Taxation-Law-I-Santiago-2019_230919_094307 (1)

ABAKADA v. ERMITA ..........................................................
30
TABLE OF CONTENTS II. Administrative Feasibility .............................. 30
III. Theoretical Justice ........................................ 30
I. FUNDAMENTALS OF TAXATION .............. 7 DIAZ v. SECRETARY OF FINANCE .................................... 30
A. Definition ...................................................... 7 E. Theory and Basis of Taxation....................31
B. Nature and Characteristics ......................... 7 I. Necessity .......................................................... 31
I. Inherent ............................................................... 7 II. Ability to Pay ................................................... 31
PEPSI COLA v. MUNICIPALITY OF TANAUAN .................... 7 III. Benefit-Protection .......................................... 31
VALENTIN TIO v. VIDEOGRAM REGULATORY BOARD .... 7 IV. Lifeblood Theory ........................................... 31
PHIL. HEALTH CARE PROVIDERS v. CIR ........................... 8 1. No Injunction Rule; Exception................... 31
REPUBLIC v. CAGUIOA ........................................................ 9
ANGELES CITY v. ANGELES CITY ELECTRIC CORP. ..... 31
CIR v. HON. SANTOS ............................................................ 9
2. Strict Construction..................................... 32
II. Legislative ........................................................ 10
a. LGU ........................................................... 10 F. Doctrines in Taxation .................................32
FERRER, JR. v. CITY MAYOR HERBERT BAUTISTA ....... 10 I. Prospectivity .................................................... 32
FILM DEVELOPMENT COUNCIL v. COLON HERITAGE ... 11 CIR v. ACOSTA .................................................................... 33
MANILA ELECTRIC v. PROVINCE OF LAGUNA ................ 12
II. Imprescriptibility ............................................. 33
b. Delegation to the President ....................... 12 CIR v. PHIL. GLOBAL COMMUNICATION .......................... 33
GARCIA v. EXECUTIVE SECRETARY ............................... 12
SOUTHERN CROSS v. CEMENT MANUFACTURERS ...... 13
III. Double Taxation ............................................. 33
ABAKADA v. ERMITA .......................................................... 13 CITY OF MANILA v. COCA COLA BOTTLERS ................... 34
SWEDISH MATCH v, CITY OF MANILA .............................. 34
c. Administrative Agencies ............................ 13 NURSERY CARE CORPORATION v. ACEVEDO ............... 35
CIR v. FORTUNE TOBACCO CORPORATION .................. 13 ERICSSON TELECOM v. CITY OF PASIG ......................... 35
SEC. OF FINANCE v. PHIL. TOBACCO INSTITUTE .......... 14 CIR v. BPI ............................................................................. 36
d. Delegation to the People at Large............. 15 IV. Eliminating Double Taxation ........................ 36
III. Tax is a Burden .............................................. 15 1. Tax Treaties .............................................. 36
IV. Jurisdiction..................................................... 15 CIR v. S.C. JOHNSON ......................................................... 37
1. Territoriality................................................ 15 2. Tax Credits ................................................ 38
2. Situs of Taxation........................................ 15 3. Tax Deduction ........................................... 38
a. Income Tax................................................ 16 4. Tax Reduction ........................................... 38
CIR v. JULIANE BAIER-NICKEL.......................................... 16
b. Property Tax .............................................. 16 II. LIMITATIONS ........................................... 39
c. Excise Tax ................................................. 17
A. Inherent Limitations ...................................39
d. Business Tax ............................................. 17
CIR v. JAPAN AIRLINES ..................................................... 17 I. Public Purpose ................................................. 39
ILOILO BOTTLERS, INC v. CITY OF ILOILO ...................... 17 PLANTERS PRODUCTS v. FERTIPHIL .............................. 39
CIR v. BRITISH OVERSEAS AIRWAYS CORP. ................. 18 PAMBANSANG KOALISYON v. EXECUTIVE SECRETARY
.............................................................................................. 39
V. Purpose of Taxation ....................................... 19
II. Inherently Legislative ..................................... 39
1. Primary Purpose........................................ 19
III. Territorial ........................................................ 40
2. Secondary Purposes ................................. 19
BATANGAS POWER CO v. BATANGAS AND NPC ........... 19 IV. International Comity ...................................... 40
TAÑADA V. ANGARA .......................................................... 40
VI. Public Purpose ............................................... 19
PLANTERS PRODUCTS v. FERTIPHIL .............................. 19 V. Exemption of Government Entities .............. 40
PAMBANSANG KOALISYON v. EXECUTIVE SECRETARY MACTAN-CEBU AIRPORT v. MARCOS .............................. 40
............................................................................................. 20 MACTAN-CEBU AIRPORT v. CITY OF LAPU-LAPU .......... 41
C. Comparison with Other Powers ............... 21 B. Constitutional Limitations .........................42

I. Police Power ..................................................... 21 I. Due Process ..................................................... 42
PHILIPPINE AIRLINES v. EDU ............................................ 22 CIR v. METRO STAR SUPERAMA, INC. ............................. 42
REPUBLIC v. BACOLOD-MURCIA MILLING, ET AL. ......... 22 II. Equal Protection ............................................. 43
GEROCHI v. DEPARTMENT OF ENERGY ......................... 23 III. Uniformity and Equity in Taxation ............... 43
CHEVRON PHILIPPINES v. BCDA ..................................... 24 FERRER, JR. v. CITY MAYOR BAUTISTA .......................... 43
REPUBLIC v. INTERNATIONAL COMMUNICATIONS ....... 24 SISON, JR. v. ANCHETA ..................................................... 44
FERRER, JR. v. CITY MAYOR HERBERT BAUTISTA ....... 25 TIU v. COURT OF APPEALS ............................................... 45
PLANTERS PRODUCTS v. FERTIPHIL .............................. 26 TAN v. COURT OF APPEALS ............................................. 46
PAMBANSANG KOALISYON v. EXECUTIVE SECRETARY ABAKADA v. ERMITA .......................................................... 46
............................................................................................. 26 BRITISH AMERICAN TOBACCO v. CAMACHO ................. 47
II. Eminent Domain .............................................. 26 ABAKADA v. PURISIMA ...................................................... 48
CIR v. CENTRAL LUZON DRUG CORPORATION ............. 27 COC v. HYPERMIX FEEDS CORPORATION ..................... 48
CARLOS SUPERDRUG v. VELASCO, JR. ......................... 28 IV. Progressive Taxation .................................... 49
MANILA MEMORIAL PARK v. SECRETARY OF DSWD .... 29 TOLENTINO v. SECRETARY OF FINANCE ....................... 49
ABAKADA v. ERMITA .......................................................... 50
D. Principles of a Sound Tax System ........... 30 V. Origin of Appropriation, Revenue and Tariff
I. Fiscal Adequacy ............................................... 30 Bills ...................................................................... 50
CHAVEZ v. ONGPIN ............................................................ 30
NOTES ON TAXATION I | REGINALD MATT SANTIAGO 3
TOLENTINO v. SECRETARY OF FINANCE ....................... 50 CIR v. TRANSFIELD ............................................................ 68

ABAKADA v. ERMITA .......................................................... 51 II. Distinguished from Tax Exemption ........... 68
VI. Voting Requirements for Tax Exemptions .. 51 CIR v. PHILIPPINE ALUMINUM WHEELS .......................... 68
JOHN HAY v. LIM ................................................................ 51 PHILIPPINE BANKING CORPORATION v. CIR .................. 69
VII. Delegation to President to Fix Tariff Rates 52 ASIA INTERNATIONAL AUCTIONEERS v. CIR .................. 69
VIII. President’s Veto Power on Appropriation,
IV. CONSTRUCTION AND
Revenue or Tariff Bills ........................................ 52
CIR v. CTA AND MANILA GOLF ......................................... 52 INTERPRETATION ....................................... 69
IX. Taxes Levied for a Special Purpose ............ 53 A. Tax Laws ......................................................... 69
X. Grant to LGUs to Create Own Source of CIR v. FORTUNE TOBACCO .............................................. 69
Revenue ............................................................... 53 B. Exemption and Exclusion ............................. 69
PANASONIC v. CIR ............................................................. 70
XI. Flexible Tariff Clause..................................... 53 CIR v. PHILIPPINE AIRLINES ............................................. 70
SOUTHERN CROSS v. CEMENT MANUFACTURERS ...... 53 CIR v. SM PRIME HOLDINGS ............................................. 70
AKBAYAN v. AQUINO ......................................................... 53 SMART COMMUNICATIONS v. CITY OF DAVAO .............. 70
XII. Exemption from Real Property Taxes ......... 53 CIR v. FORTUNE TOBACCO .............................................. 70
ROMAN CATHOLIC BISHOP v. ILOCOS NORTE .............. 54 CIR v. CENTRAL LUZON DRUG ......................................... 70
ABRA VALLEY COLLEGE v. AQUINO ................................ 54 ASIA INTERNATIONAL AUCTIONEERS v. CIR .................. 70
LUNG CENTER v. QUEZON CITY ...................................... 54 CIR v. PILIPINAS SHELL ..................................................... 71
CIR v. ST. LUKE’S MEDICAL CENTER .............................. 55 C. Tax Rules and Regulations ........................... 71
MACTAN-CEBU v. CITY OF LAPU-LAPU ........................... 57
D. Penal Provisions of Tax Laws....................... 71
XIII. Tax Exemptions of Revenues, Assets,
E. Non-retroactivity ............................................. 71
Including Donations to Educational Institutions
I. Exceptions ................................................. 71
.............................................................................. 57
F. Mandatory and Directory Provisions ............ 71
XIV. Non-impairment of Supreme Court’s
Jurisprudence on Construction and
Jurisdiction in Tax Cases ................................... 58
Interpretation ....................................................... 72
XV. Non-imprisonment for Non-payment of Poll CIR v. LIQUIGAZ .................................................................. 72
Tax ........................................................................ 58 GULF AIR COMPANY v. CIR ............................................... 72
XVI. Freedom of Speech and of the Press ........ 58 SAN PABLO MANUFACTURING CORPORATION v. CIR .. 72
TOLENTINO v. SECRETARY OF FINANCE ....................... 58 PELIZLOY REALTY v. PROVINCE OF BENGUET ............. 72
XVII. Religious Freedom ..................................... 59 ALTA VISTA GOLF v. CITY OF CEBU ................................ 73
AMERICAN BIBLE SOCIETY v. CITY OF MANILA ............. 59 CIR v. MIRANT PAGBILAO .................................................. 73
TOLENTINO v. SECRETARY OF FINANCE ....................... 59 MANDANAS v. EXECUTIVE SECRETARY ......................... 73
XVIII. Non-impairment of Contracts .................. 59 V. TAXES ...................................................... 74
MANILA ELECTRIC v. PROVINCE OF LAGUNA ............... 60
A. Stages of Taxation ......................................... 74
Judicial Review – Taxpayer’s Suit ..................... 61
ABAKADA v. ERMITA .......................................................... 74
ANTI-GRAFT LEAGUE v. SAN JUAN .................................. 61
CHAVEZ v. ONGPIN ............................................................ 74
LANDBANK v. CACAYURAN ............................................... 62
DIAZ v. SECRETARY OF FINANCE .................................... 74
REMULLA v. MALIKSI ......................................................... 62
B. Definition, Nature and Characteristics of
III. ESCAPE FROM TAXATION ................... 63 Taxes .................................................................... 74
A. Shifting of Tax Burden ................................... 63 C. Requisites of a Valid Tax ............................... 74
I. Ways of Shifting ......................................... 63 D. Kinds of Taxes ................................................ 75
II. Taxes that Can be Shifted ......................... 63 I. As to Object ............................................... 75
III. Impact from Incidence of Taxation ........... 63 II. As to Burden or Incidence ........................ 75
DIAGEO PHILIPPINES v. CIR ............................................. 63 CIR v. PLDT ......................................................................... 75
SILKAIR v. CIR ..................................................................... 64 III. As to Tax Rates ....................................... 75
B. Tax Avoidance ................................................ 64 IV. As to Purposes ........................................ 75
C. Tax Evasion ..................................................... 65 V. As to Scope or Authority ........................... 75
CIR v. ESTATE OF TODA ................................................... 65 VI. As to Graduation...................................... 75
BIR v. CA, SPOUSES MANLY ............................................. 66
E. Tax from Other Exactions.............................. 75
D. Tax Exemption ................................................ 66
I. Tax from Tariff............................................ 75
I. Meaning...................................................... 66
II. Tax from Toll ............................................. 76
II. Nature of Tax Exemptions ......................... 66 DIAZ v. SECERTARY OF FINANCE .................................... 76
III. Kinds of Exemptions ................................ 66 III. Tax from License Fee .............................. 76
IV. Rationale/Grounds for Exemption............ 67 IV. Tax from Special Assessment ................. 76
V. Revocation of Tax Exemption ................... 67 V. Tax from Debt ........................................... 76
FILM DEVELOPMENT COUNCIL v. COLON HERITAGE ... 67
VI. Tax from Compromise ............................. 77
E. Compensation ................................................. 67
SOUTH AFRICAN AIRWAYS v. CIR ................................... 67
VII. Tax from Penalty .................................... 77
CIR v. ESSO STANDARD .................................................... 67 F. Tax Pyramiding ............................................... 77
F. Equitable Recoupment ................................... 68 PEOPLE v. SANDIGANBAYAN ........................................... 77
G. Tax Amnesty ................................................... 68 INCOME TAXATION..................................... 78
I. Definition .................................................... 68
Summarized from the discussions of Atty. Percy Valsan Jun P. Donalvo, CPA; Lectures from d
Dean Manuel P. Quibod and Annotations from Domondon, De Leon, Aban and Casasola
PRELIMINARIES .......................................... 78 5. Percentage of Completion Method ........... 88

CIR v. LANCASTER PHILIPPINES ...................................... 88
I. INCOME TAXATION ................................. 78 V. Tests in Determining Whether Income is
Earned for Tax Purposes ................................... 89
II. INCOME TAX SYSTEMS ......................... 78 1. Realization Test ........................................ 89
III. FEATURES OF THE PHILIPPINE INCOME 2. Claim of Right Doctrine or Doctrine of
Ownership, Command or Control ................. 89
TAX LAW...................................................... 78 3. Economic Benefit Test or Doctrine of
IV. CRITERIA IN IMPOSING PHILIPPINE Proprietary Interest ....................................... 89
4. Severance Test ......................................... 89
INCOME TAX ............................................... 78
5. All Events Test .......................................... 89
V. TYPES OF PHILIPPINE INCOME TAX.... 78 D. Gross Income .............................................92
VI. TAXABLE PERIOD ................................. 79 I. Definition .......................................................... 92
II. Concept of Income From Whatever Source
VII. KINDS OF TAXPAYERS........................ 79 Derived ................................................................. 92
A. Individuals ................................................. 79 III. Gross Income v. Net Income v. Taxable
I. Citizens.............................................................. 79 Income ................................................................. 92
II. Aliens................................................................ 81 IV. Classification of Income as to Source ........ 92
III. Special Class of Individual Employees........ 82 V. Normal Tax v. Final Tax, Tax Treatment ...... 93
B. Corporations ............................................. 82 VI. Sources of Income Subject to Normal Tax . 93
I. Domestic Corporations ................................... 82 1. COMPENSATION INCOME ..................... 93
II. Foreign Corporations ..................................... 82 (a) In General ......................................... 93
III. Joint Ventures and Consortium ................... 82 (b) Fringe Benefits .................................. 93
C. Partnerships.............................................. 82 (i) Definition and Concept.......................... 94
D. General Professional Partnerships ........... 82 (ii) Taxable and Non-Taxable Fringe
E. Estates and Trusts .................................... 82 Benefits ......................................................... 94
F. Co-ownerships .......................................... 83 (iii) De Minimis Benefits .......................... 95
CONFEDERATION FOR UNITY AND RECOGNITION v. CIR
INCOME TAX PROPER ............................... 83 .............................................................................................. 96
(iv) Minimum Wage Earners ................... 96
VIII. GENERAL PRINCIPLES OF INCOME SORIANO v. SECRETARY OF FINANCE ........................... 97
TAXATION.................................................... 83 2. BUSINESS INCOME ................................ 97
RR No. 179: “Most of the Time” ......................... 83 3. GAINS ....................................................... 97
BIR Ruling No. 517-2011: “Employment (a) Types of Gains ........................................ 97
Thereat”................................................................ 84 (i) Ordinary Gains......................................... 97
(ii) Capital Gains ........................................... 97
IX. INCOME .................................................. 84 (iii) Actual Gain.............................................. 98
(iv) Presumed Gain ....................................... 98
A. Definition, Income v. Capital .................... 84
CIR v. COURT OF APPEALS .............................................. 84 (v) Net Capital Gain ...................................... 98
ASSOCIATION OF NON-PROFIT CLUBS v. BIR................ 84 b. Computation of Capital Gain or Loss ........ 98
c. Tax Treatment ........................................... 98
B. Nature ......................................................... 85 (i) Ordinary Gain ........................................ 98
C. When Income is Taxable ........................... 85 (ii) Capital Gain ...................................... 99
MADRIGAL v. RAFFERTY ................................................... 85 (iii) Capital Gains Tax ............................. 99
FISHER v. TRINIDAD .......................................................... 86 1. Shares of Stocks of Domestic
CONWI v. COURT OF TAX APPEALS ................................ 86
Corporation ................................................... 99
CIR v. JULITA CAMPOS BENEDICTO ................................ 86
I. Existence of Income ........................................ 86 2. Real Property Located in the Philippines
II. Realization of Income ..................................... 87 99
SMI-ED v. CIR .................................................................... 101
1. Tests of Realization ................................... 87 3. Real Property Outside the Philippines 101
2. Actual v. Constructive Receipt .................. 87 4. Other Income ...................................... 101
LIMPAN INVESTMENT v. CIR ............................................. 87
III. Recognition of Income .................................. 87 4. INTERESTS ............................................ 101
DUMAGUETE CATHEDRAL CREDIT COOP v. CIR ......... 102
IV. Methods of Accounting ................................. 87 5. RENTS .................................................... 102
1. Cash Method ............................................. 88 6. ROYALTIES ............................................ 103
2. Accrual Method ......................................... 88 7. DIVIDENDS ............................................ 103
3. Installment Method .................................... 88 Taxability of Dividends ................................ 103
4. Deferred Payment Method ........................ 88 CIR v. CA, A. SORIANO CORPORATION ......................... 104
CIR v. MANNING ............................................................... 105 Improperly Accumulated Earnings Tax (Section

8. PRIZES AND WINNINGS ....................... 105 29) ....................................................................... 122
9. PENSIONS, ANNUITIES AND LIFE Exemptions from Tax on Corporations (Section
INSURANCE ............................................... 105 30) ....................................................................... 123
10. SHARE IN THE GENERAL CIR v. ST. LUKE’S MEDICAL CENTER ............................. 125
PROFESSIONAL PARTNERSHIPS INCOME CIR v. ST. LUKE’S MEDICAL CENTER ............................. 126
..................................................................... 105
DEDUCTIONS ............................................ 127
11. OTHERS ............................................... 106
Deductions, Defined.................................... 127
E. Exclusions ................................................ 106 Two Types of Expenditures ........................ 127
I. Life Insurance [Section 32(B)(1)] ............. 106 Concept and Nature of Deductions............. 127
II. Return of Premium .................................. 106 Distinctions .................................................. 127
III. Gifts, Bequests, Devises ........................ 106 Taxpayers Entitled to Claim Deductions ..... 127
IV. Compensation for Injuries or Sickness .. 106 Types of Deduction ..................................... 127
V. Income Exempt Under Treaty ................. 107 General Requisites for Deductibility............ 128
VI. Retirement Benefits, Pensions, Gratuities,
ITEMIZED DEDUCTIONS...............................128
etc. ............................................................... 107
IN RE: ATTY. ZALCITA ...................................................... 107 A. EXPENSES ................................................128
VII. Miscellaneous Items ............................. 108 1. Ordinary and Necessary Trade, Business or
PAGCOR v. BIR ................................................................. 108
BLOOMBERRY RESORTS v. BIR ..................................... 109
Professional Expenses Section 34(A)(1) .... 128
ESSO STANDARD EASTERN v. CIR ................................ 129
CIR v. GENERAL FOODS .................................................. 129
INCOME TAX RATES ................................ 110 H. TAMBUNTING PAWNSHOP v. CIR .............................. 130
INCOME TAX RATES ON INDIVIDUALS ..... 110 B. INTERESTS ...............................................131
Graduated Income Tax Rates for Individuals . 111
Married Individuals Section 24(A) [continued] C. TAXES .......................................................133
............................................................................ 111 Non-deductible Taxes ................................. 133
Minimum Wage Earners Section 24(A) Tax Benefit Rule ......................................... 133
[continued] ......................................................... 111 Limitations on NRAETB and RFC............... 133
Purely Self-Employed Individuals or Foreign Tax Credits .................................... 133
Professionals ..................................................... 112
D. LOSSES .....................................................134
Section 24(A) [continued]................................. 112 CHINA BANKING CORPORATION v. CA .......................... 138
Mixed Income Earners Section 24(A)
[continued] ......................................................... 113 E. BAD DEBTS ...............................................139
Non-Resident Aliens Engaged in Trade or
F. DEPRECIATION .........................................139
Business [NRAETB] .......................................... 115
Non-Resident Not Aliens Engaged in Trade or G. DEPLETION ...............................................140
Business [NRANETB] ....................................... 115
Special Aliens [Section 25 (C) (D) (E) .............. 116 H. CHARITABLE AND OTHER
CONTRIBUTIONS ..........................................141
GENERAL PROFESSIONAL PARTNERSHIPS
....................................................................... 116 I. RESEARCH AND DEVELOPMENT ............141
General Professional Partnerships (Section 26) J. PENSION TRUSTS ....................................142
............................................................................ 116
OPTIONAL STANDARD DEDUCTION ..........142
CORPORATIONS .......................................... 117
Domestic Corporations (Section 27) ............... 117 SPECIAL DEDUCTIONS ................................143
Normal Tax .................................................. 117 MANILA MEMORIAL PARK v. SECRETARY OF DSWD .. 143
Special Domestic Corporations ................... 117 ITEMS NOT DEDUCTIBLE ............................145

Passive Income and Capital Gains [Section
27(D)] .......................................................... 118 DETERMINATION OF AMOUNT AND
Minimum Corporate Income Tax (MCIT)..... 119 RECOGNITION OF GAIN OR LOSS..............146
Foreign Corporations ....................................... 119
INVENTORIES ................................................146
Resident Foreign Corporations (Section 28)
..................................................................... 119 INCOME FROM SOURCES WITHIN THE
SOUTH AFRICAN AIRWAYS v. CIR ................................. 120 PHILIPPINES ..................................................147
Nonresident Foreign Corporations (Section 28)
..................................................................... 122 ACCOUNTING PERIODS AND METHODS OF
ACCOUNTING ................................................147
RETURNS, PAYMENTS, AND

WITHHOLDING OF TAXES ....................... 149
INDIVIDUAL TAX RETURN .......................... 149
CORPORATION TAX RETURNS .................. 150
CIR v. PERF REALTY CORPORATION ............................ 151
UNITED INTERNATIONAL PICTURES v. CIR .................. 151
COMMISSIONER OF INTERNAL REVENUE v. TEAM
[PHILIPPINES] OPERATIONS CORPORATION ............... 152
WINEBRENNER & IÑIGO INSURANCE BROKERS, INC v.
COMMISSIONER OF INTERNAL REVENUE .................... 153
UNIVERSITY PHYSICIANS SERVICES INC.-
MANAGEMENT, INC. v. COMMISSIONER OF INTERNAL
REVENUE .......................................................................... 153
RHOMBUS ENERGY, INC. v. COMMISSIONER OF
INTERNAL REVENUE ....................................................... 154
PAYMENT OF TAXES ................................... 156

WITHHOLDING OF TAXES .......................... 157
METROBANK v. CIR .......................................................... 157
PHILIPPINE AIRLINES v. CIR ........................................... 157
CHAMBER OF REAL ESTATE AND BUILDERS'
ASSOCIATIONS, INC. v. CIR ............................................ 157
RIZAL COMMERCIAL BANKING CORPORATION v. CIR 158
CIR v. PNB ......................................................................... 159
WITHHOLDING ON WAGES ........................ 160

ESTATES AND TRUSTS .............................. 161
the government without infringing upon the theory of separation of

I. FUNDAMENTALS OF TAXATION powers.
A. Definition The exception, however, lies in the case of municipal corporations, to

which, said theory does not apply. Legislative powers may be delegated
Taxation is the power by which the sovereign raises revenue to defray to local governments in respect of matters of local concern. This is
the necessary expenses of the government (Aban). sanctioned by immemorial practice.
It is a process or an act imposing a charge by governmental authority on By necessary implication, the legislative power to create political
property, individuals, or transaction to raise money for public purposes corporations for purposes of local self-government carries with it the
(Black’s Law). power to confer on such local governmental agencies the power to tax.
Three Basic Concepts of Taxation Under the New Constitution, local governments are granted the
1. Taxation is a power – it is a power wielded by the State to autonomous authority to create their own sources of revenue and to levy
collect money so that they have to spend for public purposes; taxes. Section 5, Article XI provides
2. Taxation is a process – from time it is enforced, collected
and the whole process; Withal, it cannot be said that Section 2 of Republic Act No. 2264
3. Taxation is a means – for survival of a state. emanated from beyond the sphere of the legislative power to enact and
vest in local governments the power of local taxation.
Taxation is the inherent power of the State exercised through the
legislature, to impose burdens upon subjects and objects within its When it is said that the taxing power may be delegated to municipalities
jurisdiction, for the purpose of raising revenues and carry out legitimate and the like, it is meant that there may be delegated such measure of
objects of the government (Domondon). power to impose and collect taxes as the legislature may deem
expedient.
B. Nature and Characteristics Thus, municipalities may be permitted to tax subjects which for reasons
of public policy the State has not deemed wise to tax for more general
Nature of Taxation purposes.
1. It is an inherent power of the State
2. It is a legislative power in itself
3. It is subject to inherent and constitutional limitations Power of Taxation is Plenary
“The power to tax tends to be the most powerful among the inherent
I. Inherent powers of the state.” The power to tax is Plenary thus, all-encompassing
and it is unlimited.
Taxation is the inherent power of the sovereign. This is one of the three
inherent powers of the state (1) police power; (2) eminent domain; and Three of Objects of Taxation
(3) taxation. 1. Persons such as Community Tax
2. Property such as Real Property Tax
It is inherent because the moment that the state comes into being, the 3. Rights such as Excise Tax and Income Tax, what the
power to tax, along with the other inherent powers, will automatically government taxes is the privilege of earning income in case
of income tax.
come out with it. Thus:
[1] Constitution is not needed for the government to exercise the power Taxation practically covers everything. Government can tax certain
things and one cannot do anything about it. Theoretically the
of taxation; and
[2] Laws are not needed so that the government may exact measures in government can impose any kind of tax because the power to tax is all-
order for it to survive. encompassing, plenary and unlimited.
Taxes are burdens. This si the natural effect of this principle as it is the
PEPSI COLA v. MUNICIPALITY OF TANAUAN most power of all the inherent powers of the government, while it is not
GR L-31156, February 27, 1976 the most pervasive, it is the most powerful.
The power of taxation is an essential and inherent attribute of VALENTIN TIO v. VIDEOGRAM REGULATORY BOARD
sovereignty belonging as a matter of right to every independent
government without being expressly conferred by the people.
GR, L-75697, June 18, 1987
Facts: Pepsi-Cola filed complaint with preliminary injunction to declare Facts: Valentin Tio was an operator of Omi Enterprises who seeks to
Section 2 of RA 2264 or Local Autonomy Act as being unconstitutional assail the constitutionality of PD 1987 creating the board. Tio attacks
as an undue delegation of taxing authority as well as to declare constitutionality of such because the tax imposed upon is harsh,
Ordinances 23 and 27 of Tanauan Leyte null and void. confiscatory, oppressive and unlawful restraint of trade and in violation
of due process of Constitution.
Ordinance 23 levies and collects from soft drink procedures and
manufacturers a tax of 1/16 of centavo for every bottle of soft drink It has been provided by the law that in regulation of videotapes, those
corked. not locally made will be subject to a tax, but if is locally made it will be
tax free [subjected to sales tax?].
Ordinance 27 levies and collects on soft drinks produced and
manufactured within municipality a tax of one centavo on each gallon. Tio argues that the 30% tax imposed is harsh and oppressive.
Both ordinances are denominated as municipal production tax.
Issue: Is the contention of Tio tenable? – No.
Issue: Is Section 2 of RA 2264 an undue delegation of power,
confiscatory and oppressive? – No. Held: However, it is beyond serious question that a tax does not cease
to be valid merely because it regulates, discourages, or even definitely
The power of taxation is an essential and inherent attribute of deters the activities taxed.
sovereignty, belonging as a matter of right to every independent
government, without being expressly conferred by the people. The power to impose taxes is one so unlimited in force and so searching
in extent, that the courts scarcely venture to declare that it is subject to
It is a power that is purely legislative and which the central legislative any restrictions whatever, except such as rest in the discretion of the
body cannot delegate either to the executive or judicial department of authority which exercises it. In imposing a tax, the legislature acts upon
its constituents. This is, in general, a sufficient security against security against its abuse is to be found only in the responsibility of the
erroneous and oppressive taxation. legislature which imposes the tax on the constituency who is to pay it.
The tax imposed by the DECREE is not only a regulatory but also a So potent indeed is the power that it was once opined that "the power
revenue measure prompted by the realization that earnings of to tax involves the power to destroy."
videogram establishments of around P600 million per annum have not
been subjected to tax, thereby depriving the Government of an Petitioner claims that the assessed DST to date which amounts to ₱376
additional source of revenue. million is way beyond its net worth of ₱259 million. Respondent never
disputed these assertions.
It is an end-user tax, imposed on retailers for every videogram they
make available for public viewing. It is similar to the 30% amusement Given the realities on the ground, imposing the DST on petitioner
tax imposed or borne by the movie industry which the theater-owners would be highly oppressive. It is not the purpose of the government
pay to the government, but which is passed on to the entire cost of the to throttle private business. On the contrary, the government ought to
admission ticket, thus shifting the tax burden on the buying or the encourage private enterprise.
viewing public. It is a tax that is imposed uniformly on all videogram
operators. Petitioner, just like any concern organized for a lawful economic activity,
has a right to maintain a legitimate business. As aptly held in Roxas, et
The levy of the 30% tax is for a public purpose. It was imposed primarily al. v. CTA, et al.:
to answer the need for regulating the video industry, particularly because
of the rampant film piracy, the flagrant violation of intellectual property The power of taxation is sometimes called also the power to destroy.
rights, and the proliferation of pornographic video tapes. And while it was Therefore it should be exercised with caution to minimize injury to the
also an objective of the DECREE to protect the movie industry, the tax proprietary rights of a taxpayer.
remains a valid imposition.
It must be exercised fairly, equally and uniformly, lest the tax collector
kill the "hen that lays the golden egg."
The Power to Tax is the Power to Destroy
In the opinion of Justice Marshall in a US Case, the power to tax is a Legitimate enterprises enjoy the constitutional protection not to be
destructive power which can pierce through personal and property taxed out of existence. Incurring losses because of a tax imposition
right of the people. If the state should wiled it, it can destroy a particular may be an acceptable consequence but killing the business of an entity
business – all in the name of taxation. is another matter and should not be allowed.
The Power to Tax is NOT the Power to Destroy It is counter-productive and ultimately subversive of the nation’s thrust
This is according to Justice Holmes “the power to tax is not the power to towards a better economy which will ultimately benefit the majority of our
destroy while this court sits.” people.
Reconciliation: The first one refers to a valid tax law; the second one
refers to an invalid tax law.
CIR v. SM PRIME HOLDINGS AND FIRST ASIA REALTY
Implications of Power to Tax is Not Power to Destroy
Gr 183505, February 26, 2010
1. The courts may strike down an invalid tax law;
Facts: BIR sent assessment notice to SM Prime and First Asia for VAT
2. The power to tax is subject to limitations: [1] inherent deficiency on cinema ticket sales both filed a letter-protest but was
limitations and [2] constitutional limitations; denied by BIR. CTA ruled in favor of the private respondents.
3. The power to tax involves the power to destroy thus must be Issue: Whether the gross receipts derived by operators or proprietors of
exercised with great caution. cinema/theater houses from admission tickets are subject to VAT. – No.
Held:
PHIL. HEALTH CARE PROVIDERS v. CIR
GR 167330, September 18, 2009 (1) The legislature never intended operators or proprietors of
cinema/theater houses to be covered by VAT. – The legal history
Facts: Petitioner operates group practice health care delivery system to reveal the legislative intent not to impose VAT on persons already
take care of sick and disabled persons enrolled in the healthcare plan covered by the amusement tax. This holds true even in the case of
and to provide admin, legal and financial responsibilities for the cinema/theater operators taxed under the LGC of 1991 precisely
organization. because the VAT law was intended to replace the percentage tax on
certain services.
In 2000, CIR demanded deficiency documentary stamp tax [DST]
assessment. In 2002, CTA rendered a decision ordering petitioner to The mere fact that they are taxed by the local government unit and not
pay the imposed taxes. by the national government is immaterial. The Local Tax Code, in
transferring the power to tax gross receipts derived by cinema/theater
In 2008, the SC denied the PFR from CA decision and ruled that DST is operators or proprietor from admission tickets to the local government,
not a tax on the business transacted but an excise on the privilege for did not intend to treat cinema/theater houses as a separate class. No
the transaction of business. Thus, this MR. distinction must, therefore, be made between the places of amusement
taxed by the national government and those taxed by the local
It was only in MR that it reveals that it availed tax amnesty. Applying the government.
"principal object and purpose test," there is significant American case
law supporting the argument that a corporation (such as an HMO, (2) If held liable, it would be oppressive and unjust. - To hold
whether or not organized for profit), whose main object is to provide the otherwise would impose unreasonable burden cinema/theater houses
members of a group with health services, is not engaged in the operators or proprietors, who would be paying an additional 10% VAT
insurance business. on top of the 30% amusement tax imposed by Section 140 of the LGC
of 1991, or a total of 40% tax. Such imposition would result in injustice,
Issue: Is the imposition of DST oppressive. - Yes as persons taxed under the NIRC of 1997 would be in a better position
than those taxed under the LGC of 1991.
The SC granted the MR. The deficiency assessment is around P300M,
its assets were only 259M. We need not belabor that a literal application of a law must be rejected
if it will operate unjustly or lead to absurd results. Thus, we are
As a general rule, the power to tax is an incident of sovereignty and is convinced that the legislature never intended to include cinema/theater
unlimited in its range, acknowledging in its very nature no limits, so that operators or proprietors in the coverage of VAT.
documents requested by BIR. Similar Letters of Authority were issued

to examine other members of the Guild of Phil. Jewelers.
Lifeblood Theory
Taxes are the lifeblood of state, without which the government cannot In 1988, private respondents filed with the RTC Pasig for a declaratory
endure or survive. relief with writ of preliminary injunction or TRO against petitioners
praying that certain provisions of the NIRC and Tariff and Customs code
Manifestation of the Lifeblood Doctrine: be declared unconstitutional and void, and CIR be prevented to issue
orders of similar nature.
[1] No Injunction Principle
RTC ruled certain provisions of the two laws involving percent tariff and
GR: Collection of national taxes cannot be enjoined (Republic v . customs duty and excise tax on jewelry, pearls and precious stones as
Caguioa). inoperative and without force and effect. As well enjoining enforcement
of the same.
XPN: CTA Law. Upon compliance with certain requirement the CTA may The public respondent ruled that the laws in question are confiscatory
enjoin the collection of taxes. and oppressive adopting verbatim the reasons that were presented by
the private respondents in their position paper and ruled that the
government taxation and duties were the highest in the Asia-Pacific
REPUBLIC v. CAGUIOA region citing that in Hongkong, Thailand, Malaysia and Singapore
GR 168584, October 15, 2007 jewelries and precious metals are duty free.
Facts: Petitioners seek to annul the order that was issued by RTC Judge It went to rule due to these “constraints” the local manufacturer then has
Caguioa which granted private respondent’s application for issuance of no recourse but to the back door for smuggled good in order to compete
WPI which stayed implementation of RA 9334 (Increasing Excise Tax and ruled that the statutory provisions are confiscatory and destructive
Rates of Alcohol and Tobacco) and certain provisions of NIRC. of the proprietary right of the petitioners to engage in business in
Pursuant to RA 9334, SBMA issued a memorandum declaring that violation of Article III, Sec. 1 of the Constitution.
cigars, spirits, etc. into SBF and other free ports in PH shall be treated
as ordinary importations subject to all applicable taxes, duties, including The petitioner now contends that the public respondent has no
excise taxes. BIR then started to collect such tax and required the authority to pass judgment upon the taxation policy and there was no
department to pay corresponding duties and taxes. showing that the tax laws on jewelry are confiscatory and destructive of
private respondent’s proprietary rights.
Alleging that great and irreparable loss and injury would befall them as
a consequence of the imposition of taxes on alcohol and tobacco Issue: Whether the RTC decision was proper. – No.
products brought into the SBF, private respondents prayed for the
issuance of a writ of preliminary injunction and/or Temporary Restraining (1) Respondent judge encroached upon matters properly falling
Order (TRO) and preliminary mandatory injunction to enjoin the within the province of legislative functions. - While the judge did not
directives of herein petitioners. declare the laws unconstitutional he declared them to be inoperative and
see: Necessity Doctrine without force and effect but he wrongly declared the provisions of the
Injunction on Collection of Taxes law to be violative of Section 1, Article III.
The collection of taxes, which is the inevitable result of the suspension
of the implementation of the assailed Section 6 of R.A. No. 9334, is a There is no doubt in the Court’s mind, despite protestations to the
limitation upon the right of the government to its lifeline and contrary, that respondent judge encroached upon matters properly
wherewithal. falling within the province of legislative functions.
The power to tax emanates from necessity; without taxes, government In citing as basis for his decision unproven comparative data pertaining
cannot fulfill its mandate of promoting the general welfare and well-being to differences between tax rates of various Asian countries, and
of the people. That the enforcement of tax laws and the collection of concluding that the jewelry industry in the Philippines suffers as a result,
taxes are of paramount importance for the sustenance of government the respondent judge took it upon himself to supplant legislative policy
has been repeatedly observed. Taxes being the lifeblood of the regarding jewelry taxation. In advocating the abolition of local tax and
government that should be collected without unnecessary hindrance, duty on jewelry simply because other countries have adopted such
every precaution must be taken not to unduly suppress it. policies, the respondent judge overlooked the fact that such matters are
not for him to decide.
[2] Strict Construction of Tax Exemption Laws
There are reasons why jewelry, a non-essential item, is taxed as it is in
Question: When can the Regional Trial Court pronounce that certain this country, and these reasons, deliberate upon by our legislature, are
provisions of the Tariff and Customs Code and the National Internal beyond the reach of judicial questioning.
Revenue Code as unconstitutional?
What we see here is a debate on the WISDOM of the laws in question.
This is a matter on which the RTC is not competent to rule. As
CIR v. HON. SANTOS
Cooley observed: “Debatable questions are for the legislature to decide.
GR 119252, August 18, 1997 The courts do not sit to resolve the merits of conflicting issues”.
Facts: Guild of Philippine Jewelers engaged in the manufacture of In Angara vs. Electoral Commission, Justice Laurel made it clear that
jewelries and allied undertakings it also has other members. The “the judiciary does not pass upon question of wisdom, justice or
Regional Director of BIR issued order to BIR officers to conduct expediency of legislation.” And fittingly so, for in the exercise of judicial
surveillance, monitoring and inventory of all imported articles of Hans power, we are allowed only “to settle actual controversies involving
Brumann, Inc. (member) and that it be placed the same under preventive rights which are legally demandable and enforceable”, and may not
embargo. annul an act of the political departments simply because we feel it is
unwise or impractical.
Inventory was then made and also requested for presentation of proof
of necessary payment for excise tax and VAT on the said articles. BIR (2) It is to the legislature that they must resort to relief. - Regional
officers requested not to sell articles until proven that necessary taxes Trial Courts can only look into the validity of a provision, that is, whether
have been paid. Mr. Hans Brumann signed a receipt for articles seized or not it has been passed according to the procedures laid down by law,
and promised not to dispose the same without authority of CIR pending and thus cannot inquire as to the reasons for its existence. Granting
investigation. arguendo that the private respondents may have provided convincing
arguments why the jewelry industry in the Philippines should not be
During the investigation for examination of books of accounts and other taxed as it is, it is to the legislature that they must resort to for relief,
accounting records of Hans Brumann, it was not able to produce the since with the legislature primarily lies the discretion to determine the
nature (kind), object (purpose), extent (rate), coverage (subjects) and The legislature, by establishing a municipal corporation, does not divest
situs (place) of taxation. This Court cannot freely delve into those the State of any of its sovereignty; absolve itself from its right and duty
matters which, by constitutional fiat, rightly rest on legislative judgment. to administer the public affairs of the entire state; or divest itself of any
power over the inhabitants of the district which it possesses before the
charter was granted.
II. Legislative
The power of taxation is a legislative function. It is legislative in LGUs are able to legislate only by virtue of a valid delegation of
character. legislative power from the national legislature; they are mere agents
vested with what is called the power of subordinate legislation.
How are Tax Laws Passed?
Article VI, Section 24: All appropriation, revenue or tariff bills, bills Congress enacted the LGC as the implementing law for the delegation
authorizing increase of the public debt, bills of local application, and to the various LGUs of the State’s great powers, namely: the police
private bills, shall originate exclusively in the House of Representatives, power, the power of eminent domain, and the power of taxation.
but the Senate may propose or concur with amendment
The LGC was fashioned to delineate the specific parameters and
Power of taxation is a power purely legislative and which the central limitations to be complied with by each LGU in the exercise of these
legislative body cannot delegate either to the executive or judicial delegated powers with the view of making each LGU a fully functioning
department. As a general rule, power of taxation cannot be delegated. subdivision of the State subject to the constitutional and statutory
Exception is to the power of LGUs. limitations.
Scope of Legislative Power of Congress as to Taxation Specifically, with regard to the power of taxation, it is indubitably the
1. The Object of taxation; most effective instrument to raise needed revenues in financing and
2. The Nature and kind supporting myriad activities of the LGUs for the delivery of basic services
3. The Extent or the rate of the particular subject or object essential to the promotion of the general welfare and the enhancement
4. The Coverage of taxation; of peace, progress, and prosperity of the people.
5. The Place or situs of taxation
Indeed, LGUs have no inherent power to tax except to the extent
Principle of Non-Delegation that such power might be delegated to them either by the basic law
GR: The power of taxation cannot be delegated. or by the statute. "Under the now prevailing Constitution , where there
XPN: Those provided in Abakada v. Ermita is neither a grant nor a prohibition by statute, the tax power must be
1. Delegation to the LGU deemed to exist although Congress may provide statutory limitations
2. Delegation to the President and guidelines. The basic rationale for the current rule is to safeguard
3. Delegation to the Administrative agencies the viability and self-sufficiency of local government units by directly
4. Delegation to the People at Large granting them general and broad tax powers.
5. Emergency powers of the President
AS TO SOCIALIZED HOUSING TAX (SHT) - VALID
a. LGU The respondents emphasize that the SHT is pursuant to the social
justice principle under the Constitution and under RA 7279 asserting that
Basis: Article X, Section 5: Each LGU shall have the power to create it is not oppressive as well as it did not violate the equal protection
its own sources of revenues and to levy taxes, fees and charges subject clause.
to such guidelines and limitations as Congress may provide consistent
with the basic policy of local autonomy. Such taxes, fees and charges Ferrer, Jr. on the other hand claims that the SHT is tantamount to a
shall accrue exclusively to the local governments. penalty imposed on real property owner for failure of the Quezon City
Mayor and Council to perform their duty to secure and protect real
FERRER, JR. v. CITY MAYOR HERBERT BAUTISTA property owners from informal settlers, and now burdening them with
GR 210551, June 30, 2015 expenses to provide funds for housing. SHT is a not a charity, since it is
forced not voluntary.
Facts: In October 2001, Quezon City council enacted the Socialized
Housing Tax of Quezon City. This ordinance imposes a special Rule: Clearly, the SHT charged by the Quezon City Government is a tax
assessment equivalent of 0.5% on the assessed value of the land in which is within its power to impose. Aside from the specific authority
excess of P100K to be collected by the City Treasurer which is to accrue vested by Section 43 of the RA 7279 or Urban Development and
to Socialized Housing Programs of the City Government. Housing Act, cities are allowed to exercise such other powers and
discharge such other functions and responsibilities as are necessary,
In December 2013, it also enacted ordnance for collection of Garbage appropriate, or incidental to efficient and effective provision of the basic
Fee on residential properties. services and facilities which include, among others, programs and
projects for low-cost housing and other mass dwellings. The collections
In this case, Jose J. Ferrer, Jr. alleges that he is a registered co-owner made accrue to its socialized housing programs and projects.
of a residential property in Quezon. This petition was filed directly to the
Supreme Court, the petition seeks to declare as unconstitutional and The tax is not a pure exercise of taxing power or merely to raise revenue;
illegal the two ordinances: it is levied with a regulatory purpose. The levy is primarily in the exercise
of the police power for the general welfare of the entire city.
[1] Socialized Housing Tax; and
[2] Garbage Fee It is greatly imbued with public interest. Removing slum areas in Quezon
City is not only beneficial to the underprivileged and homeless
Issue: Are both ordinances unconstitutional? Only [2] constituents but advantageous to the real property owners as well. The
Power of Local Government to Tax situation will improve the value of their property investments, fully
LGUs must be reminded that they merely form part of the whole; that enjoying the same in view of an orderly, secure, and safe community,
policy of ensuring autonomy of local governments was never intended and will enhance the quality of life of the poor, making them law-abiding
by the drafters of the 1987 Constitution to create an imperium in imperio constituents and better consumers of business products.
and install an intra-sovereign political subdivision independent of a
single sovereign state. GARBAGE FEE - UNCONSTITUTIONAL
LGUs are statutorily sanctioned to impose and collect such reasonable
Municipal corporations are bodies politic and corporate, created not only fees and charges for services rendered. "Charges" refer to pecuniary
as local units of local self-government, but as governmental agencies of liability, as rents or fees against persons or property, while "Fee" means
the state. a charge fixed by law or ordinance for the regulation or inspection of a
business or activity The fee imposed for garbage collections under
Ordinance No. SP-2235 is a charge fixed for the regulation of an activity.
FILM DEVELOPMENT COUNCIL v. COLON HERITAGE

Certainly, as opposed to petitioner’s opinion, the garbage fee is not a
GR 203754, June 16, 2015
tax. Thus, it does not violate the rule on double taxation.
Here, Ferrer argues that there is already garbage fee under Sec. 47and Facts: In 1993, : In 1993, City of Cebu passed a Tax Ordinance which
that the purpose is inconsistent with the mandate of RA 9003 (Waste require proprietors, lessees or operators of theatres, cinemas, concert
Management Act). halls, circuses, boxing stadia, and other places of amusement, to pay an
amusement tax equivalent to thirty percent (30%) of the gross receipts
In this case, the alleged bases of Ordinance No. S-2235 in imposing the of admission fees to the Office of the City Treasurer of Cebu City.
garbage fee is the volume of waste currently generated by each person
in Quezon City, which purportedly stands at 0.66 kilogram per day, and A decade later, 2002, Congress passed RA 9167 creating the Film
the increasing trend of waste generation for the past three years. Development Council of the Philippines (FDCP) and provided for the tax
Respondents did not elaborate any further. treatment of certain graded films where films which obtained A or B
grading shall be entitled to an Amusement Tax Reward equivalent to
The figure presented does not reflect the specific types of wastes the tax imposed and collected on the grade films, if grade A then 100%
generated – whether residential, market, commercial, industrial, of the amusement tax collected on such film and if grade B then 65% in
construction/demolition, street waste, agricultural, agro-industrial, Metro Manila and other highly urbanized and independent component
institutional, etc. It is reasonable, therefore, for the Court to presume that cities. Section 14 also provided for amusement tax deduction and
such amount pertains to the totality of wastes, without any distinction, remittance requiring that tax that accrues to the LGUs shall be remitted
generated by Quezon City constituents. To reiterate, however, the to FDCP which it will reward to the producers of graded films.
authority of a municipality or city to impose fees extends only to those
related to the collection and transport of non-recyclable and special According to FDCP all cities required have complied except Cebu City.
wastes. Thus, OSG sent demand letter for unpaid amusement tax reward due to
the producers of Grade “A” or “B” films to cinema proprietors and
In the subject ordinance, the rates of the imposable fee depend on land operators in Cebu City.
or floor area and whether the payee is an occupant of a lot,
condominium, social housing project or apartment. Because of the persistent refusal of the proprietors and cinema
operators to remit the said amounts as FDCP demanded, on one hand,
For the purpose of garbage collection, there is, in fact, no substantial and Cebu City’s assertion of a claim on the amounts in question, the city
distinction between an occupant of a lot, on one hand, and an occupant finally filed on May 18, 2009 before the RTC, a petition for declaratory
of a unit in a condominium, socialized housing project or apartment, on relief with application for a writ of preliminary injunction, In said petition,
the other hand. Cebu City sought the declaration of Secs. 13 and 14 of RA 9167 as
invalid and unconstitutional. Colon Heritage also filed the similar case.
The rates being charged by the ordinance are unjust and
inequitable: a resident of a 200 sq. m. unit in a condominium or RTC declared Secs. 13 and 14 of RA 9167 as unconstitutional for being
socialized housing project has to pay twice the amount than a resident violative of Article X, Section 5 of Constitution. It ruled that the
of a lot similar in size; unlike unit occupants, all occupants of a lot with arrangement were amusement tax are transferred to FDCP is a
an area of 200 sq. m. and less have to pay a fixed rate of Php100.00; confiscatory measure where the national government extract money
and the same amount of garbage fee is imposed regardless of whether from LGU and transfers it to FDCP a private agency and award it to
the resident is from a condominium or from a socialized housing project. private persons – the film producers for having produced graded films.
Indeed, the classifications under Ordinance No. S-2235 are not It held that the provisions are contrary to the basic policy in local
germane to its declared purpose of "promoting shared responsibility with autonomy that all taxes, fees, and charges imposed by the LGUs shall
the residents to attack their common mindless attitude in over- accrue exclusively to them, as articulated in Article X, Sec. 5 of the 1987
consuming the present resources and in generating waste." Instead of Constitution. This edict, according to the court, is a limitation upon the
simplistically categorizing the payee into land or floor occupant of a rule-making power of Congress when it provides guidelines and
lot or unit of a condominium, socialized housing project or apartment, limitations on the local government unit’s (LGU’s) power of taxation.
respondent City Council should have considered factors that could truly Therefore, when Congress passed this “limitation,” it went beyond its
measure the amount of wastes generated and the appropriate fee for its legislative authority, rendering the questioned provisions
collection. unconstitutional.
Disposition: Issue: Whether Secs. 13 and 14 of RA 9167 are unconstitutional. –

[1] Socialized Housing Tax ordinance is valid. Yes.
[2] Garbage fee is unconstitutional and illegal.
(1) Local Fiscal Autonomy and the Constitutionally Delegated
Power to Tax. - The power of taxation, being an essential and inherent
[1] Merely Delegated Power attribute of sovereignty, belongs, as a matter of right, to every
If there is no Constitution, there would be no LGU which are considered independent government, and needs no express conferment by the
as municipal corporations. They are corporations with special purpose people before it can be exercised. It is purely legislative and, thus,
and been given the power to tax by virtue of the Constitution. cannot be delegated to the executive and judicial branches of
government without running afoul to the theory of separation of powers.
[2] A Direct Grant
Once it is stated in the constitution, there is no need for an enabling law It, however, can be delegated to municipal corporations, consistent with
for such to happen. Automatically, the LGU then has the power to tax the principle that legislative powers may be delegated to local
because of the Constitutional provision. The Congress may then set governments in respect of matters of local concern. The authority of
forth limits of the LGU’s power to tax and it is presents the LGC. provinces, cities, and municipalities to create their own sources of
revenue and to levy taxes, therefore, is not inherent and may be
Constant Rule: exercised only to the extent that such power might be delegated to them
LGUs do not have the inherent power to tax. either by the basic law or by statute.
Reconciliation: Accordingly, under the present Constitution, where there is neither a
It is a mere delegated power but nonetheless it is a direct grant by the grant nor a prohibition by statute, the tax power of municipal
Constitution for LGUs can tax without having to wait for an executing corporations must be deemed to exist although Congress may provide
law. The purpose of LGC was just to limit. But, the power of the LGU to statutory limitations and guidelines. The basic rationale for the current
tax is limited and not plenary. Thus: rule on local fiscal autonomy is the strengthening of LGUs and the
1. National Government – power to tax is plenary; safeguarding of their viability and self-sufficiency through a direct grant
2. Local Government – power to tax is limited. of general and broad tax powers. Nevertheless, the fundamental law did
not intend the delegation to be absolute and unconditional.
Indicative of the legislative intent to carry out the Constitutional mandate

The taxing powers of LGU as provided by LGC is that all revenue of vesting broad tax powers to local government units, the Local
collected pursuant to the provisions of the LGC shall inure solely to the Government Code has effectively withdrawn under Section 193 thereof,
benefit of, and be subject to the disposition by, the LGU levying the tax, tax exemptions or incentives theretofore enjoyed by certain entities. The
fee, charge or other imposition unless otherwise specifically provided by Code, in addition, contains a general repealing clause in its Section
the LGC––upon which the present controversy grew. 534.
(2) RA 9167 violates fiscal autonomy. - A reading of the challenged These policy considerations are consistent with the State policy to
provision reveals that the power to impose amusement taxes was NOT ensure autonomy to local governments and the objective of the LGC that
removed from the covered LGUs, RA 9167, however, the covered LGUs they enjoy genuine and meaningful local autonomy to enable them to
were deprived of the income which they will otherwise be collecting attain their fullest development as self-reliant communities and make
should they impose amusement taxes, or, in “Section 14 of [RA 9167] them effective partners in the attainment of national goals.
can be viewed as an express and real intention on the part of Congress
to remove from the LGU’s delegated taxing power, all revenues from the The power to tax is the most effective instrument to raise needed
amusement taxes on graded films which would otherwise accrue to revenues to finance and support myriad activities of local government
[them] pursuant to Section 140 of the [LGC].” In other words, per RA units for the delivery of basic service essential to the promotion of the
9167, covered LGUs still have the power to levy amusement taxes, general welfare and the enhancement of peace, progress, and
albeit at the end of the day, they will derive no revenue therefrom. prosperity of the people.
It is a basic precept that the inherent legislative powers of Congress, In the recent case of the City Government of San Pablo, etc., et al. vs.
broad as they may be, are limited and confined within the four walls of Hon. Bienvenido V. Reyes, et al., the Court has held that the phrase in
the Constitution. Accordingly, whenever the legislature exercises its lieu of all taxes "have to give way to the peremptory language of the
power to enact, amend, and repeal laws, it should do so without going Local Government Code specifically providing for the withdrawal of such
beyond the parameters wrought by the organic law. exemptions, privileges," and that upon the effectivity of the Local
Government Code all exemptions except only as provided therein can
In the case at bar, through the application and enforcement of Sec. 14 no longer be invoked by MERALCO to disclaim liability for the local tax.
of RA 9167, the income from the amusement taxes levied by the covered
LGUs did not and will under no circumstance accrue to them, not even
partially, despite being the taxing authority therefor. Congress,
therefore, clearly overstepped its plenary legislative power, the b. Delegation to the President
amendment being violative of the fundamental law’s guarantee on local Basis: Article VI, Section 28 (2): The Congress may, by law, authorize
autonomy. the President to fix within specified limits, and subject to such limitations
and restrictions as it may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts within the
framework of the national development program of the Government.
MANILA ELECTRIC v. PROVINCE OF LAGUNA
GR 131359, 366 Phil. 428, May 05, 1999 Delegated and Not Inherent
This is merely delegated (by law), and President does not have inherent
Facts: On various dates, certain municipalities issued resolutions power to tax. Power to tax is inherently legislative in nature while the
granting franchise to MERALCO for the supply of electric light, heat and President is executive.
power. In 1983, MERALCO was also granted a franchise to operate
electric light and power service in Laguna. Scope T-I-T-O
1. Tariff rates;
RA 7160 was enacted enjoining local government units to create their 2. Import and Export Quotas
own sources of revenue and to levy taxes, fees and charges, subject to 3. Tonnage and Wharfage Dues; and
the limitations expressed therein, consistent with the basic policy of local 4. Other duties or imposts within the framework of the national
autonomy. dev’t program of the governments.
Laguna issued Provincial Ordinance imposing a Franchise Tax. Thus on GARCIA v. EXECUTIVE SECRETARY
this, the provincial treasurer sent a demand letter to MERALCO for the
GR 101273, July 3, 1992
tax payment. MERALCO had paid under protest. A formal claim for
refund sa sent arguing that it had paid and had continued to pay the
National Government due to PD 551 and the imposition of such was in Facts: In 1990, the President issue EO 438 which imposed an additional
contravention of PD 551. The claim of refund was denied citing RA 7160. duty of five percent ad valorem on all imported articles and was
increased to 9% by EO 443. In 1991, EO 475 reduced duty to 5% ad
RTC dismissed complaint for refund citing that local government units valorem excluding crude oil and other oil products still at 9% ad valorem.
have delegated power to tax or revenue making powers. EO 478 also imposed a special duty at a price per liter or per barrel of
imported oil products.
Issue: Does the Province have such power? – Yes.
Congressman Enrique Garcia assails the validity of Eos 475 and 478 for
(1) Power of province to impose taxes. - The Local Government being violative of Section 24, Article VI (revenue bills should original from
Code of 1991 has incorporated and adopted, by and large the provisions the HOR, etc.). He contends that since the Constitution vests the
of the now repealed Local Tax Code, which had been in effect since 01 authority to enact revenue bills in Congress, the President may not
July 1973, promulgated into law by Presidential Decree No. 231[7] assume such power by issuing Executive Orders Nos. 475 and 478
pursuant to the then provisions of Section 2, Article XI, of the 1973 which are in the nature of revenue-generating measures.
Constitution. The 1991 Code explicitly authorizes provincial
governments, notwithstanding "any exemption granted by any law or Issues: Are the EOs unconstitutional? – No.
other special law, x x x (to) impose a tax on businesses enjoying a
franchise. Held: Under Section 24, Article VI of the Constitution, the enactment of
This is in recognition that under the now prevailing Constitution, where appropriation, revenue and tariff bills, like all other bills is, of course,
there is neither a grant nor a prohibition by statute, the tax power must within the province of the Legislative rather than the Executive
be deemed to exist although Congress may provide statutory limitations Department. It does not follow, however, that therefore Executive Orders
and guidelines. The basic rationale for the current rule is to safeguard Nos. 475 and 478, assuming they may be characterized as revenue
the viability and self-sufficiency of local government units by directly measures, are prohibited to the President, that they must be enacted
granting them general and broad tax powers. instead by the Congress of the Philippines.
Section 28(2) of Article VI of the Constitution provides for such. There is

thus explicit constitutional permission to Congress to authorize the
President "subject to such limitations and restrictions is [Congress] may rate upon factual matters outside of the control of the executive. No
impose" to fix "within specific limits" "tariff rates . . . and other duties or discretion would be exercised by the President.
imposts . . ." The relevant congressional statute is the Tariff and
Customs Code of the Philippines,[now Customs Modernization and Highlighting the absence of discretion is the fact that the word shall is
Tariff Act].This is such law that authorizes the President to adjust or used in the common proviso. The use of the word shall connotes a
remove the rates imposed. mandatory order. Thus, it is the ministerial duty of the President to
immediately impose the 12% rate upon the existence of any of the
Requirements for Valid Exercise of conditions specified by Congress.
President’s Power to Tax
1. There must be a law promulgated by the Congress This is a duty which cannot be evaded by the President. Inasmuch
authorizing the President to do impose such; as the law specifically uses the word shall, the exercise of discretion by
2. Exercise must be within the limits set forth in the law. the President does not come into play. It is a clear directive to impose
the 12% VAT rate when the specified conditions are present. The time
of taking into effect of the 12% VAT rate is based on the happening of a
SOUTHERN CROSS v. CEMENT MANUFACTURERS
[1] It is the Congress which authorizes the President to impose tariff certain specified contingency, or upon the ascertainment of certain facts
rates, import and export quotas, tonnage and wharfage dues, and other or conditions by a person or body other than the legislature itself.
duties or imposts within the framework of the national development
program of the government [Thus, this is a pure delegation to the c. Administrative Agencies
President].
This is also referred to subordinate legislation. In delegation to
[2] It is not enough for the Congress to allow the President to exercise
administrative bodies, the rules and regulations must conform to the law.
such power. Delegation must be embodied in a law.
It can neither expand nor constrict what is written in the red letter of the
law. In case of conflict between the law and the revenue regulation, the
[3] The authorization of the President may only be exercised within the
law prevails.
specified limits in the law and is further subject to limitations and
restrictions which Congress may impose. [He does not have a vested
In CIR v. Fortune Tobacco (2008), this discussed the
right over such power, and can be taken away].
issuance of RR 17-99 implementing the RA 8420’s shift from ad valorem
tax to specific tax.
Tests for Valid Delegation
In ABAKADA v. Ermita Ad Valorem Tax, Meaning
1. Completeness Test. - is complete in itself, setting forth Ad valorem means “according to value” which is a tax which is based
therein the policy to be executed, carried out, or implemented upon the value of the transaction or of property. Put simply, an ad
by the delegate; and valorem tax is a tax based on the assessed value of an item.
2. Sufficient Standards Test. – it fixes a standard — the limits
of which are sufficiently determinate and determinable — to Specific Tax, Meaning
which the delegate must conform in the performance of his As contrasted to ad valorem tax, these are taxes which have a fixed
functions. amount of tax added on market price of a good or service.
A sufficient standard is one which defines legislative policy, marks its
limits, maps out its boundaries and specifies the public agency to apply CIR v. FORTUNE TOBACCO CORPORATION
it. It indicates the circumstances under which the legislative command is GR 167274-75 July 21, 2008
to be effected. Both tests are intended to prevent a total transference of
legislative authority to the delegate, who is not allowed to step into the Facts: In this Fortune was granted a tax refund or tax credit for tax
shoes of the legislature and exercise a power essentially legislative. wrongly collected from its tobacco products, however, in this case, the
tax refund is being reclaimed by the CIR.
ABAKADA v. ERMITA
Fortune Tobacco manufactures certain cigarette brands with tax rates
GR 168056, September 1, 2005
of P1 (for Champion, Salem and Camel) or P5 (for Winston) prescribed
by RA 4280. Now, prior to Jan. 1, 1977 these brands were subject to ad
Facts: RA 9337 amending the NIRC was passed and was assailed for valorem tax based on the net rail price [Tax Code 1977]
being unconstitutional.
But on January 1, 1997, RA 8420 took effect from ad valorem tax system
Stand-by Powers of the President to the specific tax system subject these brands to a specific tax which
Under Section 108, it was provided that the VAT is equivalent to 10% of provides under Section 145:
gross receipts derived from sale or exchange of services provided that _________
the President, upon recommendation of the Secretary of Finance shall,
effective Jan. 1, 2006, raise the rate of VAT to 12% after the following [A] Cigars – P1 each
conditions: [B] Cigarettes packed by hands – P0.40 per pack
[C] Cigarettes packed by machines
[1] VAT Collection as a percentage of GDP of previous year exceeds Excluding Excise Tax and VAT:
two and four-fifths percent (2 4/5%); or [1] If net retail price – more than P10 – P12 per pack
[2] National government deficit as a percentage of GDP of previous year [2] If net retail price – above P6.50 to P10 – P8 per pack
exceeds one and one-half percent (1 ½%). [3] If net retail price – P5 to P6.50 – P5 per pack
[4] If net retail price – below P5 – P1 per pack
Petitioners here argue that the grant of the stand-by authority to the
President to increase the VAT rate is a virtual abdication by Congress Variants of existing brands of cigarettes which are introduced in the
of its exclusive power to tax because such delegation is not within the domestic market after the effectivity of R.A. No. 8240 shall be taxed
purview of Section 28 (2), Article VI of the Constitution. under the highest classification of any variant of that brand.
Issue: Is there delegation of power? – No. It is Ministerial. The excise tax from any brand of cigarettes within the next three years
from effectivity of RA 8240: Shall not be lower than the tax due on each
Held: The case before the Court is not a delegation of legislative power. brand on October 1, 1996.
It is simply a delegation of ascertainment of facts upon which
enforcement and administration of the increase rate under the law is Provided, however, than in cases the excise tax rate imposed in (1) (2)
contingent. The legislature has made the operation of the 12% rate (3) (4) will result in an increase in excise tax of more than 70%, for a
effective January 1, 2006, contingent upon a specified fact or brand of cigarette the increase shall take effect in two tranches:
condition. It leaves the entire operation or non-operation of the 12% 1.) 50% of the increase effective in 1997
2.) 100% of the increase on 1998 Limits of Rule Making Power of Admin Agencies.
As we have previously declared, rule-making power must be confined to
Duly registered or existing brands of cigarettes or new brands thereof details for regulating the mode or proceedings in order to carry into effect
packed by machine shall only be packed in twenties. the law as it has been enacted, and it cannot be extended to amend or
expand the statutory requirements or to embrace matters not covered
The rates of excise tax on cigars and cigarettes packed by by the statute. Administrative regulations must always be in harmony
machines shall be increased by twelve percent on January 1, 2000. with the provisions of law because any resulting discrepancy between
the two will always be resolved in favor of the basic law.
Net retail price – price at which cigarette is sold on retail in 20 major
supermarkets in Metro Manila excluding excise and VAT. [If outside MM, It bears repeating that Revenue memorandum-circulars are considered
then price at 5 major supermarkets in the region]. administrative rulings (in sense of more specific and less general
______________ interpretations of tax laws) which are issued from time to time by the
To implement the provisions for a 12% increase of excise tax by January Commissioner of Internal Revenue.
1, 2000, the Sec. of Finance upon recommendation of the CIR issued
RR 17-99 which provides for the increase on the applicable tax rates on It is widely accepted that the interpretation placed upon a statute by the
cigar and cigarettes. executive officers, whose duty is to enforce it, is entitled to great respect
by the courts. Nevertheless, such interpretation is not conclusive
RR 17-99, Section 1, last paragraph provides that: and will be ignored if judicially found to be erroneous. Thus, courts
That the new specific tax rate for any existing brand of cigars, will not countenance administrative issuances that override, instead of
cigarettes packed by machines, distilled spirits wines and fermented remaining consistent and in harmony with, the law they seek to apply
liquor shall not be lower than the excise tax that is actually paid prior to and implement.
January 1, 2000.
The foregoing leads us to conclude that Revenue Regulation No. 17-99
It was shown that specific tax were paid on all brands for the period is indeed indefensibly flawed. The Commissioner cannot seek refuge in
covering January 1-31, 2000 around P585M. his claim that the purpose behind the passage of the Tax Code is to
generate additional revenues for the government.
Fortune Tobacco filed for a claim for refund or tax credit for the allegedly
overpaid excise tax for the month of January around P35M. [Filed first Revenue generation has undoubtedly been a major consideration in the
with the Appellate Division, also sent a letter to the Legal Division]. There passage of the Tax Code. However, as borne by the legislative record,
was no action on their part. the shift from the ad valorem system to the specific tax system is likewise
meant to promote fair competition among the players in the industries
This prompted Fortune Tobacco to file with the SC to comply with the concerned, to ensure an equitable distribution of the tax burden and to
two-year period for filing a claim for refund. In their answer, the CIR simplify tax administration by classifying cigarettes, among others, into
stated that the last paragraph, Section 1 had the force and effect of law high, medium and low-priced based on their net retail price and
as a valid implementing regulation. accordingly graduating tax rates
In another case: With similar facts, here CIR assails the CTA grant of Rule: Administrative regulations must be in harmony with the provisions
claim for tax refund for illegally collected taxes. of the law. The revenue regulations must not expand, modify, alter or
amend basic law which is seeks to implement.
In this case, Fortune Tobacco argues that the decision of CA and CTA
on granting the tax refunds was proper because the CIR allegedly has
gone beyond his rule making power when he promulgated, enforced and SEC. OF FINANCE v. PHIL. TOBACCO INSTITUTE
implemented RR 17099 which effectively created a separate GR 210251, April 17, 2015
classification for cigarettes based on the excise tax actually being paid
prior to Jan. 1, 2000.u Facts: In Dec. 20, 2012, President Benigno Aquino signed RA 10351 or
the Sin Tax Reform Law which restructured the excise tax on alcohol
Issue: Was there a proper exercise of delegate rule-making power? – and tobacco products amending some provisions of the NIRC. It
No. increased the excise tax rate on cigars and cigarettes and allowed
cigarettes packed by machine to be packed in other packaging
Examination of the Revenue Regulation combinations of not more than 20.
RR 17-99 further added that the new specific tax rate for any existing
brand of cigars, etc, shall not be lower than the excise tax that is In Dec. 21, 2012, Sec. of Finance upon recommendation of CIR, issued
actually being paid prior to January 1, 2000. RR 17-2012 imposing an excise tax on individual cigarette pouches of
5’s and 10’s even if even if they are bundled or packed in packaging
Section 145 provides that during the transition period (three years after combinations not exceeding 20 cigarettes. CIR also issued RMC 90-
effectivity of Tax Code) the excise tax shall not be lower than the tax 2012 providing for classifications of cigarette brands according to tax
due on each brand on October 1, 1996. rates. PMFTC (member of Phil. Tobacco Institute), paid excise taxes
under protest without prejudice to its rights to question said issuances.
This qualification, however, is conspicuously absent as regards the
12% increase which is to be applied on cigars and cigarettes packed by In 2013, PTI filed petition seeking to have RR 17-2012 and MRC 90-
machine, among others, effective on 1 January 2000. 2012 null and void for violating Constitution and imposing tax rates not
authorized by RA 10351. RTC granted such and declared the issuances
Clearly and unmistakably, Section 145 mandates a new rate of excise null and void and without force and effect.
tax for cigarettes packed by machine due to the 12% increase effective
on 1 January 2000 without regard to whether the revenue collection Petitioners argue that RA 10351 imposes excise tax per pack
starting from this period may turn out to be lower than that collected prior regardless of the content or number of cigarettes. It asserted that the
to this date. two regulations merely clarify the tax rates but did not amend nor add
new taxes. The pack is the unit on which the tax rates are imposed and
By adding the qualification that the tax due after the 12% increase is understood to be unit that reaches the ultimate consumer.
becomes effective shall not be lower than the tax actually paid prior to 1
January 2000, Revenue Regulation No. 17-99 effectively imposes a PTI argues that RA 10351 allows manufacturer to adopt packaging
tax which is the higher amount between the ad valorem tax being combinations such as bundling of 4x5s and 2x10s and that it does not
paid at the end of the three (3)-year transition period and the specific tax exceed 20 sticks thus individual cigarette pouches of 5's and 10's
under paragraph C, sub-paragraph (1)-(4), as increased by 12%—a bundled together into a single packaging of not more than 20 sticks are
situation not supported by the plain wording of Section 145 of the Tax considered as one pack and should be subjected to excise tax only
Code once. Otherwise, a cigarette pouch of 5's, for example, will be subjected
to an excise tax of P48.00 since the BIR will impose an individual excise
tax of P12.00 upon each and every pouch of 5's. While the same brand d. Delegation to the People at Large
in a pack of 20's will only be subjected to an excise tax rate of P12.00.
This is through Initiative and Referendum but however, it is actually
As a result, the affected cigarette brands that should have been taxed
impossible for people to exercise tax powers because of the possible
only either P12.00 or P25.00 per pack are subjected to a different and
difficulty that surrounds such.
higher excise tax rate not provided in RA 10351
Issue: Whether the issuances imposing excise tax to packaging III. Tax is a Burden
combinations of 5’s and 10’s, etc. not exceeding 20 cigarette sticks
packed by machine are unconstitutional. The subject of taxation is persons, property and rights. It is all
encompassing. Tax is a forced contribution. Aban defines it as a civil
Held: The issuances are unconstitutional. liability of citizen that may give rise to criminal prosecution if not
performed. One cannot refuse to pay tax because he does not derive
(1) “Per Pack”- Section 145(C) of the NIRC is clear that the excise tax any benefits from it, otherwise there will be sanctions.
on cigarettes packed by machine is imposed per pack. "Per pack" was
not given a clear definition by the NIRC. However, a "pack" would Tax is the price we pay for a civilized society, there is no need that one
normally refer to a number of individual components packaged as a unit. must see an actual or direct consideration. It is enough that the money
Under the same provision, cigarette manufacturers are permitted to made for taxation is for profit and for cost and for the benefit of the public
bundle cigarettes packed by machine in the maximum number of 20 in general. Tax is a burden to be used as a power to destroy and at the
sticks and aside from 20's, the law also allows packaging combinations same time it can also be used as a power to build.
of not more than 20's - it can be 4 pouches of 5 cigarette sticks in a pack
(4 x 5's), 2 pouches of 10 cigarette sticks in a pack (2 x 10's), etc.
IV. Jurisdiction
(2) BIR went beyond the express provisions of RA 10351. - The basis
of RR 17-2012 is RA 10351. RA 10351, in amending Section 145(C) of Jurisdiction in taxation usually refers to territory.
the NIRC provided that "duly registered cigarettes packed by machine
shall only be packed in twenties and other packaging combinations of 1. Territoriality
not more than twenty." However, nowhere is it mentioned that the other
“Taxation is jurisdictional in nature” This means the power of taxation
packaging combinations of not more than 20 will be imposed individual
operates only within the territorial limits of the taxing authority.
tax rates based on its different packages of 5's, 10's, etc. In such a case,
a cigarette pack of 20's will only be subjected to an excise tax rate of
GR: Once object or subject of taxation is outside PH, it is no longer
P12.00 per pack as opposed to packaging combinations of 5's or 10's
subject to PH Taxation.
which will be subjected to a higher excise tax rate of P24.00 for 10's and
P48.00 for 5's.
XPN: If there is a privity of relationship between the taxing authority
and the tax subject or object.
The lawmakers intended to impose the excise tax on every pack of
cigarettes that come in 20 sticks. Individual pouches or packaging
Privity of Relationship
combinations of 5's and 10's for retail purposes are allowed and will be
There is such privity (so as to be covered by tax jurisdiction) if the taxing
subjected to the same excise tax rate as long as they are bundled
authority can afford protection to the tax subject or object.
together by not more than 20 sticks. Thus, by issuing Section 11 of RR
17-2012 and Annex "D-1" on Cigarettes Packed by Machine of RMC 90-
Three Factors to Determine if
2012, the BIR went beyond the express provisions of RA 10351. C-R-S
Government Can Afford Protection
1. Citizenship of the tax subject or object
(3) Administrative regulations should not amend but must remain
2. Residence or location of the tax subject or object; and
consistent with the law they intend to implement. - It is an
3. Source of the tax subject or object
elementary rule in administrative law that administrative rules and
regulations enacted by administrative bodies to implement the law which
they are entrusted to enforce have the force of law and are entitled to 2. Situs of Taxation
great weight and respect. It means the place of taxation. The situs of taxation are the general
rules that states or taxing authorities follow when it comes to taxation
However, these implementations of the law must not override, supplant, schemes and most of them, if not all, are applicable to the Philippine
or modify the law but must remain consistent with the law they intend to taxation setting.
implement. It is only Congress which has the power to repeal or amend
the law. In this case, Section 11 of RR 17-2012 and Annex "D-1" on The situs of taxation is the place or authority that has the right to impose
Cigarettes Packed by Machine of RMC 90-2012 clearly contravened the and collect taxes. It has bee said that tax laws basically operate only
provisions of RA 10351. It is a well-settled principle that a revenue within the territory of tax authority. This is so because it is only within the
regulation cannot amend the law it seeks to implement. boundaries of the tax authority where it could provide protection to the
taxpayer.
In the present case, a reading of Section 11 of RR 17-2012 and Annex
"D-1" on Cigarettes Packed by Machine of RMC 90-2012 reveals that Determination of Situs of Taxation
they are not simply regulations to implement RA 10351. They are In general, the situs of taxation is determine by the place that gives
amendatory provisions which require cigarette manufacturers to be protection which has the right to levy and collect taxes. Specifically the
liable to pay for more tax than the law, RA 10351, allows. determinants are the following:
The BIR, in issuing these revenue regulations, created an additional tax [1] The benefits-protection theory or symbiotic relationship. The
liability for packaging combinations smaller than 20 cigarette sticks. In reciprocal relation of protection and support between the taxpayer and
so doing, the BIR amended the law, an act beyond the power of the the state. The state gives protection and in order to continue giving
BIR to do. In sum, we agree with the ruling of the RTC that Section 11 protection, it must be supported in the form of taxes.
of RR 17-2012 and Annex "D-1" on Cigarettes Packed by Machine of
RMC 90-2012 are null and void. [2] The jurisdiction-state or political unit that gives protection has the
right to demand support.
Excise tax on cigarettes packed by machine shall be imposed on
packaging combination of 20 cigarette sticks as a whole and not to Technically, tax laws are jurisdictional or operate only within the
individual packaging combinations or pouches of 5's, 10's, etc. territorial jurisdiction of a state because that is where it could give
protection. This is subject to the concept of mobilia sequntur personam.
Factors to Determine Whether Tax Subject/Object

Is Subject to Philippine Taxation
1. Kind of tax being imposed or levied; (1) Non-resident alien’s personal services, where taxable. –
2. Place where the thing or property is located; Pursuant to Sec. 25 of the NIRC, non-resident aliens, whether or not
3. Residence of the person being taxed; engaged in trade or business, are subject to Philippine income taxation
4. Citizenship of the person being taxed; and on their income received from all sources within the Philippines.
5. Place where the excise or privilege or business or occupation
is being performed (place of exercise) Thus, the keyword in determining the taxability of non-resident aliens is
the income's "source." In construing the meaning of "source" in Section
There is no need for all factors to go together. It is enough that one or 25 of the NIRC, resort must be had on the origin of the provision.
some factors exist in order that the tax subject or object may be covered The important factor therefore which determines the source of income
by Philippine Taxation. of personal services is not the residence of the payor, or the place where
the contract for service is entered into, or the place of payment, but the
DIFFERENT TYPES OF TAX SUBJECTS place where the services were actually rendered.
The Court reiterates the rule that "source of income" relates to the
a. Income Tax property, activity or service that produced the income. With respect to
rendition of labor or personal service, as in the instant case, it is the
Three Considerations place where the labor or service was performed that determines the
1. Citizenship of the taxpayer; source of the income. There is therefore no merit in petitioner's
2. Residence or Location of the taxpayer; interpretation which equates source of income in labor or personal
3. Source of the income service with the residence of the payor or the place of payment of the
income.
(1) Davao resident earning income in Davao via compensation income
– covered by PH taxation; (2) Not capacity, but sufficiency of evidence to prove services were
performed in Germany. - The decisive factual consideration here is not
(2) Davao resident earning income abroad. Income abroad taxable in the capacity in which respondent received the income, but the
the Philippines. – still covered because the Gov’t can afford protection sufficiency of evidence to prove that the services she rendered were
being a PH Citizen; performed in Germany.
(3) Non-resident foreigner earning income in the PH, her income made Rule of Construction:
in the PH is taxable in the PH. – still covered because the source of her tax refunds are in the nature of tax exemptions and are to be construed
income is in the Philippines and the government can still afford strictissimi juris against the taxpayer. To those therefore, who claim a
protection because she earns and contributes to the community. refund rest the burden of proving that the transaction subjected to tax is
actually exempt from taxation.
(4) Filipino residing abroad having properties in the Philippines – it is still
subject of PH taxation since the source of income is in the Philippines. What she presented as evidence to prove activities abroad were copies
of documents she allegedly faxed to JUBANITEX and bearing
Tax on Persons instructions as to the fabrics to be used and samples of sale order which
A state may impose taxes on a person subject to its sovereignty. In the do not show that she was in Germany when she sent such
PH, we have community tax or cedula, thus community tax is paid in the instructions/orders.
community for such.
As to whether these instructions/orders gave rise to consummated sales
CIR v. JULIANE BAIER-NICKEL and whether these sales were truly concluded in Germany, respondent
presented no such evidence. Neither did she establish reasonable
GR 153793, 531 Phil. 480, August 29, 2006
connection between the orders/instructions faxed and the reported
monthly sales purported to have transpired in Germany.
Facts: Juliane Baier-Nickel who is a non-resident German citizen, is the
President of JUBANITEX a domestic corporation engaged in textile In sum, we find that the faxed documents presented by respondent did
products. Baier-Nickel was appointed as commission agent and will not constitute substantial evidence, or that relevant evidence that a
receive 10% sales commission on all sales concluded and collected reasonable mind might accept as adequate to support the conclusion,
through her efforts. that it was in Germany where she performed the income producing
service which gave rise to the reported monthly sales in the months of
In 1995, Baier-Nickel received P1.7M as commission from which March and May to September of 1995. She thus failed to discharge the
JUBANITEX withheld corresponding 10% withholding tax of P170K burden of proving that her income was from sources outside the
and remitted it to BIR. Philippines and exempt from the application of our income tax law.
Hence, the claim for tax refund should be denied.
In 1998, Baier-Nickel filed a claim to refund the amount of P170K alleged
to have been mistakenly withheld and remitted to BIR and contended
that her commission income is not taxable in the Philippines because b. Property Tax
the same was a compensation for her services rendered in Germany
Under Property, there are two kinds of property, (1) real properties and
and therefore considered as income from sources outside the
(2) personal properties.
Philippines.
[1] Real Properties – the situs is where the property is located. In the
She then went to CTA via PFR contending that BIR did not take action
PH, the real property tax is governed by the LGC.
on her claim for refund. CTA denied her claim and held that the
commissions were actually her remuneration in the performance of her
Thus if A has a land in Davao, real property taxes are imposed or levied
duties as president and not as sales agent thus the income is taxable
by LGU-Davao. Properties outside the jurisdiction of the city cannot be
in PH because JUBANITEX is a domestic corporation.
levied by them pursuant to the territoriality principle.
CA reversed CTA holding that the commissions received were as sales
[2] Personal Property
agent and since the source of income means that activity or service that
produce such, it is not taxable for the marketing activities was performed
(a) Tangible Personal Property
in Germany.
Where the property is located (prevailing rule) though some suggest it
follows the owner.
Issue: Whether Baier-Nickel’s sales commission income is taxable in
the Philippines.
(b) Intangible Personal Property
Held: Yes, she failed to discharge burden of proof.
GR: Mobilia sequntur personam – the thing follows its owner. This is (1) Test of Taxability. – The source of an income is the property, activity
because the properties have no form and essentially rights which follow or service that produced the income. For the source of income to be
the owner. considered as coming from the Philippines, it is sufficient that the income
is derived from activity within the Philippines.
XPN: When the law provides for the situs. Like stocks of a corporation
but must determine whether they are in PH or it is outside to subject to The absence of flight operations to and from the Philippines is not
PH Taxation. determinative of the source of income or the situs of income taxation.
The test of taxability is the 'source'; and the source of an income is that
Example: A died outside PH but has PH stocks, as a rule mobilia activity which produced the income.
sequntur personam applies but when rights are exercisable in the PH, In CIR v. Air India, the court ruled that revenue derived from the sales
being a stock from PH corporation, the owner will exercise rights in PH of airplane tickets through agent PAL is considered as taxable income
jurisdiction. and that in CIR v. American Airlines, it was likewise declared that for
the source of income to be considered as coming from the Philippines,
c. Excise Tax it is sufficient that the income is derived from activities within this country
Also known as Privilege Taxes, this is the tax on enjoyment of privilege. regardless of the absence of flight operations within Philippine territory.
According to Domondon, the current definition of an excise tax is that
levied on a specific article rather than one upon performance of activity. (2) JAL is a Resident Foreign Corporation. – A resident foreign
Since 1986, excise taxes refer exclusively to specific or ad valorem corporation under the 1977 Tax Code applies to foreign corporation
taxes, imposed by NIRC. engaged in trade or business within PH or having an office or place of
Despite above, the concept of privilege tax still finds application for were business therein.
the transaction is performed. Thus, the gauge for the taxability does not
depend on the location of the office but attaches upon the place where There being no dispute that JAL constituted PAL as local agent to sell
the respective transaction is perfected and consummated (Allied its airline tickets, there can be no conclusion other than that JAL is a
Threated v. City Mayor of Manila, 77 Phil. 496). resident foreign corporation, doing business in the Philippines. Indeed,
the sale of tickets is the very lifeblood of the airline business, the
The situs is where the act is performed, where occupation is engaged in generation of sales being the paramount objective. Thus, JAL is
or where the business is done. ordered to pay the deficiency taxes inclusive of interest and charges.
(a) Donor’s Tax – the following are to be considered: ILOILO BOTTLERS, INC v. CITY OF ILOILO
1. Residency of donor
GR 52019, 247 Phil. 575, August 19, 1988
2. Citizenship of donor, and sometimes
3. Location of the property
Facts: Petitioner filed a complaint seeking to recover P3.3K that
Note by Domondon: It is to be noted that the residence and the constituted payments of municipal license taxes under City of Iloilo Tax
nationality of the donee is not taken into consideration for determining Ordinance No. 5 which it paid under protest.
whether the donation is subject to donor’s tax.
Petitioner engaged in the business of bottling soft-drinks and selling the
(b) Sales Tax – the situs is the place where the contract is same to its customers, with a bottling plant in the Municipality of Pavia
consummated. outside jurisdiction of respondent. It was stated that it once operated in
Iloilo City (which it paid taxes when it was there) but it transferred later
in 1968 to Pavia.
d. Business Tax
The situs of business and occupation is the place where the business In 1969, the City demanded from the petitioner the payment of municipal
and occupation are being conducted. The reason being that this is the license tax. Petitioner argued that its bottling plant is outside Iloilo City
place which gives protection to the business or occupation. and that it sells its own product to customers directly and cannot be
considered as a distributor.
CIR v. JAPAN AIRLINES
It was shown that Iloilo bottlers does not maintain any store in Iloilo City
GR 60714, 279 Phil. 499, October 04, 1991 but by means of fleet of delivery trucks from its plant in Pavia and
directly to its customers in the Province of Iloilo, as well as Iloilo City.
Facts: Japan Airlines (JAL) did not have planes that lifted or landed CFI ruled in favor of petitioner declaring it not liable under the tax
passengers nor cargo in the PH since 1959 to 1963 since it was not ordinance ordering the City to pay it the amount.
granted by Civil Aeronautics Board a Certificate of Public Convenience
and Necessity to operate in PH. Arguments:
However, since July 1957, JAL has office in Filipinas Hotel in Manila. [1] It contends that since it is not engaged in the independent business
Such hotel did not sell tickets but was just for public relations and to of distributing softdrinks, but that its activity of selling is merely an
hand out brochures, literature and info with Japan as tourist spot and incident to, or is a necessary consequence of its main or principal
services enjoyed in JAL planes. business of bottling, then it is NOT liable under the city tax ordinance.
In July 1957, JAL constituted PAL as its general sales agent I the PH, [2] It claims that only manufacturers or bottlers having their plants inside
thus PAL sold in behalf of JAL plane tickets and the reservation for cargo the territorial jurisdiction of the city are covered by the ordinance.
spaces used by passengers of JAL.
Issue: Whether Iloilo Bottlers which had its bottling plant in Pavia,
In 1972, JAL received deficiency income tax assessment notice and Iloilo, but which sold softdrinks in Iloilo City is liable under Iloilo City
demand letter from CIR for around P2M w/ surcharge and int. from 1953 Tax Ordinance No. 5 which imposes municipal license tax on
until 1963. distributors of softdrinks.
JAL protested said assessment alleging that as a non-resident foreign Held: Yes it had an independent selling or distributing business.
corporation it was taxable only on income from PH sources and there
being no such income during the period, it was not liable for any (1) Tax Ordinance Coverage. – The ordinance imposes tax on persons,
deficiency income tax liabilities. But this was denied by the CIR. CTA firms and corporation engaged in [1] distribution; [2] manufacture; and
reversed CIR. [3] bottling of softdrinks within the territory of City of Iloilo. Thus the
second argument lacks merit.
Issue: Does JAL have taxable source of income in PH?
(2) Iloilo Bottlers falls under the Second Category and thus it was
Held: Yes, it has source of income in the PH. engaged in the separate business of selling or distributing drinks
independently from bottling them.
The right to manufacture implies the right to sell/distribute the Although it maintained a general sales agent in the Philippines, Warner
manufactured products. Hence, for tax purposes, a manufacturer does Barnes and later Qantas Airways responsible for selling BOAC tickets
not necessarily become engaged in the separate business of selling covering passengers and cargoes.
simply because it sells the products it manufactures. In certain cases,
however, a manufacturer may also be considered as engaged in the CIR assessed BOAC for deficiency income taxes which it paid under
separate business of selling its products. To determine whether an entity protest (1959-1967). In 1970, BOAC claimed for a refund which was
engaged in the principal business of manufacturing, is likewise engaged denied by CIR.
in the separate business of selling, its marketing system or sales
operations must be looked into. In second case, CIR 1971, assessed deficiency income taxes, interests
ad penalty of 1968-1969 to 1970-1971. CIR still denied the request for
Two Marketing Systems refund for the first case and re-issued the second case deficiency.
[1] Manufacturer enters into sales transactions and invoices the sales at Thus, the two cases joined, BOAC seeks to be absolved of the liability
its main office where purchase orders are received and approved before for deficiency income tax for 1969 to 1971.
delivery orders are sent to the company's warehouses, where in turn
actual deliveries made. No warehouse sales are made nor are separate CTA reversed CIR and held that proceeds from the sales of BOAC
stores maintained where products may be sold independently from the passage tickets by the sales agents do not constitute income from PH
main office. The warehouses only serve as storage sites and delivery since no service of carriage of passengers or freight was performed by
points of the products earlier sold at the main office. BOAC in PH.
[2] Sales transactions are entered into and perfected at stores or Issue: Is the income of BOAC taxable? – Yes.
warehouses maintained by the company. Anyone who desires to (1) BOAC is a resident foreign corporation engaged in business in
purchase the product may go to the store or warehouse and there the PH. – It is clear that during the periods covered by the assessments,
purchase the merchandise. The stores and warehouses serve as selling it maintained a general sales agent engaged in selling and issuing
centers. tickets among others, those activities were in exercise of the functions
which are normally incident to, and are in progressive pursuit of, the
Entities operating under the first system are NOT considered engaged purpose and object of its organization as an international air carrier.
in the separate business of selling or dealing in their products,
independent of their manufacturing business. Entities operating under In fact, the regular sale of tickets, its main activity, is the very lifeblood
the second system are considered engaged in the separate business of of the airline business, the generation of sales being the paramount
selling. objective.
In the case at bar, the company distributed its softdrinks by means of a There should be no doubt then that BOAC was "engaged in" business
fleet of delivery trucks which went directly to customers in the different in the Philippines through a local agent during the period covered by
places in Iloilo province. Sales transactions with customers were the assessments.
entered into and sales were perfected and consummated by route
salesmen. Truck sales were made independently of transactions in Accordingly, it is a resident foreign corporation subject to tax upon its
the main office. The delivery trucks were not used solely for the total net income received in the preceding taxable year from all sources
purpose of delivering softdrinks previously sold at Pavia. within the Philippines.
They served as selling units. They were what were called, until (2) BOAC’s “source” of income is in PH. - The source of an income
recently, "rolling stores". The delivery trucks were therefore much the is the property, activity or service that produced the income. For the
same as the stores and warehouses under the second marketing source of income to be considered as coming from the Philippines, it is
system. Iloilo Bottlers, Inc. thus falls under the second category above. sufficient that the income is derived from activity within the Philippines.
That is, the corporation was engaged in the separate business of selling
or distributing softdrinks, independently of its business of bottling them. In BOAC's case, the sale of tickets in the Philippines is the activity that
produces the income. The tickets exchanged hands here and payments
(3) Situs of Excise Tax. - The tax imposed under Ordinance No. 5 is for fares were also made here in Philippine currency.
an excise tax. It is a tax on the privilege of distributing, manufacturing
or bottling softdrinks. Being an excise tax, it can be levied by the taxing The situs of the source of payments is the Philippines. The flow of
authority only when the acts, privileges or businesses are done or wealth proceeded from, and occurred within, Philippine territory,
performed within the jurisdiction of said authority Specifically, the situs enjoying the protection accorded by the Philippine government. In
of the act of distributing, bottling or manufacturing softdrinks must be consideration of such protection, the flow of wealth should share the
within city limits, before an entity engaged in any of the activities may be burden of supporting the government.
taxed in Iloilo City.
The absence of flight operations to and from the Philippines is not
As stated above, sales were made by Iloilo Bottlers, Inc. in Iloilo City. determinative of the source of income or the situs of income taxation.
Thus, We have no option but to declare the company liable under the
tax ordinance. Admittedly, BOAC was an off-line international airline at the time
pertinent to this case. The test of taxability is the "source", and the
source of an income is that activity which produced the income.
CIR v. BRITISH OVERSEAS AIRWAYS CORP.
GR 65773-74, 233 Phil. 406, April 30, 1987 Unquestionably, the passage documentations in these cases were sold
Termed as the “BOAC Doctrine” in the Philippines and the revenue therefrom was derived from a
business activity regularly pursued within the Philippines.
Facts: BOAC is 100% British Government owned corporation under UK
Laws engaged in international airline business. It operates air transport And even if the BOAC tickets sold covered the "transport of passengers
service and sell tickets over the routes of the other airline members. and cargo to and from foreign cities", it cannot alter the fact that income
from the sale of tickets was derived from the Philippines. The word
During the periods covered by the disputed assessments, it is admitted "source" conveys one essential idea, that of origin, and the origin of the
that BOAC had no landing rights for traffic purposes in the Philippines, income herein is the Philippines.
and was not granted a Certificate of public convenience and necessity
to operate in the Philippines by the Civil Aeronautics Board (CAB), Thus CTA decision set aside and BOAC ordered to pay the deficiency
except for a nine-month period, partly in 1961 and partly in 1962, when income tax.
it was granted a temporary landing permit by the CAB.
V. Purpose of Taxation previously enjoyed by the NPC under its Charter. We explained the
rationale for this provision, thus:
1. Primary Purpose In recent years, the increasing social challenges of the times expanded
The primary purpose of taxation is raising income or generate revenue the scope of state activity, and taxation has become a tool to realize
for the funds to be used by the government in order that it may conduct social justice and the equitable distribution of wealth, economic
its operations. It is the lifeblood of the government without which it progress and the protection of local industries as well as public
cannot operate. welfare and similar objectives.
2. Secondary Purposes Taxation assumes even greater significance with the ratification of the
1987 Constitution. Thenceforth, the power to tax is no longer vested
[1] Social Justice/Compensatory (e.g. Senior Citizens) exclusively on Congress; local legislative bodies are now given direct
[2] Regulatory/Sumptuary (e.g. excise tax on liquors) authority to levy taxes, fees and other charges pursuant to Article X,
[3] Implement the Eminent Domain powers of government section 5 of the 1987 Constitution,
Heart of Taxation: Public Purpose
This paradigm shift results from the realization that genuine
Note: The power of taxation can also be used for police power such as development can be achieved only by strengthening local autonomy and
the regulatory effect of excise tax. It is also used as a tool to promote promoting decentralization of governance. For a long time, the country’s
social justice. highly centralized government structure has bred a culture of
dependence among local government leaders upon the national
Social Justice Provision in Taxation leadership. It has also "dampened the spirit of initiative, innovation and
An example is here is the discount given to the Senior Citizens. But the imaginative resilience in matters of local development on the part of local
social justice provision is applicable not only to the people in general but government leaders. The only way to shatter this culture of dependence
also the government. This is when the power to tax was delegated to the is to give the LGUs a wider role in the delivery of basic services, and
municipal corporations. confer them sufficient powers to generate their own sources for the
purpose. To achieve this goal, x x x the 1987 Constitution mandates
How may the power to tax be utilized to carry out the social justice Congress to enact a local government code that will, consistent with the
program of our government? basic policy of local autonomy, set the guidelines and limitations to this
grant of taxing powers x x x."
BATANGAS POWER CO v. BATANGAS AND NPC
GR 152675, April 28, 2004 To recall, prior to the enactment of the x x x Local Government Code x
x x, various measures have been enacted to promote local autonomy. x
x x Despite these initiatives, however, the shackles of dependence on
Facts: Due to the power problem of PH during the early 1990s, NPC
the national government remained.
sought to attract investors in power plant operations by giving them
Local government units were faced with the same problems that hamper
incentives one of which where NPC’s assumption of payment of their
their capabilities to participate effectively in the national development
taxes in Build-Operate-Transfer Agreement.
efforts, among which are: (a) inadequate tax base, (b) lack of fiscal
control over external sources of income, (c) limited authority to prioritize
Enron Power and NPC then entered into a BOT and then to transfer its
and approve development projects, (d) heavy dependence on external
plant to NPC after 10 years of operations. The BOT agreement provided
sources of income, and (e) limited supervisory control over personnel of
that NPC shall be responsible for payment of all taxes imposed except
national line agencies. Considered as the most revolutionary piece of
income tax and permit fees. Later, Enron assigned its obligation to
legislation on local autonomy, the LGC effectively deals with the fiscal
Batangas Power Co. BPC registered as pioneer enterprise entitled tax
constraints faced by LGUs. It widens the tax base of LGUs to include
holiday for 6 years.
taxes which were prohibited by previous laws.
Batangas City then sent letter to BPC demanding payment for the
business taxes and penalties under the Batangas Tax Code. BPC
refused to pay citing its tax holiday. Thus, the City amended and VI. Public Purpose
demanded those not covered by 6-year period.
Public purpose was discussed in Planters Products v. Fertiphil:
BPC still refused to pay and asserted that the city should collect tax from
NPC as the latter assumed responsibility for its payment under the BOT
agreement. The term “public purpose” is not defined. It is an elastic concept that can
be hammered to fit modern standards. Jurisprudence states that “public
purpose” should be given a broad interpretation. It does not only pertain
NPC refused to pay BPC’s business tax as it constituted an indirect tax
on NPC which is a tax-exempt corporation. to those purposes which are traditionally viewed as essentially
government functions, such as building roads and delivery of basic
services, but also includes those purposes designed to promote social
RTC held that BPC is liable and the NPC’s tax exemption was
withdrawn by RA 7160. justice. Thus, public money may now be used for the relocation of illegal
settlers, low-cost housing and urban or agrarian reform.
Held: Petitioners insist that NPC’s exemption from all taxes under its
While the categories of what may constitute a public purpose are
Charter had not been repealed by the LGC. They argue that NPC’s
Charter is a special law which cannot be impliedly repealed by a general continually expanding in light of the expansion of government functions,
the inherent requirement that taxes can only be exacted for a public
and later legislation like the LGC. They likewise anchor their claim of tax-
purpose still stands. Public purpose is the heart of a tax law. When a
exemption on Section 133 (o) of the LGC which exempts government
instrumentalities, such as the NPC, from taxes imposed by local tax law is only a mask to exact funds from the public when its true intent
is to give undue benefit and advantage to a private enterprise, that law
government units (LGUs),
will not satisfy the requirement of “public purpose.”
We find no merit in these contentions.
PLANTERS PRODUCTS v. FERTIPHIL
The effect of the LGC on the tax exemption privileges of the NPC has GR 166006, March 14, 2008
already been extensively discussed and settled in the recent case of
National Power Corporation v. City of Cabanatuan. In said case, this Facts: PPI and Fertiphil are private corporations under PH law which
Court recognized the removal of the blanket exclusion of government are both engaged in the importation and distribution of fertilizers,
instrumentalities from local taxation as one of the most significant pesticides and agricultural chemicals.
provisions of the 1991 LGC. Specifically, we stressed that Section 193
of the LGC, an express and general repeal of all statutes granting
exemptions from local taxes, withdrew the sweeping tax privileges
In 1985, Pres. Marcos exercising legislative powers issued LOI 1465 for [3] Payment directly remitted to PPI’s depositary bank
the imposition of Capital Recovery Component (CRC) on the domestic [4] Levy was used to pay corporate debts of PPI
sale of all grades of fertilizers in the PH.
Issue: Would it be constitutional if it was police power – No.
The LOI provides that the fertilizer pricing formula shall include a
contribution component of not less P10 per bag. This capital contribution The LOI is still unconstitutional even
shall be collected until adequate capital is raised to make PPI viable. if enacted under the police power; it
did not promote public interest.
Thus pursuant to such, Fertiphil paid P10/bag of fertilizer it sold in the
domestic market to FPA which the FPA remitted to Far East Bank, the Even if We consider LOI No. 1695 enacted under the police power of
depositary of PPI. the State, it would still be invalid for failing to comply with the test of
“lawful subjects” and “lawful means.” Jurisprudence states the test as
With the return of democracy, FPA stopped imposing P10 and Fertiphil follows: (1) the interest of the public generally, as distinguished from
demand from PPI a refund of the amounts it paid, but PPI refused to those of particular class, requires its exercise; and (2) the means
accede to the demand. Prompting it to file a complaint for collection and employed are reasonably necessary for the accomplishment of the
damages with RTC Makati. Fertiphil argued that the LOI was unjust and purpose and not unduly oppressive upon individuals.
solely favored PPI which was a privately owned corporation which used
the proceeds to maintain its monopoly of the fertilizer industry. For the same reasons as discussed, LOI No. 1695 is invalid because it
RTC ruled in favor of Fertiphil and ordered it to pay finding that the CRC did not promote public interest. The law was enacted to give undue
violated the principle that taxes can only be levied for public purposes. advantage to a private corporation.
CA affirmed such decision.
Police Power and Power of Taxation PAMBANSANG KOALISYON v. EXECUTIVE SECRETARY

