles of Incorporation and other official registration papers as being the official address of said "Head Office" hall be considered a s the site thereof. (c) Branch a fixed place in a locality established as a branch of a banking institution, as authorized by the Monetary Board of the Central Bank of the Phil ippines. However, a regional or extension offices of banks and banking instituti ons shall not be considered as a branch. Sec. 2. Tax on the Gross Receipts of Banks and Banking Institutions. (a) The tax on banks and banking institutions may be levied on their gross receipts for the preceding calendar year, as follows: (1) By municipalities, at a rate not exceeding fifty percent (50%) of one pe rcent (1%) of the gross receipts for the preceding calendar year; and (2) By cities including municipalities within the Metropolitan Manila area, at a rate not exceeding seventy five percent (75%) of one percent (1%) of the gr oss receipts for the preceding calendar year. (b) For this purpose, gross receipts shall only include the following: (1) Interest from loans and discounts this represents interest earned and ac tually collected on loans and discounts. The following is a breakdown: cdt (i) Discounts earned and actually collected in advance on bills discounted; (ii) Interest earned and actually collected on demand loans; (iii) Interest earned and actually collected on time loans, including the earn ed portions of interest collected in advance; (iv) Interest earned and actually collected on mortgage contracts receivables ; (2) Interest earned and actually collected on inter-bank loans. (3) Rental of property this represents the following rental income: (i) Earned portion of rental collected in advance from lessees of safe depos

it boxes; (ii) Rental earned and actually collected from lessees on bank premises and e quipment. (4) Income earned and actually collected from acquired assets. (5) Income from sale or exchange of assets and property. (6) Cash dividends earned and received on equity investments. (7) Bank commissions from lending activities. (8) Income component of rentals from financial leasing. (c) All other income and receipts of banks and banking institutions not othe rwise enumerated above shall be excluded from the taxing authority of the LGU co ncerned, such as: (1) Interest earned under the expanded foreign currency deposit system. (2) Interest accumulated by lending institutions on mortgages insured under Republic Act No. 580, as amended, otherwise known as Home Financing Act. (3) Receipts from filing fees, service and other administrative charges. In view thereof, the provisions of Art. 242 of the IRR requiring a person or ent ity to get a separated mayor's permit for each business activity shall not apply to the banking activities, as defined above. Sec. 4. Procedures for the Enactment of Tax Ordinances. (a) The tax on banks and banking institutions as provided herein may be imposed by a city or municipalit y only through an appropriate ordinance enacted by the Sangguniang Panlungsod or Sangguniang Bayan, as the case may be. Such ordinance shall be enacted and appr oved in accordance with Arts. 107, 108, 275 and 276 of the IRR. (b) Pursuant to the procedures on the conduct of public hearings as prescrib ed in Art. 276 (b) of the IRR, the Sanggunians concerned shall cause the sending of written notices of public hearings for proposed ordinances to the branch man ager or the highest officer of the Head Office of affected banks and banking ins titutions within their territorial jurisdictions. (c) Any tax ordinance which does not comply with the above provisions shall be deemed null and void. Enforcement of such ordinance shall be a ground for dis ciplinary action against the officials or employees responsible therefore as pro vided for in Art. 280 of the IRR. Sec. 5. Situs of the Tax. For purposes of collection of the tax, the following s hall apply - (a) All transactions filed with or negotiated in the branch shall b e recorded in said branch and the gross receipts derived from said transactions shall be applied to: (1) transactions negotiated with and approved by the branch manager under hi s own authority; or (2) transactions filed and negotiated in the branch but being beyond the app roving authority of the branch manager, are forwarded to the Head Office for fin al approval. (b) The gross receipts derived from transactions made by the Head Office, ex cept gross receipts recorded in the branches, shall be taxable by the city or mu nicipality where said Head Office is located. (c) In case there is a transfer or relocation of the Head Office or of any b ranch to another city or municipality, the bank shall give due notice of such tr ansfer or relocation to the chief executives of the cities or municipalities con cerned within fifteen (15) days after such transfer or relocation is effected. Sec. 6. Time of Payment. The tax on banks due and accruing to the LGUs shall be payable within the first twenty (20) days of January or of each subsequent quart er, as the case may be, unless otherwise fixed in the corresponding local tax or dinance. Sec. 7. Examination of Books of Accounts and Pertinent Records. (a) The Treasure r of the LGU concerned or through his deputies duly authorized in writing may ex amine the books of accounts and other pertinent records of banks in order to asc ertain, assess, and collect to correct amount of tax due. (b) The examination shall be made during regular office hours not oftener th an once a year for every tax period, which shall be limited to verifying the sum mary of transactions contained in the prescribed form (see Annex "A") submitted by the bank upon which the declaration of gross receipts for the preceding calen

dar year has been based and the tax paid thereon. Such examination shall be cert ified by the examining official, which certification shall be made of record in the books of accounts of the bank examined. Sec. 8. Repealing Clause. All rules, regulations, orders, and/or circulars which are contrary to, or inconsistent with, the provisions of this Circular are here by repealed or modified accordingly. Sec. 9. Effectivity. This circular shall take effect immediately. The Regional Directors of the Bureau of Local Government Finance and District Tr easurers of Metropolitan Manila Area are hereby instructed to disseminate the co ntents of this Circular to all Provincial, City and Municipal Treasurers within their respective jurisdiction for their information and guidance. Local Finance Circular No. 2-93, June 16, 1993 Subject : Prescribing the guidelines governing the power of municipalities and cities to impose a business tax on insurance companies pursuant to Sections 143 (f) and 151 of Republic Act No. 7160 of 1991, and its Implementing Rules an d Regulations (IRR) To : All Regional Directors, Bureau of Local Government Finance; Dist rict Treasurers of Metropolitan Manila; Provincial, City and Municipal Treasurer s; and Others Concerned. Pursuant to the provisions of Sections 143(f) and 151 of the Republic Act No. 71 60, otherwise known as the Local Government Code of 1991 (LGC), as implemented b y Article 232(f) and 237 of the Implementing Rules and Regulations (IRR), cities and municipalities may impose taxes on banks and other financial institutions w hich may include insurance companies. aisa dc Accordingly, the following guidelines are hereby prescribed in accordance with A rticle 287 of the IRR, to ensure the proper and effective exercise by cities and municipalities of their taxing powers over insurance companies for the guidance and compliance of all concerned. SECTION 1. Coverage. (a) As used herein, the term "insurance companies" sha ll mean those formed or organized to save any person or persons or other corpora tions harmless form loss, damage or liability, arising form any unknown or futur e or contingent event, or to indemnify or to compensate any person or persons or other corporations for any such loss, damage or liability, or to guarantee the performance of or compliance with contractual obligations or the payment of debt s of others. The term "insurance companies" shall include all individuals, partnerships, asso ciations, or corporations including government owned or controlled corporations or entities, engaged as principals in the insurance business, including their br anches, except mutual benefit associations and purely cooperative insurance asso ciations organized under the laws on cooperatives. The term shall also include p rofessional reinsures. (b) Domestic insurance company - shall refer to companies formed, organized, or existing under the laws of the Philippines. (c) Foreign insurance company shall include companies formed, organized, or existing under any laws other than those in the Philippines. (d) Branch a fixed place in a locality established as a branch of an insuran ce company as authorized by the Insurance Commission. (e) General Agent is any person duly licensed so to act by the Insurance Com mission, who for compensation solicits or obtains insurance in behalf of any ins urance company or transmits for a person other than himself an application for a policy or contract of insurance to or from such company, or offers or assumes t o act in the negotiation of such insurance and empowered by such company to do s uch other acts and things for and on its behalf in the conduct of its business a s specified in the general agency agreement executed by and between them. In pro perty and liability insurance, a general agent can bind a risk and thereby make insurance effective immediately and prior to the actual delivery of the policy; a limited agent has restricted powers and must operate within the scope of the a uthority delegated to him. (f) Head Office shall refer to the principal office of the insurance company

appearing in its article of incorporation. (g) Insurance Policy is a written instrument in which a contract of insuranc e is set forth. For purposes of this Circular, insurance policies shall be classified as follows : (1) Life insurance policies which may be (i) Individual life (ii) Group life (iii) Health, accident and disability insurance (2) Non-life insurance contracts which may be (i) Marine (ii) Fire (iii) Casualty (3) Contracts of suretyship or bonding (h) Insurance Premium is the agreed price for assuming and carrying the risk , i.e., the consideration is paid to an insurer for undertaking to identify the insured against a specified peril, as indicated in the insurance contract. (i) Insurance Agent any person who for compensation solicits or obtains insu rance in behalf of any insurance company or transmits for a person other than hi mself or application for a policy or contract of insurance to or from such compa ny, or offers or assumes to act in the negotiating of such insurance. (j) Insurance Broker any person who for any compensation, commission or othe r thing of value acts or aids in any manner in soliciting, negotiating or procur ing the making of any insurance contract or in placing risk or taking out insura nce, on behalf of the insured other than himself. SECTION 2. Tax on the Gross Receipts of Insurance Corporations. (a) The ta x on insurance companies may be levied on their gross receipts for the preceding calendar year as follows: (1) By municipalities, at a rate not exceeding fifty percent (50%) of one pe rcent (1%) of the gross receipts for the preceding calendar year; and cdasia (2) By all cities and municipalities within the Metropolitan Manila area, at a rate not exceeding seventy five percent (75%) of one percent (1%) of the gros s receipts for the preceding calendar year. (b) For this purpose, "gross receipts" shall include only the following: (1) Insurance premiums actually collected, except the following: (i) Premiums collected before the effectivity of the ordinance enacted by th e city or municipality imposing the tax; (ii) Two percent (2%) of all premiums for the sake of fire, earthquake, and e xplosions hazard insurance pursuant to P.D. 1185, otherwise known as Fire Code o f the Philippines; (iii) Premiums refunded within six (6) months after payment of account; (iv) Reinsurance premiums by a company that has already paid the tax: (v) Premiums collected or received by any branch of a domestic corporation, firm, or association doing business outside the Philippines on account of any li fe insurance of the insured who is non-resident. (vi) Premiums collected or received on account of any reinsurance, if the ris k insured against covers property located outside the Philippines, or the insure d, in the case of personal insurance, resides outside the foreign country where the original insurance has been issued or perfected; (vii) Portions of the premiums collected or received by insurance companies pe rtaining to variable contracts; and (viii) The excess of the amounts necessary to insure the lives of variable cont racts. However, the aforementioned tax-exempt premiums shall be recorded and declared s eparately. (2) Interest earnings on loans and discounts actually collected; (3) Rentals actually collected from property owned by insurance companies. (4) Income actually collected from acquired assets. (5) Cash dividends received on equity investments. (c) As used herein, "gross receipts" shall not include the following:

(l) All other income are receipts not otherwise enumerated in the preceding guidelines shall be excluded from the taxing authority of the city or municipali ty concerned. (2) Service fees received from fire, earthquake, and explosion preinsurance adjustment business directly to agents, pursuant to P.D. No. 1185, otherwise kno wn as the Fire Code of the Philippines. (d) At the time of the annual payment of the tax due, the Head Office or bra nch of an insurance company, shall submit to the LGU concerned, a breakdown of t he declared gross receipts for the preceding calendar year. (e) Commissions and other means of earnings of insurance agents and service representatives and insurance brokers shall not be taxable; however, these perso ns may be levied an occupation fee pursuant to Sec. 147 of the LGC; (f) The gross receipts of insurance brokers may, however be levied the tax o n contractors and/or independent contractors pursuant to Sec. 143(e) of the LGC. cdtai SECTION 3. Non-separability of Insurance Business. Activities which are inh erent, related, necessary or incidental to the insurance business shall treated as one business activity subject to the same tax rate under Section 2(a) hereof. The amount of tax thereon shall be computed on the basis of the combined gross receipts of all said insurance activities. In view thereof, the provisions of Art. 242 of the IRR requiring a person or ent ity top get a separate mayor's permit for each activity shall not apply to the i nsurance activities, as defined above. SECTION 4. Procedures for the Enactment of Tax Ordinances. (a) The tax on i nsurance companies as provided herein may be imposed by a city or municipality o nly through an appropriate ordinance enacted by the Sangguniang Panlungsod or Sa ngguniang Bayan, as the case may be. Such ordinance shall be enacted and approve d in accordance with Arts. 107, 108, 276 of the IRR. (b) Pursuant to the procedures on the conduct of public hearings as prescrib ed in the Art. 276 (b) of the IRR, the Sanggunians concerned shall cause the sen ding of written notices of public hearings for proposed ordinances to the branch manager or the highest officer of the Head Office of affected insurance compani es within their territorial jurisdictions. (c) Any tax ordinance which does not comply with the above provisions shall be deemed null and void. Enforcement of such ordinance shall be a ground for dis ciplinary action against the officials or employees responsible therefore as pro vided in Art. 280 of the IRR. SECTION 5. Situs of the Tax. For purposes of collection of the tax, the fol lowing shall apply (a) Insurance contracts/policies issued by the Head Office or branch shall be recorded in said office or branch as the case may be and the pr emiums and/or gross receipts due on such contracts/policies shall be taxable by the city or municipality where such Head Office or branch to which such premiums or gross receipts were actually paid is located. This rule shall be applied irr espective of whether the insurance contracts/policies were solicited or negotiat ed by insurance agents, or brokers who are not residents of the city or municipa lity where the branch is located or affiliated with or assigned to such branch: (b) The offices of an insurance agent or broker, shall not be considered a b ranch and shall not be subject to the situs of taxation rule. (c) All insurance premiums and/or gross receipts from transactions not recor ded in the branches of the insurance companies in accordance with paragraph (a) above shall be recorded in the Head Office and taxable by the city or municipali ty where said Head Office is located. (d) In case there is a transfer or relocation of the Head Office or of any b ranch to another city or municipality, the insurance companies shall give due no tice of such transfer or relocation to the chief executives of the cities or mun icipalities concerned within fifteen (15) days after such transfer or relocation is effected. SECTION 6. Time of Payment. The tax on insurance companies accruing the LGU 's shall be paid within the first twenty (20) days of January or of each subsequ ent quarter, as the case may be, unless otherwise fixed in the corresponding loc

al tax ordinance. cd i SECTION 7. Examination of Books of Accounts and Pertinent Records. (a) The Treasurer of the LGU concerned or through any of his deputies duly a uthorized in writing may examine the books of accounts and other pertinent recor ds of insurance companies in order to ascertain, assess, and collect the correct amount of the tax due. (b) The examination shall be made during regular office hours not oftener th an once a year for every tax period, which shall be the year immediately precedi ng the transactions submitted by the Head Office or branch of the insurance comp anies being audited, upon which the declaration of gross receipts for the preced ing calendar year has been based and the tax paid thereon. Such certification sh all be made of record in the books of accounts of the insurance company examined . SECTION 8. Repealing Clause All rules, regulations, orders, and/or circular s which are contrary to, or inconsistent with, the provisions of this Circular a re hereby repealed or modified accordingly. SECTION 9. Effectivity. This circular shall take effect immediately. The Regional Directors of the Bureau of Local Government Finance and District Tr easurers of Metropolitan Manila Area are hereby instructed to disseminate the co ntents of this Circular to all Provincial, City and Municipal Treasurers within their respective jurisdictions for their information and guidance. Local Finance Circular No. 3-93, June 16, 1993 Subject : Prescribing the guidelines governing the power of municipalities and cities to impose a business tax on financing companies pursuant to Sections 143 (f) and 151 of Republic Act No. 7160 of 1991, and its Implementing Rules an d Regulations (IRR) To : All Regional Directors, Bureau of Local Government Finance; Dist rict Treasurers of Metropolitan Manila; Provincial, City and Municipal Treasurer s; and Others Concerned. Pursuant to the provisions of Section 143 (f) and 151 of the Republic Act No. 71 60, otherwise known as the Local Government Code of 1991 (LGC), as implemented b y Article 232 (f) and 237 of the Implementing Rules and Regulations (IRR), munic ipalities and cities may impose a tax on businesses, which may include financing companies. Accordingly, the following guidelines are hereby prescribed in accordance with A rticle 287 of the IRR, to ensure the proper, efficient, and effective exercise o f the aforesaid taxing powers of cities and municipalities for guidance and comp liance of all concerned. SECTION 1. Coverage. (a) As used herein, the term "financing companies" sha ll refer to corporations or partnerships, except those regulated by the Central Bank of the Philippines, Insurance Commission and the Cooperatives Development A uthority, which are primarily organized for the purpose of extending credit faci lities to consumers and to industrial, commercial or agricultural enterprises, e ither by discounting or factoring commercial papers or accounts receivable, or b y buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by leasing of motor vehicles, heavy equipment and industrial m achinery, business and office machines and equipment, appliances and other movab le property; (b) "Credit" shall mean any loan, mortgage, deed of trust, advance, or disco unt; and conditional sales contract, any contract to sell, or sale or contract o f sale of property or service, either for present or future delivery, under whic h, part or all of the price is payable subsequent to the making of such sale or contract; any rental-purchase contract; any option, demand, lien, pledge, or oth er claim against, or for the delivery of, property or money, any purchase or oth er acquisition of or any credit upon the security of, any obligation or claim ar ising out of foregoing; and transaction or series of transaction having a simila r purpose or effect; (c) "Purchase discount" is the difference between the value of the receivabl e purchased or credit assigned, and the net amount paid by the finance company f

or such purchase or assignment, exclusive of fees, service charges, interests an d other charges incident to the extension of credit; (d) "Head Office" shall refer to the main office of the financing company in dicated in the pertinent documents submitted to the Securities and Exchange Comm ission or to the Monetary Board of the Central Bank of the Philippines; the city or municipality specifically mentioned in the Articles of Incorporation and oth er official registration papers as being the official address of said Head Offic e; (e) "Branch" is a fixed place in a locality established as a branch of a fin ancing company, as authorized by the Securities and Exchange Commission. However , a regional or extension office of financing companies shall not be considered as a branch. SECTION 2. Tax on the Gross Receipts of Financing Companies. (a) The tax on financing companies may be levied on their gross receipts for the preceding cal endar year, as follows: (1) By municipalities, at a rate not exceeding fifty percent (50%) of one pe rcent (1%) of the gross receipts for the preceding calendar year; and (2) By cities and municipalities within the Metropolitan Manila area, at a r ate not exceeding seventy five percent (75%) of one percent (1%) of the gross re ceipts for the preceding calendar year. (b) For this purpose, "gross receipts" shall include only the following: (1) Interest from loans and discounts this represents interest earned and ac tually collected on loans and discounts. The following is a breakdown: cdt (i) Discounts earned and actually collected on the portion of interest colle cted in advance on bills discounted; (ii) Interest earned and actually collected on demand loans; (iii) Interest earned and actually collected on time loans, including the earn ed portion of interest collected in advance; (iv) Interest earned and actually collected on mortgage contracts receivable; (2) Interest earned and actually collected on inter-bank loans. (3) Rental of property this represents the following rental income: (i) Earned portion of rental collected in advance from lessees of safe depos it boxes; (ii) Rental earned and actually collected from lessees on bank premises and e quipment. (4) Income earned and actually collected from acquired assets. (5) Income from sale or exchange of assets or property. (6) Cash dividends earned and received on equity investments. (7) Income components of rentals from financial leasing. At the time of the annual payment of the tax due, the Head Office or branch of t he financing company shall submit to the LGU concerned, a breakdown of the decla red gross receipts for the preceding calendar year. (c) All other income and receipts of financing companies not otherwise enume rated above shall be excluded from the taxing authority of the LGU concerned. SECTION 3. Non-separability of Financing Company Business. Activities which are inherent, related, necessary or incidental to the financing company busines s shall be treated as one business activity subject to the same tax rate under S ection 2 (a) hereof. The amount of tax thereon shall be computed on the basis of the combined gross receipts of all said financial activities. In view thereof, the provisions of Art. 242 of the IRR requiring a person or ent ity to get a separated mayor's permit for each business activity shall not apply to the banking activities, as defined above. SECTION 4. Procedures for the Enactment of Tax Ordinances. (a) The tax on b anks and banking institutions as provided herein may be imposed by a city or mun icipality only through an appropriate ordinance enacted by the Sangguniang Panlu ngsod or Sangguniang Bayan, as the case may be. Such ordinance shall be enacted and approved in accordance with Arts. 107, 108, 275 and 276 of the IRR. (b) Pursuant to the procedures on the conduct of public hearings as prescrib ed in Art. 276 (b) of the IRR, the Sanggunians concerned shall cause the sending

of written notices of public hearings for proposed ordinances to the branch man ager or the highest officer of the Head Office of affected banks and banking ins titutions within their territorial jurisdictions. (c) Any tax ordinance which does not comply with the above provisions shall be deemed null and void. Enforcement of such ordinance shall be a ground for dis ciplinary action against the officials or employees responsible therefore as pro vided for in Art. 280 of the IRR. SECTION 5. Situs of the Tax. For purposes of collection of the tax, the fol lowing shall apply - (a) All transactions filed with or negotiated in the branch shall be recorded in said branch and the gross receipts derived from said trans actions shall be applied to: (1) transactions negotiated with and approved by the branch manager under hi s own authority; or (2) transactions filed and negotiated in the branch but being beyond the app roving authority of the branch manager, are forwarded to the Head Office for fin al approval. (b) The gross receipts derived from transactions made by the Head Office, ex cept gross receipts recorded in the branches, shall be taxable by the city or mu nicipality where said Head Office is located. (c) In case there is a transfer or relocation of the Head Office or of any b ranch to another city or municipality, the bank shall give due notice of such tr ansfer or relocation to the chief executives of the cities or municipalities con cerned within fifteen (15) days after such transfer or relocation is effected. SECTION 6. Time of Payment. The tax on banks due and accruing to the LGUs s hall be payable within the first twenty (20) days of January or of each subseque nt quarter, as the case may be, unless otherwise fixed in the corresponding loca l tax ordinance. SECTION 7. Examination of Books of Accounts and Pertinent Records. (a) The Treasurer of the LGU concerned or through his deputies duly authorized in writin g may examine the books of accounts and other pertinent records of banks in orde r to ascertain, assess, and collect the correct amount of tax due. (b) The examination shall be made during regular office hours not oftener th an once a year for every tax period, which shall be limited to verifying the sum mary of transactions submitted by the financing company upon which the declarati on of gross receipts for the preceding calendar year has been based and the tax paid thereon. Such examination shall be certified by the examining official, whi ch certification shall be made of record in the books of accounts of the Head Of fice or branch of the financing company being examined. SECTION 8. Repealing Clause. All rules, regulations, orders, and/or circula rs which are contrary to, or inconsistent with, the provisions of this Circular are hereby repealed or modified accordingly. cda SECTION 9. Effectivity. This circular shall take effect immediately. The Regional Directors of the Bureau of Local Government Finance and District Tr easurers of Metropolitan Manila Area are hereby instructed to disseminate the co ntents of this Circular to all Provincial, City and Municipal Treasurers within their respective jurisdictions for their information and guidance. Memo Circular No. 92-02 - Jan. 16, 1992 issued by Department of the Interior and Loca l Government - MISSING Local Finance Circular No. 5-93, October 22, 1993 Subject : Prescribing the Guidelines Governing the Power of Municipalities and Cities to Impose a Business Tax on BOI-Registered Enterprises Pursuant to S ection 133 (g) of Republic Act No. 7160, Otherwise Known as the Local Government Code of 1991 (LGC), and its Implementing Rules and Regulations (IRR) To : All Regional Directors, Bureau of Local Government Finance; Dist rict Treasurers of Metropolitan Manila; Provincial, City and Municipal Treasur ers; and Others Concerned. Pursuant to Section 133 (g) of Republic Act No. 7160, otherwise known as the Loc