Police power and the power of taxation are inherent powers of the State. GR 147036-37, 685 Phil. 295, April 10, 2012
These powers are distinct and have different tests for validity. Police
power is the power of the State to enact legislation that may interfere These are consolidated petitions to declare unconstitutional certain
with personal liberty or property in order to promote the general welfare,[ presidential decrees and executive orders of the martial law era relating
while the power of taxation is the power to levy taxes to be used for to the raising and use of coco-levy funds.
public purpose.
Coco Levy Funds are Prima Facie Public Funds
The main purpose of police power is the regulation of a behavior or The Court was satisfied that the coco-levy funds were raised pursuant
conduct, while taxation is revenue generation. The “lawful subjects” and to law to support a proper governmental purpose. They were raised with
“lawful means” tests are used to determine the validity of a law enacted the use of the police and taxing powers of the State for the benefit of the
under the police power. coconut industry and its farmers in general. The COA reviewed the use
of the funds. The Bureau of Internal Revenue (BIR) treated them as
The power of taxation, on the other hand, is circumscribed by inherent public funds and the very laws governing coconut levies recognize their
and constitutional limitations. public character.
Issue: Is the CRC an exercise of police power or taxation? – Power of The Court has also recently declared that the coco-levy funds are in
taxation. the nature of taxes and can only be used for public purpose. Taxes
are enforced proportional contributions from persons and property,
We agree with the RTC that the imposition of the levy was an levied by the State by virtue of its sovereignty for the support of the
exercise by the State of its taxation power. government and for all its public needs.
While it is true that the power of taxation can be used as an implement Here, the coco-levy funds were imposed pursuant to law, namely, R.A.
of police power, the primary purpose of the levy is revenue generation. 6260 and P.D. 276. The funds were collected and managed by the PCA,
If the purpose is primarily revenue, or if revenue is, at least, one of the an independent government corporation directly under the President.
real and substantial purposes, then the exaction is properly called a tax. And, as the respondent public officials pointed out, the pertinent laws
used the term levy, which means to tax, in describing the exaction.
The P10 levy under LOI No. 1465 is too excessive to serve a mere
regulatory purpose. The levy, no doubt, was a big burden on the seller Of course, unlike ordinary revenue laws, R.A. 6260 and P.D. 276 did not
or the ultimate consumer. It increased the price of a bag of fertilizer by raise money to boost the government’s general funds but to provide
as much as five percent. means for the rehabilitation and stabilization of a threatened industry,
the coconut industry, which is so affected with public interest as to be
A plain reading of the LOI also supports the conclusion that the levy was within the police power of the State. The funds sought to support the
for revenue generation. The LOI expressly provided that the levy was coconut industry, one of the main economic backbones of the country,
imposed “until adequate capital is raised to make PPI viable.” and to secure economic benefits for the coconut farmers and farm
workers.
Issue: Was the CRC exacted for public purpose? – No.
Fund Not Private Property of Farmers; Not Public Purpose
Taxes are exacted only for a public purpose. The P10 levy is Notably, the raising of money by levy on coconut farm production, a form
unconstitutional because it was not for a public purpose. The levy was of taxation as already stated, began in 1971 for the purpose of
imposed to give undue benefit to PPI. developing the coconut industry and promoting the interest of coconut
farmers. The use of the fund was expanded in 1973 to include the
An inherent limitation on the power of taxation is public purpose. Taxes stabilization of the domestic market for coconut-based consumer goods
are exacted only for a public purpose. They cannot be used for purely and in 1974 to divert part of the funds for obtaining direct benefit to
private purposes or for the exclusive benefit of private persons. The coconut farmers. After five years or in 1976, however, P.D. 961
reason for this is simple. The power to tax exists for the general welfare; declared the coco-levy funds private property of the farmers. P.D.
hence, implicit in its power is the limitation that it should be used only for 1468 reiterated this declaration in 1978. But neither presidential decree
a public purpose. It would be a robbery for the State to tax its citizens actually turned over possession or control of the funds to the farmers in
and use the funds generated for a private purpose. their private capacity. The government continued to wield undiminished
authority over the management and disposition of those funds.
[See citation previously as to definition of public purpose].
In any event, such declaration is void. An owner is free to exercise all
It was shown that attributes of ownership: the right, among others, to possess, use and
[1] It was levied to benefit PPI a private company; enjoy, abuse or consume, and dispose or alienate the thing owned.[64]
[2] It was to make PPI viable and payment indefinite; The owner is of course free to waive all or some of these rights in favor
of others. But in the case of the coconut farmers, they could not,
individually or collectively, waive what have not been and could not be As an inherent attribute of sovereignty which virtually extends to all
legally imparted to them. public needs, police power grants a panoply of instruments through
which the State, as parens patriae, gives effect to a host of its regulatory
Section 2 of P.D. 755, Article III, Section 5 of P.D. 961, and Article III, powers. The Court has held that the “power” to regulate means the
Section 5 of P.D. 1468 completely ignore the fact that coco-levy power to protect, foster, promote, preserve and control, with due regard
funds are public funds raised through taxation. And since taxes for the interests, first and foremost, of the public, then of the utility and
could be exacted only for a public purpose, they cannot be
of its patrons (Gerochi v. DOE; Southern Luzon Drug v. DSWD, 2017).
declared private properties of individuals although such
individuals fall within a distinct group of persons.
Property rights may of individuals may be subjected to restraints and
The Court of course grants that there is no hard-and-fast rule for burdens in order to fulfill the objectives of the government in the exercise
determining what constitutes public purpose. It is an elastic concept that of police power (Ferrer, Jr., supra). The State, in the exercise of police
could be made to fit into modern standards. Public purpose, for power, can intervene in operations of a business which may result in
instance, is no longer restricted to traditional government functions like impairment of property rights.
building roads and schoolhouses or safeguarding public health and
safety. Relationship Between Taxation and Police Power
Public purpose has been construed as including the promotion of social In this jurisdiction, it is well-entrenched that taxation may be made to
justice. Thus, public funds may be used for relocating illegal settlers, implement state’s police power (Ferrer, Jr. v. Bautista, GR 210551). It
building low-cost housing for them, and financing both urban and is a well-established doctrine that the taxing power may be used as an
agrarian reforms that benefit certain poor individuals. Still, these uses implement of police power (Gerochi v. DOE, 2007).
relieve volatile iniquities in society and, therefore, impact on public order
and welfare as a whole.
The motivation behind many taxation measures is the implementation of
But the assailed provisions, which removed the coco-levy funds from the police power goals. Progressive income taxes alleviate the margin
general funds of the government and declared them private properties between rich and poor; the so-called “sin taxes” on alcohol and tobacco
of coconut farmers, do not appear to have a color of social justice manufacturers help dissuade the consumers from excessive intake of
for their purpose. The levy on copra that farmers produce appears, these potentially harmful products (Southern Cross Cement v. Cement
in the first place, to be a business tax judging by its tax base. The Manufacturers, GR 158540, 2005).
concept of farmers-businessmen is incompatible with the idea that
coconut farmers are victims of social injustice and so should be In relation to the regulatory purpose of the imposed fee, “the imposition
beneficiaries of the taxes raised from their earnings. questioned must relate to an occupation or activity that so engages the
public interest, morals, safety and development as to require regulation
It would altogether be different of course if the laws mentioned set apart for the protection and promotion of such public interest, the imposition
a portion of the coco-levy fund for improving the lives of destitute
must also bear a reasonable relation to the probable expenses of
coconut farm owners or workers for their social amelioration to establish
regulation, taking into account not only the costs of direct regulation but
a proper government purpose.
also its incidental consequences as well.” (Chevron v. BCDA, 1989).
The support for the poor is generally recognized as a public duty and Similarities Between Police Power and Taxation
has long been an accepted exercise of police power in the promotion of 1. Both are inherent in the State and may be exercised even if
the common good. there is no specific authority granted by the Constitution;
2. Without these powers the State could not attain the purpose
But the declarations do not distinguish between wealthy coconut farmers for which it is established. Otherwise stated , the very
and the impoverished ones. And even if they did, the Government existence of the State is dependent upon the exercise of
cannot just embark on a philanthropic orgy of inordinate dole-outs for these powers;
motives political or otherwise. 3. The powers are to be exercised by the legislative
department; and
Consequently, such declarations are void since they appropriate 4. Both interfere with ownership and use of private property.
public funds for private purpose and, therefore, violate the citizens’ right
to substantive due process.
Criteria for Distinguishing Between
A Tax and an Imposition under Police Power
C. Comparison with Other Powers
The Supreme Court held that “if the generating of revenue is the primary
I. Police Power purpose and regulation is merely incidental, the imposition is a tax; but
if the regulation is the primary purpose, the fact that incidentally revenue
is also obtained does not make the imposition a tax (Ferrer, Jr., supra).
Police Power, Defined
Police power is the power to make, ordain and establish all manner of
The purpose and the effect of the imposition determine the whether it is
wholesome and reasonable laws, statutes and ordinances, whether with
a tax or a fee, and that the lack of any standards for such imposition
penalties or without, not repugnant to the Constitution, the good and
gives the presumption that the same is a tax (Smart Communications
welfare of the commonwealth, and for the subjects of the same (MMDA
vs. Municipality of Malvar, 2014).
v. Garin, 2005). It is the power of the state to promote public welfare by
restraining or by regulating the use of liberty or property.
The designation in the ordinance does not decide whether imposition is
a license fee or a tax. The determining factors are the purpose and effect
It has also been defined as the plenary power vested in the legislature
of the imposition which as may be apparent from the provisions of the
to make statutes and ordinances to promote the health, morals, peace,
ordinance (Ferrer, Jr., supra)
education, good order or safety and general welfare of the people
(Ferrer, Jr. v. Bautista, 2015).
Taxation Power Police Power
Police Power, Explained Purpose
Primary purpose is for the Primary purpose is for general
It is the most pervasive, the least limitable, and it is the most demanding
revenue welfare or regulation
of the three fundamental powers of the State. The justification is found
Power to levy taxes to be used Power to enact legislation that
in the Latin maxim salus populi est suprema lex (the welfare of the
for public purpose may interfere with personal
people is the supreme law) and sic utere tuo ut alienam non laedas (so liberty or property in order to
use your property as not to injure the property of others). promote general welfare
Amount
The amount of tax collected is The license fee should not

usually unlimited exceed the cost of regulation It is patent therefrom that the legislators had in mind a regulatory tax as
Compensation the law refers to the imposition on the registration, operation and
Enjoyment of public services Feeling of having done ownership of a motor vehicle as a “tax or fee”
something good for the society
in general Section 591-593 speaks of "taxes." or fees ... for the registration or
Property Taken operation or on the ownership of any motor vehicle, or for the exercise
Generally, money Any property which may be the of the profession of chauffeur ..." making the intent to impose a tax more
source of the danger to health, apparent.
safety or morals Thus, even RA 5448 cited by the respondents, speak of an "additional"
Effect to Property Taken tax," where the law could have referred to an original tax and not one in
It is constructive for money It is destructive, for the property addition to the tax already imposed on the registration, operation, or
collected is spend for building taken is usually destroyed ownership of a motor vehicle under RA 4136. Simply put, if the exaction
infrastructure or providing public under RA 4136 were merely a regulatory fee, the imposition in RA 5448
services need not be an "additional" tax.
Relation to Non-Impairment Clause
RA 4136 also speaks of other "fees," such as the special permit fees for
Taxation is inferior to the non- Police power is superior to the
certain types of motor vehicles (Sec. 10) and additional fees for change
impairment clause and could non-impairment clause
of registration (Sec. 11). These are not to be understood as taxes
not override the same
because such fees are very minimal to be revenue-raising. Thus, they
Scope
are not mentioned by Sec. 591-593). of the Code as taxes like the motor
Taxation interferes with property Police power regulates both vehicle registration fee and chauffers' license fee. Such fees are to go
rights only liberty and property into the expenditures of the Land Transportation Commission.
Surrender
It may be bargained away Police power cannot be It is quite apparent that vehicle registration fees were originally simple
through a contract such that if bargained away exceptional. intended only for rigidly purposes in the exercise of the
the government issues a tax- State's police powers. Over the years, however, as vehicular traffic
exempt bond, it could not exploded in number and motor vehicles became absolute necessities
withdraw the exemption without which modern life as we know it would stand still, Congress
because it would violate the found the registration of vehicles a very convenient way of raising
non-impairment clause much needed revenues. Registration payments as "fees," their nature
has become that of "taxes."
What is the nature of motor vehicle registration fees? Are they taxes or
regulatory fees? In view of the foregoing, we rule that motor vehicle registration fees as
at present exacted pursuant to the Land Transportation and Traffic Code
are actually taxes intended for additional revenues of government
PHILIPPINE AIRLINES v. EDU even if one fifth or less of the amount collected is set aside for the
GR L-41383, August 15, 1998, En Banc operating expenses of the agency administering the program.
Facts: PAL, under its franchise is exempt from payment of taxes it was
pointed out that PAL has, since 1956, not been paying the motor vehicle
registration fees. REPUBLIC v. BACOLOD-MURCIA MILLING, ET AL.
GR L-19824-26, July 9, 1966 En Banc
In 1971, Commissioner Elevate issued a regulation requiring all tax
exempt entities, among them PAL, to pay motor vehicle registration fees. Facts: RA 632 is the carter for Philsugin (Phil. Sugar Institute) a semi-
Registration was refused unless the amounts imposed under RA 4136 public corporation made to conduct research work for the sugar industry,
(Land Transportation and Traffic Code) were paid. Thus, PAL paid under improve existing methods, promote effective merchandising of sugar
protest the amount of P19K as registration fees of its motor vehicles. and by product in domestic and foreign markets and improve the living
and economic conditions of laborers engaged in sugar industry.
PAL then wrote a letter to Land Transportation Commissioner Edu
demanding a refund of the amounts paid invoking the ruling in Calalang To achieve these objectives RA 632 provides that under Section 15, in
v. Lorenzo in 1951, where it was held that motor vehicle registration fees order to raise the necessary funds to carry out provisions of the law,
are in reality, taxes from the payment of which PAL is exempt by virtue there shall be levied on the annual sugar production a tax of 10 centavos
of the legislative franchise. per picul of sugar to be collected for a period of five years beginning from
copy year 1951-1952. The amount shall be borne by sugar cane planters
Edu denied the request for refund citing Republic v. Phil. Rabbit Bus and sugar centrals in the proportion of their corresponding milling share
Lines (1970) to the effect that motor vehicle registration fees are and said levy shall constitute a lien on their sugar quedans and/or
regulatory fees and not revenue measures and thus do not come within warehouse receipts.
the exemption granted to PAL.
In 1951, Philsugin acquired the Insular Sugar Refinery for P3M by 3
Issue: Are the registration fees in the nature of taxes by virtue of which installments from the process of the sugar tax to be collected. It was
PAL can demand a refund for it was exempt therefrom? - Taxesi shown later that the operation of that refinery turned out as disastrous
where Philsugin incurred tremendous losses.
Held: The Court citing numerous legislations, has stated that the
legislative intent and purpose behind the law requiring owners of Contending that the purchase of the refinery from the Philsugin fund was
vehicles to pay their registration is mainly to raise funds for the not authorized and that the continued operation of such were inimical to
construction and maintenance of highways and to a much lesser degree, their interests, the sugar centrals (Bacolod-Murcia Milling, Ma-ao Sugar
pay for the operating expenses of administering agency. Central and Talisay-lisay Milling) refused to pay their contribution to the
said fund. They argued that the obligation subsists to the limited they
While in the Phil. Rabbit case the term “fees” was favored by the are benefited.
legislature to distinguish fee from other taxes, fees may be properly
regarded as taxes even though they also serve as instrument of This is because they argue RA 632 is not a revenue measure but an act
regulation. Indeed, taxation may be made the implement of state’s which establishes a “Special assessments”. Thus they posit that the “10
police power. centavo per picul of sugar” authorized to be collected under Sec. 15 is
a special assessment, the proceeds thereof to be devoted for special
If the purpose is primarily for revenue, or if revenue, is at least one of purpose. Arguing that once it has been determined that no benefit
the real and substantial purposes, then the exaction is properly called a accrues or inures to the property owners by paying the “assessment” or
tax. Such is the case of motor vehicle registration fees.
that the proceeds are misapplied to their prejudice, the authority to insist government cannot fulfill its mandate of promoting the general welfare
payment ceases. and well-being of the people.
Issue: What is the nature of the special assessments being imposed On the other hand, police power is the power of the state to promote
under Section 15 of RA 632? – It is not a tax nor special public welfare by restraining and regulating the use of liberty and
assessment but an exaction for regulation as an exercise of property. It is the most pervasive, the least limitable, and the most
police power for the general welfare of the country as it will aid demanding of the three fundamental powers of the State. The
the sugar industry. justification is found in the Latin maxims salus populi est suprema lex
(the welfare of the people is the supreme law) and sic utere tuo ut
Held: In Lutz v. Araneta, there was a similar question involving a special alienum non laedas (so use your property as not to injure the property
assessment under CA 567 for the Sugar Adjustment Act, where a 12% of others). As an inherent attribute of sovereignty which virtually extends
tax on the assessed value of the land devoted to the cultivation of sugar to all public needs, police power grants a wide panoply of instruments
was questioned as unconstitutional for it was devoted exclusively to through which the State, as parens patriae, gives effect to a host of its
sugar industry exclusively and thus not for public purpose. regulatory powers. We have held that the power to "regulate" means the
power to protect, foster, promote, preserve, and control, with due regard
The Court ruled in the Lutz case that, the petitioner assumes that the for the interests, first and foremost, of the public, then of the utility and
levy was a pure exercise of taxing power, which upon analysis reveals of its patrons.
that it was a tax levied for a regulatory purpose, to provide means for
the rehabilitations and for the stabilization of the threatened sugar The conservative and pivotal distinction between these two powers
industry. In other words, the act is primarily an exercise of police power. rests in the purpose for which the charge is made. If generation of
revenue is the primary purpose and regulation is merely incidental, the
With such ruling, the special assessment at bar may be considered imposition is a tax; but if regulation is the primary purpose, the fact that
as similarly as in the case of Lutz. The levy for the Philsugin Fund is revenue is incidentally raised does not make the imposition a tax.
not so much an exercise of the power of taxation, nor the
imposition of a special assessment, but, the exercise of the police Police Power was Invoked for the Universal Charge
power for the general welfare of the entire country. It is, therefore, In exacting the assailed Universal Charge through Sec. 34 of the EPIRA,
an exercise of a sovereign power which no private citizen may lawfully the State's police power, particularly its regulatory dimension, is invoked.
resist. Such can be deduced from Sec. 34 which enumerates the purposes for
which the Universal Charge is imposed and which can be amply
The acquisition of the refinery is justified for the conduct of the research discerned as regulatory in character.
work for the sugar industry in all its phases and to achieve greater
efficiency. The operation of the sugar refinery is a phase of sugar This can be also gleaned from Section 2, Declaration of Policy where it
production and that from such operation may be learned methods of enumerates the policy of the states towards the total electrification of the
reducing the cost of sugar manufactured, or opportunity to discover country and other matters of public interest and general welfare. [See
more effective means of achieving progress in the sugar industry. next page for the policies].
The experience of running a sugar industry alone is a gain to the entire From the aforementioned purposes, it can be gleaned that the
industry. Thus, from its financially unsuccessful venture, the Philsugin assailed Universal Charge is not a tax, but an exaction in the
could very well have advanced in its appreciation of the problems of exercise of the State's police power. Public welfare is surely
management faced by sugar centrals. It could have understood more promoted. Moreover, it is a well-established doctrine that the taxing
clearly the difficulties of marketing sugar products. power may be used as an implement of police power.
GEROCHI v. DEPARTMENT OF ENERGY

GR 159796, July 17, 2007, En Banc Under the EPIRA Law, the declaration of state policy provides that the
imposition of the universal charge was an exaction for the public welfare
Facts: Gerochi and others sought to declare as unconstitutional Section of the country:
34 of RA 9136 or the Electric Power Industry Reform Act of 2001, or
EPIRA which imposes the Universal Charge as well as Rule 18 of IRR; RA 9136 – EPIRA Law
and that the universal charge imposed be refunded. SECTION 2. Declaration of Policy. – It is hereby declared the policy of
the State:
It was challenged because the universal charge was alleged to be a tax (a) To ensure and accelerate the total electrification of the country;
which is to be collected from all electric end-users and self-generating (b) To ensure the quality, reliability, security and affordability of the
entities. The petitioners argue that the power to tax is purely legislative supply of electric power;
and that the delegation to ERC for the determination of such is
(c) To ensure transparent and reasonable prices of electricity in a regime
unconstitutional for the Universal Charge is to be determined, fixed and
approved by ERC. of free and fair competition and full public accountability to achieve
In addition, the imposition of the Universal Charge on all end-users is greater operational and economic efficiency and enhance the
oppressive and confiscatory. They contend that there is no regulatory competitiveness of Philippine products in the global market;
purpose of the charges imposed therein. (d) To enhance the inflow of private capital and broaden the ownership
base of the power generation, transmission and distribution sectors;
On the other hand, respondents contend that the Universal Charge is (e) To ensure fair and non-discriminatory treatment of public and private
levied for the specific regulatory purpose which is to ensure the viability sector entities in the process of restructuring the electric power industry;
of the country’s electric power industry thus they argue that it was an (f) To protect the public interest as it is affected by the rates and services
exaction in the exercise of the State’s police power. of electric utilities and other providers of electric power; (g) To assure
socially and environmentally compatible energy sources and
Issue: Whether or not the Universal Charge imposed under Section 34 infrastructure;
of EPIRA is a tax. – No, it is an exaction under the State’s police
(h) To promote the utilization of indigenous and new and renewable
power.
energy resources in power generation in order to reduce dependence
Distinction between Police Power and Taxation on imported energy;
The power to tax is an incident of sovereignty and is unlimited in its (i) To provide for an orderly and transparent privatization of the assets
range, acknowledging in its very nature no limits, so that security against and liabilities of the National Power Corporation (NPC);
its abuse is to be found only in the responsibility of the legislature which (j) To establish a strong and purely independent regulatory body and
imposes the tax on the constituency that is to pay it. It is based on the system to ensure consumer protection and enhance the competitive
principle that taxes are the lifeblood of the government, and their prompt operation of the electricity market; and (k) To encourage the efficient use
and certain availability is an imperious need. Thus, the theory behind the of energy and other modalities of demand side management.
exercise of the power to tax emanates from necessity; without taxes,
Note: Thus, we look at the policies of the assailed exaction whether it is It is also declared the policy of CDC to operate and manage the CSEZ as a
primarily for revenue-raising or for general welfare or regulation, which separate customs territory ensuring free flow or movement of goods and
capital within, into and exported out of the CSEZ.
then defines what nature the exaction is.
From the foregoing, it can be gleaned that the Policy Guidelines was
CHEVRON PHILIPPINES v. BCDA issued, first and foremost, to ensure the safety, security, and good
GR 173863, September 15, 2010 condition of the petroleum fuel industry within the CSEZ. The questioned
royalty fees form part of the regulatory framework to ensure "free
Facts: In June 2002, the Board of Directors of the Clark Dev’t flow or movement" of petroleum fuel to and from the CSEZ.
Corporation (CDC) issued and approved Policy Guidelines on the
Movement of Petroleum Fuel to and from the Clark Special Economic The fact that respondents have the exclusive right to distribute and
Zone which provided for: market petroleum products within CSEZ pursuant to its JVA with SBMA
[1] Accreditation Fee and CSBTI does not diminish the regulatory purpose of the royalty fee
[2] Annual Inspection Fee for fuel products supplied by petitioner to its client at the CSEZ.
[3] Royalty Fee [P0.50/L for Coastal; P1/L outside sources]
[4] Gate Pass Fee From the time JVA took effect up to the time CDC implemented its Policy
Guidelines on the Movement of Petroleum Fuel to and from the CSEZ,
It was implemented in July 2002 and on October, CDC sent a letter to suppliers/distributors were allowed to bring in petroleum products
Chevron Phils. (formerly Caltex Phils.) a domestic corp. which has been inside CSEZ without any charge at all.
supplying fuel to Nanox Phils a locator in the CSEZ since 2001 informing But this arrangement clearly negates CDC's mandate under the JVA as
it about the assessed royalty fee. A statement of account was sent to exclusive distributor of CSBTI's fuel products within CSEZ and
Chevron for royalty fees in the amount of P115K for its fuel sales for respondents' ownership of the Subic-Clark Pipeline. On this score,
August-Sept., 2002. respondents were justified in charging royalty fees on fuel
delivered by outside suppliers.
Chevron sent a letter to Chief Executive Officer of CDC, Mr. Angeles
protesting the assessment for royalty fees which it paid under protest In the case at bar, there can be no doubt that the oil industry is greatly
arguing that CDC had no authority under the law to imposed such royalty imbued with public interest as it vitally affects the general welfare.
fees or any fees per unit measurement of any commodity sold in the
special economic zone. In addition, fuel is a highly combustible product which, if left
unchecked, poses a serious threat to life and property.
The protest was elevated to the Bases Conversion Development
Authority arguing that the royalty fees has no reasonable relation to the Also, the reasonable relation between the royalty fees imposed on a
probable expenses of regulation and that the imposition was for a "per liter" basis and the regulation sought to be attained is that the higher
revenue generating purpose thus a tax. the volume of fuel entering CSEZ, the greater the extent and frequency
The protest was denied by BCDA which was appealed to the Office of of supervision and inspection required to ensure safety, security, and
the President which was also dismissed thus it was then elevated to the order within the Zone. Respondents submit that increased
CA which also dismissed the appeal for lack of merit. administrative costs were triggered by security risks that have recently
emerged, such as terrorist strikes in airlines and military/government
What Chevron argues is that CDC does not have any power to impose facilities.
royalty fees on sale of fuel inside the CSEZ on the basis of purely income
generating functions and its exclusive right to market and distribute As to the issue of reasonableness of the amount of the fees, we hold
goods inside the CSEZ. Such imposition was akin to a tax which the that no evidence was adduced by the petitioner to show that the fees
CDC has no power to imposed for the assessed royalty fee was not imposed are unreasonable.
regulatory in nature but it was a revenue generating measure to increase
its profits and further enhance its exclusive right to market and distribute
REPUBLIC v. INTERNATIONAL COMMUNICATIONS
fuel in CSEZ.
GR 141667, July 17, 2006
In addition, Chevron argues that the fees imposed, assuming that they
are regulatory, are also unreasonable and are grossly in excess of Facts: In 1995, International Communications Corp. (ICC), a holder of
regulation costs. legislative franchise (RA 7633) to operate domestic
telecommunications, had file with NTC application for Certificate of
Issue: Are the fees imposed by CDC partake the nature of taxes which Public Convenience and Necessity (CPCN) to install, operate, and
it has no power to impose? – No, these are imposed primarily for maintain an international telecom leased circuit service between PH and
regulatory purposes. other countries, charge rates with provisional authority for the purpose.
Distinguishing Tax and NTC approved the application to the condition that ICC shall pay a
Regulation as Form of Police Power Permit Fee of P1,190,750 in accordance with Section 40(g) of the
Citing the ruling in Gerochi v. Department of Energy (2007), in Public Service Act. NTC denied MR as to permit fee.
distinguishing tax and regulation as a form of police power, the
determining factor is the purpose of the implemented measure. If the Upon reaching CA, it ruled that NTC had arrogated upon itself the power
purpose is primarily to raise revenue, then it will be deemed a tax even to tax an entity which it is not authorized to do. NTC argues that the fee
though the measure results in some form of regulation. On the other in question is not in the nature of tax but is merely a regulatory measure.
hand, if the purpose is primarily to regulate, then it is deemed a
regulation and an exercise of the police power of the state, even though Issue: Is the permit fee a tax or regulatory measure? – It is a simple
incidentally, revenue is generated. regulatory provision.
In the case at bar, we hold that the subject royalty fee was imposed Held: Upon examination of the provisions of Sec. 40(g) of the Public
primarily for regulatory purposes, and not for the generation of Service, it is clear that the permit fee is not a tax measure but a simple
income or profits as petitioner claims. The Policy Guidelines on the regulatory provision for the collection of fees imposed pursuant to the
Movement of Petroleum Fuel to and from the Clark Special Economic exercise of the State's police power. A tax is imposed under the taxing
Zone provides: power of government principally for the purpose of raising revenues.
It is hereby declared the policy of CDC to develop and maintain the Clark The law in question, however, merely authorizes and requires the
Special Economic Zone (CSEZ) as a highly secured zone free from collection of fees for the reimbursement of the Commission's expenses
threats of any kind, which could possibly endanger the lives and properties of in the authorization, supervision and/or regulation of public services.
locators, would-be investors, visitors, and employees. There can be no doubt then that petitioner NTC is authorized to
collect such fees.
However, the amount thereof must be reasonably related to cost of such special assessment is the same tax referred to in R.A. No. 7279 or the
supervision and/or regulation. UDHA.
Amount Assessed Was Unreasonable Clearly, the SHT charged by the Quezon City Government is a tax which
It is difficult to comprehend how the cost of licensing, regulating, and is within its power to impose. Aside from the specific authority vested by
surveillance could amount to P1,190,750.50. The CA was correct in Section 43 of the RA 7279 or Urban Development and Housing Act,
finding the amount imposed as permit fee exorbitant and in complete cities are allowed to exercise such other powers and discharge such
disregard of the basic limitation that the fee should be at least other functions and responsibilities as are necessary, appropriate, or
approximately commensurate to the expense. Petitioner itself admits incidental to efficient and effective provision of the basic services and
that it had imposed the maximum amount possible under the Public facilities which include, among others, programs and projects for low-
Service Act, as amended. That is hardly taking into consideration the cost housing and other mass dwellings. The collections made accrue
actual costs of fulfilling its regulatory and supervisory functions. to its socialized housing programs and projects.
Parity Clause in RA 7925 The tax is not a pure exercise of taxing power or merely to raise
Makes ICC Not Liable for Pay the Fee revenue; it is levied with a regulatory purpose. The levy is primarily
The CA was correct in ruling that Section 6, of PD 947 (which provides in the exercise of the police power for the general welfare of the
that franchise tax shall be in lieu of all charges or fees of any kind nature entire city.
or description) is, by law, considered as ipso facto part of ICC's franchise
due to the "parity clause" embodied in Section 23 of R.A. No. 7925. It is greatly imbued with public interest. Removing slum areas in
Accordingly, respondent ICC cannot be made subject to the payment of Quezon City is not only beneficial to the underprivileged and
the subject fees because its payment of the franchise tax is "in lieu" of homeless constituents but advantageous to the real property
all other taxes and fees. owners as well.
The situation will improve the value of their property investments, fully
enjoying the same in view of an orderly, secure, and safe community,
FERRER, JR. v. CITY MAYOR HERBERT BAUTISTA and will enhance the quality of life of the poor, making them law-abiding
GR 210551, June 30, 2015 constituents and better consumers of business products.
Facts: In October 2001, Quezon City council enacted the Socialized Garbage Fee is Unconstitutional
Housing Tax of Quezon City. This ordinance imposes a special It is Not a Tax but a Fee for Regulation of an Activity
assessment equivalent of 0.5% on the assessed value of the land in
excess of P100K to be collected by the City Treasurer which is to accrue LGUs are statutorily sanctioned to impose and collect such reasonable
to Socialized Housing Programs of the City Government. fees and charges for services rendered. "Charges" refer to pecuniary
liability, as rents or fees against persons or property, while "Fee" means
In December 2013, it also enacted ordnance for collection of Garbage a charge fixed by law or ordinance for the regulation or inspection of a
Fee on residential properties. business or activity The fee imposed for garbage collections under
Ordinance No. SP-2235 is a charge fixed for the regulation of an
In this case, Jose J. Ferrer, Jr. alleges that he is a registered co-owner activity.
of a residential property in Quezon. This petition was filed directly to the
Supreme Court, the petition seeks to declare as unconstitutional and Certainly, as opposed to petitioner’s opinion, the garbage fee is not a
illegal the two ordinances: tax. Thus, it does not violate the rule on double taxation.
[1] Socialized Housing Tax; and Here, Ferrer argues that there is already garbage fee under Sec. 47and
[2] Garbage Fee that the purpose is inconsistent with the mandate of RA 9003 (Waste
Management Act).
Issue: Are both ordinances unconstitutional? Only [2]
In this case, the alleged bases of Ordinance No. S-2235 in imposing the
[NOTE: The discussion was primarily on the power of the LGU to tax garbage fee is the volume of waste currently generated by each person
which was discussed earlier.] in Quezon City, which purportedly stands at 0.66 kilogram per day, and
the increasing trend of waste generation for the past three years.
Socialized Housing Tax is a Valid Tax Respondents did not elaborate any further.
In the Exercise of Police Power for a Regulatory Purpose
The figure presented does not reflect the specific types of wastes
The respondents emphasize that the SHT is pursuant to the social generated – whether residential, market, commercial, industrial,
justice principle under the Constitution and under RA 7279 asserting that construction/demolition, street waste, agricultural, agro-industrial,
it is not oppressive as well as it did not violate the equal protection institutional, etc. It is reasonable, therefore, for the Court to presume that
clause. such amount pertains to the totality of wastes, without any distinction,
generated by Quezon City constituents. To reiterate, however, the
Ferrer, Jr. on the other hand claims that the SHT is tantamount to a authority of a municipality or city to impose fees extends only to
penalty imposed on real property owner for failure of the Quezon City those related to the collection and transport of non-recyclable and
Mayor and Council to perform their duty to secure and protect real special wastes.
property owners from informal settlers, and now burdening them with
expenses to provide funds for housing. SHT is a not a charity, since it is In the subject ordinance, the rates of the imposable fee depend on land
forced not voluntary. or floor area and whether the payee is an occupant of a lot,
condominium, social housing project or apartment.
Rule: Police power, which flows from the recognition that salus populi
est suprema lex (the welfare of the people is the supreme law), is the For the purpose of garbage collection, there is, in fact, no substantial
plenary power vested in the legislature to make statutes and ordinances distinction between an occupant of a lot, on one hand, and an occupant
to promote the health, morals, peace, education, good order or safety of a unit in a condominium, socialized housing project or apartment, on
and general welfare of the people. the other hand.
Property rights of individuals may be subjected to restraints and burdens
in order to fulfill the objectives of the government in the exercise of police The rates being charged by the ordinance are unjust and
power. In this jurisdiction, it is well-entrenched that taxation may be inequitable: a resident of a 200 sq. m. unit in a condominium or
made the implement of the state’s police power. socialized housing project has to pay twice the amount than a resident
of a lot similar in size; unlike unit occupants, all occupants of a lot with
Ordinance No. SP-2095 imposes a Socialized Housing Tax equivalent an area of 200 sq. m. and less have to pay a fixed rate of Php100.00;
to 0.5% on the assessed value of land in excess of Php100,000.00. This
and the same amount of garbage fee is imposed regardless of whether seller or the ultimate consumer. It increased the price of a bag of
the resident is from a condominium or from a socialized housing project. fertilizer by as much as five percent. A plain reading of the LOI also
supports the conclusion that the levy was for revenue generation. The
Indeed, the classifications under Ordinance No. S-2235 are not LOI expressly provided that the levy was imposed “until adequate
germane to its declared purpose of "promoting shared responsibility with capital is raised to make PPI viable.”
the residents to attack their common mindless attitude in over-
consuming the present resources and in generating waste." Instead of [NOTE: As discussed earlier with the same case, the CRC was not
simplistically categorizing the payee into land or floor occupant of a levied for a public purpose, but it was instead levied for the benefit of
lot or unit of a condominium, socialized housing project or apartment, PPI which is a private entity. Thus, the tax was not valid for it was not
respondent City Council should have considered factors that could truly levied for a public purpose.]
measure the amount of wastes generated and the appropriate fee for its
collection.
Disposition: PAMBANSANG KOALISYON v. EXECUTIVE SECRETARY

[1] Socialized Housing Tax ordinance is valid. GR 147036-37, 685 Phil. 295, April 10, 2012
[2] Garbage fee is unconstitutional and illegal.
These are consolidated petitions to declare unconstitutional certain
presidential decrees and executive orders of the martial law era relating
PLANTERS PRODUCTS v. FERTIPHIL to the raising and use of coco-levy funds.
GR 166006, March 14, 2008
[NOTE: The coco levy funds are public funds that were raised through
Facts: PPI and Fertiphil are private corporations under PH law which taxation, and since taxes could only be exacted for a public purpose,
are both engaged in the importation and distribution of fertilizers, they cannot be declared private properties of individuals, although such
pesticides and agricultural chemicals. individuals fall within a distinct group of persons. The court ruled here
that the declaration stating that the tax levied shall be passed to the
In 1985, Pres. Marcos exercising legislative powers issued LOI 1465 for individuals was void because it does not satisfy the public purpose
imposition of Capital Recovery Component (CRC) on the domestic requirement.]
sale of all grades of fertilizers in the PH.
Imposition of Coco-Levy
The LOI provides that the fertilizer pricing formula shall include a Combined Exercise of Police and Taxing Power
contribution component of not less P10 per bag. This capital contribution The Court was satisfied that the coco-levy funds were raised
shall be collected until adequate capital is raised to make PPI viable. pursuant to law to support a proper governmental purpose. They
were raised with the use of the police and taxing powers of the State
Thus pursuant to such, Fertiphil paid P10/bag of fertilizer it sold in the for the benefit of the coconut industry and its farmers in general. The
domestic market to FPA which the FPA remitted to Far East Bank, the COA reviewed the use of the funds. The Bureau of Internal Revenue
depositary of PPI. (BIR) treated them as public funds and the very laws governing coconut
levies recognize their public character.
With the return of democracy, FPA stopped imposing P10 and Fertiphil
demand from PPI a refund of the amounts it paid, but PPI refused to The Court has also recently declared that the coco-levy funds are in
accede to the demand. Prompting it to file a complaint for collection and the nature of taxes and can only be used for public purpose. Taxes
damages with RTC Makati. are enforced proportional contributions from persons and property,
levied by the State by virtue of its sovereignty for the support of the
Fertiphil argued that the LOI was unjust and solely favored PPI which government and for all its public needs. Here, the coco-levy funds were
was a privately owned corporation which used the proceeds to maintain imposed pursuant to law, namely, R.A. 6260 and P.D. 276. The funds
its monopoly of the fertilizer industry. were collected and managed by the PCA, an independent government
RTC ruled in favor of Fertiphil and ordered it to pay finding that the CRC corporation directly under the President. And, as the respondent public
violated the principle that taxes can only be levied for public purposes. officials pointed out, the pertinent laws used the term levy, which means
CA affirmed such decision. to tax, in describing the exaction.
Police Power and Power of Taxation Of course, unlike ordinary revenue laws, R.A. 6260 and P.D. 276 did not
Police power and the power of taxation are inherent powers of the State. raise money to boost the government’s general funds but to provide
These powers are distinct and have different tests for validity. Police means for the rehabilitation and stabilization of a threatened
power is the power of the State to enact legislation that may interfere industry, the coconut industry, which is so affected with public
with personal liberty or property in order to promote the general welfare, interest as to be within the police power of the State.
while the power of taxation is the power to levy taxes to be used for
public purpose. The funds sought to support the coconut industry, one of the main
economic backbones of the country, and to secure economic benefits
The main purpose of police power is the regulation of a behavior or for the coconut farmers and farm workers. The subject laws are akin to
conduct, while taxation is revenue generation. The “lawful subjects” the sugar liens imposed by Sec. 7(b) of P.D. 388,52 and the oil price
and “lawful means” tests are used to determine the validity of a law stabilization funds under P.D. 1956,53 as amended by E.O. 137.
enacted under the police power.
The power of taxation, on the other hand, is circumscribed by inherent

and constitutional limitations. II. Eminent Domain
Issue: Is the CRC an exercise of police power or taxation? – Power of Power of Eminent Domain, Defined
taxation. It is the inherent right of the State and those entities to which the power
has been lawfully delegated, to condemn private property to public use
We agree with the RTC that the imposition of the levy was an upon payment of just compensation.
exercise by the State of its taxation power.
Just compensation is not required in the exercise of police power but
While it is true that the power of taxation can be used as an implement
of police power, the primary purpose of the levy is revenue generation. this is required in the exercise of power of eminent domain. In the
If the purpose is primarily revenue, or if revenue is, at least, one of the exercise of police power, there is no taking involved but the imposition
real and substantial purposes, then the exaction is properly called a tax. of a burden. Thus, there must be taking in order that there be proper
claim for just compensation due to the exercise of the power of eminent
The P10 levy under LOI No. 1465 is too excessive to serve a mere domain.
regulatory purpose. The levy, no doubt, was a big burden on the
Requisites to Qualify Taking as an

Exercise of Power of Eminent Domain Tax credit generally refers to an amount that is subtracted directly from
Republic v. Vda. de Castellvi, 157 Phil, 329 (1974) one’s total tax liablity. It is an “allowance against the tax itself” or a
1. The expropriator must enter a private property; “deduction from what is owed” by a taxpayer to the government.
2. The entrance into the private property must be for more than
a momentary period; Tax deduction is defined as a subtraction from income for tax purpose,
or an amount that is “allowed by law to reduce income prior to the
3. The entry into the property should be under warrant or color
applicable of the tax rate to compute the amount of tax which is due”.
of legal authority;
4. Property must be devoted to a public use or otherwise A tax credit differs from a tax deduction. On the one hand, a tax credit
informally appropriated or injuriously affected; and reduces the tax due, including -- whenever applicable -- the income tax
5. The utilization of the property for pubic use must be in such a that is determined after applying the corresponding tax rates to taxable
away as to oust the owner and deprive him of all beneficial income. A tax deduction, on the other, reduces the income that is subject
enjoyment of the property. to tax in order to arrive at taxable income. A tax credit is used only after
the tax has been computed; a tax deduction, before.
Additional Requirement for LGUs
6. There must be a previous offer that must be made by the local Tax Liability Required
government unit to which the property owner has rejected. For Tax Credit
Since a tax credit is used to reduce directly the tax that is due, there
Taxation Power Eminent Domain
ought to be a tax liability before the tax credit can be applied. Without
Who Could Exercise
that liability, any tax credit application will be useless. There will be no
It could be exercised by the Eminent domain may be reason for deducting the latter when there is, to begin with, no existing
legislative department and in exercised by private entities obligation to the government.
certain cases by the President
or the local government units However, as will be presented shortly, the existence of a tax credit or its
Property Taken grant by law is not the same as the availment or use of such credit. While
It is money that is taken Property, usually land the grant is mandatory, the availment or use is not. If a net loss is
Intervention reported by, and no other taxes are currently due from, a business
Court intervention is not Court intervention is usually establishment, there will obviously be no tax liability against which any
required required for the exercise of tax credit can be applied. For the establishment to choose the immediate
eminent domain. availment of a tax credit will be premature and impracticable.
The succeeding cases on eminent domain will touch on the matters of Nevertheless, the irrefutable fact remains that, under RA 7432,
tax deduction and tax credit, thus it may be useful to understand their Congress has granted without conditions a tax credit benefit to all
meanings and differences: covered establishments.
Although this tax credit benefit is available, it need not be used by losing
CIR v. CENTRAL LUZON DRUG CORPORATION ventures, since there is no tax liability that calls for its application.
GR 159657, April 15, 2005 Neither can it be reduced to nil by the quick yet callow stroke of an
administrative pen, simply because no reduction of taxes can instantly
Panganiban, J.: The 20 percent discount required by the law to be given be effected.
to senior citizens is a tax credit, not merely a tax deduction from the
gross income or gross sale of the establishment concerned. A tax credit By its nature, the tax credit may still be deducted from a future, not a
is used by a private establishment only after the tax has been computed; present, tax liability, without which it does not have any use. In the
a tax deduction, before the tax is computed. RA 7432 unconditionally meantime, it need not move. But it breathes.
grants a tax credit to all covered entities. Thus, the provisions of the
revenue regulation that withdraw or modify such grant are void. Basic is Tax Credit Benefit
the rule that administrative regulations cannot amend or revoke the law. Deemed Just Compensation
Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of
Facts: Central Luzon Drug Corporation is engaged in retail of medicines its power of eminent domain. Be it stressed that the privilege enjoyed
and other pharmaceutical products as “Mercury Drug.” From Jan. to by senior citizens does not come directly from the State, but rather from
Dec. 1996, it granted 20% sales discount to qualified senior citizens on the private establishments concerned. Accordingly, the tax credit
the medicine purchase pursuant to RA 7432 amounting to P904,769. benefit granted to these establishments can be deemed as their
just compensation for private property taken by the State for public
In 1997, it filed its Annual Income Tax Return for taxable year 1996, use.
declaring that it incurred net losses from its operations.
The discount privilege to which our senior citizens are entitled is actually
In 1998, it filed with CIR a claim for tax refund/credit in amount of a benefit enjoyed by the general public to which these citizens belong.
P904,769 arising from the 20% sales discount granted by it to qualified The discounts given would have entered the coffers and formed part of
senior citizens. Unable to obtain affirmative response from CIR it went the gross sales of the private establishments concerned, were it not for
to CTA and to the CA which ordered CIR to issue a tax credit certificate RA 7432. The permanent reduction in their total revenues is a forced
in favor of Central Luzon but in the reduced amount of P903,038. CA subsidy corresponding to the taking of private property for public use or
ruled that the credit is not an unintended benefit but rather a just benefit.
compensation for taking of private property for public use.
As a result of the 20 percent discount imposed by RA 7432,
CIR argues that CA erred in holding that Central Luzon may claim that respondent becomes entitled to a just compensation. This term
20% sales discount it gave as a tax credit rather than as a tax deduction. refers not only to the issuance of a tax credit certificate indicating the
correct amount of the discounts given, but also to the promptness in its
Section 4(a) of RA 7432: It grants to senior citizens the privilege of release.
obtaining a 20% discount on their purchase of medicine in any private Equivalent to the payment of property taken by the State, such issuance
establishment in the country. The private establishment may then claim -- when not done within a reasonable time from the grant of the discounts
the cost of the discount as a tax credit. -- cannot be considered as just compensation. In effect, respondent is
made to suffer the consequences of being immediately deprived of its
Issue: Is Central Luzon entitled to the tax credit? – Yes. revenues while awaiting actual receipt, through the certificate, of the
equivalent amount it needs to cope with the reduction in its revenues.
Tax Credit versus Tax Deduction
Besides, the taxation power can also be used as an implement for Based on the Opinion, the tax deduction scheme does not fully
the exercise of the power of eminent domain. Tax measures are but reimburse petitioners for the discount privilege accorded to senior
“enforced contributions exacted on pain of penal sanctions” and “clearly citizens. This is because the discount is treated as a deduction, a tax-
imposed for a public purpose.” In recent years, the power to tax has deductible expense that is subtracted from the gross income and results
indeed become a most effective tool to realize social justice, public in a lower taxable income. Stated otherwise, it is an amount that is
welfare, and the equitable distribution of wealth. allowed by law to reduce the income prior to the application of the tax
rate to compute the amount of tax which is due. Being a tax deduction,
To put it differently, a private establishment that merely breaks even -- the discount does not reduce taxes owed on a peso for peso basis but
without the discounts yet -- will surely start to incur losses because of merely offers a fractional reduction in taxes owed.
such discounts.
Theoretically, the treatment of the discount as a deduction reduces the
The same effect is expected if its mark-up is less than 20 percent, and net income of the private establishments concerned. The discounts
if all its sales come from retail purchases by senior citizens. given would have entered the coffers and formed part of the gross sales
of the private establishments, were it not for R.A. No. 9257.
Aside from the observation we have already raised earlier, it will also be
grossly unfair to an establishment if the discounts will be treated merely The permanent reduction in their total revenues is a forced subsidy
as deductions from either its gross income or its gross sales. corresponding to the taking of private property for public use or
benefit. This constitutes compensable taking for which petitioners would
Operating at a loss through no fault of its own, it will realize that the tax ordinarily become entitled to a just compensation.
credit limitation under RR 2-94 is inutile, if not improper. Worse, profit-
generating businesses will be put in a better position if they avail Just compensation is defined as the full and fair equivalent of the
themselves of tax credits denied those that are losing, because no taxes property taken from its owner by the expropriator. The measure is not
are due from the latter. the taker's gain but the owner's loss. The word just is used to intensify
meaning of the word compensation, and to convey the idea that the
In the case of Carlos Superdrug v. Velasco, Jr. (2007) here the Court equivalent to be rendered for the property to be taken shall be real,
ruled that the amendment to the Senior Citizens law changing the benefit substantial, full and ample.
from tax credit to a tax deduction was not deemed unconstitutional.
A tax deduction does not offer full reimbursement of the senior
citizen discount. As such, it would not meet the definition of just
Note that the Court said here in this case that “tax deduction is not just compensation.
compensation” but later the court did not strike down the law as
unconstitutional because (1) the calculation presented by the petitioners Having said that, this raises the question of whether the State, in
were on transactional basis and not based on gross income; and (2) promoting the health and welfare of a special group of citizens, can
police power was also used as a basis for the general welfare for the impose upon private establishments the burden of partly subsidizing a
petitioners have to take into account that in operating business there is government program. – Yes.
competition and there is the State.
The Senior Citizens Act was enacted primarily to maximize the
contribution of senior citizens to nation-building, and to grant benefits
CARLOS SUPERDRUG v. VELASCO, JR. and privileges to them for their improvement and well-being as the State
GR 166494, June 29, 2007, En Banc considers them an integral part of our society.
Facts: Here, RA 9257 amended RA 7432, Section 4(a) states: To implement the above policy, the law grants a twenty percent discount
to senior citizens. As a form of reimbursement, the law provides that
SEC 4. Privileges for the Senior Citizens. – The senior citizens shall business establishments extending the twenty percent discount to
be entitled to the following: senior citizens may claim the discount as a tax deduction.
Exercise of Police Power; Incorrect Calculations
(a) the grant of twenty percent (20%) discount from all The law is a legitimate exercise of police power which, similar to the
establishments relative to the utilization of services in hotels and power of eminent domain, has general welfare for its object.
similar lodging establishments, restaurants and recreation centers,
and purchase of medicines in all establishments for the exclusive use Police power is not capable of an exact definition, but has been
purposely veiled in general terms to underscore its comprehensiveness
or enjoyment of senior citizens, including funeral and burial services
to meet all exigencies and provide enough room for an efficient and
for the death of senior citizens; . . .
flexible response to conditions and circumstances, thus assuring the
greatest benefits.
The establishment may claim the discounts granted under (a), (f), (g)
and (h) as tax deduction based on the net cost of the goods sold or Accordingly, it has been described as "the most essential, insistent and
services rendered xxx the least limitable of powers, extending as it does to all the great public
needs.”
In a clarification by the DOF, it stated that the tax credit scheme under
the Old Senior Citizens Act (RA 7432) necessitates that tax payment It is "[t]he power vested in the legislature by the constitution to make,
has been made, thus it is rendered inapplicable. Thus, the new provision ordain, and establish all manner of wholesome and reasonable laws,
in tax deduction scheme the entities are allowed to deduct from gross statutes, and ordinances, either with penalties or without, not repugnant
income in computing for its tax liability, the amount of discounts it to the constitution, as they shall judge to be for the good and welfare of
granted. the commonwealth, and of the subjects of the same.
In the present petition, petitioners argues that Section 4(a) is It is incorrect for petitioners to insist that the grant of the senior citizen
unconstitutional as it constitutes deprivation of private property. discount is unduly oppressive to their business, because petitioners
Compelling drugstore owners and establishment to grant the discounts have not taken time to calculate correctly and come up with a
will result in a loss of profit and capital because (1) the drugstores only financial report, so that they have not been able to show properly
mark up 5% to 10% and (2) law failed to provide a scheme whereby whether or not the tax deduction scheme really works greatly to their
drugstores will be justly compensated for the discount. Examining disadvantage.
petitioners' arguments, it is apparent that what petitioners are
questioning is validity of tax deduction scheme as a reimbursement In treating the discount as a tax deduction, petitioners insist that they will
mechanism for the twenty percent (20%) discount that they extend to incur losses because, referring to the DOF Opinion, for every P1.00
senior citizens. senior citizen discount that petitioners would give, P0.68 will be
shouldered by them as only P0.32 will be refunded by the government
Issue: Is the provision unconstitutional? – No. by way of a tax deduction.
Here, petitioners tried to show a loss on a per transaction basis, DSWD and DOF insofar as these allow the business establishments to
which should not be the case. An income statement, showing an claim the 20% discount given to senior citizens as a tax deduction.
accounting of petitioners' sales, expenses, and net profit (or loss) for a
given period could have accurately reflected the effect of the discount They argue that the tax deduction scheme contravenes Art. III, Section
on their income. Absent any financial statement, petitioners cannot 9 of the Constitution: “private property shall not be taken for public use
substantiate their claim that they will be operating at a loss should without just compensation.” In support of their position, petitioners cite
they give the discount. In addition, the computation was CIR v. Central Luzon, where it was ruled that the 20% discount privilege
erroneously based on the assumption that their customers constitutes taking of private property for public use which requires the
consisted wholly of senior citizens. payment of just compensation, and Carlos Superdrug Corporation v.
DWSD where it was acknowledged that the tax deduction scheme does
The Court is not oblivious of the retail side of the pharmaceutical industry not meet the definition of just compensation.
and the competitive pricing component of the business. While the
Constitution protects property rights, petitioners must accept the They also seek the reversal of the Carlos Superdrug ruling that the tax
realities of business and the State, in the exercise of police power, deduction scheme adopted by the government is justified by police
can intervene in the operations of a business which may result in an power. They assert that although both police power and the power of
impairment of property rights in the process. eminent domain have the general welfare for their object, there are still
traditional distinctions between the two” and that “eminent domain
Undeniably, the success of the senior citizens program rests largely on cannot be made less supreme than police power.” Petitioners further
the support imparted by petitioners and the other private establishments claim that the legislature, in amending RA 7432, relied on an erroneous
concerned. This being the case, the means employed in invoking the contemporaneous construction that prior payment of taxes is required
active participation of the private sector, in order to achieve the purpose for tax credit.
or objective of the law, is reasonably and directly related.
The validity of the 20% senior citizen discount and tax deduction
Without sufficient proof that Section 4(a) of R.A. No. 9257 is arbitrary, scheme under RA 9257, as an exercise of police power of the State,
and that the continued implementation of the same would be has already been settled in Carlos Superdrug Corporation.
unconscionably detrimental to petitioners, the Court will refrain from
quashing a legislative act. [NOTE: Court just cited here the ruling in Carlos Superdrug v. Velasco
in full, discussing how police power justifies the tax deduction scheme –
Clarifying the Nature and Effect of the that the law is a legitimate exercise of police power which does not
Senior Citizens Discount require just compensation and will necessarily impair property rights of
private establishments].
Thus, with the two preceding cases, it can be observed that:
• In the case of CIR v. Central Luzon (1995), the tax credits No compelling reason has been proffered to overturn, modify or
were considered as proper just compensation for private abandon the ruling in Carlos Superdrug Corporation.
establishments shouldering the 20% discount of senior
citizens as to medicines. The present case, thus, affords an opportunity for us to clarify the
• The former tax credit under the Senior Citizens Act is now a statements in Central Luzon Drug Corporation and Carlos Superdrug
tax deduction under the Expanded Senior Citizens Act Corporation.
• In the case of Carlos Superdrug v. Velasco (2007), the Court
ruled that the new tax deduction scheme, unlike the tax credit A fair reading of Carlos Superdrug Corporation would show that we
scheme under the old Senior Citizen’s act no longer satisfies categorically ruled therein that the 20% discount is a valid exercise of
requirement of just compensation, but the law was not police power. Thus, even if the current law, through its tax deduction
scheme (which abandoned the tax credit scheme under the previous
declared unconstitutional and was even justified under police
law), does not provide for a peso for peso reimbursement of the 20%
power. Because in police power, just compensation is not discount given by private establishments, no constitutional infirmity
required. obtains because, being a valid exercise of police power, payment of
just compensation is not warranted.
To clarify as to what nature the Senior Citizen’s discount now as being
considered a tax deduction for the private establishments, the case of The 20% Senior Citizen Discount
Manila Memorial v. DSWD (En Banc, 2013) attempts to clarify that as Is an Exercise of Police Power
to its nature and effects, 20% discount is a regulation affecting the The 20% discount is intended to improve the welfare of senior citizens
ability of private establishments to price their products and services who, at their age, are less likely to be gainfully employed, more prone to
relative to a senor citizens for which the Constitution affords a illnesses and other disabilities, and, thus, in need of subsidy in
preferential concern. purchasing basic commodities.
It may not be amiss to mention also that the discount serves to honor
In turn, this affects the amount of profits or income or gross
senior citizens who presumably spent the productive years of their
sales that a private establishment can derive from senior citizens. In
lives on contributing to the development and progress of the
other words the subject regulation affect the pricing and hence the nation. This distinct cultural Filipino practice of honoring the elderly is
profitability of the private establishment. an integral part of this law. As to its nature and effects, the 20% discount
is a regulation affecting the ability of private establishments to price
It does not purport to appropriate nor burden specific their products and services relative to a special class of individuals,
properties used in the operation or conduct of the business but merely senior citizens, for which the Constitution affords preferential concern.
regulates the pricing of goods and services relative to, and the amount
of profits or income or gross sales the private establishments may gain In turn, this affects the amount of profits or income/gross sales that a
from senior citizens. private establishment can derive from senior citizens.
As Domondon puts it, the nature and effects of the 20% senior citizens In other words, the subject regulation affects the pricing, and, hence,
discount is an exercise of police power and not of eminent domain. the profitability of a private establishment. However, it does not
purport to appropriate or burden specific properties, used in the
operation or conduct of the business of private establishments, for the
MANILA MEMORIAL PARK v. SECRETARY OF DSWD use or benefit of the public, or senior citizens for that matter, but merely
GR 175356, December 03, 2013, En Banc regulates the pricing of goods and services relative to, and the amount
of profits or income/gross sales that such private establishments may
Facts: In this case, the petitioners here assails constitutionality of derive from, senior citizens.
Section 4 of RA 7432 as amended by RA 9257 as well as the IRR by
The 20% senior citizen discount has not been shown to be ABAKADA v. ERMITA
unreasonable, oppressive or confiscatory for failure to show burden of
GR 168056, September 1, 2005, En Banc
proof to defeat presumption of constitutionality.
Facts: This case involved the constitutionality of RA 9337 on the
D. Principles of a Sound Tax System provisions of the VAT, stand-by authority of the president to increase it
to 12% upon certain conditions. In this case, petitioners contend that the
Principles of a Sound Tax System increase of VAT rate should be based on fiscal adequacy.
The basic principles of a sound tax system are: [F-A-T]
As discussed by public respondents, in the first condition requiring that
1. Fiscal Adequacy which means that the revenues that are
VAT/GDP > 2.8%, means that, if the VAT/GDP is less than 2.8% it
generated by taxation should be sufficient to meet the needs
means that government has weak or no capability of implementing the
of the government; VAT or the VAT is not effective in the function of tax collection
2. Administrative Feasibility which means that the tax laws
should be easily implemented in order to assure the smooth Issue: Was it based on fiscal adequacy? – Yes.
flow into the treasury of the fiscally adequate amounts; and
3. Theoretical Justice which means that the tax should be Held: The first condition amounts to an incentive to the President to
collected only from those that have the ability to pay. increase the VAT collection does not render it unconstitutional so long
The canons serve as standards in order to determine whether a tax as there is a public purpose for which the law was passed, which in this
system is able to meet the purpose or objectives of taxation. case, is mainly to raise revenue. In fact, fiscal adequacy dictated the
need for a raise in revenue.
1 I. Fiscal Adequacy The principle of fiscal adequacy as a characteristic of a sound tax

system was originally stated by Adam Smith in his Canons of Taxation
Fiscal adequacy means that the tax system must be able to provide (1776), as:
revenues in order to meet the legitimate objects of the government.
Stated otherwise, the taxes collected must be able to finance IV. Every tax ought to be so contrived as both to take out and to keep
government expenditures and their variations. out of the pockets of the people as little as possible over and above
what it brings into the public treasury of the state.
According to Dean Quibod, the sources of revenue should be sufficient
to meet the varied levels of expenditure, regardless of business It simply means that sources of revenues must be adequate to meet
government expenditures and their variations. The dire need for revenue
condition and problems on economic adjustment.
cannot be ignored. Our country is in a quagmire of financial woe.
Congress passed the law hoping for rescue from an inevitable
Thus, the tax systems or the prevailing tax measures that the state have catastrophe. Whether the law is indeed sufficient to answer the state’s
should be able to expand in response to variations in public economic dilemma is not for the Court to judge.
expenditures.
Thus, if the collection for revenue is 20%, the Congress should not
increase the tax rates, the problems with collection and the enforcement
2 II. Administrative Feasibility cccn
should not be resolved the enacting more taxes. The state should, The tax measures should be easily implemented in order to assure the
through its executive branch, be able to enforce and implement. smooth flow into the treasury of the fiscally adequate amounts.
CHAVEZ v. ONGPIN “Feasible” means it is possible and doable. The tax system should be
capable of being effectively administered and enforced with the least
GR 76778, June 06, 1990, En Banc
inconvenience to the taxpayer.
Facts: The petition seeks to declare unconstitutional EO 73 alleging that
EO 73 accelerated the applicable of the general revision of assessment This means that ta laws should be capable of convenient, just and
mandating an increase in real property taxes by 100% to 400% on effective administration. Each tax should be:
improvements and 100% on land and the increase in value of property • Clear and plain to the taxpayer
results to increase of real property taxes resulting to a sheer oppression • Capable of uniform enforcement
and that increase in the market values of real properties was only due • Convenient as to time, place and manner of payment
to inflation and economic rescission. • Not unduly burdensome upon or discouraging to business
activity
Chavez argues here the unreasonable increase in real property taxes
brought by EO 73 amounts to a confiscation of property repugnant to the
constitutional guarantee of due process. 3 III. Theoretical Justice
Issue: The tax should be collected on the basis of ability to pay through a
Should it be declared unconstitutional? – No. progressive system of taxation. Thus, the incidence or burden of taxation
should fall more on those who could afford.
Held: EO 73 merely directs that the real property values as determined
by local assessors during the latest general revision of assessment shall
This is termed as the Ability-to-Pay Theory, those who have more
take effect on January 01, 1987. And this is a continuing process
mandated by law. should pay more and those have less should pay less.
Without EO 73, the basis for collection of real property taxes will still be Q. What happens if there is non-observance to any of the canons of a
the 1978 revision of property values. Certainly, to continue collecting real sound tax system?
property taxes based on valuations arrived at several years ago, in
disregard of the increases in the value of real properties that have DIAZ v. SECRETARY OF FINANCE
occurred since then, is not in consonance with a sound tax system. GR 193007, July 19, 2011, En Banc
Fiscal adequacy, which is one of the characteristics of a sound tax
Facts: Petitioners question the validity of imposition of VAT to the
system, requires that sources of revenues must be adequate to meet
collections of tollway operators, arguing that the Congress did not intent
government expenditures and their variations.
to include toll fees within the meaning of “sale of services” subject to
VAT and that it was “user’s vat” and not a sale of services, and that
imposing VAT would tax public service and that VAT was never factored progressive tax system in which those who have more should contribute
in computing toll fees. more, and those who have less should contribute less.
Petitioners assert that the substantiation requirements for claiming input

VAT make the VAT on tollway operations impractical of
implementation.
3 III. Benefit-Protection
The Benefits-Protection Theory or Symbiotic Relationship concept
They cite the fact that, in order to claim input VAT, the name, address is the basis of taxation. In CIR v. Algue, 158 SCRA 8:
and tax identification number of the tollway user must be indicated in the
VAT receipt or invoice. The manner by which the BIR intends to The basis of taxation is the symbiotic relationship which is the reciprocal
implement the VAT - by rounding off the toll rate and putting any excess relation of protection and support between the state and the taxpayers.
collection in an escrow account - is also illegal, while the alternative of The state gives protection and for it to continue giving protection, it must
giving "change" to thousands of motorists in order to meet the exact toll be supported by taxpayers in the form of taxes.
rate would be a logistical nightmare. Thus, according to them, the VAT
on tollway operations is not administratively feasible.
Taxes are what we pay for a civilized society. Without taxes, the
Issue: May toll fees collected by tollway operators be subjected to value- government would be paralyzed for lack of motive power to activate and
added tax? – Yes and non-observance of a canon does not render operate it.
a tax imposition in valid.
Despite natural reluctance to surrender part of one’s hard-earned
Held: (1) They are subject to VAT because tollway operators are income to the taxing authorities, every person who is able must
franchise grantees and they do not belong to exceptions from the contribute his share to the government.
payment of VAT.
The government, for its part, is expected to respond in the form of
(2) Administrative feasibility is one of the canons of a sound tax tangible and intangible benefits intended to improve the lives of the
system. It simply means that the tax system should be capable of being people and enhance their moral and material values.
effectively administered and enforced with the least inconvenience to
the taxpayer.
This symbiotic relationship is the rationale of taxation and should dispel
Non-observance of the canon, however, will not render a tax the erroneous notion that it is an arbitrary method of exaction by those
imposition invalid "except to the extent that specific constitutional in the seat of power.
or statutory limitations are impaired."
This is also termed as “Benefits received principle” where the more
Thus, even if the imposition of VAT on tollway operations may seem man enjoys the advantages of society, the more he ought to hold himself
burdensome to implement, it is not necessarily invalid unless some honored in contributing to those expenses (ABAKADA v. Ermita, 2005).
aspect of it is shown to violate any law or the Constitution.
Here, it remains to be seen how the taxing authority will actually 4 IV. Lifeblood Theory
implement the VAT on tollway operations. Any declaration by the Court
that the manner of its implementation is illegal or unconstitutional would Taxes are the lifeblood of the government for without taxes, the
be premature. government can neither exist nor endure. Without revenue raised from
taxation, the government will not survive, resulting in detriment to
The Court cannot preempt the BIR's discretion on the matter, absent any society. Without taxes, the government would be paralyzed for lack of
clear violation of law or the Constitution. For the same reason, the Court motive power to activate and operate it.
cannot prematurely declare as illegal, BIR RMC 63-2010
Concepts that Flow from Lifeblood Theory
E. Theory and Basis of Taxation 1. Collection of taxes may not be enjoined by injunction (or the
No Injunction Principle)
2. The taxes could not be subject of compensation and set-off
The theory of taxation is
3. A valid tax may result in destruction of the taxpayer’s property;
• The necessity theory which is inextricably linked with the
and (Power to destroy)
lifeblood theory;
4. Taxation is an unlimited and plenary power.
The basis of taxation is
• The benefits-protection theory also known as symbiotic 1. No Injunction Rule; Exception
relationship
GENERAL RULE
1 I. Necessity Collection of taxes may not be enjoined by injunction.
Taxes, being the lifeblood of the government, should be

Theory of taxation is based on Necessity Theory. It is the theory behind
collected promptly. No court shall have the authority to grant an
the exercise of the power to tax to have emanated from necessity, for
injunction to restrain the collection of any internal revenue tax, fee or
without taxes, the government cannot then fulfill its mandate of
charge imposed by NIRC (Angeles City v. Angeles Electric Corporation,
promoting the general welfare and well-being of the people.
622 SCRA 43, 2010).
The theory of necessity discusses the acceptance that governmental
EXCEPTIONS
existence is a necessity and performance of governmental functions
1. Local taxes can be enjoined by the courts
redounds to the benefit of the populace in general; and the government
could levy proportionate forced contributions among the populace to
defray its expenditures. ANGELES CITY v. ANGELES CITY ELECTRIC CORP.
GR 166134, June 29, 2010
2 II. Ability to Pay Facts: Angeles City Electric Corp (AEC), a legislative franchise holder
for the generation and distribution of electric light, heat and power for
The Ability to Pay Theory is related to the principle of sound tax system sale in Angeles City, Pampanga by virtue of RA 4079. Pursuant to
– Theoretical Justice, where the tax system should be based on a
Section 3-A, AEC’s payment of franchise tax was in lieu of all taxes, fees b. In this instance, the court may require the taxpayer either to
and assessments. deposit the amount claimed for file a surety bond for not more
than double the amount with the court (RA 1125, Sec. 11).
By virtue of LGC Angeles City enacted the Revised Revenue Code of
Angeles City or RRCAC which now imposed tax on businesses enjoying 3. Supreme Court, Constitutional Basis
franchise in December 23, 1993. While not mentioned, Domondon submits that the Supreme Court, being
the court constitutionally vested with judicial powers, may enjoin the
Now, in 2004, City Treasurer issued a Notice of Assessment on AEC for
collection of taxes under its general judicial power but it should be
payment of business tax, license fee and other charges since 1993 to
2004 in the total amount of P94,861,194.10. AEC protested such apparent that the source of the power is not statutory but constitutional.
arguing it is exempt.
2. Strict Construction
AEC filed with the RTC a petition for declaratory relief. Then the City
Treasurer levied on the real properties of AEC which then prompted the
latter to filed a motion for issuance of TRO and/or Writ of Preliminary Construction and Interpretation of Tax Laws
Injunction to enjoin Angeles City from levying and selling the properties.
General Rule: No person or property is subject to taxation unless within
RTC issued a TRO and WPI. This was meted with a motion for the terms or plain import of a taxing of statute.
dissolution filed by the petitioners. • In case of doubt, tax statutes are construed strictly against
the government and liberally in favor of the taxpayer;
Issue: Did RTC gravely abuse its discretion in issuing the writ of • Taxes being burdens, they are not to be presumed beyond
preliminary injunction? – No. what the statute expressly and clearly declares;
Held: Local taxes can be enjoined by the courts. The LGC does not
Exception: The rule of strict construction as against government is not
specifically prohibit an injunction enjoining the collection of taxes.
applicable where:
A principle deeply embedded in our jurisprudence is that taxes being the • The language of the tax statue is plain and there is no doubt
lifeblood of the government should be collected promptly, without as to the legislative intent. In such case, the words are given
unnecessary hindrance or delay. their ordinary meaning.
In line with this principle, the National Internal Revenue Code of 1997 • Tax statutes are to receive reasonable construction with a
(NIRC) expressly provides that no court shall have the authority to grant view to carrying out their purpose and intent. They should not
an injunction to restrain the collection of any national internal revenue be construed as to permit the taxpayer to easily evade
tax, fee or charge imposed by the code. payment of tax.
• A tax statute should be construed to avoid possibilities of tax
An exception to this rule obtains only when (1) in the opinion of the Court evasion
of Tax Appeals (CTA) the collection thereof may jeopardize the interest
of the government and/or the taxpayer.
As to Tax Exemption and Exclusion
The situation, however, is different in the case of the (2) collection of
local taxes as there is no express provision in the LGC prohibiting courts General Rule: Exemptions are not favored and are construed
from issuing an injunction to restrain local governments from collecting strictissimi juris against the taxpayer.
taxes. • Taxation is the rule, exemption is the exception
• Whoever claims exemption must be able to justify his claim or
Nevertheless, it must be emphasized that although there is no express right thereto
prohibition in the LGC, injunctions enjoining the collection of local taxes • Claims for refund partake of the nature of tax exemptions and
are frowned upon. Courts therefore should exercise extreme caution in will not be allowed unless granted in the most explicit and
issuing such injunctions.
categorical language.
Exception: When the law itself expressly provides for a liberal

2. CTA Law, RA 1125 as am. RA 9282, par. 4 construction, that is in case of doubt, in shall be resolved in favor of
exemption.
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. xxx • Exemption in favor of government agencies for they are
No appeal taken to the CTA from the decision of the Commissioner of generally exempt from taxes;
Internal Revenue or the Commissioner of Customs or the Regional Trial • Exemption refers to religious, charitable and educational
Court, provincial, city or municipal treasurer or the Secretary of Finance, institutions
the Secretary of Trade and Industry or the Secretary of Agriculture, as • Express mention or clear legislative intent that the rule on
the case may be, shall suspend the payment, levy, distraint, and/or sale strict construction does not apply.
of any property of the taxpayer for the satisfaction of his tax liability as
provided by existing law: Provided, however, That when in the opinion
of the Court the collection by the aforementioned government agencies
F. Doctrines in Taxation
may jeopardize the interest of the Government and/or the taxpayer
the Court any stage of the proceeding may suspend the said
collection and require the taxpayer either to deposit the amount
1 I. Prospectivity
claimed or to file a surety bond for not more than double the General Rule: Tax laws do not have retroactive application.
amount with the Court.
Tax laws do not have any retroactive application, to give them
CTA Can Suspend Tax Collection retroactive application would violate the due process rights of the
The provisions of RA 1125 authorizes CTA to issue an injunction to taxpayer who should know his obligations to be able to comply them.
prohibit BIR from collecting tax and is considered as an exception to the The public need must exist at the time of the enactment of the tax
no injunction rule under Sec. 218 of the National Internal Revenue Code. measure. Thus, the previously assessed and demanded tax may still
be collected because the repeal is to be construction as exemption that
must be strictly construed.
Conditions for the Issuance
The CTA may enjoin collection of taxes
Exception: Unless the language of statute clearly provides
a. If in its opinion the same may jeopardize the interest of the
.
government and/or the taxpayer;
CIR v. ACOSTA In 1994, respondent received a Preliminary Assessment Notice for

deficiency of income tax of P118,271,672 inclusive of the surcharge,
GR 154068, August 03, 2007, 556 Phil. 31
interest and penalty. A formal protest was made against the assessment
alleging it was invalid for lack of factual and legal basis, the formal
Facts: Rosemarie Acosta is an employee of Intel, for year 1996, she protest was filed on May 6, 1994.
was assigned to a foreign country. Intel withheld the taxes due on her
compensation income and remitted to BIR P308K. On October 16, 2002, more than 8 years after assessment was issued,
the counsel received from CIR a Final Decision denying the protest and
In Oct. 08, 1997, Rosemarie Acosta filed an amended return where she affirming assessment. The CTA ruled that right of CIR to collected has
indicated overpayment of around P358K. prescribed pursuant to Sec. 269 of the Tax Code of 1977.
In April 15, 1999, claiming that the income taxes withheld and paid by Issue: Whether or not CIR’s right to collect alleged deficiency income
Intel resulted to an overpayment of P340K, a petition for review was field tax is barred by prescription under Sec. 296 (c) of the Tax Code of
with CTA. 1977. – Yes.
The CIR moved to dismiss the petitioner for failure of Acosta to file the Held: The assessment, in this case, was presumably issued on 14 April
mandatory written claim for refund before the CIR. CTA ruled against 1994 since the respondent did not dispute the CIR's claim. Therefore,
Acosta for such failure to file. But the CA then reversed ruling that the the BIR had until 13 April 1997. However, as there was no Warrant of
filing of amended return was sufficient compliance with a written claim Distraint and/or Levy served on the respondents nor any judicial
for refund. proceedings initiated by the BIR, the earliest attempt of the BIR to collect
the tax due based on this assessment was when it filed its Answer in
CIR argues that an amended return showing an overpayment does not CTA Case No. 6568 on 9 January 2003, which was several years
constitute the written claim for refund as required under the old Tax beyond the three-year prescriptive period. Thus, the CIR is now
Code of 1993. He claims that an actual written claim for refund is prescribed from collecting the assessed tax.
necessary before suit for recovery may proceed.
The provisions on prescription in the assessment and collection of
Acosta argues that the filing of amended return indicating an national internal revenue taxes became law upon the recommendation
overpayment constitutes as a written claim for refund under the new of the tax commissioner of the Philippines. The report submitted by the
1997 Tax Code. tax commission clearly states that these provisions on prescription
should be enacted to benefit and protect taxpayers:
The applicable law on refund of taxes pertaining to the 1996
compensation income is Section 230 of the old Tax Code, which was
the law then in effect, and not Section 204(c) of the new Tax Code, which Under the former law, the right of the Government to collect the
was effective starting only on January 1, 1998. tax does not prescribe. However, in fairness to the taxpayer,
the Government should be estopped from collecting the tax
Issue: Can the 1997 Tax Code apply retroactively? - No. where it failed to make the necessary investigation and
assessment within 5 years after the filing of the return and where
Held: The Court finds that it cannot give retroactive application to it failed to collect the tax within 5 years from the date of assessment
Section 204(c). We have to stress that tax laws are prospective in thereof. Just as the government is interested in the stability of its
operation, unless the language of the statute clearly provides otherwise. collections, so also are the taxpayers entitled to an assurance that
Thus, the old Tax Code prevails thus a written claim is required. they will not be subjected to further investigation for tax purposes
after the expiration of a reasonable period of time. (Vol. II, Report of
Finally, we cannot agree with the Court of Appeals' finding that the the Tax Commission of the Philippines, pp. 321-322).
nature of the instant case calls for the application of remedial laws.
Revenue statutes are substantive laws and in no sense must their In a number of cases, this Court has also clarified that the statute of
application be equated with that of remedial laws. limitations on the collection of taxes should benefit both the Government
and the taxpayers. In these cases, the Court further illustrated the
As well said in a prior case, revenue laws are not intended to be harmful effects that the delay in the assessment and collection of taxes
liberally construed. Considering that taxes are the lifeblood of the inflicts upon taxpayers.
government and in Holmes's memorable metaphor, the price we pay for
civilization, tax laws must be faithfully and strictly implemented.
Can imprescriptibility of taxation be present?
Atty. Donalvo submits that following
2 II. Imprescriptibility 1. When there is fraud involved;
2. There is failure to file the income tax return or the income tax
General Rule: The right of the government to collect taxes is return field is false.
imprescriptible because the very existence of the state depends upon
the exercise of power of taxation. This is because the running of the 10-year period will start to run from
the discovery.
Where the government has not by express statutory provision, provided
a limitation upon its right to assess unpaid taxes, such rights is
imprescriptible.
3 III. Double Taxation
Is double taxation a constitutional or inherent limitation?
Exception: Statutes may, however, provide for prescriptive periods for
the collection of particular kinds of taxes in order to respect the due Atty. Donalvo submits that it is a constitutional one. It is not an
process rights of the taxpayers. inherent limitation because the power to tax is plenary, all-
encompassing and unlimited.
CIR v. PHIL. GLOBAL COMMUNICATION
GR 167146, October 31, 2006 Not All Double Taxation is Illegal
It is important to point out that double taxation to be illegal must refer to
Facts: Philippine Global Communication (respondent) filed its annual a direct double taxation or also known as obnoxious double taxation.
ITR for taxable year 1990 on April 15, 1991. In 1992, the BIR examined
that books of account and other accounting records of respondent as to Thus if the double taxation is a direct duplicate taxation, then it is a valid
its income tax liability. defense against a tax measure. The tax measure would be nullified for
being unconstitutional for violating the equal protection clause.
Two Forms of Double Taxation

1. Direct Duplicate Taxation or Direct Double Taxation City of Manila argue no double taxation because in Section 14
2. Indirect Duplicate Taxation or Indirect Double Taxation respondent is tax as a manufacturer and second it is being taxed as a
business subject to excise, TAX or percentage tax.
Direct Duplicate Indirect Duplicate Taxation
Taxation Issue: Whether the enforcement of Section 21 constitutes double
A valid defense against the Not a valid defense against the taxation – Yes.
legality of tax measure legality of tax measure
Also termed as “double taxation Also termed as “double taxation Held: Prior to Tax Ordinance 7988 (as am. 8011), Coca-Cola was never
in its strict since” in its broad sense” assessed with Section 21 due to the clear and unambiguous
Void for being unconstitutional Not necessarily void provision of Section 21 of Tax Ordinance No. 7794 exempts from the
as it violates the equal payment of the local business tax imposed by said section, businesses
protection clause that are already paying such tax under other sections of the same tax
Elements: Absence of one of the foregoing ordinance. The said proviso, however, was deleted from Section 21 of
1. Subject matter is elements renders the double Tax Ordinance No. 7794 by Tax Ordinances No. 7988 and No. 8011.
taxed twice taxation an indirect one Following this deletion, petitioners began assessing respondent for the
2. Same purpose local business tax under Section 21 of Tax Ordinance No. 7794, as
3. By the same taxing amended.
authority
4. Within the same Note the pronouncement by this Court in the Coca-Cola case that Tax
jurisdiction Ordinance No. 7988 and Tax Ordinance No. 8011 were null and void
5. During the same tax and without legal effect, then Section 21 of Tax Ordinance No. 7794, as
period it has been previously worded, with its exempting proviso, is back in
6. Taxes are the same effect.
kind and character
Accordingly, respondent should not have been subjected to the
The following elements are all local business tax under Section 21 of Tax Ordinance No. 7794
present since it was already paying the local business tax under Section 14 of
the same ordinance. Petitioners obstinately ignore the exempting
Direct Duplicate Taxation E-U-EP proviso in Section 21 of Tax Ordinance No. 7794, to their own detriment.
Said exempting proviso was precisely included in said section so
It violates the equal protection, as well as uniformity and equality of
protection clauses of 1987 Philippine Constitution resulting to the as to avoid double taxation.
nullification of tax laws. Consequent, there could only be one tax
collected. Double taxation means taxing the same property twice when Double taxation means taxing the same property twice when it should
it should be taxed only once; that is taxing the same person twice by the be taxed only once; that is, "taxing the same person twice by the same
same jurisdiction for the same thing. It is obnoxious when the taxpayer jurisdiction for the same thing."
is taxed twice, when it should be but once. It is obnoxious when the taxpayer is taxed twice, when it should be but
once. Otherwise described as "direct duplicate taxation," the two taxes
must be imposed on
CITY OF MANILA v. COCA COLA BOTTLERS [1] The same subject matter,
GR 181845, August 04, 2009, 612 Phil. 609 [2] For the same purpose,
[3] By the same taxing authority,
Facts: (1) Coca-Cola Bottlers has been paying City of Manila local [4] Within the same jurisdiction,
business tax only under Sec. 14 of Tax Ordinance 7794 but is exempted [5] During the same taxing period;
from Sec. 21 of same ordinance. [6] and the taxes must be of the same kind or character.
(2) In February 25, 2000, City of Manila approved Tax Ordinance 7988 Using the aforementioned test, the Court finds that there is indeed
amending Sec. 14 by increasing tax rates applicable; Sec. 21 removed double taxation if respondent is subjected to the taxes under both
the exemption provision. Sections 14 and 21 of Tax Ordinance No. 7794, since these are being
Provisions Involved: imposed:
Section 14. - Tax on Manufacturers, Assemblers and Other Processors. (1) on the same subject matter - the privilege of doing business in the
- There is hereby imposed a graduated tax on manufacturers, assemblers, City of Manila;
repackers, processors, brewers, distillers, rectifiers, and compounders of
liquors, distilled spirits, and wines or manufacturers of any article of commerce
(2) for the same purpose - to make persons conducting business within
of whatever kind or nature xxx
the City of Manila contribute to city revenues;
Section 21. - Tax on Businesses Subject to the Excise, Value-Added or
Percentage Taxes under the NIRC. - On any of the following businesses (3) by the same taxing authority - petitioner City of Manila;
and articles of commerce subject to excise, value-added or percentage taxes
under the National Internal Revenue Code hereinafter referred to as NIRC, as (4) within the same taxing jurisdiction - within the territorial jurisdiction of
amended, a tax of FIFTY PERCENT (50%) of ONE PERCENT (1%) per annum the City of Manila;
on the gross sales or receipts of the preceding calendar year is hereby imposed
xxx (5) for the same taxing periods - per calendar year; and
PROVIDED, that all registered businesses in the City of Manila that are (6) of the same kind or character - a local business tax imposed on gross
already paying the aforementioned tax shall be exempted from payment thereof.
sales or receipts of the business.
[This was removed by Ordinance 7988]
Note that Tax Ordinance 7988 was amended by 8011, these were
declared null and void by SC for being violative of LGC. However, before The City of Manila case is related to the case of:
such declaration of nullity, City of Manila, has already assessed Coca-
Cola on the basis of Sec. 21, and it was assessed for deficiency local SWEDISH MATCH v, CITY OF MANILA
business taxes, penalties and interest in the amount of P18.5M. GR 181277, July 03, 2013
Respondent filed a protest arguing that the said amendment had amount
Facts: Swedish Match paid business taxes based on Sec. 14 and
to double taxation as it was taxed twice by Sec. 14 and Sec. 21.
Section 21 of Ordinance 7794, otherwise amended by Ordinances 7988
and 8011 (declared void by SC).
Assuming it was not liable to pay taxes under Sec. 21, it claimed for a elements of double taxation concurred upon the City of Manila’s
tax refund for the business taxes paid under Sec. 21 for it constituted assessment on and collection from the petitioners of taxes for the first
allegedly double taxation. quarter of 1999 pursuant to Section 21 of the Revenue Code of Manila.
Issue: Is there double taxation? – Yes. Firstly, because Section 21 of the Revenue Code of Manila imposed
the tax on a person who sold goods and services in the course of trade
Held: At the outset, it must be pointed out that the issue of double or business based on a certain percentage of his gross sales or receipts
taxation is not novel, as it has already been settled by this Court in City in the preceding calendar year,
of Manila v. Coca-Cola Bottlers
While Section 15 and Section 17 likewise imposed the tax on a person
[Court cited the above explanation in the preceding case]. who sold goods and services in the course of trade or business but only
identified such person with particularity, namely, the wholesaler,
Accordingly, respondent’s assessment under both Sections 14 and 21 distributor or dealer (Section 15), and the retailer (Section 17)
had no basis. All the taxes – being imposed on the privilege of doing business in the
City of Manila in order to make the taxpayers contribute to the city’s
Petitioner is indeed liable to pay business taxes to the City of Manila; revenues – were imposed on the same subject matter and for the same
nevertheless, considering that the former has already paid these taxes purpose.
under Section 14 of the Manila Revenue Code, it is exempt from the
same payments under Section 21 of the same code. Hence, payments Secondly, the taxes were imposed by the same taxing authority (the
made under Section 21 must be refunded in favor of petitioner. City of Manila) and within the same jurisdiction in the same taxing period
(i.e., per calendar year).
It is undisputed that petitioner paid business taxes based on Sections
14 and 21 for the fourth quarter of 2001 in the total amount of Thirdly, the taxes were all in nature of local business taxes.
P470,932.21. Therefore, it is entitled to a refund of P164,552.04
corresponding to the payment under Section 21 of the Manila Revenue In fine, the imposition of the tax under Section 21 of the Revenue Code
Code. of Manila constituted double taxation, and the taxes collected pursuant
thereto must be refunded.
In a much later case involving the same Tax Ordinance and Section 21,
both City of Manila v. Coca-Cola (2009) and Swedish Match v. City of Jurisprudence: The imposition of local business tax based on gross
Manila (2013) were cited in ruling: revenue inevitably results to double taxation.
NURSERY CARE CORPORATION v. ACEVEDO ERICSSON TELECOM v. CITY OF PASIG

GR 180651, July 30, 2014 GR 176667, November 22, 2007
Facts: The City of Manila assessed and collected taxes from the Facts: City of Pasig assessed Ericsson for tax deficiency from years
individual petitioners pursuant to Section 15 (Tax on Wholesalers, 1998 and 1999 based on its gross revenues. Ericsson protested
Distributors, or Dealers) and Section 17 (Tax on Retailers) of the claiming that the computation of the local business tax should be based
Revenue Code of Manila. At the same time, the City of Manila imposed on gross receipts not gross revenue.
additional taxes upon the petitioners pursuant to Section 21 (Tax on
Business Subject to the Excise, Value-Added or Percentage Taxes Respondent assessed deficiency local business taxes on petitioner
under the NIRC) of the Revenue Code of Manila, as amended, as a based on the latter’s gross revenue as reported in its financial
condition for the renewal of their respective business licenses for the statements, arguing that gross receipts is synonymous with gross
year 1999. earnings/revenue, which, in turn, includes uncollected earnings.
To comply with assessment, the petitioners paid under protest the Petitioner, however, contends that only the portion of the revenues
amounts assessed. Later, the petitioners formally requested the Office which were actually and constructively received should be considered in
of the City Treasurer for the tax credit or refund of the local business tax determining its tax base.
paid under protest. This was denied by then City Treasurer Acevedo.
Issue: Whether tax on contractors should be based on gross receipts
Petitions point out that though Section 21 of the Revenue Code of Manila or gross revenue.
was not itself unconstitutional or invalid, its enforcement against the
petitioners constituted double taxation because the local business taxes Applicable Provision:
under Section 15 and Section 17 of the Revenue Code of Manila were SEC. 143. Tax on Business. -The municipality may impose taxes on the
already being paid by them. They contend that the proviso in Section 21 following businesses: x x x x (e) On contractors and other independent
exempted all registered businesses in the City of Manila from paying the contractors, in accordance with the following schedule: With gross receipts
tax imposed under Section 21; and that the exemption was more in for the preceding calendar year.
accord with Section 143 of the Local Government Code,[33] the law that
vested in the municipal and city governments the power to impose Gross Receipts from Gross Revenue
business taxes. The law is clear. Gross receipts include money or its equivalent actually
or constructively received in consideration of services rendered or
The respondents counter, however, that double taxation did not occur articles sold, exchanged or leased, whether actual or constructive.
from the imposition and collection of the tax pursuant to Section 21 of
the Revenue Code of Manila; that the taxes imposed pursuant to Section In contrast, gross revenue covers money or its equivalent actually or
21 were in the concept of indirect taxes upon the consumers of the constructively received, including the value of services rendered or
goods and services sold by a business establishment; articles sold, exchanged or leased, the payment of which is yet to be
received.
Issue: Is there double taxation? – Yes.
This is in consonance with the International Financial Reporting
Collection of Taxes Pursuant to Section 21 of Standards, which defines revenue as the gross inflow of economic
Revenue Code of Manila Constituted Double Taxation benefits (cash, receivables, and other assets) arising from ordinary
In resolving the issue of double taxation involving Section 21 of the operating activities of an enterprise (such as sales of goods, sales of
Revenue Code of Manila, the Court is mindful of the ruling in City of services, interest, royalties, and dividends), which is measured at the
Manila v. Coca-Cola Bottlers Philippines, Inc., which has been reiterated fair value of the consideration received or receivable.
in Swedish Match Philippines, Inc. v. The Treasurer of the City of Manila.
Amounted to Double Taxation
On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc. and In petitioner’s case, its audited financial statements reflect income or
Swedish Match Philippines, Inc., the Court now holds that all the revenue which accrued to it during the taxable period although not yet
actually or constructively received or paid. This is because petitioner Additional Principles in Double Taxation
uses the accrual method of accounting, where income is reportable • Double taxation is not expressly or specifically prohibited under the
when all the events have occurred that fix the taxpayer’s right to receive Philippine constitution. However, where the exists a direct duplicate
the income, and the amount can be determined with reasonable taxation, then there may be a violation of constitutional precepts
accuracy; the right to receive income, and not the actual receipt, such as equal protection and uniformity in taxation.
determines when to include the amount in gross income. • In La Suerte Cigar v. CA (2014), there is no double taxation when
the cigarette manufacturers are paying the (1) specific tax on the raw
The imposition of local business tax based on petitioner’s gross material; and (2) specific tax on the finished protect in which the raw
revenue will inevitably result in the constitutionally proscribed material was part thereof.
double taxation – taxing of the same person twice by the same • In Ferrer, Jr. v. Bautista (2015), a garbage fee is not a tax, hence its
jurisdiction for the same thing – inasmuch as petitioner’s revenue or imposition does not amount to a double taxation.
income for a taxable year will definitely include its gross receipts already
reported during the previous year and for which local business tax has
already been paid.
CIR v. BPI
4 IV. Eliminating Double Taxation
Modes of Eliminating Double Taxation

GR 147375, June 26, 2006 The following are the methods for easing the economic burden of
double taxation:
Facts: Domestic corporate taxpayers, including banks, here are levied 1. Tax Treaties which exempts foreign nationals from local
20% final withholding tax of bank provided by 1977 Tax Code. Banks taxation and local nationals from foreign taxation under the
are also liable for a tax on gross receipts derived from sources within the principle of reciprocity;
Philippines.As a domestic corporation, the interest earned by BPI from 2. Tax Credits where foreign taxes are allowed as deductions
deposits and similar arrangements are subjected to a final withholding from local taxes that are due to be paid;
tax of 20%. Consequently, the interest income it receives on amounts 3. Tax Deduction allowing foreign taxes as deduction from the
that it lends out are always net of the 20% withheld tax. As a bank, BPI taxable gross income; and
is furthermore liable for a 5% gross receipts tax on all its income. 4. Tax Reduction of the Philippine income taxes.
For the four (4) quarters of the year 1996, BPI computed its 5% gross
receipts tax payments by including in its tax base the 20% final tax on
interest income that had been withheld and remitted directly to the 1. Tax Treaties
Bureau of Internal Revenue (BIR).
Tax Treaty, Defined
CTA in a previous case that 20% final tax withheld on a bank’s interest A tax treaty is an arrangement entered into between sovereign states
income did not form part of its taxable gross receipts for the purpose of for purpose of eliminating double taxation on income and capital,
computing gross receipts tax. With this, BIR requested BPI for refund for preventing fiscal evasion, promoting mutual trade and investment and
alleged overpayment of taxes representing the 5% gross receipts taxes according fair and equitable tax treatment to foreign resident or
paid on the 20% final tax withheld at source but this was denied. nationals.
BPI argues that to include the 20% final tax withheld in its gross receipts Tax Treaties, Purpose
tax base would be to tax twice its passive income and would constitute The purpose of these international agreements is to reconcile the
double taxation. national fiscal legislations of the contracting parties in order to help the
taxpayer avoid simultaneous taxation in two different jurisdictions.
Issue: Is there double taxation? – No.
More precisely the purposes are:
Held: Granted that interest income is being taxed twice does not amount 1. Tax conventions are drafted with a view towards the
to double taxes. There is no double taxation if the law then imposes two elimination of international juridical double taxation which
different taxes on the same income, business or property. Citing is defined as the imposition of comparable taxes in two or
Solidbank ruling: more states on the same taxpayer in respect of the same
subject matter and for identical periods.
[1] Taxes are imposed on two different subject matters 2. Encourage free-flow of goods and services and the movement
Subject matter of withholding tax: of capital, technology and persons between countries,
- Passive income generated in the form conditions deemed vital in creating robust and dynamic
of interest in the deposits and economies.
yield on deposit substitutes; (CIR v. SC Johnson and Son, 1999).
Subject matter of gross receipt taxes: Important: Domondon here emphasizes that for purposes of
- Privilege of engaging business of banking. international juridical double taxation, the double taxation here is the
indirect duplicate taxation, which is the valid form, because it cannot be
A tax based on receipts is a tax on business, unlike the final withholding considered as direct duplicate because there is no same taxing authority
tax which is considered as a property tax. – because in this instance, there are two or more states involved in a tax
treaty, and thus different taxing authorities.
[2] They have different taxing periods
Final withholding tax: As a treaty:
- Deducted and withheld as soon income is earned • It has the binding under pacta sunt servanda rule
Gross Receipts Tax: • Entered into by the President concurred by Senate
- Paid only after taxable quarter in which it is earned
[3] They have different character “Most Favored Nation” Clause in Tax Treaties
Final withholding tax is an income tax MFN clause is a clause which is to grant the contracting party treatment
Gross receipts tax is a percentage tax not less favorable than which has been or may be granted to the most
favored among other countries.
In short, there is no double taxation, because there is no taxing twice,
by the same taxing authority, within the same jurisdiction, for the same The MFN is intended to establish the principle of equality of international
purpose, in different taxing periods, some of the property in the territory. treatment by providing that the citizens or subjects of the contracting
Subjecting interest income to a 20% FWT and including it in the nations may enjoy privileges accorded by either party either party to
computation of the 5% GRT is clearly not double taxation. Clearly, those of the most favored nation.
therefore, despite the fact that that interest income is taxed twice, there
is no double taxation present in this case.
The essence of the principle is to allow the taxpayer in one state to avail incumbent upon the state of residence to allow relief in order to
of more liberal provisions granted in another tax treaty to which the avoid double taxation.
country of residence of such taxpayer is also a party provided that the
subject matter of taxation is the same as that in the tax treaty under There are two methods of relief: (a) Exemption method; and the (b)
which taxpayer is liable (CIR v. S.C. Johnson, supra.) Credit Method
[2a] In the exemption method, the income or capital which is taxable

CIR v. S.C. JOHNSON
in the state of source or situs is exempted in the state of residence,
GR 127105, June 25, 2009 although in some instances it may be taken into account in determining
rate of tax applicable to the taxpayer's remaining income or capital. [Tax
Facts: SC Johnson a domestic corporation entered into agreement with deduction method]
SC Johnson and Son, USA (non-domestic) into a license agreement
where SC Johnson (domestic) is given the right to use the trademark, [2b] On the other hand, in the credit method, although the income
patents and technology owned by the latter including the right to or capital which is taxed in the state of source is still taxable in the state
manufacture, package and distribute the products covered by the of residence, the tax paid in the former is credited against the tax levied
Agreement. in the latter. [Tax credit method]
SC Johnson (domestic) was obliged to pay SC Johnson USA, royalties The basic difference between the two methods is that in the exemption
based on a percentage of net sales, and subject the same to 25% method, the focus is on the income or capital itself, whereas the credit
withholding tax on royalty payment. method focuses upon the tax.
SC Johnson filed with International Tax Affairs Divisions of BIR a claim In negotiating tax treaties, the underlying rationale for reducing the tax
for refund over overpaid withholding tax arguing that the royalties rate is that the Philippines will give up a part of the tax in the expectation
paid subject be subject only to 10% withholding tax pursuant to the that the tax given up for this particular investment is not taxed by the
MFN clause of the RP-US Tax Treaty in relation to RP-West Germany other country. Thus the petitioner correctly opined that the phrase
Tax Treaty. "royalties paid under similar circumstances" in the most favored
nation clause of the US-RP Tax Treaty necessarily contemplated
BIR did not act, thus it went to CTA which issued a tax credit certificate "circumstances that are tax-related". In the case at bar, the state of
for the overpaid withholding tax on royalty payments. CIR filed with CA source is the Philippines because the royalties are paid for the right to
a petition for review which was dismissed. use property or rights, i.e. trademarks, patents and technology, located
within the Philippines.
CTA found that the concession tax rate of 10 percent applies for the The United States is the state of residence since the taxpayer, S. C.
taxes imposed upon royalties in the RP-US Tax Treaty and in RP- Johnson and Son, U. S. A., is based there.
Germany Tax Treaty are paid in similar circumstances.
Under the RP-US Tax Treaty, the state of residence and the state of
Issue: source are both permitted to tax the royalties, with a restraint on the
Is the CTA correct in finding similarity in circumstances to merit the tax that may be collected by the state of source. Furthermore, the
10% withholding tax rate in favor of SC Johnson? – No. The RP-US method employed to give relief from double taxation is the allowance of
and RP-West Germany Treaties are dissimilar. a tax credit to citizens or residents of the United States (in an appropriate
amount based upon the taxes paid or accrued to the Philippines) against
Tax Treaties to Avoid Double Taxation the United States tax, but such amount shall not exceed the limitations
The RP-US Tax Treaty is just one of a number of bilateral treaties which provided by United States law for the taxable year.
the Philippines has entered into for the avoidance of double taxation.
Under Article 13 thereof, the Philippines may impose one of three rates-
The purpose of these international agreements is to reconcile the 25 percent of the gross amount of the royalties; 15 percent when the
national fiscal legislations of the contracting parties in order to help the royalties are paid by a corporation registered with the Philippine Board
taxpayer avoid simultaneous taxation in two different jurisdictions. of Investments and engaged in preferred areas of activities; or the
lowest rate of Philippine tax that may be imposed on royalties of
More precisely, the tax conventions are drafted with a view towards the the same kind paid under similar circumstances to a resident of a
elimination of international juridical double taxation, which is third state. [Third State here being Germany].
defined as the imposition of comparable taxes in two or more states on
the same taxpayer in respect of the same subject matter and for identical Given the purpose underlying tax treaties and the rationale for the most
periods. favored nation clause, the concessional tax rate of 10 percent provided
for in the RP-Germany Tax Treaty should apply only if the taxes imposed
The apparent rationale for doing away with double taxation is to upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax
encourage the free flow of goods and services and the movement of Treaty are paid under similar circumstances. This would mean that
capital, technology and persons between countries, conditions deemed private respondent must prove that the RP-US Tax Treaty grants similar
vital in creating robust and dynamic economies. tax reliefs to residents of the United States in respect of the taxes
imposable upon royalties earned from sources within the Philippines as
Double taxation usually takes place when a person is resident of a those allowed to their German counterparts under the RP-Germany Tax
contracting state and derives income from, or owns capital in, the other Treaty.
contracting state and both states impose tax on that income or
capital. The RP-US and the RP-West Germany Tax Treaties do not contain
similar provisions on tax crediting. Article 24 of the RP-Germany Tax
How Tax Treaties Eliminate Double Taxation Treaty, supra, expressly allows crediting against German income and
In order to eliminate double taxation, a tax treaty resorts to several corporation tax of 20% of the gross amount of royalties paid under the
methods: law of the Philippines. On the other hand, Article 23 of the RP-US Tax
Treaty, which is the counterpart provision with respect to relief for double
[1] First, it sets out the respective rights to tax of the state of source or taxation, does not provide for similar crediting of 20% of the gross
situs and of the state of residence with regard to certain classes of amount of royalties paid.
income or capital. In some cases, an exclusive right to tax is conferred
on one of the contracting states; however, for other items of income or Similarity of Circumstances of Payment of Taxes
capital, both states are given the right to tax, although the amount of Required to Enjoy Most Favor Nation Clause
tax that may be imposed by the state of source is limited. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-
West Germany Tax Treaty, above-quoted, speaks of tax on royalties for
[2] The second method for the elimination of double taxation applies the use of trademark, patent, and technology.
whenever the state of source is given a full or limited right to tax
together with the state of residence. In this case, the treaties make it
The entitlement of the 10% rate by U.S. firms despite the absence
of a matching credit (20% for royalties) would derogate from the
design behind the most favored nation clause to grant equality of
international treatment since the tax burden laid upon the income
of the investor is not the same in the two countries.
The similarity in the circumstances of payment of taxes is a

condition for the enjoyment of most favored nation treatment
precisely to underscore the need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax Treaty
does not give a matching tax credit of 20 percent for the taxes paid to
the Philippines on royalties as allowed under the RP-West Germany Tax
Treaty, private respondent cannot be deemed entitled to the 10 percent
rate granted under the latter treaty for the reason that there is no
payment of taxes on royalties under similar circumstances.
2. Tax Credits
Tax Credits is where foreign taxes are allowed as deductions from local
taxes that are due to be paid.
In CIR v. S.C. Johnson (1999), tax credit method is applied where

although the income or capital which is taxed in the state of source is
still taxable in the state of residence, the tax paid in the former is credit
(directly reduced) against the tax levied in the latter.
Tax credit generally refers to an amount that is subtracted directly from

one’s total tax liability, and allowance against the tax itself, or a
deduction from what is owed.
A tax credit reduces the tax due, including, whenever applicable, the
income tax that is determined after applying the corresponding tax rates
to taxable income.
3. Tax Deduction
Tax Deduction allows foreign taxes as deduction from the taxable gross
income.
As illustrated in CIR v. S.C. Johnson (1999), the tax deduction method

(also referred to as the exemption method in the case), is when the
income or capital which is taxable in the state of source is
exempted in the state of residence, although in some instances it may
be taken into account in determining the rate of tax applicable to the
taxpayer’s remaining income or capital. This is done by using the tax
deduction method.
Tax deduction is a subtraction from income for tax purposes, or an

amount that is allowed by law to reduce income prior to the application
of tax rate to compute the amount of the tax which is due. A tax
deduction reduces the income that is subject to tax in order to arrive at
a taxable income.
Tax Credit Tax Deduction

Direct reduction on the tax Deduction on the taxable
liability itself income for tax purposes
Focuses upon the tax Focuses on income or capital
itself
Applied after applying the Applied directly to the income
determination of the that is taxable
corresponding tax rates to the
taxable income
4. Tax Reduction
Tax Reduction as Atty. Donalvo posits, is more of a legislative measure.

This would mean that the Congress would enact a new law that would
reduce the tax liabilities of a taxpayer or the tax rate or tax base of a
particular measure.
Taxes are exacted only for a public purpose. The P10 levy is
II. LIMITATIONS unconstitutional because it was not for a public purpose. The levy was
imposed to give undue benefit to PPI.
Scope of the Power of Taxation
As a general rule, the power to tax is an incident of sovereignty and is An inherent limitation on the power of taxation is public purpose. Taxes
unlimited in its range, acknowledging in its very nature no limits, so that are exacted only for a public purpose. They cannot be used for purely
security against its abuse is to be found only in the responsibility of the private purposes or for the exclusive benefit of private persons. The
legislature which imposes the tax in the constituency who are to pay it reason for this is simple. The power to tax exists for the general welfare;
(FELS Energy v. The Province of Batangas,, 2007). hence, implicit in its power is the limitation that it should be used only for
a public purpose. It would be a robbery for the State to tax its citizens
Limitations on the Power of Taxation and use the funds generated for a private purpose.
1. Inherent Limitations: These are part and parcel of the power
of taxation and originate from the very nature of taxation.
2. Constitutional Limitations: These are the restrictions imposed
PAMBANSANG KOALISYON v. EXECUTIVE SECRETARY
by the constitution.
GR 147036-37, April 10, 2012
While the power to tax is plenary and unlimited, there are inherent and
But the assailed provisions, which removed the coco-levy funds from the
constitutional limitations to the power of taxation in order to prevent
general funds of the government and declared them private properties
abuse in the exercise of the otherwise plenary and unlimited power of
of coconut farmers, do not appear to have a color of social justice
taxation.
for their purpose. The levy on copra that farmers produce appears,
in the first place, to be a business tax judging by its tax base. The
The failure of a tax measure to achieve its objectives is not a ground for
concept of farmers-businessmen is incompatible with the idea that
its nullification. Whatever imperfections may occur, the same should be
coconut farmers are victims of social injustice and so should be
addressed to the democratic process to refine and evolve a taxation
beneficiaries of the taxes raised from their earnings.
system which ideally will achieve most, if not all, of the state’s objectives.
The remedy is with the Congress and not with the Court (Soriano v.
It would altogether be different of course if the laws mentioned set apart
Secretary of Finance, 2017).
a portion of the coco-levy fund for improving the lives of destitute
coconut farm owners or workers for their social amelioration to establish
A. Inherent Limitations a proper government purpose.
Inherent Limitations The support for the poor is generally recognized as a public duty and
1. The tax imposed should be for a public purpose. has long been an accepted exercise of police power in the promotion of
2. The power to tax is inherently legislative. the common good.
3. The power to tax is generally limited to the territorial
jurisdiction of the taxing government. It cannot be denied that the coconut industry is one of the major
4. Observance of international comity such that property of industries supporting the national economy. It is, therefore, the state’s
foreign sovereigns are not subject to taxation. concern to make it strong and secure source not only of livelihood of the
5. The exemption of government entities is recognized significant segment of population, but also of export earnings, the
sustained growth of which is one of the imperatives of economic growth
I. Public Purpose (COCOFED v. PCGG).
Public Purpose is the Heart of Taxation

The power to tax exists for the general welfare, hence, implicit in its II. Inherently Legislative
power is the limitations that it should be used only for a public purpose.
It would be robbery for the State to tax its citizen and use the funds
Inherent Legislative Power to Tax
generated for a private purpose (Planters Products v. Fertiphil
The legislature wields the power and discretion to determine
Corporation 548 SCRA 485 [2008]).
1. The nature or kind of tax
2. The object or purpose of the tax
Expanded Concept of Public Purpose
3. The extent or rate of the tax
The Court of course grants that there is no hard-and-fast rule for
4. The coverage or subjects of the tax
determining what constitutes public purpose.
5. The situs or the place of taxation
It is an elastic concept that could be made to fit into modern standards.
Note however, that the legislative power does not include the collection
Public purpose, for instance, is no longer restricted to traditional
of tax as it is part of the functions of the executive department.
government functions like building roads and schoolhouses or
safeguarding public health and safety.
The power of taxation, being an essential and inherent attribute of
sovereignty, belongs as a matter of right, to every independent
Public purpose has been construed as including the promotion of social
government, and needs no express conferment by the people before it
justice.
can be exercised.
Thus, public funds may be used for relocating illegal settlers, building
It is purely legislative and thus, cannot be delegated to the executive
low-cost housing for them, and financing both urban and agrarian
and judicial branches without running afoul to the theory of separation
reforms that benefit certain poor individuals. Still, uses relieve volatile
of powers. It, however, can be delegated to municipal corporations,
iniquities in society and, therefore, impact on public order and welfare
consistent with the principle that legislative powers may be delegated to
as whole (Pambansang Koalisyon v. Executive Secretary, 2012).
local governments in respect of matters of local concern (FDCP v. Colon
Heritage, GR 203754, 2015).
PLANTERS PRODUCTS v. FERTIPHIL
GR 166006, March 14, 2008 General Rule: Non-Delegation
There should be no improper delegation of legislative authority to tax,
A plain reading of the LOI also supports the conclusion that the levy was the power to tax is inherent in the State, such power being inherently
for revenue generation. The LOI expressly provided that the levy was legislative, based on the principle that taxes are a grant of the people
imposed “until adequate capital is raised to make PPI viable.” who are taxed, and the grant must be made by the immediate
representatives of the people; and where the people have laid the
Issue: Was the CRC exacted for public purpose? – No. power, there it must remain and be exercised (CIR v. Fortune Tobacco,
2008).
This is based on the maxim: associated legal instruments were signed by the President and by the
Delegata potestas non potest delegari Secretary Navarro of DTI.
A delegated power cannot further delegated
The petition assails that WTO (World Trade Organization) here would
Since the power of taxation is a power that is exercised by the Congress require that the Philippines place its nationals and products of other
as delegates of the people, then as a general rule, the Congress could countries as same footing as Filipinos and local products and that that
not redelegate this delegated power. WTO intrudes, limits or impairs the constitutional powers of both
Congress and the Supreme Court. The whole contention revolves
Exceptions: ABAKADA v. Ermita (2005) around that violation of the 1987 Constitution mandate to “develop a self-
1. Delegation to local governments reliant and independent national economy effectively controlled by
2. Delegations to the President of the Philippines Filipinos to give preference by Filipinos … (to) give preference to
3. Delegation to administrative bodies qualified Filipinos (and to) promote the preferential use of Filipino labor,
4. Delegation to the people at large domestic materials and locally produced goods.”
5. Emergency powers of the President
Issue: Does the Philippine Constitution prohibit participation in
These exceptions were already discussed worldwide trade liberalization and economic globalization? Does it
proscribe integration into a global economy that is liberalized,
III. Territorial deregulated and privatized?
Economic Nationalism Should be Read with

Territoriality in Taxation Other Constitutional Mandates to Attain
This inherent limitation means that the power of taxation could be Balanced Development of Economy
exercised only within the territorial boundaries of the taxing authority. Article XII on National Economy and Patrimony under Sec 1 lays down
This is consonance with the precept that protection could only be given basic goals of national economic development as follows:
within the territorial boundaries of the taxing authority. [1] A more equitable distribution of opportunities, income and wealth;
[2] A sustained increase in the amount of goods and services provided
Exception: Privity of Relationship. There is such privity (so as to be by the nation for the benefit of the people; and
covered by tax jurisdiction) if the taxing authority can afford protection to [3] An expanding productivity as the key to raising the quality of life for
the tax subject or object. all especially the underprivileged.
Three Factors to Determine if The Constitution takes into account the realities of the outside world as
Government Can Afford Protection it requires the pursuit of a trade policy that serves the general welfare
1. Citizenship of the tax subject or object and utilizes all forms and arrangements of exchange on the basis of
2. Residence or location of the tax subject or object; and equality and reciprocity, and speaks of industries “which are competitive
3. Source of the tax subject or object in both domestic and foreign markets” as well as of the protection of
“Filipino enterprises against unfair foreign competition and trade
[Dean Quibod] The principle of territoriality admits an exception: When practices. All told, while the Constitution indeed mandates a bias in favor
the State exercises personal jurisdiction, citing the possibility that the of Filipino goods, services, labor and enterprises, at the same time, it
State can impose income taxes on income of non-resident Filipinos recognizes the need for business exchange with the rest of the world on
working abroad by the reason that an OFW, for instance, is still a citizen the bases of equality and reciprocity and limits protection of Filipino
(subject) of the State. enterprises only against foreign competition and trade practices that are
unfair. In other words, the Constitution did not intend to pursue an
Note however, this is tempered by the rules on international juridical isolationist policy. It did not shut out foreign investments, goods and
double taxation as discussed in CIR v. SC Johnson, where the Court services in the development of the Philippine economy. While the
explained the modes of eliminating indirect duplicate taxation by two Constitution does not encourage the unlimited entry of foreign goods,
different taxing authority (States). services and investments into the country, it does not prohibit them
either. In fact, it allows an exchange on the basis of equality and
IV. International Comity reciprocity, frowning only on foreign competition that is unfair.
International Comity: Respect between Foreign Equals V. Exemption of Government Entities

Dean Quibod proffers this question:
Can the sovereign tax another sovereign? Government Entities

As to government entities, exemption is the general rule while taxation
This is answered by the maxim: is the exception. For the government to tax itself is like getting money
from one pocket (paying taxes) and placing it in another pocket (in
In par in parem non habet imperium collecting taxes). In addition, this is also connected with the principle that
Between equals there is no sovereign. the state is immune from suit when it sovereign functions.
The power of taxation is an act of sovereignty. Out of respect General Rule: Government entities are exempt from taxation.
for equal sovereign nations, the Philippines does not tax the incomes or
the property of foreign governments earned in the Philippines. The Exception: It engages in proprietary activity therefore immunity will not
Doctrine of Non-Suability, where the state cannot be sued without its apply. The exemption of the immunity will not apply because it is no
consent, squarely applies, so that it is useless to impose a tax which longer that exercise of sovereign functions.
could not be collected. When a foreign sovereign enters the territorial
jurisdiction of another, it does not subject itself to the jurisdiction of the It is also accepted that the State may tax itself, while exemption from
other. taxation of the government is one of the inherent limitations but the
sovereignty being absolute and taxation is an act of high sovereignty,
the state if it is so minded could tax itself.
TAÑADA V. ANGARA
GR 118295, May 2, 1997
MACTAN-CEBU AIRPORT v. MARCOS
GR 120082, September 11, 1996
Facts: As a result to hasten worldwide records from devastation of
World War II, the GATT or the General Agreement on Tariffs and Trade
arose. This was a collection of treaties governing access to the Facts: Mactan Cebu International Airport Authority (MCIAA) had
economics of the countries to adheres to it. The agreement along with enjoyed the privilege of exemption from payment of realty taxes in
accordance with its charter (RA 6958, Sec. 14).
In 1994, the City Treasurer of Cebu demanded payment for the realty 193 of LGC provides for general provision on withdrawal of tax
taxes on several parcels of land belonging of MCIAA located in Lahug, exemption privileges.
Cebu City with total amount of P2,229,078.79.
Since the last paragraph of Section 234 unequivocally withdrew, upon
MCIAA objected to such claiming exemption and asserting that it is an the effectivity of the LGC, exemptions from real property taxes granted
instrumentality of government performing governmental function arguing to natural or juridical persons, including government-owned or controlled
that as such it puts it out of the purview of local taxation (citing Sec. 133 corporations, except as provided in the said section, and the petitioner
of LGC). is, undoubtedly, a government-owned corporation, it necessarily follows
that its exemption from such tax granted it in Section 14 of its charter,
Respondent City refused to cancel and set aside petitioner's realty tax R.A. No. 6958, has been withdrawn.
account, insisting that the MCIAA is a government-controlled
corporation whose tax exemption privilege has been withdrawn by virtue
of Sections 193 and 234 of the Local Governmental Code that took effect
on January 1, 1992. MACTAN-CEBU AIRPORT v. CITY OF LAPU-LAPU
GR 181756, June 15, 2015
As the City of Cebu was about to issue a warrant of levy against the
properties of petitioner, the latter was compelled to pay its tax account Facts: MCIAA enjoyed tax emption from realty taxes under RA 6958,
"under protest" and filed a Petition for Declaratory Relief with the RTC Section 14. But the SC ruled in Mactan-Cebu v. Marcos (1996) declaring
Cebu. that upon effectivity of RA 7160 or LGC, it was no longer exempt from
real estate taxes.
MCIAA basically contended that the taxing powers of local government
units do not extend to the levy of taxes or fees of any kind on an With this the City issued a Statement of Real Estate Tax which assessed
instrumentality of the national government. the lots comprising the Mactan International Airport in the amount of
Petitioner insisted that while it is indeed a government-owned P162,058,959.52 but MCIAA complained due to the discrepancy thus
corporation, it nonetheless stands on the same footing as an agency or and amended billing of P151,376,134.66 was sent. MCIAA averred that
instrumentality of the national government by the very nature of its the calculated amount included the lots utilized solely and exclusively
powers and functions. for public or governmental purposes such as the airfield, runway and
taxiway and the lots on which they are situated.
Issue: Can MCIAA be exempted from the demanded realty taxes? –
No. Petitioner paid respondent City P4M monthly, which was later increased
to P6M monthly. As of December 2003, petitioner had paid respondent
Strict Rule of Construction City a total of ₱275,728,313.36.
As a rule, claim of exemption from tax payment must be clearly shown
and based on language in the law too plain to be mistaken. Elsewise Based on a DOJ Opinion it stated that: The airfield, runway and taxiway
stated, taxation is the rule, exemption therefrom is the exception. and the lots on which the runway and taxiway are located, are owned by
the State or by the Republic of the Philippines and are merely held in
However, if the grantee of the exemption is a political subdivision or trust by the MCIAA, notwithstanding that certificates of titles thereto may
instrumentality, the rigid rule of construction does not apply because the have been issued in the name of the MCIAA.
practical effect of the exemption is merely to reduce the amount of
money that has to be handled by the government in the course of its The DOF issued an indorsement to the City Treasurer stating that based
operations. on the DOJ Opinion, real property tax exemption is deemed tenable
involving those enumerated as part of the property used for
There can be no question that under Section 14 of R.A. No. 6958 the governmental purposes. DOF instructed that City Assessor to assess
petitioner is exempt from the payment of realty taxes imposed by the the airfield, runway, taxiway and the lots thereon to be moved from
National Government or any of its political subdivisions, agencies, and “Taxable Roll” to the “Exempt Roll”.
instrumentalities.
Respondent City Treasurer Pacaldo sent petitioner a Statement of Real
Nevertheless, since taxation is the rule and exemption therefrom the Property Tax Balances up to the year 2002 reflecting the amount of
exception, the exemption may thus be withdrawn at the pleasure of the P246,395,477.20. Petitioner claimed that the statement again included
taxing authority. the lots utilized solely and exclusively for public purpose such as the
airfield, runway, and taxiway and the lots on which these are built.
The only exception to this rule is where the exemption was granted to Pacaldo then issued Notices of Levy on 18 sets of real properties of
private parties based on material consideration of a mutual nature, which petitioner.
then becomes contractual and is thus covered by the non-impairment
clause of the Constitution. This prompted MCIAA to file for prohibition and WPI which was first
granted but was later on lifted because a certified copy of City
Withdrawal of Tax Exemption by the Ordinance No. 44 (Lapu-Lapu Omnibus Tax Ordinance) which
Local Government Code authorizes collection of 1.5% from owners of real estate based on the
The LGC, enacted pursuant to Section 3, Article X of the constitution assessed value.
provides for the exercise by local government units of their power to tax,
the scope thereof or its limitations, and the exemption from taxation. The CA applied the 1996 MCIAA ruling rather than 2006 Manila
Section 133 of the LGC prescribes the common limitations on the taxing International Airport Authority (MIAA) ruling (which ruled MIAA is not a
powers of local government units: GOCC but instrumentality) finding that the 2066 MIAA ruling was
unsound.
Sec. 133. Common Limitations on the Taxing Power of Local Government
Units. — Unless otherwise provided herein, the exercise of the taxing powers Upon reaching Supreme Court, MIAA invokes the 2006 ruling arguing
of provinces, cities, municipalities, and barangays shall not extend to the levy that the SC already ruled that MIAA is not a GOCC but is a government
of the following: xxx instrumentality and thus its airport lands and buildings are exempt from
real estate taxes imposed by the City.
(o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE NATIONAL
GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES, AND
Petitioner suggests that it is because of its similarity with MIAA that this
LOCAL GOVERNMENT UNITS.
Court, in the 2006 MIAA case, placed it in the same class as MIAA and
considered it as a government instrumentality.
But, Section 234 of LGC provides for exemptions from payment of real
property taxes and withdraws previous exemptions therefrom granted to
Petitioner submits that it is also a government instrumentality like MIAA,
natural and juridical persons, including government owned and
the following conclusion arrived by the Court in the 2006 MIAA case is
controlled corporations, except as provided therein. In addition, Section
also applicable to petitioner. It argues that the 2006 MIAA ruling
overturned the 1996 MCIAA ruling.
Issue: Are the lots used by MCIAA for the airport operations exempt I. Due Process
from real estate tax? – Yes.
Held: The petitioner is an instrumentality of the government; thus, its ARTICLE III. SECTION 1
properties actually, solely and exclusively used for public No person shall be deprived of life, liberty, or property without due
purposes, consisting of the airport terminal building, airfield, runway, process of law, nor shall any person be denied the equal protection of
taxiway and the lots on which they are situated, are not subject to real the laws.
property tax and respondent City is not justified in collecting taxes
from petitioner over said properties. Due Process
2006 MIAA Ruling In Effect Reversed 1996 MCIAA Ruling

1 According to Dean Quibod, the provisions does not say anything about
taxation, yet it used as a basis for the limitation of such power. This is
While it is true, as respondents allege, that the 1996 MCIAA case was because taxation is an enforced contribution to raise revenue. Since it is
cited in a long line of cases, still, in 2006, the Court en banc decided a enforced there must be a basis for the taking of property or deprivation
case that in effect reversed the 1996 Mactan ruling. The decision of property.
became final and executory. Furthermore, the 2006 MIAA case was
decided by the Court en banc while the 1996 MCIAA case was decided Due process is comprised of two components — substantive due
by a Division. Hence, the 1996 MCIAA case should be read in light of process which requires the intrinsic validity of the law in interfering with
the subsequent and unequivocal ruling in the 2006 MIAA case. the rights of the person to his life, liberty, or property, and procedural
due process which consists of the two basic rights of notice and
To recall, in the 2006 MIAA case, we held that MIAA’s airport lands and hearing, as well as the guarantee of being heard by an impartial and
buildings are exempt from real estate tax imposed by local governments; competent tribunal (SOJ v. Lantion, GR 139465, 2000).
that it is not a GOCC but an instrumentality of the national government,
with its real properties being owned by the Republic of the Philippines, Due process then presupposes that:
and these are exempt from real estate tax. 1. There is a valid law; and
2. There is a valid procedure.
Power to Tax by Local Government against National Government
Strictly Construed AGAINST LGUs While it has been said that taxation is a unilateral obligation by the
When local governments invoke the power to tax on national taxpayer, the government, in case of non-payment, can enforce
government instrumentalities, such power is construed strictly against methods in order for it to collect money.
local governments. The rule is that a tax is never presumed and there
must be clear language in the law imposing the tax. Any doubt whether As discussed in Pepsi-Cola v. Municipality of Tanauan:
a person, article or activity is taxable is resolved against taxation. This
rule applies with greater force when local governments seek to tax “This is not to say though that the constitutional injunction
national government instrumentalities. against deprivation of property without due process of law may be
passed over under the guise of the taxing power, except when the taking
Another rule is that a tax exemption is strictly construed against the of the property is in the lawful exercise of the taxing power, as when
taxpayer claiming exemption. However, when Congress grants (1) the tax is for a public purpose;
exemption to a national government instrumentality from local (2) the rule on uniformity of taxation is observed;
taxation, such exemption is construed liberally in favor of the (3) either the person or property taxed is within the jurisdiction of
national government instrumentality. There is, moreover, no point in the government levying the tax; and
national and local governments taxing each other, unless a sound (4) in the assessment and collection of certain kinds of taxes
and compelling policy requires such transfer of public funds from one notice and opportunity for hearing are provided.
government pocket to another.
Due process is usually violated where the tax imposed is for a
There is also no reason for local governments to tax national private as distinguished from a public purpose; a tax is imposed on
government instrumentalities for rendering essential public services property outside the State, i.e., extraterritorial taxation; and arbitrary or
to inhabitants of local governments. The only exception is when the oppressive methods are used in assessing and collecting taxes. But, a
legislature clearly intended to tax government instrumentalities for the tax does not violate the due process clause, as applied to a particular
delivery of essential public services for sound and compelling policy taxpayer, although the purpose of the tax will result in an injury rather
considerations. There must be express language in the law empowering than a benefit to such taxpayer.
local governments to tax national government instrumentalities. Any Due process does not require that the property subject to the tax
doubt whether such power exists is resolved against local governments. or the amount of tax to be raised should be determined by judicial
inquiry, and a notice and hearing as to the amount of the tax and the
The Airport Lands and Buildings are devoted to public use because manner in which it shall be apportioned are generally not necessary to
they are used by the public for international and domestic travel due process of law.
and transportation. The fact that the MIAA collects terminal fees and
other charges from the public does not remove the character of the As Dean Quibod illustrated, when a tax law is made to operate outside
Airport Lands and Buildings as properties for public use. In addition the jurisdiction of the taxing authority, two violations are committed:
these are outside the commerce of man and property of public 1. It violates the principle of territoriality; and
dominion. 2. It violates the constitutional right to due process because
there is no basis to tax a property outside its jurisdiction
B. Constitutional Limitations
In addition, Dean Quibod also emphasized that if the tax law does not
have public purpose then it also amounts to a violation of due process.
Constitutional Restrictions As Atty. Donalvo posits: Due process is when the process is due.
It has been submitted that the constitutional restrictions are not
truly limitations on the power of taxation. They have been placed Meaning must afford one a process and a justification before it can take
in the constitution to afford protection to the people against any away life, liberty, and in this case, property, of an individual or a person.
abuses that may be committed against them when legislative
department imposes taxes and when the executive imposes tax. CIR v. METRO STAR SUPERAMA, INC.
GR 185371, December 8, 2010
Presumption of Validity of Tax Laws
While the courts may invalidate tax measures that run counter Facts: Metro Star received a Formal Letter of Demand on April 2002
to the Constitution, it bears emphasis that deeply ingrained in being assessed with P292,874.16 for deficiency value-added and
our jurisprudence is the time-honored principle that a statute is withholding tax for taxable year 1999. Then, in May 2003, the Revenue
presumed to be valid (Coconut Oil Refiners v. Torres, 2005). District Office sent a copy of Final Notice of Seizure giving Metro Star
the last opportunity to settle the deficiency or else it shall be constrained
to serve and execute the Warrants of Distraint and/or Levy and Equality in Taxation
Garnishment to enforce the collection. Constitutional equality in taxation means application of concept of equal
protection of the laws which prohibits discrimination other than instances
On Feb. 2004, Metro Star received Warrant of Distraint and/or dated where there is valid classification. This then provides that persons who
May 12, 2003 demanding payment of deficiency value-added tax and are similarly situated, or who belong to the same class, should be given
withholding tax payment in the amount of P292,874.16. Metro Star filed by law the same protection and privileges as well as imposed the same
MR but was denied. burdens.
Metro Star then went to the CTA in a petition for review stating that it did This concept is to be read together with:
not receive a Preliminary Assessment Notice (PAN) and claiming that
it was not accorded due process.
The CTA ruled in favor of Metro Star and ordered desistance from
3 III. Uniformity and Equity in Taxation
collection finding that there was no clear showing that the PAN was ARTICLE VI, SECTION 28(1)
actually received ruling that the Formal Letter of Demand as well as the The rule of taxation shall be uniform and equitable. The Congress
Warrant of Distraint/Levy was void as Metro star was denied due shall evolve a progressive system of taxation.
process.
Uniformity, Defined
CIR, insisted that Metro Star received the PAN, dated January 16, 2002, A tax satisfies the uniformity principle when it operates with the same
and due process was served nonetheless because the latter received force and effect within the territorial boundaries of the taxing authority
the Final Assessment Notice (FAN). (Philippine Trust & Co. v. Yatco).
Equality and uniformity of taxation may mean the same as equal
Issue: Was Metro Star denied due process? protection. In such a case, the terms would mean that all subjects and
objects of taxation which are similarly situated shall be subject to the
Failure to Discharge Evidence of PAN Receipt same burdens and granted the same privileges without any
The Court agrees with CTA that CIR failed to discharge its duty and discrimination whatsoever.
present any evidence to show that Metro Star indeed received the PAN
dated January 16, 2002. It could have simply presented registry receipt Equal protection clause is subject to reasonable classification. If the
or certification from the postmaster that it mailed the PAN, but failed. groupings are characterized by substantial distinctions that make real
Neither did it offer any explanation on why it failed to comply with the differences, one class may be treated and regulated differently from
requirement of service of the PAN. It merely accepted the letter of Metro another. The classification must also be germane to the purpose of the
Star’s chairman that he had received the FAN, but not the PAN; that he law and must apply to all those belonging to the same class (Tiu v. CA,
was willing to pay the tax as computed by the CIR; and that he just 1999).
wanted to clarify some matters with the hope of lessening its tax liability.
Almost all tax laws classify or discriminate subjects and objects of
Taxpayer Must be Informed of Liability taxation. When tax legislation is enacted, there is always a classification,
For Deficiency Taxes through Sending of PAN one group that is subject to tax and another group that is not subject to
tax. The main issue is always the determination of whether the
Indeed, Section 228 of the Tax Code clearly requires that the taxpayer classification is valid or not. If the classification si valid, the tax law is
must first be informed that he is liable for deficiency taxes through the also valid. If the classification is not valid, then the tax law would also be
sending of a PAN. He must be informed of the facts and the law upon invalid because there would be a violation of the equal protection clause.
which the assessment is made. The law imposes a substantive, not
merely a formal, requirement. Equal protection does not demand absolute equality. It just merely
requires that all persons shall be treated alike, under like circumstances
Thus, to proceed heedlessly with tax collection without first establishing and conditions, both as to the privileges conferred and liabilities
a valid assessment is evidently violative of the cardinal principle in enforced (CIR v. Fortune Tobacco).
administrative investigations - that taxpayers should be able to present
their case and adduce supporting evidence. This is confirmed under the Requirements for a Valid Classification
provisions R.R. No. 12-99 of the BIR. It is clear that the sending of a All that is required of valid classification is that it be reasonable which
PAN to taxpayer to inform him of the assessment made is but part means that:
of the "due process requirement in the issuance of a deficiency tax 1. The classification should be based on substantial distinctions
assessment," the absence of which renders nugatory any which to make for real differences;
assessment made by the tax authorities. The use of the word "shall" 2. It must be germane to the purpose of the law; that
in subsection 3.1.2 of RR 12-99 describes mandatory nature of the 3. It must apply to future and existing conditions; and
service of a PAN. 4. It must apply equally to all members of the same class.
The persuasiveness of the right to due process reaches both substantial
and procedural rights and the failure of the CIR to strictly comply with FERRER, JR. v. CITY MAYOR BAUTISTA
the requirements laid down by law and its own rules is a denial of GR 210551, June 30, 2015, En Banc
Metro Star’s right to due process Thus, for its failure to send the PAN
stating the facts and the law on which the assessment was made as Facts: Quezon City council enacted two ordinances:
required by Section 228 of R.A. No. 8424, the assessment made by
the CIR is void. Even as we concede the inevitability and [1] Socialized Housing Tax (SHT) Ordinance
indispensability of taxation, it is a requirement in all democratic regimes This is a special assessment equivalent to 0.5% of assessed value of
that it be exercised reasonably and in accordance with the prescribed the land in excess of P100K which shall accrue to the Socialized
procedure. If it is not, then the taxpayer has a right to complain and the Housing Programs of QC government.
courts will then come to his succor. For all the awesome power of the
tax collector, he may still be stopped in his tracks if the taxpayer can [2] Garbage Fee Ordinance
demonstrate that the law has not been observed, The proceeds of which is to be utilized for garbage collections. Under
Section 1 of the Ordinance it provides collection based:
2 II. Equal Protection (a) Domestic Households (P100-P500) based on Land Area
ARTICLE III. SECTION 1 (b) Condominium Unit and Socialized Housing Projects or Units in
No person shall be deprived of life, liberty, or property without due Quezon City (P25-200) based on Floor Area.
process of law, nor shall any person be denied the equal protection
of the laws.
(c) High rise condominium units is based on the total size of entire For the purpose of garbage collection, there is, in fact, no substantial
condominium or housing unit and additional fee based on area occupied distinction between an occupant of a lot, on one hand, and an occupant
for unit sold or amortized (if apartment, entire apartment and for every of a unit in a condominium, socialized housing project or apartment, on
unit occupied). Here, Ferrer, a co-owner of a residential property filed a the other hand. Most likely, garbage output produced by these types of
petition question that constitutionality of the two ordinances. occupants is uniform and does not vary to a large degree; thus, a similar
schedule of fee is both just and equitable.
As to the Contention on Equal Protection
Petitioner argues that the SHT is a kind of class legislation that violates The rates being charged by the ordinance are unjust and inequitable:
the right of property owners to equal protection of the laws, since it a resident of a 200 sq. m. unit in a condominium or socialized housing
favors informal settlers who occupy property of not their own and pay no project has to pay twice the amount than a resident of a lot similar in
taxes over law-abiding property owners who pay realty taxes. size; unlike unit occupants, all occupants of a lot with an area of 200 sq.
Petition argues that the Garbage Fee is also discriminatory since it m. and less have to pay a fixed rate of Php100.00; and the same amount
collects garbage fee only from domestic households and not from of garbage fee is imposed regardless of whether the resident is from a
restaurants, food courts, fast food chains and other commercial dining condominium or from a socialized housing project.
places that spew garbage much more than residential property owners.
Indeed, the classifications under Ordinance No. S-2235 are not
Issue: Did the ordinances violate equal protection clause? Only the germane to its declared purpose of "promoting shared responsibility
Garbage Fee Ordinance is violative of the equal protection clause, with the residents to attack their common mindless attitude in over-
not the SHT Ordinance. consuming the present resources and in generating waste."
Equal Protection, Explained Instead of simplistically categorizing the payee into land or floor
occupant of a lot or unit of a condominium, socialized housing project or
Equal protection requires that all persons or things similarly situated apartment, respondent City Council should have considered factors that
should be treated alike, both as to rights conferred and responsibilities could truly measure the amount of wastes generated and the
imposed. The guarantee means that no person or class of persons shall appropriate fee for its collection. Factors include, among others,
be denied the same protection of laws which is enjoyed by other persons household age and size, accessibility to waste collection, population
or other classes in like circumstances. Similar subjects should not be density of the barangay or district, capacity to pay, and actual occupancy
treated differently so as to give undue favor to some and unjustly of the property.
discriminate against others. The law may, therefore, treat and regulate
one class differently from another class provided there are real and
substantial differences to distinguish one class from another. An SISON, JR. v. ANCHETA
ordinance based on reasonable classification does not violate the GR L-59431, July 25, 1984, En Banc
constitutional guaranty of the equal protection of the law. The
requirements for a valid and reasonable classification are: (1) it must Facts: BP 135, Sec. 21 pertains to modified gross income tax wherein
rest on substantial distinctions; (2) it must be germane to the purpose of the individuals who are purely compensation income earner were
the law; (3) it must not be limited to existing conditions only; and (4) it subject to a set of graduated and progressive tax rates. Individuals who
must apply equally to all members of the same class. are self-employed, professionals engaged in business were also taxed
on graduated rates. But the rates for these individuals were higher
Socialized Housing Tax compared to rates of individuals who are purely compensation earners.
Disparity Between Informal Settler and A petition was filed seeking to question the validity of BP 135, Section
Real Property Settler Are Too Obvious 21. Sison argues that he would be unduly discriminated against by the
imposition of higher rates of tax upon his income arising from the
For the purpose of undertaking a comprehensive and continuing urban exercise of his profession vis-à-vis which imposed upon fixed income or
development and housing program, the disparities between a real salaried individual taxpayers.
property owner and an informal settler as two distinct classes are too
obvious and need not be discussed at length. The differentiation He further argues such as arbitrary and amounts to a class legislation,
conforms to the practical dictates of justice and equity and is not oppressive and capricious amount to a transgression of both due
discriminatory within the meaning of the Constitution. process and equal protection clauses as well as the uniformity in
taxation.
Notably, the public purpose of a tax may legally exist even if the motive
which impelled the legislature to impose the tax was to favor one over Issue: Whether the imposition of a higher tax rate on the taxable net
another. It is inherent in the power to tax that a State is free to select income derived from business or profession than on compensation is
subjects of taxation. Inequities which result from a singling out of one constitutionally infirm. – No.
particular class for taxation or exemption infringe no constitutional
limitation. Further, the reasonableness of Ordinance No. SP-2095 Equal Protection, Explained
cannot be disputed. The principle is that equal protection and security shall be given to every
person under circumstances which if not Identical are analogous. If law
It is not confiscatory or oppressive since the tax being imposed therein be looked upon in terms of burden or charges, those that fall within a
is below what the UDHA actually allows. As pointed out by respondents, class should be treated in the same fashion, whatever restrictions cast
while the law authorizes LGUs to collect SHT on lands with an assessed on some in the group equally binding on the rest." That same formulation
value of more than ₱50,000.00, the questioned ordinance only covers applies as well to taxation measures. The equal protection clause is, of
lands with an assessed value exceeding ₱100,000.00. Even better, on course, inspired by the noble concept of approximating the ideal of the
certain conditions, the ordinance grants a tax credit equivalent to the laws benefits being available to all and the affairs of men being governed
total amount of the special assessment paid beginning in the sixth (6th) by that serene and impartial uniformity, which is of the very essence of
year of its effectivity. Far from being obnoxious, the provisions of the the idea of law.
subject ordinance are fair and just.
Uniformity, Explained
Garbage Fee According to the Constitution: "The rule of taxation shall be uniform and
equitable." This requirement is met according when the tax "operates
There is No Substantial Distinction Between Occupant with the same force and effect in every place where the subject may be
Of a Lot from Occupant of Condominium, etc. found”. The rule of uniformity does not call for perfect uniformity or
perfect equality, because this is hardly attainable."
In the subject ordinance, the rates of the imposable fee depend on land
or floor area and whether the payee is an occupant of a lot, Taxpayers May be Classified
condominium, social housing project or apartment. Into Different Categories
Taxpayers may be classified into different categories. To repeat, it is of municipalities outside the City of Olongapo and the Municipality
enough that the classification must rest upon substantial distinctions that of Subic, and other municipalities contiguous to the base areas.
make real differences.
Later, President Ramos issued EO 97-A providing that:
In the case of the gross income taxation embodied in BP 135, the,
discernible basis of classification is the susceptibility of the income to
Sec. 1.1. The Secured Area consisting of the presently fenced-in
the application of generalized rules removing all deductible items for all
former Subic Naval Base shall be the only completely tax and
taxpayers within the class and fixing a set of reduced tax rates to be
duty-free area in the SSEFPZ [Subic Special Economic and Free
applied to all of them.
Port Zone]. Business enterprises and individuals (Filipinos and
Taxpayers who are recipients of compensation income are set apart foreigners) residing within the Secured Area are free to import raw
as a class. There is practically no overhead expense, they are not materials, capital goods, equipment, and consumer items tax and
entitled to make deductions for income tax purposes because they are duty-free. Consumption items, however, must be consumed within
in same situation more or less. the Secured Area. Removal of raw materials, capital goods,
equipment and consumer items out of the Secured Area for sale to
On the other hand, in the case of professionals in the practice of non-SSEFPZ registered enterprises shall be subject to the usual
their calling and businessmen, there is no uniformity in the costs or taxes and duties, except as may be provided herein.
expenses necessary to produce their income. It would not be just then
to disregard the disparities by giving all of them zero deduction and In 1994, petitioners challenged the constitutionality of EO 97-A for
indiscriminately impose on all alike the same tax rates on the basis of allegedly being violative of their right to equal protection of the laws this
gross income. There is ample justification then for the Batasang was referred by SC to the CA.
Pambansa to adopt the gross system of income taxation to
compensation income, while continuing the system of net income CA ruled that the intention of the Congress was to confine the coverage
taxation as regards professional and business income. of SSEZ to the secured area and not to include the entire Olongapo
City and other areas in Sec. 12, thus the tax incentives are limited
within the area.
As discussed by Dean Quibod:
Petitioners contend: SSEZ encompasses (1) Olongapo City, (2)
Those purely compensation income earners do not claim deductions Municipality of Subic and (3) former Subic Naval Base. They argue that
because they use their labor to derive compensation income unlike EO 97-A narrowed it only to the naval base.
those who or engaged in business they have to consider the payment of
salaries or wages, purchase or lease of equipment to be used for trade Issue: Does EO 97-A violate the equal protection clauses as being
or business. discriminatory by confining the application of RA 7227 within the
secured area and excluding the resident of the zone outside of the
Thus, there exists a real distinction between professional and fixed secured area. – No.
income tax earners. For the professionals and businessmen, there is no
uniformity in the costs or expenses necessary to produce their income. Held: The EO 97-A is not violative of the equal protection clause neither
it is discrimination. Rather, the Court finds real and substantive
For the fixed income earners, there is practically no overhead expense; distinctions between the circumstances obtaining inside and those
these taxpayers are not entitled to make deduction for income tax outside the Subic Naval Base, thereby justifying a valid and reasonable
purposes because they are in the same situation more or less. classification.
Equal Protection, Explained

In Tiu v. Court of Appeals (1999), Justice Panganiban in his prologue
The fundamental right of equal protection of the laws is not absolute, but
discussed that:
is subject to reasonable classification. If the groupings are characterized
by substantial distinctions that make real differences, one class may be
“The constitutional rights to equal protection of the law is not
treated and regulated differently from another. The classification must
violated by an executive order, issued pursuant to law, granting tax and
also be germane to the purpose of the law and must apply to all those
duty incentives only to the business and residents within the "secured
belonging to the same class.
area" of the Subic Special Economic Zone and denying them to those
who live within the Zone but outside such "fenced-in" territory. The
Classification, to be valid, must (1) rest on substantial distinctions, (2)
Constitution does not require absolute equality among residents. It is
be germane to the purpose of the law, (3) not be limited to existing
enough that all persons under like circumstances or conditions are given
conditions only, and (4) apply equally to all members of the same class.
the same privileges and required to follow the same obligations. In short,
a classification based on valid and reasonable standards does not
Germane to the Purpose of the Law
violate the equal protection clause.
The real concern RA 7227 is to convert the lands formerly occupied by
the US military bases into economic or industrial areas. In furtherance
TIU v. COURT OF APPEALS of such objective, Congress deemed it necessary to extend economic
GR 127410, January 20, 1999, En Banc incentives to attract and encourage investors, both local and foreign
among such enticements is tax-and-duty-free importations,.
Facts: RA 7227 was passed into law in March 1992, known as the
Bases Conversion and Development Act which converted military We believe it was reasonable for the President to have delimited the
reservations into other productive uses which included Subic to become application of some incentives to the confines of the former Subic
Subic Special Economic Zone (SSEZ). Section 12 thereof provides: military base. It is this specific area which government intends to
transform and develop from its status quo ante as an abandoned naval
(c) The provision of existing laws, rules and regulations to the facility into a self-sustaining industrial and commercial zone, particularly
for big foreign and local investors to use as operational bases for their
contrary notwithstanding, no taxes, local and national, shall be
businesses and industries. The classification is, therefore, germane to
imposed within the Subic Special Economic Zone. In lieu of
the purposes of the law. And as the legal maxim goes, "The intent of a
paying taxes, three percent (3%) of the gross income earned by all
statute is the law."
businesses and enterprises within the Subic Special Economic Zone
shall be remitted to the National Government, one percent (1%) each There are Substantial Differences
to the local government units affected by the declaration of the zone There are substantial differences between the big investors who are
in proportion to their population area, and other factors. In addition, being lured to establish and operate their industries in the so-called
there is hereby established a development fund of one percent (1%) "secured area" and the present business operators outside the area.
of the gross income earned by all businesses and enterprises within
the Subic Special Economic Zone to be utilized for the development
On the one hand, we are talking of billion-peso investments and questions such as the kind, object, extent, coverage and place of
thousands of new, jobs. On the other hand, definitely none of such taxation are matters which rightly rest on legislative judgment.
magnitude.
In addition, due process clause may be correctly invoked only when
In the first, the economic impact will be national; in the second, only there is a clear contravention of inherent or constitutional limitations in
local. Even more important, at this time the business activities outside exercise of tax power, which is absent in this case.
the "secured area" are not likely to have any impact in achieving the
purpose of the law, which is to turn the former military base to productive
use for the benefit of the Philippine economy.
ABAKADA v. ERMITA
GR 168056, September 1, 2005, En Banc
There is, then, hardly any reasonable basis to extend to them the
benefits and incentives accorded in RA 7227. Additionally, as the Court A. Due Process and Equal Protection Clause
of Appeals pointed out, it will be easier to manage and monitor the
activities within the "secured area," which is already fenced off, to Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that
prevent "fraudulent importation of merchandise" or smuggling. Section 8 of R.A. No. 9337, amending Sections 110 (A)(2), 110 (B), and
Section 12 of R.A. No. 9337, amending Section 114 (C) of the NIRC are
Does Not Only Apply to Existing Conditions arbitrary, oppressive, excessive and confiscatory. Their argument is
As laid down in RA 7227, the objective is to establish a "self-sustaining, premised on the constitutional right against deprivation of life, liberty of
industrial, commercial, financial and investment center" in the area. property without due process of law, as embodied in Article III, Section
There will, therefore, be a long-term difference between such 1 of the Constitution. Petitioners also contend that these provisions
investment center and the areas outside it. violate the constitutional guarantee of equal protection of the law.
Applies Equally to All Members in the SSEZ
Lastly, the classification applies equally to all the resident individuals and Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC
businesses within the "secured area." The residents, being in like imposes a limitation on the amount of input tax that may be credited
circumstances or contributing directly to the achievement of the end against the output tax. It states, in part:
purpose of the law, are not categorized further. Instead, they are all
similarly treated, both in privileges granted and in obligations required. "[P]rovided, that the input tax inclusive of the input VAT carried over from the
previous quarter that may be credited in every quarter shall not exceed
seventy percent (70%) of the output VAT…
Ruling: All told, the Court holds that no undue favor or privilege was
extended. The classification occasioned by EO 97-A was not
Input Tax is defined under Section 110(A) of the NIRC, as amended, as
unreasonable, capricious or unfounded. To repeat, it was based, rather,
the value-added tax due from or paid by a VAT-registered person on the
on fair and substantive considerations that were germane to the
importation of goods or local purchase of good and services, including
legislative purpose.
lease or use of property, in the course of trade or business, from a VAT-
registered person, and Output Tax is the value-added tax due on the
TAN v. COURT OF APPEALS sale or lease of taxable goods or properties or services by any person
GR 109289, October 3, 1994, En Banc registered or required to register under the law.
Facts: This involve a question of constitutionality of: Petitioners here claim that the provision imposes a limit to the amount
[1] RA 7496 known as SNIT or the Simplified Net Income of input tax that may be claimed against the output tax. They argue that
Taxation Scheme; and in effect, a portion of input tax that was paid cannot now be credited
[2] RR 2-93 issued by CIR for implementation of SNIT against the output tax.
Section 21 and 29 of the law provides for the calculation of the simplified Held: This argument is not absolute. They assumes that the 70%
net income tax for the self-employed or professionals engaged in the limitation means that the excess of the input tax can no longer be
practice of profession as the amended deductions from gross income. uncredited.
Petitioner here claim to be adversely affected by the continued Looking at the law, the excess input tax is retained in the books of
implementation of the law citing Uniformity Rule in Taxation as well as accounts and remains creditable in the succeeding quarters as allowed
the Due Process and Equal Protection Clause in the Constitution. by Sec. 110(B).
Petitioner argues here that the SNIT law would now attempt to tax single
proprietorships and professionals differently from the manner it imposes In addition, Sec. 112(B) allows a VAT-registered person to apply for the
the tax on corporations and partnerships. issuance of Tax Credit Certificate or Refund for any Unused Input
Taxes, to the extent that such input taxes have not been applied against
Issue: Does the provision of law violate uniformity rule or equal the output taxes. Such unused input taxes, may be used in payment of
protection clause? – No. his other internal revenue taxes.
Uniformity of Taxation, Explained In short, the petitioners fail to see that the unused input tax can still be
Uniformity of taxation, like the kindred concept of equal protection, carried over to the succeeding quarters by virtue of the carry-over
merely requires that all subjects or objects of taxation, similarly situated, provision of Sec. 110(B) and even refunded by a tax credit certificate
are to treated alike both in privileges and liabilities. Uniformity does not under Sec. 112(B).
forfend classification as long as: (1) the standards that are used
therefor are substantial and not arbitrary, (2) the categorization is Calculation of Payable Value Added Tax
germane to achieve the legislative purpose, (3) the law applies, all things With Respect to the 70% Limit of
being equal, both present and future conditions, and (4) classification Crediting Input Tax against the Output Tax
applies equally well to all those belonging to the same class.
As earlier stated, the input tax is the tax paid by a person, passed on to
What may instead be perceived to be apparent from the amendatory law him by the seller, when he buys goods. Output tax meanwhile is the tax
is the legislative intent to increasingly shift the income tax system due to the person when he sells goods. In computing the VAT payable,
towards the schedular approach in the income taxation of individual three possible scenarios may arise:
taxpayers and to maintain, by and large, present global treatment on
taxable corporations. We certainly do not view this classification to be First, if at the end of a taxable quarter the output taxes charged by the
arbitrary and inappropriate. seller are equal to the input taxes that he paid and passed on by the
suppliers, then no payment is required;
It is to be noted that petitioner here discussed the merits of the law
illustrating the process what he believes to be an imbalance between Second, when the output taxes exceed the input taxes, the person shall
tax liabilities of those covered and those not, however this kind of be liable for the excess, which has to be paid to the Bureau of Internal
Revenue (BIR);
In this case, the tax law is uniform as it provides a standard rate of 0%

Third, if the input taxes exceed the output taxes, the excess shall be or 10% (or 12%) on ALL goods and services. Sections 4, 5 and 6 of R.A.
carried over to the succeeding quarter or quarters. No. 9337, amending Sections 106, 107 and 108, respectively, of the
NIRC, provide for a rate of 10% (or 12%) on sale of goods and
Should the input taxes result from zero-rated or effectively zero-rated properties, importation of goods, and sale of services and use or lease
transactions, any excess over the output taxes shall instead be refunded of properties. These same sections also provide for a 0% rate on certain
to the taxpayer or credited against other internal revenue taxes, at the sales and transaction. It must be stressed that rule of uniform taxation
taxpayer’s option. does not deprive Congress of power to classify subjects of taxation, and
demands uniformity within the particular class.
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on
the input tax. Thus, a person can credit his input tax only up to the R.A. No. 9337 is also equitable. The law is equipped with a threshold
extent of 70% of the output tax. margin. The VAT rate of 0% or 10% (or 12%) does not apply to sales of
goods or services with gross annual sales or receipts not exceeding
In layman’s term, the value-added taxes that a person/taxpayer paid ₱1,500,000.00. Also, basic marine and agricultural food products in their
and passed on to him by a seller can only be credited up to 70% of original state are still not subject to the tax, thus ensuring that prices at
the value-added taxes that is due to him on a taxable transaction. the grassroots level will remain accessible.
There is no retention of any tax collection because the person/taxpayer It is admitted that R.A. No. 9337 puts a premium on businesses with low
has already previously paid the input tax to a seller, and the seller will profit margins, and unduly favors those with high profit margins.
subsequently remit such input tax to the BIR. The party directly liable for Congress was not oblivious to this. Thus, to equalize the weighty burden
the payment of the tax is the seller. What only needs to be done is for the law entails, the law, under Section 116, imposed a 3% percentage
the person/taxpayer to apply or credit these input taxes, as evidenced tax on VAT-exempt persons under Section 109(v), i.e., transactions
by receipts, against his output taxes. with gross annual sales and/or receipts not exceeding ₱1.5 Million. This
acts as an equalizer because in effect, bigger businesses that qualify
Input Tax is Not a Property Within the Constitutional for VAT coverage and VAT-exempt taxpayers stand on equal-footing.
Purview of the Due Process Clause
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue

that the input tax partakes the nature of a property that may not be BRITISH AMERICAN TOBACCO v. CAMACHO
confiscated, appropriated, or limited without due process of law. GR 164583
The input tax is not a property or a property right within the Facts from Decision: August 20, 2008, En Banc
constitutional purview of the due process clause. A VAT-registered Ruling from Resolution: April 15, 2009, En Banc
person’s entitlement to the creditable input tax is a mere statutory
privilege. Facts: A petition was filed assailing the validity of Section 145 of the
NIRC which was amended by RA 9334 as well as the Revenue
The distinction between statutory privileges and vested rights must be Regulations seeking to implement such. Petitioner argues that the said
borne in mind for persons have no vested rights in statutory privileges. provisions are violative of equal protection and uniformity clauses of the
The state may change or take away rights, which were created by the Constitution.
law of the state, although it may not take away property, which was
vested by virtue of such rights. Section 145 par. (c): This provides for four tiers of tax rates based on
the net retail price per pack of cigarettes. To determine the applicable
tax rates for existing cigarettes brands, a survey of net rail prices was
Different Consequences Resulting to High Ratio of Input Tax made and results are in NIRC as Annex D.
Does Not Mean that the Law Classified Any Subject to Warrant However, as to new brands they shall be classified according to their
Invocation of the Equal Protection Clause current net retail price while old brands shall be taxed based on their
net retail price as of October 1, 1996.
Petitioners point out that the limitation on the creditable input tax if the
entity has a high ratio of input tax, or invests in capital equipment, or has In June 2001, petitioner British American Tobacco introduced into
several transactions with the government, is not based on real and the market Lucky Strike Filter, Lucky Strike Lights and Lucky Strike
substantial differences to meet a valid classification. Menthol Lights cigarettes, with a suggested retail price of P9.90 per
pack. Pursuant to Sec. 145 (c) Lucky Strike brands were initially
The argument is pedantic, if not outright baseless. The law does not assessed the excise tax at P8.96 per pack.
make any classification in the subject of taxation, the kind of property,
the rates to be levied or the amounts to be raised, the methods of In August 2003, RR 22-2003 was issued and that based upon the survey
assessment, valuation and collection. Petitioners’ alleged distinctions of current net rail price, it revealed that Lucky Strike Filter, Lucky Strike
are based on variables that bear different consequences. Lights, and Lucky Strike Menthol Lights, are sold at the current net retail
While the implementation of the law may yield varying end results price of P22.54, P22.61 and P21.23, per pack, respectively. Respondent
depending on one’s profit margin and value-added, the Court cannot go Commissioner of the Bureau of Internal Revenue thus recommended
beyond what the legislature has laid down and interfere with the affairs the applicable tax rate of P13.44 per pack inasmuch as Lucky Strike’s
of business. average net retail price is above P10.00 per pack.
The equal protection clause does not require the universal This prompted petitioner to file with RTC seeking to enjoin the
application of the laws on all persons or things without distinction. implementation of Section 145 of NIRC on the ground that they
This might in fact sometimes result in unequal protection. What the discriminate against new brand of cigarettes, in violation of the
clause requires is equality among equals as determined according to a equal protection and uniformity provisions of the Constitution.
valid classification. By classification is meant the grouping of persons or
things similar to each other in certain particulars and different from all While the case was pending, RA 9334 took effect increasing the excise
others in these same particulars. taxes and provided for a classification freeze of cigarettes introduced
since January 2, 1997 until December 31, 2003 until revised by
B. Uniformity and Equitability of Taxation Congress.
Uniformity in taxation means that all taxable articles or kinds of Under RA 9334, the excise tax due on petitioner’s products was
property of the same class shall be taxed at the same rate. Different increased to P25.00 per pack. In the implementation thereof, respondent
articles may be taxed at different amounts provided that the rate is Commissioner assessed petitioner’s importation of 911,000 packs of
uniform on the same class everywhere with all people at all times. Lucky Strike cigarettes at the increased tax rate of P25.00 per pack,
rendering it liable for taxes in the total sum of P22,775,000.00.
Hence, petitioner filed a Motion to Admit Attached Supplement19 and a Uniformity of Taxation, Present
Supplement20 to the petition for review, assailing the constitutionality Uniformity of taxation, like the kindred concept of equal protection,
of RA 9334 insofar as it retained Annex "D" and praying for a merely requires that all subjects or objects of taxation, similarly situated,
downward classification of Lucky Strike products at the bracket are to be treated alike both in privileges and liabilities.
taxable at P8.96 per pack.
In the instant case, there is no question that the classification freeze
Petitioner claims that the old brands (citing Marlboro and Philip Morris) provision meets the geographical uniformity requirement because the
that were classified under Annex D (1996 prices) already increased their assailed law applies to all cigarette brands in the Philippines. And, for
prices and that if they were taxed on their 2004 net retail prices they reasons already adverted to in our August 20, 2008 Decision, the above
should be paying a higher excise tax rate of P13.44 rather than P8.96. four-fold test has been met in the present case.
However, due to the legislative classification freeze, they continued

to be classified under the high-priced tax bracket with a lower excise tax
ABAKADA v. PURISIMA
rate. Petitioner thereafter deplores the fact that its Lucky Strike Filter, GR 166715, August 14, 2008, En Banc
Lucky Strike Lights, and Lucky Strike Menthol Lights cigarettes,
introduced in the market sometime in 2001 and validated by a BIR Facts: RA 9335 or the Attrition Act of 2005 encourages BIR and BOC
survey in 2003, were found to have net retail prices of P11.53, P11.59 officials and EEs to exceed their revenue targets by providing a system
and P10.34,42 respectively, which are lower than those of Marlboro and of rewards and sanctions through the creation of a Rewards and
Philip Morris. However, since petitioner’s cigarettes were newly Incentives Fund and a Revenue Performance Evaluation Board. It
introduced brands in the market, they were taxed based on their current covers all officials and EEs of BIR and BOC with at least 6 months of
net retail prices and, thus, fall under the premium-priced tax bracket with service regardless of employment status. This is to be sourced from the
a higher excise tax rate of P13.44 per pack. This unequal tax treatment excess of revenue targets.
between Marlboro and Philip Morris, on the one hand, and Lucky
Strike, on the other, is the crux of petitioner’s contention that the Petitioners, invoking their right as taxpayers filed petition to challenge
legislative classification freeze violates the equal protection and the constitutionality of RA 9335 contending that the system of rewards
uniformity of taxation clauses of the Constitution. turn officials and EEs of BIR and BOC into mercenaries and bounty
hunters and that it limits the scope of the system of rewards only to the
In short, petitioner argues that the classification freeze provision violates officials and employees of BIR and BOC which violates the constitutional
the equal protection and uniformity of taxation clauses because Annex guarantee of equal protection and that there is no valid basis for
"D" brands are taxed based on their 1996 net retail prices while new classification or distinction as to why such a system should not apply to
brands are taxed based on their present day net retail prices officials and employees of all the other government agencies.
Issue: Is the legislative classification freeze tantamount to a violation Issue: Does the law violate the equal protection clause? – No.
of the equal protection and uniformity of taxation clauses of the
Constitution? – No. Equal Protection Clause
Equality guaranteed under the equal protection clause is equality under
Rational Basis Test Used the same conditions and among persons similarly situated; it is equality
No Violation of Equal Protection Clause among equals, not similarity of treatment of persons who are classified
These contentions are without merit. The rational basis test was properly based on substantial differences in relation to the object to be
applied to gauge the constitutionality of the assailed law in the face of accomplished. When things or persons are different in fact or
an equal protection challenge. Under the rational basis test, it is circumstance, they may be treated in law differently. The equal
sufficient that the legislative classification is rationally related to protection clause recognizes a valid classification, that is, a classification
achieving some legitimate State interest. that has a reasonable foundation or rational basis and not arbitrary.
As the Court ruled in the assailed Decision, viz: A legislative With respect to RA 9335, its expressed public policy is the optimization
classification that is reasonable does not offend the constitutional of the revenue-generation capability and collection of the BIR and the
guaranty of the equal protection of the laws. The classification is BOC. Since the subject of the law is the revenue- generation capability
considered valid and reasonable provided that: (1) it rests on substantial and collection of the BIR and the BOC, the incentives and/or sanctions
distinctions; (2) it is germane to the purpose of the law; (3) it applies, all provided in the law should logically pertain to the said agencies.
things being equal, to both present and future conditions; and (4) it Moreover, the law concerns only the BIR and the BOC because they
applies equally to all those belonging to the same class. have the common distinct primary function of generating revenues for
the national government through the collection of taxes, customs duties,
The first, third and fourth requisites are satisfied. The classification fees and charges.
freeze provision was inserted in the law for reasons of practicality and
expediency. That is, since a new brand was not yet in existence at the Both the BIR and the BOC are bureaus under the DOF. They principally
time of the passage of RA 8240, then Congress needed a uniform perform special function of being the instrumentalities through which the
mechanism to fix the tax bracket of a new brand. The current net retail State exercises one of its great inherent functions – taxation. Indubitably,
price, similar to what was used to classify the brands under Annex "D" such substantial distinction is germane and intimately related to the
as of October 1, 1996, was thus the logical and practical choice. purpose of the law. Hence, the classification and treatment accorded
to the BIR and the BOC under RA 9335 fully satisfy the demands of
Further, with the amendments introduced by RA 9334, the freezing of equal protection.
the tax classifications now expressly applies not just to Annex "D"
brands but to newer brands introduced after the effectivity of RA 8240
on January 1, 1997 and any new brand that will be introduced in the COC v. HYPERMIX FEEDS CORPORATION
future.
GR 179579, February 1, 2012
Curiously, the classification freeze provision was put in place of
periodic adjustment and reclassification provision because of the belief Facts: Commissioner of Customs (COC) issued CMO 27-2003 for tariff
that the latter would foster an anti-competitive atmosphere in the market. purposes, wheat was classified according to (1) importer or consignee;
Yet, as it is, this same criticism is being foisted by petitioner upon the (2) country of origin and (3) port of discharge. Depending on these
classification freeze provision. To our mind, the classification freeze factors, wheat would be classified either as food grade or feed grade.
provision was in the main the result of Congress’s earnest efforts to The corresponding tariff for food graded wheat was 3%, for feed grade
improve the efficiency and effectivity of the tax administration over sin 7%.
products while trying to balance the same with other State interests.
Congress may have reasonably conceived that a tax system which A month after the CMO was issued, Hypermix Feeds filed a case
would give the least amount of discretion to the tax implementers would anticipating that the regulation would be applied in its import of
address the problems of tax avoidance and tax evasion. perishable Chinese milling wheat in transit from China. It contended that
the equal protection clause of the Constitution was violated when the
regulation treated non-flour millers differently from flour millers for no Systems of Taxation
reason at all. 1. Proportional system – where the tax increases or decreases
in relation to the tax bracket.
The RTC ruled that the CMO was invalid and of no force and effect 2. Progressive or graduated system – where the tax increase as
finding that the CMO was issued without following the requirement of the income of the taxpayer goes higher.
hearing and publication. This was affirmed by the Court of Appeals. 3. Regressive system – where the tax decreases as the income
of the taxpayer increases.
Note: The Court ruled that CMO failed to follow requirements of public
notice and hearing citing the case of Tañada v. Tuvera, where there Evolving a Progressive System of Taxation
must be notice and publication of those which regulate the actions and Progressive system of taxation means that as the resources of the
conduct of citizens otherwise it would be the height injustice to punish or taxpayer becomes higher, his tax rate likewise increases. Under this
burden a citizen for a law which he had no notice whatsoever. system of taxation, the tax rate increases much faster than the tax base.
Issue: Does CMO violate the equal protection clause? – Yes. Tax Base is the amount to which a tax rate is applied. The Tax
Rate is the percentage of the tax base that must be paid in taxes. To
Equal Protection, Defined calculate most taxes, it is necessary to know the tax base and tax rate.
The equal protection clause means that no person or class of persons
shall be deprived of the same protection of laws enjoyed by other This is exemplified by the income tax rate which increases as the net
persons or other classes in the same place in like circumstances. Thus, taxable income increases. It is based on the ability to pay or
the guarantee of the equal protection of laws is not violated if there is a Theoretical Justice and the social justice principle that those more
reasonable classification. affluent should contribute more to society’s benefit.
For a classification to be reasonable, it must be shown that (1) it rests The progressive system of taxation is constitutionally imposed to
on substantial distinctions; (2) it is germane to the purpose of the law; achieve social justice through redistribution of income. Thus,
(3) it is not limited to existing conditions only; and (4) it applies equally progressive income taxes alleviate the margin between the rich and the
to all members of the same class.22 poor (Southern Cross Cement v. Cement Manufacturers Association,
2005).
Unfortunately, CMO 27-2003 does not meet these requirements. We
do not see how the quality of wheat is affected by who imports it,
where it is discharged, or which country it came from. TOLENTINO v. SECRETARY OF FINANCE
GR 115455, August 24, 1994, En Banc
Thus, on the one hand, even if other millers excluded from CMO 27-
2003 have imported food grade wheat, the product would still be In this case, the petitioners are questioning the constitutionality of RA
declared as feed grade wheat, a classification subjecting them to 7% 7716 which seeks to widen the tax base of the existing VAT system and
tariff. enhance its administration by amending NIRC.
On the other hand, even if the importers listed under CMO 27-2003 have As to Claims of Regressivity
imported feed grade wheat, they would only be made to pay 3% tariff,
thus depriving the state of the taxes due. Petitioners argue that the VAT is regressive and that it violates the
requirement that “the rule of taxation shall be uniform and equitable and
The regulation, therefore, does not become disadvantageous to Congress shall evolve a progressive system of taxation. They argue
respondent only, but even to the state. It is also not clear how the that, citing from a paper from IMF, that the VAT payment by low-income
regulation intends to "monitor more closely wheat importations and thus households will be a higher proportion of their incomes than payment
prevent their misclassification." A careful study of CMO 27-2003 shows higher-income households. That is, the VAT will be regressive."
that it not only fails to achieve this end, but results in the opposite. The
application of the regulation forecloses the possibility that other Petitioners contend that as a result of the uniform 10% VAT, the tax on
corporations that are excluded from the list import food grade wheat; at consumption goods of those who are in the higher-income bracket,
the same time, it creates an assumption that those who meet the criteria which before were taxed at a rate higher than 10%, has been reduced,
do not import feed grade wheat. In the first case, importers are while basic commodities, which before were taxed at rates ranging from
unnecessarily burdened to prove the classification of their wheat 3% to 5%, are now taxed at a higher rate.
imports; while in the second, the state carries that burden.
The respondents claim that the opposite, it distributes the tax burden to
Sec. 1403 of Tariff and Customs Law mandates that the customs officer as many goods and services as possible particularly to those which are
must first assess and determine the classification of the imported article within the reach of higher-income groups, even as the law exempts basic
before tariff may be imposed. Unfortunately, CMO 23-2007 has already goods and services. It is thus equitable. The goods and properties
classified the article even before the customs officer had the chance to subject to the VAT are those used or consumed by higher-income
examine it. In effect, petitioner Commissioner of Customs diminished the groups.
powers granted by the Tariff and Customs Code with regard to wheat
importation when it no longer required the customs officer’s prior Regressivity is Not a Negative Standard
examination and assessment of the proper classification of the wheat. For the Courts to Enforce
Lacking empirical data on which to base any conclusion regarding these
In summary, petitioners violated respondent’s right to due process in the arguments, any discussion whether the VAT is regressive in the sense
issuance of CMO 27-2003 when they failed to observe the requirements that it will hit the "poor" and middle-income group in society harder than
under the Revised Administrative Code. Petitioners likewise violated it will the "rich," as is largely an academic exercise.
respondent’s right to equal protection of laws when they provided for an
unreasonable classification in the application of the regulation. Finally, Indeed, regressivity is not a negative standard for courts to enforce.
petitioner Commissioner of Customs went beyond his powers of What Congress is required by the Constitution to do is to "evolve a
delegated authority when the regulation limited the powers of the progressive system of taxation." This is a directive to Congress, and
customs officer to examine and assess imported articles. these provisions are put in the Constitution as moral incentives to
legislation, not as judicially enforceable rights.
IV. Progressive Taxation
4 According to Dean Quibod:
ARTICLE VI, SECTION 28(1) The provision for the Congress to evolve a progressive
The rule of taxation shall be uniform and equitable. The Congress system of taxation is just a directive. Meaning, it is not required or
shall evolve a progressive system of taxation. mandated upon the Congress thus the Congress could not be compelled
to evolve a progressive system of taxation, for there exists only a
directive which is similar to the laws of human dignity, economic and must originate from the House of Representatives. This provision does
political equalities, quality education, and that they are in the not make the House or Representatives superior to the Senate. The
Constitution as moral incentives to legislation not as a judicially house is still co-equal to the Senate.
enforceable right. Thus, the tax policy towards a progressive system is
merely a directive. Dean Quibod proffers this question:
ABAKADA v. ERMITA Why does the Constitution require that this revenue and tariff bills must
GR 168056, September 1, 2005, En Banc originate from the House of Representatives?
Petitioners here content that the limitation on the creditable input tax is He explains that this is because the members of the House
anything but regressive. It is the smaller business with higher input tax- are those elected by the greater majority. They, more or less, represent
output tax ratio that will suffer consequences. the Filipino constituency. They are elected on the basis of their
legislative districts. A senator is elected by the people at large.
The subjects of every state ought to contribute towards the support of
the government, as nearly as possible, in proportion to their respective TOLENTINO v. SECRETARY OF FINANCE
abilities; that is, in proportion to the revenue which they respectively GR 115455, August 25, 1994, En Banc
enjoy under the protection of the state. Taxation is progressive when its
rate goes up depending on the resources of the person affected. Facts: This involves the constitutionality of RA 7716 of the Expanded
VAT Law. The bill (H. No. 11197) was approved by the HOR on Nov, 17,
VAT is Regressive but Not Necessarily Invalid 1993 and was sent to Senate on Nov. 23, 1993 and later referred by the
Senate to its Committee on Ways and Means. In Feb. 7, 1994,
The VAT is an antithesis of progressive taxation. By its very Committee submitted its report recommending approval of S. No. 1630.
nature, it is regressive. The principle of progressive taxation has no Stated therein that the bill was being submitted in substitution of S. No.
relation with the VAT system inasmuch as the VAT paid by the consumer 1129 taking into consideration PS Res 734 and H. 11197.
or business for every goods bought or services enjoyed is the same
regardless of income. In March 24. 1994, the Senate approved the bill on third reading and
then H. 11197 and S. 1630 were then referred to the Conference
In other words, the VAT paid eats the same portion of an income, Committee and after four meetings, recommended that H. 11197 in
whether big or small. The disparity lies in the income earned by a person consolidation with S. 1639 be approved in accordance with the attached
or profit margin marked by a business, such that the higher the income copy of the bill as reconcile and approved by both houses.
or profit margin, the smaller the portion of the income or profit that is
eaten by VAT. A converso, the lower the income or profit margin, the The enrolled bill was then presented to the President and was signed
bigger the part that the VAT eats away. At the end of the day, it is not law on May 5, 1994.
really the lower income group or businesses with low-profit
margins that is always hardest hit. Petitioners’ contention is that RA 7716 did not “originate exclusively” in
Nevertheless, the Constitution does not really prohibit the the House of Representatives as required by Art. VI, §24 of the
imposition of indirect taxes, like the VAT. What it simply provides is Constitution, because it is in fact the result of the consolidation of two
that Congress shall "evolve a progressive system of taxation." distinct bills, H. No. 11197 and S. No. 1630.
The Court stated in the Tolentino case, thus: In this connection, petitioners point out that although Art. VI, SS 24 was
adopted from the American Federal Constitution, it is notable in two
The Constitution does not really prohibit the imposition of respects: the verb “shall originate” is qualified in the Philippine
indirect taxes which, like the VAT, are regressive. What it simply Constitution by the word “exclusively” and the phrase “as on other bills”
provides is that Congress shall ‘evolve a progressive system of taxation.’ in the American version is omitted. This means, according to them, that
The constitutional provision has been interpreted to mean simply to be considered as having originated in the House, Republic Act No.
that ‘direct taxes are . . . to be preferred [and] as much as possible, 7716 must retain the essence of H. No. 11197.
indirect taxes should be minimized.’
Issue: Was there a violation of Article VI, Sec. 24? – No.
Indeed, the mandate to Congress is not to prescribe, but to evolve, a
progressive tax system. Otherwise, sales taxes, which perhaps are the Held: This argument will not bear analysis.
oldest form of indirect taxes, would have been prohibited with the
proclamation of Art. VIII, §17 (1) of the 1973 Constitution from which the To begin with, it is not the law — but the revenue bill — which is
present Art. VI, §28 (1) was taken. Sales taxes are also regressive. required by the Constitution to "originate exclusively" in the House of
Resort to indirect taxes should be minimized but not avoided entirely Representatives.
because it is difficult, if not impossible, to avoid them by imposing such
taxes according to the taxpayers' ability to pay. It is important to emphasize this, because a bill originating in the
House may undergo such extensive changes in the Senate that the
In the case of the VAT, the law minimizes the regressive effects of this result may be a rewriting of the whole.
imposition by providing for zero rating of certain transactions (R.A. No.
7716, §3, amending §102 (b) of the NIRC), while granting exemptions There is even a possibility of a third version by the conference
to other transactions. (R.A. No. 7716, §4 amending §103 of the NIRC). committee.
At this point, what is important to note is that, as a result of the Senate
5 V. Origin of Appropriation, Revenue and Tariff Bills action, a distinct bill may be produced.
To insist that a revenue statute — and not only the bill which initiated the
ARTICLE VI, SECTION 24 legislative process culminating in the enactment of the law — must
All appropriation, revenue or tariff bills, bills authorizing increase of substantially be the same as the House bill would be to deny the
the public debt, bills of local application, and private bills, shall Senate's power not only to "concur with amendments" but also to
originate exclusively in the House of Representatives, but the Senate "propose amendments."
may propose or concur with amendments.
It would be to violate the coequality of legislative power of the two
Origin of Bills houses of Congress and in fact make the House superior to the
Senate.
The appropriation of revenue and tariff bills originates in the
House of Representative. According to Dean Quibod, this is a Indeed, what the Constitution simply means is that the initiative for filing
requirement under the Constitution for revenue measures, the it revenue, tariff, or tax bills, bills authorizing an increase of the public debt,
private bills and bills of local application must come from the House of
Representatives on the theory that, elected as they are from the The Changes Were Only Meant
districts, the members of the House can be expected to be more To Reconcile the Disagreeing Provisions
sensitive to the local needs and problems. In the present case, the changes introduced by the Bicameral
Conference Committee on disagreeing provisions were meant only to
On the other hand, the senators, who are elected at large, are expected reconcile and harmonize the disagreeing provisions for it did not inject
to approach the same problems from the national perspective. Both any idea or intent that is wholly foreign to the subject embraced by the
views are thereby made to bear on the enactment of such laws. original provisions.
Thus, all the changes or modifications made by the Bicameral

Conference Committee were germane to subjects of the provisions
ABAKADA v. ERMITA referred to it for reconciliation. Such being the case, the Court does
GR 166006, March 14, 2008 not see any grave abuse of discretion amounting to lack or excess of
jurisdiction committed by the Bicameral Conference Committee.
Contention: The petitioners, Escudero, et al., and Pimentel, et al.
alleged that the Bicameral Conference Committee exceeds its authority In the earlier cases of Philippine Judges Association vs. Prado29 and
by: Tolentino vs. Secretary of Finance, the Court recognized the long-
[1] Inserting stand-by authority of President in RA 9337 standing legislative practice of giving said conference committee ample
[2] Deleting entirely the “no pass-on” provision on both bills latitude for compromising differences between the Senate and the
[3] Inserting the provision imposing a 70% limit on the amount House.
of input tax to be credited against the output tax; and
[4] Including the amendments introduced only by Senate Bill Thus, in the Tolentino case, it was held that: . . . it is within the power of
regarding other kinds of taxes in addition to the VAT. a conference committee to include in its report an entirely new provision
that is not found either in the House bill or in the Senate bill. If the
Issue: Was there a violation of Article VI, Section 24? – No. committee can propose an amendment consisting of one or two
provisions, there is no reason why it cannot propose several provisions,
Bicameral Conference Committee, Powers collectively considered as an "amendment in the nature of a substitute,"
It should be borne in mind that the power of internal regulation and so long as such amendment is germane to the subject of the bills before
discipline are intrinsic in any legislative body for, as unerringly elucidated the committee.
by Justice Story, "[i]f the power did not exist, it would be utterly
impracticable to transact the business of the nation, either at all, or at After all, its report was not final but needed the approval of both
least with decency, deliberation, and order." Thus, Article VI, Section 16 houses of Congress to become valid as an act of the legislative
(3) of the Constitution provides that "each House may determine the department. The charge that in this case the Conference Committee
rules of its proceedings." Pursuant to this inherent constitutional power acted as a third legislative chamber is thus without any basis.
to promulgate and implement its own rules of procedure, the respective
rules of each house of Congress provided for the creation of a
Bicameral Conference Committee.
VI. Voting Requirements for Tax Exemptions
The creation of such conference committee was apparently in response
to a problem, not addressed by any constitutional provision, where the ARTICLE VI, SECTION 28 (4)
two houses of Congress find themselves in disagreement over changes No law granting any tax exemption shall be passed without the
or amendments introduced by the other house in a legislative bill. concurrence of a majority of all the Members of the Congress.
Given that one of the most basic powers of the legislative branch is to
formulate and implement its own rules of proceedings and to discipline Grant of Tax Exemption by Congress
its members, may the Court then delve into the details of how Congress There is a qualified absolute majority vote of all Members of the
complies with its internal rules or how it conducts its business of passing Congress in order of granting any tax exemption.
legislation?
It is important to note that there are other instances where tax exemption
Moreover, as far back as 1994 or more than ten years ago, in the case that are granted other than by act of Congress.
of Tolentino vs. Secretary of Finance, the Court already made the 1. Where the President of the Philippines exercises his power
pronouncement that "[i]f a change is desired in the practice [of the under the flexible tariff clause to remove existing protective
Bicameral Conference Committee] it must be sought in Congress since tariff rates without participation of Congress (Article VI,
this question is not covered by any constitutional provision but is only an Section 28 [2]).
internal rule of each house." To date, Congress has not seen it fit to 2. A local government unit may grant exemptions from the
make such changes adverted to by the Court. It seems, therefore, that payment of local government taxes, without congressional
Congress finds the practices of the bicameral conference committee to approval, consequent to its power to levy taxes, fees or other
be very useful for purposes of prompt and efficient legislative action. charges (Article X, Sec. 5).
3. President may enter and ratify tax treaty granting tax
The Court observes that there was a necessity for a conference exemptions subject to Senate concurrence.
committee because a comparison of the provisions of House Bill and 4. President may enter in executive agreement which provides
Senate Bill on the other, reveals that there were indeed disagreements. for tax exemptions without need of Senate concurrence.
5. Foreign dignitaries may even be granted “courtesies of the
The disagreements between the provisions in the House bills and the port” and their baggage is not subject to inspection and taxes
Senate bill were with regard to (1) what rate of VAT is to be imposed; (2) upon arrival in Philippine ports, this is premised upon
whether only the VAT imposed on electricity generation, transmission international comity.
and distribution companies should not be passed on to consumers, as
proposed in the Senate bill, or both the VAT imposed on electricity JOHN HAY v. LIM
generation, transmission and distribution companies and the VAT GR 119775, October 24, 2003
imposed on sale of petroleum products should not be passed on to
consumers, as proposed in the House bill; (3) in what manner input tax Facts RA 7227 created the Subic Special Economic and Free Port Zone
credits should be limited; (4) and whether the NIRC provisions on where its metes and bounds are to be delineated in a proclamation to
corporate income taxes, percentage, franchise and excise taxes should be issued by the President. It granted Subic SEZ incentives such as tax
be amended. and duty-free importations, exemption of businesses therein from local
There being differences and/or disagreements on the foregoing and national taxes among others.
provisions of the House and Senate bills, the Bicameral Conference
Committee was mandated by the rules of both houses of Congress to
act on the same by settling said differences and/or disagreements.
In addition RA 7227 gave authority to the President to create by Delegation to Fix Tariff Rates
executive proclamation, subject to LGU concurrence, other Special This is illustrated in the provision of Tariff and Customs Code which is a
Economic Zones in areas covered by the Clark military reservation like legislative enactment that grants flexible tariff clause.
Camp John Hay.
According to Dean Quibod, the President, under certain economic
In July 5, 1994, President Ramos issued Proclamation No. 420 which conditions, has been authorized to fix tariff rates, import and export
established a SEZ on a portion of Camp John Hay which spawned this quotas, tonnage and wharfage dues and other duties or imposts. These
instant case which assails its constitutionality. are revenue raising acts of taxation which is normally given to the
legislative branch.
Petitioners here object against the creation by Proclamation No. 40 of a
regime of tax exemption within the John Hay SEZ. Here they argue that As discussed in Garcia v. Executive Secretary (1992) where
nowhere in RA 7227 where it provides that there was a tax exemption Congressman Enrique Garcia assails the validity of Eos 475 and 478 for
to SEZs yet to be established. being violative of Section 24, Article VI (revenue bills should original from
the HOR, etc.). He contends that since the Constitution vests the
The grant of tax exemption to the John Hay SEZ, petitioners conclude, authority to enact revenue bills in Congress, the President may not
thus contravenes Article VI, Section 28 (4) of the Constitution which assume such power by issuing Executive Orders Nos. 475 and 478
provides that "No law granting any tax exemption shall be passed which are in the nature of revenue-generating measures.
without the concurrence of a majority of all the members of Congress.
The Court ruled that:
Issue: Would the grant of exemption to John Hay to be in violation
Article VI, Section 28(4). – Yes. Under Section 24, Article VI of the Constitution, the enactment
of appropriation, revenue and tariff bills, like all other bills is, of course,
Incentives and Exemption Exclusive to Subic SEZ within the province of the Legislative rather than the Executive
Upon examination of legislative deliberations, it was the intent of the Department. It does not follow, however, that therefore Executive Orders
legislature and express provision of the law that the incentives under Nos. 475 and 478, assuming they may be characterized as revenue
R.A. No. 7227 are exclusive only to the Subic SEZ, hence, the extension measures, are prohibited to the President, that they must be enacted
of the same to the John Hay SEZ finds no support therein. Neither does instead by the Congress of the Philippines.
the same grant of privileges to the John Hay SEZ find support in the
other laws. There is explicit constitutional permission to Congress to
authorize the President "subject to such limitations and restrictions as
Tax Exemption by the Legislature [Congress] may impose" to fix "within specific limits" "tariff rates . . . and
More importantly, the nature of most of the assailed privileges is one of other duties or imposts . . . ." The relevant congressional statute is the
tax exemption. It is the legislature, unless limited by a provision of the Tariff and Customs Code of the Philippines, and Sections 104 and 401,
state constitution, that has full power to exempt any person or the pertinent provisions thereof. These are the provisions which the
corporation or class of property from taxation, its power to exempt being President explicitly invoked in promulgating Executive Orders Nos. 475
as broad as its power to tax. and 478.
Other than Congress, the Constitution may itself provide for specific tax VIII. President’s Veto Power on Appropriation,
exemptions, or local governments may pass ordinances on exemption
only from local taxes.
Revenue or Tariff Bills
The challenged grant of tax exemption would circumvent the ARTICLE VII, SECTION 27(2)
Constitution's imposition that a law granting any tax exemption The President shall have the power to veto any particular item or
must have the concurrence of a majority of all the members of items in an appropriation, revenue, or tariff bill, but the veto
Congress. In the same vein, the other kinds of privileges extended to shall not affect the item or items to which he does not object.
the John Hay SEZ are by tradition and usage for Congress to legislate
upon. Contrary to public respondents' suggestions, the claimed statutory
Veto Power of the President
exemption of the John Hay SEZ from taxation should be manifest and
GR: Veto all or veto none.
unmistakable from the language of the law on which it is based; it must
XPN: Item-veto is allowed as to:
be expressly granted in a statute stated in a language too clear to be
• Appropriation,
mistaken.
• Revenue, or
Tax exemption cannot be implied as it must be categorically and • Tariff bills.
unmistakably expressed. If it were the intent of the legislature to grant to
the John Hay SEZ the same tax exemption and incentives given to the “Any Particular Item”
Subic SEZ, it would have so expressly provided in the R.A. No. 7227. An item in a revenue bill does not refer to an entire section imposing a
particular tax, but rather to the subject of the tax and the tax rate. In the
This Court no doubt can void an act or policy of the political departments portion of a revenue bill which actually imposes a tax, a section identifies
of the government on either of two grounds-infringement of the the tax and enumerate the persons liable therefore with the
Constitution or grave abuse of discretion. This Court then declares corresponding tax rate.
that the grant by Proclamation No. 420 of tax exemption and other
privileges to the John Hay SEZ is void for being violative of the To construe the word “item” as referring to the whole section would tie
Constitution. This renders it unnecessary to still dwell on petitioners' the President’s hand in choosing whether to approve the whole section
claim that the same grant violates the equal protection guarantee. at the expense of also approving a provision therein which he deems
unacceptable or veto the entire section at the expense of foregoing the
collection of the kind of tax altogether (CIR v. CTA and Manila Golf,
1990).
VII. Delegation to President to Fix Tariff Rates
CIR v. CTA AND MANILA GOLF
ARTICLE VI, SECTION 28 (2) GR L-47421, May 14, 1990
The Congress may, by law, authorize the President to fix within
specified limits, and subject to such limitations and restrictions as it Facts: Manila Golf and Country Club, a non-stock corporation. It
may impose, tariff rates, import and export quotas, tonnage and maintains a golf course and operates a clubhouse with lounge, bar and
wharfage dues, and other duties or imposts within the framework of dining room but these facilities are for exclusive use of its members and
the national development program of the Government. guest via cost-plus-expense basis. As such, it claims it should have been
exempt from payment of privilege taxes were it not for last paragraph of
Sec. 191-A of RA 6110 or the Omnibus Tax Law.
SOUTHERN CROSS v. CEMENT MANUFACTURERS

By virtue of RA 6110, petitioners assessed the club fixed taxes as
[1] It is the Congress which authorizes the President to impose tariff
operators of golf links and restaurants, and also percentage tax or
rates, import and export quotas, tonnage and wharfage dues, and other
caterer’s tax for its sale of foods and liquor, wines in the amount of
duties or imposts within the framework of the national development
P32,504.96. The club protested claiming assessment to be without basis
program of the government [Thus, this is a pure delegation to the
because Section 42 was vetoed by the President Marcos.
President].
The protestation was denied by CIR alleging that Section 42 was not
[2] It is not enough for the Congress to allow the President to exercise
entirely vetoed but merely the words “hotels, motels, rest houses” on the
such power. Delegation must be embodied in a law.
ground that it might restrain the development of hotels which is essential
to the tourism industry. CTA ruled that the President could not veto
[3] The authorization of the President may only be exercised within the
words or phrase in a bill but only an entire item.
specified limits in the law and is further subject to limitations and
restrictions which Congress may impose. [He does not have a vested
Issue: Whether the presidential veto referred to the entire section or
right over such power, and can be taken away].
merely to the imposition of the 20% tax on gross receipts of operators
or proprietor restaurants, etc.
AKBAYAN v. AQUINO
Held: The presidential veto referred merely to the inclusion of hotels, GR 170516, July 16, 2008
motels and rest houses in the 20% caterer’s tax bracket but not to the
whole section. As to item, that “inclusion of hotels, motels and rest In this case, petitioners seek to obtain from public respondents full text
houses in the 20% caterer’s tax bracket” are items within the meaning of Japan-Philippines Economic Partnership Agreement (JPEPA)
of the law therefore the President has the power to veto. An "item" in including the Philippine and Japanese offers submitted during the
a revenue bill does not refer to an entire section imposing a particular negotiation process and all pertinent attachments and all pertinent
kind of tax, but rather to the subject of the tax and the tax rate. In the attachments and annexes thereto.
portion of a revenue bill which actually imposes a tax, a section
identifies the tax and enumerates the persons liable therefor with the Petitioner-members of HOR additionally anchor their claim to have a
corresponding tax rate. right to the subject documents on the basis of the Congress’ inherent
power to regulate commerce, be it domestic or international. They allege
To construe the word "item" as referring to the whole section would tie that the Congress cannot meaningfully exercise the power to regulate
the President's hand in choosing either to approve the whole section at international trade agreement such as the JPEPA without being given
the expense of also approving a provision therein which he deems copies of the initial offers exchanged during negotiations thereof.
unacceptable or veto the entire section at the expense of foregoing the
collection of the kind of tax altogether. The evil which was sought to be In the same vein, they argue that the President cannot exclude
prevented in giving the President the power to disapprove items in a Congress from the JPEPA negotiations since whatever power and
revenue bill would be perpetrated rendering that power inutile. authority the President has to negotiate international trade agreements
is derived only by delegation of Congress, pursuant to Article VI, Section
IX. Taxes Levied for a Special Purpose 28(2) of the Constitution and Sections 401 and 402 of Presidential
Decree No. 1464.
ARTICLE VI, SECTION 29 (3) Issue: Is the contention of Congress tenable? – No.
All money collected on any tax levied for a special purpose shall be
treated as a special fund and paid out for such purpose only. If Held: The subject of Article VI Section 28(2) of the Constitution is not
the purpose for which a special fund was created has been the power to negotiate treaties and international agreements, but the
fulfilled or abandoned, the balance, if any, shall be transferred power to fix tariff rates, import and export quotas, and other taxes.
to the general funds of the Government.
As to the power to negotiate treaties, the constitutional basis thereof is
Prohibition on Use of Tax Levied for Special Purpose Section 21 of Article VII. The treaty-making power is exclusive to the
This is illustrated in the case of Pambansang Koalisyon v. Executive President, being the sole organ of the nation in its external relations.
Secretary (2012). Apparently, EO 313 intends to create a trust fund out
of the coco-levy funds to provide economic assistance to the coconut While the power then to fix tariff rates and other taxes clearly belongs to
farmers and, ultimately for the benefit of the industry. But on closer look, Congress, and is exercised by the President only by delegation of that
EO 313 strays from the special purpose for which the law raises coco- body, it has long been recognized that the power to enter into treaties is
levy funds in that it permits the use of coco-levy funds for improving vested directly and exclusively in the President, subject only to the
productivity in other food areas. concurrence of at least two-thirds of all the Members of the Senate for
the validity of the treaty. In this light, the authority of the President to
enter into trade agreements with foreign nations provided under P.D.
X. Grant to LGUs to Create Own Source of Revenue 146458 may be interpreted as an acknowledgment of a power already
inherent in its office. It may not be used as basis to hold the President
ARTICLE X, SECTION 5 or its representatives accountable to Congress for the conduct of treaty
Each local government unit shall have the power to create its own negotiations.
sources of revenues and to levy taxes, fees and charges subject
to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees, XII. Exemption from Real Property Taxes
and charges shall accrue exclusively to the local governments.
ARTICLE VI, SECTION 28 (3)
Note: This has been discussed under Nature and Characteristics
Charitable institutions, churches and personages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands,
XI. Flexible Tariff Clause buildings, and improvements, actually, directly, and exclusively
used for religious, charitable, or educational purposes shall be
ARTICLE VI, SECTION 28 (2) exempt from taxation.
The Congress may, by law, authorize the President to fix within
specified limits, and subject to such limitations and restrictions as it Exemption Limited Only to Real Property Taxes
may impose, tariff rates, import and export quotas, tonnage and Kind of tax covered: Real property tax
wharfage dues, and other duties or imposts within the framework of Subjects covered:
the national development program of the Government. • Charitable Institutions
• Churches and personages or convents appurtenant thereto