al Government Code of 1991 (LGC), the exercise of the taxing powers of the Local Government Units (LGUs) shall not extend to the levy of local business tax (LBT ) 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; Accordingly, the following guidelines are hereby prescribed in accordance with A rt. 287 of the IRR to prescribe the limitations, manner, and procedures for the imposition of supplement Article 221 (g) of the IRR with a view of further clari fying the implementation of said provision consistent with Executive Order No. 2 26, otherwise known as the Omnibus Investment Code of 1987, Republic Act No. 704 2, otherwise known as the Foreign Investment Act of 1991 and other related laws and national policies; SECTION 1. COVERAGE. This Circular prescribes the guidelines governing the powers of cities and municipalities to impose business taxes on BOI-registered e nterprises as provided for in Sec. 133 (g) of the LGC. SECTION 2. Definition of Terms. As used herein, the following terms shall m ean acd (a) Registered Enterprise shall mean any individual, partnership, cooperativ e, corporation or other entity incorporated and/or organized and registered with the Board of Investments (BOI) in accordance with Book I of Executive Order No. 226; Provided, however that the term "registered enterprise" shall not include commercial banks, savings, and mortgage banks, rural banks, savings and loans as sociations, development banks, trust companies, investment banks, finance compan ies, brokers and dealers in securities, consumer cooperatives and credit unions and other business organizations whose principal purpose or principal source of income is to receive deposits, lend or borrow money, buy and sell or otherwise d eal, trade or invest in common or preferred stocks, debentures, bonds or other m arketable instruments generally recognized as securities, or discharge other sim ilar intermediary, trust or fiduciary functions. {Art. 11, E.O. 226} (b) Pioneer enterprise shall mean a BOI-registered enterprise (i) engaged in the manufacture, processing or production, and not merely in the assembly or pa ckaging of goods, commodities or raw materials that have not been or are nor bei ng produced in the Philippines on a commercial scale, or (ii) which uses a desig n, formula, scheme, method, process or system of production or transformation of any element, substance or raw materials into another raw material or finished g oods which is new and untried in the Philippines, or (iii) engaged in the pursui t of agricultural, forestry and mining activities and/or services including the industrial aspects of food processing whenever appropriate, pre-determined by th e BOI to be feasible and highly essential to the attainment of the national goal , in relation to a declared specific national food and agricultural program for self-sufficiency and other social benefits of the project, or (iv) which produce s non-conventional sources of energy or uses or converts to coal or other non-co nventional fuels or manufacturers equipment which utilize non-conventional fuels or sources of energy in its production, manufacturing or processing operations: Provided, that the final product in any of the foregoing instances, involves or will involve substantial use and processing of domestic raw materials, whenever available; taking into account the risks and magnitude of investment. cd (c) Non-pioneer enterprise shall include all BOI-registered producer enterpr ises other than pioneer enterprises. (d) Expansion shall include modernization and rehabilitation and shall mean increase of existing volume or value of production or upgrading the quality of t he registered product or utilization of inefficient or idle equipment under such guidelines as the BOI may adopt. SECTION 3. Exemption of pioneer and non-pioneer enterprises. (a) Pursuant Sec. 133 (g) of the LGC and Art. 221 (g) of its IRR, business e nterprises certified to and registered with the Board of Investments (BOI) as pi oneer to non-pioneer shall be exempt from local business taxes for a period of s ix (6) and four (4) years respectively, from the date registration; (b) Starting January 1, 1992, pioneer and non-pioneer enterprises registered with the BOI prior to the effectivity of the LGC shall be exempt from local bus

iness taxes until the end of their six (6) and four (4) years exemption from the date of registration. (c) Pioneer and non-pioneer enterprises registered with the BOI on or after the effectivity of the LGC shall be exempt from local business taxes for a perio d of six (6) and four (4) years, respectively, starting from the date indicated in the certificate of registration issued by the BOI; and (d) In the case of registered expanding firms, the gross sales or receipts d irectly arising from such expansion shall be exempt from local business taxes fo r a period stated in (a) or (b) above. SECTION 4. Availment of the Exemption. (a) Within sixty (60) days (i) from the receipt of the Certificate of Registration from the BOI, or (ii) from the effectivity of the tax ordinance or revenue measure imposing a tax on business, or (iii) from the effectivity of these guidelines, whichever comes later, the President or any duly authorized representative of th e registered enterprise, shall submit a BOI-certified true copy of said Certific ate of Registration to the local treasurer concerned together with a request for a Certificate of Exemption for the appropriate period, as indicated in Sec. 3 a bove. (b) Within fifteen (15) days from the submission of its BOI Certificate of R egistration by the registered enterprise, the local treasurer concerned shall, a fter due verification of the documents submitted, issue a Certificate of Exempti on, in the form hereto attached as Annex "A", to the registered enterprise. cd i SECTION 5. Business tax on BOI-registered Enterprises. - For business enter prises registered with the BOI not covered or no longer exempt under Sec. 3 abov e and whose goods or products are sold abroad and/or domestically, the said ente rprises shall be subject to the business tax as follows: (a) the gross sales/receipts on goods or products sold domestically shall be subject to the business tax at rates prescribed under paragraphs (a), (b) and ( d) of Sec. 143 of the LGC; (b) the amount of export sales as defined in Sec. 2(b) shall be subject to t he business tax at rates not exceeding one-half (1/2) of the rates stated in par agraph (a) of this Section; For this purpose, the amount of export sales shall be excluded and declared sepa rately from the total sales and shall be subject to the rates prescribed in (b) above. Failure to make this separate declaration of export sales shall subject t he total sales to the rates prescribed in (a) hereof. (c) Upon expiration of the period of exemption of BOI-registered enterprises as provided for in the preceding Sec. 3 hereof, the situs of the tax shall be d etermined in accordance with Sec. 150 of the LGC and Art. 243 of the IRR. (d) In case of manufactures or produces which engage the services of an inde pendent contractor to produce or manufacture some of their products, the rules o n situs of taxation shall apply except that the factory or plant and warehouse o f the contractor utilized for the production and storage of the manufacturer's p roducts shall be considered as the factory or plant and warehouse of the manufac turer; the independent contractor under Sec. 143 (e) of the LGC, as implemented under Art. 232 (e) of its IRR. SECTION 6. Non-separability of business enterprises registered with the BOI . The provisions of Art. 242 of the IRR requiring a person or entity to get a se parate mayor's permit for each business activity shall not apply to business ent erprises registered with the BOI, with respect to activities inherent, necessary and incidental to its business operations. SECTION 7. Transfer or Relocation In case there is a transfer or relocation of the principal office or of any of its branch to another city or municipality , due notice of such transfer or relocation shall be given to the chief executiv es of the cities or municipalities concerned within fifteen (15) days after such transfer or relocation is effected. (b) The tax due and accruing to the city or municipality shall be paid withi n the first twenty (20) days of January or of each subsequent quarter, as the ca

se may be. SECTION 8. Examination of Books of Accounts and Pertinent Records. (a) The Treasurer of the LGU concerned or through his deputies duly authoriz ed in writing may examine the books of accounts and other pertinent records of b anks in order to ascertain, assess, and collect the correct amount of tax due. (b) The examination shall be made during regular office hours not oftener th an once a year for every tax period, which shall be the year immediately precedi ng the examination and shall be certified by the examining official. Such certif ication shall be made of record in the books of accounts of the business enterpr ise examined. casia SECTION 9. Repealing Clause. All rules, regulations, orders, and/or circula rs which are contrary to, or inconsistent with, the provisions of this Circular are hereby repealed or modified accordingly. SECTION 10. Effectivity. This circular shall take effect immediately. This circular has been approved and recommended by the Oversight Committee for i ssuance by the Secretary of Finance in accordance with Art. 287 of the IRR. The Regional Directors of the Bureau of Local Government Finance and District Tr easurer of Metropolitan Manila Area are hereby instructed to disseminate the con tents of this Circular to all Provincial, City and Municipal Treasurers within t heir respective jurisdiction for their information and guidance. III. TARIFF AND CUSTOMS CODE I. Concept A. The Tariff and Customs Code (R.A. No. 1937, June 22, 1957) B. The Bureau of Customs Duties, Power, and Jurisdiction II. Articles Subject to Duty A. Export (suspended except on logs) and import duties B. Meaning of Importation - Sec. 1201, 1202 SECTION 1201. Articles to Be Imported Only Through Customhouse. All articles imp orted into the Philippines, whether subject to duty or not, shall be entered thr ough a customhouse at a port of entry. SECTION 1202. When Importation Begins and Deemed Terminated. Importation begins when the carrying vessel or aircraft enters the jurisdiction of the Philippines with intention to unlade therein. Importation is deemed terminated upon payment of the duties, taxes and other charges due upon the articles, or secured to be p aid, at a port of entry and the legal permit for withdrawal shall have been gran ted, or in case said articles are free of duties, taxes and other charges, until they have legally left the jurisdiction of the customs. C. Classes of Importation a. Dutiable importation - Sec. 101 SECTION 101. Imported Articles Subject to Duty. All articles, when imported from any foreign country into the Philippines, shall be subject to duty upon each im portation, even though previously exported from the Philippines, except as other wise specifically provided for in this Code or in other laws. b. Prohibited importations - Sec. 102, 1207 SECTION 102. Prohibited Importations. The importation into the Philippines of th e following articles is prohibited: a. Dynamite, gunpowder, ammunitions and other explosives, firearm and weapo ns of war, and detached parts thereof, except when authorized by law. b. Written or printed article in any form containing any matter advocating or inciting treason, rebellion, insurrection or sedition against the Government of the Philippines, of forcible resistance to any law of the Philippines, or con taining any threat to take the life of or inflict bodily harm upon any person in

the Philippines. c. Written or printed articles, photographs, engravings, lithographs, objec ts, paintings, drawings or other representation of an obscene or immoral charact er. d. Articles, instruments, drugs and substances designed, intended or adapte d for preventing human conception or producing unlawful abortion, or any printed matter which advertises or describes or gives directly or indirectly informatio n where, how or by whom human conception is prevented or unlawful abortion produ ced. e. Roulette wheels, gambling outfits, loaded dice, marked cards, machines, apparatus or mechanical devices used in gambling, or in the distribution of mone y, cigars, cigarettes or other articles when such distribution is dependent upon chance, including jackpot and pinball machines or similar contrivances. f. Lottery and sweepstakes tickets except those authorized by the Philippin e Government, advertisements thereof and lists of drawings therein. g. Any article manufactured in whole or in part of gold silver or other pre cious metal, or alloys thereof, the stamps brands or marks of which do not indic ate the actual fineness or quality of said metals or alloys. h. Any adulterated or misbranded article of food or any adulterated or misb randed drug in violation of the provisions of the "Food and Drugs Act." i. Marijuana, opium poppies, coca leaves, or any other narcotics or synthet ic drugs which are or may hereafter be declared habit forming by the President o f the Philippines, any compound, manufactured salt, derivative, or preparation t hereof, except when imported by the Government of the Philippines or any person duly authorized by the Collector of Internal Revenue, for medicinal purposes onl y. j. Opium pipes and parts thereof, of whatever material. k. All other articles the importation of which is prohibited by law. SECTION 1207. Jurisdiction of Collector Over Articles of Prohibited Importation. Where articles are of prohibited importation or subject to importation only upo n conditions prescribed by law, it shall be the duty of the Collector to exercis e such jurisdiction in respect thereto as will prevent importation or otherwise secure compliance with all legal requirements. c. Conditionally-Free Importation - Sec. 105 SECTION 105. Conditionally Free Importations. The following articles shall be ex empt from the payment of import duties upon compliance with the formalities pres cribed in, or with the regulations which shall be promulgated by the Commissione r of Customs with the approval of the department head: a. Animals and plants for scientific, experimental, propagation, botanical, breeding, zoological and national defense purposes: Provided, That no live tree s, shoots, plants and moss, and bulbs, tubers and seeds for propagation purposes may be imported under this section, except by order of the Government of the Ph ilippines or other duly authorized institutions: Provided, further, That the fre e entry of animals for breeding purposes shall be restricted to animals of a rec ognized breed, duly registered in the book of record established for that breed: And provided, finally, That certificate of such record, and pedigree of such an imal duly authenticated by the proper custodian of such book of record, shall be produced and submitted to the Collector of Customs, together with affidavit of the owner or importer, that such animal is the identical animal described in sai d certificate of record and pedigree. cd i b. Aquatic products (e.g., fish, crustaceans, mollusks, marine animals, sea weed, fish oil, roe), including preparations or manufactures thereof, caught or gathered by vessels of Philippine registry: Provided, That they are imported in such vessels or in crafts attached thereto: And provided, further, That they hav e not been landed in any foreign territory or, if so landed, they have been land ed solely for transhipment without having been advanced in condition. c. Samples of the kind, in such quantity and of such dimensions or construc tion as to render them unsalable or of no appreciable commercial value, models n

ot adapted for practical use and samples of medicine properly marked "physicians ' samples not for sale". Commercial samples, except those that are not readily and easily identifiable (e .g., precious and semi-precious stones, cut or uncut, and jewelry set with preci ous or semi-precious stones), the value of any single importation of which does not exceed ten thousand pesos, upon the giving of a bond in an amount equal to o ne and one-half times the ascertained duties, taxes and other charges thereon, c onditioned for the exportation of said samples within six months from the date o f the acceptance of the import entry, or in default thereof, the payment of the corresponding duties, taxes and other charges. If the value of any single consig nment of such commercial samples exceeds ten thousand pesos, the importer thereo f may select any portion of same not exceeding in value ten thousand pesos for e ntry under the provisions of this subsection, and the excess of the consignment may be entered in bond, or for consumption, as the importer may elect. d. Articles, including binnacles, propellers, and the like, the character o f which, as imported, prevents their use for other purposes than the constructio n, equipment, or repair of vessels and aircraft, and life-preservers and life bu oys, related equipment and parts and accessories thereof, which are necessary fo r the take-off and landing and for the safe navigation of vessels and aircraft. e. Equipment for use in the salvage of vessels or aircraft, upon identifica tion and the giving of a bond in an amount equal to one and one-half times the a scertained duties, taxes and other charges thereon, conditioned for the exportat ion thereof or payment of the corresponding duties, taxes and other charges with in six months from the date of acceptance of the import entry: Provided, That th e Collector of Customs may extend the time for exportation or payment of duties, taxes and other charges for a term not exceeding six months from the expiration of the original period. f . Cost of repairs made in foreign countries upon vessels or aircraft docum ented, registered or licensed in the Philippines, upon proof satisfactory to the Collector of Customs (1) that adequate facilities for such repairs are not affo rded in the Philippines, or (2) that such vessels or aircraft, while in the regu lar course of her voyage or flight was compelled by stress of weather or other c asualty to put into a foreign port to make such repairs in order to secure the s afety seaworthiness or airworthiness of the vessel or aircraft to enable her to reach her port of destination. g. Articles brought into the Philippines for repair, processing or recondit ioning to be re-exported upon completion of the repair, processing or reconditio ning: Provided, That the Collector of Customs may, in his discretion, require th e giving of a bond in an amount equal to one and one-half times the ascertained duties, taxes and other charges thereon, conditioned for the exportation thereof or payment of the corresponding duties, taxes and other charges within six mont hs from the date of acceptance of the import entry. h. Medals, badges, cups and other small articles bestowed as trophies or pr izes, or those received or accepted as honorary distinctions. i. Wearing apparel and household effects, including those articles provided for under subsections "j" and "k", and belonging to residents of the Philippine s returning from abroad, which were exported from the Philippines by such return ing residents upon their departure therefrom or during their absence abroad, upo n the identity of such articles being established to the satisfaction of the Col lector of Customs; personal and household effects brought into the Philippines b y returning residents, the export value of which does not exceed five hundred pe sos, solely for personal or household use but not imported for the account of an y other person nor intended for barter, sale or hire: Provided, That such return ing residents have not received the benefit of any exemption hereunder within on e hundred and eighty days from and after the date of the last exemption granted: And provided, further, That in the event the total export value of the imported article or articles exceeds the amount of five hundred pesos, such article or a rticles shall be subject to duty only on the amount in excess of five hundred pe sos; articles of the same kind and class purchased in foreign countries by resid ents of the Philippines during their absence abroad and accompanying them upon t

heir return to the Philippines, or arriving within a reasonable time which in no case shall exceed ninety (90) days before or after the owner's return, upon pro of satisfactory to the Collector of Customs that same have been in their use abr oad for more than one year; articles in any single shipment consigned to any sin gle person when the total export value of such shipment does not exceed one hund red pesos: Provided, That when the export value exceeds the amount of one hundre d pesos, only the amount in excess of one hundred pesos shall be subject to duty . j. Wearing apparel, articles of personal adornment, toilet articles, portab le tolls and instruments, theatrical costumes, and similar personal effects, acc ompanying travelers or tourists in their baggage or arriving within a reasonable time, in the discretion of the Collector of Customs, before or after the owners , in use of and necessary and appropriate for the wear or use of such persons ac cording to their profession or position for the immediate purposes of their jour ney and their present comfort and convenience: Provided, That this exemption sha ll not be held to apply to articles intended for other persons or for barter, sa le or hire: Provided, further, That the Collector of Customs may, in his discret ion, require a bond in an amount equal to one and one-half times the ascertained duties, taxes and other charges upon articles classified under this subsection, conditioned for the exportation thereof or payment of the corresponding duties, taxes and other charges, within six months from the date of acceptance of the i mport entry: And provided, finally, That the Collector of Customs may extend the time for exportation or payment of duties, taxes and other charges for a term n ot exceeding six months from the expiration of the original period. cdasia k. Vehicles, horses, harness, bed and table linen, table service, furniture , musical instruments and personal effects of like character, owned and imported by travelers or tourists for their convenience and comfort, upon identification and the giving of a bond in an amount equal to one and one-half times the ascer tained duties, taxes and other charges thereon, conditioned for the exportation thereof or payment of the corresponding duties, taxes and other charges within s ix months from the date of acceptance of the import entry: Provided, That the Co llector of Customs may extend the time for exportation or payment of duties, tax es and other charges for a term not exceeding six months from the expiration of the original period. l. Professional instruments and implements, tools of trade, occupation or e mployment, wearing apparel, domestic animals, and personal and household effects , including those of the kind and class provided for under subsections "j" and " k" and belonging to persons coming to settle in the Philippines, in quantities a nd of the class suitable to the profession, rank or position of the person impor ting them, for their own use and not for barter or sale, accompanying such perso ns, or arriving within a reasonable time, in the discretion of the Collector of Customs, before or after the arrival of their owners, upon the production of evi dence satisfactory to the Collector of Customs that such persons are actually co ming to settle in the Philippines, that the articles are brought from their form er place of abode, that change of residence is bona fide, and that the privilege of free entry under this subsection has never been previously granted to them: Provided, That neither merchandise of any kind, nor machinery or other articles for use in manufacture, shall be classified under this subsection. m. Animals, vehicles, portable theaters, circus and theatrical equipment, i ncluding musical instruments, sceneries, panoramas, properties, saddlery, wax fi gures and similar objects for public entertainment, and other articles for displ ay in public expositions, or for exhibition or competition for prizes, and devic es for projecting pictures and parts and appurtenances therefor, upon identifica tion and the giving of a bond in an amount equal to one and one-half times the a scertained duties, taxes and other charges thereon, conditioned for exportation thereof or payment of the corresponding duties, taxes and other charges within s ix months from the date of acceptance of the import entry: Provided, That the Co llector of Customs may extend the time for exportation or payment of duties, tax es and other charges for a term not exceeding six months from the expiration of the original period; and technical and scientific films when imported by technic

al, cultural and scientific institutions, and not to be exhibited for profit: Pr ovided, That if any of the said films is exhibited for profit, the proceeds ther efrom shall be subject to confiscation, in addition to the penalty provided unde r section three thousand six hundred and ten of this Code. cda n. Articles (e.g., photographic, sound recording, electrical and other equi pment, vehicles, animals, costumes, apparel, properties, supplies, unexposed mot ion picture films) brought by foreign producers for making or recording motion p ictures on location in the Philippines, upon identification and the giving of a bond in an amount equal to one and one-half times the ascertained duties, taxes and other charges thereon, conditioned for exportation thereof or payment of the corresponding duties, taxes and charges within six months from the date of acce ptance of the import entry. Unexposed motion picture films allowed free entry un der bond for exportation falling within this subsection and subsequently exposed , whether or not developed, may be reexported free of import duties, taxes and o ther charges. Negative films, undeveloped, exposed outside the Philippines by resident Filipin o citizens or by producing companies of Philippine registry where the principal actors and artists employed for the production are Filipinos, upon affidavit by the importer that such exposed films are the same films previously exported from the Philippines. As used in this paragraph, the terms "actors" and "artists" in clude the persons working the photographic camera or other photographic and soun d recording apparatus by means of which the film is made. o. Costumes, regalia and other articles, including office supplies and equi pment, imported for the official use of members and attaches of foreign embassie s, legations, consular officers and other representatives of foreign government: Provided, That the country which any such person represents accords like privil eges to corresponding officials of the Philippines. Articles imported for the personal or family use of the members and attaches of foreign embassies, legations, consular officers and other representatives of for eign governments: Provided, That such privilege shall be accorded under special agreements between the Philippines and the countries which they represent: And p rovided, further, That the privilege may be granted only upon specific instructi ons of the Department of Finance in each instance which will be issued only upon request of the Department of Foreign Affairs. p. Regalia, gems, statuary, specimens or casts of sculptures imported for t he bona fide use and by the order of any society incorporated or established sol ely for religious, philosophical, educational, scientific or literary purposes, or for the encouragement of the fine arts, or for the use and by the order of an y institution of learning, public library, museum, orphan asylum or hospital, an d not for barter, sale or hire: Provided, That the term "regalia" shall be held to embrace only such insignia of rank or office or emblems as may be worn upon t he person or borne in the hand during public exercises or ceremonies of the soci ety or institution, and shall not include articles of furniture or fixtures, or ordinary wearing apparel, nor personal property of individuals. q. Musical organs imported for the bona fide use and by the owner of any so ciety incorporated or established for religious or educational purposes, or, exp ressly for presentation thereto. r. Scientific apparatus, instruments and utensils specially imported for th e bona fide use and by the order of any society or institution incorporated or e stablished solely for educational, scientific, or charitable purposes, or for th e encouragement of the fine arts, or for the bona fide use and by the order of a ny institution of learning in the Philippines, and not for barter, sale or hire. s. Philosophical, historical, economic, scientific, technical and vocationa l books specially imported for the bona fide use and by the order of any society or institution, incorporated or established solely for philosophical, education al, scientific, charitable or literary purposes, or for the encouragement of the fine arts, or for the bona fide use of and by the order of any institution of l earning in the Philippines: Provided, That the provisions of this subsection sha ll apply to books not exceeding two copies of any one work when imported by any