• Mosques The trial court among others, found that: (a) that the school is recognized
• Non-profits by the government and is offering Primary, High School and College
• And all other lands which satisfies the condition that: Courses, and has a school population of more than 1000; (b) that it is
Requirement: These lands and buildings are Actually, Directly, and located right in the heart of the town of Bangued; (c) that the elementary
Exclusively used for Religious, Charitable or Education. pupils are housed in a two-storey building across the street; (d) that the
high school and college students are housed in the main building; (e)
“Actually, Directly and Exclusively Used” that the Director with his family is in the second floor of the main building;
According to Atty. Donalvo, there are two interpretations for this and (f) that the annual gross income of the school reaches more than
requirement: one hundred thousand pesos.
1. Liberal Meaning stated in Abra Valley interpreting that even
if the property is not directly used for religious charitable or Petitioner contends that the primary use of the lot and building is for
educational purposes but these facilities are incidental to or educational purposes and not the incidental use thus it falls under the
reasonably necessary for the accomplishment of the main exemption and the seizure and sale of lot and building are without legal
purpose, they are covered by the exception. and therefore void.
2. Restrictive Interpretation where the condition that the
purpose being actually, directly and exclusively used for the In this regard petitioner argues that the primary use of the school lot and
aforementioned purposes. building is the basic and controlling guide, norm and standard to
determine tax exemption, and not the mere incidental use thereof.
An example where incidental use is liberally considered:
Respondents maintain that college lot and building in question for
subjected to answer for unpaid tax are used (1) for the educational
ROMAN CATHOLIC BISHOP v. ILOCOS NORTE purposes of the college; (2) as the permanent residence of the President
GR L-27588, December 31, 1927, En Banc and Director thereof, Mr. Pedro V. Borgonia, and his family including the
in-laws and grandchildren; and (3) for commercial purposes because the
Facts: The Roman Catholic Apostolic Church represented by the ground floor of the college building is being used and rented by a
Bishop of Nueva Segovia, possesses and owns a parcel of land in commercial establishment, the Northern Marketing Corporation,
Ilocos, all four sides facing public street.
Issue: Whether or not the lot and building in question are used
South side – Churchyard, convent and adjacent lot used for exclusively for education purposes. – The first floor thereof is not
vegetable garden exempted as it was subjected to commercial lease.
Center – remainder of churchyard and the church
North – old cemetery, base of an old tower “Exclusively Used for Educational Purposes”
While the Court allowed a more liberal and non-restrictive interpretation
It paid under protest the land tax on the lot adjoining the convent and the of such phrase, reasonable emphasis has been made that exemption
lot which formerly was the cemetery and the portion where the tower extends to facilities which are incidental to and reasonably necessary
stood. for the accomplishment of the main purpose.
The plaintiff filed an action for recovery of the sum of the land tax paid Otherwise stated, the use of the school building or lot for commercial
alleging that the collection was illegal. he lower court absolved the purposes is neither contemplated by law, nor by jurisprudence. Thus,
defendants from the complaint in regard to the lot adjoining convent and while the use of the second floor of the main building in the case at bar
declared that the tax collected on the lot, which formerly was the for residential purposes of the Director and his family, may find
cemetery and on the portion where the lower stood, was illegal. Both justification under the concept of incidental use, which is complimentary
parties appealed from this judgment. to the main or primary purpose—educational, the lease of the first floor
thereof to the Northern Marketing Corporation cannot by any stretch
Note that there are two lots being subject in this case: of the imagination be considered incidental to the purpose of
[1] Convent; [2] Lot formerly cemetery education.
Issue: Are both lots exempt from land tax? – Yes. Under the 1935 Constitution, the trial court correctly arrived at the
conclusion that the school building as well as the lot where it is built,
As to Convent. The exemption in favor of the convent in the payment should be taxed, not because the second floor of the same is being used
of the land tax refers to the home of the parties who presides over the by the Director and his family for residential purposes, but because the
church and who has to take care of himself in order to discharge his first floor thereof is being used for commercial purposes.
duties. In therefore must, in the sense, include not only the land actually However, since only a portion is used for purposes of commerce, it is
occupied by the church, but also the adjacent ground destined to the only fair that half of the assessed tax be returned to the school involved.
ordinary incidental uses of man. Except in large cities where the density Thus, the assessed tax shall be subject to a modification that half of the
of the population and the development of commerce require the use of assessed tax be returned to the petitioner.
larger tracts of land for buildings, a vegetable garden belongs to a
house and, in the case of a convent, it use is limited to the necessities
of the priest, which comes under the exemption. LUNG CENTER v. QUEZON CITY
GR 144104, June 29, 2004, En Banc
As to Lot Formerly Cemetery. In regard to the lot which formerly was
the cemetery, while it is no longer used as such, neither is it used for Facts: The Lung Center of the Philippines is a registered owner of a
commercial purposes and, according to the evidence, is now being used parcel of land in Quezon City (121,463 sq.m.). Erected in the middle of
as a lodging house by the people who participate in religious festivities, the lot is the hospital (Lung Center).
which constitutes an incidental use in religious functions, which
also comes within the exemption. A big space at the ground floor is being leased to private parties, for
canteen and small store spaces, and to medical or professional
practitioners who use the same as their private clinics for their patients
whom they charge for their professional services.
ABRA VALLEY COLLEGE v. AQUINO
GR L-39086, June 15, 1998 Almost one-half of the entire area on the left side of the building along
Quezon Avenue is vacant and idle, while a big portion on the right side,
Facts: Abra Valley College filed a Complaint seeking to annul and at the corner of Quezon Avenue and Elliptical Road, is being leased for
declare void the Notice of Seizure and the Notice of Sale of its lot and commercial purposes to a private enterprise known as the Elliptical
building in Abra due to the non-payment of real estate taxes and Orchids and Garden Center.
penalties amounting P5,140.31. During the auction sale of said college
lot and building the highest bid was by the Mayor of Abra, Dr. Millare.
In June 1993, both land and hospital building were assessed for real
property taxes of P4,554,860 by the City Assessor of Quezon City. Issue 2: Is the Lung Center exempt from taxation? – Not all. Those
portions of its real property that are leased to private entities are not
In August 1993, petitioner filed a Claim for Exemption from real exempt from real property taxes as these are not actually, directly and
property taxes with the City Assessor, predicated on its claim that it is a exclusively used for charitable purposes.
charitable institution. This claim was denied.
Strict Construction Against Exemptions
It went to QC-Local Board of Assessment Appeals which held that it was Taxation is the rule, exemption is the exception. It is plain as day that
liable for the real property taxes and was affirmed by the Central Board under the decree, the petitioner does not enjoy any property tax
of Assessment Appeals of QC which also ruled that the petition was not exemption privileges for its real properties as well as the building
a charitable institution and that its real properties were not actually, constructed thereon.
directly and exclusively used for charitable purposes hence it was not
entitled to exemption. The CA also affirmed the CBAA decision. Requisites for Charitable Institutions to Claim Exception
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order
Petitioner avers that it is a charitable institution within context of Article to be entitled to the exemption, the petitioner is burdened to prove, by
VI, Section 28(3) of the Constitution, arguing that such character is not clear and unequivocal proof, that
altered by the fact that it admits paying patients, leases portions of land,
rents out portions of hospital to private medical practitioners for the (a) it is a charitable institution; and
income is to be used for operational expenses. (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY
used for charitable purposes.
It asserts that 60% of bed capacity is allotted to charity patients (170 out
of 282 beds) and asserts that it receives subsidies from the government If real property is used for one or more commercial purposes, it is not
and that “exclusivity” does not mean “solely.” exclusively used for the exempted purposes but is subject to taxation.
The words "dominant use" or "principal use" cannot be substituted for
Issue 1: Is the Lung Center of the Philippines a charitable institution? – the words "used exclusively" without doing violence to the Constitutions
Yes. and the law. Solely is synonymous with exclusively.
What is meant by actual, direct and exclusive use of the property for
Criteria to Determine Whether Enterprise charitable purposes is the direct and immediate and actual
Is a Charitable Institution or Entity application of the property itself to the purposes for which the
The elements which should be considered include: charitable institution is organized. It is not the use of the income from
1. Statute creating the enterprise the real property that is determinative of whether the property is used for
2. Corporate purposes tax-exempt purposes.
3. Its constitution and by-laws
4. The methods of administration The petitioner failed to discharge its burden to prove that the entirety
5. Nature of the actual work performed of its real property is actually, directly and exclusively used for charitable
6. Use and occupation of the properties. purposes. While portions of the hospital are used for the treatment of
patients and the dispensation of medical services to them, whether
Charity, Defined paying or non-paying, other portions thereof are being leased to
In the legal sense, a charity may be fully defined as a gift, to be applied private individuals for their clinics and a canteen. Further, a portion
consistently with existing laws, for the benefit of an indefinite number of the land is being leased to a private individual for her business
of persons, either by bringing their minds and hearts under the enterprise under the business name "Elliptical Orchids and Garden
influence of education or religion, by assisting them to establish Center." Indeed, the petitioner’s evidence shows that it collected
themselves in life or otherwise lessening the burden of government. ₱1,136,483.45 as rentals in 1991 and ₱1,679,999.28 for 1992 from the
said lessees.
It may be applied to almost anything that tend to promote the well-doing
and well-being of social man. It embraces the improvement and Accordingly, we hold that the portions of the land leased to private
promotion of the happiness of man. The word "charitable" is not entities as well as those parts of the hospital leased to private
restricted to relief of the poor or sick. The test of a charity and a individuals are not exempt from such taxes. On the other hand, the
charitable organization are in law the same. The test whether an portions of the land occupied by the hospital and portions of the hospital
enterprise is charitable or not is whether it exists to carry out a purpose used for its patients, whether paying or non-paying, are exempt from real
reorganized in law as charitable or whether it is maintained for gain, property taxes.
profit, or private advantage.
Fallo: The Quezon City Assessor is then directed to determine after
Examining its Statute (PD 1823) and Articles of Incorporation hearing the precise portions of land and area leased to private persons
The medical services of the petitioner are to be rendered to the public in and compute real property taxes due.
general in any and all walks of life including those who are poor and the
needy without discrimination. After all, any person, the rich as well as
the poor, may fall sick or be injured or wounded and become a subject
of charity. CIR v. ST. LUKE’S MEDICAL CENTER
GR 195909, September 26, 2012
Character of a Charitable Institution, Not Simply Lost
As a general principle, a charitable institution does not lose its character Facts: St. Luke's Medical Center, Inc. (St. Luke's) is a hospital
as such and its exemption from taxes simply because it derives income organized as a non-stock and non-profit corporation.
from paying patients, whether out-patient, or confined in the hospital, or
receives subsidies from the government, so long as the money received BIR assessed St. Luke’s deficiency taxes amounting to P76,063,116.06
is devoted or used altogether to the charitable object which it is intended for 1998, comprised of deficiency income tax, value-added tax,
to achieve; and no money inures to the private benefit of the persons withholding tax on compensation and expanded withholding tax. The
managing or operating the institution. BIR reduced the amount to ₱63,935,351.57 during trial in the First
Division of the CTA.
The money received by the petitioner becomes a part of the trust fund
and must be devoted to public trust purposes and cannot be diverted to In 2003, St. Luke’s filed an administrative protest with the BIR against
private profit or benefit. Under P.D. No. 1823, the petitioner is entitled to the deficiency tax assessments but was not acted upon. Thus
receive donations. The petitioner does not lose its character as a respondent appealed to CTA.
charitable institution simply because the gift or donation is in the form of
subsidies granted by the government. There was substantial evidence BIR claimed St. Luke's was actually operating for profit in 1998 because
showing that it spent its income, as well subsidies for operation, it only 13% of its revenues from charitable purposes. Moreover, the
even incurred net loss from its operations. hospital's BOT, officers and employees directly benefit from its profits
and assets. St. Luke's had total revenues approximately ₱1.73 billion To be exempt from real property taxes, Section 28(3), Article VI of the
from patient services in 1998. Constitution requires that a charitable institution use the property
"actually, directly and exclusively" for charitable purposes.
In its defense, St. Luke contended should not consider its total revenues
because its free services to patients was around P218,187,498 or To be exempt from income taxes, Section 30(E) of the NIRC requires
65.20% of its operating income and further claimed that its income does that a charitable institution must be "organized and operated exclusively"
not inure to benefit any person. for charitable purposes. Likewise, to be exempt from income taxes,
Section 30(G) of the NIRC requires that the institution be "operated
St. Luke's maintained that it is a non-stock and non-profit institution for exclusively" for social welfare.
charitable and social welfare purposes under Section 30(E) and (G) of
the NIRC. It argued that the making of profit per se does not destroy its Section 30 Allows Charitable Institutions to Engage
income tax exemption. Activities Conducted for Profit
Thus, even if the charitable institution must be "organized and operated
CTA ruled that St. Luke’s is a non-stock, non-profit institution and would exclusively" for charitable purposes, it is nevertheless allowed to engage
exempt all income derived from services to its patient, whether paying in "activities conducted for profit" without losing its tax exempt status
or non-paying identifying it as a charitable institution. for its not-for-profit activities. The only consequence is that the
Issue: Is St. Luke’s exempted from payment of income taxes? – No. "income of whatever kind and character" of a charitable institution "from
This is because it failed to meet the requirements of Section 30 (E) for any of its activities conducted for profit, regardless of the disposition
operating exclusively for charitable and social welfare purposes. made of such income, shall be subject to tax." Prior to the introduction
of Section 27(B), the tax rate on such income from for-profit activities
Provisions Involved was the ordinary corporate rate under Section 27(A). With the
introduction of Section 27(B), the tax rate is now 10%.
10% Preferential Income Tax Rate
[Section 27(B), NIRC] Analysis of the Total Revenues of St. Luke’s
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services
income of (1) proprietary non-profit educational institutions and (2) to paying patients. It cannot be disputed that a hospital which receives
proprietary non-profit hospitals. The only qualifications for hospitals are approximately ₱1.73 billion from paying patients is not an institution
that they must be proprietary and non-profit. "operated exclusively" for charitable purposes. Clearly, revenues from
paying patients are income received from "activities conducted for
"Proprietary" means private, following the definition of a "proprietary profit."
educational institution" as "any private school maintained and
administered by private individuals or groups" with a government permit. Indeed, St. Luke's admits that it derived profits from its paying patients.
"Non-profit" means no net income or asset accrues to or benefits any St. Luke's declared ₱1,730,367,965 as "Revenues from Services to
member or specific person, with all the net income or asset devoted Patients" in contrast to its "Free Services" expenditure of ₱218,187,498.
to the institution's purposes and all its activities conducted not for
profit. "Non-profit" does not necessarily mean "charitable. Services to Paying Patients are
Activities Conducted for Profit
Exemption of Charitable Institutions They cannot be considered any other way. There is a "purpose to make
as provided for by the Constitution profit over and above the cost" of services. The ₱1.73 billion total
Compared with the provision of NIRC revenues from paying patients is not even incidental to St. Luke's charity
[Article VI, Section 28(3) vs. Section 30(E), NIRC]. expenditure of ₱218,187,498 for non-paying patients. St. Luke's claims
that its charity expenditure of ₱218,187,498 is 65.20% of its operating
The Constitution exempts charitable institutions only from real income in 1998.
property taxes.
However, if a part of the remaining 34.80% of the operating income is
In the NIRC, Congress decided to extend the exemption to income reinvested in property, equipment or facilities used for services to paying
taxes. and non-paying patients, then it cannot be said that the income is
"devoted or used altogether to the charitable object which it is intended
However, the way Congress crafted Section 30(E) of the NIRC is to achieve." The income is plowed back to the corporation not
materially different from Section 28(3), Article VI of the Constitution. entirely for charitable purposes, but for profit as well. In any case,
Section 30(E) of the NIRC defines the corporation or association that is the last paragraph of Section 30 of the NIRC expressly qualifies that
exempt from income tax. income from activities for profit is taxable "regardless of the disposition
made of such income."
On the other hand, Section 28(3), Article VI of the Constitution does not
define a charitable institution, but requires that the institution "actually, Not Operating Exclusively for Charitable or
directly and exclusively" use the property for a charitable purpose. Social Welfare Purposes
The Court finds that St. Luke's is a corporation that is not "operated
Section 30(E) of the NIRC provides that a charitable institution must be: exclusively" for charitable or social welfare purposes insofar as its
(1) A non-stock corporation or association; revenues from paying patients are concerned.
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and This ruling is based not only on a strict interpretation of a provision
(4) No part of its net income or asset shall belong to or inure to the granting tax exemption, but also on the clear and plain text of Section
benefit of any member, organizer, officer or any specific person. 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an
institution be "operated exclusively" for charitable or social welfare
“Non-stock” means that one where no part of its income is distributable purposes to be completely exempt from income tax. An institution under
as dividends to its members, trustees, or officers" and that any profit Section 30(E) or (G) does not lose its tax exemption if it earns income
"obtain[ed] as an incident to its operations shall, whenever necessary or from its for-profit activities.
proper, be used for the furtherance of the purpose or purposes for which
the corporation was organized. Such income from for-profit activities, under the last paragraph of
Section 30, is merely subject to income tax, previously at the ordinary
There is no dispute that St. Luke's is organized as a non-stock and non- corporate rate but now at the preferential 10% rate pursuant to Section
profit charitable institution. However, this does not automatically 27(B).
exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if it meets the test of charity, a charitable A tax exemption is effectively a social subsidy granted by the State
institution is not ipso facto tax exempt. because an exempt institution is spared from sharing in the expenses of
government and yet benefits from them. Tax exemptions for charitable
institutions should therefore be limited to institutions beneficial to the Kinds of Educational Institutions
public and those which improve social welfare. A profit-making entity For Purposes of Constitutional Tax Exemption
should not be allowed to exploit this subsidy to the detriment of the 1. Non-profit, non-stock educational institutions.
government and other taxpayer. 2. Proprietary educational institutions including those
cooperatively owned.
St. Luke Failed to Meet Exemption Requirements
But Entitled to 10% Preferential Tax Rate [1] Non-profit, Non-stock Educational Institutions
Because it is Still a Proprietary Non-Profit Hospital
St. Luke's fails to meet the requirements under Section 30(E) and (G) of Under RMC 51-14, “non-stock” was defined to mean that “no part of its
the NIRC to be completely tax exempt from all its income. However, it income is distributable as dividends to its members, trustees, or officers”
remains a proprietary non-profit hospital under Section 27(B) of the and that any profit “obtained as an incident to its operations shall,
NIRC as long as it does not distribute any of its profits to its members whenever necessary or proper, be used for the furtherance of the
and such profits are reinvested pursuant to its corporate purposes. St. purpose or purposes for which the corporation was organized.”
Luke's, as a proprietary non-profit hospital, is entitled to the
preferential tax rate of 10% on its net income from its for-profit Moreover, it also defined “non-profit”, which means that “no net income
activities. St. Luke's is therefore liable for deficiency income tax in 1998 or asset accrues to or benefits any member or specific person, with all
under Section 27(B) of the NIRC. the net income or asset devoted to the institution’s purposes and all its
activities conducted not for profit.”
Exemption Granted: Exempt for taxes and duties.

MACTAN-CEBU v. CITY OF LAPU-LAPU
GR 181756, June 15, 2015
Coverage of Exemption: All revenues and assets
The petitioner is an instrumentality of the government; thus, its
Requirement for Exemption: These revenues and assets are:
properties actually, solely and exclusively used for public
purposes, consisting of the airport terminal building, airfield, runway, • Used Actually, Directly and Exclusively for educational
taxiway and the lots on which they are situated, are not subject to real purposes.
property tax and City is not justified in collecting taxes from
petitioner over said properties. Notice that, unlike the previous exemption under Article VI, Section
28(3), it is clear that exemption granted to educational institutions is not
There is no point in national and local governments taxing each limited to real property tax, because the constitutional provision is
other, unless a sound and compelling policy requires such transfer of clear, “all revenues and assets” shall be exempt. This exemption for
public funds from one government pocket to another. non-stock, non-profit education institution is a self-executing
provision.
There is also no reason for local governments to tax national
government instrumentalities for rendering essential public services As discussed by Dean Quibod, the exemption of non-stock, non-profit
to inhabitants of local governments. educational institutions is wider compared of those which is a proprietary
educational institution. Dean illustrates that the tuition income earned
The only exception is when the legislature clearly intended to tax are exempted from taxes and even when they import educational
government instrumentalities for the delivery of essential public services materials, constructing or build and import steel bars and materials.
for sound and compelling policy considerations. There must be express Even the transportation cost is also exempted from taxes on customs
language in the law empowering local governments to tax national duties because they are for educational purposes. And even when these
government instrumentalities. Any doubt whether such power exists is institutions have bank deposits and interests are earned these are also
resolved against local governments. exempted because they are for educational purposes.
The Airport Lands and Buildings are devoted to public use because
they are used by the public for international and domestic travel Dean Quibod then proffers the question:
and transportation. The fact that the MIAA collects terminal fees and
other charges from the public does not remove the character of the What about the non-tuition income like the income from rentals from
Airport Lands and Buildings as properties for public use. In addition operations and income from investments?
these are outside the commerce of man and property of public
dominion. Dean suggests that the yardstick is that as long as they are
flowed directly back to educational purposes. If they are not used for
educational purposes insofar as the non-tuition income is concerned,
XIII. Tax Exemptions of Revenues, Assets, Including then taxation will come in.
Donations to Educational Institutions
Atty. Donalvo illustrates Dean’s answer in this scenario:
ARTICLE XVI AAA University leases space for Mercury Drug and derives non-tuition
SECTION 4 income therein in the form of rentals:
a.) If the rentals are directly used back for educational purposes,
(3) All revenues and assets of non-stock, non-profit educational then the rent income is exempt for tax.
institutions used actually, directly, and exclusively for educational b.) If the rentals, however, are invested to an outside source, and
purposes shall be exempt from taxes and duties. Upon the the income derived from the investment is that which is
dissolution or cessation of the corporate existence of such institutions, applied for educational purposes, then the rent income is no
their assets shall be disposed of in the manner provided by law. longer exempt for tax.
c.) But the income from the investment that is actually, directly
Proprietary educational institutions, including those and exclusively used by AAA for educational purposes, then
cooperatively owned, may likewise be entitled to such exemptions, such is exempt from taxation.
subject to the limitations provided by law, including restrictions on As similarly illustrated by Domondon, the crucial point of inquiry then
dividends and provisions for reinvestment. lies on the use of the assets or use of the revenues. Domondon states
that if the university, actually, directly and exclusively uses for
(4) Subject to conditions prescribed by law, all grants, educational purposes the revenues earned from the lease of school
endowments, donations, or contributions used actually, directly, premises, such revenues shall be exempt from taxes and duties. The
and exclusively for educational purposes shall be exempt from tax. tax exemption no longer hinges on the use of the asset from which the
revenues were earned but on the actual, direct and exclusive use of
the revenues for educational purposes.
[2] Proprietary Educational Institutions Judicial Power of the Supreme Court

Including those Cooperatively Owned The Supreme Court shall have the power to decide tax cases especially
involving the legality of any tax, impost, assessment or toll or any penalty
“Proprietary education institution” is defined as any school in relation thereto. The judicial power to adjudicate disputes is
maintained and administered by private individuals or groups with a constitutionally vested only in the Supreme Court, and as such, it is the
government permit (CIR v. St. Luke’s Medical Center, 2012). court of last resort.
Exemption Granted: Exempt for taxes and duties. XV. Non-imprisonment for Non-payment of Poll Tax
Coverage of Exemption and Requirement for Exemption:
Subject to the limitations as may be provided by law.
ARTICLE III, SECTION 20
Comparing this with those of non-profit, non-stock educational No person shall be imprisoned for debt or non-payment of a poll tax.
institutions, the exemption is not self-executing as it requires an
enabling law as they do not have the same automatic tax exemption. Extent of the Prohibition
But as to real property tax exemption, they are still covered as it is a The prohibitions refers to a poll tax which is a tax imposed on a per
constitutional provisions (Article VI, Section 28[3]) which confers such head basis. The present “poll tax” is the community tax. However, a
real property tax exemptions as long as the requirements are present: person may be imprisoned from non-payment of internal revenue taxes
1. Actual, direct and exclusive use for as well as other taxes that are not “poll taxes.”
2. Religious, charitable or educational purposes Brief Description of Community Tax
NOTE: As illustrated in the case of CIR v. St. Luke’s (2012), the Court Community Tax is laid down in the Local Government Code of 1991,
pointed out that Section 27 of NIRC provides proprietary educational under Chapter II on Specific Provisions on the Taxing and Other
institutions a preferential tax rate of 10% for those income not covered Revenue-Raising Powers of Local Government Units, Article VI on
by exemptions. Community Tax from Section 156 to Section 164.
ARTICLE XVI, SECTION 4 (3) Community Tax under the Local Government Code
(4) Subject to conditions prescribed by law, all grants, • May be levied by cities or municipalities in accordance with
endowments, donations, or contributions used actually, directly, Article VI (Sec. 156).
and exclusively for educational purposes shall be exempt from tax. • May be levied to individuals (Sec. 157) and as well as juridical
persons (Sec. 158).
Note: This is not self-executing as can be gleaned from its first • However, (1) diplomatic and consular representatives; as well
sentence, “subject to conditions prescribed by law.” Law in point: as (2) transient visitors when stay in PH does not exceed three
Section 101, NIRC as amended by TRAIN LAW (RA 10963) months are exempt from paying the community tax (Sec. 159).
• It shall be paid in the place of the residence of the individual
or principal office of juridical entity (Sec. 160)
NIRC
• It shall accrued on January 1 each year, which shall not be
paid later than the last day of February, failure to pay there
SECTION 101. Exemption of Certain Gifts. – The following gifts shall be added amount of 24% interest per annum as penalty
shall be exempt from the tax provided for in this Chapter: for delinquency (Sec. 161), but there can no imprisonment
for failure to pay such.
(A) In the Case of Gifts Made by a Resident. -
xxx
XVI. Freedom of Speech and of the Press
(2) Gifts in favor of an educational and/or charitable, religious,
cultural or social welfare corporation, institution, accredited ARTICLE III, SECTION 4
nongovernment organization, trust or philanthropic organization or No law shall be passed abridging the freedom of speech, of expression,
research institution or organization: Provided, however, That not or of the press, or the right of the people peaceably to assemble and
more than thirty percent (30%) of said gifts shall be used by such petition the government for redress of grievances..
donee for administration purposes. For the purpose of this
exemption, a 'non-profit educational and/or charitable
TOLENTINO v. SECRETARY OF FINANCE
corporation, institution, accredited nongovernment organization,
trust or philanthropic organization and/or research institution or GR 115455, October 30, 1995
organization' is a school, college or university and/or charitable
corporation, accredited nongovernment organization, trust or Claims of Press Freedom
philanthropic organization and/or research institution or
PPI here contends, that by removing exemption of press from the
organization, incorporated as a non-stock entity, paying no
VAT while maintaining grant to others, discriminates the press, thus
dividends, governed by trustees who receive no compensation, and
arguing a violation of press freedom.
devoting all its income, whether students' fees or gifts, donation,
subsidies or other forms of philanthropy, to the accomplishment and VAT does not violate press freedom.
promotion of the purposes enumerated in its Articles of
Incorporation. Press is not exempt from the taxing power of the State and what the
constitutional guarantee of free press prohibits are laws which single out
the press or target a group belonging to the press for special treatment
XIV. Non-impairment of Supreme Court’s Jurisdiction or which in any way discriminate against the press on the basis of the
content before publication. RA 7716 is not one of these.
in Tax Cases
It would suffice to say that since the law granted the press a privilege,
ARTICLE VIII, SECTION 5 the law could take back the privilege anytime without offense to the
The Supreme Court shall have the following powers: xxx Constitution.
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari,
as the law or the Rules of Court may provide, final judgments and The reason is simple: by granting exemptions, the State does not forever
orders of lower courts in: xxx waive the exercise of its sovereign prerogative. Indeed, in withdrawing
the exemption, the law merely subjects the press to the same tax burden
(b) All cases involving the legality of any tax, impost, assessment, to which other businesses have long ago been subject.
or toll, or any penalty imposed in relation thereto.
The VAT is not a license tax, or a tax on the exercise of privilege it is
imposed on the sale, barter, lease or exchange of goods or properties
or the sale or exchange of services and the lease of properties purely engaged in the business or occupation of selling said "merchandise" for
for revenue purpose. profit. For this reason We believe that the provisions of City of Manila
Ordinance No. 2529, as amended, cannot be applied to appellant, for
To subject the press to its payment is not to burden the exercise of in doing so it would impair its free exercise and enjoyment of its
its right any more than to make the press pay income tax or subject religious profession and worship as well as its rights of
it to general regulation is not to violate its freedom under the dissemination of religious beliefs.
Constitution.
TOLENTINO v. SECRETARY OF FINANCE

XVII. Religious Freedom GR 115455, October 30, 1995
ARTICLE III, SECTION 5 Claims of Religious Freedom

No law shall be made respecting an establishment of religion, or
Whether the registration provision of the law, although of general
prohibiting the free exercise thereof. The free exercise and
applicability, nonetheless is invalid when applied to the press because it
enjoyment of religious profession and worship, without
lays a prior restraint on its essential freedom.
discrimination or preference, shall forever be allowed. No religious
test shall be required for the exercise of civil or political rights. The case of American Bible Society v. City of Manila is cited by both
the PBS and the PPI in support of their contention that the law imposes
Religious Freedom censorship. There, this Court held that an ordinance of the City of
This provides for the freedom of religion, in relation to power to tax, free Manila, which imposed a license fee on those engaged in the business
exercise of religion and worship, without discrimination or preference, of general merchandise, could not be applied to the appellant's sale of
shall forever be allowed. Thus, Dean Quibod submits that freedom of bibles and other religious literature.
religion is superior against tax power.
This Court relied on Murdock v. Pennsylvania, in which it was held
AMERICAN BIBLE SOCIETY v. CITY OF MANILA that, as a license fee is fixed in amount and unrelated to the receipts of
the taxpayer, the license fee, when applied to a religious sect, was
GR L-9637, April 30, 1957, En Banc
actually being imposed as a condition for the exercise of the sect's right
under the Constitution. For that reason, it was held, the license fee
Facts: American Bible Society has been distributing and selling bibles "restrains in advance those constitutional liberties of press and religion
and/or gospel portions throughout the Philippines and translating the and inevitably tends to suppress their exercise."
same into several Philippine dialects.
Registration Fee Does Not Violate Religious Freedom
In 1953, City Treasurer of Manila informed that it was conducting the
business of general merchandise since 1945 without the necessary The Court cited the U.S. Supreme Court unanimously held in Jimmy
Mayor’s permit and municipal license in violation of the Ordinance and Swaggart Ministries v. Board of Equalization, the Free Exercise of
required it to secure such permit. Religion Clause does not prohibit imposing a generally applicable
sales and use tax on the sale of religious materials by a religious
Plaintiff protested but however paid under protest permit and license organization.
fees in P5,891.45. Thus, this complaint where plaintiff prays that
Municipal Ordinance 3000 be declared illegal and unconstitutional and But, in this case, the fee in § 107, although a fixed amount (P1,000), is
it be refunded the amount if paid under protest. Petitioner argued that it not imposed for the exercise of a privilege but only for the purpose of
was not made to pay any license fee or sales tax for the sale of bible defraying part of the cost of registration. The registration requirement
and tried to establish that it never made profit from the sale of its bibles. is a central feature of the VAT system. It is designed to provide a
Trial court ruled against it. record of tax credits because any person who is subject to the payment
of the VAT pays an input tax, even as he collects an output tax on sales
Thus, in this case they argue that Ordinances 2529 and 3000 are made or services rendered. The registration fee is thus a mere
unconstitutional and illegal as they provide for religious censorship administrative fee, one not imposed on the exercise of a privilege,
and restrain the free exercise and enjoyment of its religious profession, much less a constitutional right.
to wit: the distribution and sale of bibles and other religious literature to
the people of the Philippines. For the foregoing reasons, we find the attack on Republic Act No. 7716
on the ground that it offends the free speech, press and freedom of
Issue: Is there a violation of religious freedom by requiring the Society religion guarantees of the Constitution to be without merit.
to pay the fixed license fee? – Yes.
Held: The constitutional guaranty of the free exercise and enjoyment of

religious profession and worship carries with it the right to disseminate Dean Quibod points out however that later on, the imposition of the tax
religious information. Any restraints of such right can only be justified on books and religious articles under RA 7716 was then withdrawn and
like other restraints of freedom of expression on the grounds that there are now embodied in separate law concerning the sale of books in so
is a clear and present danger of any substantive evil which State has far as taxation is concerned. RA 7716 have been met with several
right to prevent. amendments and one of them withdrew for the tax coverage of VAT the
sale of books and of periodicals.
Citing Murdock v. Pennsylvania, the acts of members of the Jehovah’s
witnesses who went door-to-door distributing literature and soliciting XVIII. Non-impairment of Contracts
people to “purchase” certain religious books or pamphlets could not be
described as an occupation selling books and pamphlets. It is one thing
ARTICLE III, SECTION 10
to impose a tax on the income or property of a preacher. It is quite
another to exact a tax from him for the privilege of delivering a sermon. No law impairing the obligation of contracts shall be passed.
xxx. A license tax – a flat tax imposed on the exercise of a privilege
granted by the Bill of Rights .. The power to impose a license tax Impairment of Obligations
on the exercise of these [religious] freedom, is indeed as potent as There is impairment when a law substantially invalidates, releases or
the power of censorship which this Court has repeatedly stuck extinguishes the obligations of a contract, or that derogates substantial
down. contractual rights. Taxing powers cannot alter or revoke existing rights
and obligations under a valid contract.
It may be true that in the case at bar the price asked for the bibles and
other religious pamphlets was in some instances a little bit higher than • Police power is superior to the non-impairment clause
the actual cost of the same but this cannot mean that appellant was • Power of taxation is inferior to the non-impairment clause
Rationale for the Non-Impairment Clause impose additional burdens to one class and release the burden to
When the state grants an exemption on the basis of a contract, another, does not impair the obligations of contracts. In other words, one
consideration is presumed to be paid to the state, and the public is cannot invoke the non-impairment clause because the relationship is
supposed to receive the whole equivalent, therefore. Thus, the under private agreements.
exemption from taxation will be binding upon succeeding legislation and
a tax could not be imposed without infringing on the impairment clause. [2] In Case of Franchises
Scope and Coverage of the Non-Impairment Clause ARTICLE XII, SECTION 11

Constitutional tax exemptions, in the real sense of the term, and where No franchise, certificate, or any other form of authorization for the
the non-impairment clause can be invoked, these are those agreed by operation of a public utility shall be granted except to citizens of the
the taxing authority in contracts such as those contained in
Philippines or to corporations or associations organized under the
government bonds or debentures lawfully entered to by them under
laws of the Philippines, at least sixty per centum of whose capital is
enabling laws in which the government, acting it is private capacity,
owned by such citizens; nor shall such franchise, certificate, or
shields its cloak of authority and waives government immunity. Truly, tax
exemptions of these kind may not be revoked without impairing the authorization be exclusive in character or for a longer period than fifty
obligations of contracts. years. Neither shall any such franchise or right be granted
except under the condition that it shall be subject to
As Domondon briefly puts it, if the tax exemption was granted for a amendment, alteration, or repeal by the Congress when the
consideration, it is in the nature of a contract, protected by the non- common good so requires. The State shall encourage equity
impairment clause and may not be withdrawn. If the tax exemption was participation in public utilities by the general public. The
granted gratuitously, without any material consideration in favor of the participation of foreign investors in the governing body of any public
State, it may be revoked at any time without impairing the obligations of utility enterprise shall be limited to their proportionate share in its
contracts. capital, and all the executive and managing officers of such
corporation or association must be citizens of the Philippines.
In Casanova v. Hord (8 Phil. 125), the imposition of a statute of higher
taxes on mining claims which have been issued a title deed “subject to A franchise partakes of the nature of a grant which is beyond
the conditions that certain taxes should be paid annually and no other the purview of non-impairment clause. The Constitution is explicit that
taxes than those mentioned shall be imposed upon mining and no franchise for the operation of a public utility shall be granted under
metallurgical industries,” was stricken down as violative of the non- the condition that such privilege shall be subject to amendment,
impairment clause. alteration or repeal by Congress as and when the common goods so
requires.
Importantly, in Tolentino v. Secretary of Finance (1995), the E-VAT
(RA 7716) was assailed by CREBA to have impaired the obligations of
contracts, arguing that the application of the tax to existing contracts MANILA ELECTRIC v. PROVINCE OF LAGUNA
would result in substantial increases in the monthly amortizations to be GR 131359, May 5, 1999
paid due to the VAT, arguing that this additional amount, is something
the buyer did not anticipate at the time he entered in to the contract. Facts: Municipalities of Province of Laguna issued resolutions through
their respective municipal councils granting franchise in favor of
The Court responded: MERALCO for the supply of electric light, heat and power within their
The short answer to this is the one given by this Court in an concerned areas. It was also granted by National Electrification
early case: "Authorities from numerous sources are cited by the Administration franchise for Calamba.
plaintiffs, but none of them show that a lawful tax on a new subject, or In January 1, 1992, RA 7160 or the LGC was enacted giving the LGUs
an increased tax on an old one, interferes with a contract or impairs its the power to generate their own sources of revenue and to levy taxes,
obligation, within the meaning of the Constitution. Even though such fees and charges.
taxation may affect particular contracts, as it may increase the debt of
one person and lessen the security of another, or may impose additional Pursuant to such, the province of Laguna enacted Laguna Province
burdens upon one class and release the burdens of another, still the Ordinance 01-92 providing in part:
tax must be paid unless prohibited by the Constitution, nor can it be
said that it impairs the obligation of any existing contract in its true legal Sec. 2.09. Franchise Tax. — There is hereby imposed a tax on
sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. businesses enjoying a franchise, at a rate of fifty percent (50%) of one
567, 574 , 1919). percent (1%) of the gross annual receipts, which shall include both
cash sales and sales on account realized during the preceding
Indeed not only existing laws but also "the reservation of the calendar year within this province, including the territorial limits on
essential attributes of sovereignty, is read into contracts as a postulate any city located in the province.
of the legal order." (Philippine-American Life Ins. Co. v. Auditor General,
22 SCRA 135, 147, 1968)
With this basis, the Provincial Treasurer sent a demand letter to
MERALCO for the corresponding tax payment of P19,520,628 which
Contracts must be understood as having been made in
MERALCO paid under protest.
reference to the possible exercise of the rightful authority of the
government and no obligation of contract can extend to the defeat of
It filed a formal claim for refund claiming that the franchise tax it had paid
that authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885, 1935).
to National Government already included the franchise tax imposed by
the Ordinance.
Exceptions from the Coverage
[NOTE: This case was discussed under Nature and Characteristics of Taxation;
[1] Buyer and Seller in a Supply Purchase Agreement
Legislative; Delegation to LGUs. Illustrating the power of local government units to
Dean Quibod provides us with this scenario: tax and the general repealing clause under the Local Government Code.]
“Suppose that a seller will supply the buyer for the next 20 years of a MERLACO argues that the franchise tax under the ordinance is violative
certain material at the rate of P1.00 plus 12% VAT equals the price. of the non-impairment clause of the Constitution as well as Section 1 of
However, on the 10th years of that contract, the Congress increased the PD 551.
VAT rate from 12% to 15%, the seller then also changed then VAT rate
to 15%. The buyer complained arguing that the seller could not impose Issue: Is there violation of the non-impairment clause? – No.
a higher rate than 12% by virtue of their contract. Is that argument
tenable?” Tax Exemptions under Franchises
Not Covered by Non-Impairment Clause
The imposition of a tax which affects an existing contract to Contractual tax exemptions, in the real sense of the term and where the
increase the debt of one party or lessen the security of the other or non-impairment clause of the Constitution can rightly be invoked, are
those agreed to by the taxing authority in contracts, such as those

contained in government bonds or debentures, lawfully entered into by 4.) For legislators, there must be a claim that the official action
them under enabling laws in which the government, acting in its private complained of infringes their prerogatives as legislators.
capacity, sheds its cloak of authority and waives its governmental
immunity. Taxpayer’s Suit
A taxpayer’s suit presupposes a claim of illegal disbursement of public
Truly, tax exemptions of this kind may not be revoked without impairing funds or that the tax measure is unconstitutional. In Velarde v. SJS
the obligations of contracts. (2004), parties suing as taxpayers must specifically prove that they have
sufficient interest in preventing the illegal expenditure of money raised
These contractual tax exemptions, however, are not to be confused with by taxation.
tax exemptions granted under franchises.
A taxpayer’s action may be properly brought only when there is an
A franchise partakes the nature of a grant which is beyond the exercise by Congress of its taxing or spending power.
purview of the non-impairment clause of the Constitution. Indeed,
Article XII, Section 11, of the 1987 Constitution, like its precursor A petitioner filing as a taxpayer to question the validity of an act
provisions in the 1935 and the 1973 Constitutions, is explicit that no 1. Must have a sufficient interest in preventing the illegal
franchise for the operation of a public utility shall be granted except expenditure of money raised by taxation;
under the condition that such privilege shall be subject to amendment, 2. He or she will had sustained or will sustain a direct injury in
alteration or repeal by Congress as and when the common good so the enforcement of the law.
requires.
ANTI-GRAFT LEAGUE v. SAN JUAN
GR 97797, August 1, 1996, En Banc
Judicial Review – Taxpayer’s Suit
Facts: Anti-Graft League of the Philippines, claims the instant petition
Judicial Review, Defintion for certiorari is a taxpayer's suit which it filed because Provincial Board
In Garcia v. Executive Secretary (2009), the power of judicial has been of Rizal allegedly illegally disbursed public funds in transactions
discussed as the power of the courts to test the validity of executive and involving four parcels of land in Ugong Norte, Pasig.
legislative acts for their conformity with the Constitution.
In 1975, the Board acquired for parcels of land in Pasig pursuant to PD
Through such power, the judiciary enforces and upholds the supremacy 674 to establish Technological Colleges of Rizal however the
of the Constitution. construction never materialized because of the decimation of the
Conditions for Judicial Review resources of the Province due to the creation of Metro Manila
For a court to exercise this power, certain requirements must first be Commission in 1976.
met, namely:
(1) an actual case or controversy calling for the exercise of The property being idle, the Board issued resolution authorizing
judicial power; governor to sell the same and was sold to Valley View Realty for P134M.
(2) the person challenging the act must have "standing" to After learning such sale, a rescission case was filed by the original
challenge or locus standi; he must have a personal and vendor Ortigas of the parcels of land as being violative of the original
substantial interest in the case such that he has sustained, or purpose as a site for the college. Additionally, Valley View also filed for
will sustain, direct injury as a result of its enforcement; rescission but however entered later into a compromise agreement with
(3) the question of constitutionality must be raised at the earliest the Province.
possible opportunity; and
(4) the issue of constitutionality must be the very lis mota of the As between Ortigas and the Province, a compromise agreement was
case. also entered into were the Province agreed to return and reconvey the
four parcels of land to Ortigas worth P432M which was much higher than
In a taxpayer’s suit this involves the second requirement of locus standi the market values. This was approved by the Judge. Thus, the
or legal standing: petitioners filed the instance case for certiorari seeking to nullify the
Compromise Agreement between Ortigas and the Province.
Locus Standi or Legal Standing, Defined
Legal standing or locus standi has been defined as a personal and Issue: Is the present action a taxpayer’s suit? Does petitioner posses
substantial interest in the case, such that the party the legal standing to question the transaction entered into by the
• Has sustained or Provincial Board of Rizal and Ortigas? – None.
• Will sustain direct injury as a result of challenged act.
Interest means a material interest in issue that is affected by the Held: To constitute a taxpayer's suit, two requisites must be met,
questioned act or instrument, as distinguished from a mere incidental namely, (1) that public funds are disbursed by a political subdivision or
interest in the question involved. (Velarde v. SJS). instrumentality and in doing so, a law is violated or some irregularity is
committed, and (2) that the petitioner is directly affected by the alleged
In Funa v. Villar (2012), the rule on locus standi is after all a mere ultra vires act.
procedural technicality in relation to which the Court, in a catena of
cases involving a subject of transcendental import, has waived, or Not a constitutional issue. A closer examination of the facts of this
relaxed, thus allowing non-traditional plaintiffs, such as concerned case would readily demonstrate that petitioner's standing should not
citizens, taxpayers, voters or legislators, to sue in the public interest, even be made an issue here, "since standing is a concept in
albeit they may not have been personally injured by the operation of a constitutional law and here no constitutional question is actually
law or any other government act. involved.
In David, the Court laid out the bare minimum norm before the First Requisite, Absent
so-called "non-traditional suitors" may be extended standing to sue, In the case at bar, disbursement of public funds was only made in 1975
thusly: when the Province bought the lands from Ortigas at P110.00 per square
meter in line with the objectives of P.D. 674. Petitioner never referred
1.) For taxpayers, there must be a claim of illegal disbursement of public to such purchase as an illegal disbursement of public funds but
funds or that the tax measure is unconstitutional; focused on the alleged fraudulent reconveyance of said property to
Ortigas because the price paid was lower than the prevailing market
2.) For voters, there must be a showing of obvious interest in the validity value of neighboring lots. The first requirement, therefore, which would
of the election law in question; make this petition a taxpayer's suit is absent.
3.) For concerned citizens, there must be a showing that the issues Second Requisite, Absent
raised are of transcendental importance which must be settled early; and
Undeniably, as a taxpayer, petitioner would somehow be adversely with the characteristics of public funds when they are under official
affected by an illegal use of public money. When, however, no such custody.
unlawful spending has been shown, as in the case at bar, petitioner,
even as a taxpayer, cannot question the transaction validly executed by Second Requisite is Met
and between the Province and Ortigas for the simple reason that it is Second, as a resident-taxpayer of the Municipality, Cacayuran is
not privy to said contract. Petitioner has absolutely no cause of directly affected by the conversion of the Agoo Plaza which was funded
action, and consequently no locus standi, in the instant case. by the proceeds of the Subject Loans.
It is well-settled that public plazas are properties for public use and
LANDBANK v. CACAYURAN therefore, belongs to the public dominion. As such, it can be used by
GR 191667, April 17, 2013 anybody and no one can exercise over it the rights of a private owner.
Facts: Municipality of Agoo, La Union passed resolutions to implement In this light, Cacayuran had a direct interest in ensuring that the Agoo
a redevelopment plan of Agoo Plaza. A resolution was passed Plaza would not be exploited for commercial purposes through the
authorizing May Eriguel to obtain loan from Land Bank and mortgage a APC’s construction.
portion of Plaza Lot as collateral and assigning portions of its Internal
Revenue Allotment (IRA). Another loan was applied for the Moreover, Cacayuran need not be privy to the Subject Loans in
construction of a commercial center on the plaza lot with the same order to proffer his objections thereto. In Mamba v. Lara, it has been
securities. held that a taxpayer need not be a party to the contract to challenge
its validity; as long as taxes are involved, people have a right to
The construction of commercial center was vehemently objected to by question contracts entered into by the government.
some residents of the Municipality, led by Eduardo Cacayuran claiming
that the conversion to a commercial center was highly irregular, violative
of the law and detrimental to public interests and will result to wanton
desecration of the said historical and public park. This was even REMULLA v. MALIKSI
manifested in a Manifesto. Cacayuran even sent letter but with no GR 171633, September 18, 2013
response.
Facts: Marietta De Villa, as administratrix of her late husband, ceded by
Unable to get any response, Cacayuran, invoking his right as a deed of donation in 1957 a significant portion of their property (134,957
taxpayer, filed a Complaint against the Implicated Officers and Land square meters as donated portion) in favor of the Province of Cavite on
Bank, assailing, among others, the validity of the Subject Loans on the which now stands various government offices and facilities.
ground that the Plaza Lot used as collateral thereof is property of public
dominion and therefore, beyond the commerce of man. Around 1982, the Province of Cavite filed a Complaint seeking to
expropriate for P215,050 the remaining 261,665 sq.m. of the property
Land Bank claims that Cacayuran did not have any standing to contest which it intends to develop as Provincial Capitol Site. RTC issued a
the construction of APC as it was funded by proceeds coming from the confirmatory writ of immediate possession which Province of Cavite took
Subject Loans and not from public funds. Besides, Cacayuran was not possession.
even a party to any of the Subject Loans and is thus, precluded from
questioning the same. De Villa opposed the expropriation proceedings arguing that there are
still areas in the donated portion undeveloped and that the fair market
Issue: Does Cacayuran have legal standing to sue? – Yes. value of her lot is at P11M and that she sold the portion already to
Golden Rod in 1989 for P2M. Governor Maliksi issued EO 004 creating
Requisites for Taxpayer’s Suit a committed which recommended terms and conditions for the proper
A taxpayer is allowed to sue where there is a claim that public funds are settlement of the expropriation case. The recommendations were
illegally disbursed, or that public money is being deflected to any reduced into a Compromise Agreement and was approved.
improper purpose, or that there is wastage of public funds through the
enforcement of an invalid or unconstitutional law. Later, Remulla in his personal capacity as taxpayer and as then Vice-
Governor, filed a petitioner for annulment of judgment arguing that
A person suing as a taxpayer, however, must show that the act subject compromise is grossly disadvantageous for the agreed price
complained of directly involves the illegal disbursement of public funds was excessive compared to value of taking in 1981 and that it would lost
derived from taxation. prime lots and amends the 1957 deed of donation.
In other words, for a taxpayer’s suit to prosper, two requisites must be Moreover, Maliksi entered into the subject compromise without authority
met namely, from the Sangguniang Panlalawigan of the Province of Cavite and sans
[1] public funds derived from taxation are disbursed by a political any certification on the availability of funds as required by law.
subdivision or instrumentality and in doing so, a law is violated or some
irregularity is committed; and The CA however dismissed the petition for annulment of judgment
[2] the petitioner is directly affected by the alleged act. because (a) there was yet no disbursement of public funds at the time
of its filing, thus not a taxpayer’ suit and (b) not a real party in interest as
Records reveal that the foregoing requisites are present in the instant he was not a signatory thereto.
case. Issue: Whether or not Remulla had legal standing to question the
Compromise Agreement. – Yes
First Requisite is Met
Though the APC is sourced from proceeds of Subject Loans, there is no Taxpayer’s Suit
denying that public funds derived from taxation are bound to be Jurisprudence dictates that a taxpayer may be allowed to sue where
expended as the Municipality assigned a portion of its IRA as there is a claim that public funds are illegally disbursed or that public
security for the foregoing loans. money is being deflected to any improper purpose, or that public funds
are wasted through the enforcement of an invalid or unconstitutional law
Needless to state, the Municipality’s IRA, which serves as the local or ordinance.
government unit’s just share in the national taxes, is in the nature of
public funds derived from taxation. The Court believes, however, that In this case, public funds of the Province of Cavite stand to be expended
although these funds may be posted as a security, its collateralization to enforce the compromise judgment.
should only be deemed effective during the incumbency of the public
officers who approved the same, else those who succeed them be As such, Remulla – being a resident-taxpayer of the Province of Cavite
effectively deprived of its use. – has the legal standing to file the petition for annulment of judgment
In any event, it is observed that the proceeds from the Subject Loans and, therefore, the same should not have been dismissed on said
had already been converted into public funds by the Municipality’s ground.
receipt thereof. Funds coming from private sources become impressed
Notably, the fact that there lies no proof that public funds have already Capitalization is a form of backward shifting in a sense that this form of
been disbursed should not preclude Remulla from assailing the validity escape is not applicable to all types of transactions, it applies or is
of the compromise judgment. Lest it be misunderstood, the concept of peculiar only like whereby future taxes on the property sold are
legal standing is ultimately a procedural technicality which may be capitalized at the time of the purchase and deducting in the lump sum
relaxed by the Court if the circumstances so warrant. from the selling price.
As observed in Mamba v. Lara, the Court did not hesitate to give Ex. X, engaged in real estate business decides to buy a real property
standing to taxpayers in cases where serious legal issues were with a budget of P20,000,000.00. A property was for sale for P20M. After
raised or where public expenditures of millions of pesos were negotiations with the seller, the amount agreed upon is P16M. The P4M
involved. in savings would be to address the future taxes on the property (instead
of normally paying them) the P4M will be capitalized for a period to pay
Likewise, it has also been ruled that a taxpayer need not be a party to the taxes in that real property, it benefits one for the reasons that one
the contract in order to challenge its validity, or to seek the will not look for another money to pay future taxes.
annulment of the same on the ground of extrinsic fraud. Indeed, for as
long as taxes are involved, the people have a right to question contracts Transformation where the producer on whom the tax imposed, feeling
entered into by the government,39 as in this case. the loss of his market if he adds a tax to the price, pays now the tax and
pays additional expense by improving his methods of production turning
out units at a les cost, hence the tax is transferred to a gain through the
medium of production. The seller then absorbs the impact of the tax, but
this burden is shouldered by improving the methods of production.
III. ESCAPE FROM TAXATION Mainly, this is effected through the process of production.
Escape From Taxation Ways of Shifting Taxation

Escape from taxation refers to the means employed by a taxpayer According to Domondon and Atty. Donalvo
whether legal or illegal, so as not to pay or absorb the burden of a tax 1. Include tax on the selling price, where the tax is not billed
that is imposed. separately but included in the selling price.
2. Method of listing the price separately and defining taxable
According to Dean, these are Forms of Escape which are remedies that gross receipts as the amount received less the amount of tax
they taxpayer may also resort to for purposes of reducing the burden. added. The tax is then billed separately.
Escape from Taxation Tax Exemption Note: It is still the seller who is subject to the tax and not the buyer, the
It is the taxpayer’s employment These are the laws promulgated additional amount paid by the buyer is not payment for the tax but
of any means regardless of its by the Congress wherein the payment for the purchase of goods. Thus in Philippine Acetylene v. CIR
legality to reduce or to taxpayer will not suffer the (1997), even if the sales invoice would be named to NEA a tax exempt
altogether avoid the payment of burden of taxation government corporation, the sale is still taxable, because the buyer’s
taxes exemption does not flow to the seller as it is still the seller who is the
subject of the tax and not the buyer, the total amount paid by the NEA
is not payment for the tax but payment for the purchase of the electric
cables.
A. Shifting of Tax Burden
II. Taxes that Can be Shifted
Shifting of Tax Burden
It means the transferring the economic burden from the one who pays 1. Franchise tax
the tax to another. The tax where shifting is allowed are indirect taxes, 2. Contractor’s tax
that is the only tax when shifting is allowed. ex: VAT 3. Value-added tax
4. Documentary stamp taxes
Unlike indirect taxes, direct taxes cannot be shifted, because the person 5. Excise tax
liable to the tax is the one who also shoulders the burden like income 6. Percentage tax
tax.
• Income tax is based on the income, wages or salaries and this III. Impact from Incidence of Taxation
cannot be transferred to another
• Donor’s tax is also a form of direct tax. Impact of taxation refers to the liability of the payment of tax
Incidence of taxation refers to the burden of paying the tax.
In shifting the burden in indirect taxes, the first one liable on the tax –
statutory taxpayer is the person liable under the law. He is allowed to The rule is that only Indirect Taxes can be subject of shifting
shift or pass the burden of the tax to another person like the transaction and not direct taxes because in indirect taxes is where the impact and
of buyer and seller. incidence of taxation can be split. As to direct taxes, the impact and
incidence always fall upon one person only.
For example, the buyer purchases an item from the seller, the
price of the item already includes the tax yet the tax liability is on the In indirect taxation the amount of tax paid may be shifted or passed on
store but the store is allowed to add the tax as part of the purchase price by the seller to the buyer. What is transferred in such instance is not the
because of the shifting. liability or impact of the tax but the tax burden (incidence of taxation).
For example, a seller who is directly and legally liable for payment of an
Q. Can Congress enact a law that all indirect tax could not be shifted? indirect tax, like VAT on goods or services, is not necessarily the person
No, because Congress legislate because it is inherent from the nature who ultimately bears the burden of the same tax. It is usually the final
of indirect tax to be shifted. purchaser or consumer of such goods or services, who, although not
directly and legally liable for the payment thereof, ultimately bears the
I. Ways of Shifting burden of the tax (Contex Corporation v. CIR, GR 151135, 2004). What
Is then shifted to the intermediate buyer and ultimately to the final
purchaser is the burden or incidence of taxation.
Three Types or Forms of Shifting
According to Dean Quibod
1. Forward Shifting – the transfer of tax from factors of DIAGEO PHILIPPINES v. CIR
production to factors of distribution (buyer to seller) GR 183553, November 12, 2012
2. Backward Shifting – when the seller absorbs the tax
3. Onward Shifting – occurs when the tax is shifted two or more Facts: Diageo purchased raw alcohol from its supplier for use in its
times either forward of backward shifting, in a chain there are manufacture of beverage and liquor. The supplier imported the raw
several shifts until it ends to the consumer. alcohol and paid the related excise taxes before the same was sold to
Diageo. The purchase price for the raw alcohol included among others, In sum, Diageo, not being the party statutorily liable to pay excise taxes
excise tax paid by the supplier of P12M. and having failed to prove that it is covered by the exemption granted
under Section 130(D) of the Tax Code, is not the proper party to claim a
Diageo then exported its liquor products to countries like Japan, Taiwan, refund or credit of the excise taxes paid on the ingredients of its exported
Turkey and Thailand and received proceed for such sales. locally produced liquor.
Diageo filed for tax refund/tax credit corresponding to the excise taxes
which its supplier paid but passed on to it as part of the purchase price
of the subject raw alcohol. CIR did not act on it. SILKAIR v. CIR
GR 173594, February 6, 2008
Upon the CTA, CIR filed a motion to dismiss alleging Diageo’s lack of
personality to institute the claim for refund because it was not the one Facts: Silkair filed with BIR a written application for the refund of P4.5M
that paid the alleged excise taxes but its supplier. CTA dismissed the excise taxes it claimed to have paid on its purchases of jet fuel from
petition. Petron. It was not acted upon thus it went to CTA.
Diageo invokes Section 130(D) which provides in part: CIR answered that the excise tax on petroleum products is the direct
(D) Credit for Excise tax on Goods Actually Exported.- When goods locally liability of manufacturer or producer, and when added to the cost of
produced or manufactured are removed and actually exported without the goods sold to the buyer, it is no longer a tax but part of the price
returning to the Philippines, whether so exported in their original state or as which buyer has to pay.
ingredients or parts of any manufactured goods or products, any excise tax paid
thereon shall be credited or refunded upon submission of the proof of actual Silkair argues that it is exempt from indirect taxes because the Air
exportation and upon receipt of the corresponding foreign exchange payment
Transport Agreement between RP and Singapore grants tax exemption
xxx
and also invoking Maceda v. Macaraig, Jr., which upheld the claim for
tax credit or refund of NPC on the ground that it was exempt even from
Issue: Does Diageo have legal personality to file a claim for refund or
payment of indirect taxes.
tax credit for the excise taxes paid by its supplier on the raw alcohol it
purchased and used in the manufacture of its exported goods? – No.
Issue: Would the claim of refund prosper? – No.
Excise Taxes Partake of the
(1) The property party to seek refund of an indirect tax is the
Nature of Indirect Taxes
statutory taxpayer. – The statutory taxpayer is the person on whom the
The cited provision reveals that the right then to be credited for the
tax is imposed by law and who paid that same even if he shifts the
excise taxes belongs to the supplier, and not Diageo. The proper party
burden thereof to another, thus it is Petron, not Silkair, who is the
to question, or seek the refund of an indirect tax is the statutory taxpayer
statutory taxpayer entitled to claim for refund.
the person on whom the tax imposed by law and who paid the same
even if he shifts the burden thereof to another.
(2) NPC exemption for both direct and indirect taxes is expressly
provided in its charter. – In CIR v. PLDT, it clarified that the NPC
Excise tax, which are taxes imposed on goods manufactured or
exemption for all taxes of NPC is clear in its charter. Unlike in the Air
produced in PH for domestic sales or consumption or for any other
Transport Agreement, there is no clear showing for such, strictissimi juris
disposition and to things imported, partake of the nature of indirect taxes
applies to tax exemption claims, thus Silkair cannot use such defense.
when it is passed to the subsequent purchaser.
Indirect Taxes are those wherein the liability for the payment of the tax
falls on one person but the burden thereof can be shifted to another
person. When the seller passes on the tax to his buyer, he in effect,
shifts the tax burden, not the liability to pay it, to the purchaser as part
B B. Tax Avoidance
of the price of goods or services that are rendered. Tax Avoidance
It is the exploitation by the taxpayer of legally permissible alternative
Accordingly, when the excise taxes paid by the supplier were passed on rates or methods of assessing taxable property or income in order to
to Diageo, what was shifted is not the tax per se but an additional reduce or entirely avoid tax liability like when one avails of all deductions
cost of the goods sold. Thus, the supplier remains the statutory allowed by law or refraining from engaging in activities subject to tax.
taxpayer even if Diageo, the purchaser, actually shoulders the burden
of tax. In CIR v. Toda (2004), tax avoidance is the tax saving device within the
Statutory Taxpayer is the Property Party means sanctioned by law. This method should be used by the taxpayer
To Claim Refund of Indirect Taxes in good faith and at arm’s length. Tax avoidance is also described as
Pursuant Section 204(c) of the Tax Code, the person entitled to claim a using the legal loopholes to lessen tax liability.
tax refund is the statutory taxpayer or the person liable for or subject to
tax. Tax avoidance is not forbidden in our jurisdiction, in Heng Tong v. CIR
(1968), an attempt to minimize one’s tax does not necessarily constitute
In the present case, it is not disputed that the supplier of Diageo fraud. It is a settled principle that a taxpayer may diminish his liability by
imported the subject raw alcohol, hence, it was the one directly liable any means which the law permits.
and obligated to file a return and pay the excise taxes under the Tax
Code before the goods or products are removed from the customs In Gregory v. Helvering 29 US 465, “to avoid is legal but to evade is
house. illegal. The legal right of a taxpayer to decrease the amount of what
otherwise would be his taxes, altogether avoid them by means which the
It (the supplier of Diageo) is, therefore, the statutory taxpayer as law permits, cannot be doubted.”
contemplated by law and remains to be so, even if it shifts the burden of
tax to Diageo. Consequently, the right to claim a refund, if legally Difference of Tax Evasion
allowed, belongs to it and cannot be transferred to another, in this case From Tax Avoidance
Diageo, without any clear provision of law allowing the same.
Tax Evasion Tax Avoidance
Unlike the law on Value Added Tax which allows the subsequent Evasion should be applied to It covers escape accomplished
purchaser under the tax credit method to refund or credit input taxes the escape from taxation by legal procedures or means
passed on to it by a supplier, no provision for excise taxes exists granting accomplished by breaking the which maybe contrary to the
non-statutory taxpayer like Diageo to claim a refund or credit. It should letter of the tax law, like the intent of the sponsor of the tax
also be stressed that when the excise taxes were included in the deliberate omission to report law but nevertheless do not
purchase price of the goods sold to Diageo, the same was no taxable item. violate the letter of the law.
longer in the nature of a tax but already formed part of the cost of Tax evader breaks the law Tax avoider sidesteps it.
the goods.
Tax evasion is the use of It is the use of lawful, or legally the property to Royal Match, Altonaga paid capital gains tax in the
unlawful or illegal means to permissible methods to reduce amount of P10M. The two deeds were both notarized and on the same
evade the payment of tax, tax tax liability like tax minimization day by the same notary public.
evasion is punishable. (e.g. sale, donation or estate
planning). Meanwhile CIC stocks were sold by Roda to Chao. (Toda owned
Almost always results in Minimization of taxes 99.991% of capital stock).
absence of tax payments
Warrants the imposition of civil, Does not result to any penalties CIC asked to reconsider the assessment that it be directed against old
administrative and criminal CIC because Toda had undertaken to hold the buyer Choa free from all
penalties. tax liabilities.
1972 BAR Question: Thus, the Estate of Toda received a notice of assessment from the CIR
“A” after studying his tax problems, decided to withdraw his bank for a deficiency of income tax for P79,099,999.22.
deposits and to buy non-taxable or tax-exempt securities. Does his acts
constitute tax evasion which is penalized? CIR dismissed the protest finding that a fraudulent scheme was
deliberately perpetuated by the CIC wholly owned and controlled by
No. Tax evasion is the deliberate intention, using illegal Toda by covering up the additional gain of P100M (from the sale of the
means to deprive the government of its right to collect taxes. There is property) evading the higher corporate income tax rate of 25%. It ruled
not law that prohibits the withdrawal of bank deposits to use the that the additional gain of P100M (by sale of Altonaga to RMI for P200M)
proceeds to buy non-taxable or tax-exempt securities. What was realized by CIC was taxed only at 5% by the sale of Altonaga instead of
resorted to was a tax avoidance. 35% as corporate income tax of CIC.
CTA however ruled that CIR failed to prove that CIC committed fraud to
NOTE: Another way of tax avoidance is estate planning which involves deprive government of the taxes, and even assuming that such scheme
gradual donation of amounts that are exempt from the taxation on a was made, the same constituted only a tax avoidance and not tax
sense that when the person dies, there is no more taxable properties left evasion.
and thus estate tax will not be paid.
Is this case of tax evasion or tax avoidance?
In addition, when one donates his assets to an education institution
(non-stock and non-profit), and uses such asset actually, directly and Tax avoidance and tax evasion are the two most common ways used by
exclusively – tax is avoided. taxpayers in escaping from taxation. Tax avoidance is the tax saving
device within the means sanctioned by law. This method should be used
C. Tax Evasion by the taxpayer in good faith and at arms-length. Tax evasion, on the
other hand, is a scheme used outside of those lawful means and when
availed of, it usually subjects taxpayer further or additional civil or
Tax Evasion criminal liabilities.
It is a scheme used outside of lawful means and when availed of usually
subjects the taxpayer to further addition civil or criminal liabilities. Tax Three Factors of Tax Evasion, Present
evasion connotes fraud in the use of pretenses and forbidden devices Tax evasion connotes the integration of three factors: (1) the end to be
to lessen or defeat taxes. achieved, i.e., the payment of less than that known by the taxpayer to
be legally due, or the non-payment of tax when it is shown that a tax is
When Consummated due; (2) an accompanying state of mind which is described as being
The crime of tax evasion is complete when the taxpayer has then "evil," in "bad faith," "willful," or "deliberate and not accidental"; and (3)
knowingly and willfully filed a fraudulent return with intent to evade and a course of action or failure of action which is unlawful.
defeat the tax (CIR v. Gonzales, 2010).
All these factors are present in the instant case. It is significant to note
Fraud in Tax Evasion that as early as 4 May 1989, prior to the purported sale of the Cibeles
According to Aban, tax evasion may be exemplified by means of tax property by CIC to Altonaga on 30 August 1989, CIC received ₱40
fraud, or the use of deceit in order to evade taxes. Fraud, whoever, is a million from RMI, and not from Altonaga.
serious charge and to be sustained, it must then be supported by clear
and convincing evidence. Fraud, being a question of fact must be That ₱40 million was debited by RMI and reflected in its trial balance as
alleged and proved. "other inv. – Cibeles Bldg." Also, as of 31 July 1989, another ₱40 million
was debited and reflected in RMI’s trial balance as "other inv. – Cibeles
In determining whether fraud exists, substance and not form should Bldg." This would show that the real buyer of the properties was RMI,
control. Like in Republic v. Gonzales (1965), when a taxpayer fails to and not the intermediary Altonaga.
declare for taxation his true and actual income derived from furniture
business for two consecutive years is an indication of fraudulent intent Altonaga as a mere conduit as admitted by the Estate when it stated
to cheat government taxes. that the sale to Altonaga was a part of tax planning scheme of CIC.
Tax planning was defined as their way to reduce if not eliminate
Factors Integrated in Tax Evasion altogether a tax for wanting to reduce from a 35% corporate tax to 5%
1. The ends to be achieved such as the payment of less than tax.
that known by the taxpayer to be legally due, or the non-
payment of tax when it is shown that tax is due. Scheme is Tainted with Fraud
2. An accompanying state of mind which is described as being It is obvious that the objective of the sale to Altonaga was to reduce the
evil or in bad faith, willful or deliberate and not accidental, and amount of tax to be paid especially that the transfer from him to RMI
3. Course of action of failure of action which is unlawful. would then subject the income to only 5% individual capital gains tax,
(CIR v. Estate of Toda, Jr. [2004]). and not the 35% corporate income tax. Altonaga’s sole purpose of
acquiring and transferring title of the subject properties on the same day
CIR v. ESTATE OF TODA was to create a tax shelter.
GR 147188, September 14, 2008
Altonaga never controlled the property and did not enjoy the normal
Facts: A notice of assessment was sent to Cibeles Insurance benefits and burdens of ownership. The sale to him was merely a tax
Corporation (CIC) for deficiency income tax of P79M arising from an ploy, a sham, and without business purpose and economic substance.
alleged simulated sale of 16-storey commercial building known as
Cibeles Building in Makati. Doubtless, the execution of the two sales was calculated to mislead the
BIR with the end in view of reducing the consequent income tax liability.
Toda president and owner allegedly sold the property for P100M to
Altonaga who sold the same to Royal Match for P200M. For the sale of
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, be inferred that such expenditures represented unreported or
which was prompted more on the mitigation of tax liabilities than for undeclared income.
legitimate business purposes constitutes one of tax evasion.
Since the underdeclaration is more than 30% of respondent income
Incidence of Taxation Depends on Substance which constitutes prima facie evidence of false or fraudulent return
Generally, a sale or exchange of assets will have an income tax BIR recommended filing case.
incidence only when it is consummated. The incidence of taxation
depends upon the substance of a transaction. The defense of spouses that they had savings was self-serving because
The tax consequences arising from gains from a sale of pr to transfer they did not present evidence to support such. It is a basic concept in
legal title. Rather, the transaction must be viewed as a whole, and each taxation that income denotes a flow of wealth during a definite period of
step from the commencement of negotiations to the consummation of time, while capital is a fund or property existing at one distance point in
the sale is relevant. time.
A sale by one person cannot be transformed for tax purposes into a sale There is a manifest showing the spouses had underdeclared their
by another by using the latter as a conduit through which to pass title. income. The huge disparity cannot be ignored. In fact, it makes us
wonder how they were able to purchase the properties in cash given
To permit the true nature of the transaction to be disguised by mere respondent Antonio’s meager income.
formalisms, which exist solely to alter tax liabilities, would seriously
impair the effective administration of the tax policies of Congress. In view of the foregoing, we are convinced that there is probable cause
to indict respondent spouses for tax evasion as petitioner was able to
To allow taxpayer to deny tax liability on the ground that the sale was show that a tax is due from them.
made through another and distinct entity when it is proved that the latter
was merely a conduit is to sanction a circumvention of our tax laws.
D. Tax Exemption
Hence, the sale to Altonaga should be disregarded for income tax
purposes. The two sale transactions should be treated as a single
direct sale by CIC to RMI. I. Meaning
Exemption from taxation is the act of the State in divesting itself of its
prerogative to collect taxes upon certain subject and objects of taxation.
BIR v. CA, SPOUSES MANLY
GR 197590, November 24, 2014 The essence of tax exemption is the immunity or freedom from a charge
or burden to which others are subjected. It is a waiver of the
government’s right to collect. It is understood as freedom from the
Facts: In this case Spouses Manly owned a family corporation named
imposition and payment of particular tax.
Standard Realty Corporation, upon investigation by the BIR it was found
that spouses failed to show the source of their cash purchases or a
vacation house in Tagaytay and two Toyota vehicles thus, the revenue II. Nature of Tax Exemptions
officers concluded that the ITRs were underdeclared and since the It is in the nature of a waiver by the State of an act of sovereignty hence
underdeclaration exceeded 40% of the reported income, it was to be strictly construed against the taxpayer. It is to be granted only
considered prima facie evidence of fraud with intent to evade the upon the clearest intention and should not exist by mere implication
payment of proper taxes to the government. otherwise the very existence of the State would be imperiled for lack of
wherewithal to perform its functions. Taxation is the rule and exemption
The revenue officers recommended the filing of criminal cases against is the exception.
the spouses for failing to supply correct and accurate information in their
ITRs under the 1997 Tax Code. However, the Secretary of Justice Exemptions from taxation are highly disfavored in law, and he who
ordered the withdrawal of the information filed against the Spouses claims an exemption must be able to justify his claim by the clearest
Manly affirmed by CA. grant of organic or statute law.
CA dismissed the petition because it was not able to show the source of However, the rule on strict interpretation does not apply in cases of
the alleged unreported or undeclared income and it ignored the exemptions granted in favor of government political subdivision or
argument of the spouses that it was from their lifetime savings. instrumentality like public corporations.
BIR however contends that in filing a criminal case for tax evasion, a Principle of Equity, Not Ground
prior computation or assessment of tax is not required because the Equity is not a valid ground for granting tax exemption, there must be
crime is complete when the violator knowingly and willfully filed a some basis by law or by some reason of public policy that one is entitled
fraudulent return with intent to evade a part or all of the tax. to the exemption because tax exemption is construed strictly against the
taxpayer. Thus, a taxpayer invoking the exemption should show the law
An analysis of respondent spouses’ income and expenditure shows that of which he is invoking allows him or grants him the coverage of
their cash expenditure is grossly disproportionate to their reported or exemption, without such basis, such person will be taxable.
declared income, leading petitioner to believe that they under declared
their income. III. Kinds of Exemptions
Issue: Is there probable cause to indict the Spouses Manly for tax
evasion under Section 254 and 255 of the NIRC? – Yes. As to Manner of Creation
[1] Express – there is express exemption where the law is specific in
Tax Evasion the identification of the subjects and objects that are not to be taxed,
It is deemed complete when the violator has knowingly and willfully filed there is a direct grant by constitution or by law.
a fraudulent return with intent to evade and defeat a part or all of the tax.
Corollarily, an assessment the tax deficiency is not required for the [2] Implied – exemption results from a failure to include the subject or
criminal prosecution. objects as among those to be taxed. Meaning, if there are groups of
However, the fact that a tax is due must first be first proved before one taxpayers that are taxable, if one is not found therein, then by implication
can be prosecuted for tax evasion. one is not covered.
Under expenditure method, which is reconstructing taxpayer’s [3] Contractual – the exemption results from the rendition of the subject
Income by deducting the yearly expenditures from the declared yearly or objects of a service in exchange for the exemption.
income. The theory of this method is that when the amount of the money
that a taxpayer spends during a given year exceeds his reported or As to Object of Exemption
declared income and the source of such money is unexplained, it may
[1] Personal – directed in favor of certain persons or individual Taxes Cannot be Subject of Compensation or Set-off
taxpayers; 1. Lifeblood theory. This is because taxes are the lifeblood of the
government which it needs for its operations.
[2] Impersonal – directed to a certain class
2. Taxes are not contractual obligations. Payment of taxes is not in
As to Scope the nature of contractual obligations between the state and the taxpayer,
[1] Total Exemption – like non-stock, non-profit education exemptions but grows out of a duty which does not require the personal consent of
however, exemption only in so far as to direct taxes. the taxpayer.
• Exempted from both direct and indirect taxes – NPC granted
through presidential decree (Macaraig case). 3. Not mutual creditors or debtors of each other. The government
and the taxpayer are not mutually creditors and debtors of each other
[2] Partial Exemption – only partial and a claim for taxes is no such a debt, demand, contract or judgment
as is allowed to be set-off.
IV. Rationale/Grounds for Exemption
There is no off-setting of taxes against taxpayer’s claims against
Rationale for Tax Exemption government. A person cannot refuse to pay a tax on the ground that the
1. Sumptuary or regulatory – to promote general welfare and government owes him an amount equal to or greater than the tax being
to protect the health, safety, or morals of the inhabitants collected. The collection of tax cannot await the results of a lawsuit
2. To implement police power goals; and against the government (Francia v. IAC, 162 SCRA 753).
3. Compensatory purpose to implement social justice
provisions of the constitution Tax from Debt
Tax exemptions may be granted to lower the price of certain SOUTH AFRICAN AIRWAYS v. CIR
commodities and services. Employment opportunities may also be GR 180356, February 16, 2010
created as a result of tax exemptions which would encourage the
establishment of business enterprises.
Taxes cannot be subject to compensation for the simple reason that the
government and the taxpayer are not creditors and debtors of each
V. Revocation of Tax Exemption other. There is a material distinction between a tax and a debt. Debts
A tax exemption may be revoked because it is an act of liberality which are due to the Government in its corporate capacity, while Taxes are
could be taken back by the Government. Since taxation is the rule and due to Government in its sovereign capacity.
exemption therefrom is the exception, the exemption may thus be
withdrawn at the pleasure of the taxing authority. We have consistently ruled that there can be no off-setting of taxes
against the claims that the taxpayer may have against the government.
There is no vested right in a tax exemption, more so when the latest A person cannot refuse to pay a tax on the ground that the government
expression of legislative intent renders its continuance doubtful. owes him an amount equal to or greater than the tax being collected.
Congress can enact a law withdrawing a tax exemption just as The collection of a tax cannot await the results of a lawsuit against the
efficaciously as it may grant the same. government.
A taxpayer may not offset taxes due from the claims that he may have
against the government. Taxes cannot be the subject of compensation
FILM DEVELOPMENT COUNCIL v. COLON HERITAGE
because the government and taxpayer are not mutually creditors and
GR 203754, June 16, 2015, En Banc
debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.
It is a basic precept that the inherent legislative powers of Congress,
broad as they may be, are limited and confined within the four walls of
the Constitution.
Permissible Compensation: Solutio Indebiti
Accordingly, whenever the legislature exercises its power to enact, In case of a tax overpayment, the BIR’s obligation to refund or off-set
amend, and repeal laws, it should do so without going beyond the arises from the moment the tax was paid.
parameters wrought by the organic law.
CIR v. ESSO STANDARD
In the case at bar, through the application and enforcement of Sec. 14 GR 147188, September 14, 2008
of RA 9167, the income from the amusement taxes levied by the covered
LGUs did not and will under no circumstance accrue to them, not even Facts: ESSO overpaid its 1959 income tax by P221,033. It was
partially, despite being the taxing authority therefor. Congress, accordingly granted a tax credit. However, ESSOs payment of its
therefore, clearly overstepped its plenary legislative power, the income tax for 1960 was found to be short by P367,994.
amendment being violative of the fundamental law's guarantee on local
autonomy, as echoed in Sec. 130(d) of the LGC. ESSO paid under protest the amount alleged to be due, contending that
it should have not been required to pay the interest but only of amount,
Incentive Award not a Tax Exemption which was P146,961 representing the deficiency of P367K and its earlier
Simply put, both the burden and incidence of the amusement tax are overpayment of P221,033 for which it had been granted a tax credit. CIR
borne by the proprietors, lessors, and operators, not by the producers of denied claim for refund but was granted by CTA.
the graded films.
Issue: Should overpayment be considered for a set-off? – Yes.
The transfer of the amount to the film producers is actually a monetary
reward given to them for having produced a graded film, the funding for Held: The Government had already in its hands sum of P221K
which was taken by the national government from the coffers of the representing the excess payment. Having been paid and received by
covered LGUs. Without a doubt, this is not an exemption from mistake, which Commissioner recognized that sum belonged to ESSO
payment of tax. and Government had the obligation to return it ESSO. The obligation of
the payee to reimburse an amount paid to him results from the mistake,
E. Compensation not from the payee's confession of the mistake or recognition of the
obligation to reimburse.
Compensation or Set-off In other words, since the amount of P221,033.00 belonging to ESSO
It is a mode of extinguishing an obligation when two persons in their own was already in the hands of the Government as of July, 1960, although
right are debtors and creditors of each other, and that the debts are both the latter had no right whatever to the amount and indeed was bound to
due and demandable. return it to ESSO, it was neither legally nor logically possible for ESSO
thereafter to be considered a debtor of the Government in that amount
of P221,033.00; and whatever other obligation ESSO might However, BIR wrote to Transfield that it is not allowed to avail the
subsequently incur in favor of the Government would have to be reduced benefits of RA 9480. Later, it issued Warrant of Distraint and/or Levy
by that sum, in respect of which no interest could be charged. (WDAL) directing seizure of property of Transfixed to the extent of
P563M.
F. Equitable Recoupment The respondent argues in this case that the WDAL was improper as well
as the letter written because it alleged that a taxpayer immediately
enjoys the immunities granted by RA 9480 as soon as the taxpayer
Doctrine of Equitable Recoupment complies with the conditions under the law and the BIR may not prevent
The doctrine of equitable recoupment holds that where the refund of a or delay taxpayer from such.
tax illegally or erroneously collected or overpaid by a taxpayer is barred
by prescription, a tax presently being assessed against a taxpayer may Issue: Is Transfield entitled to tax amnesty? – Yes.
be recouped or set-off against the tax whose refund is now barred by
prescription. Tax Amnesty, Defined
A tax amnesty operates as a general pardon or intentional overlooking
The doctrine of not applicable in the Philippines because of the lifeblood by the State of its authority to impose penalties on persons otherwise
theory. Taxpayers would become lazy in paying taxes because they guilty of evasion or violation of a revenue or tax law. It is an absolute
could offset the alleged illegally or erroneously collected or overpaid forgiveness or waiver by the government of its right to collect what is due
taxes. it and to give tax evaders who wish to relent a chance to start with a
clean slate. A tax amnesty, much like a tax exemption, is never favored
The same could also be said of tax collectors relative to their duty to nor presumed in law. The grant of a tax amnesty is akin to a tax
collect taxes because they know that the taxpayers would not pay exemption; thus, it must be construed strictly against the taxpayer and
anyway because of the offset with previously illegally or erroneously liberally in favor of the taxing authority.
collected or overpaid taxes (UST v. Collector, 104 Phil. 1062).
RA 9480
G. Tax Amnesty It grants tax amnesty to qualified taxpayers for revenue taxes for the
taxable years 2005 and prior years. It was shown Transfield complied
with the documents and successfully availed itself of the tax amnesty
I. Definition benefits granted under RA 9480 which include immunity from the
appurtenant, civil, criminal or administrative penalties under the Tax
Tax Amnesty, Defined Code arising from the failure to pay any and all internal revenue taxes
A tax amnesty is a general pardon or intentional overlooking by the State for the TY 2005 and prior years.
of its authority to impose penalties on persons otherwise guilty of
evasion or violation of a revenue or tax law. It partakes of an absolute Thus, the WDAL should have not been ordered and issued.
forgiveness or waiver by the government of its right to collect what is due
it and to give tax evaders who wish to relent a chance to start with a II. Distinguished from Tax Exemption
clean state.
Nature of Tax Amnesty Tax Amnesty Tax Exemption

It partakes of an absolute forgiveness or waiver of the Government of its It is an immunity from all It is an immunity from civil
rights to collect otherwise would be due it, and in this sense, prejudicial criminal, civil, and administrative liability only, it is an immunity or
thereto. liabilities arising from non- privilege, a freedom from a
payment of taxes charge or burden to which
Only Congress Could Grant Tax Amnesty others are subjected
Under the Philippine Constitution, there could be no tax amnesty granted Tax amnesty applies only to Tax exemption has prospective
by the President of the Philippines because the same is in the nature of past tax periods application
a tax exemption which could be granted only by a majority of all the
members of Congress (Article VI, Section 28[4], 1987 Philippine
Constitution). CIR v. PHILIPPINE ALUMINUM WHEELS
GR 216161, August 9, 2017
Purpose of Tax Amnesty
It is to give tax evaders who wish to relent and are willing to reform a Facts: BIR issued a FAN to Phillippine Aluminum Wheels for the
chance to do so and thereby start with a clean tax slate. It aims to grant deficiency taxes for TY 2001 for P32M. Respondent asked for
a general reprive to the evaders who wish to come clean by giving them reconsideration but BIR issued a Final Decision on Disputed
an opportunity to straighten out their records. Assessment (FDDA) and demanded full payment.
It also gives government a chance to collect uncollected tax from tax In 2007, it informed BIR that it already paid its tax deficiency on
evaders without having to go through the tedious process of a tax case. withholding tax amounting to P736,726.89 and that it was also in the
To avail a tax amnesty granted by the government, and to be immune process of availing the Tax Amnesty Program under RA 9480 to settle
from suit omits delinquencies, the taxpayer must have voluntarily his its deficiency for TY 2001. Respondent complied with the requirements.
disclosed his previously untaxed income and must have paid the
corresponding tax on such previously untaxed income. CTA Division ruled that respondent complied with RA 9480 and thus
entitled to the immunities and privileges and this is affirmed by the CTA
Strictly Construed En Banc.
A tax amnesty, like tax exemption is never favored nor presumed in law
and if granted by statute, must be strictly construed against the taxpayer Issue: Is Philippine Aluminum Wheels entitled to the benefits of the
and liberally in favor of the taxing authority. Tax Amnesty Program under RA 9480? – Yes.
CIR v. TRANSFIELD Tax Amnesty, Defined

GR 211449, January 16, 2019 A tax amnesty is a general pardon or intentional overlooking by the State
of its authority to impose penalties on persons otherwise guilty of
Facts: Transfield was given a final assessment notice by CIR for total evasion or violation of a revenue or tax law. It partakes of an absolute
sum of P563M of tax deficiency, mainly on income tax. In 2008, it availed forgiveness or waiver by the government of its right to collect what is due
of benefits of RA 9480 (law granting tax amnesty) by submitting it and to give tax evaders who wish to relent a chance to start with a
documents to DBP (BIR-agent bank). On the same day, Transfield paid clean slate. A tax amnesty, much like a tax exemption, is never favored
to BIR via DBP an amnesty tax of P112,500. nor presumed in law. The grant of a tax amnesty, similar to a tax
exemption, must be construed strictly against the taxpayer and liberally Exceptions: The rule of strict construction as against government is not
in favor of the taxing authority. applicable where:
This case cited: • The language of the tax statue is plain and there is no doubt
as to the legislative intent. In such case, the words are given
PHILIPPINE BANKING CORPORATION v. CIR their ordinary meaning.
597 Phil. 363, 577 SCRA 366, January 30, 2009 • Tax statutes are to receive reasonable construction with a
view to carrying out their purpose and intent. They should not
The Court ruled in this cited case that the taxpayer’s completion of the be construed as to permit the taxpayer to easily evade
requirements under RA 9480 will extinguish the taxpayer’s liability, payment of tax.
additions and all appurtenant civil, criminal or administrative penalties • A tax statute should be construed to avoid possibilities of tax
under the NIRC. evasion.
Considering that the completion of these requirements shall be deemed

CIR v. FORTUNE TOBACCO
full compliance with the tax amnesty program, the law mandates that the
taxpayer shall thereafter be immune from the payment of taxes, and GR 167274-75, July 21, 2008
additions thereto, as well as the appurtenant civil, criminal or
administrative penalties under the NIRC of 1997, as amended, arising What is controlling in this case is the well-settled doctrine of strict
from the failure to pay any and all internal revenue taxes for taxable year interpretation in the imposition of taxes, not the similar doctrine as
2005 and prior years. applied to tax exemptions.
Also cited is the case of: The rule in the interpretation of tax laws is that a statute will not be
construed as imposing a tax unless it does so clearly, expressly, and
ASIA INTERNATIONAL AUCTIONEERS v. CIR unambiguously. A tax cannot be imposed without clear and express
GR 179115, September 26, 2012 words for that purpose.
The Court ruled in this cited case that the tax liability of Asia Accordingly, the general rule of requiring adherence to the letter in
International Auctioneers, Inc. was fully settled when it was able to avail construing statutes applies with peculiar strictness to tax laws and the
of the Tax Amnesty Program under RA 9480. The Court ruled that the provisions of a taxing act are not to be extended by implication. In
pending case involving the tax liability of Asia International Auctioneers answering the question of who is subject to tax statutes, it is basic that
is rendered moot since the company’s compliance with the Tax in case of doubt, such statutes are to be construed most strongly
Amnesty Program under RA 9480 extinguished the company’s against the government and in favor of the subjects or citizens
outstanding deficiency taxes. because burdens are not to be imposed nor presumed to be
___________ imposed beyond what statutes expressly and clearly import. As
burdens, taxes should not be unduly exacted nor assumed beyond the
Philippine Aluminum Wheels plain meaning of the tax laws
Is Entitled to the Privileges and Immunities
On 19 September 2007, respondent availed of the Tax Amnesty
Program under RA 9480, as implemented by DO 29-07. Respondent It is also said in MCIAA v. Marcos that since taxation is a destructive
submitted its Notice of Availment, Tax Amnesty Return, Statement of power which interfere with personal and property rights of the people
Assets, Liabilities and Net Worth, and comparative financial statements and takes from them a portion of their property to support the
for 2005 and 2006. government, tax statutes must then be construed strictly in against the
government and liberally in favor of the taxpayer.
Respondent paid the amnesty tax to the Development Bank of the Other rules to be observed:
Philippines, evidenced by its Tax Payment Deposit Slip dated 21 1. Interpretation must be according to the letter of the law and
September 2007. Respondent's completion of the requirements of the must not be extended by mere implication
Tax Amnesty Program under RA 9480 is sufficient to extinguish its tax 2. Meaning of the words first resorted to in statutory construction
liability under the FDDA of the BIR. 3. Law must be read as a whole and should be read in its entirety
when interpreting it and every part of the statute must be
Final Decision on Disputed Assessment (FDDA) considered
Is Not a Final and Executory Tax Case Decision 4. Statute must be harmonized with other laws
The exception to the immunity effect of RA 9480 under Section 8(f) is 5. Special law prevails over general law
when Tax cases are final and executory, the FDDA issued by the BIR 6. Inclusio unius est exclusio alterius
is not a tax case subject to a final and executory judgment. 7. Ejusdem generis
8. Doubts should be resolved in favor of constitutionality
B. Exemption and Exclusion

IV. CONSTRUCTION AND INTERPRETATION
General Rule: Exemptions are not favored and are construed
strictissimi juris against the taxpayer.
Statutory Construction, When Necessary • Taxation is the rule, exemption is the exception
If the law is clear and unambiguous and admits of no other interpretation,
• Whoever claims exemption must be able to justify his claim or
there is no need then to apply statutory construction. It is only when
right thereto
there is doubt in the interpretation of the provisions there be necessity
• Claims for refund partake of the nature of tax exemptions and
to resort to statutory construction. No doubt, no interpretation.
will not be allowed unless granted in the most explicit and
categorical language.
A. Tax Laws
Exceptions: When the law itself expressly provides for a liberal
General Rule: In case of doubt, tax laws must always be construed construction, that is in case of doubt, in shall be resolved in favor of
strictly against the State and liberally in favor of the taxpayer. exemption.
• Exemption in favor of government agencies for they are
No person or property is subject to taxation unless within the terms or generally exempt from taxes;
plain import of a taxing of statute. • Exemption refers to religious, charitable and educational
• In case of doubt, tax statutes are construed strictly against institutions
the government and liberally in favor of the taxpayer; • Express mention or clear legislative intent that the rule on
• Taxes being burdens, they are not to be presumed beyond strict construction does not apply.
what the statute expressly and clearly declares;
PANASONIC v. CIR Court further held that tax exemptions are highly disfavored and
that a tax exemption must be expressed in the statute in clear
GR 178090, February 8, 2010
language that leaves no doubt of the intention of the legislature to
grant such exemption. And, even in the instances when it is granted,
Tax Refunds in relation to Value-Added Tax (VAT) the exemption must be interpreted in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority.
This Court will not set aside lightly the conclusions reached by the CTA
which, by the very nature of its functions, is dedicated exclusively to the The word "exemption" as used in the statute refers or pertains merely
resolution of tax problems and has accordingly developed an expertise to an exemption from regulatory or reporting requirements of the
on the subject, unless there has been an abuse or improvident exercise Department of Transportation and Communication or National
of authority. Besides, statutes that grant tax exemptions are construed Transmission Corporation and not to an exemption from the grantee's
strictissimi juris against the taxpayer and liberally in favor of the taxing tax liability. Applying the rule of strict construction of laws granting tax
authority. Tax refunds in relation to the VAT are in the nature of such exemptions and the rule that doubts are resolved in favor of municipal
exemptions. The general rule is that claimants of tax refunds bear the corporations in interpreting statutory provisions on municipal taxing
burden of proving the factual basis of their claims. Taxes are the powers, the Court held that Section 23 of RA 7925 could not be
lifeblood of the nation. Therefore, statutes that allow exemptions are considered as having amended petitioner's franchise so as to entitle it
construed strictly against the grantee and liberally in favor of the to exemption from the imposition of local franchise taxes.
government.
CIR v. FORTUNE TOBACCO

CIR v. PHILIPPINE AIRLINES GR 167274-75, July 21, 2008
GR 180066, July 7, 2009
Rule of strict interpretation applies in claims for tax refund
PAL Exemption as an Established Fact Tax exemption is a result of legislative grace. He who claims an
exemption from the burden of taxation must justify his claim by showing
Accordingly, the general rule of requiring adherence to the letter in that the legislature intended to exempt him by words too plain to be
construing statutes applies with peculiar strictness to tax laws and the mistaken. The rule is that tax exemptions must be strictly construed such
provisions of a taxing act are not to be extended by implication." that the exemption will not be held to be conferred unless the terms
Parenthetically, in answering the question of who is subject to tax under which it is granted clearly and distinctly show that such was the
statutes, it is basic that "in case of doubt, such statutes are to be intention. A claim for tax refund may be based on statutes granting tax
construed most strongly against the government and in favor of the exemption or tax refund. In such case, the rule of strict interpretation
subjects or citizens because burdens are not to be imposed nor against the taxpayer is applicable as the claim for refund partakes of the
presumed to be imposed beyond what statutes expressly and clearly nature of an exemption, a legislative grace, which cannot be allowed
import." unless granted in the most explicit and categorical language.
For two decades following the grant of its franchise by Presidential
Decree No. 1590 in 1978, PAL was only being held liable for the basic
corporate income tax or franchise tax, whichever was lower; and its CIR v. CENTRAL LUZON DRUG
payment of either tax was in lieu of all other taxes, except real property GR 159647, April 15, 2005
tax, in accordance with the plain language of Section 13 of the charter
of PAL. Therefore, the exemption of PAL from "all other taxes" was Special law (RA 7432) prevails
not just a presumption, but a previously established, accepted, and over General Law (Tax Code)
respected fact, even for the BIR.
RA 7432 is a special law that should prevail over the Tax Code -- a
general law. “x x x [T]he rule is that on a specific matter the special law
CIR v. SM PRIME HOLDINGS shall prevail over the general law, which shall be resorted to only to
supply deficiencies in the former.” In addition, “[w]here there are two
GR 183505, February 26, 2010
statutes, the earlier special and the later general -- the terms of the
general broad enough to include the matter provided for in the special -
Rule on tax exemption does not apply - the fact that one is special and the other is general creates a
presumption that the special is to be considered as remaining an
Moreover, contrary to the view of petitioner, respondents need not prove exception to the general, one as a general law of the land, the other as
their entitlement to an exemption from the coverage of VAT. The rule the law of a particular case.”
that tax exemptions should be construed strictly against the taxpayer
presupposes that the taxpayer is clearly subject to the tax being levied “It is a canon of statutory construction that a later statute, general in its
against him. The reason is obvious: it is both illogical and impractical to terms and not expressly repealing a prior special statute, will ordinarily
determine who are exempted without first determining who are covered not affect the special provisions of such earlier statute.”
by the provision. Thus, unless a statute imposes a tax clearly, expressly
and unambiguously, what applies is the equally well-settled rule that the RA 7432 is an earlier law not expressly repealed by, and therefore
imposition of a tax cannot be presumed. In fact, in case of doubt, tax remains an exception to, the Tax Code -- a later law. When the former
laws must be construed strictly against the government and in favor of states that a tax credit may be claimed, then the requirement of prior tax
the taxpayer. payments under certain provisions of the latter, as discussed above,
cannot be made to apply. Neither can the instances of or references to
[This is because VAT is not imposed to those already covered by the a tax deduction under the Tax Code be made to restrict RA 7432. No
amusement tax.] provision of any revenue regulation can supplant or modify the acts of
Congress.
SMART COMMUNICATIONS v. CITY OF DAVAO

ASIA INTERNATIONAL AUCTIONEERS v. CIR
GR 155491, July 21, 2009
GR 179115, September 26, 2012
“Exemption” in Smart’s legislative franchise via RA 7923 and RA
7925 is not a blanket tax exemption A tax amnesty, much like a tax exemption, is never favored or presumed
in law. The grant of a tax amnesty, similar to a tax exemption, must be
In PLDT v. City of Davao, Congress did not intend it to operate as a construed strictly against the taxpayer and liberally in favor of the taxing
blanket tax exemption to all telecommunications entities. Section 23 authority.
cannot be considered as having amended PLDT's franchise so as to
entitle it to exemption from the imposition of local franchise taxes. The
CIR v. PILIPINAS SHELL E. Non-retroactivity

GR 188497, February 19, 2014
Tax Laws, Rules and Regulations Operate Prospectively
Section 135 exempts International Carriers and does not exempt Tax laws, unlike remedial laws, are not to be applied retroactively.
the oil companies from the payment of excise tax on petroleum Revenue laws are substantive laws and their application must not be
products sold by them to international carriers; tax refunds must equated with remedial laws. Revenue laws are not intended to be
be denied. liberally construed, and exemptions are not given retroactive application,
considering that taxes are the lifeblood of the government (CIR v.
Referring to international carriers, the Court said that the exemption from Acosta, 2007).
tax given under Section 135(a) is based on international understanding
that fuel used for international air services should be exempt from tax. Thus, if a tax is assessed and demanded under a certain tax
law, and such tax law however is subsequently repealed, there is no
Both the earlier amendment in the 1977 Tax Code and the present Sec. effect of the repeal of the revenue law on such tax previously assessed
135 of the 1997 NIRC did not exempt the oil companies from the and demanded. The previously assessed and demanded tax may still
payment of excise tax on petroleum products manufactured and sold by be collected because the repeal is to be construed as an exemption that
them to international carriers.” must be strictly construed. After all, tax laws do not have any retroactive
application even if favorable to the taxpayer because tax laws are not
Time and again, we have held that tax refunds are in the nature of tax considered as part of criminal law.
exemptions which result to loss of revenue for the government. Upon
the person claiming an exemption from tax payments rests the burden NOTE: In CIR v. CA (1997), a BIR Ruling does not have retroactive
of justifying the exemption by words too plain to be mistaken and too application especially if it will prejudice the taxpayer.
categorical to be misinterpreted, it is never presumed nor be allowed
solely on the ground of equity. These exemptions, therefore, must not I. Exceptions
rest on vague, uncertain or indefinite inference, but should be granted
only by a clear and unequivocal provision of law on the basis of language
too plain to be mistaken. Such exemptions must be strictly construed Instances of Retroactive Application
against the taxpayer, as taxes are the lifeblood of the government. CIR v. Filinvest Development Corporation, 654 SCRA 56
1. Where the taxpayer deliberately misstates or omits
C. Tax Rules and Regulations material facts from his return or any document required
of him by the BIR;
2. Where the facts subsequently gathered by the BIR are
Regulations Deserve Respect of Courts
Rules and Regulations interpreting tax code and promulgated by the materially different from the facts on which the ruling is
Secretary of Finance who has been granted authority to do so, deserve based; or
to be given weight and respect by the courts in view of the rule-making 3. Where the taxpayer acted in bad faith.
authority given to those who formulate them and their specific expertise
in their respective fields. F. Mandatory and Directory Provisions
Revenue Regulations Partake the Nature of a Law
In general, rules and regulations issued by administrative or executive [1] Mandatory Provisions
officers pursuant to the procedure or authority that is conferred by law As a general rule, tax laws must provide for mandatory provisions
upon the administrative agency has the force and effect and partake of because tax is the lifeblood of the State. Mandatory provisions are
the nature of the statute. intended for the security of the citizens or which are designed to ensure
equality or certainty as to the nature and amount of each person’s tax.
Administrative Issuance May Not Override the Law
While it may be true that the Secretary of Finance in conjunction with the Example of Mandatory Provisions
Commissioner of Internal Revenue can promulgate rules and
regulations for the enforcement of internal revenue laws however all (a) Deadlines. – For example, the filing of corporate annual
such issuances must not override but must remain consistent and in income tax return must be filed within the 15th day of the 4th month
harmony with the law they seek to apply and neither to supplant, nor to following the end of the taxable year, failure to do so would result to
modify the law. (CIR v. SM Prime Holdings, 613 SCRA 774). penalty and surcharges.
(b) Prescriptive Period. – The law sets a 3-year prescriptive
Administrative Issuance Must Not Run Counter to the Law period within which the BIR can go over tax returns and determine
To be valid an administrative rule or regulation must conform and not whether there is a deficiency or not. If there is a finding of deficiency, it
contradict the provisions of the enabling law. An implementing rule or should be conveyed to the taxpayer within the 3-year prescriptive period.
regulation cannot modify, expand, or subtract from the law it is intended
to implement. Any rule that is not consistent with the statute itself is null If the conveyance of the notification came out after the 3rd year, then
and void (Fort Bonifacio v. CIR, GR 173425, 2012). prescription has set in, the taxpayer can then invoke as a defense the
prescription.
Revenue Regulation Are Binding on Courts
As long as the procedure for its promulgation is followed and is germane (c) Provisions for levy of properties. – The process of
to the law and is not contrary to the enabling law and is not ultra vires, it publication, notice to taxpayer and other requirements must be followed
is binding on the courts. before the property can be sold in public auction to satisfy tax
delinquency.
D. Penal Provisions of Tax Laws
(d) Appeal. – The provisions on appeal must be strictly
BAR Question 2010: followed otherwise it may not be taken cognizance. Appeal is a privilege
In criminal cases involving tax offenses punishable under the National and not a right.
Internal Revenue Code (NIRC), prescription is construed strictly against
the government. True or False. (e) Assessments and decisions. – They must contain the
facts, the law or jurisprudence or legal basis on which the assessment
False. Statutes of limitations in criminal cases constitute is based, otherwise the assessment is void.
surrender by the sovereign of its right to prosecute. Hence, they receive
a strict construction in favor of the government (Lim v. CA, 1990). This (f) Protest. – A taxpayer has to observe the procedure to be
is because in criminal cases, statutes of limitations are acts of grace, a able to file protest.
surrendering by the sovereign of its right to prosecute. They receive a
strict construction in favor of the Government and limitations in such
cases will not be presumed in the absence of a clear legislation.
(g) Waiver. – the 3-year prescriptive period may be waived by the provisions without substantial change, such action is to some extent
the taxpayer (1) if it is in writing; (2) signed by him and by the confirmatory that the ruling carries out the legislative purpose.” Thus,
Commissioner or authorized representative; (3) it must be for a definite there is tacit approval of a prior executive construction of a statute which
period; and (4) for a specific tax period. was re-enacted with no substantial changes.
[2] Directory Provisions – These are designed merely for the

information or direction of officers or to secure methodical and
systematic modes of proceedings.
SAN PABLO MANUFACTURING CORPORATION v. CIR
GR 147749, June 22, 2006
An example is mode of payment of taxes, the taxpayer has
the option of filing and paying taxes either online or through the banking Expressio unius est exclusio alterius
system.
Facts: SPMC was assessed and ordered to pay P8.1M which
Importance of the Distinction represents deficiency miller’s tax and manufacturer’s sales tax among
The omission or failure to comply with a mandatory provision renders other taxes for TY 1987. The miller’s tax was imposed on its sale of
invalid the act or proceeding while the omission or failure to follow a crude oil to UNICHEM. Upon CTA, it cancelled liability on
directory provision does not involve such consequence. The latter will manufacturer’s tax but upheld the liability for deficiency miller’s tax.
not invalidate the act or proceeding.
SPMC argues that it must be exempted from tax because the milled
products sold by the miller were actually exported as an ingredient or
Jurisprudence on Construction and Interpretation part of the manufactured article by the buyer or the manufacturer of the
milled products. It argued that since UNICHEM which bought SPMC’s
CIR v. LIQUIGAZ milled productions, which exported such, SPMC be exempted from
miller’s tax.
GR 215534, April 18, 2016
Issue: Is SPMC exempted from miller’s tax? – No.
Facts: Liquigaz was initially assessed deficiency withholding tax of
P23M which upon the receipt of Formal Letter of Demand (FLD) and Held: The language of the exempting clause of Section 168 of the 1987
FAN, the total was P24M. Liquigaz protested. In 2010, it received copy Tax Code was clear. The tax exemption applied only to the exportation
of FDDA which is P22M. of rope, coconut oil, palm oil, copra by-products and dessicated
coconuts, whether in their original state or as an ingredient or part of any
CTA ruled that the FDDA was void because it did not provide the details manufactured article or products, by the proprietor or operator of the
thus Liquigaz has no way of knowing what items were being considered factory or by the miller himself.
by CIR in making the assessment. CTA En Banc affirmed and found that
the FDDA reflected different amounts in the FLD/FAN. The language of the exemption proviso did not warrant the interpretation
advanced by SPMC. Nowhere did it provide that the exportation made
However, not all the deficiency assessments were cancelled out, thus by the purchaser of the materials enumerated in the exempting clause
the Withholding Tax on Compensation (WTC) must also be invalidated or the manufacturer of products utilizing the said materials was covered
because the FDDA did not provide for the facts on which the assessment by the exemption. Since SPMC's situation was not within the ambit of
was based. the exemption, it was subject to the 3% miller's tax imposed under
Section 168 of the 1987 Tax Code.
Issue: Does a void FDDA render the assessment void? – No.
SPMC’s proposed interpretation unduly enlarged the scope of the
Held: While it may be true that if the FDDA was void for failure to comply exemption clause. The rule is that the exemption must not be so
with requirement to state the facts which assessment was based this is enlarged by construction since the reasonable presumption is that
because an FDDA is not the only means that the final tax liability is the State has granted in express terms all it intended to grant and
fixed. that, unless the privilege is limited to the very terms of the statute,
the favor would be intended beyond what was meant.
While failure of the FDDA to state the law and facts on which it is based
will make it void, it does not state nor extend to the nullification of the Where the law enumerates the subject or condition upon which it
entire assessment. applies, it is to be construed as excluding from its effects all those not
expressly mentioned. Expressio unius est exclusio alterius. Anything
To recapitulate, a "decision" differs from an "assessment" and failure that is not included in the enumeration is excluded therefrom and a
of the FDDA to state the facts and law on which it is based renders the meaning that does not appear nor is intended or reflected in the very
decision void—but not necessarily the assessment. Tax laws may not language of the statute cannot be placed therein.
be extended by implication beyond the clear import of their language,
nor their operation enlarged so as to embrace matters not specifically The rule proceeds from the premise that the legislature would not have
provided made specific enumerations in a statute if it had the intention not to
restrict its meaning and confine its terms to those expressly mentioned.
GULF AIR COMPANY v. CIR The rule of expressio unius est exclusio alterius is a canon of restrictive
GR 182045, September 19, 2012 interpretation. Its application in this case is consistent with the
construction of tax exemptions in strictissimi juris against the taxpayer.
Principle of Legislative Approval by Re-enactment To allow SPMC's claim for tax exemption will violate these established
principles and unduly derogate sovereign authority.
As such, absent any showing that Revenue Regulations No. 6-66 is
inconsistent with the provisions of the NIRC, its stipulations shall be
upheld and applied accordingly. This is in keeping with our primary duty
PELIZLOY REALTY v. PROVINCE OF BENGUET
of interpreting and applying the law. Regardless of our reservations as
to the wisdom or the perceived ill-effects of a particular legislative GR 183137, April 10, 2013
enactment, the court is without authority to modify the same as it is the
exclusive province of the law-making body to do so. Ejusdem generis
Moreover, the validity of the questioned rules can be sustained by the Issue: On what can the province impose amusement tax?
application of the principle of legislative approval by re-enactment.
Under the aforementioned legal concept, “where a statute is susceptible Held: Section 140 of the Local Government Code expressly allows for
of the meaning placed upon it by a ruling of the government agency the imposition by provinces of amusement taxes on “the proprietors,
charged with its enforcement and the Legislature thereafter re-enacts
lessees, or operators of theaters, cinemas, concert halls, circuses, acquiring jurisdiction over the same. Tax refunds or tax credits much
boxing stadia, and other places of amusement.” like tax exemptions are strictly construed against the taxpayers, the
latter having the burden to prove strict compliance with the condition for
However, resorts, swimming pools, bath houses, hot springs, and tourist the grant of tax refund or credit. It was held that a premature filing of a
spots are not among those places expressly mentioned by Section 140 claim for refund or credit of input VAT before the CTA warrants a
of the LGC as being subject to amusement taxes. dismissal inasmuch as no jurisdiction is acquired by the tax court.
Thus, the determination of whether amusement taxes may be levied on In this case, Mirant Pagbilao filed its Petition for Review with the CTA
admissions to resorts, swimming pools, bath houses, hot springs, and just 15 days after it filed an administrative claim for refund with the
tourist spots hinges on whether the phrase ‘other places of amusement’ CIR. It should have waited for the lapse of the 120-day period provided
encompasses resorts, swimming pools, bath houses, hot springs, and by law within which the CIR shall grant or deny the application for refund.
tourist spots. It is indisputable that compliance with the 120-day waiting period is
mandatory and jurisdictional.
Under the principle of ejusdem generis, “where a general word or
phrase follows an enumeration of particular and specific words of the Fallo: CTA lacked jurisdiction to entertain Mirant Pagbilao’s judicial
same class or where the latter follow the former, the general word or claim as it was prematurely filed.
phrase is to be construed to include, or to be restricted to persons, things
or cases akin to, resembling, or of the same kind or class as those
specifically mentioned.”
MANDANAS v. EXECUTIVE SECRETARY
In the present case, the Court need not embark on a laborious effort at GR 199802, April 10, 2019
statutory construction. Section 131 (c) of the LGC already provides a
clear definition of ‘amusement places’. Interpretation of “Just Share” of LGUs
In the National Taxes
Indeed, theaters, cinemas, concert halls, circuses, and boxing stadia are
bound by a common typifying characteristic in that they are all venues Article X, Section 6 of the Constitution provides:
primarily for the staging of spectacles or the holding of public shows, Local government units shall have a just share, as determined
exhibitions, performances, and other events meant to be viewed by an by law, in the national taxes which shall be automatically
audience.
released to them.
Accordingly, ‘other places of amusement’ must be interpreted in light of
the typifying characteristic of being venues “where one seeks admission To carry out this provision, the Congress enacted LGC and Section 284
to entertain oneself by seeing or viewing the show or performances” or to carry out such mandate.
being venues primarily used to stage spectacles or hold public shows,
exhibitions, performances, and other events meant to be viewed by an Section 284, Local Government Code
audience. Local government units shall have a share in the national internal
revenue taxes based on the collection of the third fiscal year preceding
Considering these, it is clear that resorts, swimming pools, bath houses, the current fiscal year as follows:
hot springs and tourist spots cannot be considered venues primarily (a) On the first year of the effectivity of this Code, thirty percent
“where one seeks admission to entertain oneself by seeing or (30%);
viewing the show or performances”. While it is true that they may be (b) On the second year, thirty-five percent (35%); and
venues where people are visually engaged, they are not primarily (c) On the third year and thereafter, forty percent (40%).
venues for their proprietors or operators to actively display, stage or
present shows and/or performances. Issue: Can Congress limit the just share of the LGUs on the national
taxes by limited it to national internal revenue taxes?
Thus, resorts, swimming pools, bath houses, hot springs and tourist
spots do not belong to the same category or class as theaters, Verba Legis Non Est Recedendum
cinemas, concert halls, circuses, and boxing stadia. It follows that The phrase national internal revenue taxes engrafted in Section 284 is
they cannot be considered as among the ‘other places of undoubtedly more restrictive than the term national taxes written in
amusement’ contemplated by Section 140 of the LGC and which Section 6 of the Constitution. As such, Congress has actually
may properly be subject to amusement taxes. departed from the letter of the 1987 Constitution stating that national
taxes should be the base from which the just share of the LGU comes.
Such departure is impermissible. Verba legis non est recedendum

ALTA VISTA GOLF v. CITY OF CEBU (from the words of a statute there should be no departure). Equally
GR 180235, January 20, 2016 impermissible is that Congress has also thereby curtailed the guarantee
of fiscal autonomy in favor of the LGUs under the 1987 Constitution.
Amusement Tax Coverage espoused in Pelizloy Realty Case
Applies; Golf Course Not Covered We reiterate that Congress, in limiting the base amount to national
internal revenue taxes, gravely abused its discretion. What the
Applying ejusdem generis, a golf course cannot be considered a place Constitution extended to Congress was the power to determine, by law,
of amusement, people do not enter a golf course to see or view a show the just share. The Constitution did not empower Congress to
or performance. People go to a golf course to engage in a sports activity determine the just share and the base amount other than national taxes.
– golf. Thus, there is no basis for singling out golf courses for
amusement tax purposes. Otherwise this would be in contravention with The respondents' construction of Section 6, Article X of the Constitution
the principle of uniformity of taxation. can lead to empowering Congress to change the base amount despite
the Constitution having already pegged it to national taxes.
Thus, the provision in the Cebu City Tax Ordinance imposing
amusement tax on golf courses is deemed null and void. Interpretation Free From Constitutional
Infirmity is to be Preferred
CIR v. MIRANT PAGBILAO We should remember that between two possible interpretations one of
which will be free from constitutional infirmity and the other tainted by
GR 179115, September 26, 2012
such grave defect, the former is to be preferred. A construction that will
save rather than one that will affix the seal of doom certainly commends
Mandatory 120-day period strictly construed itself.
Mirant Pagbilao’s failure to observe the 120-day period under the law Moreover, it is a rule in statutory construction that every part of the law
involving judicial claims is fatal. It operates to bar the tax court from must be interpreted with reference to the context, i.e., every part of the
law must be considered together with the other parts, and kept III. Payment
subservient to the general intent of the whole enactment. The law must Payment by the taxpayer of the tax is the compliance with the tax laws
not be read in truncated parts; its provisions must be read in relation to
including whatever remedies that are available to him under the law.
its entirety. The particular words, clauses and phrases should not be
studied as detached and isolated expressions, but the whole and every
part of the statute must be considered in fixing the meaning of any of its IV. Refund
parts and in order to produce a harmonious whole. Refund is the process for the return to the taxpayer of previous,
erroneous, excessive or illegal collection of taxes.
Accordingly, between the Court's construction that is consistent with the
constitutional policy on local autonomy and decentralization, on one
hand, and the OSG's construction that seemingly rejects the
DIAZ v. SECRETARY OF FINANCE
constitutional policy, the former is to be desired.). GR 193007, July 19, 2011
Indeed, Section 6, Article X of the Constitution expressly states that Illustration of the Stages of Taxation – VAT
national taxes shall constitute the base amount from which the just share
shall be computed. Without the Constitution itself excluding such VAT is levied, assessed, and collected, according to Section 108, on the
national taxes from the computation of the base amount, the rule will be gross receipts derived from the sale or exchange of services as well as
that such national taxes are to be included. from the use or lease of properties.
VAT on tollway operations is not really a tax on the tollway user, but on
the tollway operator. Under Section 105 of the Code, VAT is imposed on
any person who, in the course of trade or business, sells or renders
V. TAXES services for a fee. In other words, the seller of services, who in this case
is the tollway operator, is the person liable for VAT. The latter merely
shifts the burden of VAT to the tollway user as part of the toll fees. For
A. Stages of Taxation this reason, VAT on tollway operations cannot be a tax on tax even if toll
fees were deemed as a "user's tax."
Stages of Taxation
1. Levy VAT is assessed against the tollway operator's gross receipts and not
2. Assessment and Collection necessarily on the toll fees. Although the tollway operator may shift the
3. Payment VAT burden to the tollway user, it will not make the latter directly liable
4. Refund for the VAT. The shifted VAT burden simply becomes part of the toll fees
that one has to pay in order to use the tollways.
ABAKADA v. ERMITA
GR 168056, September 1, 2005 B. Definition, Nature and Characteristics of Taxes
The power of the State to make reasonable and natural classifications Tax, Defined
for the purposes of taxation has long been established. Whether it A tax is an enforced contribution, generally payable in money,
relates to the subject of taxation, the kind of property, the rates to be proportionate in character, levied on persons, property or the exercise
levied, or the amounts to be raised, the methods of assessment, of a right or privilege by the state having jurisdiction, through its
valuation and collection, the State’s power is entitled to presumption of legislature for public purpose and paid at regular periods or intervals
validity. (Cooley).
As a rule, the judiciary will not interfere with such power absent a clear Nature of Taxes
showing of unreasonableness, discrimination, or arbitrariness 1. They are impositions inherent in the state
2. Their imposition may be made only by the legislative
RA 9337 aims to restructure the value-added tax (VAT) system by department (as a rule)
broadening its based and raising the rate so as to generate more 3. Subject to inherent and constitutional limitations
revenues for the government that can assuage the economic
predicament that our country is now facing. Characteristics or Elements of a Tax
1. It is a forced charge, imposition, or contribution. It is in no way
All the revenue bills were intended to levy taxes and raise funds for the dependent upon the will, or contractual assent, express or
government. implied, of the person taxed.
2. Generally payable in money. It is a pecuniary burden although
I. Levy the law may provide for payment in kind.
3. It is proportionate in character.
Levy is also known as imposition of tax. This stage involves the 4. Levied on persons, property, or exercise of a right or privilege.
determination by the Congress of the subject and object of taxation as 5. Levied by the state having jurisdiction.
well as the rate. 6. Levied by the legislature
7. Levied and collected for a public purpose
II. Assessment and Collection 8. Paid at regular periods or intervals
Assessment refers to the determination of the amount of tax to be paid
while Collection prescribes the means, process and the method of C. Requisites of a Valid Tax
implementing the tax law for the purpose of satisfying the tax obligation.
It is the actual effort in obtaining payment of the tax.
Requisites for a Valid Tax
1. It should be for a public purpose
CHAVEZ v. ONGPIN
2. The rule of taxation should be uniform
186 SCRA 331, GR 76778, June 6, 1990
3. That either the person or property taxed be within the
jurisdiction of the taxing authority
Basis of Collection and Fiscal Adequacy
4. That the assessment and collection of certain kinds of taxes
guarantees against injustice to individuals especially by way
Certainly, to continue collecting real property taxes based on valuations
of notice and opportunity for hearing be provided.
arrived at several years ago, in disregard of the increases in the value
5. The tax must not impinge on the inherent and constitutional
of real properties that have occurred since then, is not in consonance
limitations on the power of taxation
with a sound tax system. Fiscal adequacy, which is one of the
characteristics of a sound tax system requires that sources of revenues
must be adequate to meet government expenditures and variations.
D. Kinds of Taxes by adding the tax to the selling price of the imported article or finished
product .
I. As to Object [3] Compensating tax is an excise tax payable by all persons who
1. Personal, capitation or poll tax – this refers to the tax import articles where in the course of business or not.
imposed uniformly on all residents whether citizen or not, like
a community tax. Held: Thus, given the tax exemption in PLDT’s franchise being limited
2. Property tax – this is a tax imposed on a property. only to direct taxes the following items could not included in the
3. Privilege or excise tax – this is a tax imposed upon the exemptions this is because the franchise is not all encompassing to
performance of an act, the enjoyment of a privilege or the embrace indirect taxes.
engaging in an occupation (income tax, estate tax, sales tax,
etc.) Excise tax are imposed on the production, sale or
consumption of specific goods (CIR v. San Miguel, 2017). Direct Tax Indirect Tax
The burden of taxation falls The burden of taxation may be
II. As to Burden or Incidence directly upon the taxpayer and shifted or transferred to others.
1. Direct Tax – these are taxes that are extracted from the very may not be shifted to others.
person who it is intended or desired, should pay them. They Usually involves personal taxes, Usually involves business taxes
are imposition for which a taxpayer is directly liable on the such as income tax, donor’s tax, due like value-added tax,
transaction or business he is engaged in. estate tax, etc. documentary stamp tax, etc.
a. Income Tax
b. Estate Tax
c. Donor’s Tax
III. As to Tax Rates
2. Indirect Tax – these are taxes wherein the liability for the 1. Specific tax – it is based on a certain measure such as
payment of the tax falls on one person but the burden thereof weight, volume capacity or any other physical unit of
can be shifted to another person. They are those demanded measurement.
on the first instance, from, or are paid by one person in the 2. Ad valorem tax – those taxes imposed based on a specific
expectation and intention that he can shift the burden on proportion of the value fixed by law or as appraised such as
someone else, not as a tax, but as a part of purchase price. the selling price or other specified value like sugar and
cigarettes
3. Mixed taxes – or compound taxes, are those which impose
CIR v. PLDT both specific and ad valorem
514 Phil. 255, GR 140230, December 15, 2005
This case involves the question, whether or not PLDT, given the tax
IV. As to Purposes
component of its franchise, is exempt from paying VAT, compensating 1. General or Fiscal – also known as revenue purpose. These
taxes, advance sales taxes and internal revenue taxes on its are the taxes imposed for the purpose of raising public funds
importations. for the service of the government.
2. Special, Regulatory or Sumptuary – taxes imposed
Direct Tax from Indirect Tax primarily for the regulation of useful or non-useful occupation
Based on the possibility of shifting the incidence of taxation, or as to who or enterprises, to promote the general welfare in the
shall bear the burden of taxation, taxes may be classified into either protection of health safety or morals, and secondarily only for
direct tax or indirect tax. the purpose of raising revenue.
In context, direct taxes are those that are exacted from the very person V. As to Scope or Authority
who, it is intended or desired, should pay them; they are impositions for 1. National internal revenue taxes –levied by the Congress
which a taxpayer is directly liable on the transaction or business he is that find application all throughout the Philippines.
engaged in. 2. Local real property tax, municipal taxes – taxes that are
levied by local government units that are applied and enforced
On the other hand, indirect taxes are those that are demanded, in the only within the territorial boundaries of the imposing local
first instance, from, or are paid by, one person in the expectation and government unit.
intention that he can shift the burden to someone else.
Stated elsewise, indirect taxes are taxes wherein the liability VI. As to Graduation
for the payment of the tax falls on one person but the burden thereof can 1. Progressive or graduated taxes – are those that increase as
be shifted or passed on to another person, such as when the tax is the income of the taxpayer increases.
imposed upon goods before reaching the consumer who ultimately pays 2. Regressive – are those that decrease as the income of the
for it. When the seller passes on the tax to his buyer, he, in effect, shifts taxpayer increases.
the tax burden, not the liability to pay it, to the purchaser as part of the 3. Proportionate – are those which increase or decrease in
price of goods sold or services rendered. relation to the tax bracket.
To put the situation in graphic terms, by tacking the VAT due E. Tax from Other Exactions
to the selling price, the seller remains the person primarily and legally
liable for the payment of the tax. What is shifted only to the intermediate
buyer and ultimately to the final purchaser is the burden of the tax. I. Tax from Tariff
Stated differently, a seller who is directly and legally liable for
payment of an indirect tax, such as VAT, is not necessarily the person Tax Tariff
who ultimately bears the burden of the same tax. It is the final purchaser All embracing term to include Understood to mean a kind of
or end-user of such goods or services who, although not directly and various kinds of enforced tax imposed on articles which
legally liable for the payment thereof, ultimately bears the burden of the contributions imposed upon are traded internationally
tax. persons for the attainment of
public purposes
The following were considered by the court as Indirect Taxes May be levied by the national or Always levied by the national
[1] VAT is an indirect tax the amount of which may be shifted or passed local government government
on to the buyer, transferee or lessee of the goods. May be levied upon domestic or Generally imposed only upon
imported products imported or exported articles
[2] Advance sales tax has also attributes of an indirect tax because the Usually collected by BIR or by Collected by Bureau of Customs
tax-paying importer of goods for sale or raw materials to be processed the LGU
into merchandise can lay the economic burden of tax on the purchaser
II. Tax from Toll

Basis
Power of taxation Police power
Tax Toll
Amount
Purpose
Practically unlimited Limited to the cost of the license
Imposed under taxing power of Collected by private tollway
and the expenses of police
the government principally for operators are reimbursement for
surveillance and regulation
the purpose of raising revenues the costs and expenses
to fund public expenditures incurred in the construction, Time of Payment
maintenance and operation of Taxes are normally paid after License fees are paid before
the tollways as well as to assure commencement of the business
them a reasonable margin of Effect of Non-Payment
income. Does not make business illegal Makes business illegal
Surrender
Can be also be collected by the Cannot be surrendered except May be surrendered with or
government. for lawful consideration without consideration
Exemptions
(Diaz v. Secretary Finance, Local governments may grant Local government cannot
2011) exemptions from payment of provide for exemptions from the
local taxes payment of license fees.
Basis
Power of taxation Imposed under general IV. Tax from Special Assessment
principles of no unjust
enrichment
Subject and Object Special Assessments
It is a local imposition upon a property for the payment of the cost of
Cover practically all subjects Applies only to actual users of
public improvements in its immediate vicinity and levied with reference
and objects the facility
to special benefits to the property assessed.
Amount
Unlimited to the amount Toll fees are limited to the
Tax Special Assessment
recovery of expenditures
Subject
incurred for the construction of
the facility being used Levied on land, persons, Levied on land
property, income or business,
Imposing Authority
etc.
Imposed by the sovereign Imposed by private entity
Amount
Practically unlimited Limited only to the recovery of
Time of Payment
the expenditures for
Taxes are normally paid after Paid either before or after the
improvement
commencement of the business use of the facility.
Liability
Personal liability of the Some special assessment in
taxpayer some states cannot be made a
Effect of Non-Payment
personal liability of the person
Failure to pay taxes does not Non-payment of toll fees may
assessed
prohibit a person from prohibit the person from using
continuing with his business the facility
Basis
although the state may impose
suspension or closure as a Necessity and partially on Solely on benefits
penalty for failure to pay taxes benefits
Surrender Application
Cannot be surrendered except May be waived with or without General application Special application to certain
for lawful consideration consideration time and place
Exemptions
Being lifeblood of the Can be surrendered with or
DIAZ v. SECERTARY OF FINANCE government, it cannot be without consideration
GR 193007, July 19, 2011 surrendered without lawful
consideration
Toll fees collected on tollways are not taxes
V. Tax from Debt
Toll fees paid by the public to tollway operators for use of the tollways,
are not taxes in any sense. A tax is imposed under the taxing power of
the government principally for the purpose of raising revenues to fund Tax is Different from Debt
public expenditures. Toll fees, on the other hand, are collected by private Debts may be due to the government in its corporate capacity while tax
tollway operators as reimbursement for the costs and expenses incurred is due to the government in its sovereign capacity. Thus, tax cannot be
in the construction, maintenance and operation of the tollways, as well subject to compensation.
as to assure them a reasonable margin of income. Although toll fees
are charged for the use of public facilities, therefore, they are not Tax Debt
government exactions that can be properly treated as a tax. Taxes may Basis
be imposed only by the government under its sovereign authority, toll Based on law Based on contract or judgment
fees may be demanded by either the government or private individuals
or entities, as an attribute of ownership. Failure to Pay
May result to imprisonment There is no imprisonment for
III. Tax from License Fee non-payment of debt
Mode of Payment
Generally payable in money Payable by money, property or
Tax License Fee service
Purpose
Imposed for revenue or for Collected for regulatory Assignability
general public purposes purposes Not assignable Assignable
Payment
Not subject to compensation or Subject to compensation or set-
set-off off
Interest
No interest unless delinquent Draws interest if stipulated or
delayed
Authority
Imposed by public authority Can be imposed by private
individuals
Prescription
Provided for in the NIRC Provided for in the Civil Code
VI. Tax from Compromise

.
Tax Compromise
Unilateral obligation by the A bilateral contract where
taxpayer to pay taxes to the parties though mutual
state agreement make reciprocal
concessions to avoid litigation
or put an end to one
commenced
Governed by NIRC, LGC and Usually governed by the Civil
other tax laws Code (Title XIV on Compromise
and Arbitrations)
Note: The law grants BIR power to enter into tax compromises.
VII. Tax from Penalty

.
Tax Penalty
It is collected for the raising It is collected with the aim of
revenue for the operations of deterring some kind of
the government undesirable behavior
Failure to pay tax will give rise The possible consequence of
to either civil or criminal penalty failure to pay tax which can
either be civil or criminal in
nature
(e.g. Penalties for Late Filing of

Tax Returns, such as
surcharge, interest and even
imprisonment or fine).
F. Tax Pyramiding
Tax Pyramiding
It is the practice of imposing a tax upon another tax. It is a situation
where some or all of the stages of distribution of goods or services are
taxed ,with the accumulation borne by the final consumer. There is tax
pyramiding when sales tax are applied to both inputs and outputs, thus
shifting the tax burden to the ultimate consumer. It has no basis in law.
It has been rejected, since 1922, by the Supreme Court, the legislature
and tax authorities. It is prohibited that a taxpayer cannot be compelled
to pay a tax on the tax itself.
PEOPLE v. SANDIGANBAYAN
504 Phil. 407, GR 152532, August 16, 2005
A tax should not be imposed upon another tax.
In this case, the Supreme Court agrees that the inclusion of the ad
valorem tax in the tax base would yield a circuitous manner of
computation that will never in just one ad valorem tax properly
chargeable against a taxpayer.
Tax pyramiding has since 1922 rejected by this Court, the legislature
and our tax authorities. The intent behind the law is clearly to obviate a
tax imposed upon another tax.
Therefore, it is appropriate to deduct the ad valorem tax from the tax

base upon which it is computed
END OF FIRST EXAM COVERAGE
Income Taxes are Direct Taxes

INCOME TAXATION The impact and incidence of taxation falls on the person who is mainly
liable to pay the tax. It is almost impossible to imagine passing the
burden of income taxation to another person. Income tax is considered
as an annual tax.
PRELIMINARIES
III. FEATURES OF THE PHILIPPINE INCOME TAX
I. INCOME TAXATION LAW
Income Taxation, Defined Basic Features of Philippine Income Taxation
It is branch of taxation which provides for the statutory and 1. It is a direct tax
administrative system of imposing and collecting a tax on the yearly 2. It is progressive in character
profits arising from property, professions, trades and offices. 3. Its coverage is comprehensive
4. It has adopted a semi-schedular and semi-global tax system.
Nature of Income Taxation
Income taxation is in the nature of an excise transaction system, or 1. Direct Tax
the taxation on the exercise of a privilege, the privilege to earn yearly Direct tax as a feature of income tax law means that the burden of the
profits from various sources. income tax could not be shifted or transferred by the income taxpayer to
another person.
II. INCOME TAX SYSTEMS
2. Progressive
Under the progressive tax system of taxation, more popularly known as
Income Tax System the progressive system of taxation, the tax rate increases with the tax
The income tax system is the manner of implementing income tax laws, base. The tax liability increases much faster than the income in the tax
they can be classified into: base.
1. As to the manner of imposition
a. Global Tax System 3. Comprehensive
b. Schedular Tax System The income tax is imposed on practically all forms of income irrespective
c. Semi-schedular or Semi-global Tax System of nature, whether compensation, from exercise of the professions, from
2. As to the applicable tax law trade or business, or from use of capital. There is no distinction as to
a. National Internal Revenue Code, as amended taxability of the original of income. It does not matter whether it is from
b. Special Laws (e.g. Customs) an illegal or from a legal source, it shall be taxable.
3. As to the tax rate
a. Progressive Tax System In Section 32, gross income means “income derived from whatever
b. Regressive Tax System sources” which means that regardless of the source of the income,
c. Proportionate Tax System whether earned legally or illegally, it will still form part of taxable income.
Global Tax System 4. Semi-schedular and Semi-Global
It is a system employed where the tax system views indifferently the tax As stated earlier, the income taxation system applied in the Philippines
base and generally treats in common all categories of taxable income of applies both kinds of tax systems where corporations are usually taxed
the individual (Tan v. Del Rosario 237 SCRA 324). It prescribed therein in a global tax system while individuals are tax in a schedular tax system.
a unitary but progressive rate for the taxable aggregate income and
flat rates for certain passive incomes derived by individuals.
IV. CRITERIA IN IMPOSING PHILIPPINE INCOME TAX
Schedular Tax System
It is a system employed where the income tax treatment varies and is Principles in Imposing Income Tax
made to depend on the kind or category of taxable income of taxpayer.
It is a system which itemizes the different incomes and provides for 1. Citizenship or Nationality Theory – the country where the
varied percentages of taxes, to be applied thereto. income earner is a citizen is the situs of taxation because a
citizen is given protection by his country no matter where he
Global Tax System Schedular Tax System is found no matter where he earns his income. He is therefore
There is a unitary or single tax There are different tax rates obligated to support that country, in exchange for the
rate protection that he receives.
There is no need for There are different categories of
classification as all taxpayers taxable income 2. Residence or Domiciliary Theory – the country where the
are subject to a single rate income earner resides is the situs of taxation for the reason
Usually applied to corporations Usually used in the income that it is where he is given protection, he must support it.
taxation of individuals
3. Source – the country which is the source of the income is
Semi-schedular and Semi-global Tax System where the activity that produced income took place. This is the
This is the application of both global and schedular tax system. The best situs of taxation and not the place where the money then had
example is the NIRC itself, because it has adopted a global system for originated. The money may come from one place but if that is
corporations and the schedular system of taxation for individuals. Thus, not where the activity that produced the income, then it is not
the NIRC is sometimes referred to as the semi-schedular and the semi- the source of income.
global system.
The apparent intent of current amendatory laws to the income tax law is V. TYPES OF PHILIPPINE INCOME TAX
to maintain, by and large, the global treatment on corporations and to
increasingly shift the income tax system toward the schedular approach 1. Gross Income Tax
in the income taxation of individual taxpayers (Tan v. Del Rosario). This type of gross income taxation occurs where the tax base is the total
gross income of an individual or corporation during the taxable year
The NIRC is patterned from the Internal Revenue Code of the United without any deductions whatsoever.
States. Thus, Supreme Court has ruled that in case of doubt, one of the
aids in interpreting tax laws are USSC pronouncements relative to their 2. Net Income Tax
income taxation. The taxpayer is allowed to claim for the deductions (different from
exclusions), deductions are usually business expenses.
3. Presumptive Income Tax Computation under Short Period

This is allowed in the context of capital gains taxation, especially in the
exchanges involving real property where the capital gains tax are SEC. 47. Final or Adjustment Returns for a Period of Less than
subjected to a 6% final tax on the gross selling price or the fair market Twelve (12) Months. -
value and not the actual value thereof, which is the presumed gain.
(A) Returns for Short Period Resulting from Change of
4. Composite Tax Accounting Period. - If a taxpayer, other than an individual, with
It is a tax consisting of a series of quasi-personal taxes, assessed on the the approval of the Commissioner, changes the basis of computing
particular source of income with a superimposed personal tax on the
net income from fiscal year to calendar year, a separate final or
income as a whole.
adjustment return shall be made for the period between the close
of the last fiscal year for which return was made and the following
5. Unitary Tax
Incomes are arranged according to source. The separate items are December 31. If the change is from calendar year to fiscal year, a
added together and the rate applied to the resulting total income. separate final or adjustment return shall be made for the period
between the close of the last calendar year for which return was made
and the date designated as the close of the fiscal year. If the change
VI. TAXABLE PERIOD is from one fiscal year to another fiscal year, a separate final or
adjustment return shall be made for the period between the close of
Taxable Year the former fiscal year and the date designated as the close of the new
This means the calendar year, or the fiscal year ending during such fiscal year.
calendar year upon the basis of which the net income is computed under
this Title. It is important to know the meaning of taxable period because (B) Income Computed on Basis of Short Period. - Where a
the taxable income shall be computed upon the basis of the taxpayer’s separate final or adjustment return is made under Subsection (A) on
annual accounting period. account of a change in the accounting period, and in all other cases
where a separate final or adjustment return is required or permitted
NIRC by rules and regulations prescribed by the Secretary of Finance, upon
SECTION 43 recommendation of the Commissioner, to be made for a fractional
part of a year, then the income shall be computed on the basis of the
General Rule. – The taxable income shall be computed upon the period for which separate final or adjustment return is made.
basis of the taxpayer's annual accounting period (fiscal year or
calendar year, as the case may be) in accordance with the method Authority to Terminate the Taxable Period
of accounting regularly employed in keeping the books of such When it shall come to the knowledge of the Commissioner that taxpayer:
taxpayer, but if no such method of accounting has been so (a) Is retiring from business subject to tax, or
employed, or if the method employed does not clearly reflect the (b) Intending to leave the Philippines, or
income, the computation shall be made in accordance with such (c) To remove his property, hide or concealing, or
method as in the opinion of the Commissioner clearly reflects the (d) Performs any act to obstruct proceedings to collect tax or to
income. If the taxpayer's annual accounting period is other than render the same totally or party ineffective
a fiscal year, as defined in Section 22(Q), or if the taxpayer has no Then the Commissioner of Internal Revenue shall have the power to
annual accounting period, or does not keep books, or if the terminate the taxable period.
taxpayer is an individual, the taxable income shall be computed
on the basis of the calendar year. VII. KINDS OF TAXPAYERS
Different Taxable Periods for Income Taxation
1. Calendar Period Income Taxpayers
2. Fiscal Period Persons who derive taxable income are considered income taxpayers.
3. Short Period • Taxpayers means any person subject to tax under this Title
(Tax on Income) [Section 22(N)].
[1] Calendar Period • Person for tax purposes is means to be an
This refers to the twelve (12) consecutive months starting on January 1 1. Individuals
and ending on December 31. Note that individual taxpayers are only 2. Trust
allowed to use this calendar period. 3. Estate
4. Corporation
[2] Fiscal Period
The term fiscal year means an accounting period of twelve (12) months Note that in taxation, these entities (estate and trust) are considered as
ending on the last day of any month other than December. In fiscal persons for the income of taxation. Though they do not have juridical
period corporations (as defined under Section 22) may use the fiscal personally if strictly speaking they are considered as persons for the
year period of taxable period. purposes of taxation.
[3] Short Period A. Individuals

Simply, a short period is a taxable period of less than twelve (12) months They are those taxpayers who are of flesh and blood, or considered as
the following are the instances: natural persons. There is a need to know the classification of individual
1. A corporation changes its tax, where a short period tax return income taxpayers because they would differ as to the tax rates and as
shall be filed depending on when it will shift is accounting to the exclusions.
periods.
2. A separate final or adjustment return is required or permitted
to be made for a fractional part of the year.
I. Citizens
They are those who are the citizens of the Philippines either they are
Change of Accounting Period natural-born Filipino or naturalized in accordance with the law. For the
purposes of classification of citizens they are:
SEC. 46. Change of Accounting Period. - If a taxpayer, other
1. Resident Citizen
than an individual, changes his accounting period from fiscal year to
They are citizens of the Philippines who stay in the Philippines
calendar year, from calendar year to fiscal year, or from one fiscal
without the intention of transferring their physical presence
year to another, the net income shall, with the approval of the abroad whether to stay permanently or temporarily.
Commissioner, be computed on the basis of such new accounting
period, subject to the provisions of Section 47. They are taxable on all income derived from sources within
and without the Philippines (Section 23).
2. Non-resident Citizen Income from Abroad

Section 22(E) (3) A citizen of the Philippines who works and derives income from
abroad and whose employment thereat requires him to be physically
(E) The term 'nonresident citizen' means; present abroad most of the time during the taxable year.
(1) A citizen of the Philippines who establishes to the satisfaction of Permanent Employees Income from Abroad
the Commissioner the fact of his physical presence abroad with a The Filipino Citizen is The Filipino Citizen is abroad
definite intention to reside therein. permanently abroad because of most of the time during the
employment. taxable year because of his
(2) A citizen of the Philippines who leaves the Philippines during the employment.
taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis. New Rule on Taxation of Nonresident Citizens
Article by Yap-Balmores, Senior Tax Director, SGV & Co., June 2012
(3) A citizen of the Philippines who works and derives income from
abroad and whose employment thereat requires him to be physically Section 22(E)(3) provides that a person is considered a nonresident
present abroad most of the time during the taxable year. citizen who is a citizen who works and derives income from abroad and
whose employment thereat requires him to be physically present
(4) A citizen who has been previously considered as nonresident abroad most of the time during the taxable year.
citizen and who arrives in the Philippines at any time during the
taxable year to reside permanently in the Philippines shall likewise RR 1-79: “Most of the Time”
be treated as a nonresident citizen for the taxable year in which he Section 2. Who are considered as nonresident citizens. –
arrives in the Philippines with respect to his income derived from The term "non-resident citizen" means one who establishes to the
sources abroad until the date of his arrival in the Philippines. satisfaction of the Commissioner of Internal Revenue the fact of his
physical presence abroad with the definite intention to reside therein
and shall include any Filipino who leaves the country during the
(5) The taxpayer shall submit proof to the Commissioner to show his
taxable year as:
intention of leaving the Philippines to reside permanently abroad or
to return to and reside in the Philippines as the case may be for (a) Immigrant — one who leaves the Philippines to reside abroad as
purpose of this Section. an immigrant for which a foreign visa as such has been secured.
(1) Passive Definition (b) Permanent employee — one who leaves the Philippines to
(1) A citizen of the Philippines who establishes to the satisfaction of reside abroad for employment on a more or less permanent basis.
the Commissioner the fact of his physical presence abroad with a
definite intention to reside therein. (c) Contract worker — one who leaves the Philippines on account
of a contract of employment which is renewed from time to time within
This is a passive definition of a non-resident citizen, as someone who is or during the taxable year under such circumstances as to require
able establish of this physical presence and intention to reside abroad. him to be physically present abroad most of the time during the
taxable year. To be considered physically present abroad most
(2) Permanent Immigrants or Employees of the time during the taxable year, a contract worker must have
been outside the Philippines for not less than 183 days during
(2) A citizen of the Philippines who leaves the Philippines during the
such taxable year.
taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.
Any such Filipino shall be considered a non-resident citizen for such
taxable year with respect to the income he derived from foreign
There are two considerations sources from the date he actually departed from the Philippines.
1. Immigrants who are Filipinos who leave the Philippines in
order to permanently reside abroad. (e.g. green card holder). A Filipino citizen who has been previously considered as a non-
2. Employment on a Permanent Basis as to those who leaves resident citizen and who arrives in the Philippines at any time during
the Philippines to permanently reside abroad as an immigrant the taxable year to reside therein permanently shall also be
because his permanent employment requires him to stay considered a non-resident citizen for the taxable year in which he
abroad. arrived in the Philippines with respect to his income derived from
sources abroad until the date of his arrival.
Andres operated a business in the Philippines, he already had plans
of leaving the country to seek permanent employment in Japan. He In Section 2, of RR 1-79, the term most of the time means
received news that his application and visa for permanent residency presence outside of the Philippines for not less than 183 days during the
in Japan was approved. In the middle of the year, precisely on July 1 taxable year. This definition of most of the time under RR-179 has been
Andres left the Philippines for good. used in certain ruling finding that the non-residency of a Filipino and for
the eligibility for tax exemption were determined on the basis of physical
Determine taxability of (1) business income and (2) compensation residence. The place where salary was paid was deemed immaterial
income earned in Japan beginning July. When is Andres considered in determining residency based on the underlying principle that situs of
a non-resident alien? taxation in the case of personal services is determined by the place
where the services are rendered.
Revenue Regulation 1-79
(1) As to the business in the Philippines, the income is taxable because However, based on a recent BIR ruling, it appears that looking only at
the source of the income is the Philippines and a non-resident alien is the 183-day rule is not enough:
obliged to pay income taxes for sources within the Philippines.
BIR RULING 517-2011
(2) As to the compensation income earned in July, there is a need to “Employment Thereat”
determine when did Andres become a non-resident alien. The RR would
instruct that it begins from the time taxpayer actually departed from BIR held that a local company’s employees (who were
the Philippines. engineers) are assigned to render services abroad do not qualify as
“nonresident citizens” and were treated as resident citizens. Their
Therefore, since January to July 1 Andres is taxable as resident citizen compensation income from their assignment abroad, where such
after that Andres will be considered as a non-resident citizen, who as a engineers are present in the foreign country most of the time during the
non-resident citizen, is only taxable for sources of income within the taxable year (even though more than 183 days), are made subject to
Philippines. Therefore, the compensation income earned by Andres in Philippine income tax and consequently to withholding tax.
Japan is not taxable under Philippine jurisdiction.
The domestic employer sends its engineers to various countries for a Only residents citizens are taxable
maximum period of 214 days per calendar year. While working overseas on their income within and
these engineers remain on the Philippine payroll. without the Philippines.
BIR held that the engineers cannot qualify because the phrase used Balikbayan
“employment thereat” means that the individual must be employed by (4) A citizen who has been previously considered as nonresident
such country. It ruled that the salaries were paid by local company citizen and who arrives in the Philippines at any time during the
whether they were in the Philippines or on foreign assignment. Their taxable year to reside permanently in the Philippines shall
temporary assignment does not make them employees of the foreign
likewise be treated as a nonresident citizen for the taxable year in
companies for which they rendered service.
which he arrives in the Philippines with respect to his income derived
from sources abroad until the date of his arrival in the Philippines.
Effect of Ruling: It is the entity who holds the employment contract and
pays the payroll costs that were considered material.
Two Views as to Taxability as Nonresident
Instructor’s Comment: As to income he receives abroad prior to arrival in the Philippines,
• Disregarded the 183-day rule. suppose that the nonresident taxpayer arrived in the middle of the year,
• Defined “employment thereat” Meaning that it said there and what is the tax treatment?
employment contract and that said contract is abroad. 1. [Dean Quibod] For the entire taxable year, one will be
considered as a non-resident citizen, but the following year
• The ruling disregard rule on situs of taxation.
one shall be considered as a resident citizen. This is based
on the need to show one’s intention under Section 23(E)(5).
BIR RULING 305-2016
2. [Atty. Donalvo] His income abroad prior to the date of his
In this case this involved a situation where a government employee who
arrival is not yet taxable, the moment the taxpayer arrives then
was on assignment abroad for three years was held to be a resident
he shall be treated as a resident citizen. This is based on the
citizen for tax purposes, and as such, subject to tax on her worldwide
last sentence “until the date of his arrival in the Philippines.”
income. The BIR emphasized the temporary nature of the transfer
(secondment) and the continuing employer-employee relationship of
the employee with the Philippine employer. II. Aliens
What also is important to emphasized is that there was a Memorandum Simply put, aliens are not citizens of the Philippines. They are those who
of Agreement where the individual remained an employee of the have not acquired Philippine Citizenship.
government agency during the period of secondment but was only
considered to be on leave without pay. The government agency to pay [1] Resident Aliens
for the contributions during the secondment. The term 'resident alien' means an individual whose residence is within
the Philippines and who is not a citizen thereof [Section 22(F)].
Clearly, the person cannot be considered as a non-resident alien,
therefore his income that was received in the secondment shall then be Under the Revenue Regulations, a resident alien is:
subject to income tax even if abroad because the employee does not (a) An alien actually present in the Philippines who is not a mere
qualify as a non-resident citizen. In addition, the individual did not have transient or sojourner.
any intention to reside in the foreign country either as an immigrant or (b) Lives in the Philippines and has no definite intention as to his
on a permanent basis to make one a non-resident citizen. or her stay
(c) One who comes to the Philippines for a definite purpose which
NOTE: Given that there is still NO SC RULING, it is safer to stick with for its nature than an extended stay may be necessary for its
the provisions of the law, and just cite the BIR Ruling for reference. accomplishment and to the end the alien makes his home
temporarily in the Philippines. (e.g. NGO workers)
3. Overseas Contract Workers and Seamen
Section 23 (C) [2] Non-Resident Aliens
The term nonresident alien means an individual whose residence is
An individual citizen of the Philippines who is working and deriving not within the Philippines and who is not a citizen thereof. [Sec. 22(G)].
income from abroad as an overseas contract worker is taxable only
They are further classified into two:
on income derived from sources within the Philippines: Provided, 1. Non-Resident Alien Engaged in Trade or Business in the
That a seaman who is a citizen of the Philippines and who receives Philippines (NRAETB)
compensation for services rendered abroad as a member of the 2. Non-Resident Alien Not Engaged in Trade or Business in
complement of a vessel engaged exclusively in international trade the Philippines (NRANTEB)
shall be treated as an overseas contract worker;
Non-Resident Alien Engaged in Trade of Business (NRAETB)
Overseas Contract Workers, Defined
Overseas Contract Workers refers to Filipino citizens who are employed (1) In General. - A nonresident alien individual engaged in trade or
in foreign countries also known as OFWs, who are physically present in business in the Philippines shall be subject to an income tax in the
a foreign country as a consequence of their employment thereof. Their same manner as an individual citizen and a resident alien individual,
salaries and wages are paid by an employer abroad and is not born by on taxable income received from all sources within the Philippines.
an entity or person in the Philippines. A nonresident alien individual who shall come to the Philippines and
stay therein for an aggregate period of more than one hundred eighty
To be considered as an OCW or OFW, they must be duly registered (180) days during any calendar year shall be deemed a 'nonresident
as such with the Philippine Overseas Employment Administration or the alien doing business in the Philippines'. Section 22 (G) of this Code
POEA with a valid Overseas Employment Certificate (OEC). notwithstanding.
Seafarers or Seaman NRAETB refers to a non-resident alien who shall come to the Philippines
They are the Filipino citizens who receive compensation for services and stay for an aggregate period of more than one hundred eighty (180)
rendered as a member of the complement of a vessel engaged days during any calendar year.
exclusively in international trade. In addition to the registration with
POEA and OEC, a valid SIRB (Seafarer’s Identification Record Book) 1. They are engaged in trade or business within the Philippines;
2. They stay in the Philippines for a period more than 180 days
Consequence of Non-Registration with POEA: Then for them to be
considered as non-resident citizens, they must wait for 183 days or
more (abroad most of the time).
Non-Resident Alien Not Engaged in Trade of Business (NRANETB) 3. Offshore banking units;
A NRANETB refers to a non-resident alien who shall come to the 4. Regional or area headquarters and regional operating
Philippines and stay for an aggregate period of 180 or less during any headquarters or multinational companies.
calendar year (RR 8-2018).
Non-Resident Foreign Corporation
III. Special Class of Individual Employees The term non-resident foreign corporation applies to a foreign
corporation not engaged in trade or business within the Philippines [Sec.
Minimum Wage Earner 22(I)]. Their incomes within the Philippines are subject to income tax.
Minimum wage earner shall refer to a worker in the private sector paid
the statutory minimum wage or to an employee in the public sector with
compensation income of not more than the statutory minimum wage in III. Joint Ventures and Consortium
the non-agricultural sector where he/she is assigned. [Sec. 22(HH)].
Joint Venture, Defined
Statutory Minimum Wage The legal concept of a joint venture is of common law origin. It has no
The term 'statutory minimum wage' shall refer to the rate fixed by the precise legal definition but it has been generally understood to mean an
Regional Tripartite Wage and Productivity Board, as defined by the organization formed for some temporary purpose.
Bureau of Labor and Employment Statistics (BLES) of the Department
of Labor and Employment (DOLE) [Sec. 22(GG)]. GR: Joint venture and consortium are taxable as corporations.
Under Section 51(A)(2)(d), a minimum wage earner or an individual who XPN: Joint ventures are not taxable as corporations when they are for:
is exempt from income tax is not required to file an income tax return
1. Undertaking construction projects; or
pursuant to the provisions of the NIRC, other laws, general or special.
2. Engaging in petroleum, coal, geothermal, and other energy
operations pursuant to an agreement or service contract.
B. Corporations
C. Partnerships
Definition of Corporation for Income Tax Purposes
Section 22(B) [Spliced]
Partnership, Defined
By the contract of partnership two or more persons bind themselves to
The term corporation shall contribute money, property, or industry to a common fund, with the
1. Include intention of dividing the profits among themselves.
a. Partnerships, no matter how organized
b. Joint stock companies
Two or more persons may also form a partnership for the exercise of a
c. Joint accounts (cuentas en participacion)
profession. (Article 1767, Civil Code).
d. Association and insurance companies
2. But does not include
Kinds of Partnerships under Income Taxation
a. General professional partnerships
1. General Co-Partnership (Taxable Partnership)
b. Joint venture or consortium for the purpose of
2. General Professional Partnership (Exempt Partnership)
i. Undertaking construction projects, or
ii. Engaging in petroleum, coal,
geothermal, and other energy General Co-Partnerships
operations pursuant to These are partnerships which are by law assimilated to be within the
1. An operation or consortium context of, and so legally contemplated as corporations. These are
agreement or business partnership or partnerships which are organized for the
2. Under a service contract purpose of engaging in trade or business. They are subject to income
with the Government tax as if they are corporations whether or not registered.
I. Domestic Corporations D. General Professional Partnerships
Domestic Corporations, Defined General Professional Partnerships, Defined

The term 'domestic', when applied to a corporation, means created or They are formed by persons for the sole purpose of exercising their
organized in the Philippines or under its laws (Sec. 22[C]). Like a common profession and no part of income of which is derived from
resident citizen, only domestic corporations are taxable on their income engaging in any trade or business.
globally within or without the Philippines.
Not a Taxable Entity
II. Foreign Corporations A general professional partnership as such shall not be subject to
income taxes. A general professional partnership is deemed to be no
Foreign Corporations, Defined more than a mechanism or flow-through entity in the generation of
The term “foreign” when applied to a corporation, means a corporation income by and the ultimate distribution of income to, respectively, each
which is not domestic. [Sec. 22(D)]. This is a corporation which is of the individual partners.
organized and existing other than under Philippine law. It is a corporation
that is organized and existing by virtue of a foreign law. But, while a GPP as such is not a taxable entity and therefore not subject
to income taxes, the member professionals are to be subject to income
Classification of Foreign Corporations taxes on their share in the distributive net income of such GPPs.
1. Resident Foreign Corporation
2. Non-Resident Foreign Corporation E. Estates and Trusts
Resident Foreign Corporation Estate, Defined for Tax Purposes
The term resident foreign corporation applies to a foreign corporations The NIRC did not define estate in connection to taxation, but it may be
engaged in trade or business within the Philippines [Sec. 22(H)]. They meant to refer to the mass of properties and assets left behind by the
can be further classified as: deceased. It may also refer to all the assets and liabilities of the
1. Resident foreign corporations in general decedent existing at the time of his death.
2. International carriers
The income that is subject to income taxation is the income received by New Rule on Taxation of Nonresident Citizens
estates of deceased persons during the period of administration and of Article by Yap-Balmores, Senior Tax Director, SGV & Co., June 2012
the settlement of the estate.
SECTION 22 (E)
Trusts, Defined for Tax Purposes
In its technical term, a trust is a right of property, real or personal, held The term ‘nonresident citizen’ means:
by one party for the benefit of another. There isa confidence given by a
person, the grantor; reposed in another called the trustee or the fiduciary (1) A citizen of the Philippines who establishes to the satisfaction
for the benefit of the beneficiary or the cestui que trust. Same income of the Commissioner the fact of his physical presence abroad with
taxes imposed upon individuals shall apply to income of any kind of a definite intention to reside therein.
property that are held in trust.
(2) A citizen of the Philippines who leaves the Philippines during
the taxable year to reside abroad, either as an immigrant or for
NOTE: Estates and trusts are not considered having personality but for
employment on a permanent basis.
purpose of taxation they are treated as having limited personality.
(3) A citizen of the Philippines who works and derives income from
F. Co-ownerships abroad and whose employment thereat requires him to be
They are not necessarily treated as unregistered partnerships like the physically present abroad most of the time during the taxable
corporation, until and unless there is an unmistakable intention to form year.
a partnership or joint venture the co-ownership is not a partnership. In
co-ownership, the purpose is merely to jointly own properties, retaining (4) A citizen who has been previously considered as nonresident
their separate pro-indiviso titles, and not for the purpose of earning profit. citizen and who arrives in the Philippines at any time during the
An isolated sale by the heirs does not make the co-ownership into a taxable year to reside permanently in the Philippines shall
partnership (Obillos v. CIR). likewise be treated as a nonresident citizen for the taxable year
in which he arrives in the Philippines with respect to his income
derived from sources abroad until the date of his arrival in the
INCOME TAX PROPER Philippines.
(5) The taxpayer shall submit proof to the Commissioner to show

VIII. GENERAL PRINCIPLES OF INCOME TAXATION his intention of leaving the Philippines to reside permanently
abroad or to return to and reside in the Philippines as the case
NIRC, SECTION 23 may be for purpose of this Section.
General Principles of Income Taxation in the Philippines.

– Except when otherwise provided in this Code: Section 22(E)(3) provides that a person is considered a nonresident
citizen who is a citizen who works and derives income from abroad and
(A) A citizen of the Philippines residing therein is taxable on all whose employment thereat requires him to be physically present
income derived from sources within and without the Philippines; abroad most of the time during the taxable year.
(B) A nonresident citizen is taxable only on income derived from RR No. 179: “Most of the Time”
sources within the Philippines;
Section 2. Who are considered as nonresident citizens. –
(C) An individual citizen of the Philippines who is working and The term "non-resident citizen" means one who establishes to the
deriving income from abroad as an overseas contract worker is satisfaction of the Commissioner of Internal Revenue the fact of his
taxable only on income derived from sources within the physical presence abroad with the definite intention to reside therein
Philippines; Provided, That a seaman who is a citizen of the and shall include any Filipino who leaves the country during the
Philippines and who receives compensation for services rendered taxable year as:
abroad as a member of the complement of a vessel engaged
exclusively in international trade shall be treated as an overseas (a) Immigrant — one who leaves the Philippines to reside abroad as
contract worker; an immigrant for which a foreign visa as such has been secured.
(b) Permanent employee — one who leaves the Philippines to

(D) An alien individual, whether a resident or not of the
reside abroad for employment on a more or less permanent basis.
Philippines, is taxable only on income derived from sources within
the Philippines;
(c) Contract worker — one who leaves the Philippines on account
of a contract of employment which is renewed from time to time within
(E) A domestic corporation is taxable on all income derived from or during the taxable year under such circumstances as to require
sources within and without the Philippines; and him to be physically present abroad most of the time during the
taxable year. To be considered physically present abroad most
(F) A foreign corporation, whether engaged or not in trade or of the time during the taxable year, a contract worker must have
business in the Philippines, is taxable only on income derived been outside the Philippines for not less than 183 days during
from sources within the Philippines. such taxable year.
o Revenue Regulation 1-79 or the Regulations Any such Filipino shall be considered a non-resident citizen for such
Governing Taxation of Non-Resident Citizens taxable year with respect to the income he derived from foreign
sources from the date he actually departed from the Philippines.
o BIR Ruling No. 517-2011
A Filipino citizen who has been previously considered as a non-
NOTE: There is a confusion between the BIR ruling and the rules as to resident citizen and who arrives in the Philippines at any time during
determination of taxability of the income of a taxpayer who is working the taxable year to reside therein permanently shall also be
abroad but whose employer is still is a Filipino entity, the prescribed considered a non-resident citizen for the taxable year in which he
answer is to better cite the law first under Section 23 and to also point arrived in the Philippines with respect to his income derived from
out the BIR Ruling regarding the interpretation of the phrase sources abroad until the date of his arrival.
“employment thereat”
In Section 2, of RR 1-79, the term most of the time means Wealth or the fund Service of wealth or the flow
presence outside of the Philippines for not less than 183 days during the Tree Fruit
taxable year. This definition of most of the time under RR-179 has been
used in certain ruling finding that the non-residency of a Filipino and for
the eligibility for tax exemption were determined on the basis of physical Terms to Remember:
residence. The place where salary was paid was deemed immaterial
in determining residency based on the underlying principle that situs of Dividends are payments made by a company to shareholders or the
taxation in the case of personal services is determined by the place owners of the company’s stock. They are a way for the companies to
where the services are rendered. distribute revenue back to investors, and one of the ways investors earn
a return from investing in stock (also termed as cash dividend which
However, based on a recent BIR ruling, it appears that looking only at are taxable).
the 183-day rule is not enough.
On the other hand, Stock Dividends is a dividend payment
BIR Ruling No. 517-2011: “Employment Thereat” made in the form of additional shares rather than a cash payout.
BIR held that a local company’s employees (who were engineers) are Companies may decide to distribute this type of dividend to shareholders
assigned to render services abroad do not qualify as “nonresident if the company’s liquid cash is in short supply. Stock dividends also have
citizens” and were treated as resident citizens. Their compensation a tax advantage in that they are not taxed until sold.
income from their assignment abroad, where such engineers are
present in the foreign country most of the time during the taxable year
(even though more than 183 days), are made subject to Philippine CIR v. COURT OF APPEALS
income tax and consequently to withholding tax. The domestic GR 108576, January 20, 1999
employer sends its engineers to various countries for a maximum
period of 214 days per calendar year. While working overseas these Stock Dividends are Generally Capital and
engineers remain on the Philippine payroll. Cannot be Made Subject to Income Tax
BIR held that the engineers cannot qualify because the phrase used GR: A stock dividend representing the transfer of surplus to capital
“employment thereat” means that the individual must be employed by account shall not be subject to tax. As a rule, stock dividends, represent
such country. It ruled that the salaries were paid by local company capital do not constitute income to its recipient. Thus, the mere issuance
whether they were in the Philippines or on foreign assignment. Their of a stock dividend is not yet subject to income tax as they are nothing
temporary assignment does not make them employees of the foreign but an enrichment through increase in value of capital investment.
companies for which they rendered service.
As capital, the stock dividends postpone the realization of
Effect of Ruling: It is the entity who holds the employment contract and profits because the “fund represented by the new stock has been
pays the payroll costs that were considered material. transferred from surplus to capital and no longer available for actual
Instructor’s Comment: Atty. Donalvo however finds this ruling to be distribution. Income in tax law, is an amount of money coming to a
questionable because it runs counter to the concept of situs of taxation person within a specified time, whether as payment for services, interest
because it shall be the place where the service was rendered, it is also or profit from investment. It means cash or its equivalent, it is a gain
important to keep in mind the case of CIR v. Baier-Nickle. Aside from derived and severed from capital from labor or both combined – so
this, Atty. Donalvo also emphasizes that this is a BIR ruling that is that to tax a stock divided would be to tax a capital increase rather
specific to the case at hand. than income.
In a loose sense, stock dividends issued by the corporation, are then

IX. INCOME considered as unrealized gain, and cannot be subject to income tax until
that gain has been realized. As capital it is not yet subject to income
tax. It should be noted that capital and income are different. Capital is
A. Definition, Income v. Capital wealth or fund; whereas income is profit or gain or the flow of wealth.
The determining factor for imposition of income tax is whether any gain
Income, Defined
or profit was derived from a transaction.
According to De Leon, income is all wealth that flows to the taxpayer
other than as a mere return of accumulation of capital. It is an
XPN: The Redemption or Cancellation of stock dividends, depending
accumulation of wealth. In Fisher v. Trinidad (43 Phil. 981), it is the
on the time and manner is essentially equivalent to a distribution of now
amount of money coming to a person or corporation within a specified
taxable dividends making the proceeds thereof taxable income to the
time whether as payment for services, interest, or profit from investment.
extent it represents profits.
Under the revenue regulations, it includes the forms of income that are
specifically described as gains and profits derived from the sale or other
disposition of capital assets. ASSOCIATION OF NON-PROFIT CLUBS v. BIR
GR 228539, June 26, 2019
Sources of Income
1. Services rendered or labor Facts: BIR issued RMC 35-2012 which states that “clubs which are
2. Capital which is not limited to money or property organized and operated exclusively for pleasure, recreation, and other
3. Gains from exchange of properties or gains from profit non-profit purposes are subject to income tax under the NIRC.
Income and Receipt are not synonymous to each other. Income relates According to the BIR, under the doctrine of casus omissus the provision
more to the gains from the exchange or profit and Receipt does not of NIRC granting tax exemption to such recreational clubs was omitted
necessarily mean the income, this is what is received and includes the in the current list of tax exempt corporations under the present NIRC.
income in its definition. Hence the income of recreational clubs, from whatever sources
including but not limited to membership fees, assessment dues, rental
CAPITAL INCOME income, and service fees are subject to income tax.
Is the wealth or fund Is the profit or gain from the flow
of wealth In addition as to VAT the gross receipts also of recreational clubs for the
Fund or property existing at an Is the flow of services rendered like fees and dues are subject to VAT citing Section 105 that even non-
instant of time by the capital by the payment of stock and non-profit organization or government entity is liable to pay
money from it or any other VAT on the sale of goods or services.
benefit rendered by a fund of
capital in relation to such fund ANPC requested the non-application of RMC 35-2012 for income tax
through a period of time. and VAT liability on membership fees, association dues, and fees of
similar nature collected by the exclusive membership clubs from their
members which are used to defray the expenses of the said clubs. But devoted for the operations/maintenance of the facilities of the
despite 2 years BIR has not acted upon the request and all member organization. As such, there could be no "sale, barter or exchange of
clubs of ANPC were subjected to income tax and VAT on all the goods or properties, or sale of a service" to speak of, which would then
membership fees, assessment dues and service fees. be subject to VAT under the 1997 NIRC.
ANPC filed a Petition for Declaratory Relief before the RTC seeking that
RM 35-2012 be declared violative of the due process clause of the B. Nature
Constitution that BIR acted beyond its rule making authority. RTC denied
Income is the fruit of capital or labor severed from the tree. On the other
the petition and upheld the constitutionality of RMC 35-2012.
hand income tax is an excise tax and not a tax on property. The theory
that a tax on income is legally or economically a tax on its source is no
Factual Circumstance in Issue:
longer tenable (Madrigal v. Rafferty, 38. Phil. 414). There is a difference
RMC 35-2012 provides interpretation that since the old tax exemption
between the nature of income tax from the nature of income tax laws.
under the 1977 Tax Code to recreational clubs was deleted in the 1997
NIRC, then the income of recreational clubs from whatever sources,
including but not limited to membership fees, assessment dues, rental C. When Income is Taxable
income, and service fees is subject to income tax.
NIRC
Issue: Are the membership dues and assessment dues subject to SECTION 31
income tax liability? – No.
Taxable Income Defined. – The term ‘taxable income’ means
Held: (1) Erroneous sweeping interpretation. – RMC No. 35-2012 the pertinent items of gross income specified in this Code, less
erroneously foisted a sweeping interpretation that membership fees and deductions, if any, authorized for such types of income by this code
assessment dues are sources of income of recreational clubs from or other special laws.
which income tax liability may accrue.
Taxable Income
The distinction between capital and income is well-settled in our Section 31 can be illustrated in this manner:
jurisprudence. The essential difference between capital and income is
that capital is a fund and income is a flow. A fund of property existing at Gross Income xx
an instant of time is called capital. A flow of services rendered by that Less: Deductions (xx)
capital by the payment of money from it or any other benefit rendered by Personal Exemptions (xx)
a fund of capital in relation to such fund through a period of time is called Taxable Income xx
income. Capital is wealth and income is the service of wealth.
Requirements for Taxable Income
As correctly argued by ANPC, membership fees, assessment dues and 1. There must be a gain or profit;
other fees of similar nature only constitute contributions and/or the 2. The gain or profit must be received and realized; and
replenishment of the funds and for the maintenance and operations of 3. The income must not be excluded by law.
the facilities offered by recreational clubs to their exclusive members.
They represent held in trust to defray their operating and general
costs and hence, only constitute infusion of capital. MADRIGAL v. RAFFERTY
GR L-12287, August 7, 1918
(2) Forms part of capital. – In order to constitute income there must be
a realized gain. Clearly, because of the nature of membership fees and Facts: This involves Spouses Vicente Madrigal and Susana Paterno.
assessment dues as funds inherently dedicated for the maintenance, Vicente declared total net income for 1914 of P296K but later argued
preservation, ad upkeep of the clubs’ general operations and facilities, that the amount was not his income but of the conjugal partnership
nothing is to be gained from their collection. This stands in contrast to between himself and his wife and that it must be divided into two parts
the fees received by recreational clubs coming from their income- but the US CIR ruled against the Spouses.
generating facilities.
After payment under protest by CIR, Vicente Madrigal filed an action for
Given these recreational clubs’ non-profit nature, membership fees and the recovery of P3,786 alleged to have been wrongfully and illegally
assessment dues cannot be considered as funds that would represent collected from him. But the Cir stated that the basis was the three items
these clubs’ interest or profit from any investment. In fact, these fees are (1) Madrigal’s own profits; (2) Susana’s own profits from embroidery and
paid by the clubs’ members without any expectation of any yield or gain (3) profits from pawnshop.
but only for the above-stated purposes and in order to retain their
membership therein. Issue: Should the additional income tax be divided into two equal parts,
because of the conjugal partnership existing between them.
In fine, for as long as these membership fees, assessment dues, and
the like are treated as collections by recreational clubs from their Held: Income as contrasted with capital or property is to be the test. The
members as an inherent consequence of their membership, and are, by essential difference between capital and income is that capital is a fund,
nature, intended for the maintenance, preservation, and upkeep of the and income is a flow.
clubs' general operations and facilities, then these fees cannot be
classified as "the income of recreational clubs from whatever A fund of property existing at an instant of time is called capital. A flow
source" that are "subject to income tax." Instead, they only form of services rendered by that capital by the payment of money from it or
part of capital from which no income tax may be collected or any other benefit rendered by a fund of capital in relation to such fund
imposed. through a period of time is called an income. Capital is wealth, while
income is the service of wealth. The fact is that property is a tree, income
(3) Not Subject to VAT. - The Court declares as invalid the BIR's is the fruit; labor is a tree, income the fruit; capital is a tree, income the
interpretation in RMC No. 35-2012 that membership fees, assessment fruit." A tax on income is not a tax on property. "Income," as here used,
dues, and the like are part of "the gross receipts of recreational clubs" can be defined as "profits or gains."
that are "subject to VAT." It is a basic principle that before a transaction
is imposed VAT, a sale, barter or exchange of goods or properties, or It was ruled that the wife Susana who only has an inchoate right and has
sale of a service is required. no right to make a separate return in order to receive the benefit of the
exemption which would arise by reason of the additional tax. And she
As ANPC aptly pointed out, membership fees, assessment dues, and has not estate nor income actually and legally vested in her and entirely
the like are not subject to VAT because in collecting such fees, the club distinct from her husband’s property, the income cannot be properly be
is not selling its service to the members. Conversely, the members are considered the separate income of the wife for the purposes of the
not buying services from the club when dues are paid; hence, there is additional tax. [Note this was decided in 1918].
no economic or commercial activity to speak of as these dues are
FISHER v. TRINIDAD While petitioners argue that since there were no remittances and
GR L-17518, October 30, 1922 acceptances of their salaries and wages in US into the Philippines, they
argue that they are exempt. Petitioners forget that they are citizens of
Facts: In this case, Frederick Fisher was a stockholder of the Philippine the Philippines, and their income, within or without, and in these cases
American Drug Company, which is a domestic corporation. Fisher had wholly without, are subject to income tax. Sec. 21, NIRC, as amended,
declared a stock dividend for which he was assessed income tax. does not brook any exemption.
Fisher paid under protest and brought an action for recovery.
Issue: Are the stock dividends “income” and taxable as such? – No. CIR v. JULITA CAMPOS BENEDICTO
GR 191999, July 30, 2014
Held: A stock dividend is not income as they represent undistributed
increase in the capital of corporations or firms for a particular period. Facts: Julita here was appointed administratrix of her husband Roberto
They are used to show the increased interest or proportional shares in intestate estate. Roberto being one of the cronies of former President
the capital of each stockholder. In other words, the inventory of the Marcos, PCGG ran after his assets. There was compromise agreement
property of the corporation, for particular period shows and increase in involving his Swiss bank deposits, and granted him civil, criminal and
its capital, so that the stock theretofore issued does not show the real tax immunities to the 49% of the deposits to the amount of US$15M in
value of the stockholder’s interest, and additional stock is issued consideration of his having ceded to the Republic to 51%.
showing the increase in actual capital or property, or assets thereof.
The CIR proposed to assess Benedicto of US$15M which later issued
The stockholder who receives a stock dividend has received nothing but the Assessment Notice for 1990 of P193M. CIR stated that the PCGG’s
a representation of his increased interest in the capital of the grant of immunity from taxation over the 49% share pursuant to the
corporation. There has been no separation or segregation of his interest. compromise agreement did not preclude him from assessing the taxes
All the property or capital of corporation still belongs to the corporation. due on the amount retained by Benedicto.
There has been no separation of the interest of the stockholder from the
general capital of the corporation. But the CTA Division ruled that Benedicto was not liable for deficiency
income tax for 1990 because the portion given to him was not income
The stockholder, by virtue of the stock dividend, has no separate or but a mere return of his capital. If at all, what is subjects of the Swiss
individual control over the interest represented thereby, further than he deposits is the interest income. CTA En Banc affirmed that such was
had before the stock dividend was issued. He cannot use it for the indeed a mere return of capital and CIR failed to represent that it was an
reason that it is still the property of the corporation and not the property ill-gotten wealth.
of the individual holder of stock dividend. A certificate of stock
represented by the stock dividend is simply a statement of his Issue: Can the Intestate Estate of Roberto Benedicto be held liable for
proportional interest or participation in the capital of the corporation. deficiency income tax. – No.
The receipt of a stock dividend in no way increases the money received Held: Income means all the wealth that flows into the taxpayer other
of a stockholder nor his cash account at the close of the year. It simply than a mere return of capital. Capital is a fund or property existing at
shows that there has been an increase in the amount of the capital one distinct point in time while income denotes a flow of wealth during a
of the corporation during the particular period, which may be due to definite period of time. Income is gain derived and severed from capital.
an increased business or to a natural increase of the value of the capital
due to business, economic, or other reasons. Requisites for Income to be Taxable
1. There must be gain;
We believe that the Legislature, when it provided for an "income tax," 2. The gain must be realized or received; and
intended to tax only the "income" of corporations, firms or individuals, 3. The gain must not be excluded by law or treaty from taxation.
as that term is generally used in its common acceptation; that is that the
income means money received, coming to a person or corporation for Though the deposits were subject of freeze order by Swiss authorities
services, interest, or profit from investments. We do not believe that the they remained, and were later confirmed, to be owned by Benedicto
Legislature intended that a mere increase in the value of the capital or when they were frozen. The compromise agreement only led to the
assets of a corporation, firm, or individual, should be taxed as "income." unfreezing of these deposits and termination of Swiss cases against
Such property can be reached under the ordinary from of taxation. Benedicto in exchange for the withdrawal of his opposition and appeal
against the grant of international legal cooperation requested by the
Republic.
CONWI v. COURT OF TAX APPEALS
GR 108576, January 20, 1999 The 49% share in the deposits was in no way an income because
Benedicto did not gain any wealth or did not become any richer than
Facts: Conwi and others were Filipino citizens and employees of Procter he was before. In fact his wealth was diminished by virtue of the
and Gamble, Phils. which is a subsidiary of Procter and Gamble, USA agreement for having ceded the 51% to the Republic. The 49% share
and the petitioners were paid US dollars as compensation for their was therefore, a mere return of capital not subject to income tax.
services for foreign assignments.
When they filed their ITR for 1970, they computed tax due by applying
the dollar-to-peso conversion this was also applied for 1971. Later they I. Existence of Income
filed for refund for overpayments. CTA held that the proper conversion
rate for the purpose of reporting and paying PH income tax on the dollar Without Income There is Nothing that is Taxable
earnings are those prescribed in RR 7-71 and 41-71 denying their claim A primary consideration in income taxation is that there must be income
for tax refund or tax credit. before there could be income taxation. The rules such as:
• Realization of income
Held: This is basically an income tax case. Income may be defined as • Recognition of income
amount of money coming to a person or corporation within specified • Methods of accounting, and the
time, whether as payment for services, interest or profit from investment.
• Tests in determining if income is earned for tax purposes
Unless specified, it means cash or its equivalent. Income can also be
are important considerations to discover whether or not there is income
though as flow of the fruit of one’s labor.
for tax purposes.
The dollar earnings of petitioners are the fruits of their labors in the
Requirement for Taxable Income
foreign subsidiaries of Procter and Gamble. It was a definite of money
1. There must be gain or profit;
which came to them within a specified period of 2 years for their
2. The gain or profit must be realized or received; and
services.
3. The income is not excluded by law from taxation.
Scenario: A bought a land in Davao for P1,000,000 in 1995, when the in 1957 but did so only in 1959 and that a tenant deposited in court
President became Duterte, the value of the property rocketed to amount his rentals – which the corporation had no actual or constructive control.
of P5,000,000. At this point there is yet no income, because there is
no gain, as there is only an expectation of profit, while there was an The Secretary-Treasurer of Limpan admitted that he omitted to report
appreciation of value of the property, mere increase of value under the the amounts because it did not collect or receive the same because
eyes of the law is not subject to tax. of refusal of some tenants to recognize new owner Lim;
Another reason is that the income has not been received or realized: In addition that corporation did not receive or collect the same but that
its president, Isabelo Lim collected part thereof and may have reported
II. Realization of Income it in his own personal income tax return.
Issue: Can petitioner corporation argue the failure to include in their

1. Tests of Realization
income tax returns the alleged “non-receipt” of the amounts? – NO.
Income, When Realized Held: The withdrawal in 1958 of the deposits in court pertaining to the
Under the realization principle, revenue is generally recognized when 1957 rental income is no sufficient justification for the non-declaration of
both of the following conditions are met: said income in 1957, since the deposit was resorted to due to the refusal
(1) The earning process is complete or virtually complete; and of petitioner to accept the same.
(2) An exchange has taken place
Here, Limpan Investment Company is deemed to have constructively
In the previous situation of the increased realty price of Davao property received rental payment in 1957 when they were deposited in court due
(Scenario), there is no realization of income because in the first place to its refusal to receive them.
there was no transaction.
Atty. Donalvo’s Explanation:
As to Donations: They are not subject to income tax because there is no
realization of income. This is because the donee, while he gains, there Limpan should have declared income because there was already
is no exchange, or some sort of sacrifice on his part. constructive receipt of the rent income. A corporation can only act
through its officers, agents, and representative and whatever payment
Other rules as to realization of income is made to them is good payment as if it was received by the corporation.
• Mere increments to the value of the shares of stock are not
realizations of income thus not subject to income tax.
• If there is an offer to buy the property higher than its actual Instances of Constructive Receipt
market value, there is yet no realization of income as there is 1. Interest on a Bank Deposit – there is a gain from the amount
yet no exchange of economic value. and there is realization of such gain or profit because the
depositor has the capacity to use such funds such as in online
2. Actual v. Constructive Receipt transactions or bank transfers.
2. Offsetting or Compensation – Offsetting of debts. This also
Actual Receipt Constructive Receipt applies in withholding taxes, such as when the income tax is
It is the physical It is a tax term mandating an individual or deducted by the employer before it is received by employee,
possession of, business to pay taxes on income despite there is prior to the withholding, a constructive receipt by the
exchange proceeds the fact that it has not been physically employee of the amount withheld (Asiabank v. CIR, 2006).
or other property or in received. 3. Money Given to an Agent – Such as in partnerships or in
income tax cases, the cases of officers of a corporation, they are deemed to be good
income. There is constructive receipt when payments to the juridical person.
individual has ability to control or utilize 4. Consignment in Court – As illustrated in the case of Limpan
the funds even if they do not have direct Investments, when there is a valid tender and consignation,
possession of them or guaranteed they which may be due to refusal of creditor to receive payment,
will have the ability to draw upon the funds the deposit to the court is deemed payment as there is such
in the future. constructive receipt by the creditor.
LIMPAN INVESTMENT v. CIR III. Recognition of Income

GR L-12570, July 26, 1966
Income, When Recognized
Facts: Limpan Investment leases real properties consisting of several There is recognition of income when income has been received, actually
lots and buildings in Manila and Pasay. It filed its 1956 and 1957 ITRs, or constructively. Thus, income is considered received:
reporting net income of P3287.81 and P11,098.36 paying taxes in the 1. If actually or physically received by taxpayer; or
sums of P657 and P2,220. Upon investigation by BIR they discovered 2. If constructively received by taxpayer
that there was underdeclaration.
For purposes of financial accounting: Income is increase in economic
It was found that the 1956 and 1957 ITRs were underdeclared by benefits during the accounting period in the form of inflows or
P20,199 and P81,690 during these taxable years and had claimed the enhancement of assets or decreases of liabilities resulting in increases
excessive depreciation of its buildings in the sums of P4K and P16K. of equity other than relating from contributions from equity participants.
CIR issued a demand for deficiency income tax and surcharge against
Limpan Investment. IV. Methods of Accounting
Deficiency tax due: (1956): P11,098 and (1957) P30,502.50 NIRC

ACCOUNTING PERIODS AND
In raising the issue to the CTA, Limpan disclaimed of having received or
METHODS OF ACCOUNTING
collected the amounts purporting to be unreported rental income or
SECTION 43
any part thereof, reasoning out that for 1956 the previous owners of the
leased buildings have to collect part of the total rents to apply to their
payment of rental in the land. General Rule – The taxable income shall be computed upon the
For 1957 explaining that the amount did not reflect in their 1957 income calendar year, as the case may be) in accordance with the method
tax return because its President Lim who collected and received the of accounting regularly employed in keeping the books of such
amount from the tenants did not turn the same over to the corporation taxpayer, but if no such method of accounting has been so
employed, or if the method employed does not clearly reflect the
income, the computation shall be made in accordance with such o There is then a reasonable accurate determination
method as in the opinion of the Commissioner clearly reflects the because there is a contract of lease.
income. If the taxpayer's annual accounting period is other than The receivable rentals for December 2018 shall then form part
a fiscal year, as defined in Section 22(Q), or if the taxpayer has no of the income for December 2018.
annual accounting period, or does not keep books, or if the
taxpayer is an individual, the taxable income shall be computed 3. Installment Method
on the basis of the calendar year. The installment method usually involves transactions where
the taxpayer would receive revenues before and during the project, such
Accounting Method, Defined as construction projects where costs add up and building materials are
It is a set of rules for determining when and how to report income and paid along the way regardless of revenues received. The taxpayer would
deduction. The provisions of NIRC citing the methods of accounting that then calculate gross profit for the entire transaction, then applies that
the law expressly recognizes, to wit: proportionately to the revenues as they are received.
(1) Cash basis method
(2) Accrual method 4. Deferred Payment Method
(3) Installment payment This is usually applied when the initial payment/s or usually
(4) Deferred payment the downpayment exceeds 25% of the contract price, which in effects
(5) Percentage of completion (long-term contracts) the income is to be accounted in the first year of the contract even if the
payments still to be made by the buyer or payor is for the succeeding
Any of the foregoing methods may be employed by any taxpayer so long years to be made (Atty. Donalvo).
as it reflects its income properly and such method is used regularly. The
peculiarities of business or occupation engaged by the taxpayer would 5. Percentage of Completion Method
largely determine how it would report incomes and expenses in its
accounting books or records. The NIRC does not prescribe a uniform, The percentage of completion method is also commonly seen
or even specific method of accounting. with builders, although for those with much longer-term contracts for
huge projects. In this methods, revenues and expenses are recorded
Too, other methods approved by the CIR, even when not expressly based on how much work has been completed. This means that:
mentioned by the NIRC, may be adopted is such method would then • The project be easily identifiable by stages of completion and
enable the taxpayer to properly reflect its income. Section 43 of the • That specific costs be attributed to each stage.
NIRC authorizes the CIR to allow the use of the method of accounting
that in its opinion would clearly reflect the income of the taxpayer (CIR The company would then report earnings using an estimated total cost
v. Lancaster Philippines, 2017). against incurred expenses or distinguish milestones, such as how many
floors are completed.
In general, there are two accounting methods
(1) Cash method CIR v. LANCASTER PHILIPPINES
(2) Accrual method GR 183408, July 12, 2017
1. Cash Method Facts: BIR examined Lancaster (domestic tobacco company) for its
It calculates income when cash is received and expenses books of accounts and other accounting records for all internal taxes due
when bills are paid. It has been said to be employed by small businesses from 1998 to unspecified date. After the conduct, a PAN was issued
and it is part of the income the moment it is received, and is part of the finding that (1) overstatement of purchases; and (2) non-compliance
expenses the moment that it is spent. Regardless of the dealing, there with the generally accepted accounting principle of matching of
is no income unless cash is received. cost and revenue. BIR denied the deduction for 1999 the purchase
invoice vouchers (1998 purchases of tobacco from farmers).
2. Accrual Method
Lancaster replied to the PAN arguing that for the past decides it used an
This requires matching the income with expenses regardless tobacco-cropping season to determine its total purchases covering 1
whether the cash has been collected or not. Income is recognized when year period of October 1 up to September 30 of the following year (as
it is earned even if it was received or not, and expenses are accounted against its fiscal year of April 1 to March 31). It argued that deductions
for in the period when they are incurred, even if they are not yet paid. should have not been disallowed because the situation of farmers that
are engaged in producing tobacco like Lancaster is unique in that the
The moment one renders a services, or delivers a good, there is already costs, purchases are taken as of the different period and posted in the
an income or “accounts receivable” even if the cash is not received yet. year which the gross income from the crop is realized. It argued that it
In the same way that if there is billing or expense, even if there is yet no correctly posted the subject purchases as it was only in this year that the
spending on it, it is treated as part of the expenses. gross income was realized (to comply with cost to match revenue).
Under the accrual method, income is recognized when the requisites of However a FAN was still issued elevating to the CTA. CTA Division ruled
the test has been complied with. in favor of Lancaster and CTA En Banc affirmed such ruling ordering the
cancellation of the assessment.
Two Requisites
1. Fixing a right to income or liability to pay; Issue: Was there proper timing when Lancaster should recognize its
2. Availability of reasonable accurate determination of such purchases in computing its taxable income even if the crop-year
income or liability. method does not coincide with its fiscal year?
Scenario: If X owns a commercial lot for lease, and Y is the lessee. Y, in Held: (1) Purpose of Accounting. – Many accounting principles have
December, went out of the country, thus there was failure of Y to pay the since been adopted for purposes of taxation. In our jurisdiction, the
rent for December 2018 concepts in business accounting, including certain generally accepted
. accounting principles embedded in the NIRC comprise the rules on tax
• If applying Cash Method: If Y pays on January 2019, then the accounting.
amount shall form part of the income for January 2019 and
not December 2018 because it was received as cash only on The NIRC, recognizes the important facility provided by generally
January 2019. accepted principles and methods to the primary aim of tax laws to collect
the correct amount of taxes. The NIRC even devoted a whole chapter
• If applying Accrual Method: Even if Y has not paid the rent on accounting periods and methods of accounting.
yet, X must recognize the Receivables from Y for the amount
to be paid for December 2018. This is because: (2) Accounting method. – It is a set of rules for determining when and
o X as lessor as a right to income and Y has a liability how to report incomes and deductions.
to pay the lease rentals; and
The provisions under Chapter VIII, Title II of the NIRC cited above 1. Realization test
enumerate the methods of accounting that the law expressly recognizes, 2. Claim of right doctrine; doctrine of ownership, command or
to wit: control;
(1) Cash basis method; 3. Economic benefit test or doctrine of proprietary interest
(2) Accrual method; 4. Severance test
(3) Installment method; 5. All events test
(4) Percentage of completion method; and
(5) Other accounting methods. 1. Realization Test
As already discussed
Any of the foregoing methods may be employed by any taxpayer
so long as it reflects its income properly and such method is used Requisites for Income to be Considered Realized
regularly. The peculiarities of the business or occupation engaged in by 1. The earning process is complete or virtually completed;;
a taxpayer would largely determine how it would report incomes and 2. There is an exchange.
expenses in its accounting books or records.
Mere increase in valuation is not realized income absent an exchange
The NIRC does not prescribe a uniform, or even specific, method of or transaction for such amount.
accounting. Too, other methods approved by the CIR, even when not
expressly mentioned in the NIRC, may be adopted if such method would
2. Claim of Right Doctrine or Doctrine of Ownership,
enable the taxpayer to properly reflect its income.
Command or Control
Section 43 of the NIRC authorizes the CIR to allow the use of a method
of accounting that in its opinion would clearly reflect the income of the The power to dispose of income is the equivalent of the ownership of it.
taxpayer. The exercise of that power to procure the payment of income to another
is the enjoyment and hence the realization of the income by him who
(3) Crop Method of Accounting. – This is an example of an accounting exercises it. The dominant purpose of the revenue laws is the taxation
method not mentioned in the NIRC but duly approved by the CIR under of income to those who earn or otherwise create the right to receive it
RAM 2-95: and enjoy benefit of it when paid (Helvering v. Horst).
“II. Accounting Methods: xxxx 3. Economic Benefit Test or Doctrine of Proprietary

F. Crop Year Basis is a method applicable only to farmers engaged in Interest
the production of crops which take more than a year from the time of
planting to the process of gathering and disposal. Expenses paid or Economic benefit test or doctrine of proprietary interest is a test in
incurred are deductible in the year the gross income from the sale of the determining whether income is earned for tax purposes. Income is
crops are realized.” earned when the recipient could enjoy economic benefits over the gain
that is received. Where stock options, shares of stocks or other assets
The crop method recognizes that the harvesting and selling of crops are transferred by an employer to secure better services, they are plainly
do not fall within the same year that they are planted or grown. This compensation which is taxable income (Commissioner v. LaBue, US).
method is especially relevant to farmers, or those engaged in the
business of producing crops who, pursuant to RAM No. 2-95, would then 4. Severance Test
be able to compute their taxable income on the basis of their crop year.
Severance test theory is a test determining whether income is
On when to recognize expenses as deductions against income, the earned for tax purposes. There is no taxable income until there is a
governing rule is found in the second sentence of Subsection F cited separation from capital of something of exchangeable value, thereby
above. The rule enjoins the recognition of the expense (or the deduction supplying the realization or transmutation which would result in the
of the cost) of crop production in the year that the crops are sold (when receipt of income (Eisener v. Macomber).
income is realized).
5. All Events Test
In the present case, we find it wholly justifiable for Lancaster, as a The all events test (similar to accrual method of accounting), determines
business engaged in the production and marketing of tobacco, to adopt that an income or liability is to be accrued when there is:
the crop method of accounting. 1. Fixing of a right of income or liability to pay;
2. The availability of the reasonable accurate determination of
A taxpayer is authorized to employ what it finds suitable for its purpose such income or liability.
so long as it consistently does so, and in this case, Lancaster does
appear to have utilized the method regularly for many decades already. This does not demand that the amount of income or liability be known
absolutely only that the taxpayer has at his disposal the information that
Considering that the crop year of Lancaster starts from October up to is necessary to compute the amount with reasonable accuracy.
September of the following year, it follows that all of its expenses in the
crop production made within the crop year starting from October 1997 The all-events test is satisfied where computation remains uncertain, if
to September 1998, including the February and March 1998 purchases its basis is unchangeable.
covered by purchase invoice vouchers, are rightfully deductible for
income tax purposes in the year when the gross income from the The test is satisfied where a computation may be unknown, but is not as
crops are realized. much as knowable, within the taxable year.
(4) Matching Principle. – CIR uses such principles directing that the The amount of liability does not have to be determined exactly; it must
expenses are to be reported in the same period that revenues that be determined with reasonable accuracy implying something less than
earned. It attempts to match revenue with expenses that helped earn it. an exact or completely accurate amount (CIR v. Isabela Cultural
While GAAP applies, specific regulations prevail. Commission, 2007).
All events test is also referred to as when:

• A person who uses the accrual method, whereby an expense
V. Tests in Determining Whether Income is Earned for Tax is deductible for the taxable year in which all the events had
Purposes occurred which determined the fact of liability and the amount
thereof could be determined with reasonable accuracy.
The general rule is that income is not subject to tax until it is earned. The
different tests in determining whether income is earned for tax purposes • Thus an expense made in 2015 by a corporation using accrual
are the following: method should have been recognized as expense for 2015.
TAX TREATMENTS OF DIFFERENT ITEMS OF GROSS INCOME
Resident Resident NRAETB NRANETB Domestic RFC NRFC

Citizen Alien
Graduated Graduated Graduated
30% on Net 30% on Net
TAX TREATMENT IN Tax Rates on Tax Rates on Tax Rates on 25% on Gross 30% on Gross
Taxable Taxable
GENERAL Net Taxable Net Taxable Net Taxable Income Income
Income Income
Income Income Income
[1] 2% [1] [1] 25% of gross
Minimum International income of those
Corporate Carriers – 2 ½ cinematographic
Income Tax on Gross owner, lessor or
(MCIT) on the Philippine distributor
Gross Income Billings (Online (applies also to
(also applies carrier) NRAETB).
to RFC)
8% Tax on Gross Sales/Receipts if conditions [2] OBUs – tax [2] 4 ½% of
met for Purely Self-Employed or Professional. [2] 10% exempt except gross rentals for
Applies even to Mixed Income Earners (but no Preferential to residents owner or lessor
P250K deduction) Tax Rates then subject to of vessels
allowed to 10% Final Tax chattered by PH
Requisites: Proprietary nationals
1. Self-employed or professional income Non-Profit (1) [3] Tax on
2. Gross sales/receipts and non- 8% Tax not Educational Branch Profit [3] 7 ½ of gross
Other Tax Treatments
operation income does not exceed the available Institutions; or Remittances rentals or fees
VAT Threshold of P3,000,000 (2) Hospitals - 15% Tax on for owner or
3. Not VAT-registered - Total Profits lessor of
4. Taxpayer indicates in his return at the [3] GSIS, earmarked for aircraft,
start of the taxable period that he will SSS, PHIC remittance machineries and
be availing of the gross sales or gross and Local without any other equipment
receipts tax option Water Districts deduction on
are exempt tax component [4] Foreign
thereof Loans – 20%
Final Tax on
[3] RAH: Tax interest
exempt
[4] ROH: 10%

on taxable
income
GROSS INCOME
[1] Compensation
Income (includes Part of Gross Part of Gross
holiday, overtime, NSD Income Income
and hazard pay)
Fringe Benefits if Part of Gross Part of Gross
Rank and File Income Income
35% Fringe 35% Fringe
Benefit Tax Benefit Tax
based on based on
Fringe Benefits if
Gross Up Gross Up
Managerial/Supervisory
Monetary Monetary
Value which Value which
is a Final Tax is a Final Tax
Minimum Wage
Tax-exempt Tax-Exempt
Earner
[2] Business Income
in General Part of GI Part of GI Part of GI Part of GI Part of GI Part of GI Part of GI
[3] Gains from

Dealings in Property Part of GI Part of GI Part of GI Part of GI Part of GI Part of GI Part of GI
In General
Stock Stock
Domestic Shares of Transaction Transaction
Stock Sold or Listed Tax: 6/10 of Tax: 6/10 of
in Stock Exchange 1% of the 1% of the - - - - -
Gross Selling Gross Selling
Price as a Price as a
Final Tax Final Tax
5% on the first
P100K and 5% on first
15% Final
Domestic Shares of 15% Final 15% Final 15% Final Tax 15% Final Tax 10% on P100K and 10%
Tax on Net
Stock Not Sold in Tax on Net Tax on Net on Net Capital on Net Capital excess of on excess of
Capital
Stock Exchange Capital Gains Capital Gains Gains Gains P100K based P100K on the
Gains
on the net net capital gains
capital gains
6% of the
Gross Selling
6% of the 6% of the 6% of the 6% of the
Price of Fair
Sale of Real Property Gross Selling Gross Selling Gross Selling Gross Selling
Market Value (Silent) (Silent)
in the Philippines Price of Fair Price of Fair Price of Fair Price of Fair
limited only to
Market Value Market Value Market Value Market Value
Lands or
Buildings
Principal Residence
Available Available - - Not applicable Not applicable -
Exception
Holding Period (for
Available Available Available Available Not applicable Not applicable -
other capital gains)
20% Final 20% Final 20% Final 25% on the 30% on the
[4] Interest Income 20% Final Tax 20% Final Tax
Tax Tax Tax Gross Income Gross Income
Interest Income
Received from 15% Final 15% Final 7 ½ % Final
Tax-Exempt Tax-Exempt 15% Final Tax Tax-Exempt
Depositary Bank Tax Tax Tax
under EFCDS
Part of the
Part of the Part of the Part of the Part of the Part of the Part of the Gross
[5] Rents Gross
Gross Income Gross Income Gross Income Gross Income Gross Income Income
Income
20% Final 20% Final 20% Final 25% on the 30% on the
[6] Royalties (Passive) 20% Final Tax 20% Final Tax
Tax Tax Tax Gross Income Gross Income
20% Final Tax 20% Final Tax
Royalties to Books, 10% Final 10% Final 10% Final 25% on the 30% on the
(No (No
Literary or Music Tax Tax Tax Gross Income Gross Income
qualification) qualification)
[7] Dividends 15% (Subject to
10% Final 10% Final 20% Final 25% on the
From Domestic Tax-Exempt Tax-Exempt Tax Sparing
Tax Tax Tax Gross Income
Corporation Rule)
From Foreign Part of Gross Part of Gross
Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt Tax-Exempt
Corporation Income Income
[8] Prizes and
Winnings Part of Gross
Tax-Exempt Tax-Exempt Tax-Exempt
Without the Income
Philippines
P10,000 P10,000 P10,000
below – GI below – GI below – GI
Within the Philippines
25% on the
Exceeds Exceeds Exceeds
Gross Income
Prizes P10,000 – P10,000 – P10,000 –
20% Final 20% Final 20% Final
Tax Tax Tax
20% Final 20% Final 20% Final 25% on the
Winnings (Not PCSO)
Tax Tax Tax Gross Income
P10,000 P10,000
below – below –
Tax-Exempt Tax-Exempt
25% on the
PCSO Winnings Tax-exempt
Exceeds Exceeds Gross Income
P10,000 – P10,000 –
20% Final 20% Final
Tax Tax
D. Gross Income III. Gross Income v. Net Income v. Taxable Income
I. Definition Gross Income Net Income Taxable Income

After exclusion and Refers to that what Gross income less
NIRC prior to deduction remains after than the deductions,
SECTION 32 (A) for items subjected deducting the if any, authorized for
to final taxes after exclusions from the such types of
Gross Income. – the exclusions and gross income and income by this Code
(A) General Definition. - Except when otherwise provided in prior to deductions items subject to final or other special
for items subject to taxes. laws.
this Title, gross income means all income derived from whatever
final taxes.
source, including (but not limited to) the following items:
Totality of all income Gross Income Pertinent items of
(1) Compensation for services in whatever form paid, including,
derived from - Less: Items subject gross income or net
but not limited to fees, salaries, wages, commissions, and similar
whatever source to final taxes income
items; after subtractions for - Less: Deductions,
(2) Gross income derived from the conduct of trade or business or exclusions and prior = Pertinent items of if any authorized for
the exercise of a profession; to subtractions of gross income or net such types of
(3) Gains derived from dealings in property; items subject to final income income
(4) Interests; taxes.
(5) Rents; = Taxable income or
(6) Royalties; income subject to
(7) Dividends; tax
(8) Annuities;
(9) Prizes and winnings; Otherwise stated:
(10) Pensions; and
(11) Partner's distributive share from the net income of the Totality of all income derived xx
general professional partnership. Less: Exclusions (xx)
Gross Income xx
Gross Income Gross Income xx
It is defined under Section 32 by providing a list of what would be Less: Items Subject to Final Tax (xx)
considered as income, but the list is not limited only to the items that are Net Income (Pertinent Items of Gross Income) xx
enumerated. For purposes of tax, in particular income, whether one Pertinent Items of Gross Income xx
derives income either from legitimate or illegitimate resources it is still Less: Deductions (xx)
taxable. Taxable Income (Income subject to tax) xx
Gross Income xx IV. Classification of Income as to Source

Less: Exclusions xx
Exemptions xx Situs of Tax on Income
Income Subject to Final Tax xx Income tax may properly be exacted from persons who are residents or
Deductions xx citizens in the taxing jurisdiction and even from those who are neither
Net Taxable Income xx residents nor citizens provided the income is derived from sources
within the taxing state.
II. Concept of Income From Whatever Source Derived But the taxable situs will depend upon the nature of income:
All income not expressly excluded or exempted from the class of taxable Interest Income It is treated as income from WITHIN the
income, irrespective of the voluntary or involuntary action of the taxpayer Philippines if the debtor or lender whether
in producing income. individual or corporation is resident of the
Philippines
GR: All income whatever source derived forms part of gross income. Dividends If received from a domestic corporation, it is
treated as income from sources WITHIN the
XPN: Unless Philippines
(1) Excluded by law (or tax treaties, etc.)
(2) If income is subjected to final tax If received from foreign corporations still
treated as income from sources WITHIN the
Income from whatever source may also include the following: Philippines.
1. Taxable illegal income;
2. Forgiveness of indebtedness in certain instances; Unless only 50% of the gross income of
3. Tax benefit rule. the foreign corporation (for three-year period
prior to declaration of dividends) was derived
According to Dean, for purposes of income taxation, whether the source from sources within the Philippines, only in an
is lawful or unlawful, the income is still taxable whether it is from amount which bears the same ration shall be
legitimate or illegitimate resources. considered as income WITHIN Philippines.
Services Performed in the Philippines shall be treated
The phrase “income from whatever source derived” is so broad that it as income from sources WITHIN the PH.
includes all income not expressly excluded or exempted from the class Rentals and If property or interest is located or used
of taxable income, irrespective of the voluntary or involuntary action of Royalties WITHIN the PH.
the taxpayer in producing the income (Gutierrez v. CIR, 1965). Sale of real If property is located WITHIN the PH.
• Income from jueteng is included in gross income. property
• Income from an illegal business is subject to income taxation Sale of personal Shares of stock sold – treated as income
such as from swindling and extortion. property entirely from WITHIN the Philippines.
• Income arising from solutio indebiti is taxable income.
• Political contributions for campaign – which are excess or are Other personal property – can be considered
unutilized shall be considered as subject to income tax and within or without depending under Sec. 42(E)
must be included in the taxable income (Revenue Regulation • Note the Territoriality Principle of Taxation.
7-2011, No. 1).
V. Normal Tax v. Final Tax, Tax Treatment 3. The expenses must be substantiated (supported by receipts
and documents; excess is returned).
Final Taxes
Final taxes or under NIRC, final withholding taxes, they are taxes that (3) Allowances Given in Kind
are prescribed on certain income. Once an income is subjected to Final Dean refers this as the “For the convenience of Employer
Tax, it will not be further taxed under the normal or capital gains tax. It Rule”. Meaning if the facilities or complements are given by
is a tax specifically extracted on specifically defined income. the ER to EE is for convenience of the ER (such as lodging
for a driver of the ER) it is not part of compensation income.
For example, under the TRAIN Law:
Tips Received by Employees
Prizes are subject to 20% Final Tax if amount is above P10,000 It is taxable income because tips are received by the employees due to
if not, then subject to normal tax. Winnings of any amount their services but it is not subject to withholding tax. But it might not be
are subject to 20% Final Tax. part of the compensation income (Atty. Donalvo submits).
Thus, if A won in a dance contests for P15,000, it shall be subjected to Gratuities

a final tax of P3,000. The item being subject already to a final tax shall Like a retirement pay and there is a gratuity pay for services rendered,
no longer be included to be determined using normal tax.(See: Items it is still subjected as compensation income as it is given under ER-EE
Pertinent to Gross Income being basis for determining taxable income). relationship.
• Therefore they are no longer included in the items pertinent to
gross income under Section 31 of the NIRC. Separation Pay
GR: Retirement pay and separation pay form part of gross income.
Vacation leaves, sick leaves, service incentive leaves they still form part
VI. Sources of Income Subject to Normal Tax
of the compensation income.
The items of gross income can be categorized into three: XPN: Monetized unused vacation leave credits of employees that is not
1. Compensation income exceeding 10 days or less.
2. Business income
3. Other income Section 32(B)(7)(e)
13th Month Pay and Other Benefits. – Gross benefits received by
1. COMPENSATION INCOME officials and employees of public and private entities are excluded from
the computation of gross income. Provided, however, That the total
Compensation Income exclusion shall not exceed P90,000.
NIRC, Section 32(A)(1)
(b) Fringe Benefits
According to Dean, this refers to compensation which is received by the
taxpayer by the reason of rendition of services under an employer-
employee relationship. Fringe Benefits
Thus the elements must be present: NIRC