individual for his own use, and not for barter, sale or hire. Bibles, missals, prayerbooks, koran, ahadith and other religious books of simila r nature and extracts therefrom, hymnal and hymns for religious uses, specially prepared books, music and other instrumental aids for the deaf, mute or blind, a nd textbooks prescribed for use in any school in the Philippines: Provided, That complete books published in parts in periodical form shall not be classified he rein. t. Newsprint, whenever imported by or for publishers for the exclusive use in the publication of newspapers. u. Articles donated to public or private institutions established solely fo r educational, scientific, cultural, charitable, health, relief, philanthropic o r religious purposes, for free distribution among, or exclusive use of, the need y. v. Food, clothing, house-building and sanitary-construction materials, and medical, surgical and other supplies for use in emergency relief work, when impo rted by or directly for the account of any victim, sufferer, refugee, survivor o r any other person affected thereby, or by or for the account of any relief orga nization, not operated for profit, for distribution among the distressed individ uals, whenever the President shall, by proclamation, declare an emergency to exi st by reason of a state of war, pestilence, cholera, plague, famine, drought, ty phoon, earthquake, fire, flood and similar conditions: Provided, That the import ation free of duty of articles described in this herein subsection shall continu e only during the existence of such emergency, or within such limits and subject to such conditions as the President may, by his proclamation, deem necessary to meet the emergency. w. Philippine articles previously exported from the Philippines and returne d without having been advanced in value or improved in condition by any process of manufacture or other means, and upon which no drawback or bounty has been all owed, and foreign articles when returned after having been loaned and exported f or use temporarily abroad solely for exhibition, examination or experimentation, for scientific or educational purposes, and foreign containers packed with expo rted Philippine articles and returned empty if imported by or for the account of the person or institution who exported them from the Philippines and not for sa le, subject to identification: Provided, That any Philippine article falling und er this subsection upon which drawback or bounty has been allowed shall, upon re -importation thereof, be subject to a duty under this subsection equal to the am ount of such drawback or bounty. x. Large containers (e.g., demijohns, cylinders, drums, casks and other sim ilar receptacles of metal, glass or other material) which are, in the opinion of the Collector of Customs, of such a character as to be readily identifiable may be delivered to the importer thereof upon identification and the giving of a bo nd in an amount equal to one and one-half times the ascertained duties, taxes an d other charges thereon, conditioned for the exportation thereof on payment of t he corresponding duties, taxes and other charges within one year from the date o f acceptance of the import entry. y. Supplies or ship stores listed as such for the use of the vessel; suppli es which are intended for the reasonable requirements of the vessel in her voyag e outside the Philippines, including such articles transferred from a bonded war ehouse in any collection district to any vessel engaged in foreign trade, for us e or consumption of the passengers or its crew on board such vessel as sea store s; or articles purchased abroad for sale on board a vessel as saloon stores or s upplies: Provided, That any surplus or excess of such ship, sea or saloon stores arriving from foreign ports shall be dutiable according to the corresponding he ading or subheading. z. Articles and salvage from vessels recovered after the period of two year s from the date of filing the marine protest or the time when the vessel was wre cked or abandoned as determined by the Collector of Customs, or such part of Phi lippine vessel or her equipment, wrecked or abandoned in Philippine waters or el sewhere: Provided, That articles and salvage recovered within the said period of two years shall be dutiable according to the corresponding heading or subheadin

g. aa. Articles of easy identification exported from the Philippines for repair s abroad and subsequently reimported: Provided, That the cost of the repairs mad e to any such article shall pay a rate of duty of twenty-five per cent ad valore m. bb. Coffins or urns containing human remains, bones or ashes, and all articl es for ornamenting said coffins or urns and accompanying same; used personal and household effects, not merchandise, of deceased persons, upon identification as such, satisfactory to the Collector of Customs. III. Rates of Duty A. General Rules - Sec. 104 SECTION 104. Rates of Import Duty. There shall be levied, collected and paid upo n all imported articles the following rates of duty, except as otherwise specifi cally provided for in this Code. B. Basis of Duty - Sec. 201, 202, 204, 205, 1308-10, 1313 Customs Administrative Order No. 2-96, June 14, 1996 - MISSING R.A. No. 8181 - Transaction Value SECTION 201. Basis of Dutiable Value. Whenever an imported article is subject to an ad valorem rate of duty, the duty shall be assessed upon the market value or price at which, at the time of exportation, the same, like or similar article i s freely offered for sale in the principal markets of the exporting country for exportation to the Philippines, in the usual wholesale quantities and in the ord inary course of trade (excluding internal excise taxes to be remitted or rebated ), plus ordinary expenses prior and incidental to the lading of such article on board the vessel or aircraft at the port of export (including taxes or duties, i f any) and freight paid as well as insurance premium paid covering the transport ation of such article to the port of entry in the Philippines. When the value of the article cannot be ascertained in accordance with the prece ding paragraph, the value shall be the domestic wholesale market value or sellin g price of the same, like or similar imported article in the principal market of the Philippines on the date of exportation of the article under appraisement, i n the usual wholesale quantities and in the ordinary course of trade, minus the import duty and other taxes as well as a commission not exceeding six per centum if any has been paid or contracted to be paid on goods secured otherwise than b y purchase, and profits not to exceed eight per centum and a reasonable allowanc e for general expenses not to exceed eight per centum on purchased goods, and al l other expenses incidental to the delivery from the port of importation to the principal market in the Philippines. SECTION 202. Bases of Dutiable Weight. On articles that are subject to specific rate of duty, based on weight, the duty shall be ascertained as follows: a. When articles are dutiable by the gross weight, the dutiable weight ther eof shall be the weight of same, together with the weight of all containers, pac kages, holders and packings, of any kind, in which said articles are contained, held or packed at the time of importation. b. When articles are dutiable by the legal weight, the dutiable weight ther eof shall be the weight of same, together with the weight of the immediate conta iners, holders and/or packing in which such articles are usually contained, held or packed at the time of importation and/or, when imported in retail packages, at the time of their sale to the public in usual retail quantities: Provided, Th at when articles are packed in single container, the weight of the latter shall be included in the legal weight. c. When articles are dutiable by the net weight, the dutiable weight thereo f shall be only the actual weight of the articles at the time of importation, ex cluding the weight of the immediate and all other containers, holders or packing in which such articles are contained, held or packed. d. Articles affixed to cardboard, cards, paper, wood or similar common mate rial shall be dutiable together with the weight of such holders.

e. When a single package contains imported articles dutiable according to d ifferent weights, or to weight and value, the common exterior receptacles shall be prorated and the different proportions thereof treated in accordance with the provisions of this Code as to the dutiability or non-dutiability of such packin g. SECTION 204. Rate of Exchange. For the assessment and collection of import du ty upon imported articles and for other purposes, the value and prices thereof q uoted in foreign currency shall be converted into the currency of the Philippine s at the current rate of exchange or value specified or published, from time to time, by the Central Bank of the Philippines. SECTION 205. Effective Date of Rates of Import Duty. Imported articles shall be subject to the rate or rates of import duty existing at the time of entry, or withdrawal from warehouse in the Philippines, for consumption. On and after the day when this Code shall go into effect all articles previously imported, for which no entry has been made, and all articles previously entered without payment of duty and under bond for warehousing, transportation, or any other purpose, for which no permit of delivery to the importer or his agent has been issued, shall be subject to the rates of duty imposed by this Code and to n o other duty, upon the entry, or withdrawal thereof from warehouse, for consumpt ion. On articles abandoned or forfeited to, or seized by, the government, and then so ld at public auction, the rate of duty and the tariff in force on the date of th e auction shall apply: Provided, That duty based on the weight, volume and quant ity of articles shall be levied and collected on the weight, volume and quantity at the time of their entry into the warehouse or the date of abandonment, forfe iture and/or seizure. SECTION 1308. Invoice Contents of . Invoice of articles imported into the Philip pines shall set forth a. The place where, the date when, and the person by whom and the person to whom the articles are sold or agreed to be sold, or if to be imported otherwise than in pursuance of a purchase, the place from which shipped, the date when, a nd the person to whom and the person by whom they are shipped; b. The port of entry to which the articles are destined; c. A detailed description of the articles in customary terms or commercial designation, including the grade or quality, numbers, marks or symbols under whi ch sold by the seller or manufacturer, together with the marks and numbers of th e packages in which the articles are packed; d. The quantities in the weights and measures of the country or place from which the articles are shipped, or in the weights and measures of the Philippine s; e. The purchase price of each item in the currency of the purchase and in t he unit of the quantity in which the articles were bought and sold in the place or country of exportation, if the articles are shipped in pursuance of a purchas e or an agreement to purchase; f. The kind of currency; whether gold, silver or paper; g. If the articles are shipped otherwise than in pursuance of a purchase or an agreement to purchase, the value for each item in the unit of quantity in wh ich the articles are usually bought and sold, and in the currency in which the t ransactions are usually made, or, in the absence of such value, the price in suc h currency which the manufacturer, seller, shipper or owner would have received, or was willing to receive, for such articles if sold in the ordinary course of trade and in the usual wholesale quantities in the country of exportation; h. All charges upon the articles itemized by name and amount when known to the seller or shipper; or all charges by name (e.g., commission, insurance, frei ght, cases, containers, coverings and cost of packing) included in invoice price s when the amounts for such charges are unknown to the seller or shipper; i. All discounts, rebates, drawbacks and bounties separately itemized, allo wed upon the exportation of the articles, all internal and excise taxes applicab le to the home market;

j. The current price at which same, like or similar article is offered for sale for exportation to the Philippines, on the date the invoice is prepared or the date of exportation; and k. Any other facts deemed necessary to a proper examination, appraisement a nd classification of the articles which the Commissioner may require. SECTION 1309. Certification of Invoice. a. Consular Certification Required. Invoice required by the preceding secti on shall, at or before the shipment of the articles or as soon thereafter as con ditions will permit, be produced for certification to the consular officer of th e Philippines of the consular district in which the articles were manufactured o r purchased, or from which they are shipped, as the case may be: Provided, That in the absence of a Philippine consul in the country of exportation, such invoic e may be certified by the consul of any friendly country in the country of expor tation, or by any responsible official of the country of exportation. acd b. Declaration. Every invoice prescribed above shall contain a declaration signed by the purchaser, manufacturer, seller, owner or agent setting forth that the invoice is in all respects correct and true and was made at the place whenc e the articles are exported to the Philippines; that it contains, if the article s were obtained by purchase or an agreement to purchase, a true and full stateme nt of the date when, the place where, the person from whom the same were purchas ed and the purchase price and unit of quantity thereof, and of all charges there on; and that no discounts, bounties or drawbacks are contained in the invoice ex cept such as have been allowed thereon; and when obtained in any other manner th an by purchase or an agreement to purchase, the market value on wholesale price thereof at the time of exportation to the Philippines in the principal market of the country from which exported; that such market value is the price in the uni t of quantity at which the articles described in the invoice are freely offered for sale to all purchasers in said market for exportation to the Philippines, an d that it is the price which the manufacturer, seller, owner or agent making the declaration would have received and was willing to receive for such articles wh en sold in the ordinary course of trade in the usual wholesale quantities, and t hat it included all charges thereon; that the number, weight, measurement or qua ntity stated is correct, and that no invoice of the articles described different from the invoice so produced has been or will be furnished to anyone. If the articles were purchased, or shipped otherwise than in pursuance of a purc hase or an agreement to purchase, the declaration shall also contain a statement that the amount in the unit of quantity shown is that which was paid, or the pr ice in the unit of quantity that the shipper would have received, or was willing to receive, for such articles, and that the currency stated in such invoice is the currency of the purchase, or in which the transaction is usually made. c. Making and Signing. The invoice to be certified in accordance with the p rovisions of this section shall be made out in five copies and signed by the man ufacturer or seller if the articles have been purchase, or by the manufacturer, shipper or owner thereof if the same have been procured or obtained otherwise th an by purchase, or by the duly authorized agent of such manufacturer, seller, sh ipper or owner. d. Purchases in Different Consular Districts. When articles have been purch ased in different consular districts for shipment to the Philippines and are ass embled for shipment and embraced in a single invoice which is produced for certi fication under the provisions of this section, there shall be attached to the co nsular invoice the original bills or invoices certified by the manufacturer or s eller and received by the shipper showing the prices paid or to be paid for such articles. The consular officer to whom the invoice is so produced for certifica tion may require that any such original bill or invoice be certified by the cons ular officer for the district in which the articles were purchased. e. Disposition. The original and the quintuplicate of the invoice shall be delivered to the exporter, the former to be forwarded to the consignee for use i n making entry of the articles. The duplicate shall be filed in the office of th e consular officer by whom the invoice was certified there to be kept until the Secretary of Foreign Affairs authorizes its destruction. The triplicate shall be

promptly transmitted by the consular officer to the Collector of the port of en try named in the invoice, and the quadruplicate to the Tariff Commission, throug h the Department of Foreign Affairs. SECTION 1310. Invoice to Accompany Every Importation over P500 in Export Value. Except in case of personal and household effects accompanying a passenger as bag gage, or arriving within a reasonable time which in no case shall exceed ninety days before or after the owner's return, or in case of other articles brought in for personal use, no importation of articles exceeding five hundred pesos in ex port value shall be admitted to entry without the production of a duly certified invoice of the kind hereinabove described, or the filing of an affidavit made b y the owner, importer or consignee before the Collector, showing why it is not p ossible to produce such invoice, together with a bond, conditioned upon the prod uction of such invoice within a reasonable time, in an amount prescribed by law, rules or regulations. In the absence of such invoice, no entry shall be made ba sed on the aforesaid affidavit unless the same be accompanied by a commercial in voice signed by the manufacturer or seller or a statement in the form of an invo ice showing the purchase price of such articles in the unit of quantity and curr ency of the purchase, if same were purchased, or if obtained otherwise than by p urchase, the market value or wholesale price thereof at the time of exportation to the Philippines at which sold or offered for sale in the principal markets of the country from whence imported for export to the Philippines, and in the curr ency and unit of quantity in which the transaction is usually made. This stateme nt shall be verified by the oath of the owner, importer, consignee or agent desi ring to make the entry, taken before the Collector and it shall be lawful for th at official to examine the deponent under oath regarding the source of his knowl edge, information or belief, concerning any matter contained in his affidavit, a nd to require him to produce any correspondence, document or statement of accoun t in his possession or under his control, which may assist the customs authoriti es in ascertaining the value of the importation or of any part thereof; and in t he event of his failure to produce such correspondence, document or statement of account when so required, such owner, importer, consignee or agent shall therea fter be barred from producing such correspondence, document or statement for the purpose of avoiding the imposition of additional duty, penalty or forfeiture in curred under this Code or any other Act in force in the Philippines unless it is shown to the satisfaction of the Collector that it was not in his power to prod uce the same when so demanded; but no articles shall be admitted to entry under the provisions of this section unless the Collector shall be satisfied that the failure to produce the required invoice is due to causes beyond the control of t he owner, importer, consignee or agent: Provided, That whenever it is shown to t he satisfaction of the Collector that it is impossible to produce the consular i nvoice required by this section, the entry of the articles may be effected upon the filing of a commercial or pro forma invoice and the payment of a surcharge p rovided by section twenty-five hundred and two of this Code. SECTION 1313. Information Furnished Prior to Entry. a. As to Classification. Whe n an article imported or intended to be imported is not specifically mentioned i n this Code, the interested party, importer or foreign exporter may submit to th e Tariff Commission a sample together with a full description of its component m aterials and uses, and request it in writing to indicate the heading under which the article is or shall be dutiable, and the Tariff Commission shall comply wit h such request if it is satisfied that the application is made in good faith, in which case classification of the article in question, upon the particular impor tation involved, shall be made according to the heading indicated by the Tariff Commission. b. As to Value. Upon written application of the consignee or his agent, the Collector shall furnish any importer the latest information in his possession a s to the value of the articles to be entered at his port, after arrival or upon satisfactory evidence that they have been exported and are enroute to the Philip pines: Provided, that the information shall be given only if the Collector is sa tisfied after questioning the importer and examining all pertinent papers presen ted to him, such as invoices, contracts of sale or purchase, and orders, that th

e importer is acting in good faith and is unable to obtain proper information as to the value of the articles on the date of exportation due to unusual conditio ns: And provided, further, That the information so given is in no sense an appra isal or binding upon the Collector's action on appraisal. REPUBLIC ACT NO. 8181 AN ACT CHANGING THE BASIS OF DUTIABLE VALUE OF IMPORTED ARTICLES SUBJECT TO AN A D VALOREM RATE OF DUTY FROM THE HOME CONSUMPTION VALUE (HCV) TO TRANSACTION VALU E (TV), AMENDING FOR THE PURPOSE SECTION 201 OF TITLE II, PART 1 OF PRESIDENTIAL DECREE NO. 1464, OTHERWISE KNOWN AS THE TARIFF AND CUSTOMS CODE OF THE PHILIPPI NES, AS AMENDED, AND FOR OTHER PURPOSES SECTION 1. Section 201 of Title II, Part 1 of the Tariff and Customs Code of the Philippines, as amended, is hereby further, amended to read as follows: "Sec. 201. Basis of Dutiable Value. The dutiable value of an imported article su bject to an ad valorem rate of duty shall be the transaction value, which shall be the price actually paid or payable for the goods when sold for export for the Philippines, adjusted by adding the following to the extent that they are incur red by the buyer but are not included in the price actually paid or payable for the imported goods: (a) Commissions and brokerage fees (except buying commissions); cost of containe rs; and the cost of packing, whether for labour or materials; (b) The value of materials, components, parts and items incorporated in the impo rted goods; tools, dies, moulds and similar items used in the production of the imported goods; and engineering, development, artwork, design work, and pla ns and sketches undertaken elsewhere than in the Philippines and necessary for t he production of imported goods, where such goods and services are supplied dire ctly or indirectly by the buyer free of charge or at a reduced cost for use in c onnection with the production and sale for export of the imported goods, to the extent that such value has not been include in the price actually paid or payabl e; (c) The amount of royalties and license fees that the buyer must pay, either dir ectly or indirectly, in connection with the goods being valued, as a condition o f sale of the goods that accrues directly or indirectly to the seller; (d) The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues directly or indirectly to the seller; (e) The cost of transport of the imported goods from the port of exportation to the port of entry in the Philippines; (f) Loading, unloading and handling charges associated with the transport of the imported goods from the country of exportation to the port of entry in the Phil ippines; and (g) The cost of insurance. Where the Commissioner of Customs has reason to doubt the truth or accuracy of the declaration or particulars or documents provided in support of declared value of the importation, he may require the importer to give further explanatio n thereof and to submit additional documents or other evidence to show that the declared value represents the total amount paid or payable for the imported good s. If after receiving the explanation of the importer the Commissioner of Cust oms still has reasonable doubt as to the accuracy of the declared value, the Com missioner of Customs may proceed with the alternative methods specified hereafte r, as follows: The dutiable value shall be the transaction value of identical goods sold f or export to the Philippines at or about the date of exportation of the goods be ing valued; If the dutiable value still cannot be determined through the successive app lication of the two immediately preceding methods, the order of succession of th e following methods may be reversed upon request of the importer unless the Comm issioner of Customs deems that he will experience real difficulties in determini ng the dutiable value by using the computed value, in which case the Commissione r of Customs may refuse such a request subject to the provisions of the General

Agreement on Tariffs and Trade (GATT) 1994 and the Uruguay Round Final Act, in w hich event the valuation of the imported goods shall be determined as indicated hereunder; (1) The unit price at which the imported goods or identical or similar imported goods are sold domestically, in the same condition as when imported, in the grea test aggregate quantity, to persons not related to the seller, at or about the t ime of the importation of the goods being valued, subject to the applicable dedu ctions as provided under the GATT 1994 and the Uruguay Round Final Act; or (2) The computed value which shall be the sum of: (a) The cost or value of raw materials employed in producing the imported g oods; (b) The amount for profit and general expenses equal to the amount for prof it and general expenses as reflected in the sale of goods of the same clas s or kind as the goods being valued which are made by producers in the country o f exportation for the Philippines; and (c) The freight, insurance fees and other transportation expenses for the i mportation of the goods; If the dutiable value cannot be determined under any of the preceding methods described above, it shall be determined by using other reasonable means consistent with the principles and general provisions of GATT 1994, the agreemen t on the implementation of Article VII of the General Agreement on Tariffs and T rade as contained in the Uruguay Round Final Act, and on the basis of data avail able in the Philippines. The correct dutiable value of the imported goods referred to above sha ll be ascertained by the Commissioner of Customs from reports of revenue or comm ercial attaches or other Philippine diplomatic officers and from such other sour ces of information as may be available and published by the Commissioner of Cust oms from time to time, and such values shall be binding upon the importers and t he Bureau of Customs until changed and new value or values are similarly establi shed and published. Values shall be published in at least one (1) newspaper of general cir culation and other publications readily available to the public. Any importer or other interested party who is dissatisfied with the published value shall have fifteen (15) days from the date of publication of such published value the oppor tunity to file a protest on the questioned value and the Commissioner of Customs shall resolve the protest within fifteen (15) days from receipt of such protest , either by amending the published value or retraining the same. Whatever his de cision may be must likewise be published. If, in the course of determining the dutiable value of imported goods , it becomes necessary to delay the final determination of such dutiable value, the importer may secure the release of the imported goods upon the filing of a b ond which shall solely be in cash, in an amount equivalent to the imposable duti es and taxes on the imported goods in question plus twenty-five percent (25%) th ereof, conditioned upon the payment of customs duties and taxes for which the im ported goods may be liable: Provided, however, That goods the importation of whi ch is prohibited by law shall not be released under any circumstances whatsoever . For purposes of the preceding paragraph, the terms: (1) "Reasonable" shall refer to any condition that creates a probable cause to m ake the Commissioner of Customs believe in the accuracy of the invoice value of imported goods as reflected by the importer in his customs declaration, for valu ation purposes. Such condition may include but is not limited to any of the foll owing situations: (a) If the sale or price is subject to some consideration for which a value cannot be determined with respect to the goods being valued such as: (i) When the seller fixes the price of the imported goods on condition t hat the buyer will also buy other goods in specified quantities; (ii) When the price of the imported goods is dependent upon the price or prices at which the buyer of the imported goods sells other goods to the seller ;