1. Right to selection and hiring SECTION 33
2. Right to pay salaries or wages
3. Power of Dismissal Special Treatment of Fringe Benefit. –
4. Power to Control
(A) Imposition of Tax. - Effective January 1, 2018 and onwards,
(a) In General a final tax of thirty-five percent (35%) is hereby imposed on the
grossed-up monetary value of fringe benefit furnished or granted
Compensation Income to the employee (except rank and file employees as defined herein)
Is renumeration for services performed by an employee for his employer by the employer, whether an individual or a corporation (unless
under an employer-employee relationship unless excepted under the the fringe benefit is required by the nature of, or necessary to the
provisions of NIRC. trade, business or profession of the employer, or when the fringe
benefit is for the convenience or advantage of the employer). The
The term compensations means all remunerations paid for services tax herein imposed is payable by the employer which tax shall be
performed by an employee for his or her employer, whether paid in cash paid in the same manner as provided for under Section 57 (A) of
or in kind, unless specifically excluded under the law. this Code. The grossed-up monetary value of the fringe benefit
shall be determined by dividing the actual monetary value of the
Note: The mode of compensation is immaterial. fringe benefit by sixty-five percent (65%) effective January 1, 2018
and onwards: Provided, however, That fringe benefit furnished to
Supplementary Compensation, Included employees and taxable under Subsections (B), (C), (D) and (E) of
Compensation income as to supplementary compensation such as Section 25 shall be taxed at the applicable rates imposed thereat:
those of overnight pay, nightshift differential, hazard pay are still covered Provided, further, That the grossed -Up value of the fringe benefit
by Section 32(A)(1) on compensation income. shall be determined by dividing the actual monetary value of the
fringe benefit by the difference between one hundred percent
Allowances (100%) and the applicable rates of income tax under Subsections
(B), (C), (D), and (E) of Section 25.
Types of Allowances:
(1) Fixed Allowance – there is a specific fixed among given to
(B) Fringe Benefit Defined. - For purposes of this Section, the
the employee per month.
(2) Variable Allowance – amount is different in each case. term 'fringe benefit' means any good, service or other benefit
furnished or granted in cash or in kind by an employer to an
GR: Allowances received by the employee are included in the individual employee (except rank and file employees as defined
compensation income. herein) such as, but not limited to, the following:
(1) Housing;
XPN: Allowances received by employee shall be excluded if: (2) Expense account;
1. The allowance is necessary and ordinary expense of the ER (3) Vehicle of any kind;
2. The allowance given to the employee is subject to accounting (4) Household personnel, such as maid, driver and others;
and liquidation (5) Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employees not falling within any of the above definitions are
employer for the employee in social and athletic clubs or other considered rank-and-file employees for purposes of this Book.
similar organizations;
(7) Expenses for foreign travel; Tax Consequences of Fringe Benefits to Kinds of Employees:
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and 1. Rank and File Employee
(10) Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law allows. GR: It forms part of the gross income as it is not subject to a
final tax provided for under Section 33 – it is not subject to the
35% fringe benefit tax thus forms part of the gross income (as
(C) Fringe Benefits Not Taxable. - The following fringe benefits
it is not excluded from the pertinent items of gross income).
are not taxable under this Section:
XPN: Unless excluded by law.
(1) Fringe benefits which are authorized and exempted from tax
under special laws; Otherwise stated, where the recipient of the fringe benefit is a rank and
(2) Contributions of the employer for the benefit of the employee file employee, and the said benefit is not tax-exempt, the value of such
to retirement, insurance and hospitalization benefit plans; fringe benefit shall be considered as part of the compensation income
(3) Benefits given to the rank and file employees, whether subject to tax payable by the employee.
granted under a collective bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations 2. Managerial Employee
to be promulgated by the Secretary of Finance, upon GR: It is subjected to fringe benefits tax (35% Final Tax), as
recommendation of the Commissioner. defined, it is no longer included in the pertinent items of gross
income as it is already subjected to a final tax.
The Secretary of Finance is hereby authorized to promulgate,
upon recommendation of the Commissioner, such rules and XPN: Unless excluded by law.
regulations as are necessary to carry out efficiently and fairly the
provisions of this Section, taking into account the peculiar nature Where the recipient of the fringe benefit is not a rank and file employee,
and special need of the trade, business or profession of the and the said fringe benefit is not tax-exempt, then the same shall not be
employer. (Amended by TRAIN Law) included in the compensation income subject to normal tax.
Nature of Fringe Benefit Tax

(i) Definition and Concept
It is in the nature of a final tax which is imposed on the fringe benefit that
Definition and Concept is received by managerial or supervisory employee and is not included
Fringe benefits are those given by the employer over and above the in the pertinent items of gross income for the calculation of taxable
salaries ang wages of the employee. It is given by the employer and they income under Section 31.
are considered as compensation income. They are benefits given to
the employees above their salaries. Who Pays Fringe Benefit Tax
The fringe benefits granted to the employee (other than a rank and file)
Nature of Fringe Benefit is taxable to the employer unless exempted (Section 33[A]).
It is a compensation income but does not necessarily form part of the
gross income because: Tax Rate of Fringe Benefit Tax
(a) It may be subjected to a final tax; GR: Effective January 1, 2018 it shall be 35% Final Tax (Prior thereto,
(b) There are fringe benefits that are excluded from tax. it shall be 32% final tax).
(See: Gross Income v. Net Income v. Taxable Income).
(ii) Taxable and Non-Taxable Fringe XPN:
Benefits (1) Non-resident aliens who are not engaged in trade and
business (NRANETB) – 25%
Taxability of Fringe Benefits, As to Items (2) Special individuals or aliens – 15%
a. Taxable fringe benefits are those mentioned in 33(B) a. Aliens who are EEs in regional operating HQ of
b. Non-taxable fringe benefits are those mentioned in 33(C) multinational companies
(i) Those excluded and exempted by law b. Engaged in offshore banking units of foreign banks
(ii) Contributions by ER for benefit of EE to retirement, c. Employed in petroleum service contracts or sub-
insurance, hospitalization benefit plans contractors in the Philippines
(iii) Benefits given to rank and file EEs whether or not d. Filipino citizens who are employed in either of the 3
granted under a CBA; and companies of same positions as to special aliens.
(iv) De minimis benefits
Tax Base of Fringe Benefit Tax: Gross Up Monetary Value
Taxability of Fringe Benefits, As to Employee Under RR 3-98, the grossed up monetary value of the fringe benefit
represents the whole amount of income realized by the EE which
1. Rank and File Employees includes the net amount of money or net monetary value of the property
Section 22(AA): The term 'rank and file employees' shall which has been received plus the amount of fringe benefit tax thereon
mean all employees who are holding neither managerial nor otherwise due from the employee but paid by the employer for an in
supervisory position as defined under existing provisions of behalf of the employee (Section 2.33). It is not necessarily the money
the Labor Code of the Philippines, as amended. received but the monetary value.
2. Managerial Employees Grossed-up Monetary Value (GUMV)

Article 212(m), Labor Code: “Managerial employee” is one
who is vested with the powers or prerogatives to lay down and Actual value of the fringe benefit + fringe benefit tax paid by employer.
execute management policies and/or to hire, transfer,
suspend, lay-off, recall, discharge, assign or discipline Fringe Benefit Tax = GUMV x Tax Rate (35%, 25%, 15%)
employees.
Determining Grossed-Up Monetary Value
Supervisory employees are those who, in the interest of the
[1] Money: monetary value is the amount given or money paid
employer, effectively recommend such managerial actions if
the exercise of such authority is not merely routinary or clerical
[2] Other Than Money: determine whether there is change of transfer
in nature but requires the use of independent judgment. All
of ownership.
A. If there is transfer of ownership: fair market value of property • 30% of the first class airfare
• Travelling expenses of the family of EE paid by ER (which is
B. If there is no transfer of ownership or assignment not related to business
o Depreciation value of the property • Foreign travel not related to business meetings or
conventions
[1] Housing Privileges
1. If leased by ER for the use of EE [5] Educational Assistance
MV = 50% of the Rent Amount
GR: Educational assistance given to the ER or Managerial Staff is
2. ER owns a real property and assigns it to the EE subject to Fringe Benefit Tax
MV = 50% of the Annual Value
AV = 5% of the (Fair Market Value [FMV] or Zonal Value [ZV]) XPN: The education assistance is exempted from fringe benefit tax:
(1) If it is given to the employee upon these requisites
a. Education assistance is directly connected with
3. ER purchases real property or housing for EE’s use
the employer’s business ;and
MV = 50% of the Annual Value b. Written contract between ER and EE that the EE
AV = 5% of the Acquisition Cost exclusive of Interest shall remain in the employ for particular period.
(2) Given to the dependents of the EE if
4. ER purchases and transfers ownership to EE a. Provided for through a competitive scheme under
MV = Acquisition Cost (AC) or ZV, whichever is higher. the company’s scholarship program.
5. Transfer of ownership where EE pays part of the price Non-Taxable Fringe Benefits (From Fringe Benefit Tax) [Sec. 33(B)]
MV = ZV or FMV – Cost to the EE At least two kinds:
[Difference between ZV or FMV whichever is higher and the (1) Those required by the nature of, or necessary to the trade,
Cost to the Employee] business or profession of the employer
(2) Those granted for the convenience or advantage of the ER.
Non-Taxable Housing Privileges (Tax Exempt)
1. Housing privileges of the AFP (PNP excluded) (iii) De Minimis Benefits
2. Housing Unit inside or adjacent to the business premises or
the factory (adjacent: 50-meter radius of business premises) De Minimis Benefits [Section 33(B)(4)]
3. Temporary Housing from 3 months or less De minimis benefits that are ordinarily facilities and privileges furnished
or offered by the ER to his EEs that are of a relatively small value and
[2] Expense Account are offered or furnished by the ER as a means of promoting health,
In general, expenses incurred by the employee but which are paid by goodwill, contentment or efficiency of his employees. As a rule, they are
his employer shall be treated as taxable fringe benefits. Personal excluded from gross income.
expenses of the EE (like groceries) paid for or reimbursed by ER to the
EE shall be treated as taxable fringe benefits. [1] To be Defined in the Rules and Regulations
Under various Revenue Regulations following are de minimis benefits:
[3] Motor Vehicles
1. Monetized unused vacation leave credits of employees not exceeding
If purchased by the ER in the MV = Acquisition Cost ten (10) days during the year; (RR No. 5-2011)
name of EE
Cash is given by the ER to EE MV = Cash Value Given 2. Monetized value of vacation and sick leave credits paid to government
Purchase by ER on installment MV = Acquisition Cost exclusive officials and employees; (RR No. 5-2011)
basis (no transfer of ownership) of interest divided by 5 years
Price is shouldered by ER MV = Amount shouldered by ER 3. Medical cash allowance to dependents of employees, not exceeding
Fleet of motor vehicles MV = 50% of the Value of the P1,500 per employee per semester or P250 per month; (RR 11-2018)
maintained by ER for the use of Benefit which is the AC of all the
EE (no transfer of ownership) vehicles divided by 5 years 4. Rice subsidy of P2,000 or one (1) sack of 50 kg. rice per month
amounting to not more than P2,000; (RR No. 11-2018)
Fleet of motor vehicles leased MV = 50% of the rental payment
by ER
5. Uniform and Clothing allowance not exceeding P6,000 per annum;
Yacht MV = Depreciation amount
(RR No. 11-2018)
based on useful life of 20 years
Aircrafts No longer subject to fringe
6. Actual medical assistance, e.g. medical allowance to cover medical
benefit tax, presumed for
and healthcare needs, annual medical/executive check-up, maternity
business use.
assistance, and routine consultations, not exceeding P10,000.00 per
annum; (RR No. 5-2011)
[4] Expenses for Foreign Travel
7. Laundry allowance not exceeding P300 per month; (RR No. 5-2011)
Non-Taxable Foreign Travel Expenses
1. Reasonable business expenses for foreign business travel as 8. Employees achievement awards, e.g., for length of service or safety
they necessary to the business of ER achievement, which must be in the form of a tangible personal property
2. Inland travel expenses except lodging cost to an average of other than cash or gift certificate, with an annual monetary value not
USD 300 per day exceeding P10,000 received by the employee under an established
3. The cost of economy or business class airplane fares (if first written plan which does not discriminate in favor of highly paid
class amount to 70% of the airfare) employees; (RR No. 5-2011)
Substantiation Rule: There must be given documentary requirements 9. Gifts given during Christmas and major anniversary celebrations not
supporting the expenses and the nature of those expenses whether they exceeding P5,000 per employee per annum; (RR No. 5-2011)
are necessary or related to the business of the employer.
10. Daily meal allowance for overtime work and night/graveyard shift not
Meaning, if there is failure to substantiate it shall be considered as exceeding twenty-five percent (25%) of the basic minimum wage on a
taxable fringe benefits. per region basis; (RR No. 5-2011)
Taxable Foreign Travel Expenses 11. Benefits received by an employee by virtue of a collective bargaining
• Foreign travels unsupported by documentary exhibits agreement (CBA) and productivity incentive schemes provided that the
total monetary value received from both CBA and productivity incentive withholding tax on compensation income, for rank and file employees,
schemes combined do not exceed P10,000.00 per employee per or fringe benefits tax for managerial and supervisory employees, as the
taxable year. (RR No 1-2015) case may be.
NOTE: As such de minimis benefits, if given to supervisors and to the Based on the foregoing, it is clear that to completely determine the
managerial employees are still exempt from FBT. merits of petitioners' claimed exemption from withholding tax on
compensation, under Section 33 of the NIRC of 1997, there is a need to
[2] Ceilings Provided confirm several factual issues. As such, petitioners cannot but first resort
If the DMB if within the ceiling then the fringe benefit is exempt from FBT to the proper courts and administrative agencies which are better
but if the DMB exceeds the ceiling, the excess amount shall form part of equipped for said task.
the P90,000 non-taxable amount under Section 32(B)(7)(e) or those
under “13th Month Pay or Other Benefits” All told, the Court finds Sections III and IV of the assailed RMO valid.
• Meaning those which exceeds DMB ceilings are included to
the P90,000 ceiling for amount of non-taxable compensation The NIRC of 1997, as amended, is clear that all forms of
income. compensation income received by the employee from his employer
• Thus, is the P90,000 ceiling is already consumed, then the are presumed taxable and subject to withholding taxes. The
excess shall now form part of the gross income now taxable. Government of the Philippines, its agencies, instrumentalities, and
political subdivisions, as an employer, is required by law to withhold and
remit to the BIR the appropriate taxes due thereon.
CONFEDERATION FOR UNITY AND RECOGNITION v. CIR
GR 213446, July 3, 2018, En Banc
Any claims of exemption from withholding taxes by an employee, as in
the case of petitioners, must be brought and resolved in the appropriate
Determination of Existence of Fringe Benefits is a Question of Fact
administrative and judicial proceeding, with the employee having the
Petitioners, nonetheless, insist that the allowances, bonuses and
burden to prove the factual and legal bases thereof
benefits enumerated in Section III of the assailed RMO are, in fact, fringe
and de minimis benefits exempt from withholding tax on compensation.
The Court cannot, however, rule on this issue as it is essentially a Factual Issues in the Case:
question of fact that cannot be determined in this petition questioning
the constitutionality of the RMO. To be sure, settled is the rule that 1. Nature of fringe benefits given because the nature of the
exemptions from tax are construed strictissimi juris against the taxpayer fringe benefits will determine if it is subject to the FBT or 35%
and liberally in favor of the taxing authority. final tax or not such as:
a. Those required by the very nature of business or
The determination, therefore, of the merits of petitioners' claim for tax necessary to the business of ER;
exemption would necessarily require the resolution of both legal and b. Granted for the convenience of ER
factual issues, which this Court, not being a trier of facts, has no This requires documentation and substantiation.
jurisdiction to do; more so, in a petition filed at first instance. Among the
factual issues that need to be resolved, at the first instance, is the nature 2. Recipient of the fringe benefits
of the fringe benefits granted to employees. a. If managerial – it is subject to a final withholding tax
of 35% or the fringe benefit tax and no longer part
The NIRC of 1997, as amended, does not impose income tax, and of the taxable compensation income under normal
consequently a withholding tax, on payments to employees which are tax;
either (a) required by the nature of, or necessary to, the business of the b. If rank and file employee – it is not subjected to a
employer; or (b) for the convenience or advantage of the employer. This, final tax of 35% but included in the taxable
however, requires proper documentation. compensation income.
Without any documentary proof that the payment ultimately redounded 3. Whether fringe benefits is a de minimis benefit.
to the benefit of the employer, the same shall be considered as a taxable a. De minimis benefits are exclusive only as provided
benefit to the employee, and hence subject to withholding taxes. by the Revenue Regulations; otherwise it is not
considered as a de minimis benefit.
Another factual issue that needs to be confirmed is the recipient of the b. De minimis benefits are both exempted from
alleged fringe benefit. Fringe benefits furnished or granted, in cash or income tax on compensation and fringe benefit tax
in kind, by an employer to its managerial or supervisory employees, are hence not subject to withholding tax.
not considered part of compensation income; thus, exempt from
withholding tax on compensation. (iv) Minimum Wage Earners
Instead, these fringe benefits are subject to a fringe benefit tax Minimum Wage Earner (MWE)
equivalent to 32% of the grossed-up monetary value of the benefit, Section 22(HH): The term 'minimum wage earner' shall refer to a
which the employer is legally required to pay. worker in the private sector paid the statutory minimum wage or to an
employee in the public sector with compensation income of not more
On the other hand, fringe benefits given to rank and file employees, than the statutory minimum wage in the non-agricultural sector where
while exempt from fringe benefit tax, form part of compensation income he/she is assigned.
taxable under the regular income tax rates provided in Section 24(A)(2)
of the NIRC, of 1997, as amended; and consequently, subject to Statutory Minimum Wage
withholding tax on compensation. Section 22(GG): The term 'statutory minimum wage' shall refer to the
rate fixed by the Regional Tripartite Wage and Productivity Board, as
Furthermore, fringe benefits of relatively small value furnished by defined by the Bureau of Labor and Employment Statistics (BLES) of the
the employer to his employees (De Minimis Benefits) (both Department of Labor and Employment (DOLE).
managerial/supervisory and rank and file) as a means of promoting
health, goodwill, contentment, or efficiency, otherwise known as de Tax Implication if Taxpayer is MWE
minimis benefits, that are exempt from both income tax on They are tax exempt as provided for:
compensation and fringe benefit tax; hence, not subject to
withholding tax, are limited and exclusive only to those NIRC
enumerated under RR No. 3-98, as amended. SECTION 24(A)
All other benefits given by the employer which are not included in the (A) Rates of Income on Individual Citizen and Individual
said list, although of relatively small value, shall not be considered as de Resident Alien of the Philippines. - x x x
minimis benefits; hence, shall be subject to income tax as well as
(2) Rates of Tax on Taxable Income of Individuals. - 2. BUSINESS INCOME

xxx
(last paragraph) Provided, That minimum wage earners as Business Income
defined in Section 22(HH) of this Code shall be exempt from NIRC, Section 32(A)(2)
the payment of income tax on their taxable income:
provided, further, That the holiday pay, overtime pay, night These are the gains, returns and revenue derived from a trade or that of
shift differential pay and hazard pay received by such a commercial activity regularly engaged as a means of livelihood or with
minimum wage earners shall likewise be exempt from income tax. a view to profit.
• This is the incomed received by a taxpayer who is engaged in
the business and is included in the gross income.
They Are Exempt from Income Tax on Taxable Income
According to RR 11-2018, minimum wage earners are exempt from Two Types of General Businesses
payment of income tax on their 1. Engaged in the selling, manufacturing of goods, items or
1. Taxable compensation income; as well as materials;
2. Holiday pay, 2. Engaged in the selling or services
3. Overtime pay
4. Night shift differential pay; and Engaged in Selling and Manufacturing of Goods, Items or Materials
5. Hazard pay
As these are also considered as wages, not bonuses
Gross Income = Gross Sales
In Case There is Excess to the P90,000 Ceiling of the (less) Sales discounts
Bonuses and Other Benefits Received by an MWE (less) Sales allowances
According to RR 11-2018, the additional compensation such as those (less) Sales returns
of commissions, honoraria, fringe benefits, benefits in excess of the Net Sales
statutory amount of P90,000 given to an MWE shall be subject to (less) Costs of Sales “capital”
withholding tax. (Unless of course, these are exempt from tax). Gross Income (or Gross Profit)
SORIANO v. SECRETARY OF FINANCE

GR 184450, January 24, 2017, En Banc Engaged in Selling of Services
Issue: Whether Section 1 and 3 of RR 10-2008 are consistent with the

law in declaring that a MWE who receives other benefits in excess of the Gross Income = Gross Receipts
statutory limit of P30,000 (at that time) is no longer entitled to the (less) Discounts
exemption provided by RA 9504, is consistent with the law. – No. (less) Allowances
(less) Returns
Held: Nowhere in the above provisions of R.A. 9504 would one find the Net
qualifications prescribed by the assailed provisions of RR 10-2008. The (less) Costs of Services “salaries, wages, rent”
provisions of the law are clear and precise; they leave no room for Gross Income (or Gross Profit)
interpretation - they do not provide or require any other qualification as
to who are MWEs.
3. GAINS
To be exempt, one must be an MWE, a term that is clearly defined.
Section 22(HH) says he/she must be one who is paid the statutory Gains Derived From Dealings in Properties
minimum wage if he/she works in the private sector, or not more than Income from dealing in property, real or personal, is the excess of selling
the statutory minimum wage in the non-agricultural sector where he/she price or the market value of the property received in exchange over the
is assigned, if he/she is a government employee. Thus, one is either cost or other basis of property sold, exchange or disposed of. This refers
an MWE or he/she is not. Simply put, MWE is the status acquired to the income derived from the sale, exchange or barter of assets which
upon passing the litmus test - whether one receives wages not results to a gain.
exceeding the prescribed minimum wage. The minimum wage
referred to in the definition has itself a clear and definite meaning. The Exchange of Assets
law explicitly refers to the rate fixed by the Regional Tripartite Wage and There is a transfer of property from one person to another for a good
Productivity Board, which is a creation of the Labor Code. consideration unlike in a donation or succession when there might be a
transfer but there is no exchange.
R.A. 9504 is explicit as to the coverage of the exemption: the wages that
are not in excess of the minimum wage as determined by the wage (a) Types of Gains
boards, including the corresponding holiday, overtime, night differential
and hazard pays. In other words, the law exempts from income taxation
the most basic compensation an employee receives - the amount (i) Ordinary Gains
afforded to the lowest paid employees by the mandate of law. In a way,
the legislature grants to these lowest paid employees additional income Ordinary Gain
by no longer demanding from them a contribution for the operations of It includes any gain from the sale or exchange of property which is not
government. This is the essence of R.A. 9504 as a social legislation. a capital asset or property. These are derived from ordinary assets.
The government, by way of the tax exemption, affords increased
purchasing power to this sector of the working class. Taxability: only ordinary gains form part of the gross income.
What the legislature is exempting is the MWE's minimum wage and Ordinary Assets
other forms statutory compensation like holiday pay, overtime pay, night Ordinary assets are all the property that are held by a taxpayer in
shift differential pay, and hazard pay. These are not bonuses or other connection with his trade or business. Ordinary assets shall refer to all
benefits; these are wages. real properties specifically excluded from the definition of capital assets
(RR 7-2003, Sec. 2. b). [See: Capital Asset Definition]
Given the foregoing, the treatment of bonuses and other benefits that an
employee receives from the employer in excess of the P30,000 ceiling (ii) Capital Gains
cannot but be the same as the prevailing treatment prior to R.A. 9504 -
anything in excess of P30,000 is taxable; no more, no less. The Capital Gains
treatment of this excess cannot operate to disenfranchise the MWE They are derive from the sale, exchange or barter of capital assets
from enjoying the exemption explicitly granted by R.A. 9504.
Taxability: Deductibility of Losses

GR: It will form part of the gross income subject to regular tax. Capital losses arising from Ordinary losses arising from the
XPN: [1] If excluded by law; or [2] subject to final tax. disposition of capital asset may use of ordinary assets may be
only be deductible from a capital deducted from capital gains.
Capital Assets, Not Used for Business gain
Looking at the definition, capital assets are those which are not used in Holding Period
business. The statutory definition of capital assets is negative in nature. Taxability of certain kinds of Holding period does not apply to
If the asset is not among the exceptions, it is a capital asset. capital assets may be subject to taxability of ordinary assets.
a holding period.
NIRC
SECTION 39 The tax base imposition of capital gains taxes may either be the:
1. Actual gain; or
Capital Gains and Losses. – 2. Presumed gain
(A) Definitions. - As used in this Title – (iii) Actual Gain

The actual gain is determined by taking the receipt from the disposition
(1) Capital Assets. - The term 'capital assets' means property of the capital asset and subtracting the acquisition cost or cost basis.
held by the taxpayer (whether or not connected with his trade or This gain is then the tax base upon which capital gains tax is imposed.
business), but does not include
(iv) Presumed Gain
[1] stock in trade of the taxpayer or other property of a kind which
The presumed capital gain is usually a fixed value of the capital asset
would properly be included in the inventory of the taxpayer if on
irrespective whether there is an actual capital gain or it may even
hand at the close of the taxable year or
happen a capital loss. The tax base for the imposition of the capital gains
tax is the fixed value as determined by statute.
[2] property held by the taxpayer primarily for sale to customers
in the ordinary course of his trade or business, or
(v) Net Capital Gain
[3] property used in the trade or business, of a character which is As provided for by the NIRC (continuation of Section 39
subject to the allowance for depreciation provided in Subsection
(F) of Section 34; or NIRC
SECTION 39
[4] real property used in trade or business of the taxpayer.
(2) Net Capital Gain. – The term net capital gain means the
excess of the gains from sales or changes of capital assets over the
“Whether or not connected with his trade or business” losses from such sales or changes.
Despite this provision, a close scrutiny of the exceptions would show
that these are items connected with trade or business. Consequently, (3) Net Capital Loss. – the term net capital loss means the
capital assets are the properties of the taxpayer which are not excess of the losses from sale or exchanges of capital assets over
connected with his trade or business [despite the phrase cited]. Upon the gains from such sales or exchanges.
examination of exceptions, this would be the case.
Exceptions from Capital Assets b. Computation of Capital Gain or Loss
1. Stock in trade of the taxpayer or other property of a kind which
would properly be included in the inventory of the taxpayer if NIRC
one hand at the close of the taxable year.
SECTION 39
These are inventory assets part of the properties that are sold later on.
(A) Computation of Gain or Loss. - The gain from the sale or
2. Property held by the taxpayer primarily for sale to customers other disposition of property shall be the excess of the amount
in the ordinary course of his trade or business; or realized therefrom over the basis or adjusted basis for
determining gain, and the loss shall be the excess of the basis or
Similar to [1], still made part of inventory. adjusted basis for determining loss over the amount realized. The
amount realized from the sale or other disposition of property
3. Property used in trade or business, of a character which is shall be the sum of money received plus the fair market value of
subject to the allowance for depreciation provided in the property (other than money) received;
Subsection (F) of Section 34
Determining Gain:
This refers to Depreciable Assets, like a car, the longer time property Gain from the sale or other disposition of property shall be the excess of
is held the lesser it got because the value becomes lower overtime. the amount realized therefrom over the basis or adjusted basis of
determining gain.
4. Real property used in trade or business of the taxpayer.
Determining Loss:
Capital Assets Ordinary Assets Loss shall be the excess of the basis or adjusted basis of determining
Give rise to Capital Gains Give rise to Ordinary Gains loss over the amount realized.
Nature
Not used in trade, business or Used in trade, business or Amount Realized:
the exercise of profession. exercise of a profession. Sum of money received plus the fair market value of the property (other
Diminution of Value than money) received.
Diminution is in the form of Diminution may be allowed as a
depreciation, otherwise not deduction from gross income in c. Tax Treatment
allowed as deduction from gross the form of depreciation or
income because it is not used in otherwise. (i) Ordinary Gain
trade, business or profession. If the asset is not a capital asset, but an ordinary asset, get the net gain
Taxability of Income and report as part of ordinary gain as part of gross income and subject
GR: Included in gross income Subject to inclusion in the gross to regular income tax.
XPN: (1) excluded; (2) subject to income in the income tax return
a final tax of the earner.
(ii) Capital Gain imposed on net capital gains realized during the taxable year from the
Note however that just because it is a capital gain, it does not mean that sale, exchange or other disposition of shares of stock in a domestic
it is already subject to final tax (or capital gains tax). corporation except shares sold or disposed of through the stock
exchange.
GR: It shall form part of the gross income
E) Resident Foreign Corporation
XPN: [1] When excluded by law or [2] When subject to final tax. Section 28(A)(7)(c) – 5% or 10% Rule
(c) A final tax at the rates prescribed below is hereby imposed upon the
(iii) Capital Gains Tax net capital gains realized during the taxable year from the sale, barter,
exchange or other disposition of shares of stock in a domestic
Types of Properties Sold or Traded corporation except shares sold or disposed of through the stock
In Relation to Capital Gains Taxation exchange:
1. Stocks (domestic stocks)
2. Real properties Not over P 100,000 5%
3. Others (not domestic stocks nor real property). On any amount in excess of P 100,000 10%
1. Shares of Stocks of Domestic Corporation F) Nonresident Foreign Corporation

Section 28(B(5)(c) – 5% or 10% Rule
Type of Person Dealing With the Stock
Stock Dealers Non-Dealers (c) A final tax at the rates prescribed below is hereby imposed upon the
net capital gains realized during the taxable year from the sale, barter,
Sold by dealer of securities or If the stocks are not being sold
part of their inventory or nor part of inventory or it is sold
corporation except shares sold or disposed of through the stock
engaged in the business of by non-dealers.
exchange:
selling stocks and securities.
Part of Ordinary Assets and Part of Capital Assets
Not over P 100,000 5%
forms part of the business
On any amount in excess of P 100,000 10%
income of the dealer.
Stocks are sold through a local Stocks are not traded or listed; 2. Real Property Located in the Philippines
stock exchange; stock is listed or direct selling of stocks
Stock Transaction Tax Capital Gains Tax For Citizens and Resident Aliens:
FINAL TAX (excluded from GI) FINAL TAX (excluded from GI)
NIRC
Tax Rate: Tax Rate: SECTION 24
6/10 of 1% (TRAIN Law) Pegged at 15% (TRAIN Law)
(D) Capital Gains from Sale of Real Property. –
Tax Base: Tax Base:
Gross Selling Price or Net Capital Gains (1) In General. - The provisions of Section 39(B)
Gross Value in Money notwithstanding, a final tax of six percent (6%) based on the gross
selling price or current fair market value as determined in
Relevant Provisions Cited for Stocks of Domestic Corporation accordance with Section 6(E) of this Code, whichever is higher, is
hereby imposed upon capital gains presumed to have been
A) Citizens and Resident Aliens realized from the sale, exchange, or other disposition of real
Section 24(c) as amended by TRAIN Law property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional sales,
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock by individuals, including estates and trusts: Provided, That the
Exchange. — The provisions of Section 39(B) notwithstanding, a final tax liability, if any, on gains from sales or other dispositions of
tax at the rate of fifteen percent (15%) is hereby imposed upon the net real property to the government or any of its political subdivisions
capital gains realized during the taxable year from the sale, barter, or agencies or to government-owned or controlled corporations
shall be determined either under Section 24 (A) or under this
corporation, except shares sold, or disposed of through the stock
Subsection, at the option of the taxpayer;
exchange.
For NRAETB, Section 25(A)(3) provides:
B) Non-Resident Alien Engaged in Trade or Business
Section 25(A)(3) – 15% Final Tax
Capital Gains. - Capital gains realized from sale, barter or exchange of
shares of stock in domestic corporations not traded through the local
(3) Capital Gains. - Capital gains realized from sale, barter or exchange stock exchange, and real properties shall be subject to the tax
of shares of stock in domestic corporations not traded through the local prescribed under Subsections (C) and (D) of Section 24.
stock exchange, and real properties shall be subject to the tax
prescribed under Subsections (C) and (D) of Section 24.
For NRANETB, Section 25(B) provides:
C) NRA NOT Engaged in Trade or business
Capital gains realized by a nonresident alien individual not engaged in
Section 25(B) – 15% Final Tax
trade or business in the Philippines from the sale of shares of stock in
any domestic corporation and real property shall be subject to the
Capital gains realized by a nonresident alien individual not engaged in income tax prescribed under Subsections (C) and (D) of Section 24.
trade or business in the Philippines from the sale of shares of stock in
any domestic corporation and real property shall be subject to the
The property must be a
income tax prescribed under Subsections (C) and (D) of Section 24.
1. Real property
a. Individuals – Real properties under Civil Code
D) Domestic Corporation b. Corporations – only lands and buildings
Section 27(D)(2) – 15% Final Tax 2. Within the Philippines
a. If abroad, subject to gross income and ordinary tax
(2) Capital Gains from the Sale of Shares of Stock Not Traded in the 3. Capital Asset
Stock Exchange. - A final tax at the rate of fifteen percent (15%) shall be a. Must not be ordinary asset
Tax Rate: 6% of: sale or disposition through a prescribed return of his intention to
1. Gross selling price, OR avail of the tax exemption herein mentioned: Provided, still
2. Current fair market value further, That the said tax exemption can only be availed of
a. Zonal Value – determined by CIR once every ten (10) years: Provided, finally, That if there is no
b. Assessment Value – determined by Assessors full utilization of the proceeds of sale or disposition, the portion of
WHICHEVER IS HIGHER the gain presumed to have been realized from the sale or
disposition shall be subject to capital gains tax. For this purpose,
Here, what is being taxed not the actual gain but the presumed gain, the gross selling price or fair market value at the time of sale,
even if the taxpayer sold property at a loss, it is immaterial because the
whichever is higher, shall be multiplied by a fraction which the
sale of real properties within the Philippines considered as capital assets
unutilized amount bears to the gross selling price in order to
shall be subject to a final tax based on the presumed gain.
determine the taxable portion and the tax prescribed under
Final Tax paragraph (1) of this Subsection shall be imposed thereon.
The capital gains tax here is considered as a final tax which no longer
included in the gross income.
Principal Residence, Defined
Person Liable: The term shall refer to the dwelling house, including the land on which it
• Seller is situated where the husband and wife or unmarried individual, whether
• If shouldered by buyer, it forms part of the consideration this or not qualified as head of family, and members of the family reside.
is because capital gains tax is a direct tax. Actual occupancy of such principal residence shall not be considered
interrupted or abandoned by reason of the individual’s temporary
Transactions Covered absence therefrom due to travel, studies or work abroad or such other
Transaction covered by the presumed capital gains tax on real property similar circumstances. Such principal residence must be characterized
within the Philippines by permanency in that it must be the dwelling house which, whenever
1. Sale absent, the said individual intends to return (RR 14-2000; Sec. 2(2) a).
2. Exchange or barter
3. Other dispositions such as Requirements for the Sale of Principal Residence for Exemption
a. Pacto de retro sales 1. Taxpayer must be an individual;
b. Other forms of conditional sales 2. The sale or disposition is that of the principal residence of the
i. Including estate and trust taxpayer;
3. The proceeds of the sale must be fully utilized to purchase or
Pacto de Retro Sale construct another principal residence;
This is a disposition where a deed of sale contains a clause which gives 4. The taxpayer must purchase or construct another principal
the seller the right to repurchase the property within a fixed period from residence within 18 months from the date of sale or disposition
the date of the sale. 5. The historical cost or adjusted basis of the real property sold
or disposed is carried over to the new principal residence built
In case of redemption: This is no longer covered by CGT. or acquired
6. The Commissioner must be informed within 30 days from the
According to a BIR ruling, the act of redeeming the property is an act of date of sale or disposition through a prescribed return of his
exercise of the right of redemption under the contract, it is no longer a intention to avail of the tax exemption;
taxable sale. 7. The tax exemption may be availed of only once in every 10
Foreclosure Exempt if Redeemed years.
In a foreclosure of a real estate mortgage, the capital gains tax accrues
only after the lapse of the redemption period because it is only the and NOTE: Where ownership of the land and the dwelling house belongs to
there exists a transfer of property. Thus, if the right to redeem the different persons, then in case land is only leased, only the dwelling
foreclosed property was exercised by the mortgagor before expiration of house shall be treated as principal residence of the dwelling house
the redemption, as in this case, the foreclosure is not a taxable event. owner, unless both owners actually reside in the dwelling house (parent
and child) [RR 14-2000].
Property Sold to the Government or Expropriation
If the property is sold to the government, taxpayer has OPTION: Additional Requirements or Conditions for Availment of Exemption
1. Included as part of the gross income to be subject to the The general provisions of the code notwithstanding, the capital gains
allowable deduction then subject to be schedular tax; presumed to have been realized from the sale, exchange or disposition
2. Capital gains tax of 6% imposed on the presumed capital gain by a natural person of his Principal Residence shall not be imposed with
whichever is higher of the (1) gross selling price; or (2) fair 6% capital gains tax subject to the compliance of the following:
market value which can either be the zonal or assessed value.
1. Escrow Agreement – deposit the CGT to a third party (like a
Sale of Real Property Exempt of Capital Gains Tax bank) and withdraw if complied;
1. Sale of real property located abroad 2. Capital Gains Tax Return – still included provided however
2. Sale of principal resident under Section 24(2) of the NIRC. that the Seller/Transferor shall not be required to pay any CGT
during the 18-month period on sale of his principal residence
PRINCIPAL RESIDENCE EXCEPTION 3. Post-Reporting Requirement – Sworn statements that the
proceeds were used in construction or acquisition of a new
Principal Residence; statement from architect of cost of labor
NIRC
and other expenses; building permit
SECTION 24(D)(2)
4. Release from Escrow Agreement – The documents for the
post-reporting requirement must also be shown to show that
(2) Exception. - The provisions of paragraph (1) of this the proceeds were fully utilized, then escrow shall be released
Subsection to the contrary notwithstanding, capital gains 5. Limitation on Tax Exemption Privilege – Failure to comply
presumed to have been realized from the sale or disposition of with the documentary evidence with 30 days after the lapse of
their principal residence by natural persons, the proceeds of the 18 month period – liable for CGT deficiency with 20% int.
which is fully utilized in acquiring or constructing a new principal
residence within eighteen (18) calendar months from the date of Partial Utilization of Proceeds
sale or disposition, shall be exempt from the capital gains tax If there is partial utilization of proceeds, the taxpayer can still avail the
imposed under this Subsection: Provided, That the historical cost tax exemption to the extent of that amount utilized for the purchase or
or adjusted basis of the real property sold or disposed shall be construction of a new principal residence.
carried over to the new principal residence built or acquired:
Provided, further, That the Commissioner shall have been duly Those portion unused shall still be subject to CGT.
notified by the taxpayer within thirty (30) days from the date of
DOMESTIC CORPORATION Suppose A sold a vehicle for P500,000 as selling price, considering
the depreciation the value is P400,000 thus a gain of P100,000
NIRC
SECTION 27(D)(5) Bought the car recently Owned the car for 3 years
Entire P100K must be part of the Only 50% or P50K shall be in the
(5) Capital Gains Realized from the Sale, Exchange or Disposition gross income gross income as capital gains
of Lands and/or Buildings. - A final tax of six percent (6%) is from other income
hereby imposed on the gain presumed to have been realized on
the sale, exchange or disposition of lands and/or buildings which
are not actually used in the business of a corporation and are Holding period applies only to individual taxpayers not corporations.
treated as capital assets, based on the gross selling price of fair
market value as determined in accordance with Section 6(E) of Capital Loss Involved [Discussed in Deductions].
this Code, whichever is higher, of such lands and/or buildings.
4. INTERESTS
SMI-ED v. CIR
Gr 175410, November 12, 2014 Interest Income
The compensation which is paid by the borrower of money to the lender
On the Imposition of Capital Gains Tax for its use, and generally by a debtor to his creditor in compensation for
his detention of the debt.
Thus, "capital assets" refers to taxpayer’s property that is NOT any of
the following: Nature of Interest Income
1. Stock in trade; 1. Passive Income – income derived from any activity from
2. Property that should be included in the taxpayer’s inventory at the which the taxpayer does not materially participate
close of the taxable year; 2. Part of Business Income or Other Income
3. Property held for sale in the ordinary course of the taxpayer’s 3. Possibly Subject to Final Tax
business; a. GR: Interest income forms part of Gross Income
4. Depreciable property used in the trade or business; and b. XPN: [1] excluded; [2] subject to final tax.
5. Real property used in the trade or business.
[A] Those Subject to 20% Final Tax Rate
The properties involved in this case include petitioner’s buildings, 1. Any currency bank deposit and yield
equipment, and machineries. They are not among the exclusions 2. Or any other monetary benefit from
enumerated in Section 39(A)(1) of the National Internal Revenue Code a. Deposit substitutes; and
of 1997. None of the properties were used in petitioner’s trade or b. From trust funds and similar arrangements
ordinary course of business because petitioner never commenced 3. (1) and (2) must be derived from sources within the PH
operations. They were not part of the inventory. None of them were 4. Earned by either individual citizen, resident alien, NRAETB
stocks in trade. a. XPN: NRANETB taxed gross tax rate of 25%
5. If earned by corporations – similar 20%
Based on the definition of capital assets under Section 39 of the National a. XPN: NR Foreign Corporations taxed gross tax
Internal Revenue Code of 1997, they are capital assets. rate of 30%
Respondent insists that since petitioner’s machineries and equipment Deposit Substitutes, Defined [Section 22(Y)]
are classified as capital assets, their sales should be subject to capital The term 'deposit substitutes' shall mean an alternative from of obtaining
gains tax. Respondent is mistaken. funds from the public (the term 'public' means borrowing from twenty
(20) or more individual or corporate lenders at any one time) other than
Limited only to Lands and Buildings deposits, through the issuance, endorsement, or acceptance of debt
Since this Involves a Domestic Corporation instruments for the borrowers own account, for the purpose of relending
or purchasing of receivables and other obligations, or financing their own
Therefore, only the presumed gain from the sale of petitioner’s land needs or the needs of their agent or dealer.
and/or building may be subjected to the 6% capital gains tax.
These instruments may include, but need not be limited to bankers'
The income from the sale of petitioner’s machineries and equipment is acceptances, promissory notes, repurchase agreements, including
subject to the provisions on normal corporate income tax. reverse repurchase agreements entered into by and between the
Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank,
certificates of assignment or participation and similar instruments with
recourse:
3. Real Property Outside the Philippines
If real property is located outside the Philippines, even if it may be then Provided, however, That debt instruments issued for interbank call loans
classified as a capital asset, the proceeds from the sale, barter or the with maturity of not more than five (5) days to cover deficiency in
exchange will form part of the gross income (also considering the type reserves against deposit liabilities, including those between or among
of taxpayer). banks and quasi-banks, shall not be considered as deposit substitute
debt instruments.
4. Other Income
[B] Interest Income Received from Depositary Bank under EFCDS
Other Incomes
This refer to the CAPITAL GAINS that are subject to regular income tax Interest income received from depositary banks under the Expanded
and forms part with the gross income. Foreign Currency Deposit System shall be subject to the following:
Holding Period Individual Citizen 15% Final Tax

It is the length of time that the taxpayer holds the property before the Resident Alien 15% Final Tax
disposing of the same. NRAETB Tax-Exempt
NRANETB Tax-Exempt
Short Term Holding Period Long Term Holding Period Domestic Corporation 15% Final Tax
Not more than 1 year More than 1 year Resident Foreign Corporation 7 ½ Final Tax
Must recognize 100% of the gain Must recognize 50% of the gain Non-Resident Foreign Corporation Tax-Exempt
[C] Those which are Tax Exempt services to its members to enable them to attain increased income,
savings, investments, and productivity.
1. Interest income from EFCDS by
a. Nonresident Individuals Therefore, limiting the application of the tax exemption to cooperatives
b. Nonresident Corporations would go against the very purpose of a credit cooperative. Extending the
exemption to members of cooperatives, on the other hand, would be
2. Long Term deposits (RMC No. 81-2012) consistent with the intent of the legislature. Thus, although the tax
a. The long-term deposits or investment must have a exemption only mentions cooperatives, this should be construed to
maturity period of not less than 5 years include the members,
b. The long term deposits or investments should not
be terminated by the investor before the fifth year,
otherwise they shall be subjected to graduated 5. RENTS
rates of
i. 5% - Four to less than 5 years; Rental Income
ii. 12% - Three to less than 5 years. Rental income or rents is the amount paid for the use of property in which
iii. 20% - Less than 3 years the payor does not intend to take ownership. It is the use of tangible
personal and real property that is usually the subject of rentals.
3. Interest Earned by Members of Cooperative
(Dumaguete Cathedral v. CIR, 2010) The amount paid for the lease of property is rental income to the owner
of the property. Any additional amount paid, directly or indirectly, by the
DUMAGUETE CATHEDRAL CREDIT COOP v. CIR lessee in consideration for the lease is considered rental/ Therefore,
GR 182722, June 22, 2010 taxes paid by the lessees on leased property are part of the rental
income of the landlord (RR No. 2, Sec. 74).
The BIR ruling clearly states, without any qualification, that since interest
from any Philippine currency bank deposit and yield or any other Composition of Rent Income
monetary benefit from deposit substitutes are paid by banks, 1. Regular rent payments
cooperatives are not required to withhold the corresponding tax on 2. Security deposits given without restrictions
the interest from savings and time deposits of their members. 3. Taxes and other expenses relating to the rent paid by the
lessee
This interpretation was reiterated in BIR Ruling [DA-591-2006] dated 4. Leasehold improvements
October 5, 2006, In the said ruling, the BIR opined that: x x x x 3.
Exemption of interest income on members’ deposit (over and above the Leasehold Improvements by Lessee, Tax Treatment
share capital holdings) from the 20% Final Withholding Tax.
Suppose D leased to E a land for 10 years at a rental of P12,000 per
The National Internal Revenue Code states that a "final tax at the rate year with the condition that E would erect a building on the land which
of twenty percent (20%) is hereby imposed upon the amount of interest will become the property of D at the end of the lease without
on currency bank deposit and yield or any other monetary benefit from compensation or reimbursement whatsoever for the value of the
the deposit substitutes and from trust funds and similar arrangement x x building. E erected a building with a fair market value of P1M. At the
x" for individuals under Section 24(B)(1) and for domestic corporations end of the lease, building is worth only P900,000 due to depreciation.
under Section 27(D)(1).
Will D have income when the lease expires and becomes the owner
Considering the members’ deposits with the cooperatives are not of the building with a fair market value of P900,000? How much
currency bank deposits nor deposit substitutes, Section 24(B)(1) income must he report on the building?
and Section 27(D)(1), therefore, do not apply to members of
cooperatives and to deposits of primaries with federations, A: It would depend on the method of recognition.
respectively.
Methods for Income Recognition (RR No. 2, Section 49)
It bears stressing that interpretations of administrative agencies in 1. Outright Method. - Lessor reports as income the fair market
charge of enforcing a law are entitled to great weight and consideration value of the improvements at the time of the completion of
by the courts, unless such interpretations are in a sharp conflict with the construction.
governing statute or the Constitution and other laws. 2. Spread Out Method. - Lessor spreads over the life of the
lease the estimated value of the improvements at the
In this case, BIR Ruling No. 551-888 and BIR Ruling [DA-591-2006] are termination of the lease and report as income for each year of
in perfect harmony with the Constitution and the laws they seek to the lease an aliquot part thereof. In this case, there is no need
implement. Accordingly, the interpretation in BIR Ruling No. 551-888 to report any income at the expiration of the lease.
that cooperatives are not required to withhold the corresponding tax on
the interest from savings and time deposits of their members, which was VAT Added to Rental Paid by the Lessee
reiterated in BIR Ruling [DA-591-2006], applies to the instant case. If under the lease agreement, the lessee pays to the lessor a stipulated
rental, and in addition pays certain other expenses which are properly
Members of cooperatives deserve a preferential tax treatment payable by the lessor, the lessor is deemed to have received as rental
pursuant to RA 6938, as amended by RA 9520. Given that petitioner is income not only the stipulated rental but also the amount of such other
a credit cooperative duly registered with the Cooperative Development expenses paid by the lessee to, or for the account of the lessor. (RR 19-
Authority (CDA), Section 24(B)(1) of the NIRC must be read together 86, Section 2.01).
with RA 6938, as amended by RA 9520. Under Article 2 of RA 6938, as
amended by RA 9520, it is a declared policy of the State to foster the For example, part of the agreement is for the lessee to directly pay the
creation and growth of cooperatives as a practical vehicle for promoting city treasurer the real property taxes due on the leased property. In such
self-reliance and harnessing people power towards the attainment of a case, the real property taxes paid by the lessee forms part of the
economic development and social justice. Thus, to encourage the lessor’s rental income.
formation of cooperatives and to create an atmosphere conducive to
their growth and development, the State extends all forms of assistance Taxation of Advance Rental/Long Term Lease
to them, one of which is providing cooperatives a preferential tax Amounts received in advance are not treated as revenue of the period
treatment. in which they are received but as revenue of the future period or periods
in which they are earned. These amounts are carried as unearned
This exemption extends to members of cooperatives. It must be revenue, that is liabilities to transfer goods or services in the future –
emphasized that cooperatives exist for the benefit of their members. In until the earning process is complete (Manila Hotels v. CIR, CA Case).
fact, the primary objective of every cooperative is to provide goods and
6. ROYALTIES Philippines by every nonresident alien individual not engaged in

trade or business within the Philippines xxx cash and/or
Royalty property dividends xxx, a tax equal to twenty-five percent
The term royalty is broad enough to include compensation for the use of (25%) of such income.
an intellectual property and supply technical know-how as a means of
enabling the application or enjoyment of any such property or right
[NIRC, Section 42(4)] Domestic Corporations [Section 27(D)(4)]
Active Royalty from Passive Royalty (4) Intercorporate Dividends. - Dividends received by a domestic
The royalties must be domestically earned passive income. There are corporation from another domestic corporation shall not be
two categories of royalties: subject to tax.
1. Active Royalties are those not technically considered as
passive income which is usually the amount paid for making
or creating the article. These forms part of the gross income. Resident Foreign Corporations [Section 28(A)(7)(d)]
2. Passive Royalties are those which is contemplated to be for
the payment of the use or enjoyment or right over an article
(d) Intercorporate Dividends. - Dividends received by a resident
which is covered by a final tax.
foreign corporation from a domestic corporation liable to tax
Service Fees that are paid for the maintenance of the article is not
under this Code shall not be subject to tax under this Title.
subject to final tax but forms part of the gross income as is not actually
considered as a royalty.
Taxability of Passive Royalties Nonresident Foreign Corporations

1. For Individuals
a. General Rule (b) Intercorporate Dividends. - A final withholding tax at the rate
TAX RATE: 20% Final Tax of fifteen percent (15%) is hereby imposed on the amount of cash
TAX BASE: Amount of the royalties and/or property dividends received from a domestic corporation,
b. Exception which shall be collected and paid as provided in Section 57 (A) of
i. Books this Code, subject to the condition that the country in which the
ii. Literary Works, and nonresident foreign corporation is domiciled, shall allow a credit
iii. Musical Compositions against the tax due from the nonresident foreign corporation
TAX RATE: 10% Final Tax taxes deemed to have been paid in the Philippines equivalent to
TAX BASE: Amount of the royalties twenty percent (20%), which represents the difference between
the regular income tax of thirty-five percent (35%) and the fifteen
2. For Corporations percent (15%) tax on dividends as provided in this subparagraph:
TAX RATE: 20% Final Tax Provided, that effective January 1, 2009, the credit against the
TAX BASE: Amount of royalties tax due shall be equivalent to fifteen percent (15%), which
represents the difference between the regular income tax of thirty
For corporations there is no distinction as to the royalties
percent (30%) and the fifteen percent (15%) tax on dividends;
because even books and other literary works and musical
compositions shall be subject to the 20% Final Tax.
Dividend, Defined
7. DIVIDENDS In its statutory definition, dividends refer to any distribution made by a
corporation to its shareholders out of its earning or profits and payable
Individual Citizen and Resident Alien [Sec. 24(B)(2)] to its stockholders, whether in money or in other property (Sec. 73).
A final tax at the rate of ten percent (10%) shall be imposed upon
the cash and/or property dividends actually or constructively Types of Dividend
received by an individual from a domestic corporation or from a 1. Cash Dividend is one in which money is distributed to the
joint stock company, insurance or mutual fund companies and stockholders as share in corporate profits.
regional operating headquarters of multinational companies, or 2. Property Dividend is a dividend payable in something of
on the share of an individual in the distributable net income after economic value other than in money or shares of stock of the
tax of a partnership (except a general professional partnership) of issuing corporation.
which he is a partner, or on the share of an individual in the net 3. Stock Dividend is dividend payable in reserved or increased
income after tax of an association, a joint account, or a joint or additional stock of the issuing corporation.
venture or consortium taxable as a corporation of which he is a 4. Liquidating Dividend is dividend paid to the stockholders in
member or co-venturer. proportion to their investments after all the assets of the
corporation, after deducting its assets and liabilities, are
NRAETB [Section 25(A)(2)] converted into cash or equivalents.
General Rule: Dividends are part of the gross income.
Cash and/or property dividends from a domestic corporation, or Exception: Unless subject to final tax or exempted by law
from a joint stock company, or from an insurance or mutual fund
company or from a regional operating headquarter of Taxability of Dividends
multinational company, or the share of a nonresident alien
individual in the distributable net income after tax of a Cash Dividend Taxable
partnership (except a general professional partnership) of which Property Dividend Taxable
he is a partner, or the share of a nonresident alien individual in Stock Dividend GR: Not Taxable
the net income after tax of an association, a joint account, or a Stock dividends represents transfer of
joint venture taxable as a corporation of which he is a member or surplus to capital thus not subject to tax.
a co-venturer; xxx shall be subject to an income tax of twenty
percent (20%) on the total amount thereof: xxx XPN: Taxable
Cancellation or Redemption of Stock
NRANETB [Section 25(B)] Requisites:

(a) There is redemption or cancellation
There shall be levied, collected and paid for each taxable year (b) Transaction involves stock dividends
upon the entire income received from all sources within the
(c) Time and manner of the transaction Simply put, depending on the circumstances, the proceeds of
makes it essentially equivalent to a redemption of stock dividends are essentially distribution of cash
distribution of taxable dividends. dividends, which when paid becomes the absolute property of the
stockholder. Thereafter, the latter becomes the exclusive owner thereof
• See: CIR v. CA, Soriano Corp and can exercise the freedom of choice. Having realized gain from
for a detailed discussion. that redemption, the income earner cannot escape income tax.
Liquidating Dividend GR: Not Taxable as it is return of capital. Requisites for the Exemption to Apply
the exempting clause of Section, to apply, it is indispensable that: (a)
XPN: Taxable only when: there is redemption or cancellation; (b) the transaction involves stock
There is a gain realized from the liquidation dividends and (c) the "time and manner" of the transaction makes it
such as when the value of the dividend "essentially equivalent to a distribution of taxable dividends." Of these,
exceeds the value of the investment. the most important is the third.
Dividends from Tax-Exempt
Cooperatives Redemption is repurchase, a reacquisition of stock by a corporation
which issued the stock in exchange for property, whether or not the
acquired stock is cancelled, retired or held in the treasury.
Dividend Dividend Tax
Given By Received By Treatment
Essentially, the corporation gets back some of its stock, distributes
INDIVIDUALS cash or property to the shareholder in payment for the stock, and
Resident Citizen 10% Final Tax continues in business as before. The redemption of stock dividends
Resident Alien 10% Final Tax previously issued is used as a veil for the constructive distribution of
NRAETB 20% Final Tax cash dividends. It is not the stock dividends but the proceeds of its
Domestic
NRANETB 25% Tax (Gross Income) redemption that may be deemed as taxable dividends.
Corporation
CORPORATIONS
Domestic Tax Exempt Here, it is undisputed that at the time of the last redemption, the original
Resident Foreign Tax Exempt common shares owned by the estate were only 25,247.5 This means
Nonresident Foreign 15% (Tax Sparing Rule) that from the total of 108,000 shares redeemed from the estate, the
INDIVIDUALS balance of 82,752.5 (108,000 less 25,247.5) must have come from stock
Resident Citizen Part of Gross Income dividends. Besides, in the absence of evidence to the contrary, the Tax
Resident Alien Not Taxable* Code presumes that every distribution of corporate property, in whole or
NRAETB Not Taxable* in part, is made out of corporate profits such as stock dividends. The
Foreign capital cannot be distributed in the form of redemption of stock dividends
NRANETB Not Taxable*
Corporation without violating the trust fund doctrine — wherein the capital stock,
CORPORATIONS
Domestic Part of Gross Income property and other assets of the corporation are regarded as equity in
trust for the payment of the corporate creditors. Once capital, it is always
Resident Foreign Not Taxable*
capital. 94 That doctrine was intended for the protection of corporate
Nonresident Foreign Not Taxable*
creditors.
* - Means that the income is not taxable or tax-exempt because under With respect to the third requisite, ANSCOR redeemed stock dividends
the general principles of taxation (Section 23), only resident citizens and issued just 2 to 3 years earlier. The time alone that lapsed from the
domestic corporations are taxable on their income for sources within and issuance to the redemption is not a sufficient indicator to determine
without Philippines thus the others are not taxable. taxability. It is a must to consider the factual circumstances as to the
manner of both the issuance and the redemption.
Net Income of General Co-Partnership [Section 73(D)]
The taxable income declared by a partnership for a taxable year The "time" element is a factor to show a device to evade tax and the
which is subject to tax under Section 27 (A) of this Code, after scheme of cancelling or redeeming the same shares is a method usually
deducting the corporate income tax imposed therein, shall be adopted to accomplish the end sought. Was this transaction used as a
deemed to have been actually or constructively received by the "continuing plan," "device" or "artifice" to evade payment of tax? It is
partners in the same taxable year and shall be taxed to them in necessary to determine the "net effect" of the transaction between the
their individual capacity, whether actually distributed or not. shareholder-income taxpayer and the acquiring (redeeming)
corporation. The "net effect" test is not evidence or testimony to be
It is important to emphasize that partnerships (except those of general considered; it is rather an inference to be drawn or a conclusion to be
professional partnership) are treated as corporations for purposes of reached.
taxation, and that the distribution of profits among the partners in a set-
up of general co-partnership is considered as dividends, which under It is also important to know whether the issuance of stock dividends was
Section 73, are deemed to be receive by the partners and shall be taxed dictated by legitimate business reasons, the presence of which might
to them in their individual capacity, whether actually distributed or not. negate a tax evasion plan.
The issuance of stock dividends and its subsequent redemption must be
separate, distinct, and not related, for the redemption to be considered
CIR v. CA, A. SORIANO CORPORATION
a legitimate tax scheme. Redemption cannot be used as a cloak to
GR 108576, January 20, 1999
distribute corporate earnings. Otherwise, the apparent intention to avoid
tax becomes doubtful as the intention to evade becomes manifest.
Stock Dividends, When Taxable
This process of issuance-redemption amounts to a distribution of
It has been ruled that: [A]n operation with no business or corporate
taxable cash dividends which was lust delayed so as to escape the tax.
purpose — is a mere devise which put on the form of a corporate
It becomes a convenient technical strategy to avoid the effects of
reorganization as a disguise for concealing its real character, and the
taxation. Thus, to plug the loophole — the exempting clause was added.
sole object and accomplishment of which was the consummation of a
preconceived plan, not to reorganize a business or any part of a
It provides that the redemption or cancellation of stock dividends,
business, but to transfer a parcel of corporate shares to a stockholder.
depending on the "time" and "manner" it was made, is essentially
equivalent to a distribution of taxable dividends," making the proceeds
Depending on each case, the exempting provision may not be applicable
thereof "taxable income" "to the extent it represents profits".
if redeemed shares were issued with bona fide business purpose,
which is judged after each and every step of the transaction have been
The exception was designed to prevent the issuance and cancellation
considered and the whole transaction does not amount to a tax evasion
or redemption of stock dividends, which is fundamentally not taxable,
scheme.
from being made use of as a device for the actual distribution of cash
dividends, which is taxable.
The test of taxability under the exempting clause, when it provides "such (i) The recipient was selected without any action on
time and manner" as would make the redemption "essentially equivalent his part to enter the contest or proceeding; and
to the distribution of a taxable dividend", is whether the redemption
resulted into a flow of wealth. If no wealth is realized from the (ii) The recipient is not required to render substantial
redemption, there may not be a dividend equivalence treatment. As future services as a condition to receiving the prize
stated above, the test of taxability under the exempting clause is, or award.
whether income was realized through the redemption of stock dividends.
2. Prizes and Awards in Sports Competition [Sec.32(A)(7)(D)]
After considering the manner and the circumstances by which the
issuance and redemption of stock dividends were made, there is no
(d) Prizes and Awards in sports Competition. - All prizes and
other conclusion but that the proceeds thereof are essentially
awards granted to athletes in local and international sports
considered equivalent to a distribution of taxable dividends.
competitions and tournaments whether held in the Philippines or
abroad and sanctioned by their national sports associations.
CIR v. MANNING If the prize is not tax-exempt then apply the following:
GR L-28398, August 6, 1975
Source of the Prize Tax Treatment
Facts: MANTRASCO had a capital stock of P2.5 Million divided into Without the Philippines Part of Gross Income
25,000 commons shares (24,700 owned by Reese, remaining 300 is to Within the Philippines:
those of respondents. Reese entered into a trust agreement where upon P10,000 or Less Part of Gross Income
the death of Reese the company would buy back all of its shares. When Exceeds P10,000 20% Final Tax
Reese died, MANTRASCO repurchased the 24,700 shares and were
declared as stock dividends to be distributed among stockholders.
WINNINGS
BIR examined MANTRASCO’s books and found that the 24,700 shares
declared as dividends were not disclosed as part of taxable income for General Rule: Winnings are part of the gross income.
TY 1958. Thus, CIR issued notices of assessment for the deficiency Exception: Unless subject to final tax or exempted by law
income.
Tax-Exempt Winning
Issue: Should the respondents be made liable for deficiency income 1. The amendment under the TRAIN Law limited the exempt status of
taxes on the stock dividends? the PCSO and Lotto winning, in order to be tax-exempt then it must be:
1. PCSO and Lotto Winning and
Held: The distinctions between a stock dividend which does not and one 2. P10,000 or less
which does constitute taxable income to the shareholders is that a stock
dividend constitutes income if its gives the shareholder an interest 2. NRAETB’s winnings from PCSO and Winnings are tax-exempt
different from that which his former stockholdings represented. On the regardless of the amount (remained unamended by TRAIN Law)
other hand, it does constitute income if the new shares confer no
different rights or interests than did the old shares. If the winning is not tax-exempt then apply the following:
Therefore, whenever the companies involved parted with a portion of Source of the Prize Tax Treatment
their earnings to buy the corporate holdings of Reese, they were making Without the Philippines Part of Gross Income
a distribution of such earnings to respondents. These amounts are thus Within the Philippines 20% Final Tax
subject to income tax as a flow of cash benefits to respondents. Hence,
respondents are liable for deficiency income taxes. 9. PENSIONS, ANNUITIES AND LIFE INSURANCE
8. PRIZES AND WINNINGS General Rule: Pensions, annuities and proceeds of life insurance would
form part of the gross income.
Prizes are those which are which are won because of skill or in a
competition, while Winnings are those proceeds received by chance. Pensions
As a rule, they are taxable, because they are in the nature of payment
Principles to Remember for the services rendered. They can be excluded upon the compliances
For the prize or winnings to be subject to a final tax: with the requisites for exclusion.
1. The prize must have been derived from sources within the
Philippines Annuities
2. The prize exceeds P10,000 whether from Lotto or others Annuity binds the debtor to pay annual pension or income during the life
3. The winner must be a natural person, either a citizen, resident of determinate persons in consideration of a capital consisting of money
alien or a nonresident alien. or other property, whose ownership is transferred to him at once with the
PRIZES burden of the income (2021, NCC). Like the interest income, this
pertains to periodic payment, there is a fund set up and such fund earns
General Rule: Prizes are part of the gross income. or generates income in the form of annuities. These are taxable income
Exception: Unless subject to final tax or exempted by law in the hands of the beneficiary.
Life Insurance
Prizes that are Tax-Exempt
The proceeds of life insurance policies paid to the heirs or beneficiaries
In considering tax imposed on the prize, it is important to determine first
upon the death of the insured, whether in a single sum or otherwise are
whether the prize is taxable in the first place. The following are prizes
deemed excluded, but if such amounts are held by the insurer under an
that are exempt from taxation.
agreement to pay interest thereon, the interest payments shall be
included in the gross income [Section 32(B)(1)].
1. Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, etc. achievement [Sec.
32(A)(7)(C)]
10. SHARE IN THE GENERAL PROFESSIONAL
PARTNERSHIPS INCOME
(c) Prizes and Awards. - Prizes and awards made primarily in
recognition of religious, charitable, scientific, educational, SEC. 26. Tax Liability of Members of General Professional
artistic, literary, or civic achievement but only if: Partnerships. - A general professional partnership as such shall
not be subject to the income tax imposed under this Chapter.
Persons engaging in business as partners in a general
professional partnership shall be liable for income tax only in Requisites for Exclusion
their separate and individual capacities. 1. The proceeds are from life insurance;
2. The proceeds are paid to the heirs or beneficiaries
For purposes of computing the distributive share of the partners, 3. The proceeds are paid upon the death of insurer
the net income of the partnership shall be computed in the same
manner as a corporation. Interest Paid on Life Insurance, Included in Gross Income
Interests do not form part of the indemnity but are earnings or income
Each partner shall report as gross income his distributive share, from the use of capital, which are taxable. The tax exempt proceeds
refer only to the face value of the insurance policy. If amounts received
actually or constructively received, in the net income of the
in excess of the face value are taxable as interest.
partnership.
II. Return of Premium
General Professional General
Partnerships (GPPs) Co-Partnerships (GCPs)
The entity is exempt from Treated as a corporation and the (2) Amount Received by Insured as Return of Premium. -
income tax distribution of profits (deemed as The amount received by the insured, as a return of premiums paid
dividends) shall be subject to by him under life insurance, endowment, or annuity contracts,
But the amount received as final tax. either during the term or at the maturity of the term mentioned
distribution of profits part of in the contract or upon surrender of the contract.
gross income of partners
Requirements for Exclusion
11. OTHERS 1. The amount to be received by the insured
2. As a return of premiums paid by him
A. FORGIVENESS OF INDEBTNESS 3. Under life insurance, endowment or annuity contracts
4. Either
A debt is said to be discharged or cancelled when the debtor is relieved a. During the term or
of such debt or the payment obligation, this occurs when a taxpayer is b. At maturity of the term mentioned in the contract
no longer legally required to satisfy his debt either partially or fully. c. Upon surrender of the contract
If the discharge of the debt was made without consideration, it is not part Reason: The amount returned are not income but return of capital, they
of the gross income but may subjected to donor’s tax or gift tax. represent earning which were previously taxed.
Otherwise, if made with consideration, this will form part of the gross
income. “Dead or Alive Rule” [Note, do not use this term in the exam]
B. RECOVERY OF DEBTS WRITTEN OFF IF INSURED The beneficiary or his heirs will receive an amount
IS DEAD that is excluded from the gross income.
Also known as bad debt recovery, it is a payment received for a debt IF INSURED If it refers to: Part of gross income
that was already written off and considered uncollectible. A debt when IS ALIVE (a) Excess of premiums, or
is considered written off would generate loss, thus a bad debt recovery (b) Payment of interests
would produce income. Payment may still be made after the debt is (c) Return of Premiums Excluded from gross
written off, thus may be considered as income. income
C. RECEIPT OF TAX REFUNDS AND TAX CREDITS III. Gifts, Bequests, Devises
It is considered as part of gross income but only to the extent of the (3) Gifts, Bequests, and Devises. - The value of property
income tax benefit which was derived therefrom. acquired by gift, bequest, devise, or descent: Provided, however,
That income from such property, as well as gift, bequest, devise
E. Exclusions or descent of income from any property, in cases of transfers of
divided interest, shall be included in gross income.
Exclusions from Gross Income
Not all incomes are taxable, some incomes are excluded from gross Excluded Gifts, Bequests, Devises
incomes in the determinable of taxable income and others are subject While the value of property acquired by gift, bequest, devise or descent
to tax exemptions. The following items shall not be included in gross is excluded from gross income, hence not subject to income tax, it does
income and shall be exempt from taxation under this title. not necessary follow that it is exempt from estate tax or donor’s tax
imposed under the NIRC. In addition, it is excluded because in the first
I. Life Insurance [Section 32(B)(1)] place, these are not income.
GR: Property received by reason of donation or succession is excluded
(1) Life Insurance. - The proceeds of life insurance policies paid from gross income.
to the heirs or beneficiaries upon the death of the insured,
whether in a single sum or otherwise, but if such amounts are XPN: When it pertain to the income derived from the property donated
held by the insurer under an agreement to pay interest thereon, or received under succession, it is part of gross income.
the interest payments shall be included in gross income.
IV. Compensation for Injuries or Sickness
Life Insurance
An insurance upon life may be made payable on the death of the person, (4) Compensation for Injuries or Sickness. - amounts
or on his surviving a specified period, or otherwise contingently on the received, through Accident or Health Insurance or under
continuance or cessation of life. Workmen's Compensation Acts, as compensation for personal
injuries or sickness, plus the amounts of any damages received,
The life insurance proceeds must be paid by reason of the death of the whether by suit or agreement, on account of such injuries or
insured. Payment for reasons other than death may be made subject to sickness.
tax up to the extent of the excess of the premiums paid.
Items of Compensation
Rationale for Exclusion 1. Compensation paid out of Accident or Health Insurance is
Proceeds of life insurance are excluded from gross income because excluded from gross income. – Although these payments are
they partake more of indemnity for loss or compensation rather than gain intended to compensate the insured taxpayer for loss of future
to the client. income, the exclusion is expressly provided by law.
2. Compensation paid out of Workmen’s Compensation Acts is [1] Retirement Benefits, Gratuities, Pensions Excluded
excluded from gross income. – There are instances that the 1. Retirement benefits received under RA 7641
ER shall be required to compensate EE for work-related 2. Retirement received from reasonable private benefit plan
injuries. after compliance with certain conditions
3. Damages received whether by suit or agreement, on account 3. Amounts received for beyond control separation which does
of such injuries or sickness – Damages may be actual, moral, not require any age or years of service requirements
nominal, temperate or liquidated damages. 4. Foreign social security, retirement gratuities, pensions which
do not require any minimum age and years of service
Exemplary Damages 5. USVA benefits which do not require compliance with any
While there are US jurisprudence (Glenshaw v. Commissioner, 1955) minimum age and years of service
that would discuss that exemplary damages are not excluded from gross 6. SSS benefits which require only compliance with the
income and are taxable. It is important to note that the NIRC does not requisites for retirement under the enabling law
make any distinction with regard to the nature of damages. 7. GSIS benefits which require only compliance with the
requisites for retirement under the enabling law
V. Income Exempt Under Treaty
Requirements under the Labor Code
a. There is no agreement as to the employees retirement benefit
b. The retiring employee must have served at least five (5) years
(5) Income Exempt under Treaty. - Income of any kind, to the
with the employer
extent required by any treaty obligation binding upon the
c. The retiring employee is not less than sixty (60) years old
Government of the Philippines. d. It must be availed of by the employee only once
Requirement under the Tax Code

Rationale: Public policy recognizes the principles of reciprocity and 1. There must be a qualified funding source
comity among nations as the reasons behind the exclusion. 2. There must be a qualified employee
a. In service of same employer for at least 10 years
VI. Retirement Benefits, Pensions, Gratuities, etc. b. Not less than 50 years of age at time of retirement
c. The benefits granted can only be availed once
(6) Retirement Benefits, Pensions, Gratuities, etc.-
Q. Suppose that an EE retired under the Labor Code but was not able
(a) Retirement benefits received under Republic Act No. 7641 and to complete the 10 year requirement of the Tax Code. Supposing there
those received by officials and employees of private firms, whether was no private retirement benefit plan, can the EE avail of the tax
individual or corporate, in accordance with a reasonable private exemption for the retirement benefit?
benefit plan maintained by the employer: Provided, That the
retiring official or employee has been in the service of the same A: [Atty. Donalvo] Tax exemptions are strictly construed
against the taxpayer, thus it would be in keeping with the interpretation
employer for at least ten (10) years and is not less than fifty (50)
of tax laws. The requisites must be complied with. But Note:
years of age at the time of his retirement: Provided, further, That
the benefits granted under this subparagraph shall be availed of
by an official or employee only once. For purposes of this IN RE: ATTY. ZALCITA
Subsection, the term 'reasonable private benefit plan' means a 190 SCRA 851, October 18, 1990
pension, gratuity, stock bonus or profit-sharing plan maintained
by an employer for the benefit of some or all of his officials or Retirement Laws, Liberally Construed
employees, wherein contributions are made by such employer for We fail to see the logic in viewing with eager eyes for purposes of tax
revenues the fruits of a working lifetime of labor simply because fixed
the officials or employees, or both, for the purpose of distributing
salaries and retirement benefits are so visible and so convenient to levy
to such officials and employees the earnings and principal of the
upon.
fund thus accumulated, and wherein its is provided in said plan
that at no time shall any part of the corpus or income of the fund Retirees who are most deserving of compassion and who can least carry
be used for, or be diverted to, any purpose other than for the the multifarious burdens of Government should not be so readily
exclusive benefit of the said officials and employees. encumbered on a strained interpretation of the law.
(b) Any amount received by an official or employee or by his heirs

from the employer as a consequence of separation of such official
But, while it is true that retirement laws are to be liberally construed in
or employee from the service of the employer because of death
favor of the retiree, it does not necessarily follow that the exclusion of
sickness or other physical disability or for any cause beyond the
the retirement benefits from gross income should also be liberally
control of the said official or employee.
construed.
(c) The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement gratuities,
pensions and other similar benefits received by resident or Terminal Leave Pay
nonresident citizens of the Philippines or aliens who come to Terminal leave pay received by a government official or employee is not
reside permanently in the Philippines from foreign government subject to income tax.
agencies and other institutions, private or public.
[2] Separation Pay [Sec. 32(B)(6)(b)]
(d) Payments of benefits due or to become due to any person
residing in the Philippines under the laws of the United States General Rule: Separation pay is compensation income, it forms part of
administered by the United States Veterans Administration. the gross income or gross taxable income.
(e) Benefits received from or enjoyed under the Social Security Exception: It is also excluded from the gross income if:
System in accordance with the provisions of Republic Act No. 1. Any amount received by an official, employee, or by his heirs;
8282. 2. From the employer
3. As a consequence of such separation of such employee from
(f) Benefits received from the GSIS under Republic Act No. 8291, the service of the employer;
including retirement gratuity received by government officials a. Because of death, sickness or other physical
and employees. disability
b. For any cause beyond the control of the said official
or employee such as
i. Retrenchment VII. Miscellaneous Items

ii. Redundancy and
iii. Cessation of business (RR 2-98) [1] Income derived by Foreign Government
“Beyond the Control” (a) Income Derived by Foreign Government. - Income

In short, the EE did not voluntarily seek his separation. Even if the derived from investments in the Philippines in loans, stocks,
separation was the result of sickness, physical disability, etc., but if the bonds or other domestic securities, or from interest on deposits in
EE or official voluntarily resigned as a result of the foregoing causes, the banks in the Philippines by
amount received should not be excluded from the gross income. This is (i) foreign governments,
so because of the requirement that the separation must be for a cause (ii) financing institutions owned, controlled, or
beyond the control of the said official or employee. enjoying refinancing from foreign governments,
and
In short, there must be involuntariness on the part of the official or of (iii) international or regional financial institutions
the employee. The separation from service of the official or employee established by foreign governments.
must not be asked or initiated by him.
Rationale for Exclusion
Illegal Termination This may be premised either on the principle of comity or upon the
principle of reciprocity. Under the principle of comity, these incomes of
In case that an EE was determined to be illegally dismissed but the EE
foreign government are not subject to Philippine income tax laws
sought for separation pay in lieu of reinstatement, then it is considered
because of the respect accorded by the Philippines to other foreign
to be an involuntary manner of separation from such service. sovereign countries. As an equal, foreign countries should not be made
to pay tribute to the Philippines.
Legal Termination
But if the termination turns out to be for just cause, then it is considered The exclusion may also be justified on the ground of reciprocity. The
as voluntary separation pay on the part of the employee making it Philippines may be exempted by some countries from the payment of
subject to taxable forming part of the gross income. income taxes on its income derived from such foreign territories.
[3] Pensions and Gratuities from Foreign Sources [2] Income Derived by Government or its Political Subdivisions
The provisions of any existing law to the contrary notwithstanding the (b) Income Derived by the Government or its Political
social security benefits, retirement gratuities, pensions and other similar Subdivisions. - Income derived from any public utility or from
benefits that are: the exercise of any essential governmental function accruing to
a. Received by a resident or non-resident citizens of Philippines the Government of the Philippines or to any political subdivision
or aliens thereof.
b. Who come to reside permanently in the Philippines
Coverage of Exclusion
c. From foreign government agencies and other institutions,
private or public
1. Public utility – business or service engaged in supplying public
with some commodity or service of public consequence.
Payment of the benefits due or to become due to
• Any person residing in the Philippines 2. From the exercise of any essential governmental function by
• Under the laws of the United States administered by the the Government or any of its political subdivisions.
United States Veterans Administration [USVA]
Withdrawal of Tax Exemption of PAGCOR
Domondon’s Comment: It would appear from the above that there is no
need to comply with the 10 year length of service and age requirement PAGCOR v. BIR
giving a seeming bias in favor of “foreign retirees” GR 215247, December 10, 2014, En Banc
[4] SSS Benefits that are Excluded from Gross Income Facts: BIR issued RMC 33-2013 clarifying the income tax and franchise
tax due from the Philippine Amusement and Gaming Corporation also
It seems that the only requirement for exclusion is that the benefits are known as PAGCOR, where it stated that PAGCOR is no longer exempt
received from and enjoyed under the SSS under RA 8282, such as: from corporate income tax as it has been omitted from the list of GOCCs
that are exempted from income tax.
1. Monthly pensions
2. Dependent’s pension
Thus, income from its operations and licensing of gambling casinos,
3. Retirement benefits gaming clubs and other recreation or amusement places and other
4. Death benefits related operations are subject to corporate income tax under the NIRC.
5. Permanent disability benefits
6. Funeral benefit In addition, PAGCOR is subject to franchise tax of 5% of its gross
7. Sickness benefit revenue or earnings it derives from its operations and licensing of the
8. Maternity leave benefit aforecited activities.
[5] GSIS Benefits that are Excluded from Gross Income PAGCOR sought reconsideration of the tax treatment but was denied.
The only requirement for the exclusion is that it was given by the GSIS. PAGCOR filed a motion arguing that the RMC was an erroneous
There are no other conditions imposed such as those imposed upon EEs interpretation of the Decision (of the Supreme Court).
that derive benefits from private retirement plans, such as:
Issue: What is the tax treatment of PAGCOR?
1. Basic monthly pension
2. Separation benefits
PAGCOR’s Tax Treatment
3. Unemployment or involuntary separation benefits [1] PAGCOR’s income from gaming operations is subject only to five
4. Retirement benefits percent (5%) franchise tax under P.D. 1869, as amended,
5. Permanent disability benefits
6. Temporary disability benefits [2] While its income from other related services is subject to corporate
7. Survivorship benefits income tax pursuant to P.D. 1869, as amended, as well as R.A. No.
8. Funeral benefits 9337. This is demonstrable.
9. Dividends
As we see it, there is no conflict between P.D. 1869, as amended, and to be conducted under this Franchise, so it must be that all contractees
R.A. No. 9337. The former lays down the taxes imposable upon and licensees of PAGCOR, upon payment of the 5% franchise tax, shall
petitioner, as follows: likewise be exempted from all other taxes, including corporate income
tax realized from the operation of casinos.
(1) a five percent (5%) franchise tax of the gross revenues or earnings
derived from its operations conducted under the Franchise, which shall For the same reasons that made us conclude in the 10 December 2014
be due and payable in lieu of all kinds of taxes, levies, fees or Decision of the Court sitting En Banc in G.R. No. 215427 that PAGCOR
assessments of any kind, nature or description, levied, established or is subject to corporate income tax for "other related services", we find it
collected by any municipal, provincial or national government authority; logical that its contractees and licensees shall likewise pay corporate
income tax for income derived from such "related services."
(2) income tax for income realized from other necessary and related
services, shows and entertainment of petitioner.
[3] Prizes and Awards
With the enactment of R.A. No. 9337, which withdrew the income tax [4] Prizes and Awards in Sports Competition
exemption under R.A. No. 8424, petitioner’s tax liability on income from
other related services was merely reinstated. (c) Prizes and Awards. - Prizes and awards made primarily in
recognition of religious, charitable, scientific, educational,
To reiterate, given that [PAGCOR's] Charter is not deemed repealed or
artistic, literary, or civic achievement but only if:
amended by R.A. No. 9337, [PAGCOR's] income derived from gaming
operations is subject only to the five percent (5%) franchise tax, in
accordance with P.D. 1869, as amended. With respect to [PAGCOR's] (i) The recipient was selected without any action on his part to
income from operation of other related services, the same is subject to enter the contest or proceeding; and
income tax only.
(ii) The recipient is not required to render substantial future
The five percent (5%) franchise tax finds no application with respect to services as a condition to receiving the prize or award.
[PAGCOR's] income from other related services, in view of the express
provision of Section 14(5) of P.D. No. 1869, as amended (d) Prizes and Awards in sports Competition. - All prizes and
awards granted to athletes in local and international sports
competitions and tournaments whether held in the Philippines or
abroad and sanctioned by their national sports associations.
BLOOMBERRY RESORTS v. BIR
GR 212530, August 10, 2016
General Rule: It is part of the gross income
Facts: PAGCOR granted a provisional license to establish and operate
Exception: Except when the law provides for another tax treatment
an integrated resort and casino to Bloomberry which owns and operate
1. Prizes received within the Philippines
the Solaire Resort and Casino. Thus, being one its licensees, it only
a. Exceeds P10,000 – 20% Final Tax
pays PAGCOR license fees, in lieu of all taxes as contained in its license
b. P10,000 or less – Part of Gross Income
and consistent with PD 1869 which provides exemption from taxes of
2. Awards for Religious, Charitable, etc. Achievement
persons or entities contract with PAGCOR in casino operations.
a. The purpose must be in recognition of religious
charitable, scientific, educational, artistic, literary or
When RA 9337 took effect PAGCOR was excluded in the NIRC from the
civic achievement;
list of GOCCs that are exempted from paying corporate income tax. The
b. Recipient was selected without any action on his
enactment led to the ruling in PAGCOR v. BIR as to the such issue and
part to enter the contest or proceedings; and
also as to the RMC 33-2013 issued by BIR implementing such.
c. The recipient is not required to render substantial
future services as a condition to receiving such.
Bloomberry (as it is now being considered liable to pay corporate income
3. Prizes and Awards in Sports Competition
tax in addition to the 5% franchise tax) filed a petition directly to the SC
a. Whether local or international sports competition
citing that the exemption provided by PD 1869 (as amended) clearly
b. Whether held in the Philippines or abroad
exempts the contractees and licensees of PACGOR except the 5%
c. As long as sanctioned by their national sports
franchise tax on its gross gaming revenue. That this exemption was not
associations
repealed by the deletion of PAGCOR in the list of tax-exempt GOCCs.
i. Philippine Sports Commission through
ii. Philippine Olympics Committee
[The Supreme Court cited in length the ration in PAGCOR v. BIR, 2014.]
NOTE: If it is already professional (like Pacquiao) no longer tax-exempt.
Issue: Whether or not said provisions is valid or constitutional
consideration that the charter of the PAGCOR grants tax exemptions
[5] 13th Month Pay and Other Benefits
to such contractees and licensees. – Same extent like PAGCOR
Section 13 of PD No. 1869 evidently states that payment of the 5% (e) 13th Month. Pay and Other Benefits. - Gross benefits
franchise tax by PAGCOR and its contractees and licensees exempts received by officials and employees of public and private entities:
them from payment of any other taxes, including corporate income tax. Provided, however, That the total exclusion under this
subparagraph shall not exceed Ninety thousand pesos (P90,000)
As previously recognized, the above-quoted provision providing for the which shall cover: "
said exemption was neither amended nor repealed by any subsequent (i) Benefits received by officials and employees of the national and
laws (i.e. Section 1 of R.A. No. 9337 which amended Section 27(C) of local government pursuant to Republic Act No.6686;
the NIRC of 1997); thus, it is still in effect. Guided by the doctrinal (ii) Benefits received by employees pursuant to Presidential
teachings in resolving the case at bench, it is without a doubt that, like Decree No. 851, as amended by Memorandum Order No. 28, dated
PAGCOR, its contractees and licensees remain exempted from the August 13,1986;
payment of corporate income tax and other taxes since the law is clear
that said exemption inures to their benefit. (iii) Benefits received by officials and employees not covered by
Presidential Decree No.851, as amended by Memorandum Order
As the PAGCOR Charter states in unequivocal terms that exemptions No. 28, dated August 13,1986; and
granted for earnings derived from the operations conducted under the
franchise specifically from the payment of any tax, income or otherwise, (iv) Other benefits such as productivity incentives and Christmas
as well as any form of charges, fees or levies, shall inure to the benefit bonus.
of and extend to corporation(s), association(s), agency(ies), or
individual(s) with whom the PAGCOR or operator has any contractual
relationship in connection with the operations of the casino(s) authorized
Matters of Exclusion As a review, we refer back to Section 23:

1. Public and private entities
2. Provided that the total exclusion shall not exceed P90,000 SECTION 23. General Principles of Income Taxation in the
3. Which shall cover Philippines. - Except when otherwise provided in this Code:
a. Christmas bonus and cash gift of P5,000 to the
employees of national government (RA 6686) (A) A citizen of the Philippines residing therein is taxable on all
b. Rank and file employees entitled to 13th month pay income derived from sources within and without the Philippines;
who worked at least 1 month during a calendar year
(PD 851) (B) A nonresident citizen is taxable only on income derived from
c. Those not covered by PD 851, as amended by MO sources within the Philippines;
28
d. Other benefits such as productivity incentives and
(C) An individual citizen of the Philippines who is working and
Christmas Bonus
deriving income from abroad as an overseas contract worker is
In relation to De Minimis Benefits: taxable only on income derived from sources within the
Those in excess of the ceilings of the de minimis benefits (which are tax- Philippines: Provided, That a seaman who is a citizen of the
exempt) must be considered as accruing first to the P90,000 exclusion Philippines and who receives compensation for services rendered
under Section 32 and only when the P90,000 ceiling is reached, such abroad as a member of the complement of a vessel engaged
that the excess be made part of the gross taxable income. exclusively in international trade shall be treated as an overseas
contract worker;
[6] GSIS, SSS, Medicare and Other Contribution
(D) An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from sources within
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, the Philippines;
SSS, Medicare and Pag-Ibig contributions, and union dues of
individuals (E) A domestic corporation is taxable on all income derived from
sources within and without the Philippines; and
Section 32(B)(6)(e) and (f) Section 32(B)(7)(f) (F) A foreign corporation, whether engaged or not in trade or
This refers to the benefits that This refers to the contributions business in the Philippines, is taxable only on income derived
are received from the SSS and paid to the GSIS, SSS, Medicare from sources within the Philippines.
GSIS and PAG-IBIG
Refer to the receipts by the Refer to the outflows from the INCOME TAX RATES ON INDIVIDUALS
taxpayer taxpayer
According to Dean Quibod, so far as individuals, resident citizens are
Mandatory Contributions Only only those who are taxable for all sources. The rest of them, can only be
Only those amount that are considered as mandatory contributions taxed for their Philippine source income.
are excluded from the gross income. Thus, voluntarily contributions
to those institutions that are in excess of the amount considered as The individuals subject to tax under the NIRC are as follows:
compulsory are not excludible from the gross income and hence, not 1. Citizen
exempt from income taxation. (RMC 53-2011). a. Resident Citizen is taxable for all source within or
without the Philippines.
Note: According to Atty. Donalvo items (g) and (h) of the Miscellaneous b. Non-resident Citizen is taxable only on sources
Items were deemed removed by the TRAIN Law. But for reference, the within the Philippines.
provisions are reproduced below. [Upon checking the Repealing Clause 2. Alien
of RA 10963, there is no express mention of repeal or removal of these.] a. Resident Alien
b. Non-resident Alien
[7] Gains from Sale of Bonds, Debentures, or other Certificate of i. Engaged in trade or business NRA-ETB
Indebtedness ii. Not engaged in trade or business NRA-NETB
(g) Gains from the Sale of Bonds, Debentures or other SECTION 24. Income Tax Rates. -
Certificate of Indebtedness. - Gains realized from the same or
exchange or retirement of bonds, debentures or other certificate (A) Rates of Income Tax on Individual Citizen and
of indebtedness with a maturity of more than five (5) years. Individual Resident Alien of the Philippines. -
(1) An income tax is hereby imposed:

[8] Gains from Redemption of Shares in Mutual Fund
(a) On the taxable income defined in Section 31 of this Code, other
(h) Gains from Redemption of Shares in Mutual Fund. - than income subject to tax under Subsections (B) ; (C), and (D) of
Gains realized by the investor upon redemption of shares of stock this Section, derived for each, taxable year from all sources within
in a mutual fund company as defined in Section 22 (BB) of this and without the Philippines by every individual cdti2en of the
Code. Philippines residing therein;
(b) On the taxable income defined in Section 31 of this Code, other

INCOME TAX RATES than income subject to tax under Subsections (B), (C), and (D) of
this Section, derived for each taxable year from all sources within
In determining the income tax rates one must take into consideration the Philippines by an individual citizen of the Philippines who is
whether the income is: residing outside of the Philippines including overseas contract
1. Subject to Final Tax (such as Capital Gains Tax); and workers referred to in Subsection (C) of Section 23 hereof; and
2. General Principles of Taxation
(c) On the taxable income defined in Section 31 of this Code, other
One should be able to determine if the income is taxable, some of than income subject to tax under Subsections (B), (C), and (D) of
questions to be answered is that:
this Section, derived for each taxable year from all sources within
1. Is it classified as income?
the Philippines by an individual alien who is a resident of the
2. What is the type of taxpayer?
3. What general principles of taxation is applicable? Philippines
Graduated Income Tax Rates for Individuals

[2] Find the excess over P400,000
(2) Rates of Tax on Taxable Income of Individuals. – The tax
Net Taxable Income P500,000
shall be computed with and at the rates established in the
(P400,000)
following schedule: Excess P100,000
(a) Tax Schedule Effective January 1, 2018 until December 31, [3] Then multiply 25% of the excess
2022: P100,000 x 0.25 = P25,000
Not over P250,000 0% [4] Complete the formula

Over P250,000 but not over P400,000 20% of the excess P30,000
over P250,000 + P25,000
Over P400,000 but not over P800,000 P30,000 + 25% of the P55,000 Income Tax
excess over P400,000
Over P800,000 but not over P130,000 + 30% of
P2,000,000 the excess over If computed under the Old Law
P800,000 • Over P250,000 but not over P500,000:
Over P2,000,000 but not over P490,000 + 32% of o P50,000+30% excess over P250,000
P8,000,000 the excess over • Then the income tax could have been:
P2,000,000 o P50,000 + 0.30 (P500,000 – P250,000)
o P50,000 + 0.30 (P250,000)
Over P8,000,000 P2,410,000 + 35% of
o P50,000 + 75,000
the excess over
o P125,000 Income Tax
P8,000,000
Tax Schedule Effective January 1, 2023 and onwards:

Married Individuals Section 24(A) [continued]
Not over P250,000 0% For married individuals, the husband and wife, subject to the
Over P250,000 but not over P400,000 15% of the excess provision of Section 51(D) hereof, shall compute separately
over P250,000 their individual income tax based on their respective total taxable
Over P400,000 but not over P800,000 P22,500 + 20% of the income: Provided, That if any income cannot be definitely
excess over P400,000 attributed to or identified as income exclusively earned or realized
by either of the spouses, the same shall be divided equally
Over P800,000 but not over P102,500 + 25% of
between the spouses for the purpose of determining their
P2,000,000 the excess over
respective taxable income.
P800,000
Over P2,000,000 but not over P402,500 + 30% of
Rule In Case of Married Individuals
P8,000,000 the excess over
1. Husband and wife shall compute separately their individual
P2,000,000 income tax based on their respective total taxable income.
Over P8,000,000 P2,202,500 + 35% of 2. They are required to file an ITR to include the income of both
the excess over spouses.
P8,000,000
But, if any income cannot be definitely attributed to or identified as
income that is exclusively earned or realized by either of the spouses:
• The same shall be divided equally between spouses for the
Tax Base is the Net Taxable Income purpose of determining their respective taxable income.
Gross Income Minimum Wage Earners Section 24(A) [continued]

Add:
Compensation Income
Business Income Provided, That minimum wage earners as defined in Section
Operating Income 22(HH) of this Code shall be exempt from the payment of income
tax on their taxable income: Provided, further, That the holiday
Less: pay, pay received by such minimum wage earners shall likewise
Exclusions be exempt from income tax.
Deductions
Personal Exemptions Minimum Wage Earners
Net Taxable Income As discussed in Soriano v. Secretary, what the legislature is exempting
is the MWE's minimum wage and other forms statutory compensation
Note: Personal exemptions under the TRAIN Law no longer appeals like holiday pay, overtime pay, night shift differential pay, and hazard
there is just now exclusions and deductions. pay. These are not bonuses or other benefits; these are wages.
SAMPLE COMPUTATION “Given the foregoing, the treatment of bonuses and other benefits that
Under the Present Section 24(A) an employee receives from the employer in excess of the P30,000 [now
P90,000] ceiling cannot but be the same as the prevailing treatment prior
Annual Income: P600,000 to R.A. 9504 - anything in excess of P30,000 is taxable; no more, no
Expenses: (P100,000) less. The treatment of this excess cannot operate to disenfranchise the
Net Taxable Income: P500,000 MWE from enjoying the exemption explicitly granted by R.A. 9504.”
[1] Determine which bracket the income belongs:
This is illustrated in RR 8-2018:
Over P400,000 but not over P800,000 P30,000 + 25% of the
excess over P400,000 Illustration 1: Mr. CSO, a minimum wage earner, works for G.O.D,
Inc. He is not engaged in business nor has any other source of
income other than his employment. For 2018, Mr. CSO earned a total
Thus, the amount of tax shall be
compensation income of P135,000.00.
1. P30,000 plus
2. 25% of the excess over P400,000
a. The taxpayer contributed to the SSS, Philhealth and HDMF as having availed of the graduated rates under Section 24 (A)(2)(a) of
amounting to P5,000.00 and has received 13th month pay of P11,000. the Tax Code, as amended. Such election shall be irrevocable and no
His income tax liability will be computed as follows: amendment of option shall be made for the said taxable year.
Total Compensation Income Effect if Exceeded the VAT Threshold

P135,000.00 A taxpayer shall automatically be subject to the graduated rates under
Less: Mandatory Contributions P5,000.00 Section 24(A)(2)(a) of the Tax Code, as amended, even if the flat 8%
Non-Taxable Benefits P11,000.00 P16,000.00 income tax rate option is initially selected, when taxpayer's gross
Taxable Income sales/receipts and other non-operating income exceeded the VAT
P119,000.00 threshold during the taxable year.
Taxpayer is exempt since he is considered a MWE. In such case, his income tax shall be computed under the graduated
income tax rates and shall be allowed a tax credit for the previous
b. The following year, Mr. CSO earned, aside from his basic wage, quarter/s income tax payment/s under the 8% income tax rate option.
additional pay of P140,000.00 which consists of the overtime pay –
P80,000.00, night shift differential – P30,000.00, hazard pay –
Tax Rate: 8% Income Tax
P15,000.00, and holiday pay – P15,000.00. He has the same
Tax Base: [a] Gross Sales; or
benefits as contributions as above.
[b] Gross Receipts; or
[c] Other non-operating income
Total Compensation Income
P135,000.00
Add: Overtime, night shift differential, Taxable income for individuals earning income from self-
hazard, and holiday pay P140,000.00 employment/practice of profession shall be the net income, if taxpayer
Total Income opted to be taxed at graduated rates or has failed to signify the chosen
P275,000.00 option. However, if the option availed is the 8% income tax rate, the
taxable base is gross sales/receipts and other non-operating income.
Less: Mandatory Contributions P5,000.00
Non-Taxable Benefits P11,000.00 P16,000.00 This is illustrated in RR 8-2018:
Illustration 2: Mr. EBQ operates a convenience store while she
Taxable Income P259,000.00 offers bookkeeping services to her clients. In 2018, her gross sales
Tax Due EXEMPT
amounted to P800,000, in addition to her receipts from bookkeeping
services of P300,000. She already signified her intention to be taxed
Taxpayer is exempt as an MWE. The statutory minimum wage as
at 8% income tax rate, the taxable base is gross sales/receipts and
well as the holiday pay, overtime pay, night shift differential pays,
other non-operating income.
and hazard pay received by such MWEE are specifically exempted
from income tax under the law.
Her income tax liability for the year shall be computed as follows:
Purely Self-Employed Individuals or Professionals Gross Sales – Convenience Store P 800,000

Section 24(A) [continued] Gross Receipts – Bookkeeping 300,000
Total Sales/Receipts P1,100,000
Less: Amount allowed deduction 250,000
(b) Rate of Tax on- Income of Purely Self-employed
Taxable Income P850,000
Individuals and/or Professionals Whose Gross Sales or
Gross Receipts and Other Non-operating Income Does Not Tax Due
Exceed the Value-added Tax (VAT) Threshold as Provided 8% of P850,000 P68,000
in Section 109(BB). - Self-employed individuals and/or
professionals shall have the option to avail of an eight percent The total gross sales and receipts is below the VAT threshold of
(8%) tax on gross sales or gross receipts and other non-operating P3,000,000.00.
income in excess of Two hundred fifty thousand pesos (P250,000)
in lieu of the graduated income tax rates under Subsection The taxpayer’s source of income is purely from self-employment thus
(A)(2)(a) of this Section and the percentage tax under Section 116 she is entitled to the amount allowed as deduction of P250,000 under
of this Code. Section 24(A)(2)(b) of the Tax Code, as amended. Income tax
imposed herein is based on the total gross sales and gross receipts
Income of Purely Self-Employed Individuals or Professionals
The following are the conditions for one to be covered: Income tax payment in lieu of the graduated income tax rates under
1. Taxpayer is purely self-employed individual and/or of subsection (A) hereof and percentage tax due, by express provision
professional; of law.
2. Gross sales or gross receipts and other non-operating
income of the taxpayer does not exceed value-added tax This is an example on how the income tax is calculated of those who are
threshold (P3,000,000 [Section 109(BB)]. purely self-employed and/or professional individual taxpayers given that
3. Taxpayer should not be a VAT registered taxpayer otherwise they have elected the 8% income tax rate at the start of the TY.
subjected to VAT regardless of gross income.
4. Taxpayer indicates in his return at the start of the taxable Illustration 3: Mr. EBQ above, failed to signify her intention to be
period that he will be availing of the gross sales or gross taxed at 8% income tax rate on gross sales in her initial Quarterly
receipts tax option. Income Tax Return and she incurred cost of sales and operating
Thus, individuals covered under Section 24(A)(2)(b) shall have the expenses amounting to P600,000.00 and P200,000.00, respectively,
option to avail of the following: or a total of P800,000, the income tax shall be computed as follows.
1. The graduated tax rates under Section 24(A)(2)(a) of the Tax
Code, as amended, OR Gross Sales/Receipts P1,100,000
2. An eight percent (8%) tax on gross sales or gross receipts and Less: Cost of Sales 600,000
other non-operating income in excess of P250,000 in lieu of Gross Income P 500,000
Less: Operating expenses 200,000
the graduated tax rates under Section 24(A) and the
Taxable Income P300,000
percentage tax under Section 116.
Tax Due
Intention to Election the 8% Income Tax, Required 20% of the excess of P250,000 P10,000
Unless the taxpayer signifies the intention to elect the 8% income tax
rate in the 1st Quarter Percentage and/or Income Tax Return, or on the But, aside from income tax, Ms. EBQ is likewise liable to pay
initial quarter return of the taxable year after the commencement of a business tax.
new business practice of profession, the taxpayer shall be considered
Illustration 4: Mr. JMLH signified his intention to be taxed at 8%o The gross receipts exceeded the VAT threshold of P3,000,000;
income tax rate on gross sales in his 1st Quarter Income Tax Return. subject to graduated income tax rates; liable for business tax – VAT,
He has no other source of income, His total sales for the first three in addition to income tax.
(3) quarters amounted to P3,000,000.00 with 4th quarter sales of
P3,500,000.00.
Schedular Income Tax 8% Income Tax
Q1 Q2 Section 24(A)(2)(a) Section 24(A)(2)(b)
Q3
(8% (8% Q4 Tax Base is the Net Taxable Tax Base is
(8% Rate)
Rate) Rate) Income 1. Gross Sales; or
Total
500,000 500,000 2,000,000 3,500,000 2. Gross Receipts; or
Sales
3. Other non-operating
Less: Cost
300,000 300,000 1,200,000 1,200,000 income
of Sales
Gross Tax Rate would depend upon Tax Rate is a flat 8%
200,000 200,000 800,000 2,300,000 the bracket which it falls (can be
Income
Less: from 0% to 32%).
Operating 120,000 120,000 480,000 720,000 Allowable deductions include Allowed deduction of P250,000
Expenses those which are normally as there is “in excess of
Taxable deducted from the gross to get P250,000”
80,000 80,000 320,000 1,580,000
Income the net income
Still subject to the percentage No longer subject to the
The tax due shall be computed as follows: tax of 3% percentage tax of 3%
Total Sales P 6,500,000 Mixed Income Earners Section 24(A) [continued]

Less: Cost of Sales 3,000,000
Gross Income P3,500,000
Less: Operating Expenses 1,440,000 (c) Rate of Tax for Mixed Income Earners. - Taxpayers
Taxable Income P2,060,000 earning both compensation income and income from business or
practice of profession shall be subject to the following taxes:
Income Tax Due
Due under the graduated rates P 509,200
(1) All Income from Compensation — The rates prescribed under
(P490,000 + 32% of the
excess over P2,000,000)
Subsection (A)(2)(a) of this Section.
Less: 8% Income Tax which was P 220,000 (2) All Income from Business or Practice of Profession –
Previously paid (Q1 to Q3)
(P3,000,000 – P250,000) x 8% (a) If Total Gross Sales and/or Gross Receipts and Other Non-
operating Income Do Not Exceed the VAT Threshold as Provided
Annual Income Tax Payable P 289,200 in Section 109(BB) of this Code. - The rates prescribed under
Subsection (A) (2) (a) of this Section on taxable income, or eight
The gross receipts exceeded the VAT threshold of P3,000,000. The
percent (8%) income tax based on gross sales or gross receipts and
taxpayer shall be liable to pay income tax under graduated rates
other non-operating income in lieu of the graduated income tax
pursuant to Section 24(A)(2)(a) of the Tax Code as amended.
rates under Subsection (A)(2)(a) of this Section and the
Taxpayer shall be allowed to an income tax credit of quarterly percentage tax under Section 116 of this Code.
payments initially made under the 8% income tax option computed
net of the allowable deduction of P250,000 granted for purely (b) If Total Gross Sales and/or Gross Receipts and Other Non-
business income. operating Income Exceeds the VAT Threshold as Provided in
section 109 (BB) of this Code.- The rates prescribed under
Taxpayer is likewise liable for business tax(es) in addition to the Subsection (A)(2)(a) of this Section.
income tax. For this purpose, the taxpayer is required to update his
registration from non-VAT to VAT Taxpayer. Percentage tax Income Tax Rate for Mixed Income Earners
pursuant to Section 116 of the Tax Code as amended shall be A mixed income earner is one who earns both compensation income
imposed from the beginning of the year until taxpayer is liable to VAT. and business income or exercising his profession. For mixed income
VAT shall be imposed prospectively. earners, the income tax rates applicable are:
1. The compensation income shall be subject to the graduated
Percentage tax due on the non-VAT portion of the sales/receipts income taxes rates under Section 24(A)(2)(a) of the Tax Code
shall be collected without penalty, if timely paid on the due ate as amended; AND
immediately following the month/quarter when taxpayer ceases to be 2. The income from business or practice of profession shall
a non-VAT. be subject to the following:
a. If the gross sales/receipts or other non-operating
Illustration 5: Ms. RPSV is a prominent independent contractor who income do not exceed the VAT threshold of
offers architectural and engineering services. Since her career P3,000,000, the individuals has the option to be
flourished, her total gross receipts amounted to P4,250,000.00 for taxed at:
taxable year 2018. Her recorded cost of service and operating i. Graduated income tax rates under
expenses were P2,150,000.00 and P1,000,000.00, respectively. Section 24(A)(2)(a) of the Tax Code; OR
ii. Eight percent (8%) income tax rate based
Gross Receipts (Services) P4,250,000 on gross sales/receipts and other non-
Less: Cost of Service P2,150,000 operating income in lieu of the graduated
Gross Income P2,100,000 income tax rates and percentage tax
Less: Operating expenses P1,000,000 under Section 116 of the Tax Code.
Taxable Income P1,100,000
b. If the gross sales/receipts or other non-operating
Tax Due income exceeds the VAT threshold of P3,000,000,
On P800,000 P 130,000 the individual shall be subject to the graduated
On Excess (P1,100,000 – 90,000
income tax rates as prescribed under Section
P800,000) x 30%
24(A)(2)(a) of the Tax Code, as amended.
Income Tax Due P 220,000
“In Excess of P250,000” Is Not Applicable to Gross Sales/Receipts

or Non-operating Income of a Mixed Income Earner Total compensation income P1,500,000
The provision under Section 24(A)(2)(b) of the Tax Code, as amended, Less: Non-taxable 13 month pay and 90,000
which an option of 8% income tax rate on gross sales/receipts and other other benefits (max)
non-operating income in excess of P250,000.00 is available only to Taxable Compensation Income P1,410,000
purely self-employed individuals and/or professionals.
Add: Taxable Income from Business
Gross Sales P2,400,000
The P250,000.00 mentioned is not applicable to mixed income earners
Less: Cost of Sales 1,000,000
since it is already incorporated in the first tier of the graduated income Gross Income P1,400,000
tax rates applicable to compensation income. Less: Operating Expenses 600,000
Net Income from Operation P800,000
Under the said graduated rates' the excess of the P250,000.00 over the Add: Non-operating income P100,000
actual taxable compensation income is not deductible against the Taxable Business Income P900,000
taxable income from business practice of profession under the 8%o
income tax rate option. Total Taxable Income P2,310,000
The total tax due shall be the sum of: Tax Due
1. Tax due from compensation, computed using the graduated On P2,000,000 P490,000
income tax rates; On excess (P2,310,000-P2,000,000) 32% P99,200
Total Income Tax P589,200
2. Tax due from self-employment/practice of profession,
resulting from the multiplication of the 8% income tax rate with
The taxable income from both compensation and business shall be
the total of the gross sales/receipts and other non-operating
combined for purposes of computing the income tax due if the
income.
taxpayer chose to be subject under the graduated income tax rates.
Mixed income earner who opted to be taxed under the graduated income
In addition to the income tax, Mr. MAG is likewise liable to pay for a
tax rates for income from business/practice of profession, shall combine
percentage tax of P72,000 which is 3% of P2,400,000.
the taxable income from both compensation and business/practice of
profession in computing for the total taxable income, and consequently,
c. On February 2019, taxpayer tendered his resignation to
the income tax due.
concentrate on his business. His total compensation income
amounted to P150,000 inclusive of benefits P20,000. His business
Illustration 7: Mr. MAG, a Financial Comptroller of JAB Company,
operations for taxable year 2019 remains the same. He opted for the
earned annual compensation in 2018 of P1,500,000 inclusive of 13th
eight percent income tax rate.
month and other benefits in the amount of P120,000 but net of
mandatory contribution to SSS and Philhealth. Aside from
Total compensation income P150,000
employment income he owns a convenience store, with gross sales Less: Non-taxable benefits 20,000
of P2,400,000. His cost of sales and operating expenses are Taxable Compensation Income P130,000
P1,000,000 and P600,000 respectively, and with non-operating
income of P100,000. Tax Due
1. On Compensation
a. His tax due for 2018 shall be computed as follows if he opted to On P130,000 (not over P250,000) P0
be taxed eight percent (8%) income tax rate on his gross sales for 2. On Business Income P2,400,000
his income from business: Add: Non-operating income 100,000
Taxable Business Income P2,500,000
Total compensation income P1,500,000 Multiplied by income tax rate 8%
Less: Non-taxable 13 month pay and 90,000 Tax Due on Business P200,000
other benefits (max)
Taxable Compensation Income P1,410,000 Total Income Tax P200,000
Tax Due The option of 8% income of tax rate is applicable only to taxpayer’s
1. On Compensation income from business, and the same is in lieu of the income tax under
On P800,000 P130,000 the graduated income tax rates and the percentage tax under Section
On excess (P1,410,000-P800,000) x 30% 183,000 116 of the Tax Code as amended.
Tax due on Compensation Income 313,000
The amount of P250,000 which is allowed as deduction under the
2. On Business Income law for taxpayers earning solely from self-employment/practice of
Gross Sales P2,400,000 profession, is not applicable for mixed income earner under the 8%
Add: Non-operating income 100,000
income tax rate option.
Taxable Business Income P2,500,000
Multiply by Income Tax Rate (x 8%)
Tax due on Business Income 200,000
The P250,000 mentioned above is already incorporated in the first
tier of the graduated income tax rates applicable to compensation
Total Income Tax Due P513,000 income.
The option of 8% income tax rate is applicable only to taxpayer’s The excess of P250,000 over the actual taxable income is not
income from business, and the same in lieu of the income tax under creditable against the taxable income from business/practice of
the graduated income tax rates and the percentage tax under Section profession under the 8% income tax rate option.
116 of the Tax Code.
The amount of P250,000 allowed as deduction under the law for Illustration 8. Mr. WBV, an officer of AMBS International Corp.,
taxpayers earning solely from self-employment/practice of profession earned in 2018 an annual compensation of P1,200,000.00, inclusive
is not applicable for mixed income earner under the 8% income tax of 13th month and other benefits in the amount of P120,000.00.
rate option.
Aside from employment income, he owns a farm, with gross sales of
The P250,000 mentioned above is already incorporated in the first P3,500,000. His cost of sales and operating expenses are
tier of the graduated income tax rates applicable to the compensation P1,000,000.00 and P600,000.00, respectively, and with non-
income. operating income of P100.000.00.
His tax due for 2018 shall be computed as follows:
b. His tax due for 2018 shall be computed as follows if he did not opt
for the eight percent (8%) income tax based on gross sales/receipts Total compensation income P1,200,000
and other non-operating income:
Less: Non-taxable 13 month 90,000 ITEMS OF TAXATION

pay and other benefits (max)
Taxable Compensation Income P1,100,000 Normal Tax [Section 25(A) in relation to Section 24(A)]
In general, the income tax rates applicable to this taxpayer shall be the
Add: Taxable Income From
rates imposed on individual citizen and a resident alien individual on the
Business
Gross Sales P3,500,000
taxable income derived within the Philippines.
Less: Cost of Sales P1,000,000
Gross Income P2,500,000 Passive Income [Section 25(A)(2)]
Less: Operating Expenses P600,000 Interest Income (As a general rule) 20% Final Tax
Net Income from Operation P1,900,000 Passive Royalties 20% Final Tax
Add: Non-operating Income 100,000
• Books, Literary Works, Musical 10% Final Tax
Taxable Income From Business P2,000,000
Compositions
Total Taxable Income P3,100,000 Prizes (except P10,000 or less) 20% Final Tax
Winnings (except winnings amounting to from 20% Final Tax
Tax Due PCSO and Lotto which shall be exempt)
On P2,000,000 P490,000 [Not amended by TRAIN Law]
On excess (P3,110,000 – 335,200 Cinematographic films and similar works shall 25% Gross
P2,000,000) x 32% be subject to Section 28 Income
Total Income Tax Due P845,200
Section 28(B)(2). Nonresident Cinematographic Film Owner,
The taxpayer has no option to avail of the 8% income tax rate on his
Lessor or Distributor. - A cinematographic film owner, lessor, or
income from business since his gross sales exceed the VAT
distributor shall pay a tax of twenty-five percent (25%) of its gross
threshold. However, he is still not subject to business tax since the
income from all sources within the Philippines.
nature of his business transactions is VAT exempt (local farm).
Capital Gains Tax [Section 24(C)(D)]
OTHER ITEMS OF TAXATION Shares of Stock not Traded in Stock 15% Final Tax on
Exchange the Net Capital
Passive Income [Section 24(B)] Gains
Interest Income (As a general rule) 20% Final Tax Real Property 6% Final Tax on
• Interest income received from a 15% Final Tax the gross selling
depositary bank under EFCDS price or FMV
Passive Royalties 20% Final Tax
• Books, Literary Works, Musical 10% Final Tax Non-Resident Not Aliens Engaged in Trade or
Compositions Business [NRANETB]
Prizes (except P10,000 or less) 20% Final Tax
Winnings (except winnings amounting to 20% Final Tax
NIRC
P10,000 or less from PCSO and Lotto which
SECTION 25
shall be exempt)
Tax on Non-Resident Individual
Capital Gains Tax [Section 24(C)(D)]
(B) Nonresident Alien Individual Not Engaged in Trade or
Shares of Stock not Traded in Stock 15% Final Tax on
Business Within the Philippines. - There shall be levied,
Exchange the Net Capital
Gains collected and paid for each taxable year upon the entire income
Real Property 6% Final Tax on received from all sources within the Philippines by every
the gross selling nonresident alien individual not engaged in trade or business
price or FMV within the Philippines as interest, cash and/or property
dividends, rents, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments, or other fixed or
Non-Resident Aliens Engaged in Trade or Business
determinable annual or periodic or casual gains, profits, and
[NRAETB] income, and capital gains, a tax equal to twenty-five percent (25%)
of such income. Capital gains realized by a nonresident alien
NIRC individual not engaged in trade or business in the Philippines
SECTION 25 from the sale of shares of stock in any domestic corporation and
Tax on Non-Resident Individual real property shall be subject to the income tax prescribed under
Subsections (C) and (D) of Section 24.
(A) Nonresident Alien Engaged in Trade or Business
Within the Philippines. - NRANETB Within the Philippines
Upon the entire income received from all sources within the Philippines
(1) In General. - A nonresident alien individual engaged in trade by this taxpayer, such as interest, cash and/or property dividends, rents,
or business in the Philippines shall be subject to an income tax in salaries, wages, premiums, annuities, compensations, remuneration,
the same manner as an individual citizen and a resident alien emoluments; or other fixed or determinable annual or periodic or casual
individual, on taxable income received from all sources within the gains, profits, and income shall be taxed equal to 25% of such income.
Philippines. A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than Tax Rate: 25%
one hundred eighty (180) days during any calendar year shall be
deemed a 'nonresident alien doing business in the Philippines'. Tax Base: Gross Income earned Within the Philippines
Section 22 (G) of this Code notwithstanding.
Exceptions: (1) Capital gains tax for sale of real property in PH
(2) Capital gains tax for sale of domestic shares
NRAETB Within the Philippines
In general, the income tax rates applicable to this taxpayer shall be the
Note: The 8% income tax rate does not apply to a NRANETB.
rates imposed on individual citizen and a resident alien individual on the
taxable income derived within the Philippines. A taxpayer shall be
considered as a non-resident alien doing business in the Philippines if
he comes to the Philippines and stay therein for an aggregate period of
more than 180 days during any calendar year.
Special Aliens [Section 25 (C) (D) (E) subcontractors presently availing of preferential tax rates for qualified
employees shall continue to be entitled to avail of the preferential tax
rate for present and future qualified employees."
NIRC
SECTION 25 “While I understand the laudable objective of the proposal, the provision
Tax on Non-Resident Individual is violative of Equal protection Clause under Section I, Article III of the
1987 Constitution, as well as rule of equity and uniformity in the
(C) Alien Individual Employed by Regional or Area application of the burden of taxation” In line with this, the overriding
Headquarters and Regional Operating Headquarters of consideration is the promotion of fairness of the tax system for
Multinational Companies. - There shall be levied, collected and individuals performing similar work. Given the significant reduction in the
paid for each taxable year upon the gross income received by every personal income tax, the employees of these firms should follow the
alien individual employed by regional or area headquarters and regular tax rates applicable to other individual taxpayers.”
regional operating headquarters established in the Philippines by
multinational companies as salaries, wages, annuities, With this veto, thus:
compensation, remuneration and other emoluments, such as
honoraria and allowances, from such regional or area (F) The preferential tax treatment provided in Subsection (C),
headquarters and regional operating headquarters, a tax equal to (D), and (E) of this Section shall not be applicable to regional
fifteen percent (15%) of such gross income: Provided, however, headquarters (RHQs), regional operating headquarters (ROHQs),
That the same tax treatment shall apply to Filipinos employed offshore banking units (OBUs), or petroleum service contractors
and occupying the same position as those of aliens employed by and subcontractors registering with the Securities and Exchange
these multinational companies. For purposes of this Chapter, the Commission (SEC) after January 1, 2018: Provided, however,
term 'multinational company” means a foreign firm or entity That existing RHQs/ROHQs, OBUs or petroleum service
engaged in international trade with affiliates or subsidiaries or contractors and subcontractors presently availing of preferential
branch offices in Asia-Pacific Region and other foreign markets." tax rates for qualified employees shall continue to be entitled to
avail of the preferential tax rate for present and future qualified
(D) Alien Individual Employed by Offshore Banking Units. employees.
- There shall be levied, collected and paid for each taxable year
upon the gross income received by every alien individual Therefore, after January 1, 2018 the preferential tax treatment shall no
employed by offshore banking units established in the Philippines longer be applicable to these special aliens if the RHQ, ROHQ, OBUs
as salaries, wages, annuities, compensation, remuneration and or petroleum contractors and subcontractors are registered with the
other emoluments, such as honoraria and allowances, from such SEC. Except of course those are entitled to avail such who were already
offshore banking units, a tax equal to fifteen percent (15%) of such covered by the preferential tax rate.
gross income: Provided, however, That the same tax treatment
shall apply to Filipinos employed and occupying the same GENERAL PROFESSIONAL PARTNERSHIPS
position, as those of aliens employed by these offshore banking
units. General Professional Partnerships (Section 26)
(E) Alien Individual Employed by Petroleum Service
Contractor and Subcontractor. — An alien individual who is NIRC
a permanent resident of a foreign country but who is employed SECTION 26
and assigned in the Philippines by a foreign service contractor or
by a foreign service subcontractor engaged in petroleum of fifteen Tax Liability of Members of General Professional
percent (15%) of the salaries, wages, emoluments, such as Partnerships. - A general professional partnership as such shall
honoraria and allowances, received from such contractor or not be subject to the income tax imposed under this Chapter.
subcontractor: Provided, however, That the same tax treatment
shall apply to a Filipino employed and occupying the same Persons engaging in business as partners in a general
position as an alien employed by petroleum service contractor and professional partnership shall be liable for income tax only in
subcontractor. "Any income earned from all other sources within their separate and individual capacities.
the Philippines by the alien employees referred to under
Subsections (C), (D), and (E) hereof shall be, imposed under this For purposes of computing the distributive share of the partners,
Code. the net income of the partnership shall be computed in the same
manner as a corporation.
Direct Veto by the President
The preferential income tax rate under Section C, D or E of Section 25 Each partner shall report as gross income his distributive share,
of the Tax Code, as amended, shall no longer be applicable without actually or constructively received, in the net income of the
prejudice to the application of preferential tax rates under existing partnership.
international treaties, if warranted.
General Professional Partnerships
Thus, all concerned employees of: General professional partnerships' are partnerships formed by persons
1. Regional area headquarters and regional operating for the sole purpose of exercising their common profession, no part of
headquarters of multinational companies; the income of which is derived from engaging in any trade or business.
2. Offshore banking unit;
3. Petroleum service contractors and subcontractors They are not subject to income tax. Persons engaging in business as
Shall be subject to the regular income tax rate under Section 24(A)(2) partners in GPP shall be liable for income tax only in their separate and
of the Tax Code, as amended. individual capacities. In other words, the professional partners are the
ones separately and individually liable not the partnership itself.
This is in accordance with the Veto Message of the President which
reads as follows: “I hereby register the following line item vetoes to this Q. How about general co-partnerships? They shall be taxed as in the
law: Reduced income tax rate of employees of Regional Headquarters form of corporations because in the definition of a taxable corporation
(RHQs), Regional Operating Headquarters (ROHQs), Offshore Banking partnerships are included no matter how created or organized.
Units (OBUs), and Petroleum Service Contractors and Subcontractors. • Income of general co-partnerships are treated as dividends.
‘I am constrained to veto the proviso xxx of the enrolled bill that The determining factor in a GPP is the exercise of a common profession.
effectively maintains the special tax rate of 15% of gross income for the Thus, when there is a partnership composed of a doctor, lawyer, an
aforementioned employees xxx.” “Provided, however, that existing architect and accountant which renders multi-disciplinary services and
RHQS/ROHQS, OBUS or petroleum service contractors and operates as a partnership, it will be taxed as a business partnership.
CORPORATIONS
For a trading or merchandising concern, 'cost of goods sold'
Corporation, Defined [Section 22(B)] shall include the invoice cost of the goods sold, plus import duties,
The term 'corporation' shall include partnerships, no matter how created freight in transporting the goods to the place where the goods are
or organized, joint-stock companies, joint accounts (cuentas en actually sold, including insurance while the goods are in transit.
participacion), association, or insurance companies,
For a manufacturing concern, 'cost of goods manufactured
But does not include and sold' shall include all costs of production of finished goods,
1. General professional partnerships and such as raw materials used, direct labor and manufacturing
2. A joint venture or consortium formed for the purpose of overhead, freight cost, insurance premiums and other costs
undertaking construction projects incurred to bring the raw materials to the factory or warehouse.
3. A joint venture engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating consortium In the case of taxpayers engaged in the sale of service, 'gross
agreement under a service contract with the Government. income' means gross receipts less sales returns, allowances and
There is rather a “loose” definition of corporations in the NIRC. discounts.
Domestic Corporations (Section 27) Domestic Corporations

Like the resident citizen who is taxed on all sources, domestic
corporations are also taxed on all sources.
Normal Tax
The current tax rate for the domestic corporation is at 30% regular
NIRC corporate income tax rate.
SECTION 27
Rates of Income Tax on Domestic Corporations Tax Rate: Income tax of thirty-five percent (30%)
(A) In General. - Except as otherwise provided in this Code, an Tax Base: Upon the taxable income derived during each taxable year
income tax of thirty-five percent (35%) is hereby imposed upon the from all sources within and without the Philippines by the domestic
taxable income derived during each taxable year from all sources corporations.
within and without the Philippines by every corporation, as
defined in Section 22(B) of this Code and taxable under this Title Sources of Income
as a corporation, organized in, or existing under the laws of the 1. Business income
Philippines: Provided, That effective January 1, 2009, the rate of 2. Other income which are taxed under regular corporate income
income tax shall be thirty percent (30%). tax rate
In the case of corporations adopting the fiscal-year accounting Gross Business Income
period, the taxable income shall be computed without regard to Gross income is defined as those derived from business which shall be
the specific date when specific sales, purchases and other equivalent to gross sales less sales returns, discounts and allowances
transactions occur. Their income and expenses for the fiscal year and cost of goods sold.
shall be deemed to have been earned and spent equally for each
month of the period. Special Domestic Corporations
The corporate income tax rate shall be applied on the amount There are two categories of special domestic corporations
computed by multiplying the number of months covered by the 1. Proprietary Educational Institutions and Hospitals [27(B)]
new rate within the fiscal year by the taxable income of the 2. Government-owned or Controlled Agencies and
corporation for the period, divided by twelve. Instrumentalities or GOCCs [27(C)]
Provided, further, That the President, upon the recommendation A. Proprietary Educational Institutions and Hospitals
of the Secretary of Finance, may effective January 1, 2000, allow
corporations the option to be taxed at fifteen percent (15%) of NIRC
gross income as defined herein, after the following conditions have SECTION 27
been satisfied: Rates of Income Tax on Domestic Corporations
(1) A tax effort ratio of twenty percent (20%) of Gross National (B) Proprietary Educational Institutions and Hospitals. -
Product (GNP); Proprietary educational institutions and hospitals which are
(2) A ratio of forty percent (40%) of income tax collection to nonprofit shall pay a tax of ten percent (10%) on their taxable
total tax revenues; income except those covered by Subsection (D) hereof: Provided,
(3) A VAT tax effort of four percent (4%) of GNP; and that if the gross income from 'unrelated trade, business or
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector other activity' exceeds fifty percent (50%) of the total gross
Financial Position (CPSFP) to GNP. income derived by such educational institutions or hospitals from
all sources, the tax prescribed in Subsection (A) hereof shall be
The option to be taxed based on gross income shall be available imposed on the entire taxable income. For purposes of this
only to firms whose ratio of cost of sales to gross sales or receipts Subsection, the term 'unrelated trade, business or other
from all sources does not exceed fifty-five percent (55%). activity' means any trade, business or other activity, the conduct
of which is not substantially related to the exercise or
The election of the gross income tax option by the corporation performance by such educational institution or hospital of its
shall be irrevocable for three (3) consecutive taxable years during primary purpose or function. A 'proprietary educational
which the corporation is qualified under the scheme. institution' is any private school maintained and administered
by private individuals or groups with an issued permit to operate
For purposes of this Section, the term 'gross income' derived from the Department of Education, Culture and Sports (DECS),
from business shall be equivalent to gross sales less sales returns, or the Commission on Higher Education (CHED), or the Technical
discounts and allowances and cost of goods sold. 'Cost of goods Education and Skills Development Authority (TESDA), as the
sold' shall include all business expenses directly incurred to case may be, in accordance with existing laws and regulations.
produce the merchandise to bring them to their present location
and use.
The Preferential Tax Rate for Proprietary XPN: Except the following:
Educational Institutions and Hospitals 1. Government Service Insurance System (GSIS);
(CIR v. St. Luke’s Medical Center, GR 195909, September 26, 2012). 2. Social Security System (SSS);
3. Philippine Health Insurance Corporation (PHIC); and
Section 27(B) imposes a 10% preferential tax rate on the income of 4. Local Water Districts (LWD).
1. Proprietary non-profit educational institutions, and
2. Proprietary non-profit hospitals.
Passive Income and Capital Gains [Section 27(D)]
The only qualifications for hospitals are that they must be proprietary
and non-profit. Interest Income currency bank deposit, 20% Final Tax
• “Proprietary” means private, following the definition of a deposit substitutes
“proprietary educational institution” as “any private school
maintained and administered by private individuals or groups” • Interest derived by D/C from a 15% Final Tax
with a government permit. depository bank under EFCDS
• “Non-profit” means no net income or asset accrues to or Passive Royalties 20% Final Tax
benefits any member or specific person, with all the net
income or asset devoted to the institution’s purposes and all Capital Gains
its activities conducted not for profit. Nonprofit does not • Sale of Shares of Stock Not Traded 15% Final Tax
necessarily mean “charitable”. in the Stock Exchange on Net Capital
Gains
The court ruled in that case that: • If sold through stock exchange 6/10 of 1% of the
“St. Luke’s fails to meet the requirements under Section Gross Selling
30(E) and (G) of the NIRC to be completely tax exempt from all its Price (Final Tax)
income. However, it remains a proprietary non-profit hospital under • Sale of Land/Buildings 6% Final Tax on
Section 27(B) of the NIRC as long as it does not distribute any of its GSP or FMV
profits to its members and such profits are reinvested pursuant to its
corporate purposes. St. Luke’s, as a proprietary non-profit hospital, Income under the EFCDS
is entitled to the preferential tax rate of 10% on its net income from
its for-profit activities.” NIRC
SECTION 27 (D)
Section 27(B) provides that educational income or hospital income will
be subject to a preferential tax rate of 10% on its taxable income (3) Tax on Income Derived under the Expanded Foreign
provided that it will be subject to the predominance test. Currency Deposit System. - Income derived by a depository
bank under the expanded foreign currency deposit system from
Predominance Test
foreign currency transactions with nonresidents, offshore banking
It means that the proprietary educational institutions and hospitals will
units in the Philippines, local commercial banks including
have the (a) tuition or non-tuition income; and (b) hospital and that of
branches of foreign banks that may be authorized by the Bangko
non-hospital income. This will now be the basis of the tax.
Sentral ng Pilipinas (BSP) to transact business with foreign
More than 50% tuition or Preferential tax rate of 10% currency deposit system shall be exempt from all taxes, except net
hospital income under Section 27(B) income from such transactions as may be specified by the
More than 50% non-tuition or Regular corporate income tax Secretary of Finance, upon recommendation by the Monetary
non-hospital income rate of 30% under Section 27(A) Board to be subject to the regular income tax payable by banks:
Provided, however, That interest income from foreign currency
Constitutional Exemption from Real Property Taxes loans granted by such depository banks under said expanded
As also discussed in CIR v. St. Luke’s Medical Center (2012), there are system to residents other than offshore banking units in the
two exemptions Philippines or other depository banks under the expanded system,
(1) constitutional exemption for real property taxes of those actually, shall be subject to a final tax at the rate of ten percent (10%).
directly and exclusively used for religious, charitable and education
purposes; Any income of nonresidents, whether individuals or corporations,
and (2) for income tax under Section 30(E). They must not be confused from transactions with depository banks under the expanded
with each other. system shall be exempt from income tax.
B. Government Owned and Controlled Corporations Pertain to Banks
NIRC This separate provisions on EFCDS pertains to the banks referring to

SECTION 27 the income derived by the depositary bank under the EFCDS which are
Rates of Income Tax on Domestic Corporations exempt from all taxes except of the net income. But if other entities are
involved they shall be covered by the income tax of 15% if they are not
exempted from such.
(C) Government-owned or -Controlled Corporations,
Agencies or Instrumentalities. - The provisions of existing
Intercorporate Dividends
special or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or controlled
NIRC
by the Government, except the Government Service Insurance
SECTION 27 (D)
System (GSIS), the Social Security System (SSS), the Philippine
Health Insurance Corporation (PHIC)., and the local water
(4) Intercorporate Dividends. - Dividends received by a
districts shall pay such rate of tax upon their taxable income as
domestic corporation from another domestic corporation shall not
are imposed by this Section upon corporations or associations
be subject to tax.
engaged in a similar business, industry, or activity.
Corporations, Subject to Two Tax Treatments
GR: Under Section 27(C) of the Tax Code, as amended, GOCCs,
1. Regular corporate income tax rate of 30% [Section 27(A)] and
government agencies or instrumentalities shall pay such rate of tax upon
2. Minimum Corporate Income Tax (MCIT) of 2%
their taxable income as imposed upon corporations or associations
engaged in a similar business or activity.
Minimum Corporate Income Tax (MCIT) Carry-Over of MCIT Excess

1. If MCIT is bigger than the regular corporate income tax;
2. The corporate taxpayer would be able to carry over the excess
NIRC
of the MCIT to the regular corporate income tax to the
SECTION 27 (E) succeeding taxable years treated as a tax credit. It will be a
Minimum Corporate Income Tax on Domestic direct deduction of the income tax payment for that
Corporations corporation.
3. The carry-over is applicable only for three (3) immediately
(1) Imposition of Tax. - A minimum corporate income tax of two succeeding taxable years.
percent (2%) of the gross income as of the end of the taxable year,
as defined herein, is hereby imposed on a corporation taxable [2] Suspension of MCIT
under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation
commenced its business operations, when the minimum income (3) Relief from the Minimum Corporate Income Tax Under
tax is greater than the tax computed under Subsection (A) of this Certain Conditions. - The Secretary of Finance is hereby
Section for the taxable year. authorized to suspend the imposition of the minimum corporate
income tax on any corporation which suffers losses on account of
prolonged labor dispute, or because of force majeure, or because
MCIT (discussed by the Tax and Accounting Center of the Philippines) of legitimate business reverses.
The minimum corporate income tax is an income tax in lieu of the normal
30% corporate income tax only. It is imposed in lieu of the normal net
income tax, and only if the normal income tax is low. The MCIT in the Philippines is not absolute and it provides suspension
during certain instances. The Secretary of Finance may suspend the
The MCIT merely approximates the amount of net income tax due from imposition of MCIT upon submission of proof by the applicant-
a corporation, pegging the rate at a very much reduced 2% and uses as corporation that corporation suffers substantial losses on account of:
the base the corporation’s gross income.
1. A prolonged labor dispute;
The MCIT is imposed on gross income which is arrived at by deducting 2. Force majeure due to an irresistible force
the capital spent by a corporation in the sale of tis goods (cost of goods) 3. Legitimate business reverses such as those arising from a
because gross income is meant gross sales less sales returns, fire, robbery, theft or embezzlement or for other economic
discounts and allowances and cost of goods sold. reason as determined by the Secretary of Finance.
Rationale behind MCIT During the above instances, the corporation shall not be liable for MCIT.
A corrective measure to ensure minimum contribution
Prior to RA 8424, the legislators had notice low income tax compliance
Foreign Corporations
by corporate taxpayers by simply declaring net loss to evade income tax
in the Philippines. As such, MCIT is devised as a relatively simple and Resident Foreign Corporations (Section 28)
effective revenue-sharing instrument to ensure that corporate taxpayers
will make minimum contribution to support the government and finance NIRC
the cost of the government. SECTION 28
Rates of Income Tax on Foreign Corporations
Requirements for the Minimum Corporate Income Tax
1. Applicable to both domestic corporations and resident foreign
(A) Tax on Resident Foreign Corporations
corporations;
(1) In General. - Except as otherwise provided in this Code, a
2. It imposed beginning the fourth year immediately following the
operation year. corporation organized, authorized, or existing under the laws of
any foreign country, engaged in trade or business within the
This is because the Tax Code recognizes the fact that newly formed Philippines, shall be subject to an income tax equivalent to thirty-
corporations will undergo struggling beginnings and birth pangs. For the five percent (35%) of the taxable income derived in the preceding
first few years, sales could be minimal and the corporation would need taxable year from all sources within the Philippines: Provided,
to recover its capital expenditures. That effective January 1, 2009, the rate of income tax shall be
thirty percent (30%).
It is given enough period to establish itself and recover the necessary
funding before it is being require to pay the MCIT. In the case of corporations adopting the fiscal-year accounting
period, the taxable income shall be computed without regard to
As such, MCIT liability begins only at the fourth year immediately the specific date when sales, purchases and other transactions
following the commencement of its business counted from the year of occur. Their income and expenses for the fiscal year shall be
registration with the BIR. deemed to have been earned and spent equally for each month of
the period.
3. The corporation has 0% income or has a net loss or even if
the corporation has a gain, the MCIT is bigger than the regular The corporate income tax rate shall be applied on the amount
corporate income tax. computed by multiplying the number of months covered by the
new rate within the fiscal year by the taxable income of the
RELIEFS AVAILABLE corporation for the period, divided by twelve.
[1] Three-Year Carry Over of Excess MCIT
Provided, however, That a resident foreign corporation shall be
granted the option to be taxed at fifteen percent (15%) on gross
income under the same conditions, as provided in Section 27 (A).
(2) Carry Forward of Excess Minimum Tax. - Any excess of
the minimum corporate income tax over the normal income tax as
Income Tax Rate of Resident Foreign Corporations
computed under Subsection (A) of this Section shall be carried
GR: 30% on Taxable Income within all sources in the Philippines
forward and credited against the normal income tax for the three XPN: Unless the RFC is under a special tax rate.
(3) immediately succeeding taxable years.
(2) Minimum Corporate Income Tax for Resident Foreign XPN: Unless it is subject to a preferential rate or exemption on the basis
Corporations. - A minimum corporate income tax of two percent of an applicable tax treaty or international agreement to which the
(2%) of gross income, as prescribed under Section 27 (E) of this Philippines is a signatory or on the basis of ‘reciprocity.’
Code, shall be imposed, under the same conditions, on a resident
foreign corporation taxable under paragraph (1) of this Kinds of International Carriers
Subsection. 1. International Air Carrier
2. Intentional Shipping
Resident foreign corporations are also subject to the minimum income
tax rate of 2% on the gross income. Online Carriers Off-line Carriers
Have landing rights or authority Do not have landing right or
Resident Foreign Corporations to operate to and from the authority to operating to and
Subject to Special Tax Rates Philippines from the Philippines
1. International Carriers An international carrier having An international carrier without
2. Offshore Banking Units flights or voyages originating flights or voyage from or
3. Regional or Area Headquarters and Regional Operating from any port or point in the passing through any point, but
Headquarters of Multinational Companies Philippines, irrespective of the has a branch, office or a sales
place where passage agent is not considered subject
INTERNATIONAL CARRIERS documents are sold or issued, is to Gross Philippine Billings Tax
subject to the Gross Philippine provided for in Section 28(A)(3)
Billings Tax of two and one-half of the NIRC.
(3) International Carrier. - An international carrier doing
percent (2½ %)
business in the Philippines shall pay a tax of two and one-half
Nevertheless, an off-line carrier
percent (2 1/2 %) on its 'Gross Philippine Billings' as defined shall be subject to the regular
hereunder: income tax under Section
28(A)(1) of the NIRC, based on
(a) International Air Carrier. - 'Gross Philippine Billings' its taxable income from sources
refers to the amount of gross revenue derived from carriage of within Philippines.
persons, excess baggage, cargo, and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective Determination of Gross Philippine Billings
of the place of sale or issue and the place of payment of the ticket 1. International Air Carriers
or passage document: Provided, That tickets revalidated, In computing for “Gross Philippine Billings” of
exchanged and/or indorsed to another international airline form international air carriers, there shall be included the total
part of the Gross Philippine Billings if the passenger boards a amount of gross revenue derived from passage of persons,
plane in a port or point in the Philippines: Provided, further, That excess baggage, cargo and/or mail, originating from the
for a flight which originates from the Philippines, but Philippines in a continuous and uninterrupted flight,
transshipment of passenger takes place at any part outside the irrespective of the place of sale or issue and the place of
Philippines on another airline, only the aliquot portion of the cost payment of the passage documents.
of the ticket corresponding to the leg flown from the Philippines 2. International Sea Carriers
to the point of transshipment shall form part of Gross Philippine In computing for “Gross Philippine Billings” of
Billings. international sea carriers, there shall be included the total
amount of gross revenue whether for passenger, cargo,
(b) International Shipping. - 'Gross Philippine Billings' and/or mail originating from the Philippines up to final
means gross revenue whether for passenger, cargo or mail destination, regardless of the place of sale or payments of the
originating from the Philippines up to final destination, passage or freight documents.
regardless of the place of sale or payments of the passage or
freight documents. In Case of Transshipment
In the case of a flight that originates from the Philippines but
Provided, That international carriers doing business in the transshipment of passenger, excess baggage, cargo and/or mail takes
place elsewhere in another aircraft belonging to a different airline
Philippines may avail of a preferential rate or exemption from the
company, the Gross Philippine Billings shall be determined based on
tax herein imposed on their gross revenue derived from the
that portion of the revenue corresponding to the leg flown from any point
carriage of persons and their excess baggage on the basis of an
in the Philippines to the point of transshipment.
applicable tax treaty or international agreement to which the
Philippines is a signatory or on the basis of reciprocity such that
an international carrier, whose home country grants income tax SOUTH AFRICAN AIRWAYS v. CIR
exemption to Philippine carriers, shall likewise be exempt from GR 180356, February 16, 2010
the tax imposed under this provision.
Facts: South African Airways is a foreign corporation organized and
existing under and by virtue of the laws of the Republic of South Africa.
Its principal office is located at Johannesburg International Airport,
Income Tax Rates for Resident Foreign Corporations that South Africa. In the Philippines, it is an internal air carrier having no
are International Carriers landing rights in the country.
Tax Rate: 2 ½ % or 2.5% Petitioner has a general sales agent in the Philippines, Aerotel Limited
Tax Base: Gross Philippine Billings Corporation. Aerotel sells passage documents for compensation or
commission for petitioner's off-line flights for the carriage of passengers
This Gross Philippine Billings Tax is a special tax rate imposed upon and cargo between ports or points outside the territorial jurisdiction of
international carrier by air or sea. They are given here a preferential tax the Philippines. Petitioner is not registered with the Securities and
treatment at 2.5%. Exchange Commission as a corporation, branch office, or partnership. It
is not licensed to do business in the Philippines.
GR: An international carrier having flights or voyages originating from
any port or point in the Philippines, irrespective of the place where For TY 2000, it filed ITR for off-line flights but later on filed with BIR for
passage documents are sold or issued, is subject to the Gross Philippine a claim of refund of the amount of PhP 1,727,766.38 as erroneously
Billings Tax of two and one-half percent (2½ %) imposed under Section paid tax on Gross Philippine Billings (GPB) for the taxable year 2000.
28(A)(3)(a) and (b) of the NIRC, as amended, BIR did not act on the claim, constraining petition to go to CTA.
CTA First Division denied the claim finding that it was an RFC engaged
in trade or business in the Philippines finding it liable to pay a tax of 32%
on its income derived from the sales of passage document on the foreign banks that may be authorized by the Bangko Sentral ng
Philippines, thus claim for refund was denied. CTA En Banc denied the Pilipinas (BSP) to transact business with offshore banking units
petition for review. shall be exempt from all taxes except net income from such
transactions as may be specified by the Secretary of Finance, upon
In essence, petitioner calls upon this Court to determine the legal recommendation of the Monetary Board which shall be subject to
implication of the amendment to Sec. 28(A)(3)(a) of the 1997 NIRC the regular income tax payable by banks: Provided, however, That
defining GPB. It is petitioner's contention that, with the new definition of any interest income derived from foreign currency loans granted
GPB, it is no longer liable under Sec. 28(A)(3)(a). Further, petitioner to residents other than offshore banking units or local commercial
argues that because the 2 1/2% tax on GPB is inapplicable to it, it is
banks, including local, branches of foreign banks that may be
thereby excluded from the imposition of any income tax.
authorized by the BSP to transact business with offshore banking
units, shall be subject only to a final tax at the rate of ten percent
Issue: Whether or not South African Airways, as an off-line
international carrier selling passage documents through an (10%).
independent sales agent in the Philippines, is engaged in trade or
business in the Philippines, subject to the 32% income tax imposed by Any income of nonresidents, whether individuals or corporations,
Section 28(A)(1) of the 1997 NIRC? – Yes. from transactions with said offshore banking units shall be
exempt from income tax.
Petitioner is Subject to Income Tax
At the Rate of 32% of its Taxable Income
In CIR v. British Overseas Airways, this Court ruled that off-line air Income Tax Rates of Offshore Banking Units
carriers having general sales agents in the Philippines are engaged in 1. Income derived by OBUs authorized by BSP from foreign
or doing business in the Philippines and that their income from sales of currency transaction with nonresidents, others OBUs, local
passage documents here is income from within the Philippines. Thus, in commercial banks shall be exempt from all taxes except net
that case, we held the off-line air carrier liable for the 32% tax on its income from such transactions.
taxable income. 2. However, any interest income derived from foreign currency
loans grant to residents other than OBUs or local commercial
Contention: Petitioner's interpretation of Sec. 28(A)(3)(a) of the 1997 banks shall be subject only to a final tax of 10%.
NIRC is that, since it is an international carrier that does not maintain 3. Income of nonresidents whether individual or corporations
flights to or from the Philippines, thereby having no GPB as defined, it is from transaction with offshore banking units shall be exempt
exempt from paying any income tax at all. In other words, the existence from income tax.
of Sec. 28(A)(3)(a) according to petitioner precludes the application of
Sec. 28(A)(1) to it. TAX ON BRANCH PROFITS REMITTANCES
This argument has no merit. Sec. 28(A)(3)(a) of the 1997

NIRC does not, in any categorical term, exempt all international air (5) Tax on Branch Profits Remittances. - Any profit remitted
carriers from the coverage of Sec. 28(A)(1) of the 1997 NIRC. by a branch to its head office shall be subject to a tax of fifteen
Certainly, had legislature's intentions been to completely exclude all (15%) which shall be based on the total profits applied or
international air carriers from the application of the general rule under earmarked for remittance without any deduction for the tax
Sec. 28(A)(1), it would have used the appropriate language to do so; but component thereof (except those activities which are registered
the legislature did not. Thus, the logical interpretation of such provisions with the Philippine Economic Zone Authority). The tax shall be
is that, if Sec. 28(A)(3)(a) is applicable to a taxpayer, then the general collected and paid in the same manner as provided in Sections 57
rule under Sec. 28(A)(1) would not apply. If, however, Sec. 28(A)(3)(a) and 58 of this Code: Provided, that interests, dividends, rents,
does not apply, a resident foreign corporation, whether an international royalties, including remuneration for technical services, salaries,
air carrier or not, would be liable for the tax under Sec. 28(A)(1). wages premiums, annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits, income and
Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign
capital gains received by a foreign corporation during each
corporations are liable for 32% tax on all income from sources within the
Philippines. Sec. 28(A)(3) is an exception to this general rule. taxable year from all sources within the Philippines shall not be
treated as branch profits unless the same are effectively
In the instant case, the general rule is that resident foreign corporations connected with the conduct of its trade or business in the
shall be liable for a 32% income tax on their income from within the Philippines.
Philippines, except for resident foreign corporations that are
international carriers that derive income "from carriage of persons, These are tax rates imposed when the branch office would remit the
excess baggage, cargo and mail originating from the Philippines" which profits to the head office.
shall be taxed at 2 1/2% of their Gross Philippine Billings.
Tax Rate: 15%
Petitioner Does Not Fall under the Exception Tax Base: Total profits applied or earmarked for remittance
Petitioner, being an international carrier with no flights originating from Without any deduction for tax component thereof
the Philippines, does not fall under the exception. As such, petitioner
must fall under the general rule. Thus, when a branch office remits profits of $100, the amount that would
be remitted is $85 because 15% has been deduction from the branch
To reiterate, the correct interpretation of the above provisions is that, if profits, note that it is on the total profits and not the net profits.
an international air carrier maintains flights to and from the Philippines,
it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, Exception to this is when those activities are registered with the:
while international air carriers that do not have flights to and from the • Philippine Economic Zone Authority
Philippines but nonetheless earn income from other activities in the
country will be taxed at the rate of 32% of such income.
REGIONAL OR AREA HEADQUARTERS AND REGIONAL
OPERATING HEADQUARTERS OF MULTINATIONAL COMPANIES
OFFSHORE BANKING UNITS
(6) Regional or Area Headquarters and Regional

(4) Offshore Banking Units. - The provisions of any law to the Operating Headquarters of Multinational Companies. –
contrary notwithstanding, income derived by offshore banking
units authorized by the Bangko Sentral ng Pilipinas (BSP), from (a) Regional or area headquarters as defined in Section 22(DD)
foreign currency transactions with nonresidents, other offshore shall not be subject to income tax.
banking units, local commercial banks, including branches of
(b) Regional operating headquarters as defined in Section Philippines shall pay a tax equal to thirty-five percent (35%) of
22(EE) shall pay a tax of ten percent (10%) of their taxable the gross income received during each taxable year from all
income. sources within the Philippines, such as interests, dividends, rents,
royalties, salaries, premiums (except reinsurance premiums),
Regional or Area Regional Operating Headquarters annuities, emoluments or other fixed or determinable annual,
Headquarters periodic or casual gains, profits and income, and capital gains,
Shall mean a branch Shall mean a branch established in the except capital gains subject to tax under subparagraph 5 (c):
established in the Philippines by multinational companies Provided, That effective January 1, 2009, the rate of income tax
Philippines by which are engaged in any of the shall be thirty percent (30%).
multinational companies following services:
and which headquarters 1. General administration and Tax Rate: 30%
do not earn or derive planning; Tax Base: Gross Income during each TY from all sources
income from the 2. Business planning and within the Philippines
Philippines and which coordination;
act as supervisory, 3. Sourcing and procurement of
OTHER TAX RATES
communications and raw materials and
Nonresident Cinematographic Film 25% tax of its gross
coordinating center for components;
Owner, Lessor or Distributor income from all sources
their affiliates, 4. Corporate finance advisory
Section 28(B)(2) within the Philippines.
subsidiaries, or services;
branches in the Asia- 5. Marketing control and sales
Pacific Region and other promotion;
foreign markets. 6. Training and personnel Nonresident Owner or Lessor of 4 ½ % of gross rentals,
[Section 22(DD)] management Vessels Chartered by Philippine lease or charters fees from
7. Logistic services; Nationals leases or charters to
8. Research and development Section 28(B)(3) Filipino citizens or
services and product corporations as approved
development by Maritime Industry
9. Technical support and Authority
maintenance;
10. Data processing and Nonresident Owner or Lessor of 7 ½ % of gross rentals or
communications Aircraft, Machineries and Other fees.
11. Business Development Equipment
[Section 22(EE)]
Shall NOT be subject to Shall pay a 10% Tax on their Taxable
income tax Income TAX ON CERTAIN INCOMES RECEIVED BY A
NONRESIDENT FOREIGN CORPORATION
Interest in Foreign Loans 20% Final Withholding Tax on the
OTHER INCOMES Section 28(B)(5)(a) amount of interest on foreign loans
Interest Income currency bank deposit, 20% Final Tax Intercorporate Dividends If received from domestic
deposit substitutes Section 28(B)(5)(b) corporation:
• Interest derived by RFC from a 7 1/2 % Final Tax • 15% if NFRC is entitled to
depository bank under EFCDS a tax sparing credit; if not
Income by Depositary Bank under the • 30%
EFCDS Capital Gains from Sale Not over P100K – 5%
of Shares of Stock Not
• With non-resident, OBUs and Tax-Exempt exp Trade in the Stock On any amount in excess of P100K –
local commercial banks
Exchange 10%
(authorized by BSP)
Section 28(B)(5)(c)
• Interest income from foreign 10% Final Tax
currency loans from residents
Passive Royalties 20% Final Tax Improperly Accumulated Earnings Tax (Section 29)
Capital Gains
• Sale of Shares of Stock Not Not Over P100K – 5% NIRC
Traded in the Stock Exchange On any amount in SECTION 29
excess of P100K – Imposition of Improperly Accumulated Earnings Tax
10%
Intercorporate Dividends Tax Exempt (A) In General. - In addition to other taxes imposed by this Title,
• Dividends received by RFC there is hereby imposed for each taxable year on the improperly
from D/C accumulated taxable income of each corporation described in
Subsection B hereof, an improperly accumulated earnings tax
NOTE: Section 28 was not amended by RA 10963, thus some of the tax equal to ten percent (10%) of the improperly accumulated taxable
rates remain the same as the old Tax Code. income.
For example, the capital gains tax for sale of shares of stock not traded Improperly Accumulated Earning Tax
in the stock market is not yet 15% unlike for resident citizens. This is imposed upon every corporation formed or availed for the
purposes of avoiding income tax with respect to its shareholders or the
Nonresident Foreign Corporations (Section 28) shareholders of any other corporation, by permitting earnings and profits
to accumulate instead of being divided or distributed.
NIRC
SECTION 28 Imposed as a Penalty Tax to Recover Lost Revenue
In simple and plain language, IAET is a penalty tax upon a corporate
taxpayer for accumulating so much net income after tax beyond the
(B) Tax on Non-Resident Foreign Corporations
reasonable needs of the business. The Corporation Code in effect
prohibits a stock corporation to maintain a retained earnings more than
(1) In General. - Except as otherwise provided in this Code, a 100% of its paid-up capitalization.
foreign corporation not engaged in trade or business in the
In a corporate set-up, stockholder-owners gets their share in the earning (a) Dividends actually or constructively paid; and
of the corporation through dividends from the retained earnings. (b) Income tax paid for the taxable year.
Dividend declaration is dependent upon the will of the BOD and upon
the declaration of dividends to resident individual stockholder, it is Provided, however, That for corporations using the calendar year
subject to final tax on dividends. basis, the accumulated earnings tax shall not apply on improperly
accumulated income as of December 31, 1997. In the case of
If there is no dividend declaration by the BOD, it means that the corporations adopting the fiscal year accounting period, the
government will lose the revenue from the dividend tax. As such, the improperly accumulated income not subject to this tax, shall be
improperly accumulated earnings tax is imposed to recover the
reckoned, as of the end of the month comprising the twelve (12)-
revenue it should have earned. As a mechanism to recover lost
month period of fiscal year 1997-1998.
revenue, the tax rate is patterned after the rate that the government
should have earned. Thus, the tax rate of 10% shall be based on the
improperly accumulated earnings. (E) Reasonable Needs of the Business. - For purposes of this
Section, the term 'reasonable needs of the business' includes the
Coverage reasonably anticipated needs of the business.
(B) Tax on Corporations Subject to Improperly
According to Dean Quibod, the IAET, is a form of penalty tax or surtax
Accumulated Earnings Tax.
imposed upon corporations who would accumulate earnings beyond the
reasonable tax rates and the penalty is 10% of the improperly
(2) In General. - The improperly accumulated earnings tax accumulated earnings. To avoid this penalty, the corporation then must
imposed in the preceding Section shall apply to every divide or give rewards for profits or declare dividends to the stock
corporation formed or availed for the purpose of avoiding income holders of the corporations.
tax with respect to its shareholders of any other corporation by
permitting earnings and profits to accumulate instead of being Burden of Proving Reasonable Needs
divided and distributed. The burden is on the taxpayer to show that there is a reasonable need
of the business to justify why there is accumulation of earnings such
Exceptions as the need or decisions to expand or buy new equipment and of new
(2) Exceptions. - The improperly accumulated earnings tax as machineries. Instead of borrowing money, they resort to capital sourcing
provided for under this Section shall not apply to: as funds or capital to expand.
(a) Publicly-held corporations; Revenue Regulations No. 2-2001

Determination of reasonable needs of the business
(b) Banks and other nonbank financial intermediaries; and a. Allowance for the increase in the accumulation of earnings up
to 100% of the paid up capital of the corporation as of the
Balance Sheet date, inclusive of accumulations taken from
c) Insurance companies.
other years;
b. Earnings reserved for definite corporate expansion projects or
Exceptions to the Coverage of IAET
programs requiring considerable capital expenditure as
Not all corporate taxpayers are subject to the 10% improperly
approved by the Board of Directors or equivalent body’
accumulated earnings tax in the Philippines.
c. Earnings reserved for building, plants or equipment
1. Publicly-held corporations
acquisition as approved by the Board of Directors or
2. Bank and other nonbank financial intermediaries;
equivalent body;
3. Insurance companies
d. Earnings reversed for compliance with any loan covenant or
4. Taxable partnerships
pre-existing obligations established under a legitimate
5. General professional partnerships
business agreement;
6. Non-taxable joint ventures
e. Earnings required by law or applicable regulations to be
7. Enterprises duly registered with PEZA
retained by the corporations or in respect which there is a
8. Foreign corporations
legal prohibition against its distribution;
f. In the case of subsidiaries of foreign corporation in the
Evidence of Purpose to Avoid Income Tax Philippines, all undistributed earnings intended or reserved for
(C) Evidence of Purpose to Avoid Income Tax. - investments within the Philippines as can be proven by
corporate records and/or relevant documentary evidence.
(1) Prima Facie Evidence. - the fact that any corporation is a
mere holding company or investment company shall be prima Exemptions from Tax on Corporations (Section 30)
facie evidence of a purpose to avoid the tax upon its shareholders
or members.
NIRC
(2) Evidence Determinative of Purpose. - The fact that the SECTION 30
earnings or profits of a corporation are permitted to accumulate Exemptions from Tax on Corporations
beyond the reasonable needs of the business shall be
determinative of the purpose to avoid the tax upon its The following organizations shall not be taxed under this Title in
shareholders or members unless the corporation, by the clear respect to income received by them as such:
preponderance of evidence, shall prove to the contrary.
(A) Labor, agricultural or horticultural organization not
organized principally for profit;
Tax Rate: 10%
Tax Base: Improperly Accumulated Earnings
(B) Mutual savings bank not having a capital stock represented
by shares, and cooperative bank without capital stock organized
(D) Improperly Accumulated Taxable Income. - For and operated for mutual purposes and without profit;
purposes of this Section, the term 'improperly accumulated
taxable income' means taxable income adjusted by: (C) A beneficiary society, order or association, operating for the
(a) Income exempt from tax; exclusive benefit of the members such as a fraternal organization
(b) Income excluded from gross income; operating under the lodge system, or mutual aid association or a
(c) Income subject to final tax; and nonstock corporation organized by employees providing for the
(d) The amount of net operating loss carry-over deducted; payment of life, sickness, accident, or other benefits exclusively to
the members of such society, order, or association, or nonstock
And reduced by the sum of: corporation or their dependents;
f. Business league, chamber of commerce, or board of trade,

(D) Cemetery company owned and operated exclusively for the not organized for profit and no part of the net income of which
benefit of its members; inures to the benefit of any private stockholder, or individual
g. Civic league or organization not organized for profit but
(E) Nonstock corporation or association organized and operated operated exclusively for the promotion of social welfare
exclusively for religious, charitable, scientific, athletic, or cultural h. Non-stock and non-profit educational institution
purposes, or for the rehabilitation of veterans, no part of its net i. Government educational institution
income or asset shall belong to or inure to the benefit of any j. Farmers’ or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual cooperative
member, organizer, officer or any specific person;
telephone company, or like organization of a purely local
character, the income of which consists solely of
(F) Business league chamber of commerce, or board of trade, not
assessments, dues, and fees collected from members for the
organized for profit and no part of the net income of which inures sole purpose of meeting its expenses k. Farmers’, fruit
to the benefit of any private stock-holder, or individual; growers’, or like association organized and operated as a
sales agent for the purpose of marketing the products of its
(G) Civic league or organization not organized for profit but members and turning back to them the proceeds of sales, less
operated exclusively for the promotion of social welfare; the necessary selling expenses on the basis of the quantity of
produce finished by them
(H) A nonstock and nonprofit educational institution;
Not for Profit
(I) Government educational institution; Corporations under Section 30 are organized not for profit. “Non-
profit” means that “no net income or asset accrues to or benefits any
(J) Farmers' or other mutual typhoon or fire insurance company, member or specific person, with all the net income or asset devoted to
mutual ditch or irrigation company, mutual or cooperative the institution’s purposes and all its activities conducted not for profit”.
telephone company, or like organization of a purely local
character, the income of which consists solely of assessments, Therefore, in order for an entity to qualify as a non-stock and/or non-
dues, and fees collected from members for the sole purpose of profit corporation/association/organization exempt from Income Tax
meeting its expenses; and under Section 30 of the NIRC, as amended, it must demonstrate that its
earnings or assets shall not inure to the benefit of any of its trustees,
(K) Farmers', fruit growers', or like association organized and organizers, officers, members or any specific person. It must not be
operated as a sales agent for the purpose of marketing the organized or operated for the benefit of private interests such as specific
individuals, incorporators or his family, shareholders of the organization,
products of its members and turning back to them the proceeds of
or persons controlled directly or indirectly by such private interests. The
sales, less the necessary selling expenses on the basis of the
organization must serve a public rather than a private purpose.
quantity of produce finished by them;
Notwithstanding the provisions in the preceding paragraphs, the Section 30 Exemption, Not Absolute
income of whatever kind and character of the foregoing Income tax exemption under Section 30 is not absolute. It covers only
organizations from any of their properties, real or personal, or the income received by the corporation organized and operated in
from any of their activities conducted for profit regardless of the accordance with the Section 30 provisions. Section 30 corporations are
disposition made of such income, shall be subject to tax imposed still subject to the corresponding internal revenue taxes on income
under this Code. derived from any of their properties, real or personal, or any activity
conducted for profit regardless of the disposition thereof (i.e. interest
Characteristics and Nature of Organization and Corporations income, rental income from real or personal properties), which income
Under Section 30 of the NIRC should be reported for taxation purposes.
RMC 64-2016 issued on June 20, 2016 clarifies the nature, tax Except for non-stock, non-profit educational institutions and government
treatment, registration and compliance requirements of corporations and educational institutions, the interest income from currency bank deposits
associations under Section 30 of the National Internal Revenue Code and yield or any other monetary benefit from deposit substitute
(NIRC) of 1997, as amended, as well as the policies and guidelines in instruments and from trust funds and similar arrangements, and
Revenue Regulations (RR) No. 7-2012 relative to the registration of such royalties derived from sources within the Philippines of organizations
corporations and associations. under Section 30 are subject to the 20% Final Withholding Tax.
The characteristics and nature of the following organizations and Provided, however, that interest income derived by them from a
corporations under Section 30 of the NIRC of 1997, as amended, are depository bank under the expanded foreign currency deposit system
specified in the Circular: shall be subject to 71/2% Final Withholding Tax.
a. Labor, agricultural or horticultural organization not organized
principally for profit The tax exemption granted under Section 30 does not cover Withholding
b. Mutual savings bank not having a capital stock represented Taxes on compensation income of the organization/corporation’s
by shares, and cooperative bank without capital stock employees, or the Withholding Tax on income payments to persons
organized and operated for mutual purposes and without subject to tax pursuant to Section 57 of the NIRC of 1997.
profit
c. A beneficiary society, order or association, operating for the The corporation or association is therefore constituted as a withholding
exclusive benefit of the members, such as a fraternal agent for the government if it acts as an employer and any of its
organization operating under the lodge system, or mutual aid employees receive compensation income subject to withholding tax or if
association or a non-stock corporation organized by it makes income payments to individuals or corporations subject to the
employees providing for the payment of life, sickness, withholding tax.
accident, or other benefits exclusively to the members of such
society, order, or association, or non-stock corporation or their Purchase of goods or properties or services and importation of goods by
dependents a corporation organized and operated as a Section 30 corporation shall
d. Cemetery company owned and operated exclusively for the be subject to the 12% Value-Added Tax (VAT). The VAT, once shifted
benefit of its members to the buyer/customer as an addition to the cost of goods or services
e. Non-stock corporation or association organized and operated sold, is no longer a tax but an additional cost which the buyer/customer
exclusively for religious, charitable, scientific, athletic, or has to pay in order to obtain the goods or services. Thus, the shifting of
cultural purposes, or for the rehabilitation of veterans, no part the VAT to it does not make it the person directly liable and therefore, it
of its net income or asset shall belong to or inures to the cannot invoke its tax exemption privilege under Section 30.
benefit of any member, organizer, officer or any specific
person
Any person who, in the course of trade or business, sells, barters, CTA ruled that St. Luke’s is a non-stock, non-profit institution and would
exchanges, leases goods or properties, renders services, and any exempt all income derived from services to its patient, whether paying
person who imports goods shall be subject to the VAT. or non-paying identifying it as a charitable institution.
The phrase “in the course of trade or business” means the regular Issue: Is St. Luke’s exempted from payment of income taxes? – No.
conduct or pursuit of a commercial or an economic activity, including This is because it failed to meet the requirements of Section 30 (E) for
transactions incidental thereto, by any person regardless of whether or operating exclusively for charitable and social welfare purposes.
not the person engaged therein is a non-stock, non-profit private
organization (irrespective of the disposition of its net income and Provisions Involved
whether or not it sells its good exclusively to members or its guests), or
government entity. 10% Preferential Income Tax Rate
[Section 27(B), NIRC]
Educational Institutions
The exemption of non-stock, non-profit educational institutions refers to Section 27(B) of the NIRC imposes a 10% preferential tax rate on the
internal revenue taxes imposed by the National Government on all income of (1) proprietary non-profit educational institutions and (2)
revenue and assets used actually, directly and exclusively for proprietary non-profit hospitals. The only qualifications for hospitals are
educational purposes. that they must be proprietary and non-profit.
Revenues derived from assets used in the operation of "Proprietary" means private, following the definition of a "proprietary
cafeterias/canteens and bookstores are exempt from taxation, provided educational institution" as "any private school maintained and
they are owned and operated by the educational institution as ancillary administered by private individuals or groups" with a government permit.
activities and the same are located within the school premises. "Non-profit" means no net income or asset accrues to or benefits any
member or specific person, with all the net income or asset devoted
Unlike non-stock, non-profit corporations, the interest income from to the institution's purposes and all its activities conducted not for
currency bank deposits and yield from deposit substitute instruments profit. "Non-profit" does not necessarily mean "charitable.
used actually, directly and exclusively in pursuance of their purposes as
an educational institution are exempt from the 20% Final Tax and 71/2% Exemption of Charitable Institutions
tax on interest income under the expanded foreign currency deposit as provided for by the Constitution
system, subject to compliance with the conditions that as a tax-exempt Compared with the provision of NIRC
educational institution, they shall on an annual basis submit to the [Article VI, Section 28(3) vs. Section 30(E), NIRC].
Revenue District Office (RDO) concerned an annual information return
and duly audited financial statement. The Constitution exempts charitable institutions only from real
property taxes.
Non-stock, non-profit educational institutions shall be subject to internal
revenue taxes on income from trade, business or other activity, the In the NIRC, Congress decided to extend the exemption to income
conduct of which is not related to the exercise or performance by such taxes.
educational institutions of their educational purposes or functions, i.e.
rental income from their building/premises. Unrelated income of However, the way Congress crafted Section 30(E) of the NIRC is
non-stock, nonprofit educational institutions shall be subject to the 10% materially different from Section 28(3), Article VI of the Constitution.
preferential rate. Section 30(E) of the NIRC defines the corporation or association that is
exempt from income tax.
If the gross income from “unrelated trade business or other activity”
exceeds fifty percent (50%) of the total gross income derived by such On the other hand, Section 28(3), Article VI of the Constitution does not
educational institutions from all sources, the entire taxable income shall define a charitable institution, but requires that the institution "actually,
be subject to the regular corporate tax rate of 30%. directly and exclusively" use the property for a charitable purpose.
CIR v. ST. LUKE’S MEDICAL CENTER Section 30(E) of the NIRC provides that a charitable institution must be:
GR 195909, September 26, 2012 (1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
Facts: St. Luke's Medical Center, Inc. (St. Luke's) is a hospital
(4) No part of its net income or asset shall belong to or inure to the
organized as a non-stock and non-profit corporation.
benefit of any member, organizer, officer or any specific person.
BIR assessed St. Luke’s deficiency taxes amounting to P76,063,116.06
“Non-stock” means that one where no part of its income is distributable
for 1998, comprised of deficiency income tax, value-added tax,
as dividends to its members, trustees, or officers" and that any profit
withholding tax on compensation and expanded withholding tax. The
"obtain[ed] as an incident to its operations shall, whenever necessary or
BIR reduced the amount to ₱63,935,351.57 during trial in the First
proper, be used for the furtherance of the purpose or purposes for which
Division of the CTA.
the corporation was organized.
In 2003, St. Luke’s filed an administrative protest with the BIR against
There is no dispute that St. Luke's is organized as a non-stock and non-
the deficiency tax assessments but was not acted upon. Thus
profit charitable institution. However, this does not automatically
respondent appealed to CTA.
exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's.
BIR claimed St. Luke's was actually operating for profit in 1998 because
only 13% of its revenues from charitable purposes. Moreover, the
Even if it meets the test of charity, a charitable institution is not ipso facto
hospital's BOT, officers and employees directly benefit from its profits
tax exempt.
and assets. St. Luke's had total revenues approximately ₱1.73 billion
from patient services in 1998.
To be exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property
In its defense, St. Luke contended should not consider its total revenues
"actually, directly and exclusively" for charitable purposes.
because its free services to patients was around P218,187,498 or
65.20% of its operating income and further claimed that its income does
To be exempt from income taxes, Section 30(E) of the NIRC requires
not inure to benefit any person.
that a charitable institution must be "organized and operated exclusively"
for charitable purposes. Likewise, to be exempt from income taxes,
St. Luke's maintained that it is a non-stock and non-profit institution for
Section 30(G) of the NIRC requires that the institution be "operated
charitable and social welfare purposes under Section 30(E) and (G) of
exclusively" for social welfare.
the NIRC. It argued that the making of profit per se does not destroy its
income tax exemption.
Section 30 Allows Charitable Institutions to Engage Luke's, as a proprietary non-profit hospital, is entitled to the
Activities Conducted for Profit preferential tax rate of 10% on its net income from its for-profit
Thus, even if the charitable institution must be "organized and operated activities. St. Luke's is therefore liable for deficiency income tax in 1998
exclusively" for charitable purposes, it is nevertheless allowed to engage under Section 27(B) of the NIRC.
in "activities conducted for profit" without losing its tax exempt status
for its not-for-profit activities. The only consequence is that the
"income of whatever kind and character" of a charitable institution "from
any of its activities conducted for profit, regardless of the disposition CIR v. ST. LUKE’S MEDICAL CENTER
made of such income, shall be subject to tax." Prior to the introduction GR 203514, February 13, 2017
of Section 27(B), the tax rate on such income from for-profit activities
was the ordinary corporate rate under Section 27(A). With the Facts: St. Luke’s Medical Center received an assessment from
introduction of Section 27(B), the tax rate is now 10%. deficiency income tax under Section 27(B) for TY 2005 in the amount of
P78M and for TY 2006 for P57M. SLMC filed an administrative protest
Analysis of the Total Revenues of St. Luke’s assailing the assessment claiming that it is a non-stock, non-profit
In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services charitable and social welfare organization organized under Section
to paying patients. It cannot be disputed that a hospital which receives 30(E) and Section 30(G) of the NIRC, thus it is exempt from paying
approximately ₱1.73 billion from paying patients is not an institution income tax. SLMC received a final assessment notice.
"operated exclusively" for charitable purposes. Clearly, revenues from
paying patients are income received from "activities conducted for CTA found SLMC not liable for deficiency income since it is exempt from
profit." Indeed, St. Luke's admits that it derived profits from its paying paying income tax and this was affirmed by CTA En Banc.
patients. St. Luke's declared ₱1,730,367,965 as "Revenues from
Services to Patients" in contrast to its "Free Services" expenditure of When the case was pending, the Court rendered a decision in 2012,
₱218,187,498. finding that SLMC is not entitled to tax exemption under Section 30(E)
and Section 30(G) as it does not operate exclusively for charitable or
Services to Paying Patients are social welfare purposes insofar as its revenues from paying patients are
Activities Conducted for Profit concerned.
They cannot be considered any other way. There is a "purpose to make
profit over and above the cost" of services. The ₱1.73 billion total CIR argues that under the doctrine of stare decisis SLMC is subject to
revenues from paying patients is not even incidental to St. Luke's charity the 10% income tax rate under Section 27(B) but SLMC seeks to revisit
expenditure of ₱218,187,498 for non-paying patients. St. Luke's claims the 2012 ruling positing that a charitable institution’s earning of a profit
that its charity expenditure of ₱218,187,498 is 65.20% of its operating does not withdraw it from its tax exempt privilege.
income in 1998.
Issue: Is SLMC liable for income tax? – Yes.
However, if a part of the remaining 34.80% of the operating income is
reinvested in property, equipment or facilities used for services to paying (1) SLMC is liable for income tax under Section 27(B) insofar as its
and non-paying patients, then it cannot be said that the income is revenues from paying patients are concerned. – [The SC cited in
"devoted or used altogether to the charitable object which it is intended length the ration in the 2012 case.]
to achieve." The income is plowed back to the corporation not
entirely for charitable purposes, but for profit as well. In any case, A careful review of the pleadings reveals that there is no countervailing
the last paragraph of Section 30 of the NIRC expressly qualifies that consideration for the Court to revisit its aforequoted ruling in G.R. Nos.
income from activities for profit is taxable "regardless of the disposition 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's
made of such income." Medical Center, Inc.). Thus, under the doctrine of stare decisis, which
states that "[o]nce a case has been decided in one way, any other case
Not Operating Exclusively for Charitable or involving exactly the same point at issue xxx should be decided in the
Social Welfare Purposes same manner," the Court finds that SLMC is subject to 10% income tax
The Court finds that St. Luke's is a corporation that is not "operated insofar as its revenues from paying patients are concerned.
exclusively" for charitable or social welfare purposes insofar as its
revenues from paying patients are concerned. To be clear, for an institution to be completely exempt from income tax,
Section 30(E) and (G) of the 1997 NIRC requires said institution to
This ruling is based not only on a strict interpretation of a provision operate exclusively for charitable or social welfare purpose. But in case
granting tax exemption, but also on the clear and plain text of Section an exempt institution under Section 30(E) or (G) of the said Code earns
30(E) and (G). Section 30(E) and (G) of the NIRC requires that an income from its for-profit activities, it will not lose its tax exemption.
institution be "operated exclusively" for charitable or social welfare However, its income from for- profit activities will be subject to income
purposes to be completely exempt from income tax. An institution under tax at the preferential 10% rate pursuant to Section 27(B) thereof.
Section 30(E) or (G) does not lose its tax exemption if it earns income
from its for-profit activities. Such income from for-profit activities, under In addition, the petition is rendered moot by the payment made by
the last paragraph of Section 30, is merely subject to income tax, SLMC on April 30, 2013.
previously at the ordinary corporate rate but now at the preferential 10%
rate pursuant to Section 27(B). Tests Applied for Exemption under Section 30(E)
1. Organization Test – requires that the corporation or
A tax exemption is effectively a social subsidy granted by the State association’s constitutive documents exclusively limit its
because an exempt institution is spared from sharing in the expenses of purposes to one or more those described;
government and yet benefits from them. Tax exemptions for charitable 2. Operational Test – mandates that the regular activities of the
institutions should therefore be limited to institutions beneficial to the corporation or association be exclusively devoted to the
public and those which improve social welfare. A profit-making entity accomplishment of purposes specified. A corporation or
should not be allowed to exploit this subsidy to the detriment of the associations fails to meet this test if a substantial part of its
government and other taxpayer. operations may be considered “activities for profit.”
3. Principle of No Inurement - any profit must be plowed back
St. Luke Failed to Meet Exemption Requirements and must be devoted or used altogether for the furtherance of
But Entitled to 10% Preferential Tax Rate the purpose for which the corporations or association was
Because it is Still a Proprietary Non-Profit Hospital organized.
St. Luke's fails to meet the requirements under Section 30(E) and (G) of END OF SECOND EXAM COVERAGE
the NIRC to be completely tax exempt from all its income. However, it
remains a proprietary non-profit hospital under Section 27(B) of the
NIRC as long as it does not distribute any of its profits to its members
and such profits are reinvested pursuant to its corporate purposes. St.
Taxpayers Entitled to Claim Deductions

DEDUCTIONS
SECTION 34
Deductions, Defined
These are items that are authorized by law to be subtracted from the SEC. 34. Deductions from Gross Income. - Except for
pertinent items of gross income to arrive at a taxable income. A tax taxpayers earning compensation income arising from personal
deduction is defined as a subtraction from income for tax purposes, or services rendered under an employer-employee relationship
an amount that is allowed by law to reduce income prior to the where no deductions shall be allowed under this Section other
application of tax to compute that amount of tax that is due. A tax than under subsection (M) hereof, in computing taxable income
deduction then reduces the income that is subject to tax in order to arrive subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B)
at a taxable income. and (C); and 28(A)(1), there shall be allowed the following
deductions from gross income;
Two Types of Expenditures
1. Revenue Expenditure are recurring costs which from time to Resident Citizen No deductions under TRAIN. Note
time within the taxable year the taxpayer must have to spend Compensation Income also that there are no longer personal
for and that it would benefit the current taxable year (e.g. within and without PH and additional exemptions
water, electricity, etc.). They are also termed as short-term
expenses such as ongoing operational expenses. Nonresident Citizen
Resident Aliens
2. Capital Expenditure is an expenditure that entails a large Compensation Income
amount of expense that will benefit the current period but at within PH
the same time will benefit future periods (e.g. purchasing a Resident/Non-Resident Optional Standard Deduction or
bus for a transportation business). Citizen Itemized Deductions
Other Income
They represent major investments of capital that one makes Resident Aliens Optional Standard Deduction or
or maintain, to expand the business or to generate additional Other Income Itemized Deductions
profits. They are usually for the acquisition of long term assets NRAETB Itemized Deductions but not allowed
such as facilities or manufacturing equipment. Trade, business, or Option Standard Deduction
profession
Revenue Expenditures are Allowable Deductions NRANETB No deductions allowed since they are
The allowable deductions under the NIRC refer to those which are of Income within PH taxed on their gross income
revenue expenditures. Capital expenditures by themselves are not an whether compensation or
allowable deduction but one may claim later for depreciation expenses other income
or amortization expense.
Estate or Trusts Similar deductions to individuals
Domestic Corporation Optional Standard Deduction or
Concept and Nature of Deductions Itemized Deductions
The items or amounts allowed as deductions or Allowable Deductions Resident Foreign Optional Standard Deduction or
represent the expenses (reductions of wealth) of the taxpayer in earning Corporation Itemized Deductions
the income (increase in wealth) subject to tax as well as reasonable Nonresident Foreign No deductions allowed since they are
living expenses. Since a deduction for income tax purposes partakes of Corporation taxed on their gross income
the nature of a tax exemption, the it must also be strictly construed
against the taxpayer and cannot be allowed unless granted in the most
Persons Who Can Claim Deductions
explicit and categorical language too plain to be mistaken. As a general rule, all taxpayers, individuals or corporations as long as
they are engaged in trade or business.
Note: Not all deductions are included in the NIRC. There are other types
• But purely compensation income earner is not entitled to
of deductions such as Senior Citizen’s discount that is covered by
deductions;
special laws, another example is for PWDs. But, not all expenses of a
• GPPs, though non-taxable entities may allow deduction to
taxpayer relative to his business income is considered as a deduction.
determine the distribution among the partners.
Distinctions Persons Not Entitled to Claim Deductions
1. Those who are taxed based on their gross income (NRFC
Tax Deduction Tax Exclusion and NRANETB);
This is something that the This is income but due to a 2. Those which are covered under a special tax scheme (EEs
taxpayer has spent and that provision of law it shall not be in RAH/ROH, OBUs, and Petroleum contracts and
there is an outlay. They are also included in determining the subcontractors, International Carriers); and
referred to as expenses like gross income. It is received by 3. Purely Compensation Income Earners
business expenses. the taxpayer
Types of Deduction
Tax Deduction Tax Credit The classifications of deductions that are left after the TRAIN are those
Expenses Deductions on tax liabilities deductions that those arise from business, trade or profession. The
Subtracted from the gross Subtracted from the total tax exemptions, before, whether personal or additional have been repealed.
income liabilities. Thus, there are no longer personal and additional exemptions.
Tax Deduction Cost of Goods Sold Deductions from Trade, Business or Profession
or Cost of Services 1. Itemized Deductions (Section 34)
Tax deductions are those Cost of goods sold shall 2. Optional Standard Deductions (Section 34, L)
deductions that are allowed by include the purchase price or a. As to individuals – 40% of the gross sales or gross
law to be subtracted from the cost to produce a merchandise receipts except NRAETB
gross income. It is the amount and all expenses directly b. As to corporations – 40% of the gross income.
to be subtracted to arrive at a incurred in bringing them to their 3. Special Deductions
taxable income present location and use. Cost a. Section 37 as to Insurance Companies; and
of services means all direct b. Section 61(A) as to income distributed to the
costs and expenses necessary beneficiaries of the estates and trusts, they are
to provide the service. allowed special deductions.
Exemptions
The exemptions for the cost of living of the taxpayer are no longer (i) A reasonable allowance for salaries, wages, and other forms of
deductible as there is no longer personal and additional exemptions compensation for personal services actually rendered, including
under Section 35. the grossed-up monetary value of fringe benefit furnished or
granted by the employer to the employee: Provided, That the final
General Requisites for Deductibility tax imposed under Section 33 hereof has been paid;
The following are the general requisites for deductibility:
(ii) A reasonable allowance for travel expenses, here and abroad,
1. The deductions must be paid or incurred in connection while away from home in the pursuit of trade, business or
to the taxpayer’s trade, business, or exercise of profession;
profession;
(iii) A reasonable allowance for rentals and/or other payments
2. The deductions must be paid or incurred during the which are required as a condition for the continued use or
taxable year possession, for purposes of the trade, business or profession, of
property to which the taxpayer has not taken or is not taking title
Matching Concept for Deductibility
or in which he has no equity other than that of a lessee, user or
The matching concept for deductibility posits that the deductions must,
possessor;
as a general rule ‘match’ the income, or meaning that it must have
‘helped’ to earn the income.
(iv) A reasonable allowance for entertainment, amusement and
Thus, the requisite that ordinary and necessary expense, that is being recreation expenses during the taxable year, that are directly
deducted must have been paid or accrued or paid or incurred during the connected to the development, management and operation of the
taxable year. Consequently, a taxpayer who is authorized to deduct trade, business or profession of the taxpayer, or that are directly
certain expenses and other allowable deductions for the current year but related to or in furtherance of the conduct of his or its trade,
failed to do so, cannot deduct the same for the next year (CIR v. Isabela business or exercise of a profession not to exceed such ceilings as
Cultural Corporation, GR 172231).This is also termed as the Matching the Secretary of Finance may, by rules and regulations prescribe,
Principle directs that the expenses are to be reported in the same upon recommendation of the Commissioner, taking into account
period that related revenues are earned. It attempts to match revenue the needs as well as the special circumstances, nature and
with the expenses that helped earn it. character of the industry, trade, business, or profession of the
taxpayer: Provided, That any expense incurred for entertainment,
3. The deductions must be supported by adequate receipts amusement or recreation that is contrary to law, morals public
or invoices policy or public order shall in no case be allowed as a deduction.
Substantiation Rule (b) Substantiation Requirements. - No deduction from gross

It is required that before business or professional expenses are allowed income shall be allowed under Subsection (A) hereof unless the
as deductions from gross income, the taxpayer must substantiate with taxpayer shall substantiate with sufficient evidence, such as
sufficient evidence such as official receipts or other adequate records. official receipts or other adequate records: (i) the amount of the
expense being deducted, and (ii) the direct connection or relation
4. Deductions made must not be contrary to law, morals, of the expense being deducted to the development, management,
public policy, good customs operation and/or conduct of the trade, business or profession of
the taxpayer.
5. If the deductible expenses are subject to withholding
tax, then the corresponding withholding tax must be
(c) Bribes, Kickbacks and Other Similar Payments. - No
withheld by the taxpayer and pay to the BIR
deduction from gross income shall be allowed under Subsection
(A) hereof for any payment made, directly or indirectly, to an
ITEMIZED DEDUCTIONS official or employee of the national government, or to an official or
employee of any local government unit, or to an official or
Itemized Deductions [Section 34 (A) to (J)] employee of a government-owned or -controlled corporation, or to
(A) Expenses an official or employee or representative of a foreign government,
(B) Interest or to a private corporation, general professional partnership, or a
(C) Taxes similar entity, if the payment constitutes a bribe or kickback.
(D) Losses
(E) Bad Debts REQUISITES OF DEDUCTIBILITY
(F) Depreciation (OATS-NoW)
(G) Depletion
(H) Charitable and Other Contributions [1] They shall be Ordinary and necessary;
(I) Research and Development; and [2] Reasonable in Amount;
(J) Pension Trusts [3] They are paid or incurred during the Taxable year;
[4] They are Supported by adequate proof
A. EXPENSES [5] Not contrary to law, morals, public policy or public order; and
[6] If the payment is subject to Withholding, the corresponding
1. Ordinary and Necessary Trade, Business or withholding tax must have been withheld to the BIR.
Professional Expenses Section 34(A)(1)
Meaning of “Ordinary” and “Necessary” Expenses
SECTION 34 The term generally contemplates expenses which are directly connected
(A) Expenses. – with and proximately resulting from carrying one the business and must
(1) Ordinary and Necessary Trade, Business or be shown to be appropriate and helpful in the development of the
Professional Expenses. – taxpayer’s business for the acquisition or pursuit of income or profit.
(a) In General. - There shall be allowed as deduction from gross These are the expenses which are common to incur in the trade or
income all the ordinary and necessary expenses paid or incurred business of the taxpayer. These are usually incurred during the taxable
during the taxable year in carrying on or which are directly year and benefits such taxable year. The term “ordinary expenses” as
attributable to, the development, management, operation and/or used in income taxation is taken in its common significance and it has
conduct of the trade, business or exercise of a profession, the connotation of being normal, usual or customary.
including:
ESSO STANDARD EASTERN v. CIR engaged; the volume and amount of its net earnings; the nature of the
GR L-28508-9, July 7, 1989 expenditure itself; the intention of the taxpayer and the general
economic conditions. It is the interplay of these, among other factors and
properly weighed, that will yield a proper evaluation.
Facts: ESSO deducted from its gross income as part of its ordinary and
necessary business expenses the amount it had spent for exploration
The subject P9,461,246 media advertising expense for "Tang" was
of tis petroleum concessions. This claim for deduction was disallowed
almost double the amount of corporation’s P4,640,636 general and
by the CIR. ESSO also claimed as ordinary and necessary expenses for
administrative expenses. We find the subject expense for the
margin fees it had paid to the Central Bank on its profit remittances to
advertisement of a single product to be inordinately large. Therefore,
its New York head office.
even if it is necessary, it cannot be considered an ordinary expense
deductible under then [Section 34 (A)(1)(a) of the NIRC].
CIR disallowed the claimed deduction of the margin fees paid. Later CIR
assessed ESSO a deficiency income tax which arose from disallowance
(2) It was a Capital Expenditure. - Not only was the amount staggering;
of the deduction of the margin fees. CIR stated that the margin fees paid
the respondent corporation itself also admitted, in its letter protest, that
to the Central Bank could not be considered taxes or allowed as
the subject media expense was incurred in order to protect respondent
deductible business expenses.
corporation’s brand franchise. The protection of brand franchise is
analogous to the maintenance of goodwill or title to one’s property. This
ESSO went to the CTA contending that the margin fees were deductible
is a capital expenditure which should be spread out over a
from the gross income either as a tax or an ordinary and necessary
reasonable period of time. Respondent corporation’s venture to
business expense. But still, the CTA denied such claim for refund.
protect its brand franchise was tantamount to efforts to establish a
reputation. This was akin to the acquisition of capital assets and
ESSO argues that margin fees are ordinary and necessary expenses
therefore expenses related thereto were not to be considered as
because fees were paid for remittance by ESSO as part of the profits
business expenses but as capital expenditures.
to the head office in the United States. Hence, such remittance was an
expenditure necessary and proper for conduct of its corporate affairs.
Respondent corporation incurred the subject advertising expense in
order to protect its brand franchise. We consider this as a capital
Issue: Are margin fees necessary and ordinary business expenses
outlay since it created goodwill for its business and/or product. The
and thus deductible from gross income?
P9,461,246 media advertising expense for the promotion of a single
product, almost one-half of petitioner corporation’s entire claim for
Held: (1) Test of Deductibility. – Not only must that taxpayer meet the
marketing expenses for that year under review, inclusive of other
business test (that the expenses was for carrying on the business), he
advertising and promotion expenses of P2,678,328 and P1,548,614 for
must also substantially prove by evidence or records the deductions
consumer promotion, is doubtlessly unreasonable.
claims under the law, otherwise the same will be disallowed. The mere
allegation of the taxpayer that an item of expense is ordinary and
necessary does not justify its deduction.
Ordinary and Necessary
(2) When Expense “Ordinary” or “Necessary”. – An expense will be According to Dean Quibod, this means that the expense is related to the
considered necessary where expenditure is appropriate and helpful business or profession of the taxpayer and it is charged during the tax
in the development of the taxpayer’s business. It is considered ordinary year. If the expense will benefit not only the current tax year, but also
when it connotes a payment which is normal in relation to the the succeeding taxable years, they could not be claimed as deductions.
business of the taxpayer and the surrounding circumstances. The term They might still be claimed as a deduction but not as an outright under
'ordinary' does not require that the payments be habitual or normal in Section 34(A) – but this is no longer ordinary.
the sense that the same taxpayer will have to make them often; the
payment may be unique or non-recurring to the particular taxpayer
If an expense is to be considered ordinary, the expense is chargeable
affected. It would depend on the intention and the circumstances.
during the current taxable year. If that benefit goes beyond the taxable
(3) Margin Fees are Not Ordinary or Necessary Expenses. – ESSO year, then it cannot be charged outright for 100%, thus it would then be
has not shown that the remittance to the head office of part of its profits apportioned and that other amounts shall be charged in subsequent tax
was made in furtherance of its own trade or business. The petitioner years. The manner of apportioning it is left in the hands of the tax payer,
merely presumed that all corporate expenses are necessary and he may pro-rate it or amortize the amount.
appropriate in the absence of showing they are illegal or ultra vires. This
is error. It is clear that ESSO, having assumed an expense properly Suppose in 2018, XYZ Company purchased office equipment that is
attributable to its head office, cannot now claim this as an ordinary and used in the trade or business of the company, this includes top of the
necessary expense paid or incurred in carrying on its own trade or line office equipment, high tech printers and computers all in the
business. amounts of P5,000,000.
Are these expenses ordinary and necessary expenses as would be

deductible from the gross income in TY 2018?
CIR v. GENERAL FOODS
GR 143672, April 24, 2003 No. This is because the expense may be necessary, but it is not
ordinary because the items of purchase would last not only in the
Facts: General Foods engaged in the manufacture of beverages such current tax year, but in the subsequent taxable years.
as Tang and Kool Aid claimed in its ITR as deducting the amount of P9M
for media advertising for Tang. CIR disallowed 50% of the amount and What is then the manner of claiming the deductions?
was assessed deficiency income taxes. CTA appeal was dismissed.
Depreciation under Section 34(F). Since these expenses are
Issue: Was the media advertising expense for "Tang" paid or incurred not ordinary, they cannot be claimed outright in the same taxable
by respondent corporation for the fiscal year ending February 28, 1985 year. The manner of claiming shall be by depreciation.
"necessary and ordinary," hence, fully deductible under the NIRC? Or
was it a capital expenditure, paid in order to create "goodwill and
NOTE: There are deductions where they are not claimable as ordinary
reputation" for respondent corporation and/or its products, which should
and necessary expenses. Both must concur so that 34(A) shall apply
have been amortized over a reasonable period?
they must be ordinary and necessary. Thus, as discussed in the case
Held: (1) Even if necessary it was not ordinary. - There is yet to be a of CIR v. General Foods, the staggering amount of the advertising
clear-cut criteria or fixed test for determining the reasonableness of an expenses could not be considered as outright deduction for the current
advertising expense. There being no hard and fast rule on the matter, taxable year. It will be an ordinary and necessary expense if it is related
the right to a deduction depends on a number of factors such as but not to the business and that it is chargeable to the current tax year.
limited to: the type and size of business in which the taxpayer is
Substantiation Rule [Section 34(A)(1)(b)] Bribes, Kickbacks and Other Similar Payments [Section 34(A)(1)(b)]
No deduction from gross income shall be allowed No deduction from gross income shall be allowed
Unless the taxpayer shall substantiate with sufficient evidence For any payment made directly or indirectly to
Such as official receipts and other adequate records: • an official or employee of the national government, or
1. The amount of the expense being deducted, and • employee of a GOCC, or
2. The direct connection or relation of the expense being • to an official or employee or representation of a foreign
deducted to the government, or
a. Development [DMOC] • to a private corporation
b. Management • general professional partnership, or
c. Operation and/or • similar entity
d. Conduct If the payment constitutes a
of the trade, business, or profession of the taxpayer. 1. Bribe, or
2. Kickback
NOTE: Thus the taxpayer should be able to substantiate (1) and (2).
Non-deductible Bribes, Kickbacks and Other Payments
H. TAMBUNTING PAWNSHOP v. CIR
GR 173373, July 29, 2013 Bribe is defined as any money or any other valuable
consideration given or promised with a view of corrupting the behavior
Facts: Tambunting Pawnshop was ordered to pay deficiency income of a person, especially in that person’s performance as a public official
taxes and percentage tax as well as compromise penalties. Tambunting or employee.
argues that the CTA should have allowed its deductions because it had
been able to point out the provisions of law authorizing the deductions, Kickback is a form of bribery, in which a company is awarded
and it proved its entitlement to the deductions through all documentary a contract, or from which a purchase is made, turns over a portion of
and testimonial evidence presented in court. the money received to an official or employee of the other party to the
transaction, as a reward for helping to bring out transaction or as an
It argued that CTA had allowed deductions for ordinary and necessary incentive to exercise such influence in the future.
expenses on the basis of cash vouchers issued by the taxpayer or
certifications issued by the payees evidencing receipt of interest on The payments made through bribes or kickbacks are not deductible from
loans as well as agreements relating to the imposition of interest; that it the gross income for obvious reasons – they are Illegal.
had thus shown beyond doubt that it had incurred the losses in its
auction sales; and that it substantially complied with the requirements of 1. The payment of representation fees to a police officer in order to
Revenue Regulations No. 12-77 on the deductibility of its losses. investigate a robbery of the taxpayer is considered as a bribe which is
not deductible (1990 BAR)
Held: (1) ‘Subasta’ and ‘Rematado” books are not sufficient to
substantiate expenses for the deduction. – In this case, petitioner's 2. The payment of facilitation fees, even if argued to be standard
reliance on the entries made in the "Subasta" book were not sufficient operating procedure are considered as bribes given to government
to substantiate the claimed deduction of loss on auction sale. employees involving government transactions. They are not considered
as deductible payments. Also colloquially known as pampadulas.
As admitted by the petitioner, the contents in the "Rematado" and
"Subasta" books do not reflect the true amounts of the total capital DEDUCTIBLE EXPENSES AND ALLOWABLE DEDUCTIONS
and the auction sale, respectively. Be that as it may, petitioner still UNDER ORDINARY AND NECESSARY EXPENSES
failed to adduce evidence to substantiate the other expenses alleged to
have been incurred in connection with the sale of pawned items. Inclusions in the Term Ordinary and Necessary Expenses
1. A reasonable allowance for salaries, wages, and other forms
As the CTA En Banc held, Tambunting did not properly prove that it had of compensation for personal services;
incurred losses. The subasta books it presented were not the proper 2. A reasonable allowance for travel expenses, here and abroad
evidence of such losses from the auctions because they did not 3. A reasonable allowance for rentals;
reflect the true amounts of the proceeds of the auctions due to
4. A reasonable allowance for entertainment, amusement and
certain items having been left unsold after the auctions.
recreation expenses.
The rematado books did not also prove the amounts of capital because
the figures reflected therein were only the amounts given to the [1] Salaries, Wages, and Other Forms of Compensation
pawnees. It is interesting to note, too, that the amounts received by the The following shall be considered allowable deductions which are
pawnees were not the actual values of the pawned articles but were only reasonable allowance for:
fractions of the real values. 1. Salaries
2. Wages
Again, we affirm the foregoing holding of the CTA En Banc for the 3. Other forms of compensation
reasons therein stated. To reiterate, deductions for income tax purposes
4. Grossed-up monetary value of the fringe benefit provided that
partake of the nature of tax exemptions and are strictly construed
against the taxpayer, who must prove by convincing evidence that he is the final tax (fringe benefit tax) has been paid.
entitled to the deduction claimed.
Requirements of Deductibility
Tambunting did not discharge its burden of substantiating its claim for In addition to the basic requirements of deductibility
deductions due to the inadequacy of its documentary support of its 1. The recipient actually rendered the services which are
claim. Its reliance on withholding tax returns, cash vouchers, lessor’s ordinary and necessary to the business
certifications, and the contracts of lease was futile because such 2. The aggregate remuneration paid are reasonable or more or
documents had scant probative value. As the CTA En Banc succinctly less commensurate to the value of his services.
put it, the law required Tambunting to support its claim for deductions
with the corresponding official receipts issued by the service providers [2] Travel and Transportation Expenses
concerned.
In addition to the basic requirements of deductibility
1. Expense must be reasonable
Ex.: X is a businessman engaged in an car repair shop. Then he bought
a lot of stuffed toys. It is not enough to show that the there are receipts 2. Incurred away from home
that amount has been spent, there must also be a direct relation or 3. Paid for and incurred in the conduct of trade or business
reasonable connection in the business. 4. Must be substantiated by receipts.
[3] Rent Expenses OPTION GIVEN TO PRIVATE EDUCATIONAL INSTITUTIONS