(iii) When the price is established on the basis of a form of payment ex traneous to the imported goods, such as where the imported goods are semi-finish ed goods which have been provided by the seller on the condition that he will re ceive a specified quantity of finished foods; (b) Or, if part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of Arti cle 8 of the agreement in the implementation of Article VII of the General Agree ment on Tariffs and Trade as contained in the Uruguay Round Final Act; and (c) If the buyer and the seller are related to one another, and such relatio nship influenced the price of the goods. Such persons shall be deemed related if : (i) They are officers or directors of one another's businesses; (ii) They are legally recognized partners in business; (iii) Note : There is no number three in the original. (iv) Any person directly or indirectly owns, controls or holds five perc ent (5%) or more of the outstanding voting stock or shares of both seller and bu yer; (v) One of them directly or indirectly controls the other; (vi) Both of them are directly or indirectly controlled by a third perso n; (vii) Together they directly or indirectly control a third person; or (viii) They are members of the same family including brothers and sister s, (whether by whole or half blood) spouse, ancestors, and lineal descendants. (2) "Identical goods" shall mean goods which are the same in all respects, inclu ding physical characteristics, quality and reputation. Minor differences in appe arances shall not preclude goods otherwise conforming to the definition from bei ng regarded as identical. (3) "Similar goods" shall mean goods which, although not alike in all respects, have like characteristics and like component materials which enable them to perf orm the same functions and to be commercially interchangeable. The quality of th e goods, their reputation and the existence of a trademark shall be among the fa ctors to be considered in determining whether goods are similar. SECTION 2. Transitory Provisions. Upon the effectivity of this Act and until suc h time when the Congress authorizes the shift to transaction value before Januar y 1, 2000 as provided under Section 3 of this Act, the dutiable value of an impo rted article subject to an ad valorem rate of duty shall be based on the export value at which at the time of exportation, the same or identical, like, or simil ar article is freely offered for sale in the principal export markets of the exp orting country for exportation to the Philippines, in the usual wholesale quanti ties and in the ordinary course of trade (excluding internal excise taxes to be remitted or rebated) or where there is none on such date, then on the export val ue nearest to the date of exportation, including the value of all containers, co verings and/or packings of any kind and all other expenses, costs and charges in cident to placing the article in a condition ready for shipment to the Philippin es, and freight, as well as insurance premium covering the transportation of suc h articles to the port of entry in the Philippines. Where the export value of the article cannot be ascertained thereat or whe re there exists a reasonable doubt as to the fairness of such value, then the ex port value of the article for exportation to the Philippines shall be the export value of the article in the principal export markets of the country of manufact ure or origin, if such country is not the country of exportation. Where the dutiable value cannot be ascertained as provided in the precedin g paragraphs, or where there exists a reasonable doubt as to the dutiable value of the imported article declared in the entry, the dutiable value shall be the d omestic wholesale selling price of such or similar article in Metro Manila or ot her principal markets in the Philippines on the date the duty becomes payable on the article under appraisement, in the usual wholesale quantities and in the or dinary course of trade, minus: (a) Not more than twenty-five percent (25%) of the domestic wholesale selling pr

ice for expenses and profits; and (b) Duties and taxes paid thereon. The correct dutiable value of imported articles shall be ascertained by the Comm issioner of Customs using for that purpose reports of Revenue or Commercial Atta ches or other Philippine diplomatic officers or such other sources of informatio n that may be available to the Bureau of Customs. Such values shall be published from time to time. Values shall be published in a manner that will make them readily available to t he public. Any importer or other interested party who is dissatisfied with the p ublished value shall have fifteen (15) days from the date of publication of such published values the opportunity to file protest on the questioned value, and t he Commissioner of Customs shall resolve the protest within fifteen (15) days fr om such protest either by amending the published value or retaining the same. Wh atever his decision may be must likewise be published. If, in the course of determining the dutiable value of imported goods, it become s necessary to delay the final determination of such dutiable value, the importe r may secure the release of the imported article upon the filing of a bond which shall solely be in cash in an amount equivalent of the imposable duties and tax es on the imported goods in question plus twenty-five percent (25%) thereof, con ditioned upon the payment of customs duties and taxes for which the imported goo ds may be liable: Provided, however, That imported goods the importation of whic h is prohibited by law shall not be released under any circumstances whatsoever. SECTION 3. In the interest of national economy, general welfare and/or national security, the Congress shall, upon recommendation of the President, by joint res olution, order the shift to transaction value, as provided under Section 1 of th is Act, as the basis of dutiable value of an imported article subject to an ad v alorem rate of duty even before January 1, 2000. SECTION 4. The Secretary of Finance shall, upon the recommendation of the Commis sioner of Customs, promulgate the necessary rules and regulations for the effect ive implementation of this Act. SECTION 5. The Commissioner of Customs may delegate his power to determine dutia ble values and to release imported goods under cash bond as provided in this law in cases where there are no established and published values covering the impor tation: Provided, That in such cases, the Collector of Customs concerned shall i mmediately render a complete report to the Commissioner of Customs and the latte r shall, without delay, establish and publish the correct dutiable value or valu es for the importation, after which all Collector of Customs shall be guided acc ordingly in the assessment of import duties and taxes on similar or like importa tions. SECTION 6. The Commissioner of Customs shall create such body or bodies to recei ve and hear protests regarding published values. Such body or bodies shall hear and receive the evidence and shall submit its or their recommendations to the Co mmissioner of Customs. The hearing body shall submit its report in writing and s hall convey to all interested parties whatever decision reached by the commissio ner thereon. During the effectivity of any published values, any interested part y may petition the Commissioner of Customs for a review of the published value f or the purpose of raising or lowering such value. SECTION 7. All laws, decrees, executive orders, rules and regulations and other issuances or parts thereof which are inconsistent with this Act are hereby repea led or modified accordingly. SECTION 8. This Act shall take effect fifteen (15) days after its complete publi cation in the Official Gazette or in at least two (2) newspapers of general circ ulation, whichever date comes earlier. Approved: March 28, 1996 C. Special duties a. Dumping - Sec. 301 SECTION 301. Dumping Duty. a. Whenever the Secretary of Finance (hereinafter called the Secretary") ha

s reason to believe, from invoices or other papers or from information made avai lable to him by any government agency or interested party, that a specific kind or class of foreign article, whether dutiable or duty-free, is being sold or is likely to be sold for exportation to, or in, the Philippines, at a price less th an its fair value, as hereinafter defined, the importation or sale of which migh t injure, or prevent the establishment of, or is likely to injure an industry in the Philippines, he shall so advise the Tariff Commission (hereinafter called t he "Commission"). b. The Commission, upon receipt of such advice from the Secretary, shall co nduct an investigation to 1. Verify if the kind or class of articles in question is being sold or is likely to be sold for exportation to, or in, the Philippines at a price less tha n its fair value; 2. Determine if, as a result thereof, an industry in the Philippines is bei ng injured or is likely to be injured or is prevented from being established by reason of the importation or sale of such kind or class of article into the Phil ippines; and 3. Ascertain the difference, if any, between the purchase price or, in the absence thereof, the exporter's sales price, and the fair value of the article. The Commission shall submit its findings to the Secretary within one month after receipt of the aforesaid advice. c. The Secretary shall, within fifteen days from the report of the Commissi on, decide whether the article in question is being imported in violation of thi s section and shall give due notice of such finding and shall direct the Commiss ioner of Customs to cause the dumping duty, to be levied, collected and paid, as prescribed in this section, in addition to any other duties, taxes and charges imposed by law on such article. d. The "dumping duty" as provided for in subsection "e" hereof shall be equ al to the difference between the purchase price or, in the absence thereof, the exporter's sales price, and the fair value of the article. e. For the purpose of this section 1. The "fair value" of an article shall be its foreign market value, or, in the absence of such value, its cost of production. 2. The "purchase price" of an imported article shall be the price at which such article has been purchased or agreed to be purchased, prior to the time of exportation, by the person by whom or for whose account the article is imported, plus, when not included in such price (a) The cost of all containers and coverings and all other costs, charges an d expenses incident to placing the article in condition, packed ready for shipme nt to the Philippines; (b) The amount of any export tax paid in the country of exportation on the e xportation of the article to the Philippines; (c) The amount of any import duties imposed by the country of exportation wh ich have been rebated, or which have not been collected, by reason of the export ation of the article to the Philippines; and (d) The amount of any taxes imposed in the country of exportation upon the m anufacturer, producer or seller, in respect to the manufacture, production or sa le of the article, which have been rebated, or which have not been collected, be reason of the exportation of the article of the Philippines. Any additional costs, charges and expenses incident to bringing the article from the place of shipment in the country of exportation to the place of delivery in the Philippines and Philippine customs duties imposed thereon shall not be incl uded. cda 3. The "exporter's sale price" of an imported article shall be the price at which such article is sold or agreed to be sold in the Philippines, before or a fter the time of exportation, by or for the account of the exporter, including (a) The cost of all containers and coverings and all other costs, charges an d expenses incident to placing the article in condition, packed ready for shipme nt to the Philippines; (b) The amount of any import duties imposed by the country of exportation wh

ich have been rebated, or which have not been collected, by reason of the export ation of the article to the Philippines; and (c) The amount of any taxes imposed in the country of exportation upon the m anufacturer, producer or seller in respect to the manufacture, production or sal e of the article, which have been rebated, or which have not been collected, by reason of its exportation to the Philippines. The following amount, if included, shall be deducted (1) The amount of costs, charges and expenses, and Philippine customs duties , incident to bringing the article from the place of shipment in the country of exportation to the place of delivery in the Philippines; (2) The amount of commissions, if any, for selling in the Philippines the pa rticular article under consideration; (3) An amount equal to the expenses, if any, generally incurred by or for th e account of the exporter in the Philippines in selling identical or substantial ly identical article; and (4) The amount of any export tax paid in the country of exportation on the e xportation of the article to the Philippines. 4. The "foreign market value" of an imported article shall be the price, at the time of exportation of such article to the Philippines, at which such or si milar article is sold or freely offered for sale to all purchasers in the princi pal markets of the country from which exported, in the usual wholesale quantitie s and in the ordinary course of trade for home consumption (or, if not sold or o ffered for sale for home consumption, then for exportation to countries other th an the Philippines), including the cost of all containers and coverings and all other costs, charges and expenses incident to placing the article in condition p acked ready for shipment to the Philippines, except that in the case of articles purchased or agreed to be purchased by the person by whom or for whose account the article is imported, prior to the time of exportation, the foreign market va lue shall be ascertained as of the date of such purchase or agreement to purchas e. In the ascertainment of foreign market value for the purpose of this section, no pretended sale or offer for sale, and no sale or offer for sale intended to establish a fictitious market, shall be taken into account. 5. The "cost of production" of an imported article shall be the sum of (a) The cost of materials of, and of fabrication, manipulation or other proc ess employed in manufacturing or producing, identical or substantially identical article, at a time preceding the date of shipment of the particular article und er consideration which would ordinarily permit the manufacture or production of the particular article under consideration in the usual course of business; (b) The usual general expenses not less than 10 per cent of such cost, in th e case of identical or substantially identical articles; (c) The cost of all containers and coverings, and all other costs, charges a nd expenses incident to placing the particular article under consideration in co ndition, packed ready for shipment to the Philippines; and (d) An addition for profit not less than 8 per cent of the sum of the amount s determined under subparagraphs (a) and (b) hereof, equal to the profit which i s originally added, in the case of articles of the same general character as the particular article under consideration, by manufacturers or producers in the co untry of manufacture or production who are engaged in the same general trade as the manufacturer or producer of the particular article under consideration. f. For the purposes of this section the "exporter" of an imported article s hall be the person by whom or for whose account the article is imported into the Philippines 1. If such person is the agent or principal of the exporter, manufacturer o r producer; or 2. If such person owns or controls, directly or indirectly, through stock o wnership or control or otherwise, any interest in the business of the exporter, manufacturer or producer; or 3. If the exporter, manufacturer or producer owns or controls, directly or indirectly, through stock ownership or control or otherwise, any interest in any business conducted by such persons; or

4. If any person or persons, jointly or severally, directly or indirectly, through stock ownership or control or otherwise, own or control in the aggregate 20 per cent or more of the voting power or control in the business carried on b y the person by whom or for whose account the article is imported into the Phili ppines, and also 20 per cent or more of such power or control in the business of the exporter, manufacturer or producer. g. Pending investigation and final decision of the case, the article in que stion, and articles of the same specific kind or class subsequently imported und er similar circumstances, shall be released to the owner, importer, consignee or agent upon the giving of a bond in an amount equal to the double the estimated value thereof. Articles which may have been delivered under the provision of sec tion fifteen hundred and three of this Code prior to the institution of the inve stigation provided in this section shall, pending final decision, be ordered ret urned to the custody of the collectors of customs unless released under bond in accordance with this section. h. Any aggrieved party may only appeal the amount of dumping duty that is l evied and collected by the Commissioner of Customs to the Court of Tax Appeals i n the same manner and within the same period provided for by law in the case of appeals from decisions of the Commissioner of Customs. i. (1) The article, if it has not been previously released under bond as pr ovided in subsection "g" hereof, shall be released after payment by the party co ncerned of the corresponding dumping duty in addition to any other duties, taxes and charges, if any, or re-exported by the owner, importer, consignee or agent, at his option and expense, upon the filing of a bond in an amount equal to doub le the estimated value of the article, conditioned upon the presentation of a la nding certificate issued by a consular officer of the Philippines at the country of destination; or (2) If the article has been previously released under bond, as provided in s ubsection "g" hereof, the party concerned shall be required to pay the correspon ding dumping done in addition to any other duties, taxes and charges, if any. j. Any investigation to be conducted by the Commission under this section s hall include a hearing or hearings where the owner, importer, consignee or agent of the imported article, the local producers of a like article, other parties d irectly affected, and such other parties as in the judgment of the Commission ar e entitled to appear, shall be given an opportunity to be heard and to present e vidence bearing on the subject matter. k. It shall be the duty of collectors of customs at all ports of entry to l evy and collect the dumping duty in accordance with subsection "d" hereof on the specific kind or class of article as to which the Secretary has made a decision of dumping. It shall also be their duty to bring to the attention of the Secretary, thru the Commissioner of Customs, any case coming within their notice which may, in thei r opinion, require action as provided in this section. l. The Secretary shall promulgate all rules and regulations necessary to ca rry out the provisions of this section. b. Countervailing - Sec. 302 SECTION 302. Countervailing Duty. a. On articles dutiable under this Code, upon the production, manufacture o r export of which any bounty, subsidy or subvention is directly or indirectly gr anted in the country of origin and/or exportation, and the importation of which has been determined by the Secretary, after investigation and report of the Comm ission, as likely to materially injure an established industry, or prevent or co nsiderably retard the establishment of an industry in the Philippines, there sha ll be levied a countervailing duty equal to the ascertained or estimated amount of such bounty, subsidy or subvention: Provided, That the exception of any expor ted article from a duty or tax imposed on like articles when destined for consum ption in the country of origin and/or exportation or the refunding of such duty or tax, shall not be deemed to constitute a grant of a bounty, subsidy or subven tion within the meaning of this section; however, should an article be allowed d

rawback by the country of origin and/or exportation, only the ascertained or est imated excess of the amount of the drawback over the total amount of the duties and/or internal taxes, if any, shall constitute a bounty, subsidy or subvention. b. The Commission, on its own motion or upon application of any interested party, when in its judgment there is good and sufficient reason therefor, shall ascertain, determine or estimate the net amount of such bounty, subsidy or subve ntion and shall transmit to the Secretary the amounts so ascertained, determined or estimated, if any. Wherever it is ascertained that the conditions which nece ssitated the imposition of the countervailing duty have ceased to exist, and the Commission shall so certify to the Secretary, the latter shall take the necessa ry steps to suspend or discontinue the imposition of such duty. c. The Secretary shall make all rules and regulations necessary to carry ou t the provisions of this section. c. Marking - Sec. 303 SECTION 303. Marking of Imported Articles and Containers. a. Marking of Articles. Except as hereinafter provided, every article of fo reign origin (or its container, as provided in subsection "b" hereof) imported i nto the Philippines shall be marked in any official language of the Philippines and in a conspicuous place as legibly, indelibly and permanently as the nature o f the article (or container) will permit in such manner as to indicate to an ult imate purchaser in the Philippines the name of the country of origin of the arti cle. The Commissioner of Customs shall, with the approval of the department head , issue rules and regulations to (1) Determine the character of words and phrases or abbreviations thereof wh ich shall be acceptable as indicating the country of origin and prescribe any re asonable method of marking, whether by printing, stenciling, stamping, branding, labeling or by any other reasonable method, and a conspicuous place on the arti cle or container where the marking shall appear; (2) Require the addition of any other words or symbols which may be appropri ate to prevent deception or mistake as to the origin of the article or as to the origin of any other article with which such imported article is usually combine d subsequent to importation but before delivery to an ultimate purchaser; and cd (3) Authorize the exception of any article from the requirements of marking if (a) Such article is incapable of being marked; (b) Such article cannot be marked prior to shipment to the Philippines witho ut injury; (c) Such article cannot be marked prior to shipment to the Philippines, exce pt at an expense economically prohibitive of its importation; (d) The marking of a container of such article will reasonably indicate the origin of such article; (e) Such article is a crude substance; (f) Such article is imported for use by the importer and not intended for sa le in its imported or any other form; (g) Such article is to be processed in the Philippines by the importer or fo r his account otherwise than for the purpose of concealing the origin of such ar ticle and in such manner that any mark contemplated by this section would necess arily be obliterated, destroyed or permanently concealed; (h) An ultimate purchaser, by reason of the character of such article or by reason of the circumstance of its importation, must necessarily know the country of origin of such article even though it is not marked to indicate its origin; (i) Such article was produced more than twenty years prior to its importatio n into the Philippines; or (j) Such article cannot be marked after importation except at an expense whi ch is economically prohibitive, and the failure to mark the article before impor tation was not due to any purpose of the importer, producer, seller or shipper t o avoid compliance with this section.

b. Marking of Containers. Whenever an article is excepted under subdivision (3) of subsection "a" of this section from the requirements of marking, the imm ediate container, if any, of such article, or such other container or containers of such article as may be prescribed by the Commissioner of Customs with the ap proval of the department head, shall be marked in such manner as to indicate to an ultimate purchaser in the Philippines the name of the country of origin of su ch article in any official language of the Philippines, subject to all provision s of this section, including the same exceptions as are applicable to articles u nder subdivision (3) of subsection "a". c. Marking Duty for Failure to Mark. If at the time of importation any arti cle (or its container, as provided in subsection "b" hereof), is not marked in a ccordance with the requirements of this section, there shall be levied, collecte d and paid upon such article a marking duty of 5 per cent ad valorem, which shal l be deemed to have accrued at the time of importation, except when such article is exported or destroyed under customs supervision and prior to the final liqui dation of the corresponding entry. d. Delivery Withheld until Marked. No imported article held in customs cust ody for inspection, examination or appraisement shall be delivered until such ar ticles and/or their containers, whether released or not from customs custody, sh all have been marked in accordance with the requirements of this section and unt il the amount of duty estimated to be payable under subsection "c" of this secti on shall have been deposited. Nothing in this section shall be construed as exce pting any article or its container from the particular requirements of marking p rovided for in any provisions of law. e. The failure or refusal of the owner or importer to mark the articles as herein required within a period of thirty days after due notice shall constitute as an act of abandonment of said articles and their disposition shall be govern ed by the provisions of this Code relative to abandonment of imported articles. d. Discriminatory - Sec. 304 SECTION 304. Discrimination by Foreign Countries. a. The President, when he finds that the public interest will be served the reby, shall by proclamation specify and declare new or additional duties in an a mount not exceeding 50 per cent of the existing rates as hereinafter provided up on articles wholly or in part the growth or product of, or imported in a vessel of, any foreign country whenever he shall find as a fact that such country (1) Imposes, directly or indirectly, upon the disposition in, or transportat ion in transit through or re-exportation from such country of any article wholly or in part the growth or product of the Philippines any unreasonable charge, ex action, regulation or limitation which is not equally enforced upon the like art icles of every foreign country; or (2) Discriminates in fact against the commerce of the Philippines, directly or indirectly, by law or administrative regulation or practice, by or in respect to any customs, tonnage, or port duty, fee, charge, exaction, classification, r egulation, condition, restriction or prohibition, in such manner as to place the commerce of the Philippines at a disadvantage compared with the commerce of any foreign country. b. If at any time the President shall find it to be a fact that any foreign country has not only discriminated against the commerce of the Philippines, as aforesaid but has, after the issuance of a proclamation as authorized in subsect ion "a" of this section, maintained or increased its said discriminations agains t the commerce of the Philippines, the President is hereby authorized, if he dee ms it consistent with the interests of the Philippines, to issue a further procl amation directing that such product of said country or such articles imported in its vessels as he shall deem consistent with the public interests, shall be exc luded from importation into the Philippines. c. Any proclamation issued by the President under the authority of this sec tion shall, if he deems it consistent with the interests of the Philippines, ext end to the whole of any foreign country or may be confined to any subdivision or subdivisions thereof; and the President shall, whenever he deems the public int

erests require, suspend, revoke, supplement or amend any such proclamation. d. All articles imported contrary to the provisions of this section shall b e forfeited to the Government of the Philippines and shall be liable to be seize d, prosecuted and condemned in like manner and under the same regulations, restr ictions and provisions as may from time to time be established for the recovery, collection, distribution and remission of forfeiture to the government by the t ariff and customs laws. Whenever the provision of this section shall be applicab le to importations into the Philippines of articles wholly or in part the growth or product of any foreign country, they shall be applicable thereto whether suc h articles are imported directly or indirectly. e. It shall be the duty of the Commission to ascertain and at all times to be informed whether any of the discriminations against the commerce of the Phili ppines enumerated in subsections "a" and "b" of this section are practiced by an y country; and if and when such discriminatory acts are disclosed, it shall be t he duty of the Commission to bring the matter to the attention of the President, together with recommendation. f. The Secretary shall make such rules and regulations as are necessary for the execution of such proclamation as the President may issue in accordance wit h the provisions of this section. g. The authority granted herein to the President shall be exercised only wh en Congress is not in session. D. Flexible Tariff rates - Sec. 401 SECTION 401. Flexible Clause. a. The President, upon investigation by the Commission and recommendation o f the National Economic Council, is hereby empowered to reduce by not more than fifty per cent or to increase by not more than five times the rates of import du ty expressly fixed by statute (including any necessary change in classification) when in his judgment such modification in the rates of import duty is necessary in the interest of national economy, general welfare and/or national defense. b. Before any recommendation is submitted to the President by the Council p ursuant to the provisions of this section, the Commission shall conduct an inves tigation in the course of which it shall hold public hearings wherein interested parties shall be afforded reasonable opportunity to be present, to produce evid ence and to be heard. The Commission may also request the views and recommendati ons of any government office, agency or instrumentality, and such office, agency or instrumentality shall cooperate fully with the Commission. c. The President shall have no authority to transfer articles from the duty -free list to the dutiable list nor from the dutiable list to the duty-free list of the tariff. d. The power of the President to increase or decrease rates of import duty within the limits fixed in subsection "a" shall include the authority to modify the form of duty. In modifying the form of duty the corresponding ad valorem or specific equivalents of the duty with respect to imports from the principal conc erning foreign country for the most recent representation period shall be used a s basis. e. The Commissioner of Customs shall regularly furnish to the Commission a copy each of all customs import entries containing every pertinent information a ppearing in the collectors' liquidated duplicates, including the consular invoic e and/or the commercial invoice. The Commission or its duly authorized agents sh all have access to and the right to copy all the customs import entries and othe r documents appended thereto as finally in the General Auditing Office. f. The Commission is authorized to adopt such reasonable procedure, rules a nd regulations as it may deem necessary to carry out the provisions of this sect ion. g. Any order issued by the President pursuant to the provisions of this sec tion shall take effect thirty days after its issuance. h. The provisions of this section shall not apply to any article the import ation of which into the Philippines is or may be governed by Section 402 of this Code.

i. The authority herein granted to the President shall be exercised only wh en Congress is not in session. IV. Imposition of Duties A. Persons liable - Sec. 1203-1205 SECTION 1203. Owner of Imported Articles. All articles imported into the Philipp ines shall be held to be the property of the person to whom the same are consign ed; and the holder of a bill of lading duly indorsed by the consignee therein na med, or, if consigned to order, by the consignor, shall be deemed the consignee thereof. The underwriters of abandoned articles and the salvors of articles save d from a wreck at sea, along a coast or in any area of the Philippine may be reg arded as the consignees. SECTION 1204. Liability of Importer for Duties. Unless relieved by laws or regul ations, the liability for duties, taxes, fees and other charges attaching on imp ortation constitutes a personal debt due from the importer to the government whi ch can be discharged only by payment in full of all duties, taxes, fees and othe r charges legally accruing. It also constitutes a lien upon the articles importe d which may be enforced while such articles are in custody or subject to the con trol of the government. SECTION 1205. Importations by the Government. Except as otherwise specifically p rovided, all importations by the government for its own use or that of its subor dinate branches on instrumentalities, or corporations, agencies or instrumentali ties owned or controlled by the government, shall be subject to the duties, taxe s, fees and other charges provided for in this Code: Provided, however, That upo n certification of the head of the department or political subdivision concerned , with the approval of the Auditor General, that the imported article is actuall y being used by the government or any of its political subdivision concerned, th e amount of duty, tax, fee or charge shall be refunded to the government or the political subdivision which paid it. B. Declaration - Sec. 1302-1307 SECTION 1302. Import Entries. All imported articles, except importation admitted free of duty under subsection "o", section one hundred and five of this Code, s hall be subject to a formal or informal entry. Articles of a commercial nature i ntended for sale, barter or hire, the dutiable value of which is five hundred pe sos or less, and personal and household effects or articles, regardless of value , imported in passenger's baggage mail, or otherwise, for personal use, may be c leared on an informal entry whenever duty, tax or other charges are collectible. acd The Collector may, when he deems it necessary for the protection of the revenue, require a formal entry regardless of value. A formal entry may be for immediate consumption, or under bond for: a. Placing the articles in warehouse; b. Constructive warehousing and immediate transportation to other ports of the Philippines without appraisement; or c. Constructive warehousing and immediate exportation. Import entries under bond shall be subject to the provisions of Title V, Book II of this Code. SECTION 1303. Entry of Articles in Part for Consumption and in Part for Warehous ing. Import entries of articles covered by one bill of lading may be made simult aneously for both consumption and warehouse. Where an intent to export the artic les is shown by the bill of lading and invoice, the whole or a part of a bill of lading (not less than one package may be entered for warehouse and immediate ex portation. Articles received at any port from another port of the Philippines on any entry for immediate transportation without appraisal may be entered at the port of delivery either for consumption or warehouse. SECTION 1304. Declaration of the Import Entry. Except in case of informal entry, no entry of imported article shall be effected until there shall have been subm itted to the Collector a written declaration, in such form as shall be prescribe

d by the Commissioner, containing statements of substance as follows: a. That the entry delivered to the Collector contains a full and true state ment of all the articles which are the subject of the entry. b. That the invoice and entry contain a just and faithful account of the ac tual cost of said articles, including and specifying the value of all containers or coverings, and that nothing has been omitted therefrom or concealed whereby the Government of the Republic of the Philippines might be defrauded of any part of the duties lawfully due on the articles. c. That, to the best of declarant's information and belief, the invoice and all bills of lading relating to the articles are the only ones in existence rel ating to the importation in question and that they are in the state in which the y were actually received by him; and, furthermore, d. That, to the best of the declarant's information and belief, the entry, invoice and bill of lading, and the declaration thereon are in all respects genu ine and true, and were made by the person by whom the same purport to have been made, respectively. SECTION 1305. By Whom to be Signed. The declaration shall be signed by the impor ter, consignee or holder of the bill, by or for whom the entry is effected, if s uch person is an individual, or in case of a corporation, firm or association, b y its manager, or by a licensed customs broker duly authorized to act for either of them. When it is impracticable to obtain a declaration thus signed, the Coll ector may allow it to be signed by some person in interest having first and best knowledge of the facts. A Collector may also, in his discretion, require that t he declaration shall be sworn to by the person signing the same. SECTION 1306. Form and Contents of Import Entry. Import entries shall be in the required number of copies in such form as prescribed by regulations. They shall be signed by the person making the entry of the articles, and shall contain the names of the importing vessel and master, port of departure and date of arrival, the number and marks of packages, or the quantity, if in bulk, and the nature o f the articles contained therein, and its value as set forth in a proper invoice to be presented in duplicate with the entry. SECTION 1307. Description of Articles. The description of the articles in the im port entry shall be in customary terms or communal designation, or, if feasible and practical, in tariff terms, and in the currency of the invoice; and the valu es of the several classes of articles shall be separately declared according to their respective rates of duty, and the totals of each class duly shown. C. Examination, Appraisal, and Classification - Sec. 1405-1408 SECTION 1405. Proceedings and Report of Appraisers. Appraisers, shall by all rea sonable ways and means, ascertain, estimate and determine the value or price of the articles as required by law, any invoice or affidavit thereto or statement o f cost, or of cost of production to the contrary notwithstanding, and after revi sing and correcting the reports of the examine as they may judge proper, shall r eport in writing on the face of the entry the value so determined, irrespective of whether such value is equal, higher or lower than the invoice and/or entered value of the articles. Appraisers shall describe all articles on the face of the entry in tariff and su ch terms as will enable the Collector to pass upon the appraisal and classificat ion of the same, which appraisal and classification shall be subject to his appr oval or modification, and shall note thereon the measurements and quantities, an d any disagreement with the declaration. SECTION 1406. Appraisers' Samples. Appraisers shall see that representative and sufficient samples of all kinds of articles which may be readily sampled are tak en under proper receipt and retained for official purposes; but samples of artic les identical in quality, material and values shall not be retained, if their re turn is desired, longer than may be required for use in contested cases. The quantity and value of the samples taken shall be noted on the face of the en try. Such samples shall be duly labelled as will definitely identify them with t he importation for which they are taken. SECTION 1407. Readjustment of Appraisal, Classification or Return. Such appraisa

l, classification or return as finally passed upon and approved or modified by t he Collector shall not be altered or modified in any manner, except: a. Within one year after payment of the duties, upon statement of error in conformity with section seventeen hundred and seven hereof, approved by the Coll ector. b. Within fifteen days after such payment, upon request for reappraisal and /or reclassification addressed to the Commissioner by the Collector, if the appr aisal and/or classification is deemed to be low. c. Upon request for reappraisal and/or reclassification, in the form of a t imely protest addressed to the Collector by the interested party if the latter s hould be dissatisfied with the appraisal or return. SECTION 1408. Assessment of Duty on Less Than Entered Value. Duty shall not be a ssessed in any case upon an amount less than the entered value, unless by direct ion of the Commissioner in cases in which the importer certifies at the time of entry that the entered value is higher than the market value and that the articl es are so entered in order to meet increases made by the appraised on similar ca ses then pending reappraisement; and the lower assessment shall be allowed only when the importer's contention is sustained by final decision, and shall appear that such action of the importer was taken in good faith after due diligence and inquiry on his part. D. Assessment of Taxes E. Liquidation - Sec. 1601-1603 SECTION 1601. Liquidation and Record of Entries. If the Collector shall approve the returns of the appraiser and the report of the weights, gauge or quantity, t he liquidation shall be made on the face of the entry showing the particulars th ereof, initiated by the liquidating clerk, approved by the chief liquidator, and recorded in the record of liquidations. A daily record of all entries liquidated shall be posted in the public corridor of the customhouse, stating the name of the vessel or aircraft, the port from wh ich she arrived, the date of her arrival, the name of the importer, and the seri al number and date of the entry. A daily record must also be kept by the Collect or of all additional duties, taxes and other charges found upon liquidation, and notice shall promptly be sent to the interested parties. SECTION 1602. Tentative Liquidation. If to determine the exact amount due under the law in whole or in part some future action is required, the liquidation shal l be deemed to be tentative as to the item or items affected and shall to that e xtent be subject to future and final readjustment and settlement. The entry in s uch case shall be stamped "Tentative liquidation". SECTION 1603. Finality of Liquidation. When articles have been entered and passe d free of duty or final adjustment of duties made, with subsequent delivery, suc h entry and passage free of duty or settlement of duties will, after the expirat ion of one year, from the date of the final payment of duties, in the absence of fraud or protest, be final and conclusive upon all parties, unless the liquidat ion of the import entry was merely tentative. V. Remedies of the Government A. Extrajudicial 1. Enforcement of Tax Lien - Sec. 1506 SECTION 1506. Customs Expenses Constituting Charge on Articles. All expenses inc urred by the customs service for the handling or storage of articles and other n ecessary operations in connection therewith, or incident to its seizure, shall b e charged against such articles, and shall constitute a lien upon it. 2. Seizure and Forfeiture - Sec. 2205, 2301-2316 SECTION 2205. Exercise of Power of Seizure and Arrest. It shall be within the po wer of a customs official or person authorized as aforesaid, and it shall be his duty, to make seizure of any vessel, aircraft, cargo, articles, animal or other movable property when the same is subject to forfeiture or liable for any fine imposed under customs and tariff laws, and also to arrest any person subject to

arrest for violation of any customs and tariff laws, such power to be exercised in conformity with the law and the provisions of this Code. SECTION 2301. Warrant for Detention of Property Bond. Upon making any seizure, t he Collector shall issue a warrant for the detention of the property; and if the owner or importer desires to secure the release of the property for legitimate use, the Collector may surrender it upon the filing of a sufficient bond, in an amount to be fixed by him, conditioned for the payment of the appraised value of the article and/or any fine, expenses and costs which may be adjudged in the ca se: Provided, That articles the importation of which is prohibited by law shall not be released under bond. SECTION 2302. Report of Seizure To Commissioner and Auditor. When a seizure is m ade for any cause, the Collector of the district wherein the seizure is effected shall immediately make report thereof to the Commissioner and to the Auditor Ge neral. SECTION 2303. Notification to Owner or Importer. The Collector shall give the ow ner or importer of the property or his agent a written notice of the seizure and shall give him an opportunity to be heard in reference to the delinquency which was the occasion of such seizure. For the purpose of giving such notice and of all other proceedings in the matter of such seizure, the importer, consignee or person holding the bill of lading s hall be deemed to be the "owner" of the article included in the bill. For the same purpose, "agent" shall be deemed to include not only any agent in f act of the owner of the seized property but also any person having responsible p ossession of the property at the (missing) of the seizure, if the owner or his a gent in fact is unknown or cannot be reached. SECTION 2304. Notification to Unknown Owner. Notice to an unknown owner shall be effected by posting a notice for fifteen days in the public corridor of the cus tomhouse of the district in which the seizure was made, and, in the discretion o f the Commissioner, by publication in a newspaper or by such other means as he s hall consider desirable. SECTION 2305. Description and Appraisal and Classification of Seized Property. T he Collector shall also cause a list and particular description of the property seized to be prepared and an appraisement or classification of the same at its w holesale value in the local market in the usual wholesale quantities to be made by at least two appraising officials, if there are such officials at or near the place of seizure; in the absence of such officials, then by two competent and d isinterested citizens of the Philippines, to be selected by him for that purpose , residing at or near the place of seizure, which list and appraisement shall be properly attested to by such Collector and the persons making the appraisal. SECTION 2306. Proceedings in Case of Property Belonging to Unknown Parties. If, within fifteen days after the notification prescribed in section twenty-three hu ndred and four of this Code, no owner or agent can be found or appears before th e Collector, the latter shall declare the property forfeited to the government t o be sold at auction in accordance with law. SECTION 2307. Settlement of Case by Payment of Fine or Redemption of Forfeited P roperty. If, in any seizure case, the owner or agent shall, while the case is ye t before the Collector of the district of seizure, pay to such Collector the fin e imposed by him or, in case of forfeiture, shall pay the appraised value of the property, or, if after appeal of the case, he shall pay to the Commissioner the amount of the fine as finally determined by him, or, in case of forfeiture, sha ll pay the appraised value of the property, such property shall be forthwith sur rendered, and all liability which may or might attach to the property by virtue of the offense which was the occasion of the seizure and all liability which mig ht have been incurred under any bond given by the owner or agent in respect to s uch property shall thereupon be deemed to be discharged. Redemption of forfeited property shall not be allowed in any case where the impo rtation is absolutely prohibited or where the surrender of the property to the p erson offering to redeem the same would be contrary to law. SECTION 2308. Protest and Payment upon Protest in Civil Matters. When a ruling o r decision of the Collector is made whereby liability for duties, fees, or other

money charge is determined, except the fixing of fines in seizure cases, the pa rty adversely affected may protest such ruling or decision by presenting to the Collector at the time when payment of the amount claimed to be due the Governmen t is made, or within thirty days thereafter, a written protest setting forth his objections to the ruling or decision in question, together with the reasons the refor. No protest shall be considered unless payment of the amount due after fin al liquidation has first been made. SECTION 2309. Protest Exclusive Remedy in Protestable Case. In all cases subject to protest, the interested party who desires to have the action of the Collecto r reviewed, shall make a protest, otherwise, the action of the Collector shall b e final and conclusive against him, except as to matters correctible for manifes t error in the manner prescribed in section one thousand seven hundred and seven hereof. SECTION 2310. Form and Scope of Protest. Every protest shall be filed in accorda nce with the prescribed rules and regulations promulgated under this section and shall point out the particular decision or ruling of the Collector to which exc eption is taken or objection made, and shall indicate with reasonable precision the particular ground or grounds upon which the protesting party bases his claim for relief. The scope of a protest shall be limited to the subject matter of a single adjust ment or other independent transaction; but any number of issue may be raised in a protest with reference to the particular item or items constituting the subjec t matter of the protest. "Single adjustment", as hereinabove used, refers to the entire content of one li quidation, including all duties, fees, surcharges or fines incident thereto. SECTION 2311. Samples to be Furnished by Protesting Parties. If the nature of th e articles permit, importers filing protests involving questions of fact must, u pon demand, supply the Collector with samples of the articles which are the subj ect matter of the protests. Such samples shall be verified by the custom officia l who made the classification against which the protest are filed. SECTION 2312. Decision or Action by Collector in Protest and Seizure Cases. When a protest in proper form is presented in a case where protest in required, the Collector shall reexamine the matter thus presented, and if the protest is susta ined, in whole or in part, he shall enter the appropriate order, the entry reliq uidated if necessary. In seizure cases, the Collector, after a hearing, shall in writing make a declar ation of forfeiture or fix the amount of the fine or take such other action as m ay be proper. SECTION 2313. Review by Commissioner. The person aggrieved by the decision or ac tion of the Collector in any matter presented upon protest or by his action in a ny case of seizure may, within fifteen days after notification in writing by the Collector of his action or decision, give written notice to the Collector of hi s desire to have the matter reviewed by the Commissioner. Thereupon the Collecto r shall forthwith transmit all the records of the proceedings to the Commissione r, who shall approve, modify or reverse the action or decision of the Collector and take such steps and make such orders as may be necessary to give effect to h is decision. SECTION 2314. Notice of Decision of Commissioner. Notice of the decision of the Commissioner shall be given to the party by whom the case was brought before him for review, and in seizure cases such notice shall be effected by personal serv ice if practicable. SECTION 2315. Supervisory Authority of Commissioner And of Department Head in Ce rtain Cases. If in any case involving the assessment of duties the importer shal l fail to protest the ruling of the Collector, and the Commissioner shall be of the opinion that the ruling was erroneous and unfavorable to the Government, the latter may order a reliquidation; and if the ruling of the Commissioner in any unprotested case should, in the opinion of the department head, be erroneous and unfavorable to the Government, the department head may require the Commissioner to order a reliquidation. Except as in the preceding paragraph provided, the supervisory authority of the

department head over the Bureau of Customs shall not extend to the administrativ e review of the ruling of the Commissioner in matters appealed to the Court of T ax Appeals. B. Judicial VI. Remedies of the Taxpayer A. Refund - Sec. 1707-1708 SECTION 1707. Correction of Errors Refund of Excess Payments. Manifest clerical errors made in an invoice or entry, errors in return of weight, measure and gaug e, when duly certified to by the surveyor or examining official (when there are such officials at the port), and errors in the distribution of charges on invoic es not involving any question of law and certified to by the examining official, may be corrected in the computation of duties, if such errors be discovered bef ore the payment of duties, or, if discovered within one year after the final liq uidation, upon written request and notice of error from the importer, or upon st atement of error certified by the Collector. For the purpose of correcting errors specified in the next preceding paragraph t he Collector is authorized to reliquidate entries and collect additional charges , or to make refunds on statement of error within the statutory time limit. SECTION 1708. Claim for Refund and Mode of Payment. All claims for refund of dut ies shall be made in writing, and forwarded to the Collector to whom such duties are paid, who upon receipt of such claim shall verify the same by the records o f his office, and if found to be correct and in accordance with law, shall certi fy the same to the Commissioner with his recommendation together with all necess ary papers and documents. Upon receipt by the Commissioner of such certified cla im he shall cause the same to be paid if found correct. B. Protest - Sec. 2308, 2309, 2310, 2312 SECTION 2308. Protest and Payment upon Protest in Civil Matters. When a ruling o r decision of the Collector is made whereby liability for duties, fees, or other money charge is determined, except the fixing of fines in seizure cases, the pa rty adversely affected may protest such ruling or decision by presenting to the Collector at the time when payment of the amount claimed to be due the Governmen t is made, or within thirty days thereafter, a written protest setting forth his objections to the ruling or decision in question, together with the reasons the refor. No protest shall be considered unless payment of the amount due after fin al liquidation has first been made. SECTION 2309. Protest Exclusive Remedy in Protestable Case. In all cases subject to protest, the interested party who desires to have the action of the Collecto r reviewed, shall make a protest, otherwise, the action of the Collector shall b e final and conclusive against him, except as to matters correctible for manifes t error in the manner prescribed in section one thousand seven hundred and seven hereof. SECTION 2310. Form and Scope of Protest. Every protest shall be filed in accorda nce with the prescribed rules and regulations promulgated under this section and shall point out the particular decision or ruling of the Collector to which exc eption is taken or objection made, and shall indicate with reasonable precision the particular ground or grounds upon which the protesting party bases his claim for relief. The scope of a protest shall be limited to the subject matter of a single adjust ment or other independent transaction; but any number of issue may be raised in a protest with reference to the particular item or items constituting the subjec t matter of the protest. "Single adjustment", as hereinabove used, refers to the entire content of one li quidation, including all duties, fees, surcharges or fines incident thereto. SECTION 2312. Decision or Action by Collector in Protest and Seizure Cases. When a protest in proper form is presented in a case where protest in required, the Collector shall reexamine the matter thus presented, and if the protest is susta ined, in whole or in part, he shall enter the appropriate order, the entry reliq uidated if necessary.

In seizure cases, the Collector, after a hearing, shall in writing make a declar ation of forfeiture or fix the amount of the fine or take such other action as m ay be proper. C. Abandonment - Sec. 1801-1803 SECTION 1801. Abandonment, Kinds and Effect of . Abandonment is express when it is made direct to the Collector by the interested party in writing, and it is im plied when, from the action or omission of the interested party, an intention to abandon can be clearly inferred. The failure of any interested party to file th e import entry within fifteen days or any extension thereof from the discharge o f the vessel or aircraft, shall be implied abandonment. An implied abandonment s hall not be effective until the article is declared by the Collector to have bee n abandoned after notice thereof is given to the interested party as in seizure cases. Any person who abandons an imported article renounces all his interests and prop erty rights therein. SECTION 1802. Abandonment of Imported Articles. The owner or importer of any art icles may, within ten days after filing of the import entry, abandon to the Gove rnment all or a part of the articles included in an invoice, and, thereupon, he shall be relieved from the payment of duties, taxes and all other charges and ex penses due thereon: Provided, That the portion so abandoned is not less than ten per cent of the total invoice and is not less than one package, except in cases of articles imported for personal or family use. The article so abandoned shall be delivered by the owner or importer at such place within the port of arrival as the Collector shall designate, and upon his failure to so comply, the owner o r importer shall be liable for all expenses that may be incurred in connection w ith the disposition of the articles. Nothing in this section shall be construed as relieving such owner or importer f rom any criminal liability which may arise from any violation of law committed i n connection with the importation of the abandoned article. SECTION 1803. Right to Reclaim Article. The owner or importer of an article impl iedly abandoned may, at any time before it is sold or otherwise disposed of, rec laim such article provided all legal requirements regarding its importation are complied with and the corresponding duties, taxes and other charges as well as a ll expenses incurred as a consequence of the abandonment, are paid. PART 16 Revenue Regulation 12-99 Section 1. Scope. - Pursuant to the provisions of Section 244, in relatio n to Section 245 of the NIRC of 1997, these Regulations are hereby promulgated t o implement the provisions of Sections 6, 7, 204, 228, 247, 248 and 249 on asse ssment of national internal revenue taxes, fees and charges and to provide the r ules governing the extra-judicial settlement of a taxpayer s criminal violation of the said Code or any of its implementing Regulations through payment of a sugge sted compromise penalty. Section 2. General Principles. 2.1 The surcharge and/or interest herein prescribed shall apply to a ll taxes, fees and charges imposed under the Code which shall be collected at th e same time, in the same manner, and as part of the tax. 2.2 In case the tax due from the taxpayer is paid on a partial or in stallment basis, the interest on the deficiency tax or on the delinquency tax li ability of the taxpayer shall be imposed from due date of the tax until full pay ment thereof. The interest shall be computed based on the diminishing balance of the tax, inclusive of interests. Section 3. Due process requirement in the issuance of a deficiency tax a ssessment. 3.1 Mode of procedures in the issuance of a deficiency tax assessmen t:

3.1.1 Notice for informal conference. - The Revenue Officer who audite d the taxpayer s records shall, among others, state in his report whether or not t he taxpayer agrees with his findings that the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not amenable, based on the said Officer s submitt ed report of investigation, the taxpayer shall be informed, in writing, by the R evenue District Office or by the Special Investigation Division, as the case may be (in the case 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 si de of the case. If the taxpayer fails to respond within fifteen (15) days from d ate of receipt of the notice for informal conference, he shall be considered in default, in which case, the Revenue District Office or the Chief of the Special Investigation Division of the Revenue Regional Office, or the Chief of Division in the National Office, as the case may be, shall endorse the case with the leas t possible delay to the Assessment Division of the Revenue Regional Office or to the Commissioner or his duly authorized representative, as the case may be, for appropriate review and issuance of a deficiency tax assessment, if warranted. 3.1.2 Preliminary Assessment Notice (PAN). - If after review and evalu ation by the Assessment Division or by the Commissioner or his duly authorized r epresentative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office s hall issue to the taxpayer, at least by registered mail, a Preliminary Assessmen t Notice (PAN) for the proposed assessment, showing in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment i s based. If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN, he shall be considered in default, in which case, a formal l etter of demand and assessment notice shall be caused to be issued by the said O ffice, calling for payment of the taxpayer s deficiency tax liability, inclusive o f the applicable penalties. 3.1.3 Exceptions to Prior Notice of the Assessment. - The notice for i nformal conference and the preliminary assessment notice shall not be required i n any of the following cases, in which case, issuance of the formal assessment n otice for the payment of the taxpayer s deficiency tax liability shall be sufficie nt: (i) When the finding for any deficiency tax is the result of mathema tical error in the computation of the tax appearing on the face of the tax retur n filed by the taxpayer; or (ii) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (iii) When a taxpayer who opted to claim a refund or tax credit of exc ess creditable withholding tax for a taxable period was determined to have carri ed over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable ye ar; or (iv) When the excise tax due on excisable articles has not been paid; or (v) When an article locally purchased or imported by an exempt perso n, such as, but not limited to, vehicles, capital equipment, machineries and spa re parts, has been sold, traded or transferred to non-exempt persons. 3.1.4 Formal Letter of Demand and Assessment Notice. - The formal lett er of demand and assessment notice shall be issued by the Commissioner or his du ly authorized representative. The letter of demand calling for payment of the ta xpayer s deficiency tax or taxes shall state the facts, the law, rules and regulat ins, or jurisprudence on which the assessment is based, otherwise, the formal le tter of demand and assessment notice shall be void. The same shall be sent to th e taxpayer only by registered mail or by personal delivery. If sent by personal delivery, the taxpayer or his duly authorized representative shall acknowledge r eceipt thereof in the duplicate copy of the letter of demand, showing the follow ing: (a) His name; (b) signature; (c) designation and authority to act for and i

n behalf of the taxpayer, if acknowledged received by a person other than the ta xpayer himself; and (d) date of receipt thereof. 3.1.5 Disputed Assessment. - The taxpayer or his duly authorized repre sentative may protest administratively against the aforesaid formal letter of de mand and assessment notice within thirty (30) days from date of receipt thereof. If there are several issues involved in the formal letter of demand and assessm ent notice but the taxpayer only disputes or protests against the validity of so me of the issues raised, the taxpayer shall be required to pay the deficiency ta x or taxes attributable to the undisputed issues, in which case, a collection le tter shall be issued to the taxpayer calling for payment of the said deficiency tax, inclusive of the applicable surcharge and/or interest. No action shall be t aken on the taxpayer s undisputed issues. The prescriptive period for assessment o r collection of tax or taxes attributable to the disputed issues shall be suspen ded. The taxpayer shall state the facts, the applicable law, rules and regula tions, or jurisprudence on which his protest is based, otherwise, his protest sh all be considered void and without force and effect. If there are several issues involved in the disputed assessment and the taxpayer fails to state the facts, the applicable law, rules and regulations, or jurisprudence in support of his pr otest against some of the several issues on which the assessment is based, the s ame shall be considered undisputed issue or issues, in which case, the taxpayer shall be required to pay the corresponding deficiency tax or taxes attributable thereto. The taxpayer shall submit the required documents in support of his prote st within sixty (60) days from date of filing of his letter of protest, otherwis e, the assessment shall become final, executory and demandable. The phrase submit the required documents includes submission or presentation of the pertinent docu ments for scrutiny and evaluation by the Revenue Officer conducting the audit. The said Revenue Officer shall state this fact in his report of investigation. If the taxpayer fails to file a valid protest against the formal letter of demand and assessment notice within thirty (30) days from date of receipt the reof, the assessment shall become final, executory and demandable. If the protest is denied, in whole or in part, by the Commissioner, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from dat e of receipt of the said decision, otherwise, the assessment shall become final, executory and demandable. In general, if the protest is denied, in whole or in part, by the Commis sioner or his duly authorized representative, the taxpayer may appeal to the Cou rt of Tax Appeals within thirty (30) days from date of receipt of the said decis ion, otherwise, the assessment shall become final, executory and demandable: Pro vided, however, that if the taxpayer elevates his protests to the Commissioner s d uly authorized representative, the latter s decision shall not be considered final , executory and demandable, in which case, the protest shall be decided by the C ommissioner. If the Commissioner or his duly authorized representative fails to act o n the taxpayer s protest within one hundred eighty (180) days from date of submiss ion, by the taxpayer, of the required documents in support of his protest, the t axpayer may appeal to the Court of Tax Appeals within thirty (30) days from the lapse of the said 180-day period, otherwise, the assessment shall become final, executory and demandable. 3.1.6 Administrative Decision on a Disputed Assessment. - The decision of the Commissioner or his duly authorized representative shall (a) state the f acts, the applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the decision shall be void, in which case, the sam e shall not be considered a decision on a disputed assessment; and (b) that the same is his final decision. 3.1.7 Constructive Service. - If the notice to the taxpayer herein req uired is served by registered mail, and no response is received from the taxpaye r within the prescribed period from date of the posting thereof in the mail, the same shall be considered actually or constructively received by the taxpayer. I

f the same is personally served on the taxpayer or his duly authorized represent ative who, however, refused to acknowledge receipt thereof, the same shall be co nstructively served on the taxpayer. Constructive service thereof shall be consi dered effected by leaving the same in the premises of the taxpayer and this fact of constructive service is attested to, witnessed and signed by at least two (2 ) revenue officers other than the revenue officer who constructively served the same. The revenue officer who constrictively served the same shall make a writte n report of this matter which shall form part of the docket of this case. Section 4. Civil Penalties: 4.1 Twenty-Five Percent (25%) Surcharge. - There shall be imposed, i n addition to the basic tax required to be paid, a penalty equivalent to twentyfive percent (25%) thereof, in any of the following cases: 4.1.1 Failure to file any return and pay the tax due thereon a s required under the provisions of this Code or rules and regulations on the dat e prescribed; or 4.1.2 Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those with whom the return is required to be filed; or 4.1.3 Failure to pay the deficiency tax within the time prescr ibed for its payment in the notice of assessment; or 4.1.4 Failure to pay the full or part of the amount of tax shown on an y return required to be filed under the provisions of this Code or rules and reg ulations, or the full amount of tax due for which no return is required to be fi led, on or before the date prescribed for its payment. Fifty Percent (50%) Surcharge: 4.2.1 In case of willful neglect to file the return within the period prescribed by the Code, or in case a false or fraudulent return is willf ully made, the penalty to be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case any payment has been made on the basis of such re turn before the discovery of the falsity or fraud: Provided, That a substantial underdeclaration of taxable sales, receipts or income, or a substantial overstat ement of deductions, as determined by the Commissioner or his duly authorized re presentative, shall constitute prima facie evidence of a false or fraudulent ret urn: Provided, further, That failure to report sales, receipts or income in an a mount exceeding thirty percent (30%) of that declared per return, and a claim of deductions in an amount exceeding thirty percent (30%) of actual deductions, sh all render the taxpayer liable for substantial underdeclaration of sales, receip ts or income or for overstatement of deductions, as mentioned herein: Provided, further, that the term willful neglect to file the return within the period presc ribed by the Code shall not apply in case the taxpayer, without notice from the C ommissioner or his authorized representative, voluntarily files the said return, in which case, only 25% surcharge shall be imposed for late filing and late pay ment of the tax in lieu of the above 50% surcharge. Conversely, the 50% surcharg e shall be imposed in case the taxpayer files the return only after prior notice in writing from the Commissioner or his duly authorized representative. 4.2.2 Section 6 (A) of the Code provides that any tax return f iled by a taxpayer may be modified, changed or amended by the taxpayer within three (3) years from the date of such filing provided, however, that no notice for audi t or investigation of such return, statement or declaration has, in the meantime , been actually served upon the taxpayer. Thus, if upon investigation, it is det ermined that the taxpayer s originally filed tax return is false and fraudulent, s uch taxpayer shall remain liable to the 50% civil penalty regardless that the ta xpayer has filed his amended tax return, if the said amended tax return, however , has been filed only after issuance of the Letter of Authority for the investig ation of the taxpayer s tax return or such amendment has been made in the course o f the said investigation. Section 5. Mode of Procedures in Computing for the Tax and/or Appli 4.2

cable Surcharge. - Shown hereunder are illustrative cases for the computation an d assessment of the tax, inclusive of surcharge (if applicable) and interest: 5.1 Late filing and late payment of the tax. - Illustration: Income tax return for the calendar year 1998 was due for filing on April 15, 19 99 but the taxpayer voluntarily filed his tax return, without notice from the BI R, only on June 30, 1999. The tax due per return amounts to P100,000. In this ca se, the taxpayer shall be liable for delinquency penalties consisting of 25% sur charge, plus 20% interest per annum, computed from due of the tax until date of payment, computed as follows: Calendar Year 1998 Income tax due per return .00 Add: 25% surcharge for late filing and late payment (100,000 x 25%) 20% int. p.a. from 4-15-99 to 6-30-99 (100,000 x .0415524) 55.24 Total amount due (excluding suggested compromise for late filing and late payment of the tax) .24 Only one 25% surcharge shall be imposed for late filing of the return an d the late payment of the tax. 5.2 The tax return is filed on time but filed through an int ernal revenue officer other than with whom the return is required to be filed. Illustration: The taxpayer s 1998 income tax return is required to be filed thro ugh the authorized agent bank under the jurisdiction of RDO East Makati. But, wi thout prior authorization from the BIR, the taxpayer filed his tax return and pa id the tax through the authorized agent bank under the jurisdiction of RDO Davao City. Tax due and paid return is P100,000.00. Calendar Year 1998 Income tax due per return .00 Add: 25% surcharge 00.00 Total amount due .00 Less: Amount paid 0.00 Amount still due 0.00 5.3 Late filing and late payment due to taxpayer s wilfull neg lect.- Illustration: The taxpayer did not file his income tax return for the cal endar year 1997 which was due for filing on April 15, 1998. He was notified by t he BIR of his failure to file the tax return, for which reason, he filed his tax return and paid the tax, only after the said notice, on June 30, 1999. The tax due per return is P100,000.00. Calendar Year 1997 Income tax due per return P100,000 P 25,00 100,00 P125,000 25,0 P100,000 P129,155 25,000.00 4,155.24 29,1 P100,000

.00 Add: 50% surcharge for willful neglect to file the return and late payment of the tax (P100,000 x 50%) 50,000.00 20% int. p.a. fr 4-15-98 to 6-30-99 (P100,000 x .2415524) P24,155.24 Total amount due (excluding suggested compromise for late filing and late payment of the tax) P 74,155.24 P174,155.24

5.4 Penalty or penalties for deficiency tax. - As a rule, no surchar ge is imposed on deficiency tax and on the basic tax. However, if the amount due inclusive of penalties is not paid on or before the due date stated on the dema nd letter, the corresponding surcharge shall be imposed. Illustration No. 1: Taxpayer filed on time his income tax return for cal endar year 1997 and paid P100,000.00 on April 15, 1998. Upon pre-audit of his re turn, it was disclosed that he erroneously computed the tax due. The correct amo unt of tax due is P120,000.00. The taxpayer is assessed for deficiency income ta x in a letter of demand and assessment notice issued on June 30, 1999. Calendar Year 1997 Tax due per pre-audit .00 Less: Amount assessed and paid per tax return filed .00 Deficiency income tax 0.00 Add: 20% int. p.a. fr 4-15-98 to 6-30-99 (20,000 x .2415524) 1.05 Amount still due 1.05 Illustration No. 2: ABC CORPORATION filed its income tax return for calendar year 1997 and paid on time its income tax shown thereunder, amounti ng to P100,00. Said taxpayer was investigated. Upon verification of its accounti ng records, it was disclosed that its deduction, from gross income, of represent ation expenses in the amount of P200,000.00 did not meet all the statutory requi sites for deductibility. The corporation was duly notified of the said discrepan cy through a Preliminary Assessment Notice. Based on the 35% income tax rate on corporations applicable in the year 1997, the income tax due after investigation amounts to P170,000.00 After deduction of income tax paid per return filed, the basic deficiency income tax amounts to P70,000, excluding penalties. Failing to protest on time against the preliminary assessment notice, a formal letter of d emand and assessment notice was issued on May 31, 1999, requiring payment of the assessment not later than June 30, 1999. Calendar Year 1997 Tax due per investigation .00 Less: Income tax paid per return .00 Deficiency income tax 0.00 Add: 20% int. p.a. fr 4-15-98 to 6-30-99 P 70,00 P100,000 P170,000 P 24,83 P 4,83 P 20,00 P100,000 P120,000

(20,000 x .2415524) 8.67 Total amount still due 8.67

P 16,90 P 86,90

Illustration No. 3: XYZ CORPORATION filed its income tax return for calendar year 1997 with a net taxable income of P500,000.00. At the applicab le income tax rate of 35% for the year 1997, its income tax amounted to P175,000 .00. However, upon investigation, it was disclosed that its income tax return w as false or fraudulent because it did not report a taxable income amounting to a nother P500,000.00. On its net income of P1,000,000.00, per investigation, the i ncome tax due is P350,000.00. Deducting its payment per return filed, the defic iency, excluding penalties, amounted to P175,000.00. It was duly informed of thi s finding through a Preliminary Assessment Notice. Failing to protest on time ag ainst the preliminary assessment notice, a formal letter of demand and assessmen t notice was issued on May 31, 1999 calling for payment of the deficiency income tax on or before June 30, 1999. In this case, said corporation is liable for the civil penalties of 50% surcharge for having filed a false or fraudulent return, plus 20% intere st per annum on the deficiency, computed as follows: Calendar Year 1997 Tax due per investigation .00 Less: Income tax paid per return .00 Deficiency income tax .00 Add: 50% surcharge for filing a fraudulent or false return (175,000 x 50%) P 87,500.00 20% int. p.a. fr 4-15-98 to 6-30-99 (20,000 x .2415524) P 42,271.67 .67 Total amount due .67 5.5 Late payment of a deficiency tax assessed. - In general, the de ficiency tax assessed shall be paid by the taxpayer within the time prescribed i n the notice and demand, otherwise, such taxpayer shall be liable for the civil penalties incident to late payment. Illustration: Based on the above Illustration No. 3, Scenario 4, assuming that the calendar year 1997 deficiency income tax assessment against XYZ CORPOR ATION, in the amount of P304,711.67, is not paid by June 30, 1999, the deadline for payment of the assessment, and assuming further that this assessment has alr eady become final and collectible. In this case, such corporation shall be cons idered late in payment of the said assessment. Assuming, further, that the corpo ration pays its tax assessment only by July 31, 1999, the civil penalties for la te payment shall be computed as follows: Calendar Year 1997 Total deficiency income tax assessed on May 31, 1999 .67 Add: surcharge for late payment (304,771.67 x 25%) P76,192.92 20% int. p.a. fr 7-1-99 to 7-31-99 (304,771.67 x .0166667) P 5,079.54 2.46 P304,771 P304,771 P175,000 P175,000 P350,000

P129,771

P 81,27

Total amount due (excluding suggested compromise penalty for late payment) P386,044.13 5.6 Computation of 20% interest per annum in case of partial or inst allment payment of a tax liability. - Illustration No. 1: In case extended payme nt of the tax is duly authorized. - DEF CORPORATION, due to financial incapacity , requested that it be allowed to pay its income tax liability per return for ca lendar year 1998, in the amount of P1,000,000.00, in four (4) monthly installmen ts, starting April 15, 1999. Its request has been duly approved pursuant to Sec . 53 if the Tax Code. In this case, no 25% surcharge shall be imposed for late payment of the t ax since its deadline for payment has been duly extended. However, 20% interest per annum for the extended payment shall be imposed, computed based on the dimi nishing balance of the unpaid amount , pursuant to the provisions of Section 249 (D ) of the Code. No 25% surcharge on extended payment shall be imposed provided, however, that the taxpayer s request for extension of the period within which to pay is mad e on or before the deadline prescribed for payment of the tax due. Conversely, i t such request is made after the deadline prescribed for payment, the taxpayer s hall already be treated late in payment, in which case, the 25% surcharge shall be imposed, even if payment of the delinquency be allowed in partial amortizatio n. Example: Calendar Year 1998 Income tax due per return P1,000,000.00 Less: 1st installment of the tax on or before 4-15-99 P 250,000.00 Balance as of 4-15-99 P 750,000.00 Add: 20% int. p.a. from 4-15-99 to 5-15-99 (750,000 x .0166667) P 12,500.03 Amount due on 5-15-99 500.03 Less: 2nd installment on 5-15-99 (250,000 + 12,500.03 interest) 500.03 Balance as of 5-15-99 P 500,000.00 Add: 20% int. p.a. from 5-15-99 to 6-15-99 (500,000 x .0166667) P 8,333.35 Amount due on 6-15-99 333.35 Less: 3rd installment on 6-15-99 (250,000 + 8,333.35 interest) P 258,333.35 Balance as of 6-15-99 P 250,000.00 Add: 20% int. p.a. from 6-15-99 to 7-15-99 (250,000 x .0166667) P 4,166.68 4th and final installment on 7-15-99 P 254,166.68

P P

762, 262,

508,

Illustration No. 2: Computation of tax delinquency in case of partial pay ment of the tax due without prior BIR authorization for extended payment. Example: GHI CORPORATION did not file its final adjustment income tax ret urn for the calendar year 1998 which was due on April 15, 1999. The BIR informe d the corporation of its failure to file its said tax return and required that i t file the same, inclusive of the 25% surcharge and 20% interest per annum penal ties incident to the said omission. On May 15, 1999 it advised that its income tax dye for the said year amounts to P1,000,000.00 but, however, due to its adve rse financial condition at the moment, it will be unable to pay the entire amoun t, inclusive of the delinquency penalties. Hence, on May 15, 1999, it made a pa rtial payment of P400,000.00. Assuming that the BIR demanded payment of the unp aid balance of its tax obligation payable by June 15, 1999, the unpaid balance o f the corporation s delinquent income tax shall be computed as follows: Calendar Year 1998 Income tax due per return P1,000,000.00 Add: 25% surcharge for late filing and late payment P250,000.00 20% int. p.a. from 4-15-99 to 5-15-99 (1,000,000 x .0166667) P 16,666.70 P 266,666.70 Amount due as of 5-15-99 P1,266,6 66.70 Less: partial payment on 5-15-99 P 400, 000.00 Balance as of 5-15-99 P 866,666.70 Add: 20% int. p.a. from 5-15-99 to 6-15-99 (866,666.70 x .0166667) P 14,444.47 Amount still due (exclusive of the suggested compromise penalty for late payment) P 811, 111.17 If the said taxpayer fails to pay the amount of P811,111.17 by June a5, 1 999, no further 25% surcharge for late payment of the tax shall be imposed. Ins tead, only 20% interest per annum shall be imposed against the taxpayer, compute d from the due date thereof (i.e., June 15, 1999) until paid. If said taxpayer pays the same on partial payment basis, the 20% interest per annum shall be comp uted on the diminishing balance thereof, pursuant to the procedures in the prece ding Illustration No. 1, Section 6.6. hereof. Section 6. Suggested Compromise Penalty in Extra-judicial Settlemen t of a Taxpayer s Criminal Violation. - Section 204 of the Tax Code of 1997 provid es that All criminal violations may be compromised except: (a) those already file d in court, or (b) those involving fraud. This means that, in general, the taxpa yer s criminal liability arising from his violation of the pertinent provision of this Code may be settled extra-judicially instead of the BIR instituting against a taxpayer a criminal action in Court. A compromise in extra-judicial settleme nt of the taxpayer s criminal liability for his violation is consensual in charact er, hence, may not be imposed on the taxpayer without his consent. Hence, the B IR may only suggest settlement of the taxpayer s liability through a compromise. The extra-judicial settlement of the taxpayer s criminal liability and the amount of the suggested compromise penalty shall conform with the schedule of c ompromise penalties provided under Revenue Memorandum Order No. 1-90 or as herea fter revised. REPUBLIC OF THE PHILIPPINES V. CA, AND NIELSON & CO., INC. 149 SCRA 351 FACTS:

In a demand letter, dated 16 July 1955, the Commissioner of Internal Re venue assessed Nielson & Co. deficiency taxes for years 1949 to 1952. CIR reiter ated its demand for payment through 2 subsequent letters (24 April 1956 and 9 Fe b 1960). Nielson did not contest the assessment in the Court of Tax Appeals. On the theory that the assessment had become final and executory, the CIR filed a complaint for collection of the said amount against Nielson. However, for failu re to serve summons upon Nielson, the complaint was dismissed without prejudice. In 1962, the case was re-filed. The Court of First Instance rendered a decisio n against Nielson. On appeal, the Court of Appeals reversed. The CIR claims that the demand letter showed an imprint indicating that the original thereof was released and mailed on 4 August 1955 by the Chief, Reco rds Section of the BIR, and that the original letter was not returned to said Bu reau; thus, said demand letter must be considered to have been received by the p rivate respondent. According to the CIR, if service is made by ordinary mail, u nless the actual date of receipt is shown, service is deemed complete and effect ive upon the expiration of five (5) days after mailing. As the letter demand da ted 16 July 1955 was actually mailed to Nielson, there arises the presumption th at the letter was received by Nielson in the absence of evidence to the contrary . ISSUE: Whether Nielson is liable for deficiency taxes HELD: While the contention of the CIR is correct that a mailed letter is deeme d received by the addressee in the ordinary course of mail, still, this is merel y a disputable presumption, subject to controversion, and a direct denial of the receipt thereof shits the burden upon the party favored by the presumption to p rove that the mailed letter was indeed received by the addressee. Since the CIR has not adduced proof that Nielson had in fact received th e demand letter dated 16 July 1955, it cannot be assumed that Nielson received s aid letter. Records, however, show that the CIR wrote Nielson a follow-up lette r reiterating its demand for the payment of taxes as originally demanded in the first letter. This follow-up letter is considered a notice of assessment in its elf which was duly received by Nielson in accordance with its own admission. The taxpayer s failure to appeal within 30 days from receipt of the letter with the Court of Tax Appeals, makes the assessment final, executory and demand able. Nielson is now barred from disputing the correctness of the assessment or from invoking any defense that would reopen the question of its liability on the merits. COLLECTOR OF INTERNAL REVENUE V. BAUTISTA 105 PHIL 1326 FACTS: The spouses Bautista filed and paid their income tax separately. Upon in vestigation by the BIR, the returns were consolidated and a deficiency was asses sed against them which was mainly based on the alleged under declaration of the proceeds of the sale of the wife s share in the Tabora property and the overvaluat ion of the cost thereof. On appeal, the Court of Tax Appeals, overruled their d efense of prescription and ordered the spouses to pay the deficiency income tax. ISSUE: Whether the spouses are liable for the deficiency tax HELD: Yes. The income tax returns of the spouses for 1947 are deemed filed as of March 1, 1948. The Tax Code provides that the deficiency assessment must be made within 5 years after the return was filed, and the assessment is deemed mad e when the notice to this effect is released, mailed or sent by the Collector to the taxpayer, for the purpose of giving effect to said assessment. The Code do es not require that the notice be received by the taxpayer within the said perio d of 5 years. In the case at bar, the Collector assessed the deficiency tax on J anuary 21, 1953 and notice to this effect was sent or given due course prior to March 1, 1953, for it was received in the Office of the City Treasurer of Quezon City, on February 13, 1953, and hence, before the expiration of said period. REPUBLIC OF THE PHILIPPINES V. RICARTE 140 SCRA 1

FACTS: On 2 March 1959, Ricarte filed his income tax return for the year 1958. On 6 April 1959, the Office of the Collector of Internal Revenue made the corre sponding assessment and fixed at P222 the defendant s income tax liability. Defend ant paid his income tax in 2 equal installments. On 20 June 1959, RA 2343 took effect which provides that the taxpayer as sesses himself, files his return and pays the tax as shown in his return upon fi ling thereof. In 1961, the BIR, after investigation, found that Ricarte had a deficien cy in his income tax for 1958. An assessment notice with the corresponding audit sheet and letter of demand was mailed to Ricarte on January 25, 1961. For failu re to pay his deficiency income tax, a complaint with the City Court of Cebu was filed. The trial court dismissed the case on the ground of prescription becaus e the assessment was made by the BIR on April 6, 1959, but the case was filed on ly on January 14, 1966 or more than 5 years. ISSUE: Whether the deficiency income tax can still be collected thru a judicial proceeding HELD: Although a subsequent notice of assessment was allegedly made and sent to Ricarte on 19 Jan 1961, there was no evidence presented by the Collector that R icarte actually received a copy of the assessment notice regarding the alleged d eficiency tax. Even in the stipulation of facts entered into between the partie s, there is no stipulation showing that the appellant actually received the subs equent notice of assessment. Thus, the prescriptive period should be counted fr om 6 April 1959, the date when the BIR assessed the income tax return of Ricarte . From the said date until the filing of the case on Jan 14, 1966, 6 years and n ine months had elapsed. Verily, the action had already prescribed. ADVERTISING ASSOCIATES, INC. V. CA 133 SCRA 765 FACTS: Advertising Associates alleged that it sold in 1949 its advertising agen cy business to Philippine Advertising Counsellors, that its business is limited to the making, construction and installation of billboards and electric signs an d making and printing of posters, signs, handbills, etc. It contends that it is a media company, not an advertising company. It paid sales taxes for selling billboards, electric signs, calendars, p osters, realty dealer s tax for leasing billboards and electric signs and 3% contr actor s tax for repairing electric signs. The CIR subjected to 3% contractor s tax i ts rental income from billboards and electric signs. The CIR required Advertisi ng to pay contractor s tax for 1967-1972, including 25% surcharge on its income fr om billboards and neon signs. Advertising contested the assessments in its letters of June 25, 1973 (f or the 1967-1971 deficiency taxes) and March 7, 1974 (for the 1972 deficiency). The Commissioner reiterated the assessments in his letters of July 12 and Sept 1 6, 1974. The taxpayer requested the cancellation of the assessments in its lette rs of Sept 13 and Nov 21, 1974. Inexplicably, for about 4 years there was no mo vement in the case. Then, on March 31, 1978, the CIR resorted to the summary rem edy of issuing 2 warrants of distraint. These were served upon the taxpayer on A pril 18 and May 25, 1978. More than a year later, the Acting Commissioner Plana wrote a letter dated May 23, 1979 in answer to the requests of the taxpayer for the cancellation of the assessments and the withdrawal of the warrants of distra int on the ground that the rental income of Advertising constituted fees or comp ensation for its advertising services and requested the taxpayer to pay the defi ciency taxes within 10 days from receipt of the demand. The letter was received by Advertising on June 18, 1979. Nineteen days later, it filed its petition for review. In its resolution, the Tax Court enjoined the enforcement of the warra nts of distraint. The Tax Court dismissed the petition and did not resolve the case on the merits. It ruled that the warrants of distraint were the Commissione r s appealable decisions. Since Advertising appealed from the decision of May 23, 1979, the petition for review was filed out of time.

Advertising contends that the collection of the tax had already prescrib ed based on the Tax Code which provides that the tax may be collected by distrai nt or levy or by a judicial proceeding begun within 5 years after the assessment of the tax. ISSUE: Whether the tax has already prescribed HELD: The taxpayer received on June 18, 1973 and March 5, 1974 the deficiency assessments. The warrants of distraint were served upon it on April 18 and May 2 5, 1978 or within five years after the assessment of the tax. Obviously, the wa rrants were issued to interrupt the five-year prescriptive period. Its enforceme nt was not implemented because of the pending protests of the taxpayer and its r equests for withdrawal of the warrants which were eventually resolved in Commiss ioner Plana s letter. It should be noted that the Commissioner did not institute any judicial proceeding to collect the tax. He relied on the warrants of distraint to interru pt the running of the statute of limitations. He gave the taxpayer ample opportu nity to contest the assessments but at the same time safeguarded the Government s interest by means of the warrants of distraint. PART 17 PART 18 7. Regulations a) Revenue Regulations No. 12-85 Procedure covering administrative protests on assessments of the BIR May 27, 1985 1) a. b. c. e. d. Post-reporting notice A report is made The taxpayer is given notice for an informal conference. The notice contains a summary of findings as basis for the informal conferenc The report is forwarded to the higher authorities

* If the taxpayer agrees to the proposed assessment in writing OR the proposed assessment has been paid, the required notice may be dispensed with. 2) Pre-Assessment notice a. Commissioner/ duly authorized representative finds that taxes should be asses sed. b. Taxpayer is again notified of the Commissioner s findings i. Notice shall be made in writing ii. Sent to the taxpayer at the address indicated in the return, or his last kno wn address as stated in his notice of change of address. * If the taxpayer agrees to the proposed assessment in writing OR the proposed assessment has been paid, the required notice may be dispensed with. 3) Taxpayer s reply: Time period a. 15 days from receipt of the pre-assessment notice. b. An extension of not more than 10 days can be granted if: i. There is a written request by the taxpayer ii. The case is meritorious 4) Taxpayer s reply: Venue a. In Regional Office cases with the Assessment branch. b. In National Office cases with the Sector Audit Review Division or the Nationa l Audit Review Division, as the case may be. c. If sent by the Withholding Tax Division then file with the *@#!! Withholding Tax Division

5) If the taxpayer replies: a. The taxpayer or his representative shall be allowed to examine the records o f the case b. The taxpayer can present his arguments in writing protesting the proposed ass essment c. The Commissioner will then decide whether or not to approve the report. 6) If the taxpayer fails to reply: - report of the investigation is given due c ourse. 7) PROTEST a. Definitions of grounds: i. Request for Reconsideration: refers to a plea of re-evaluation of the assess ment on the basis of existing records without need of additional evidence. It m ay involve both a question of fact or of law or both ii. Request for Reinvestigation refers to a plea of re-evaluation of an assessme nt on the basis of newly discovered or additional evidence that a taxpayer inten ds to present in the reinvestigation. It may also involve a question of fact or law or both. b. Effect of failure to file protest The assessment is final and appealable and the taxpayer is precluded from disputing the assessment. c. When to file within 30 days from receipt of assessment. d. Where to file i. In Regional office cases: Collection Branch of the region ii. National Office cases: Collection office e. Payment of the portions of the tax to which taxpayer agrees. This is also st ated in the written request (see vi. of the next part). The protest shall not be deemed validly filed unless payment of the agreed portion of the tax is paid fi rst. f. Contents of the written request: i. Name of taxpayer and address for the immediate past 3 taxable years ii. Nature of request (whether reinvestigation or reconsideration) specifying ne wly discovered evidence he intends to present if it is a request for investigati on. iii. The taxable periods covered iv. The assessment number v. Date of receipt of assessment notice or letter of demand vi. Itemized statement of the findings to which the taxpayer agrees as a basis f or computing the tax due, (this is the amount which should be paid immediately u pon filing of the protest) vii. The itemized schedule of the adjustments with which the taxpayer does not a gree. viii. A statement of facts and/or law in support of the protest. g. Submit a Waiver of the Statute of Limitations in favor of the Government. 8) Appeal within 30 days. (I guess from receipt of decision)

9) Change of Address a. Written notice must be given to the District Revenue Officer of the district having jurisdiction over his former legal residence and/or place of business b. Copy furnished to i. the Revenue District Officer having jurisdiction over his new legal residence or place of business; ii. the Revenue Computer Center; and iii. the Receivable Accounts Division, BIR, National Office, Quezon City. c. Failure to do so, any communication referred to in these regulations previous

ly sent to his former legal residence or business address as appearing on his ta x return for the period involved shall be considered valid and binding for purpo ses of the period within which to reply. b) Revenue Regulation No. 2-90 Restoring the requirement to register and stamp receipts and invoices pri or to their use May 25, 1990 Bookkeeping Regulations Registration and stamping of receipts and invoices 1) Before being used, the printed receipts, sales or commercial invoices shall b e registered with the revenue district officer where the principal place of busi ness of the taxpayer is located. 2) This should be done within 30 days from the date of printing of the same. 3) When you register, an appropriate stamp is placed to evidence the registratio n. The stamp should be placed on the registered booklet or pad: a. On the face of the taxpayer s copy of the authority to print as well as on the front cover; b. On the back of the middle invoice or receipt; and c. On the back of the last invoice or receipt 4) This should be authenticated by the signature of the officer authorized to pl ace the stamp thereon. 5) Unused or unissued receipts and invoices in the possession of taxpayers and h ave been printed prior to the effectivity of these regulations must also be regi stered with the RDO where the principal place of business of the taxpayer is loc ated within 30 days from the effectivity of these regulations. c) Revenue Regulation No. 12-99 Implementing the Provisions of the NIRC (1997) Governing the Rules on Assessment of NIR Taxes, Civil Penalties, and Interest, and The Extra-judicial Settlement of a Taxpayer s Criminal Violation of the Code Through Payment of a Suggested Comp romise Penalty 1) Procedure in the issuance of a deficiency tax assessment: a. Notice for INFORMAL CONFERENCE i. Revenue Officer who made the audit will make a report, stating whether the ta xpayer agrees with the finding. ii. If the taxpayer is not amenable, the taxpayer shall be informed in writing o f the discrepancies in the taxpayer s payment of taxes. iii. Taxpayer has 15 days from date of receipt of the notice to respond iv. Failure to respond: Taxpayer is declared in default 1. The report is endorsed to the Assessment Division of the Revenue Regional Off ice, to the Commissioner, or his duly authorized representative, as the case may be, for appropriate review and issuance of the tax assessment, if warranted. v. Assessment Division/ Commissioner/ representative will review and evaluate th e report b. Preliminary Assessment Notice (PAN) i. The Division/ Commissioner/ Representative makes a finding that there is defi ciency tax or taxes ii. Preliminary Assessment Notice (PAN) is issued by registered mail at the leas t. iii. PAN shows in detail: 1. facts 2. law 3. rules and regulations 4. jurisprudence on which the proposed assessment is based iv. Taxpayer has 15 days to respond to the PAN v. Failure to respond = default vi. In case of DEFAULT: The Formal Letter of demand and Assessment notice (Forma

l Assessment Notice FAN?) will be issued, calling for payment of the deficiency t ax, inclusive of applicable penalties. c. EXCEPTIONS to Prior Notice of Assessment These are the cases where there is n o need for the notices for Informal Conference or the PAN, and the FAN is sufficie nt i. When the finding for any deficiency tax is the result of mathematical error i n the computation of the tax appearing on the face of the tax return filed by th e taxpayer; or ii. When a discrepancy has been determined between the tax withheld and the amou nt actually remitted by the withholding agent; or iii. When a taxpayer who opted to claim a refund or tax credit of excess credita ble withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabili ties 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 an article locally purchased or imported by an exempt person, such as, b ut not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons. d. Formal Letter of Demand and Assessment Notice (FAN) i. It is issued by the Commissioner or duly authorized representative ii. It shall state: 1. facts; 2. law; 3. rules and regulations; or 4. jurisprudence on which the assessment is based. iii. Failure to State these facts makes the FAN void iv. It shall be sent to the taxpayer only by 1. registered mail or 2. personal delivery If by personal delivery, the taxpayer or his duly authorize d representative shall acknowledge receipt thereof in the dulplicate copy of the letter of demand, showing: a. His name; b. Signature; c. Designation and authority to act for and in behalf of the taxpayer, if acknow ledged received by a person other than the taxpayer himself; and d. Date of receipt thereof. 2) Disputed Assessments: a. Taxpayer has 30 days from the receipt of the FAN to make an administrative pr otest. b. If the taxpayer disputes only some of the issues regarding the validity of s ome of the assessments, i. the taxpayer has to pay the deficiency taxes for those which he does not disp ute ii. a collection letter shall be issued to the taxpayer calling for the deficien cy tax for the undisputed issues, inclusive of applicable surcharge and/or inter est. iii. No action shall be taken on the taxpayer s disputed issues until the taxpayer has paid the deficiency tax or taxes attributable to the said undisputed issues . iv. The prescriptive period for assessment or collection of the tax or taxes att ributable to the disputed taxes shall be suspended. c. The taxpayer shall state: i. The facts; ii. Applicable law; iii. Rules and Regulations; or iv. Jurisprudence on which his protest is based. d. Failure to so state these matters will make the protest void and without forc

e and effect. e. Taxpayer files the letter of protest f. Within 60 days from filing the letter, he has to submit supporting documents. Otherwise, the assessment shall become final, executory and demandable. g. Failure to make the protest within 30 days shall make the assessment final, e xecutory and demandable. 3) a. he e, b. Decision of the Commissioner/ his representative must state: The facts, applicable law, rules and regulations or jurisdprudence on which t decision is based. Failure to so state makes the decision void, in which cas the same shall not be considered a decision on a disputed assessment; and That the same is his final decision.

4) Appeal to the CTA a. If the Commissioner denies the protest in whole or in part, the taxpayer may appeal to the Court of Tax Appeals within 30 days from receipt of the decision. However: If the decision was made by the Commissioner s duly authorized represe ntative, the taxpayer should elevate the matter to the Commissioner within 30 da ys from the receipt of the representative s decision, in which case, the protest s hall then be decided by the Commissioner. b. If the Commissioner or his representative fails to act on the protest within 180 days from the date of the submission of the required documents in support of the protest the taxpayer can appeals to the CTA within 30 days from the lapse of the 180 day period. 5) Constructive Service: a. If notice is sent by registered mail, and no response is received from the ta xpayer within the prescribed period from date and posting thereof in the mail, t he same shall be considered actually or consturcitively received by the taxpayer . b. If the notice is personally served on the taxpayer/ duly authorized represen tative who refused to acknowledge receipt thereof, there is also constructive no tice. In which case: i. Constructive service thereof shall be considered effected by leaving the same in the premises of the taxpayer and ii. This fact of constructive service is attested to, witnessed and signed by at least 2 revenue officers other than the officer who constructively served the s ame. iii. The revenue officer who constructively served the same shall make a written report of this matter which shall form part of the docket of his case. 6) Computing surcharge Mode of Procedures in Computing for the Tax and/or Applic able Surcharge. Illustrative cases for the computation and assessment of the tax , inclusive of surcharge (if applicable) and interest (This is copied from the R R) CODAL PROVISIONS: Civil Penalties. 4.1 Twenty-Five Percent (25%) Surcharge. There shall be imposed, in addition to the basic tax required to be paid, a penalty equivalent to twenty-fi ve percent (25%) thereof, in any the following cases: 4.1.1 Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and regulations on the date prescribed; or 4.1.2 Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those with whom the return is required to b e filed; or 4.1.3 Failure to pay the deficiency tax within the time prescribed for its pay ment in the notice of assessment; or 4.1.4 Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of this Code or rules and regulations , or the full amount of tax due for which no return is required to be filed, on

or before the date prescribed for its payment. 4.2 Fifty Percent (50%) Surcharge: 4.2.1 In case of willful neglect to file the return within the period prescribed by the Code, or in case a false or fraudulent return is willfully mad e, the penalty to be imposed shall be fifty percent (50%) of the tax or of the d eficiency tax, in case any payment has been made on the basis of such return bef ore the discovery of the falsity or fraud: Provided, That a substantial underdeclaration of taxable sales, receipts or income, or a substantial overstatement of deductions, as determined by the Co mmissioner or his duly authorized representative, shall constitute prima facie e vidence of a false or fraudulent return: Provided, further, That failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a claim of deductions in an amount exceeding thirty percent (30%) of actual deductions, shall render the taxpayer liable for substantial underdeclaration of sales, rece ipts or income or for overstatement of deductions, as mentioned herein: Provided, further, that the term "willful neglect to file the return with in the period prescribed by the Code" shall not apply in case the taxpayer, with out notice from the Commissioner or his authorized representative, voluntarily f iles the said return, in which case, only 25% surcharge shall be imposed for lat e filing and late payment of the tax in lieu of the above 50% surcharge. Convers ely, the 50% surcharge shall be imposed in case the taxpayer files the return on ly after prior notice in writing from the Commissioner or his duly authorized re presentative. 4.2.2 Section 6 (A) of the Code provides that any tax return filed by a taxpayer "may be modified, changed or amended" by the taxpayer "within three ( 3) years from date of such filing" provided, however, that "no notice for audit or investigation of such return, statement or declaration has, in the meantime, been actually served upon the taxpayer." Thus, if upon investigation, it is dete rmined that the taxpayer's originally filed tax return is false or fraudulent, s uch taxpayer shall remain liable to the 50% civil penalty regardless that the ta xpayer has filed his amended tax return, if the said amended tax return, however , has been filed only after issuance of the Letter of Authority for the investig ation of the taxpayer's tax return or such amendment has been made in the course of the said investigation. COMPUTATIONS a) Late filing and late payment of the tax. Illustration: Income tax ret urn for the calendar year 1998 was due for filing on April 15, 1999 but the taxp ayer voluntarily filed his tax return, without notice from the BIR, only on June 30, 1999. The tax due per return amounts to P100,000. In this case, the taxpaye r shall be liable for delinquency penalties consisting of 25% surcharge, plus 20 % interest per annum, computed from due date of the tax until date of payment, c omputed as follows: Calendar Year 1998 Income tax due per return .00 Add: 25% surcharge for late filing and late payment (P100,000.00 times 25%) 20% int. p.a. from 4-15-99 to 6-30-99 (P100,000.00 times .0415524) P4,155.24 P100,000

P25,000.00 P29,155.24 P129,155

Total amount due (excluding suggested compromise for late filing and late payment of the tax) .24

========= Only one 25% surcharge shall be imposed for late filing of the return and late p ayment of the tax. b) The tax return is filed on time but filed through an internal revenue officer other than with whom the return is required to be filed. Illustration: T he taxpayer's 1998 income tax return is required to be filed through the authori zed agent bank under the jurisdiction of RDO East Makati. But, without prior aut horization from the BIR, the taxpayer filed his tax return and paid the tax thro ugh the authorized agent bank under the jurisdiction of RDO Davao City. Tax due and paid per return is P100,000.00. Calendar Year 1998 Income tax due per return .00 Add: 25% surcharge Total amount due .00 Less: Amount paid P100,000 P25,000.00 P125,000 P100,000.00

Amount still due P25,000. 00 ========= c) Late filing and late payment due to taxpayer's willful neglect. Illus tration: The taxpayer did not file his income tax return for the calendar year 1 997 which was due for filing on April 15, 1998. He was notified by the BIR of hi s failure to file the tax return, for which reason, he filed his tax return and paid the tax, only after the said notice, on June 30, 1999. The tax due per retu rn is P100,000.00. Calendar Year 1997 Income tax due per return .00 Add: 50% surcharge for willful neglect to file the return and late payment of the tax (P100,000 times 50%) 20% int. p.a. fr. 4-15-98 to 6-30-99 (P100,000.00 times .2415524) Total amount due (excluding suggested compromise for late filing and late payment of the tax) .24 d) Penalty or penalties posed on deficiency tax and on ve of penalties is not paid on r, the corresponding surcharge P24,155.24 P100,000

P50,000.00 P74,155.24 P174,155

========= for deficiency tax. As a rule, no surcharge is im the basic tax. However, if the amount due inclusi or before the due date stated on the demand lette shall be imposed.

Illustration No. 1: Taxpayer filed on time his income tax return for cale ndar year 1997 and paid P100,000.00 on April 15, 1998. Upon pre-audit of his ret urn, it was disclosed that he erroneously computed the tax due. The correct amou nt of tax due is P120,000.00. The taxpayer is assessed for deficiency income tax in a letter of demand and assessment notice issued on June 30, 1999. Calendar Year 1997

Tax due per pre-audit Less: Amount assessed and paid per tax return filed .00 Deficiency income tax Add: 20% int. p.a. from 4-15-98 to 6-30-99 (P20,000.00 times .2415524)

P120,000.00 P100,000 P20,000.00 P4,831.05

Amount still due P24,831. 05 ========= Illustration No. 2: ABC CORPORATION filed its income tax return for calen dar year 1997 and paid on time its income tax shown thereunder, amounting to P10 0,000. Said taxpayer was investigated. Upon verification of its accounting recor ds, it was disclosed that its deduction, from gross income, of representation ex penses in the amount of P200,000.00 did not meet all the statutory requisites fo r deductibility. The corporation was duly notified of the said discrepancy throu gh a Preliminary Assessment Notice. Based on the 35% income tax rate on corporat ions applicable in the year 1997, the income tax due after investigation amounts to P170,000.00. After deduction of income tax paid per return filed, the basic deficiency income tax amounts to P70,000, excluding penalties. Failing to protes t on time against the preliminary assessment notice, a formal letter of demand a nd assessment notice was issued on May 31, 1999, requiring payment of the assess ment not later than June 30, 1999. Calendar Year 1997 Income tax due per investigation .00 Less: Income tax paid per return .00 P170,000 P100,000

Deficiency income tax P70,000.00 Add: 20% int. p.a. fr. 4-15-98 to 6-30-99 (P70,000 times .2415524) P16,908. 67 Total amount still due P86,908.67 ========= Illustration No. 3: XYZ CORPORATION filed its income tax return for calen dar year 1997 with a net taxable income of P500,000.00. At the applicable income tax rate of 35% for the year 1997, its income tax amounted to P175,000.00. Howe ver, upon investigation, it was disclosed that its income tax return was false o r fraudulent because it did not report a taxable income amounting to another P50 0,000.00. On its net income of P1,000,000.00, per investigation, the income tax due is P350,000.00. Deducting its payment per return filed, the deficiency, excl uding penalties, amounted to P175,000.00. It was duly informed of this finding t hrough a Preliminary Assessment Notice. Failing to protest on time against the p reliminary assessment notice, a formal letter of demand and assessment notice wa s issued on May 31, 1999 calling for payment of the deficiency income tax on or before June 30, 1999. In this case, said corporation is liable for the civil penalties of 50% surcharg e for having filed a false or fraudulent return, plus 20% interest per annum on the deficiency, computed as follows: Calendar Year 1997 Income tax due per investigation P350,000 .00 Less: Income tax paid per return P175,000 .00

Deficiency income tax .00 Add: 50% surcharge for filing a fraudulent or false return (P175,000.00 times 50%) 00 20% int. p.a. fr. 4-15-98 to 6-30-99 (P175,000.00 times .2415524) .67 Total amount due .67 P42,271.67

P175,000 P87,500. P129,771 P304,771

========= e) Late payment of a deficiency tax assessed. In general, the deficiency tax assessed shall be paid by the taxpayer within the time prescribed in the no tice and demand, otherwise, such taxpayer shall be liable for the civil penaltie s incident to late payment. Illustration: Based on the above Illustration No. 3, Scenario 4, assuming that the calendar year 1997 deficiency income tax assessment against XYZ CORPOR ATION, in the amount of P304,771.67, is not paid by June 30, 1999, the deadline for payment of the assessment, and assuming further that this assessment has alr eady become final and collectible. In this case, such corporation shall be consi dered late in payment of the said assessment. Assuming, further, that the corpor ation pays its tax assessment only by July 31, 1999, the civil penalties for lat e payment shall be computed as follows: Calendar Year 1997 Total deficiency income tax assessed on May 31, 1999 Add: 25% surcharge for late payment (P304,771.67 times 25%) 20% interest p.a. from 7-1-99 to 7-31-99 (P304,771.67 times .0166667) P5,079.54 Total amount due (excluding suggested compromise penalty for late payment) .13 ========= f) Computation of 20% interest per annum in case of partial or installme nt payment of a tax liability. Illustration No. 1: In case extended payment of t he tax is duly authorized. DEF CORPORATION, due to financial incapacity, request ed that it be allowed to pay its income tax liability per return for calendar ye ar 1998, in the amount of P1,000,000.00, in four (4) monthly installments, start ing April 15, 1999. Its request has been duly approved pursuant to Sec. 53 of th e Tax Code. In this case, no 25% surcharge shall be imposed for late payment of the t ax since its deadline for payment has been duly extended. However, 20% interest per annum for the extended payment shall be imposed, computed based on the dimin ishing balance of the "unpaid amount", pursuant to the provisions of Section 249 (D) of the Code. No 25% surcharge on extended payment shall be imposed provided, however, that the taxpayer's request for extension of the period within which to pay is m ade on or before the deadline prescribed for payment of the tax due. Conversely, if such request is made after the deadline prescribed for payment, the taxpayer shall already be treated late in payment, in which case, the 25% surcharge shal l be imposed, even if payment of the delinquency be allowed in partial amortizat ion. Example: Calendar Year 1998 Income tax due per return P1,000,0 P304,771.67 P76,192.92 P81,272.46 P386,044

00.00 Less: 1st installment of the tax on or before 4-15-99 .00 Balance as of 4-15-99 Add: 20% int. p.a. from 4-15-99 to 5-15-99 (P750,000.00 times .0166667) Amount due on 5-15-99 Less: 2nd installment on 5-15-99 (P250,000.00 plus P12,500.03 interest) Balance as of 5-15-99 Add: 20% int. p.a. from 5-15-99 to 6-15-99 (P500,000.00 times .0166667) Amount due on 6-15-99 Less: 3rd installment on 6-15-99 (P250,000.00 plus P8,333.35 interest) Balance as of 6-15-99 Add: 20% int. p.a. from 6-15-99 to 7-15-99 (P250,000.00 times .0166667) 4th and final installment on 7-15-99

P250,000 P750,000.00 P12,500.03 P762,500.03 P262,500.03 P500,000.00 P8,333.35 P508,333.35 P258,333.35 P250,000.00 P4,166.68

P254,166.68 =========== Illustration No. 2: Computation of tax delinquency in case of partial pay ment of the tax due without prior BIR authorization for extended payment. Example: GHI CORPORATION did not file its final adjustment income tax ret urn for the calendar year 1998 which was due on April 15, 1999. The BIR informed the corporation of its failure to file its said tax return and required that it file the same, inclusive of the 25% surcharge and 20% interest per annum penalt ies incident to the said omission. On May 15, 1999 it advised that its income ta x due for the said year amounts to P1,000,000.00 but, however, due to its advers e financial condition at the moment, it will be unable to pay the entire amount, inclusive of the delinquency penalties. Hence, on May 15, 1999, it made a parti al payment of P400,000.00. Assuming that the BIR demanded payment of the unpaid balance of its tax obligation payable by June 15, 1999, the unpaid balance of th e corporation's delinquent income tax shall be computed as follows: Calendar Year 1998 Income tax due per return 00.00 Add: 25% surcharge for late filing and late payment 20% interest per annum from 4-15-99 to 5-15-99 (P1,000,000.00 times .0166667) Amount due as of 5-15-99 66.70 Less: Partial payment on 5-15-99 .00 Balance as of 5-15-99 Add: 20% interest per annum from 5-15-99 to 6-15-99 (P866,666.70 times .0166667) Amount still due (exclusive of the suggested compromise penalty for late filing and late payment P1,000,0 P250,000.00 P16,666.70 P266,666.70 P1,266,6 P400,000 P866,666.70 P14,444.47 P811,111.17

========= If the said taxpayer fails to pay the amount of P811,111.17 by June 15, 1999, no further 25% surcharge for late payment of the tax shall be imposed. Instead, on ly the 20% interest per annum shall be imposed against the taxpayer against the taxpayer, computed from due date thereof (i.e., June 15, 1999) until paid. If sa id taxpayer pays the same on partial payment basis, the 20% interest per annum s hall be computed on the diminishing balance thereof, pursuant to the procedures in the preceding Illustration No. 1, Section 6.6 hereof. 7) Final Provisions of the RR: SECTION 6. Suggested Compromise Penalty in Extra-judicial Settlemen t of a Taxpayer's Criminal Violation. Section 204 of the Tax Code of 1997 provid es that "All criminal violations may be compromised except: (a) those already fi led in court, or (b) those involving fraud." This means that, in general, the ta xpayer's criminal liability arising from his violation of the pertinent provisio n of the Code may be settled extra-judicially instead of the BIR instituting aga inst the taxpayer a criminal action in Court. A compromise in extra-judicial set tlement of the taxpayer's criminal liability for his violation is consensual in character, hence, may not be imposed on the taxpayer without his consent. Hence, the BIR may only suggest settlement of the taxpayer's liability through a compr omise. The extra-judicial settlement of the taxpayer's criminal liability and the amoun t of the suggested compromise penalty shall conform with the schedule of comprom ise penalties provided under Revenue Memorandum Order No. 1-90 or as hereafter r evised. SECTION 8. Effectivity. 8.1 General Rule. In general, the provisions of these Regulations sh all be effective beginning January 1, 1998 pursuant to the provisions of Section 8 of R.A. No. 8424, otherwise known as the National Internal Revenue Code of 19 97. 8.2 Computation of Surcharge and Interest on Deficiency Tax Assessme nt. Any deficiency tax assessment issued beginning January 1, 1998 shall be gove rned by the rules prescribed in these Regulations. d) Revenue Regulation No. 2-78 Printing of Receipts or Sales or Commercial Invoices 1) Definitions: a. Printer any person, natural or juridical, engaged in the process or business of producing any printed matter. b. Receipt a written admission or acknowledgment of the fact of payment in money or other settlement between seller and buyer of goods, debtor and creditor, or person rendering services and client or customer. c. Sales or commercial invoice a written account of goods sold or services rende red and the prices charged therefore, or i. A list of goods consigned and the value at which the consignee is to receive them, or ii. Any other list by whatever name it is known which is used in the ordinary co urse of business evidencing sale and transfer or agreement to sell or transfer g oods and services e.g. purchase orders; job orders; provisional and temporary re ceipts, etc.; - EXCEPT (1) freight stub receipts; (2) passage tickets; and (3) amusement tickets and other similar receipts which are governed by Revenue R egulations NO. V-1, as amended. 2) Presenting your books, registers, records etc. a. Persons required to keep books of accounts, internal revenue books, records o r receipts and disbursements, additional registers, and other records, invoices

and receipts for recording their transactions as prescribed in these regulations . b. Person puts on the front cover: i. The kind of book, register, or record, ii. The name and business address of the owner, iii. Citizenship and number of the alien registration certificate if an alien iv. Kind of business engaged in v. Tax Numeric Code Number vi. Number of the privilege tax receipt issued for the business c. Approving officer will Authenticate and register the books. d. If the books, register or records presented for approval is a continuation of previous books etc, the approving officer will have a different method of annot ation. e. Presentation is made for approval and registration f. Place: the RDO of the principal place of business g. Keeping of books: the register or records which have been approved shall be kept showing such information such as: i. The date of approval; ii. The name and address of the taxpayer; iii. His citizenship; iv. The number of the alien registration certificate, if an alien; v. The kind of business vi. Tax Numeric Code Number vii. Number of privilege tax receipt issued for the business, if any; viii. The kind, volume, number of pages or sheets of the book etc. h. Every book, register or record so approved and registered shall be serially n umbered for each taxpayer. 3) Authority to print receipts, sales, or commercial invoices: a. File an application for authority to print (there s an annex) b. File with the RDO c. File where the principal place of business of the printer is located d. Copy the application in quadruplicate e. Taxpayer must duly attest f. Accompany application with four draft copies of the receipts or invoices to b e printed as well as the job order issued by the printer to the taxpayer. 4) After approval, the original copy of the authority to print shall be retained by the printer, the duplicate furnished to the taxpayer for purposes of the reg istration. 5) Registration and Stamping of receipts and invoices: a. Registered with the RDO where principal place of business of the taxpayer is located b. Within 30 days form the date of the invoice issued by the printer. c. The registration is evidenced by an appropriate stamp: i. On the face of the taxpayer s copy of the authority to print ii. On the front cover, iii. On the back of the middle page iv. On the back of the last invoice or receipt of the registration booklet or pa d d. This stamp must be authenticated by the signature of the officer authorized t o place the stamp thereon. e) Revenue Memorandum Circular No. 48-90 Counting of the Three-year Prescriptive Period Except in cases of filing a false or fraudulent return, or failure to fi le a return, the prescriptive period for assessment is 3 years from the time the return is filed. After this, such tax may be collected by distraint or levy or garnishment or by a proceeding in court within (3) years after assessment of th

e tax. It seems that it was the practice of the officers to issue assessments o n the last possible day of the prescriptive period. Example, return is filed on April 15, 1989, the assessment will be issued on April 15, 1992. The problem with this is that in the case of LEAP YEARS, there could be possible controversy as to whether the assessment was issued within the prescrip tive period. Therefore: The 3 years are counted in the same way as that prescribed in the Civil Code, as enunciated in National Marketing Corporation (NAMARCO) vs. Tecson (1969 ). Therefore, one should count a year as containing 365 days x 3 = 1,095 days b efore the prescriptive period ends. However, as an internal regulatory measure, the officers were instructed to send the assessment notices at least 90 days be fore the 3 year prescriptive period, or 1,095. 6.k. CIR v. CA and Lucio Tan et. al. GR No. 119322, June 4 1996 FACTS: On June 1 1993, the President issued a Memorandum creating a Task Force to investigate the tax liabilities of manufacturers engaged in tax evasion schem e, such as selling products through dummy marketing corporations to avoid paymen t of correct internal revenue tax, to collect from them any tax liabilities disc overed from such investigation, and to file the necessary criminal actions again st those who may have violated the tax code. The CIR then assessed Fortune Tobacco for 7B representing underpayment d eficiency income, ad valorem and value-added tax for the year 1992 with the requ est that the said amount be paid within thirty (30) days upon receipt thereof. Within 30 days from receipt of the assessment, Fortune filed a motion for recons ideration. Before the resolution of the motion for reconsideration, the CIR filed a complaint with the DOJ against Fortune and its officers for fraudulent tax evas ion for nonpayment of the correct income tax, ad valorem and VAT for the year 19 92. Fortune declared their taxes to amount to 11B, while CIR found that the tax es as declared by their daily manufacturer s sworn statements amounted to 16B, amoun ting to evasion of ad valorem taxes in the sum of 5B. The CIR claimed that Fort une, as a manufacturer, would sell their cigarettes at a lower wholesale price t o dummy corporations and individuals, who would in turn sell the cigarettes at a higher cost. During the preliminary investigations, subpoenas were issued. Meanwhile , Fortune et. al. filed a motion to enjoin the preliminary investigation proceed ings. RTC granted the Injunction of the preliminary investigations on the groun d that the Motion for Reinvestigation filed by Lucio Tan et. al. (LT) was 1) a p rejudicial question that should be determined before the case for tax evasion co uld continue; and 2) that the case was filed in violation of LT s right to due pro cess. Later, LT also asked for a TRO with respect to two other preliminary inve stigations for tax evasion cases. The Court of Appeals upheld the ruling of the trial court. CIR goes to the SC on certiorari. ISSUE: Was the Preliminary Injunction proper? YES SC: PRESUMPTION OF REGULARITY: Section 127(b) in relation to Section142(c) of t he NIRC provides for the manner by which ad valorem taxes should be imposed with respect to goods that are sold wholesale. Under these provisions, the law, spe cifically Section 142(c), requires that the corresponding tax on cigarettes shal l be levied, assessed and collected at the rates based on the "manufacturer's re gistered wholesale price." This obviously means that the taxpayer makes a deter mination of its wholesale price first, and then registers it. The determination of wholesale price by the taxpayer is also under the close supervision of the R evenue Enforcement Officers who are detailed on a 24-hour basis in the premises of the manufacturer to secure production and removal of finished products. This is to ensure that the reports filed by the taxpayer are accurate. Since Fortune s registered manufacture s wholesale price was duly approved b y the BIR and made under its strict supervision, then it is presumed that when F

ortune declared its taxes based on its registered wholesale price, such amount w as correct. In such case, and in the absence of contrary evidence, it was prema ture to conclude that private respondents made fraudulent returns or willfully a ttempted to evade payment of taxes due. "Willful" means "premeditated; malicious ; done with intent, or with bad motive or purpose, or with indifference to the n atural consequence . . ." "Fraud" in its general sense, "is deemed to comprise a nything calculated to deceive, including all acts, omissions, and concealment in volving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable adv antage taken of another." The only way the CIR can so prove that Fortune s regist ered wholesale price was incorrect is to also impute fraud and connivance on the part of the BIR officials themselves. There was no allegation to this effect. PROCEDURE FOR CRIMINAL PROSECUTION: Before Fortune can be prosecuted for tax ev asion under Secs. 253 and 255, the fact that there was deficiency income for the periods in question should be established. When Fortune received its tax asses sment from the CIR, it had 30 days from receipt of the assessment to move for re consideration. If this was denied, then Fortune would have had another 30 days from the receipt of the decision of the CIR to appeal to the Court of Appeals. S ince Fortune made a timely motion for reconsideration, the CIR should render a d ecision on this matter before filing a criminal case for tax evasion. The crimi nal case could be rendered moot should the CIR find that there was no deficiency income to begin with. The Court also distinguished this case from the ruling in Ungad v. Cusi where the Court ruled that that the lack of a final determination of Fortune's e xact or correct tax liability is not a bar to criminal prosecution, and that whi le a precise computation and assessment is required for a civil action to collec t tax deficiencies, the Tax Code does not require such computation and assessmen t prior to criminal prosecution. The Court said there must be a prima facie sho wing of a willful attempt to evade taxes. There was a willful attempt to evade t ax in Ungad because of the taxpayer's failure to declare in his income tax retur n "his income derived from banana sapplings." DUE PROCESS: 1) While the general rule is that an injunction will not prosper during the preliminary investigation stage, the Court found that this case fell under one of the exceptions enunciated in Brocka v. Enrile. 2) The subpoena was issued with precipitate haste. 3) The complaint of the prosecutors was based on a Daily Manufacturer s Sworn State ments submitted by the taxpayer. However, this document was never presented. 6.l CIR v. CTA and Fortune Tobacco GR No. 119761, Aug. 29, 1996 FACTS: On various dates, the Philippine Patent Office issued to the corporation separate certificates of trademark registration over "Champion," "Hope," and "Mo re" cigarettes. The initial position of the CIR was to classify 'Champion,' 'Ho pe,' and 'More' as foreign brands since they were listed in the World Tobacco Di rectory as belonging to foreign companies. However, Fortune Tobacco changed the names of 'Hope' to Luxury' and 'More to 'Premium More', thereby removing the said brands from the foreign brand category. RA 7654 was later enacted changing the tax rates of cigarettes. Two day s before the effectivity of this law, the CIR issued a RMC declaring that Hope, More, and Champion would be reclassified as locally manufactured cigarettes beari ng a foreign brand . It declared that as long as the cigarettes bore a foreign br and, regardless of whether the foreign owner allowed the local manufacturer to u se the foreign name, the cigarettes would still be classified as foreign, and su bject to higher ad valorem tax of 55%. The CIR assessed Fortune based on this RMC, declaring that Fortune was l iable for deficiency taxes. Fortune filed a Motion for Reconsideration but this was denied. It then appealed to the CTA. The CTA agreed with Fortune, and sai d that the assessment for deficiency ad valorem tax should be cancelled. It sai

d that the assessment was incorrect because the reclassification of the cigarett es as locally manufactured bearing a foreign brand subject to the 55% ad valorem tax is found to be defective, invalid and unenforceable, such that when R.A. No. 7654 took effect on July 3, 1993, the brands in question were not CURRENTLY CLA SSIFIED AND TAXED at 55% pursuant to Section 1142(c)(1) of the Tax Code, as amen ded by R.A. No. 7654 and were therefore still classified as other locally manufa ctured cigarettes and taxed at 45% or 20% as the case may be. The Court of Appea ls upheld the CTA decision. On certiorari before the Supreme Court, the CIR claims that the RMC was merely an interpretative ruling by the BIR which can thus become effective witho ut any prior need for notice and hearing, nor publication, and that its issuance is not discriminatory since it would apply under similar circumstances to all l ocally manufactured cigarettes. Thus, the ruling could be immediately applied to Fortune. ISSUE: Was the RMO binding even without the notice and publication requirements? No SC: Petitioner stresses on the wide and ample authority of the BIR in the issua nce of rulings for the effective implementation of the provisions of the Nationa l Internal Revenue Code. Let it be made clear that such authority of the Commiss ioner is not here doubted. Like any other government agency, however, the CIR ma y not disregard legal requirements or applicable principles in the exercise of i ts quasi-legislative powers. The Court then distinguished between a legislative rule, and an interpre tative rule: A legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation by providing the details thereof. In the same way that laws must have the benefit of public hearing, it is generally required that before a legislative rule is adopted there must be hearing. In this connec tion, the Administrative Code of 1987 provides: "Public Participation. If not otherwise required by law, an agency shall, as far as practicable, publish or circulate notices of proposed rules and affor d interested parties the opportunity to submit their views prior to the adoption of any rule. "(2) In the fixing of rates, no rule or final order shall be valid un less the proposed rates shall have been published in a newspaper of general circ ulation at least two (2) weeks before the first hearing thereon. "(3) In case of opposition, the rules on contested cases shall be obs erved. "In addition such rule must be published. On the other hand, interpretative rule s are designed to provide guidelines to the law which the administrative agency is in charge of enforcing." It should be understandable that when an administrative rule is merely i nterpretative in nature, its applicability needs nothing further than its bare i ssuance for it gives no real consequence more than what the law itself has alrea dy prescribed. When, upon the other hand, the administrative rule goes beyond me rely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of t hose governed, it behooves the agency to accord at least to those directly affec ted a chance to be heard, and thereafter to be duly informed, before that new is suance is given the force and effect of law. A reading of the RMC (37-93), particularly considering the circumstances under which it has been issued, convinces us that the circular cannot be viewed simply as a corrective measure (revoking in the process the previous holdings o f past Commissioners) or merely as construing Section 142(c)(1) of the NIRC, as amended, but has, in fact and most importantly, been made in order to place "Hop e Luxury," "Premium More" and "Champion" within the classification of locally ma nufactured cigarettes bearing foreign brands and to thereby have them covered by RA 7654. Specifically, the new law would have its amendatory provisions applied to locally manufactured cigarettes which at the time of its effectivity were no t so classified as bearing foreign brands. Prior to the issuance of the question

ed circular, "Hope Luxury," "Premium More," and "Champion" cigarettes were in th e category of locally manufactured cigarettes not bearing foreign brand subject to 45% ad valorem tax. Hence, without the RMC, the enactment of RA 7654, would h ave had no new tax rate consequence on private respondent's products. Evidently, in order to place "Hope Luxury," "Premium More," and "Champion" cigarettes with in the scope of the amendatory law and subject them to an increased tax rate, th e now disputed RMC had to be issued. In so doing, the BIR not simply interpreted the law; verily, it legislated under it quasi-legislative authority. The due ob servance of the requirements of notice, of hearing, and of publication should no t have been then ignored. UNIFORM TAXATION: There is also a violation of uniformity of taxation. Uniformi ty requires that all subjects or objects of taxation, similarly situated, are to be treated alike or put on equal footing both in privileges and liabilities. Th us, all taxable articles or kinds of property of the same class must be taxed at the same rate and the tax must operate with the same force and effect in every place where the subject may be found. It is thus apparent that the CIR did not similarly classify other cigarettes who are also locally manufactured foreign br ands such as Palm Tree, Golden Key, and Cannon, among others. 6.m. CIR V. Pascor Realty & Dev. Corp. GR No. 128315, June 29, 1999 FACTS: CIR Revenue Officers examined Pascor Realty s (PR) books of account for th e years ending 1986-1988. Instead of an assessment, the CIR filed a criminal co mplaint for tax evasion in the DOJ. PR requested for a reconsideration/ reinves tigation, but CIR denied. PR appealed this decision to the CTA contending that the Joint Affidavit submitted by the Revenue Examiners and appended to the crimi nal complaint can be considered an assessment. The CIR filed a Motion to Dismis s on the ground that the CTA had no jurisdiction over the subject matter of the petition, as there was no formal assessment issued against PR. The CTA and CA denied the Motion to Dismiss. They agreed with PR that t he criminal complaint itself can be considered an assessment that can be appeale d to the CTA. The Court of Appeals sustained the CTA by saying that since an as sessment is simply the statement of the details and amount of tax due from a taxp ayer, the Joint Affidavit in the complaint was sufficient. ISSUE 2: (as stated in the syllabus) Is an assessment necessary before filing a criminal complaint? NO. SC: Section 222 - specifically states that in cases where a false or fraudulent return is submitted or in cases of failure to file a return, such as in this ca se, proceedings in court may be commenced without an assessment. Section 205 clearly mandates that the civil and criminal aspects of the case may be pursued simultaneously. Ungab v. Cusi protests could not stop or suspend the criminal action whi ch was independent of the resolution of the protest in the CTA. This is because the commissioner of internal revenue had, in such tax evasion cases, discretion on whether to issue an assessment or to file a criminal case against a taxpayer or to do both. Moreover, the criminal charge need only be supported by a prima facie sh owing of failure to file a required return. This fact need not be proven by an assessment. ISSUE 1: Can the criminal complaint be considered an assessment? NO. SC: While neither the NIRC nor the revenue regulations governing the protest of assessments provide a specific definition or form of an assessment, the NIRC de fines the specific functions and effects of an assessment. The issuance of an a ssessment is vital in determining the period of limitation regarding its proper issuance and the period within which to protest it. Examples: a) Internal Revenue taxes must be assessed within 3 years from the last day with in which to file a return; b) In case of a fraudulent return with intent to evade, it is 10 years from the time it was submitted, or from the failure to file a return.

c) An assessment must be protested within 30 days from receipt thereof. An assessment must be sent to and received by a taxpayer, and must demand paymen t of the taxes described therein within a specific period. It should also be st ressed that the said document is a notice duly sent to the taxpayer. Indeed, an assessment is deemed made only when the collector of internal revenue releases, mails or sends such notice to the taxpayer. In this case, the Joint Affidavit only contained a computation, but not a demand, nor a period of payment. 1 Case did not state what the law says or how it amends the NIRC 2 SEC. 51(D) of the NIRC 3 Foreign currency deposit system- the conduct of banking transactions whereby any person whether natural or juridical may deposit foreign currencies forming p art of the Philippine international reserves , in accordance with RA 6462 ( RR 1 0-98) 4 a branch, subsidiary or affiliate of a foreign banking corporation which is du ly authorized by the Bangko Sentral Ng Pilipinas to transact offshore banking bu siness in the Philipiines in accordance with PD 1034 (RR 10-98) 5 Sec. 30. Deductions from gross income- In computing net income there shall b e allowed as deductions (c) Taxes - taxes paid or accrued within the taxable year, except B. income, war-profits, and excess profit taxes imposed by the authority of a ny foreign country; but this deduction shall be allowed in the case of a taxpaye r who does not signify in his return his desire to have to any extent the benefi ts of paragraph 3 of this subsection (relating to credit for foreign countries) ?? ?? ?? ??