1. Ordinary and necessary expense
2. Incurred during the taxable year SECTION 34
3. Related to the trade, business or profession
4. It must be substantiated with receipts (A) Expenses. xxx
5. The rentals should be subjected to 5% withholding tax
(2) Expenses Allowable to Private Educational
Must be an Operating Lease Institutions. - In addition to the expenses allowable as
If it is an operating lease then by the end of the lease period the taxpayer deductions under this Chapter, a private educational institution,
referred to under Section 27 (B) of this Code, may at its option
shall cease to possess the leased property, or otherwise enter into a
elect either: (a) to deduct expenditures otherwise considered as
new contract of lease with a lessor. It should not be rent to own
capital outlays of depreciable assets incurred during the taxable
otherwise it would no longer be a revenue expenditure but a capital
year for the expansion of school facilities or (b) to deduct
expenditure, as it would not only be limited for a single taxable year.
allowance for depreciation thereof under Subsection (F) hereof.
[4] Entertainment, Amusement, Recreation Expenses Option to Private Educational Institutions

Also referred to as EAR Expense. This is considered because there are In addition to the expenses allowable as deductions, a private
instances that for a business there is a need to entertain suppliers or educational institution may, at its option, in case it purchases herein a
clients in order to accommodate for the business. depreciable asset, the institution has the option to:
1. Deduct the capital expenditure outright; or
NOTE: Under RR 110-2002, it is stated that EAR Expense shall include 2. Spread it out evenly until the useful life of such depreciable
representation expenses and or depreciation or rental expense to asset have been exhausted.
entertainment facilities. The representation expense referred in this is
the expense incurred by the taxpayer in connection with the business or Other Kinds of Expenses
trade but they shall not refer to fixed representation allowances The listing in the NIRC of the expenses as allowable deductions are not
which forms part of the compensation income of the employee. necessarily exclusive, the business set up of the taxpayer may vary:
1. Repair Expense can be claimed as deductions as expenses
Requisites for Deductibility 2. Litigation Expenses. – Litigation to collect apartment rentals
1. Incurred during the taxable year or to eject tenants considered as ordinary and necessary
2. Reasonable amount expenses (Gutierrez v. Collector, 121 Phil. 809). In the same
3. Not contrary to law vein an action to collect from a buyer is also considered as
4. Must not constitute a bribe deductible expense if the demand is not heeded and recourse
5. Must be substantiated to court action is necessary.
6. The appropriate withholding taxes must be withheld
7. Must be connected to the business B. INTERESTS
8. Must not exceed the ceiling
In General
Ceiling on EAR Expense
There shall be allowed deduction from gross income EAR Expense
SECTION 34
• In an amount equivalent to the actual EAR expense within
the taxable year by the taxpayer
(B) Interest
But in no case shall such deduction exceed:
• If the taxpayer is engaged in selling goods: (1) In General. - The amount of interest paid or incurred within
o 1/2% of 1% of the Total Net Sales a taxable year on indebtedness in connection with the taxpayer's
• If the taxpayer is a seller of services: profession, trade or business shall be allowed as deduction from
o 1% of the Net Revenue gross income: Provided, however, That the taxpayer's otherwise
• However, if the taxpayer is deriving income from both allowable deduction for interest expense shall be reduced by forty-
o There shall be apportionment formula taking into two percent (42%) of the interest income subjected to final tax:
consideration the percentage Provided, That effective January 1, 2009, the percentage shall be
thirty-three percent (33%).
Advertising Expenses (CIR v. General Foods)
As discussed in the cited case, the tax treatment of advertising expense Interest as Deduction from Gross Income
would depend whether the expense is ordinary and necessary. In the It refers to the payment for the use or forbearance or detention of money
case of General Foods, there are two types of advertising expenses: regardless of the name it is called or denominated. It includes the
1. Advertising to stimulate or boost current sales amount paid for the borrower’s use of money during the term of the loan
As such it is considered as a revenue expenditure and thus as well as for his detention of money after the date of its repayment. This
may be considered as an expense that can be deducted is an expense on the part of the taxpayer. He has loaned money from
outright and be considered as allowable deductions; someone and because of such he is liable to pay principal and to pay
the interest. Thus, here it is the taxpayer who is liable.
2. Advertising to stimulate or boost future sales
REQUISITES OF DEDUCTIBILITY
In this case, as what happened in General Foods, this kind of
advertising benefits not only the present but also the future Positive Requirements
sales, thus it is considered as capital expenditure, while it 1. It must be connected in the trade or business
cannot be deducted outright, the taxpayer can make 2. It is paid during the taxable year
deductions by amortizing. 3. The debt is that of a taxpayer
4. The interest is stipulated in writing
Deduction of Capital Expenditures 5. The interest is legally due
GR: If it involves a capital expenditure, it cannot be deducted outrightly.
Negative Requirements
One must be spread it out by applying depreciation or by amortizing.
1. Debt must not be between related taxpayers
2. Debt must not be for financing petroleum operations
XPN: Private Educational Institutions 3. In case interest expense was incurred to procure a
depreciable asset
Limitation: Tax Arbitrage Rule Illustration:
Question to Note: DR borrowed money from CR on March 1, 2018. Then there is a loan
1. What is a tax arbitrage? of P100,000 with 12% interest per annum. Thus, the interest therein
is P12,000. Here the interest was paid in advance, thus what is
2. When is tax arbitrage applicable? What does it seek to limit?
received by the borrower is P88,000. Thus, the interest was paid on
3. How does the tax arbitrage rule apply such limitation in the day the loan was also released.
claiming interest expense as deduction?
In this case, given that the taxpayer applies cash basis reporting,
Tax Arbitrage rule will apply when the taxpayer borrows and the money then the cash basis taxpayer is not allowed to claim the interest
is used to invest in securities or some forms of investments where it will expense of P12,000 as a deductible interest for 2018 since a portion
earn interest income. Thus, if the amount borrowed is used in the of that does not belong to 2018 (March 2018 to February 2019). The
investments where income is earned, then the interest expense for the allowed interest expense is only those March 1 to December 31 which
borrowing cannot be deducted at 100%, it shall be subjected to the shall be 10 months of P10,000. In 2019, the balance of P2,000 shall
deduction of 33%. be claimed as deductions.
The interest expense is deductible entirely for as long as they are then
related to the business or the profession of the taxpayer. Exception: If the loan agreement is on an installment basis. By the time
that there is an amortization being paid by the taxpayer, then the
But, if the money borrowed of which the taxpayers pays an interest corresponding interest pertaining to such payment can also be deducted
expense was used to acquire investment where interest income is as interest expenses.
earned, then a person is not allowed to claim the entire interest
expense as deduction. It will be reduced by 33% interest income and [2] Interest Expense Between Related Taxpayers
not by 33% of the interest expense.
(b) If both the taxpayer and the person to whom the payment has
Illustration been made or is to be made are persons specified under Section 36
(B); or
Interest Expense: P100,000
Interest Income: P10,000 Who are Related Taxpayers [Section 36(B)]
If the money borrowed is used to invest in other investment where In computing net income, no deductions shall in any case be allowed in
it would earn interest income, the interest expense of P100,000 respect of losses from sales or exchanges of property directly or
cannot be claimed 100% as deduction, as it would be reduced by
indirectly . –
33% of the interest income. Therefore:
Allowable deduction = Interest expense – (Interest Income x 0.33) 1. Between members of a family. For purposes of this
= P100,000 – (P10,000 x 0.33) paragraph, the family of an individual shall include only his
= P100,000 – P3,300 brothers and sisters (whether by the whole or half-blood),
= P96, 700 Allowable Interest Expense spouse, ancestors, and lineal descendants; or
o Note: This does not include relative by affinity
Requisites (Atty. Donalvo) 2. Except in the case of distributions in liquidation, between an

1. Taxpayer must have an interest expense deductible in NIRC; individual and corporation more than fifty percent (50%) in
2. The taxpayer also has an interest income; value of the outstanding stock of which is owned, directly or
3. The interest income is subject to final tax indirectly, by or for such individual; or
Instance where tax arbitrage rule does not apply: 3. Except in the case of distributions in liquidation, between two
• Interest expenses paid due to delinquent taxes corporations more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly,
Non-deductible Interest Expenses by or for the same individual if either one of such corporations,
with respect to the taxable year of the corporation preceding
1. Interest paid in advance by an individual taxpayer reported on
the date of the sale of exchange was under the law applicable
a cash basis;
to such taxable year, a personal holding company or a foreign
2. Interest expense between related taxpayers;
personal holding company;
3. Interest expense incurred to finance petroleum explorations;
4. Interest expense treated as a capital expenditure.
4. Between the grantor and a fiduciary of any trust; or
[1] Cash Basis Reporting and Discounting of Interest
5. Between the fiduciary of and the fiduciary of a trust and the
fiduciary of another trust if the same person is a grantor with
SECTION 34
respect to each trust; or
(B) Interest. – 6. Between a fiduciary of a trust and beneficiary of such trust.
(2) Exceptions. – No deduction shall be allowed in respect of
interest under the succeeding subparagraphs: In this instances interest expense shall not be taxable.
(a) If within the taxable year an individual taxpayer reporting [3] Interest Expense Incurred to Finance Petroleum Operations
income on the cash basis incurs an indebtedness on which an
interest is paid in advance through discount or otherwise: (c) If the indebtedness is incurred to finance petroleum
Provided, That such interest shall be allowed as a deduction in exploration.
the year the indebtedness is paid: Provided, further, That if the
indebtedness is payable in periodic amortizations, the amount of Thus, interest expenses are not deductible from the gross income if the
interest which corresponds to the amount of the principal indebtedness on which the interest expense is paid or incurred is to
amortized or paid during the year shall be allowed as deduction finance petroleum exploration in the Philippines. This refers to interest
in such taxable year; or other consideration paid or incurred engaged in the discovery and
production of indigenous petroleum in the Philippines in respect of the
In this case (1) the taxpayer loaned from someone; (2) interest payment financing of its petroleum operations under the Oil Exploration and
was advanced at the time the loan was taken and (3) the taxpayer Development Act of 1972.
applies the cash basis of reporting.
SECTION 34 Foreign Income Tax is can either be claimed as deducting or tax credit.
Thus, if the client seeks for advice, it would be better to opt for the tax
(B) Interest. – credit option as tax credit is a peso per peso reduction of the tax liability.
(3) Optional Treatment of Interest Expense. – At the option Tax Benefit Rule
of the taxpayer, interest incurred to acquire property used in Provided, That taxes allowed under this Subsection, when refunded or
trade, business or exercise of a profession may be allowed as a credited, shall be included as part of gross income in the year of
deduction or treated as capital expenditure. receipt to the extent of the income tax benefit of said deduction.
This occurs when a taxpayer claims deduction for taxes. For example,
Optional Treatment of Interest Expense when one overpays for a tax, the BIR would grant him a tax refund. In
This occurs when a taxpayer borrows money to buy a property to be certain cases, he will receive a Tax Credit Certificate or be refunded.
used in business. Thus the interest expense incurred therein may be
deducted, and the taxpayer is given to option under Section 34(B) to The treatment will depend on whether the taxpayer benefited or not from
1. Separate deduction for interest expense where the cost of the the deduction. If there was a benefit at the time the deduction was made,
business asset will be subject to depreciation [34(F)] then the refund will be subject to tax. But if there was no tax benefit at
2. Treated as an interest expense deduction the time the deduction was made, then the refund will not be taxable.
The tax benefit rule states that, if a deduction is taken in a prior year,
C. TAXES and the underlying amount in recovered in a subsequent period, then
the underlying amount must be included in the gross income in the
subsequent period.
SECTION 34
Limitations on NRAETB and RFC
(C) Taxes. –
(1) In General. – Taxes paid or incurred within the taxable year (2) Limitations on Deductions. - In the case of a nonresident
in connection with the taxpayer's profession, trade or business, alien individual engaged in trade or business in the Philippines
shall be allowed as deduction, except: and a resident foreign corporation, the deductions for taxes
provided in paragraph (1) of this Subsection (C) shall be allowed
(a) The income tax provided for under this Title; only if and to the extent that they are connected with income from
sources within the Philippines.
(b) Income taxes imposed by authority of any foreign country; but
this deduction shall be allowed in the case of a taxpayer who does In the case of NRAETB and RFC,
not signify in his return his desire to have to any extent the • The deductions for taxes shall be allowed only if
benefits of paragraph (3) of this subsection (relating to credits for • And to the extent that they are
taxes of foreign countries); • Connected with income from sources within the Philippines
(c) Estate and donor's taxes; and Foreign Tax Credits
(d) Taxes assessed against local benefits of a kind tending to (3) Credit Against Tax for Taxes of Foreign Countries. - If
increase the value of the property assessed. the taxpayer signifies in his return his desire to have the benefits
of this paragraph, the tax imposed by this Title shall be credited
Provided, That taxes allowed under this Subsection, when with:
refunded or credited, shall be included as part of gross income in
the year of receipt to the extent of the income tax benefit of said (a) Citizen and Domestic Corporation. - In the case of a
deduction. citizen of the Philippines and of a domestic corporation, the
amount of income taxes paid or incurred during the taxable year
Rationale of Allowing Taxes as Deduction to any foreign country; and
The basic rationale for allowing the deduction of taxes paid or incurred
in connection with the taxpayer’s profession, trade or business is the (b) Partnerships and Estates. - In the case of any such
accounting concept of matching revenues with expenditures. If the individual who is a member of a general professional partnership
expenditure helped earn the income, then it should be allowed as a or a beneficiary of an estate or trust, his proportionate share of
deduction. such taxes of the general professional partnership or the estate or
trust paid or incurred during the taxable year to a foreign country,
But, taxes mean proper taxes, and no deductions however is allowed if his distributive share of the income of such partnership or trust
for the amounts that represent interest, surcharge or penalties that are is reported for taxation under this Title.
the incident of delinquency. They are not deductible as expenses
because interest for delinquency are not taxes.
An alien individual and a foreign corporation shall not be allowed
the credits against the tax for the taxes of foreign countries
Are all kinds of taxes deductible?
Both Atty. Donalvo and Dean Quibod submits that not all the allowed under this paragraph.
taxes incurred by the taxpayer is deductible. Therefore, these kind of
taxes are deductible so long as they are connected to the business. Persons that can Avail of the Tax Credit
1. Resident Citizens
2. Domestic Corporations
Non-deductible Taxes
3. Professional Partnerships
1. Income tax provided for under NIRC 4. Beneficiaries of Estates and Trusts
2. Incomes taxes imposed by authority of any foreign country
a. But this deduction shall be allowed in the case of a Persons Not Entitled
taxpayer who does not signify in his return his 1. Alien Individuals
desire to have to any extent the benefits of credits 2. Foreign Corporations
for taxes paid to foreign countries 3. Nonresident Corporations
3. Estate and donor’s taxes
4. Taxes assessed against local benefits of a kind tending to NOTE: Those who avail of the foreign income tax credit are those
increase the value of the property assessed. taxpayer who is taxable abroad on their income earned abroad.
Limitations Ordinary Loss [Sec. 34(1)(a)]

Losses, if incurred in trade, profession or business.
(4) Limitations on Credit. - The amount of the credit taken
under this Section shall be subject to each of the following Deductibility of Ordinary Loss
limitations:
[1] The losses are that of the taxpayer
(a) The amount of the credit in respect to the tax paid or incurred [2] They are actually sustained during the taxable year
to any country shall not exceed the same proportion of the tax [3] It is incurred in business, and
against which such credit is taken, which the taxpayer's taxable [4] It is not compensated by insurance or other forms of indemnity.
income from sources within such country under this Title bears to
his entire taxable income for the same taxable year; and Example 1: A customer, whom business suffered, is not able to pay for
the goods delivered. Thus, the customer no longer purchases the
(b) The total amount of the credit shall not exceed the same taxpayer’s goods. This cannot be claimed as part of the losses. Since,
proportion of the tax against which such credit is taken, which the here there is actually not a loss of the taxpayer.
taxpayer's taxable income from sources without the Philippines
taxable under this Title bears to his entire taxable income for the Example 2: T owns a realty business and he bought a parcel of land. A
same taxable year. creek suddenly appeared leading to the decrease of the value. This
cannot be claimed as losses because there is actual loss as there was
Two Limitations on Foreign Tax Credit not even transaction yet. This only involved a mere reduction of value.
If a taxpayer will avail tax credits for foreign income taxes paid, such tax
credits shall be subject to limitations Casualty Loss [Sec. 34(1)(b)]
1. Per Country Limitation If the loss arises from fires, storms, shipwrecks, etc.
2. Overall Limitation
Deductibility of Casualty Loss
D. LOSSES
[1] The casualty losses are that of the taxpayer
In General [2] The losses are connected with the taxpayer’s business
[3] It is incurred in business,
[4] It is not compensated by insurance or other forms of indemnity, and
SECTION 34 [5] The losses are must be reported to the BIR in its prescribed form
[6] The losses are not claimed as deductions for estate tax purposes
(D) Losses. –
Partial Insurance: The taxpayer will still have a deductible loss but only
(1) In General. – Losses actually sustained during the taxable up to such extent covered by the insurance.
year and not compensated for by insurance or other forms of
indemnity shall be allowed as deductions: Reporting Requirement:
• NIRC: Declaration of loss sustained from casualty, or from
(a) If incurred in trade, profession or business; robbery, theft or embezzlement during the taxable year.
• RR: 45 Days
(b) Of property connected with the trade, business or
profession, if the loss arises from fires, storms, No Double Deduction Rule
shipwreck or other casualties, or from robbery, theft or In Estate Taxation, it is said that the casualty losses are also considered
embezzlement. as allowable deductions. One must either claim as deduction for income
tax purposes or estate tax purposes, but not at the same time.
The Secretary of Finance, upon recommendation of the
Commissioner, is hereby authorized to promulgate rules Proof of Loss
and regulations prescribing, among other things, the
time and manner by which the taxpayer shall submit a (2) Proof of Loss. - In the case of a nonresident alien individual
declaration of loss sustained from casualty or from or foreign corporation, the losses deductible shall be those
robbery, theft or embezzlement during the taxable year: actually sustained during the year incurred in business, trade or
Provided, however, That the time limit to be so exercise of a profession conducted within the Philippines, when
prescribed in the rules and regulations shall not be less such losses are not compensated for by insurance or other forms
than thirty (30) days nor more than ninety (90) days of indemnity. The secretary of Finance, upon recommendation of
from the date of discovery of the casualty or robbery, the Commissioner, is hereby authorized to promulgate rules and
theft or embezzlement giving rise to the loss. regulations prescribing, among other things, the time and manner
by which the taxpayer shall submit a declaration of loss sustained
(c) No loss shall be allowed as a deduction under this from casualty or from robbery, theft or embezzlement during the
Subsection if at the time of the filing of the return, such taxable year: Provided, That the time to be so prescribed in the
loss has been claimed as a deduction for estate tax rules and regulations shall not be less than thirty (30) days nor
purposes in the estate tax return. more than ninety (90) days from the date of discovery of the
casualty or robbery, theft or embezzlement giving rise to the loss;
Kinds of Losses in General Net Operating Loss Carry-Over (NOLCO)

1. Ordinary Loss
a. Loss incurred in business
(3) Net Operating Loss Carry-Over. – The net operating loss
b. Loss in exchange of an ordinary asset
2. Casualty Losses – losses from casualties (i.e. fire or of the business or enterprise for any taxable year immediately
shipwreck) preceding the current taxable year, which had not been previously
3. Net Operating Loss Carry Over (NOLCO) offset as deduction from gross income shall be carried over as a
4. Capital Losses – those which arise from the exchange of deduction from gross income for the next three (3) consecutive
capital assets taxable years immediately following the year of such loss:
5. Losses from wash sales of stocks and securities Provided, however, That any net loss incurred in a taxable year
6. Wagering losses during which the taxpayer was exempt from income tax shall not
7. Abandonment Losses be allowed as a deduction under this Subsection: 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 Equity Ownership Rule
business or enterprise in that - A condition to avail of the NOLCO is that, there has been no substantial
change in the ownership of the business or enterprise. If the business
(i) Not less than seventy-five percent (75%) in nominal value of is in the name of a corporation, then it is held by or on behalf of the
outstanding issued shares., if the business is in the name of a same persons, in NOT LESS THAN 75% of
corporation, is held by or on behalf of the same persons; or 1. The nominal value of the outstanding issued shares
2. The paid-up capital of the corporation
(ii) Not less than seventy-five percent (75%) of the paid-up capital
Entities or Corporations Not Entitled to Claim NOLCO
of the corporation, if the business is in the name of a corporation,
1. Offshore banking units (OBUs)
is held by or on behalf of the same persons.
2. Entities registered with BOI with respect to its BOI registered
activity enjoying the Income Tax Holiday Incentive
For purposes of this subsection, the term 'net operating loss' 3. Enterprise registered with PEZA
shall mean the excess of allowable deduction over gross income of 4. Enterprise registered under RA 7227 or BCDA like SBMA
the business in a taxable year. 5. Foreign corporations engaged in international carriage
6. Any person, natural or juridical enjoying tax exemption, during
Provided, That for mines other than oil and gas wells, a net the period for which the tax exemption is applicable.
operating loss without the benefit of incentives provided for under
Executive Order No. 226, as amended, otherwise known as the Capital Loss
Omnibus Investments Code of 1987, incurred in any of the first
ten (10) years of operation may be carried over as a deduction from SECTION 34
taxable income for the next five (5) years immediately following
the year of such loss. The entire amount of the loss shall be carried (4) Capital Losses –
over to the first of the five (5) taxable years following the loss, and
any portion of such loss which exceeds the taxable income of such (a) Limitations. – Loss from sales or exchanges of capital assets
first year shall be deducted in like manner form the taxable shall be allowed only to the extent provided in Section 39.
income of the next remaining four (4) years.
(b) Securities Becoming Worthless. – If securities as defined
Net Operating Loss
in Section 22(T) become worthless during the taxable year and are
Technically, net operating loss shall mean the excess of allowable
capital assets, the loss resulting therefrom shall, for purposes of
deduction over gross income of the business in a taxable year. This is
this Title, be considered as a loss from the sale or exchange, on
one that results from the operation of the business ending with no
income or a loss. Usually when a business operates under a loss, the the last day of such taxable year, of capital assets.
taxpayer would contemplate of not continuing in the business. However,
if he chooses to continue, the losses may be allowed to be claimed as a
deduction as a net operating loss carry over. Definitions
Period Allowed to Claim Deduction i. Ordinary Gains are those which arise from the
exchange or transaction involving ordinary assets
Shall be carried over as a deduction from gross income for the
next three (3) consecutive taxable years immediately following the ii. Ordinary Losses are those losses incurred by a
year of such loss taxpayer which are not capital losses. An ordinary
loss is a loss realized by taxpayer when expenses
After the three year period, the NOLCO can no longer be exceed revenues in normal business operations. It
deducted from the gross income should the taxpayer earn any income
is the loss realized by a business owner operating
of such taxable year.
a business for profit because expenses exceeded
Exception of the Three-Year Period the revenues.
For mines other than oil and gas wells, a net operating loss without the
benefit of incentives incurred in any of the ten years of operation may be iii. Capital Gains are those which arise from the
carried over as a deduction from taxable income exchange or transaction involving capital assets.
• For the next 5 years immediately following the year of loss
• The entire amount shall be carried over to the first of the five iv. Capital Losses are those losses incurred when a
taxable years following the loss,
capital asset decreased in value, such as when a
• Any portion of such loss which exceeds the taxable income of
security or investment is sold for less than its
such first year shall be deducted in like manner from the
taxable income of the next remaining four years. original purchase price.
MCIT and NOLCO SECTION 39

Can a corporation who sought to be taxed under the Minimum Corporate
Income Tax avail of the Net Operating Loss Carry-Over Deduction? NO. (A) Definitions. – As used in this Title. -
This is because the corporate taxpayer, once it is subjected (2) Net Capital Gain. - The term 'net capital gain' means the
to an MCIT, which is based on gross, then there is no more allowable excess of the gains from sales or exchanges of capital assets over
deductions to be considered. Thus, if under the MCIT it cannot be the losses from such sales or exchanges.
considered as allowable deductions.
(3) Net Capital Loss. - The term 'net capital loss' means the
Limitations in Availing the NOLCO excess of the losses from sales or exchanges of capital assets over
1. If the net loss was incurred during a taxable year where the the gains from such sales or exchanges.
taxpayer was exempt, then it cannot be considered as
NOLCO deduction; and
2. If there has been a substantial change in the ownership of the Capital Losses are losses from capital asset transactions where no
business or enterprise. gain was arrived at. There must be a transaction in order that there be
a gain or a loss. Capital assets are properties not used in business. As
NOTE: Thus, there would be no application of NOLCO in these two a rule, capital losses are only deductible if there is capital gain.
instances.
Basic Principles in Capital Losses Net Capital Loss Carry-Over

1. Ordinary loss may be charged against ordinary gains
2. Ordinary loss may be charged against capital gains SECTION 39
3. Capital loss may be charged against capital gains
4. Capital loss can never be deducted from ordinary gains
(D) Net Capital Loss Carry-Over. - If any taxpayer, other
than a corporation, sustains in any taxable year a net capital
Holding Period [Section 39(B)] loss, such loss (in an amount not in excess of the net income for
such year) shall be treated in the succeeding taxable year as a loss
from the sale or exchange of a capital asset held for not more than
(B) Percentage Taken into Account. – In case of a taxpayer, twelve (12) months.
other than a corporation, only the following percentages of the
gain or loss recognized upon the sale or exchange of a capital asset Requisites for Deductibility of NCLCO
shall be taken into account in computing the net capital gain, net 1. The taxpayer is an individual (does not apply to corporations)
capital loss, and net income. 2. Tax payer incurs net capital loss on capital asset transactions
3. The net capital loss may be carried over in the succeeding
(1) One hundred percent (100%) if the capital asset has taxable year
been held for not more than twelve (12) months; and 4. The amount carried over should not exceed the net income of
the taxpayer in the year the carry over is to be applied.
(2) Fifty percent (50%) if the capital asset has been held for
more than twelve (12) months. NOLCO NCLCO
Type of Loss
It involves net operating loss It involves net capital loss
Implication of Holding Period which is the excess of allowable which is the loss from capital
A holding period is the amount of time the investment is held by an deductions over gross income asset transactions
investor, or the period between the purchase and sale of capital asset. Carry-over Period
The holding period is used to determine the taxing of capital gains or Can be carried over for the next Can be carried over in the
deduction of capital losses. 3 consecutive years succeeding taxable year
immediately following the year (1 year)
1. Short Term – if the capital asset has been held for not more of such loss
than 12 months, the taxpayer can recognize 100% of the Taxpayers Allowed to Avail
capital gain or the capital loss. Applicable to both individuals Available only to individual
and corporations taxpayers not corporate
For example, X bought 100 shares of stock on January 2, 2016. If X sold taxpayers
her stocks on December 23, 2016, she would realize a short term capital
gain or capital loss because her holding period is less than one year. Rules to Consider
This is considered as a short term holding period. (1) NCLCO cannot be charged against ordinary income
(2) NCLCO must be in an amount not in excess of the net income
3. Long Term – if the capital asset has been for more than 12 for such year
months, then only 50% of the gain or loss can be considered.
Retirement of Bonds, Etc.
Thus, in the same example, if X sold her stocks (assuming that they are
not traded in the stock exchange) on January 3, 2017, she would then
realize a long-term capital gain or loss because her holding period is (E) Retirement of Bonds, Etc. - For purposes of this Title,
more than one year. amounts received by the holder upon the retirement of bonds,
debentures, notes or certificates or other evidences of
NOTE: The Holding Period applies only to Individual taxpayers. This indebtedness issued by any corporation (including those issued by
does not apply to corporations. a government or political subdivision thereof) with interest
coupons or in registered form, shall be considered as amounts
Limitation on Capital Loss received in exchange therefor.
(C) Limitation on Capital losses. - Losses from sales or Bonds are obligations on the part of the corporation. They are a type of
exchange capital assets shall be allowed only to the extent of the security and at the same time an indebtedness on the part of the
gains from such sales or exchanges. If a bank or trust company corporation. Simply, corporation loans from the public by the issuance
incorporated under the laws of the Philippines, a substantial part of bonds. Upon maturity of these bonds, the corporation will then pay
of whose business is the receipt of deposits, sells any bond, the bondholders. If there is retirement of these bonds, it is then
considered as a capital asset transaction.
debenture, note, or certificate or other evidence of indebtedness
issued by any corporation (including one issued by a government
or political subdivision thereof), with interest coupons or in Gains and Losses from Short Sales, Etc.
registered form, any loss resulting from such sale shall not be
subject to the foregoing limitation and shall not be included in (F) Gains or losses from Short Sales, Etc. - For purposes of
determining the applicability of such limitation to other losses. this Title –
General Rule: Losses from sales or exchanges of capital assets shall (1) Gains or losses from short sales of property shall be considered
be allowed only to the extent of the gains from such sales or exchanges. as gains or losses from sales or exchanges of capital assets; and
The capital loss can only be charged against the capital gains.
(2) Gains or losses attributable to the failure to exercise privileges
This is to insure that only business costs and expenses are deducted or options to buy or sell property shall be considered as capital
from the gross income, based on the general rule that deductions are gains or losses.
business expenses and capital losses are not business expenses.
[1] Short Sales
Exception: Domestic banks or trust companies, whose substantial part A short sale is the sale of an asset or securities the seller does not own.
of the business is the receipts of deposits, sells any bond, debenture, It is generally a transaction which an investor sells borrowed securities
note, or certificates or other evidence of indebtedness issued by a in anticipation of price decline. A short sale is where the seller does not
corporation, they are then considered allowed to deduct capital loss actually own the stock the is being sold but borrows it from a dealer. In
against ordinary gains. this case, the seller is a mere speculator.
Example: A will sell B a car which will be delivered next week. But, A (c) A security holder of a corporation, which is a party to the
does not have the car yet nor does he own such car. Note that in the merger or consolidation, exchanges his securities in such
Law on Sales, ownership is necessary at the time of delivery. corporation, solely for stock or securities in such corporation, a
party to the merger or consolidation.
But, when it comes to securities, a seller can sell the same even when
he does not own it. Thus, called short sales. The seller will sell the No gain or loss shall also be recognized if property is transferred
securities to the buyer. He will procure the securities later on at a lower to a corporation by a person in exchange for stock or unit of
price prior to delivery. participation in such a corporation of which as a result of such
exchange said person, alone or together with others, not
Treatment of Gains or Losses from Short Sales
exceeding four (4) persons, gains control of said
They shall be considered as capital asset transactions. The gains and
corporation: Provided, That stocks issued for services shall not
losses therein shall then be considered as a sale or exchange of a
capital asset. be considered as issued in return for property.
[2] Failure to Exercise Privileges or Options to Buy and Sell xxx

If there are gains and losses that are attributable due to the failure to
exercise privileges or options to buy or sell property, they shall then be (6) Definitions. –
considered as capital gains and losses.
(a) The term "securities" means bonds and debentures but not
Determinations of Amount and Recognition of Gain or Loss 'notes' of whatever class or duration.
SECTION 40 (b) The term "merger" or "consolidation", when used in this

Determination of Amount and Section, shall be understood to mean: (i) the ordinary merger or
Recognition of Gain or Loss consolidation, or (ii) the acquisition by one corporation of all or
substantially all the properties of another corporation solely for
(A) Computation of Gain or Loss. - The gain from the sale or stock: Provided, That for a transaction to be regarded as a merger
other disposition of property shall be the excess of the amount or consolidation within the purview of this Section, it must be
realized therefrom over the basis or adjusted basis for undertaken for a bona fide business purpose and not solely for the
determining gain, and the loss shall be the excess of the basis or purpose of escaping the burden of taxation: Provided, further,
adjusted basis for determining loss over the amount realized. The That in determining whether a bona fide business purpose exists,
amount realized from the sale or other disposition of property each and every step of the transaction shall be considered and the
shall be the sum of money received plus the fair market value of whole transaction or series of transaction shall be treated as a
the property (other than money) received; single unit: Provided, finally , That in determining whether the
property transferred constitutes a substantial portion of the
(B) Basis for Determining Gain or Loss from Sale or property of the transferor, the term "property" shall be taken to
Disposition of Property. - The basis of property shall be – include the cash assets of the transferor.
(1) The cost thereof in the case of property acquired on or after (c) The term "control", when used in this Section, shall mean
March 1, 1913, if such property was acquired by purchase; or ownership of stocks in a corporation possessing at least fifty-one
percent (51%) of the total voting power of all classes of stocks
(2) The fair market price or value as of the date of acquisition, entitled to vote.
if the same was acquired by inheritance; or
(d) The Secretary of Finance, upon recommendation of the
(3) If the property was acquired by gift, the basis shall be the Commissioner, is hereby authorized to issue rules and regulations
same as if it would be in the hands of the donor or the last for the purpose "substantially all" and for the proper
preceding owner by whom it was not acquired by gift, except that implementation of this Section.
if such basis is greater than the fair market value of the property
at the time of the gift then, for the purpose of determining loss, Securities Becoming Worthless
the basis shall be such fair market value; or
SECTION 34(D)(4)
(4) If the property was acquired for less than an adequate (b) Securities Becoming Worthless. - If securities as defined
consideration in money or money's worth, the basis of such in Section 22 (T) become worthless during the taxable year and
property is the amount paid by the transferee for the property; or are capital assets, the loss resulting therefrom shall, for purposes
of this Title, be considered as a loss from the sale or exchange, on
(5) The basis as defined in paragraph (C)(5) of this Section, if the the last day of such taxable year, of capital assets.
property was acquired in a transaction where gain or loss is not
recognized under paragraph (C)(2) of this Section. SECTION 34
(E) Bad Debts. –
(C) Exchange of Property. – (2) Securities Becoming Worthless. - If securities, as defined
in Section 22 (T), are ascertained to be worthless and charged off
(1) General Rule. - Except as herein provided, upon the sale or within the taxable year and are capital assets, the loss resulting
exchange or property, the entire amount of the gain or loss, as therefrom shall, in the case of a taxpayer other than a bank or
the case may be, shall be recognized. trust company incorporated under the laws of the Philippines a
substantial part of whose business is the receipt of deposits, for
(2) Exception. - No gain or loss shall be recognized if in the purpose of this Title, be considered as a loss from the sale or
pursuance of a plan of merger or consolidation – exchange, on the last day of such taxable year, of capital assets.
(a) A corporation, which is a party to a merger or consolidation,

exchanges property solely for stock in a corporation, which is a Securities Becoming Worthless
party to the merger or consolidation; or Worthless securities are stocks, bonds, or other holdings that have no
market value, they have a market value of zero. These securities, along
(b) A shareholder exchanges stock in a corporation, which is a with any securities that an investor has abandoned, results in a capital
party to the merger or consolidation, solely for the stock of another loss for the owner and can be claimed as such when filing taxes. As
corporation also a party to the merger or consolidation; or with other securities, the holding period is to be considered in
determining the loss to be deducted.
CHINA BANKING CORPORATION v. CA Losses from Wash Sales of Stock or Securities

GR 125508, July 19, 2000
SECTION 39 (5)
Facts: Sometime in 1980, Chinabank made a 53% equity investment in Losses From Wash Sales of Stock or Securities. – Losses
First CBC. Later it was shown that First CBC became insolvent. With from ‘wash sales’ as provided under Section 38.
the approval of BSP, Chinabank wrote-off as being worthless its
investment in First CBC in its 1987 ITR and treated it as a bad debt or SECTION 38
as an ordinary loss deductible from its gross income. Losses from Wash Sales of Stock or Securities
CIR here denied the claim for deduction from gross income of those (A) In the case of any loss claimed to have been sustained from
‘securities becoming worthless’ claimed by Chinabank. CIR here stated any sale or other disposition of shares of stock or securities where
that assuming that indeed they were securities becoming worthless, it appears that within a period beginning thirty (30) days before
they should have been classified s capital loss and not as a bad debt the date of such sale or disposition and ending thirty (30) days
expense there being no debt between Chinabank and First CBC.
after such date, the taxpayer has acquired (by purchase or by
exchange upon which the entire amount of gain or loss was
Held: (1) Equity investment is a capital asset not ordinary asset. -
recognized by law), or has entered into a contact or option so to
An equity investment is a capital, not ordinary, asset of the investor the
sale or exchange of which results in either a capital gain or a capital loss. acquire, substantially identical stock or securities, then no
The gain or the loss is ordinary when the property sold or exchanged is deduction for the loss shall be allowed under Section 34 unless the
not a capital asset. claim is made by a dealer in stock or securities and with respect
to a transaction made in the ordinary course of the business of
Thus, shares of stock; like the other securities defined in Section 22(T) such dealer.
of the NIRC, would be ordinary assets only to a dealer in securities or a
person engaged in the purchase and sale of, or an active trader (for his (B) If the amount of stock or securities acquired (or covered by the
own account) in, securities. contract or option to acquire) is less than the amount of stock or
securities sold or otherwise disposed of, then the particular shares
In the hands, however, of another who holds the shares of stock by of stock or securities, the loss from the sale or other disposition of
way of an investment, the shares to him would be capital assets. which is not deductible, shall be determined under rules and
When the shares held by such investor become worthless, the loss regulations prescribed by the Secretary of Finance, upon
is deemed to be a loss from the sale or exchange of capital assets. recommendation of the Commissioner.
The loss sustained by the holder of the securities, which are capital (C) If the amount of stock or securities acquired (or covered by the
assets (to him), is to be treated as a capital loss as if incurred from a contract or option to acquire which) is not less than the amount of
sale or exchange transaction. A capital gain or a capital loss normally stock or securities sold or otherwise disposed of, then the
requires the concurrence of two conditions for it to result: (1) There is a particular shares of stock or securities, the acquisition of which
sale or exchange; and (2) the thing sold or exchanged is a capital asset. (or the contract or option to acquire which) resulted in the non-
deductibility of the loss shall be determined under rules and
When securities become worthless, there is strictly no sale or exchange
regulations prescribed by the Secretary of Finance, upon
but the law deems the loss anyway to be "a loss from the sale or
recommendation of the Commissioner.
exchange of capital assets."
(2) Capital losses are allowed to be deducted only to the extent of Wash Sale of Stock or Securities
capital gains. - Capital losses are allowed to be deducted only to the A wash sale is a transaction by which an investor sells a losing security
extent of capital gains, i.e., gains derived from the sale or exchange of to claim a capital loss only to repurchase it or a substantially identical
capital assets, and not from any other income of the taxpayer. In the security again within a certain period (30 days from the sale). Some
case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a investors use this technique to try to realize a tax lose without limiting
subsidiary corporation of petitioner bank whose shares in said investee their exposure to the security.
corporation are not intended for purchase or sale but as an investment.
Unquestionably then, any loss therefrom would be a capital loss, not For example, F bought 100 shares of XYZ technology stock
an ordinary loss, to the investor. on November 1 for P100,000. On December 15, the value of the 100
shares has declined to P70,000. Thus, F would sell the entire position
(3) Not Considered as Bad Debts. - Verily, it is for a like thesis that the (position means the amount of security of a person) to realize a capital
loss of petitioner bank in its equity investment in the Hongkong loss of P30,000. Then On December 25 of the same year, F then would
subsidiary cannot also be deductible as a bad debt. The shares of stock repurchase 100 shares of XYZ technology or substantially identical
in question do not constitute a loan extended by it to its subsidiary security to reestablish F’s position in the stock. According to the wash-
(First CBC Capital) or a debt subject to obligatory repayment by the sale rule, the loss should NOT be allowed, as F would have then
latter, essential elements to constitute a bad debt, but a long term repurchased the security within the 30-day limit.
investment made by CBC.
Principle: The wash-sale rule provides that the losses from wash sales
In sum – of stock and securities are not deductible. This is to discourage selling
a security at a loss to take advantage of a tax deduction. The rule
(a) The equity investment in shares of stock held by CBC of prohibits the selling of security at a loss and repurchasing the same
approximately 53% in its Hongkong subsidiary, the First CBC Capital security or one that is substantially identical, within 30 days either before
(Asia), Ltd., is not an indebtedness, and it is a capital, not an ordinary, or after the sale.
asset.
GR: If it is made within the 30-day period, the sale of substantial identical
(b) Assuming that the equity investment of CBC has indeed become stock then:
"worthless," the loss sustained is a capital, not an ordinary, loss. 1. Whatever gains that result from the transaction is taxable
2. But, losses cannot be claimed as part of the capital losses.
(c) The capital loss sustained by CBC can only be deducted from capital
gains if any derived by it during the same taxable year that the securities Therefore, the rule is that the gain is taxable, but the losses are not
have become "worthless." deductible.
NOTE: Here, the equity investments made by Chinabank cannot be XPN: When the sale is done by dealers in stocks and securities. Thus,
claimed as deductions from gross income as “securities becoming even if there is a loss, he can still claim it as an ordinary loss on the part
worthless” under bad debt because there was no loan obligation, and if of the dealer.
it falls under capital loss, it can only be charged against capital gains.
3. It must actually be charged off from the books of account

Wagering Losses of the taxpayer at the end of the year
(6) Wagering Losses. - Losses from wagering transactions shall 4. It must be connected with the trade, business or
be allowed only to the extent of the gains from such transactions. profession of the taxpayer
5. The debt must not be incurred between related parties.
Rules as to Wagering
Gambling losses are not deductible against gross income, but they are When a taxpayer is engaged in trade, business or profession he has
deductible only when there are gambling or wagering gains. collectibles or accounts receivables from clients or customers. But from
• The wagering gains are added to the gross income, but among these collectibles, there are debts which can no longer be
• The wagering losses are still deductible but only to the extent collected. Therefore called bad debts.
of the gambling gains or wagering gains.
Requirements of Ascertainment of Worthlessness
Abandonment Losses 1. The taxpayer did in fact ascertain the debt to be worthless in
the year for which he deducted it;
(7) Abandonment Losses. –
2. In doing so, he did in good faith.
Thus, it is upon the taxpayer to determine that the collectibles have
(a) In the event a contract area where petroleum operations are become worthless and could no longer be collected. Efforts must be
undertaken is partially or wholly abandoned, all accumulated done by the taxpayer to determine worthlessness, like sending demand
exploration and development expenditures pertaining thereto letters to the debtors. Despite such efforts, debtors still did not pay.
shall be allowed as a deduction: Provided, That accumulated
expenditures incurred in that area prior to January 1, 1979 shall Rule on Bad Debt Recovery
be allowed as a deduction only from any income derived from the If the bad debts which were declared as deductions but were later on
same contract area. In all cases, notices of abandonment shall be recovered they shall be included as part of the gross income in the year
filed with the Commissioner. of recovery to the extent of the income tax benefit of the said deduction.
Thus, if the taxpayer paid a lesser tax by reason of the deduction due to
(b) In case a producing well is subsequently abandoned, the un- the bad debt, but the taxpayer was able to recover such, the recovered
amortized costs thereof, as well as the un-depreciated costs of amount shall be recognized as income in so far as there was tax benefit.
equipment directly used therein , shall be allowed as a deduction
in the year such well, equipment or facility is abandoned by the Allowance for Bad Debts, Not Deductible
contractor: Provided, That if such abandoned well is re-entered Allowance for bad debts is the estimate of the total receivables which
and production is resumed, or if such equipment or facility is one expects to be uncollectible. It is based on estimate. This is not the
restored into service, the said costs shall be included as part of one which is an allowable deduction because one of the basic rules of
gross income in the year of resumption or restoration and shall be deduction is that there must be an actual expense or an actual loss
amortized or depreciated, as the case may be. incurred. But there are exemptions to this rule namely on (a)
depreciation and on (b) depletion.
Deductible from Gross Income
1. Petroleum operations that are abandoned – all accumulated F. DEPRECIATION
exploration and development expenditures shall be allowed
as deductions; (F) Depreciation. –
2. Producing well is abandoned – costs as well as costs of the
equipment directly used therein shall be allowed deduction in (1) General Rule. - There shall be allowed as a depreciation
the year such well was abandoned. deduction a reasonable allowance for the exhaustion, wear and
They arise from exploration and development expenditures of those of tear (including reasonable allowance for obsolescence) of property
the extractive industry. used in the trade or business. In the case of property held by one
person for life with remainder to another person, the deduction
E. BAD DEBTS shall be computed as if the life tenant were the absolute owner of
the property and shall be allowed to the life tenant. In the case of
(E) Bad Debts. – property held in trust, the allowable deduction shall be
(1) In General. - Debts due to the taxpayer actually ascertained apportioned between the income beneficiaries and the trustees in
to be worthless and charged off within the taxable year except accordance with the pertinent provisions of the instrument
those not connected with profession, trade or business and those creating the trust, or in the absence of such provisions, on the
sustained in a transaction entered into between parties basis of the trust income allowable to each.
mentioned under Section 36 (B) of this Code: Provided, That
recovery of bad debts previously allowed as deduction in the Depreciation
preceding years shall be included as part of the gross income in Technically, depreciation as deduction is the reasonable allowance for
the year of recovery to the extent of the income tax benefit of said the exhaustion, wear and tear including the reasonable allowance of
deduction. obsolescence of property used in the trade or business. It is a cost-
recovery method of an expense which ordinarily cannot be considered
(2) Securities Becoming Worthless. - If securities, as defined as ordinary and necessary business expense under Section 34(A).
in Section 22 (T), are ascertained to be worthless and charged off
within the taxable year and are capital assets, the loss resulting Depreciation is a cost-recovery method because, at the time one herein
therefrom shall, in the case of a taxpayer other than a bank or acquires the property, the taxpayer cannot claim the expense as an
trust company incorporated under the laws of the Philippines a outright deduction in the year it was acquired. These properties, while
substantial part of whose business is the receipt of deposits, for necessary expenses, are not ordinary expenses. Thus, the manner in
the purpose of this Title, be considered as a loss from the sale or which to claim them as a deduction is under Section 34(F). These are
exchange, on the last day of such taxable year, of capital assets. allowed as deductions since they are the corresponding devaluation of
the property and one of the factor to determine the true income.
Bad Debts, Defined
A bad debt is an obligation due to the taxpayer that is uncollectible Requisites for Deductibility
despite due efforts on his part to recover the same. An example is that
of an insolvent debtor. 1. The depreciation is reasonable in amount.
2. It is for exhaustion, wear and tear and obsolescence of
Requisites for Deductibility the property used in trade or business
1. There must be an existing indebtedness 3. It must be charged off during the taxable year
2. It must actually be ascertained to be worthless or 4. The property depreciated must be used for trade or
uncollectible business or exercise of profession.
Methods Depreciation of Properties Used in Petroleum Operation

Section 34(F)(4)
(2) Use of Certain Methods and Rates. ‐ The term 'reasonable
allowance' as used in the preceding paragraph shall include, but Methods Allowed
not limited to, an allowance computed in accordance with rules 1. The straight line method
and regulations prescribed by the Secretary of Finance, upon 2. The declining balance method
recommendation of the Commissioner, under any of the following
methods: Fixed Useful Life
1. 10 years if the property is used in or related in the production
(a) The straight‐line method; of petroleum
2. 5 years if the property is not used directly in the production of
petroleum which shall be depreciated under the straight-line
(b) Declining‐balance method, using a rate not exceeding twice the
method.
rate which would have been used had the annual allowance been
computed under the method described in Subsection (F) (1);
Depreciation of Properties Used in Mining Operations
Section 34(F)(5)
(c) The sum‐of‐the‐years‐digit method; and (d) Any other method
which may be prescribed by the Secretary of Finance upon
An allowance for the depreciation in respect of all properties that are
recommendation of the Commissioner.
used in mining shall be computed as follows:
1. At the normal rate of depreciation if the expected life is ten
Methods in Determining the Reasonable Allowance of Deduction years or less;
2. Depreciated over any number of years between 5 years and
1. Straight Line Method – this spreads the depreciation over the expected life (if more than 10 years).
the useful life of the property or asset used in the business.
BUT NOTE:
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑃𝑟𝑜𝑝𝑒𝑟𝑡𝑦 − 𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐿𝑖𝑓𝑒 Agreement as to Useful Life on Which Rate is Based
Section 34(F)(3)
Suppose that:
• Cost of Property is P1,000,000 If the taxpayer and the Commissioner have entered into an agreement
• Estimated Life is 10 Years that is in writing that is specifically dealing with
• Estimated Scrap Value is P50,000 1. The useful life, and
2. Rate of depreciation of any property
Then, the annual depreciation is P95,000 which can be claimed therein Shall be binding to both the taxpayer and the national Government. In
as annual deduction of P95,000 for the next 10 years. But note that if this instance mutual consent is needed, as both cannot then change
the property was acquired in the middle of the taxable year, then the the agreement unilaterally.
deduction shall be made in proportion (If acquired July then half, thus
deduct only P47,500). Depreciation Deductible by NRAETB and RFC
Section 34(F)(6)
2. Declining Balance Method which uses a rate to the A reasonable allowance for deterioration is permitted as to
declining book value of the property or asset. • Property located in the Philippines
• Arising out of its use or employment
3. Sum of the Years Digit Method
Properties Not Subject to Depreciation
𝑁𝑜. 𝑜𝑓 𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑌𝑒𝑎𝑟𝑠 1. Land
𝐴𝐷 = (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑃𝑟𝑜𝑝𝑒𝑟𝑡𝑦 − 𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒)𝑥 ( ) 2. Inventories or Stock in Trade
𝑆𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 𝑌𝑒𝑎𝑟𝑠 3. Personal effects of properties (e.g. personal car)
4. Bodies of minerals if already subject to depletion deduction
Suppose that: 5. Residential buildings
• Cost of Property is P1,000,000 6. Furnitures and furnishings.
• Estimated Life is 5 years
• Scrap Value is P50,000
• 5 years, sum of the years is 15 (5+4+3+2+1)
G. DEPLETION
Year 1: P950,000 x (5 years / 15 years) = P316,666.67 Depletion [Section 34(G)]

Year 2: P950,000 x (4 years / 15 years) = P253,333.33 Depletion refers to the method of claiming deduction for the invested
Year 3: P950,000 x (3 years / 15 years) = P190,000.00 capital of an extractive industry. It is a cost-recovery method for the
Year 4: P950,000 x (2 years / 15 years) = P126,666.67 exploration and development expenditures paid or incurred by an
Year 5: P950,000 x (1 year / 15 years) = P63,333.33 extractive industry. Depletion involves operations as to non-renewable
sources or natural resources.
Comparing Straight Line Method and SYD Method
In SYD the value of the reasonable allowance of the depreciation that There are two expenditures to consider:
can be claimed as deduction declines in the succeeding years. The 1. Exploration expenditures; and
depreciation is reduced or lessened towards its remaining life. But in 2. Development expenditures
SLM, regardless of the usage of the property the amount of the
reasonable allowance for the depreciation is fixed. Depreciation Depletion
Depreciation expenses This is the exhaustion of
These are the acceptable methods of accounting depreciation. It is upon
the taxpayer to what depreciation method he is going to use. involves depreciable assets natural resources. This
(e.g. car) refers to the extraction of
4. Any Other Method minerals, including oil and
gas wells.
Some of the examples of such: Pertains to the wear and Pertains to the removal of
a. Unit of Production Method tear of the properties. natural resources.
b. Working Hours Method
Q. What happens if the mineral land has been fully exhausted but what c. Administrative Expenses Limit: The level of the
is recovered from the exploration and development expenses was only administrative expenses should not exceed 30% of
60%? How can taxpayer recover remaining 40%? – They may be the total expenses;
considered Abandonment Losses. d. Asset Distribution upon Dissolution: In such event,
the NGO’s assets would be distributed to another
NGO for similar purpose or purposes.
H. CHARITABLE AND OTHER CONTRIBUTIONS B. Contributions that are Partially Deductible
1. If the taxpayer is an Individual, only in an amount not in
Charitable and Other Contributions [Section 34(H)] excess of 10% of the taxable income without the benefit of this
deduction;
(H) Charitable and Other Contributions. – 2. If the taxpayer is a Corporation, only in an amount not in
excess of 5% of the taxable income without the benefit of this
(1) In General. - Contributions or gifts actually paid or made deduction.
within the taxable year to, or for the use of the Government of the
Philippines or any of its agencies or any political subdivision
thereof exclusively for public purposes, or to accredited domestic I. RESEARCH AND DEVELOPMENT
corporation or associations organized and operated exclusively for
religious, charitable, scientific, youth and sports development, Research and Development Expenditures
cultural or educational purposes or for the rehabilitation of Section 34 (I)
veterans, or to social welfare institutions, or to non-government
organizations, in accordance with rules and regulations This refers to those costs incident to the development of an
promulgated by the Secretary of finance, upon recommendation of experiment or of a pilot model, a plant process, a product or formula or
the Commissioner, no part of the net income of which inures to similar property and the improvement of an already existing property of
the benefit of any private stockholder or individual in an amount the type mentioned. It comprises all of the expenditure that is directly
not in excess of ten percent (10%) in the case of an individual, and distributed to the research and development activities.
five percent (5%) in the case of a corporation, of the taxpayer's
taxable income derived from trade, business or profession as (1) In General. - A taxpayer may treat research or development
computed without the benefit of this and the following expenditures which are paid or incurred by him during the
subparagraphs. taxable year in connection with his trade, business or profession
as ordinary and necessary expenses which are not chargeable to
Nature of Deduction capital account. The expenditures so treated shall be allowed as
The business enterprise of the taxpayer engaged in the trade, business deduction during the taxable year when paid or incurred.
or profession donates something either to the government or accredited
institution. These ‘donations’ are considered as allowable deductions. (2) Amortization of Certain Research and Development
Expenditures. - At the election of the taxpayer and in
Types of Charitable Contribution accordance with the rules and regulations to be prescribed by the
1. Those Subject to Limitations – there is a limit that is based Secretary of Finance, upon recommendation of the Commissioner,
either on the actual amount given or the acquisition cost. the following research and development expenditures may be
2. Those Deductible in Full treated as deferred expenses:
Requirements of Deductibility
(a) Paid or incurred by the taxpayer in connection with his trade,
business or profession;
1. It is actually paid or made to any of those specified
institutions in the Tax Code
2. It must be made within the taxable year (b) Not treated as expenses under paragraph (1) hereof; and
3. It is subject to limitation, if it is not deductible in full
4. It must be substantiated by adequate proof (c) Chargeable to capital account but not chargeable to property
of a character which is subject to depreciation or depletion.
Qualified Institution or ‘Proper Donees’
This involves the contributions or gifts to or for the use of: In computing taxable income, such deferred expenses shall be
1. Government of the Philippines or any of its political allowed as deduction ratably distributed over a period of not
subdivision exclusively for public purposes, or to less than sixty (60) months as may be elected by the taxpayer
2. Accredited Domestic Corporation or Associations that are (beginning with the month in which the taxpayer first realizes
organized and operated exclusively for religious, scientific, benefits from such expenditures).
youth and sports development, etc., or
3. Social Welfare Institutions and Non-Government The election provided by paragraph (2) hereof may be made for
Organizations any taxable year beginning after the effectivity of this Code, but
only if made not later than the time prescribed by law for filing
A. Contributions or Gifts that are Deductible in Full the return for such taxable year. The method so elected, and the
1. Donations to the government for priority activities as period selected by the taxpayer, shall be adhered to in computing
determined by NEDA; taxable income for the taxable year for which the election is made
2. Donations to certain foreign institutions or international and for all subsequent taxable years unless with the approval of
organizations pursuant to special law (this does not refer to the Commissioner, a change to a different method is authorized
NGOs, here, there must be a law). with respect to a part or all of such expenditures. The election
3. Donations to accredit NGOs subject to these conditions
shall not apply to any expenditure paid or incurred during any
a. Purpose of Donation: The NGO must be organized
taxable year for which the taxpayer makes the election.
for said purposes; scientific, research, educational,
character-building and youth and sports, health,
and no part of he income inures to the benefit of (3) Limitations on Deduction. - This Subsection shall not apply
any private individual; to:
b. Full Utilization: Must be used not later than the
15th day of the third month after the close of the (a) Any expenditure for the acquisition or improvement of land, or
taxable year for which they were received; this can for the improvement of property to be used in connection with
be extended upon grant by SOF. research and development of a character which is subject to
depreciation and depletion; and
(b) Any expenditure paid or incurred for the purpose of Example: If the employer puts in P100 Million to cover the past services
ascertaining the existence, location, extent, or quality of any and then he needs P10 Million annually to cover the current length of
deposit of ore or other mineral, including oil or gas. service, then that P100 Million cannot be claimed outright in the year
that it was put in. That P100 Million will be amortized or be claimed as a
Options of the Taxpayer deduction for 10 years. Thus:
1. The taxpayer may deduct the research and development 1. He can claim that P10,000,000 annually to cover the 1/10 of
expenses from the gross income as an ordinary and the contribution to set up the pension trust;
necessary expense; 2. Plus, he can claim the annual contribution for the current
2. The taxpayer may also choose to capitalized or amortized and service, which is P10,000,000.
may be treated as deferred expense;
3. The taxpayer has option not to deduct it at all as an expense; Hence, the total claim of P20 Million. On the 11th year, only the annual
contribution for the current service will be considered as deduction as
Amortization of Certain R&D Expenditures the employer has already recovered his expense of P100 Million in the
This is an option or at the election of the taxpayer the R&D expenses last 10 years.
as deferred payments:
• It shall then be allowed as deduction ratably OPTIONAL STANDARD DEDUCTION
• Distributed over a period of not less than 60 months
(L) Optional Standard Deduction (OSD) - In lieu of the
Irrevocability of the Deferred Payment Option
The method so elected, and the period selected by the taxpayer, shall deductions allowed under the preceding Subsections, an
be adhered to in computing taxable income for the taxable year for which individual subject to tax under Section 24, other than a
the election is made and for all subsequent taxable years nonresident alien, may elect a standard deduction in an amount
• Unless with the approval of the Commissioner, a change to not exceeding forty percent (40%) of his gross sales or gross
a different method is authorized with respect to a part or all of receipts, as the case may be. In the case of a corporation subject
such expenditures. to tax under Sections 27(A) and 28(A)(l), it may elect a standard
deduction in an amount not exceeding forty percent (40%) of its
Limitations on Deduction gross income as defined in Section 32 of this Code. Unless the
The following cannot be claimed as R&D expenditures. Any expenditure taxpayer signifies in his return his intention to elect the
1. For the acquisition or improvement of land or property to be optional standard deduction, he shall be considered as having
used in connection with research and development of a availed himself of the deductions allowed in the preceding
character which is subject to depreciation and depletion Subsections. Such election when made in the return shall be
2. Paid or incurred for the purpose of ascertaining the existence, irrevocable for the taxable year for which the return is made:
location, extent, or quality of any deposit of ore or other Provided, That an individual who is entitled to and claimed for
mineral, including oil and gas. the optional standard deduction shall not be required to submit
with his tax return such financial statements otherwise required
J. PENSION TRUSTS under this Code: Provided, further, That a general professional
partnership and the partners comprising such partnership may
(J) Pension Trusts. - An employer establishing or maintaining avail of the optional standard deduction only once, either by the
a pension trust to provide for the payment of reasonable general professional partnership or the partners comprising the
pensions to his employees shall be allowed as a deduction (in partnership: Provided, finally, That except when the
addition to the contributions to such trust during the taxable year Commissioner otherwise permits, the said individual shall keep
to cover the pension liability accruing during the year, allowed as such records pertaining to his gross sales or gross receipts, the
a deduction under Subsection (A)(1) of this Section) a reasonable said corporation shall keep such records pertaining to his gross
amount transferred or paid into such trust during the taxable income as defined in Section 32 of this Code during the taxable
year in excess of such contributions, but only if such amount (1) year, as may be required by the rules and regulations
has not theretofore been allowed as a deduction, and (2) is promulgated by the Secretary of Finance, upon recommendation
apportioned in equal parts over a period of ten (10) consecutive of the Commissioner (RA 10963).
years beginning with the year in which the transfer or payment
is made. Optional Standard Deduction
Optional Standard Deduction or OSD means an allowable
Pension Trust deduction from the professional or business income of the persons who
When a taxpayer sets up a pension trust for the first time, it has to put in are entitled and who may elect to use this kind of deduction in lieu of
so much to cover the past services or the length of service of the current itemized deduction, in the maximum amount of, 40% of gross sales or
employees. The contribution set up the pension trust is not deductible gross receipts and in the case of corporation, 40% of gross income
outright. The amount to cover past services will have to be amortized during the taxable year.
for a period of 10 years. This does not include however, the annual
contribution for the current service. Who May Avail?
Two Fold Deduction Allowed to Use OSD Not Allowed to Use OSD
1. The amounts contributed by the employer within the taxable Resident Citizen NRAETB
year to cover the pension liability accruing to such year; and Nonresident Citizen NRANETB
2. The reasonable amount transferred or paid into such trust in Resident Alien NRFC
excess of the contribution but only if such amount has not Taxable Estates and Trusts
been previous been allowed as deduction and is apportioned Partnerships
in equal parts over 10 years. Domestic Corporation
RFC
Requisites of Deductibility
Rate of Optional Standard Deduction: 40%
1. The employer must have established a pension or Base of OSD
retirement plan to provide for reasonable pensions to his 1. Individual – Gross Sales or Gross Receipts in the Taxable
employees; Year;
2. The pension plans are reasonable and actually sound; 2. Corporation – Gross Income (Gross Sales/Receipts less
3. It must be funded by the employer Cost of Goods/Cost of Services)
4. The amount contributed must no longer be subject to his
control or disposition;
5. The amount was not allowed before as deduction
Necessity of Election Since OSD is an Option Special Deductions in Section 34

Unless the taxpayer signifies in his return his intention to elect the OSD,
he shall be considered as having availed himself of the Itemized A. Net Operating Loss Carry Over
Deductions under Section 34(F). Thus, the taxpayer must have to elect. According to Atty. Donalvo, this is a kind of ‘special’ deduction because
He must specifically signify that in his tax return that is opting of OSD. this is not actually an expense but a loss on the part of the taxpayer.
Here, there was no output to speak of.
Effect of Election
B. Charitable or Other Contributions
1. Irrevocability of the Option
Atty. Donalvo submits that this another ‘special’ deduction because
these ‘donations’ are not something that is spent by the taxpayer in
This election when made in the return shall be irrevocable for the taxable
relation to the trade, business or profession. It is not something spent
year for which the return is made. Election is irrevocable for the year that
for that purpose, but the NIRC allows such.
it is made.
2. Not Required to Submit Financial Statements and OTHER FORMS OF SPECIAL DEDUCTIONS
Supporting Documents to Support his Deductions
[1] Senior Citizen’s Discount under RA 9257
Thus an individual who is entitled to and claimed for the OSD shall not
be required to submit with his tax return the financial statements RA 9257, Section 4. The establishment may claim the discounts
otherwise required. granted under (a), (f), (g) and (h) as tax deduction based on the net
cost of the goods sold or services rendered: Provided That the cost of
As to General Professional Partnerships the discount shall be allowed as deduction from gross income for the
As to general professional partnership and partners comprising such same taxable year that the discount is granted. Provided, further, That
GPP, they may avail of the OSD only once, either by the GPP or the the total amount of the claimed tax deduction net of value added tax if
partners comprising the partnership. applicable, shall be included in their gross sales receipts for tax
purposes and shall be subject to proper documentation and to the
This is because a GPP is not a taxable entity. In a GPP, the net income provisions of the National Internal Revenue Code, as amended."
will be distributed among the partners.
MANILA MEMORIAL PARK v. SECRETARY OF DSWD
It is not a taxable entity but the GPP can compute its own income and GR 175356, December 03, 2013, En Banc
expenses to determine the sharing of the partners. Since GPPs as an
entity can compute its own income and expenses, then the GPP is Facts: In this case, the petitioners here assails constitutionality of
entitled to avail of the OSD. Thus, they are given option. Section 4 of RA 7432 as amended by RA 9257 as well as the IRR by
DSWD and DOF insofar as these allow the business establishments to
When this happens, if the GPP itself avails of the OSD, then the claim the 20% discount given to senior citizens as a tax deduction.
partners, in their individual capacity, can no longer claim allowable
deductions from his distributive share. This is because the GPP Held: The validity of the 20% senior citizen discount and tax
income receive is already the net. deduction scheme under RA 9257, as an exercise of police power
of the State, has already been settled in Carlos Superdrug
Corporation. [NOTE: Court just cited here the ruling in Carlos
SPECIAL DEDUCTIONS Superdrug v. Velasco in full, discussing how police power justifies the
tax deduction scheme – that the law is a legitimate exercise of police
SECTION 34(M) REPEALED power which does not require just compensation and will necessarily
impair property rights of private establishments].
Repealed by the TRAIN Law, RA 10963 which became effective on
January 1, 2018. But for purposes of those instances covered before No compelling reason has been proffered to overturn, modify or
January 1, 2017, the provision is reproduced below: abandon the ruling in Carlos Superdrug Corporation. The present
case, thus, affords an opportunity for us to clarify the statements in
Central Luzon Drug Corporation and Carlos Superdrug Corporation.
(M) Premium Payment on Health and/or Hospitalization
Insurance of an Individual Taxpayer. - - the amount of A fair reading of Carlos Superdrug Corporation would show that we
premiums not to exceed Two thousand four hundred pesos categorically ruled therein that the 20% discount is a valid exercise of
(P2,400) per family or Two hundred pesos (P200) a month paid police power. Thus, even if the current law, through its tax deduction
during the taxable year for health and/or hospitalization scheme (which abandoned the tax credit scheme under the previous
insurance taken by the taxpayer for himself, including his family, law), does not provide for a peso for peso reimbursement of the 20%
shall be allowed as a deduction from his gross income: Provided, discount given by private establishments, no constitutional infirmity
That said family has a gross income of not more than Two obtains because, being a valid exercise of police power, payment of
hundred fifty thousand pesos (P250,000) for the taxable year: just compensation is not warranted.
Provided, finally, That in the case of married taxpayers, only the
spouse claiming the additional exemption for dependents shall be The 20% Senior Citizen Discount
entitled to this deduction. Notwithstanding the provision of the Is an Exercise of Police Power
preceding Subsections, The Secretary of Finance, upon The 20% discount is intended to improve the welfare of senior citizens
recommendation of the Commissioner, after a public hearing shall who, at their age, are less likely to be gainfully employed, more prone to
have been held for this purpose, may prescribe by rules and illnesses and other disabilities, and, thus, in need of subsidy in
regulations, limitations or ceilings for any of the itemized purchasing basic commodities.
deductions under Subsections (A) to (J) of this Section: Provided,
That for purposes of determining such ceilings or limitations, the It may not be amiss to mention also that the discount serves to honor
Secretary of Finance shall consider the following factors: (1) senior citizens who presumably spent the productive years of their
adequacy of the prescribed limits on the actual expenditure lives on contributing to the development and progress of the
nation. This distinct cultural Filipino practice of honoring the elderly is
requirements of each particular industry; and (2)effects of
an integral part of this law. As to its nature and effects, the 20% discount
inflation on expenditure levels: Provided, further, That no ceilings
is a regulation affecting the ability of private establishments to price
shall further be imposed on items of expense already subject to
their products and services relative to a special class of individuals,
ceilings under present law.
senior citizens, for which the Constitution affords preferential concern.
In turn, this affects the amount of profits or income/gross sales that a

private establishment can derive from senior citizens.
[4] Additional Claimable Compensation Expense for

In other words, the subject regulation affects the pricing, and, hence, Employing Persons with Disabilities (RA 7277)
the profitability of a private establishment. However, it does not
purport to appropriate or burden specific properties, used in the RA 7277, Section 8(b). - Private entities that employ disabled persons
operation or conduct of the business of private establishments, for the who meet the required skills or qualifications, either as regular
use or benefit of the public, or senior citizens for that matter, but merely employee, apprentice or learner, shall be entitled to an additional
regulates the pricing of goods and services relative to, and the amount deduction, from their gross income, equivalent to twenty-five percent
of profits or income/gross sales that such private establishments may (25%) of the total amount paid as salaries and wages to disabled
derive from, senior citizens. persons: Provided, however, That such entities present proof as certified
by the Department of Labor and Employment that disabled persons are
The 20% senior citizen discount has not been shown to be under their employ: Provided, further, That the disabled employee is
unreasonable, oppressive or confiscatory for failure to show burden of accredited with the Department of Labor and Employment and the
proof to defeat presumption of constitutionality. Department of Health as to his disability, skills and qualifications.
CONDITIONS FOR DEDUCTIBILITY CONDITIONS FOR DEDUCTIBILITY

1. Only that portion of gross sales exclusively used in the sale 1. The entity or business establishment must present proof
to senior citizens shall be eligible to deductible sales as certified by DOLE that disabled persons are in their
discount (e.g. only the order of the Senior is covered in employ; as secured by the employer
group meals). 2. The disabled employee is accredited by DOLE and DOH
2. Gross selling price and the sales discount must be for his disability, skills and qualifications.
separately indicated in the official receipt or the sales
invoice
3. Only the actual amount of the discount granted not Additional Deduction:
exceeding 20% of the gross selling price can be deducted • 25% of the total amount paid as salaries
from the income
4. The discount is allowed as a deduction for the same NOTE: There is no poverty level requirement unlike for SCs.
taxable year the discount is granted;
5. The business establishment is required to keep a separate [5] Cost of Facilities Improvement for Disabled Persons
and accurate record of sales which pertain to senior (RA 7277)
citizens.
RA 7277, Section 8(c). - Private entities that improve or modify their
physical facilities in order to provide reasonable accommodation for
[2] Additional Claimable Compensation Expense for disabled persons shall also be entitled to an additional deduction from
Employing Senior Citizens (RA 9257) their net taxable income, equivalent to fifty percent (50%) of the
direct costs of the improvements or modifications. This Section,
RA 9257, Section 5. xxx Private entities that will employ senior citizens however, does not apply to improvements or modifications of facilities
as employees upon effectivity of this Act, shall be entitled to an required under Batas Pambansa Bilang 344.
additional deduction from their gross income, equivalent to fifteen
percent (15%) of the total amount paid as salaries and wages to senior Additional Deduction: 50% of the Direct Costs
citizens subject to the provision of Section 34 of the National Internal
Revenue Code, as amended: Provided, however, That such [6] Breastfeeding Act or RA 10028
employment shall continue for a period of at least six (6) months:
Provided, further, that the annual income of a senior citizen does not Section 19. The expenses incurred by a private health and non-health
exceed he poverty level as determined by the National Economic and facility, establishment or institution, in complying with the provisions of
Development Authority (NEDA) for that year. this Act shall be deductible expenses for income tax purposes UP TO
TWICE THE ACTUAL AMOUNT incurred.
NOTE: This is only applicable to private entities with respect to wages 1. Provided, That the deduction shall apply for the taxable period
or salaries to SC employees. This shall be in addition to the normal when the expense were incurred;
deduction for ordinary and necessary expenses under Section 34(A). 2. Provided further, That all health and non-health facilities,
There shall be additional deduction equal to 15% of the total amount establishment and institutions shall comply with the provisions
paid as salaries to SC employees. of this Act within 6 months after its approval;
3. Provided finally, That such facilities, establishments or
institutions shall secure a Working Mother-Baby-Friendly
CONDITIONS FOR DEDUCTIBILITY Certificate from DOH to be filed with BIR before they can
1. The employment of the senior citizen must have to avail with the incentive.
continue for 6 months;
2. The annual taxable income of the senior citizens does not [7] Free Legal Assistance Act (RA 9999)
exceed the poverty level as determined by NEDA
Section 5. Incentives to Lawyers. – For purposes of this Act, a lawyer
or professional partnerships rendering actual free legal services, as
defined by the Supreme Court:
[3] Discounts to Disabled Persons (PWD) (RA 7277) • Shall be entitled to an Allowable Deduction from their gross
income:
RA 7277, Section 32. The establishments may claim the discounts o The amount that could have been collected for the
granted in sub-sections (a), (b), (c), (e), (f) and (g) as tax deductions actual free legal services rendered, or
based on the net cost of the goods sold or services rendered: provided, o Up to 10% of the gross income derived from the
however, That the cost of the discount shall be allowed as deduction actual performance of the legal profession
from gross income for the same taxable year that the discount is o Whichever is lower
granted: provided, further, That the total amount of the claimed tax
deduction net of value-added tax if applicable, shall be Included in their
• Provided: that the actual free legal aid services herein is
gross sales receipts for tax purposes and shall be subject to proper
exclusive of the 60 hour mandatory legal aid services under
documentation and to the provisions of the National Internal Revenue
Bar Matter 2012.
Code (NIRC), as amended."
NOTE: Same conditions of deductibility as SC discount. NOTE: Its either the amount that could have been collected or 10% of
the gross income derived, whichever is lower.
Requirements to Avail of the Special Deduction Answer 2: The life insurance is not deductible because even if the ER
Secure a Certificate from the PAO, the DOJ and other accredited does is not a beneficiary from it, it is not an ordinary and necessary
association by the Supreme Court indicating: expense.
1. That the legal service to be provided are within the services
defined by the Supreme Court; Losses from Sales or Exchanges of Property
2. That the agencies cannot provide the legal services to be
provided by the legal counsel. (B) Losses from Sales or Exchanges of Property. - In
computing net income, no deductions shall in any case be allowed
__________ in respect of losses from sales or exchanges of property directly or
indirectly –
SECTION 35
REPEALED (1) Between members of a family. For purposes of this paragraph,
the family of an individual shall include only his brothers and
The provision ‘Sec. 35. Allowance of Personal Exemption for Individual sisters (whether by the whole or half-blood), spouse, ancestors,
Taxpayer’ is repealed by the TRAIN Law: and lineal descendants; or
Section 12. Section 35 of the NIRC, as amended, is hereby repealed. (2) Except in the case of distributions in liquidation, between an
individual and corporation more than fifty percent (50%) in value
_________ of the outstanding stock of which is owned, directly or indirectly,
by or for such individual; or
ITEMS NOT DEDUCTIBLE (3) Except in the case of distributions in liquidation, between two
corporations more than fifty percent (50%) in value of the
In General outstanding stock of which is owned, directly or indirectly, by or
for the same individual if either one of such corporations, with
SECTION 36 respect to the taxable year of the corporation preceding the date
Items Not Deductible of the sale of exchange was under the law applicable to such
taxable year, a personal holding company or a foreign personal
(A) General Rule. - In computing net income, no deduction shall holding company;
in any case be allowed in respect to –
(4) Between the grantor and a fiduciary of any trust; or
(1) Personal, living or family expenses;
(5) Between the fiduciary of and the fiduciary of a trust and the
(2) Any amount paid out for new buildings or for permanent fiduciary of another trust if the same person is a grantor with
improvements, or betterments made to increase the value of any respect to each trust; or
property or estate; This Subsection shall not apply to intangible
drilling and development costs incurred in petroleum operations (6) Between a fiduciary of a trust and beneficiary of such trust.
which are deductible under Subsection (G) (1) of Section 34 of this
Code. NOTE: These are considered related taxpayers, which for example, a
bad debt between them cannot be deductible.
_______________
(3) Any amount expended in restoring property or in making good
the exhaustion thereof for which an allowance is or has been
Special Provisions Regarding Insurance Companies
made; or
(4) Premiums paid on any life insurance policy covering the life of SECTION 37.
any officer or employee, or of any person financially interested in Special Provisions Regarding Income and Deductions of
any trade or business carried on by the taxpayer, individual or Insurance Companies, Whether Domestic or Foreign. –
corporate, when the taxpayer is directly or indirectly a beneficiary
under such policy. (A) Special Deduction Allowed to Insurance Companies. -
In the case of insurance companies, whether domestic or foreign
Non-Deductible Items, In General doing business in the Philippines, the net additions, if any,
1. Personal, living, or family expenses required by law to be made within the year to reserve funds and
2. Amount paid for new building or permanent improvement or the sums other than dividends paid within the year on policy and
betterments made to increase the value of any property or of annuity contracts may be deducted from their gross income:
an estate Provided, however, That the released reserve be treated as income
3. Any amount spent for restoring a property or in making good for the year of release.
the exhaustion thereof despite allowance for depreciation has
been made (e.g. restoring back a van which depreciation (B) Mutual Insurance Companies. - In the case of mutual fire
deduction was made). and mutual employers' liability and mutual workmen's
4. Premiums paid on any life insurance policy covering life of any compensation and mutual casualty insurance companies
officer or employee or a person financially interested in the requiring their members to make premium deposits to provide for
business of taxpayer when taxpayer is directly or indirectly a losses and expenses, said companies shall not return as income
beneficiary under such policy. any portion of the premium deposits returned to their
a. It covers the life of any officer of employee or policyholders, but shall return as taxable income all income
person interest in taxpayer’s trade; received by them from all other sources plus such portion of the
b. The employer is directly or indirectly the beneficiary premium deposits as are retained by the companies for purposes
of such life insurance. other than the payment of losses and expenses and reinsurance
reserves.
Situation: The company by virtue of company policy insures its
company officials. Life insurance was procured by the company and the
(C) Mutual Marine Insurance Companies. - Mutual marine
company pays premiums to those life insurance.
insurance companies shall include in their return of gross income,
Answer 1: This is deductible because there is nothing that states that gross premiums collected and received by them less amounts paid
the employer is a direct or indirect beneficiary of the insurance policy, to policyholders on account of premiums previously paid by them
and can be claimed as ordinary and necessary expense.
and interest paid upon those amounts between the ascertainment Exchange of Property [Section 40(C)(1)(2)]
and payment thereof.
General Rule: If there is sale or exchange of property, the entire amount
(D) Assessment Insurance Companies. - Assessment of the gain or loss, shall be recognized.
insurance companies, whether domestic or foreign, may deduct
from their gross income the actual deposit of sums with the Exception:
officers of the Government of the Philippines pursuant to law, as 1. If in Pursuance of a Merger or Consolidation
additions to guarantee or reserve funds. If it appears that two corporations are parties to a merger or
consolidation, and if there is an exchange by one party (either
a corporation, a shareholder, a security holder) solely for
stock in a corporation which was also a party to the merger or
DETERMINATION OF AMOUNT AND RECOGNITION consolidation, there is no gain or loss recognized.
OF GAIN OR LOSS
2. Gaining Control of Said Corporation
SECTION 40 If the property is transferred to a corporation by a person
Determination of Amount and o In exchange for stock or unit of participation in such
Recognition of Gain or Loss. – corporation
o Resulting to which said person alone or together
not exceeding 4 persons, GAINS CONTROL of
(A) Computation of Gain or Loss. - The gain from the sale or
said corporation
other disposition of property shall be the excess of the amount
o Such gain or loss shall not be recognized.
realized therefrom over the basis or adjusted basis for
determining gain, and the loss shall be the excess of the basis or Rationale of Gain or Loss Not Being Recognized
adjusted basis for determining loss over the amount realized. The An account of merger, consolidation or on account of stock exchange or
amount realized from the sale or other disposition of property real property for shares of stocks, these are considered as Tax Free
shall be the sum of money received plus the fair market value of because what is parted is a capital. Here there is no gain because the
the property (other than money) received; property made in exchange of stocks, there is no loss, basically he
capital just changed its ‘form’, thus no gain or loss is recognized.
Gain – Excess of the amount realized over the basis or adjusted basis
of determining gain Exchange Not Solely in Kind [Section 40(C)(3)]
Loss – Excess of the adjusted basis for determining loss over the A. If the exchange made under pursuance of a merger or consolidation
amount realized. or gaining control of the corporation (where no gain or loss is
recognized), and the corporation, shareholder or security holder
Amount Realized – It shall be the sum of money received plus the fair
• Receives money and/or property it shall be RECOGNIZED
market value of the property (other than money) received
• If a shareholder, it shall be treated as a taxable dividend
(B) Basis of Determining Gain or Loss from Sale or B. If the Transferor Corporation, also receives money or property
Disposition of Property. – The basis of property shall be. - 1. If it distributed in pursuance with the merger or consolidation
then no gain shall be recognized; but
(1) The cost thereof in the case of property acquired on or after 2. If it is not distributed, the gain but not the loss, shall be
March 1, 1913, if such property was acquired by purchase; or recognized.
(2) The fair market price or value as of the date of acquisition, if

the same was acquired by inheritance; or
INVENTORIES
(3) If the property was acquired by gift, the basis shall be the same SECTION 41
as if it would be in the hands of the donor or the last preceding Inventories
owner by whom it was not acquired by gift, except that if such
basis is greater than the fair market value of the property at the Whenever in the judgment of the Commissioner, the use of
time of the gift then, for the purpose of determining loss, the basis inventories is necessary in order to determine clearly the income
shall be such fair market value; or of any taxpayer, inventories shall be taken by such taxpayer upon
such basis as the Secretary of Finance, upon recommendation of
(4) If the property was acquired for less than an adequate the Commissioner, may, by rules and regulations, prescribe as
consideration in money or money's worth, the basis of such conforming as nearly as may be to the best accounting practice in
property is the amount paid by the transferee for the property; or the trade or business and as most clearly reflecting the income.
(5) The basis as defined in paragraph (C)(5) of this Section, if the If a taxpayer, after having complied with the terms and a
property was acquired in a transaction where gain or loss is not conditions prescribed by the Commissioner, uses a particular
recognized under paragraph (C)(2) of this Section. method of valuing its inventory for any taxable year, then such
method shall be used in all subsequent taxable years unless:
Item Basis
If property is acquired through Acquisition Cost (i) With the approval of the Commissioner, a change to a different
purchase on or after March 1, method is authorized; or
1913
If property is acquired by Cost if the Fair Market Value of (ii) The Commissioner finds that the nature of the stock on hand
inheritance the Property when it was (e.g., its scarcity, liquidity, marketability and price movements) is
inherited such that inventory gains should be considered realized for tax
If property is acquired through Acquisition Cost or Fair Market purposes and, therefore, it is necessary to modify the valuation
donation Value at the time of donation, method for purposes of ascertaining the income, profits, or loss in
whichever is lower a more realistic manner: Provided, however, That the
If property is acquired for less Amount paid by the transferee Commissioner shall not exercise his authority to require a change
than an adequate consideration in inventory method more often than once every three (3) years:
If property was acquired through No gain or less is recognized if Provided, further, That any change in an inventory valuation
a stock exchange there is merger or consolidation method must be subject to approval by the Secretary of Finance.
or it results to control.
income, the computation shall be made in accordance with such

Inventories method as in the opinion of the Commissioner clearly reflects the
The use of inventory is to determine taxable income. The taxpayer is income. If the taxpayer's annual accounting period is other than
then required under Section 41 to use such method of valuing its a fiscal year, as defined in Section 22(Q), or if the taxpayer has no
inventory which shall be used in subsequent taxable years. The method annual accounting period, or does not keep books, or if the
will require approval from the BIR to have the inventory method of taxpayer is an individual, the taxable income shall be computed
determining the taxable income. This is usually applied to businesses on the basis of the calendar year.
which are selling merchandise.
Different Taxable Periods for Income Taxation
This refers to record keeping. The taxpayer is then required to have 1. Calendar Period
records and apply accounting methods to clearly reflect taxpayer’s true 2. Fiscal Period
income. The inventories must conform to which: 3. Short Period
1. It must be made from the best accounting practice for the
trade or business; [1] Calendar Period
2. It must reflect the true income of the taxpayer. This refers to the twelve (12) consecutive months starting on January 1
and ending on December 31. Note that individual taxpayers are only
allowed to use this calendar period.
INCOME FROM SOURCES WITHIN THE PHILIPPINES
[2] Fiscal Period
The term fiscal year means an accounting period of twelve (12) months
Section 42, NIRC
ending on the last day of any month other than December. In fiscal
period corporations (as defined under Section 22) may use the fiscal
The following items of gross income shall be treated as gross income
year period of taxable period.
coming from sources within the Philippines:
[3] Short Period
1. Interests – derived from sources within the Philippines, from bonds,
Simply, a short period is a taxable period of less than twelve (12) months
notes or other interest-bearing obligation of resident, corporate or not.
the following are the instances:
1. A corporation changes its tax, where a short period tax return
2. Dividends
shall be filed depending on when it will shift is accounting
a. From a domestic corporation; and
periods.
b. From a foreign corporation if
2. A separate final or adjustment return is required or permitted
a. Its gross income for Philippine sources of 3 years
to be made for a fractional part of the year.
b. Is more than 50% of its total gross income
Period in Which Items of Gross Income Included (Sec. 44)
3. Services - for labor or personal services performed in Philippines.
GR: The amount of all items of gross income shall be included in the
The situs is where the services are rendered.
gross income for the taxable year in which received by the taxpayer.
4. Rentals and Royalties – from the property located in the Philippines
XPN: Unless the method of accounting period for a different period.
or from any interest in such property, including rentals or royalties for
a. Use of or right or privilege to use in the Philippines of any
Period in Which Deductions and Credits Taken (Sec. 45)
copyright, patent, design or model, plan, secret formula or
GR: The deduction shall be taken for the taxable year in which they are
process, goodwill, trademark, trade brand
‘paid or accrued’ or ‘paid or incurred’ dependent upon the method of
b. Use of or right to use in the Philippines any industrial,
accounting upon the basis of which the net income is computed.
commercial or scientific equipment
c. Supply of scientific or technical information
XPN: Unless in order to clearly reflect the income, the deductions should
d. Supply of assistance that is ancillary and subsidiary and is
be taken as of a different period.
furnished as means of enabling the application or enjoyment
• Example: CIR v. Lancaster (2017): Crop Year Method
of any such property right mentioned
e. Supply of services of nonresident person or his employee as
Change of Accounting Period
to the installation or operation of machine or apparatus that is
bought from such nonresident person
f. Use or right to use, motion picture, films, video tapes SEC. 46. Change of Accounting Period. - If a taxpayer, other
than an individual, changes his accounting period from fiscal year to
5. Sale of Real Property. – If the property is located in the Philippines calendar year, from calendar year to fiscal year, or from one fiscal
year to another, the net income shall, with the approval of the
6. Sale of Personal Property – gains, profits or income from purchase Commissioner, be computed on the basis of such new accounting
of personal property within and its sale without the Philippines, or period, subject to the provisions of Section 47.
purchase without and sale within Philippines:
a. Shall be treated as derived entirely for sources within the Computation under Short Period
country in which it is sold;
b. Provided however, sale of shares of stock in a domestic SEC. 47. Final or Adjustment Returns for a Period of Less than
corporation shall be treated as derived entirely from sources Twelve (12) Months. -
within the Philippines regardless where the shares are sold.
(A) Returns for Short Period Resulting from Change of
ACCOUNTING PERIODS AND METHODS OF Accounting Period. - If a taxpayer, other than an individual, with
ACCOUNTING the approval of the Commissioner, changes the basis of computing
net income from fiscal year to calendar year, a separate final or
adjustment return shall be made for the period between the close
NIRC
of the last fiscal year for which return was made and the following
SECTION 43
December 31. If the change is from calendar year to fiscal year, a
separate final or adjustment return shall be made for the period
General Rule. – The taxable income shall be computed upon the
between the close of the last calendar year for which return was made
and the date designated as the close of the fiscal year. If the change
calendar year, as the case may be) in accordance with the method
is from one fiscal year to another fiscal year, a separate final or
of accounting regularly employed in keeping the books of such
adjustment return shall be made for the period between the close of
taxpayer, but if no such method of accounting has been so
employed, or if the method employed does not clearly reflect the
the former fiscal year and the date designated as the close of the new
fiscal year.
(B) Income Computed on Basis of Short Period. - Where a

separate final or adjustment return is made under Subsection (A) on
account of a change in the accounting period, and in all other cases
where a separate final or adjustment return is required or permitted
by rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, to be made for a fractional
part of a year, then the income shall be computed on the basis of the
period for which separate final or adjustment return is made.
Instances Wherein the Taxpayer Would have Short Period

1. When it comes to a final return of decedent
2. The return of decedent’s estate (estate is distributed to heirs)
3. In case of change of accounting period
4. Return of a tax period to a tax period is terminated.
5. The corporation dissolves its business
6. When there is an newly organized corporation.
Shift of Tax Periods; Short Period Return

When there is a shift of tax periods under Section 47. The taxpayer is
required to file a short period return to cover the gap by reason of the
shifting any months that are not yet covered by the shift. Thus, the
taxpayer is required to finish a short period return resulting in the change
of the taxable period.
Example: Calendar period ends in December 31 and if the corporation

shifts to a Fiscal Year Period staring June 1. There is a short period of
January 1 to May 31 thus the taxpayer is required to file a short period
return for the months not covered resulting from the change of the
accounting period.
Installment Basis (Section 49)

This involves a taxpayer reporting income on installment basis. Here, a
taxpayer who regularly sells on installment basis may report income by
installment basis.
Allocation of Income and Deductions (Section 50)

In the case of two or more organizations, trades or businesses (whether
or not incorporated and whether or not organized in the Philippines)
owned or controlled directly or indirectly by the same interests, the
Commissioner is authorized to distribute, apportion or allocate gross
income or deductions between or among such organization, trade or
business, if he determined that such distribution, apportionment or
allocation is necessary in order to prevent evasion of taxes or clearly to
reflect the income of any such organization, trade or business.
Here, if there is an issue on whether the income is earned by taxpayer

or not or the deduction by one or the other, there is a basis of allocation
of income and deduction which empowers the BIR to
• Distribute, apportion or allocate the gross income or
deductions
• Between or among such organization, trade or business
• If he determines that such is necessary to prevent evasion of
taxes or to clearly reflect the income
Example: Ten corporations sharing security guards should share the

deductions of security expenses.
(5) Contents of ITR

RETURNS, PAYMENTS, AND (New TRAIN Provision)
WITHHOLDING OF TAXES The ITR shall consist a maximum of 4 pages in paper or electronic form
and shall only contain the following information:
a. Personal profile and information;
Income Tax Return b. Total gross sales/receipts or income from compensation,
It is a sworn declaration including attachments thereto designed to form conduct of trade or business or profession, except income that
part of the said return in which taxpayer discloses nature and extent of are subject to final tax;
his tax liability while formally making a report of his income and allowable c. Allowable deduction
deductions for the taxable year in a prescribed income tax form. This is d. Taxable Income
a sworn statement, any falsification therein will make the person liable e. Income tax due and payable.
to tax perjury. It partakes in the form of a public document, thus it is
presumed correct.
Section 51-A
Pay as You File System
The total amount of tax imposed under Income Tax shall be paid by the Substituted Filing
person subject thereto at the time the return is filed, as a general rule. (New TRAIN Provision)
Substituted Filing
INDIVIDUAL TAX RETURN It is when the employer’s annual return may be considered as the
substitute ITR of the employee since the employer’s annual return
Section 51 already provides the same exact information contained in the
Individual Return employee’s income tax return.
(A) Requirements Different from ‘Non Filing’

In substituted filing, the individual taxpayer, although required by the law
to file his ITR, will no longer have to personally file his own income tax
(1) Individuals Required to File an Income Tax Return return but instead the employer’s annual information return filed will be
a. Resident Citizens considered as the substitute ITR of the employee.
b. Nonresident Citizen as to income within the Philippines
c. Resident Aliens as to income within the Philippines Now, ‘non-filing’ is applicable to certain types of individual taxpayers who
d. NRAETB as to income within the Philippines are not required under the law to file an income tax return.
Q. What about NRANETB?
Sec. 51-A. Substituted Filing of Income Tax Returns by
Ans. They are not required to file ITR because they are taxed
Employees Receiving Purely Compensation Income -
based on gross and it is a final tax on them. It is a final withholding
tax on their part. The BIR will withhold the income tax and the Individual taxpayers receiving purely compensation income,
withholding agent will remit it to the BIR. regardless of amount, from only one employer in the Philippines for
the calendar year, the income tax of which has been withheld
(2) Individuals Not Required to File an Income Tax Return correctly by the said employer (tax due equals tax withheld) shall not
a. An individual whose taxable income does not exceed P250K be required to file an annual income tax return. The certificate of
provided that a citizen or NRAETB engaged in business or the withholding filed by the respective employers, duly stamped
practice of profession shall file ITR regardless of amount of ‘received’ by the BIR, shall be tantamount to the substituted filing of
the gross income (Amended by TRAIN) income tax returns by said employees.
b. An individual who is a pure compensation income earner
whose withholding income taxes have been correctly withheld Requisites for Applicability
a. The withholding tax of salaries and wages have
been correctly withheld; and a. The employee receives purely compensation income during
b. The employee has only one employer, otherwise the taxable year;
he is required to file an ITR b. The employee receives income only from one employer in
c. An individual whose sole income have been subjected to a the Philippines during the taxable year;
final withholding tax (e.g. stock trader). c. The amount of tax due from the employee at the end of the
d. A minimum wage earner, or an individual who is exempt year equals to the amount of tax withheld by the employee.
from income tax pursuant to NIRC, and other laws, general or
special. The certificate of withholding filed by the employer
• Duly stamped and received by the BIR
Marginal Income Earners • Shall be tantamount to substituted filing of ITR by said
Marginal income earners or MIE are individuals whose business do not employees
realize gross sales or receipts in a certain amount (P100,000 per year
according to RMC 7-2014). They are not deriving compensation as Individuals Not Qualified for Substitute Filing
employee and their activities is principally for subsistence or livelihood. a. Individuals earning compensation income from two or more
employers concurrently or successively during the taxable
But compared to Minimum Wage Earners, MIEs are subject to income year (e.g. Employer 1 until June; Employer 2 until December)
tax, thus they are required to file income tax returns unlike minimum b. Employees deriving compensation income which taxed as not
wage earners. being correctly withheld.
c. Individuals who are mixed income or self-employed.
d. NRAETB even if purely compensation income.
(3) Information Return
If an individual not required to file an income tax return may be required (B) Where to File
• To file an Information Return, or The Income Tax Return may be filed at either:
• The ER themselves will submit an information return a. Authorized Agent Banks
especially those who are covered by the Substituted Filing b. Revenue District Officers
c. Collecting Agents
(4) Filed in Duplicate d. Duly authorized treasurer of the city or municipality in which
For those required (RC, NRC, RA, NRAETB), the ITR shall be filed in such person has his legal residence or principal place of
duplicate on the income derived from sources within (and without if RC) business
the Philippines. e. If there is no legal residence or principal place of business in
the Philippines, then with the Office of the Commissioner
(C) When to File (E) Return of Parent to Include Income of Children

The income of unmarried minors derived from properly received from a
(1) Annually living parent shall be included in the return of the parent, except
The return of any individual specified above shall be filed a. when the donor's tax has been paid on such property, or
• On or before April 15 of each year covering income for the b. when the transfer of such property is exempt from donor's tax.
preceding taxable year, but consider: c. When property from income is earned not derived from
parents
(2) Quarterly (F) Persons Under Disability
If the taxpayer is unable to make his own return, the return may be made
Estimated Tax • by his duly authorized agent or representative or
Section 74. Declaration of Income Tax for Individuals • by the guardian or other person charged with the care of his
• Those who earn self-employment income whether solely person or property,
or in combination with compensation; • the principal and his representative or guardian assuming the
• Shall make and file a declaration of his Estimated Income responsibility of making the return and incurring penalties
for the current taxable year on or before May 15 of the same provided for erroneous, false or fraudulent returns.
taxable year.
(G) Signature Presumed Correct
Estimated Tax is the amount which the individual declared as income The fact that an individual's name is signed to a filed return shall be
tax in his final adjusted and annual income tax return for preceding prima facie evidence for all purposes that the return was actually signed
taxable year minus the sum of tax declaration. by him.
Exempted from Making Declaration of Estimated Income Remedies for Excess Tax Payments
a. NRC as to income without the Philippines a. Tax Refund
b. NRANETB b. Tax Credit Certificate
c. Purely compensation income earners. c. Tax Credit against Quarterly Income Liabilities
Amendment of Estimated Income Tax Return

If, during the current taxable year, the taxpayer reasonably expects to
pay a bigger income tax, he shall file an amended declaration during CORPORATION TAX RETURNS
any interval of installment payment dates.
Section 52
Time and Filing of Payment Corporation Returns
Amount of estimated income shall be paid in FOUR INSTALLMENTS
a. First Installment: At the time of declaration (May 15)
(A) Requirements (What to File) (Amended by TRAIN)
b. Second Installment: August 15
c. Third Installment: November 15 Every corporation subject to tax, except NRFC, shall render
d. Fourth Installment: On or before May 15 of the following year in duplicate a true and accurate Quarterly income tax return and final
or adjustment return. The income tax return shall consist of maximum
Installment Payment 4 pages in paper or electronic form signed and sworn by proper offices
and shall contain:
Section 56(A)(2) (Amended by TRAIN Law)
a. Corporate profile and information
b. Gross sales/receipts or income except those subject to FT
When a tax due is in excess of Two thousand pesos (₱2,000),
c. Allowable deductions
the taxpayer other than a corporation, may elect to pay the tax in two
d. Taxable income
(2) equal installments, in which case,
e. Income tax due and payable
1. the first installment shall be paid at the time the return is filed and
Provided that the foregoing provisions shall not affect implementation of
RA 10708 or the TIMTA.
2. the second installment on or before October 15 following the close
of the calendar year
(B) When to File (Section 75 and 76)
If any installment is not paid on or before the date fixed for its payment,
the whole amount of the tax unpaid becomes due and payable together (I) Quarterly
with the delinquency penalties.
SEC. 75. - Declaration of Quarterly Corporate Income Tax. –
(3) Capital Gains Every corporation shall file in duplicate a quarterly summary
As to individuals subject tax on capital gains declaration of its gross income and deductions on a cumulative
a. From sale of domestic shares of stock not traded basis for the preceding quarter or quarters upon which the income tax,
a. File a return within 30 days after each transaction; as provided in Title II of this Code, shall be levied, collected and paid.
b. And a final consolidated return on or before April of
each year covering all stock transactions of TY The tax so computed shall be decreased by the amount of tax previously
b. From sale of real property paid or assessed during the preceding quarters and shall be paid not
a. File a return within 30 days after sale later than sixty (60) days from the close of each of the first three (3)
quarters of the taxable year, whether calendar or fiscal year.
How Paid:
Section 56(A)(3). It shall be paid on the date of return prescribed thereto (II) Final Adjustment Return (Section 76)
by the person liable thereto.
Every corporation liable to tax shall file a: Final Adjustment Return
(D) Husband and Wife • Covering total income for preceding calendar or fiscal year.
Married individuals, whether citizens, resident or nonresident aliens,
who do not derive income purely from compensation, shall file a return If the sum of the quarterly tax payments during the said taxable year is
for the taxable year to include the income of both spouses, not equal to the tax due on the entire taxable income of that year, then
• But where it is impracticable for the spouses to file one return, the corporation shall:
each spouse may file a separate return of income a. Pay the balance of the tax still due; or
• But the returns so filed shall be consolidated by the Bureau b. Carry over the excess credit
for purposes of verification for the taxable year. c. Be credit for or refunded with excess amount paid as case
may be.
Options of the Taxpayer for Discrepancies in Total Petitioner opted to carry-over as tax credit to the succeeding taxable
Quarterly Tax Payment and Final Adjustment Returns year the said overpayment by putting an “x” mark on the corresponding
If the sum of the quarterly tax payments during the said taxable year is box.
not equal to the tax due on the entire taxable income of that year, then
the corporation shall: On April 17, 2000, petitioner filed its Corporation Annual Income Tax
a. Pay the Balance Return for the calendar year ended December 31, 1999 wherein it
b. Carry Over of Excess Credit reported, among others, a taxable income in the amount of
c. Tax Refund P7,071,651.00, an income tax due of P2,333,645.00, but with an excess
income tax payment in the amount of P9,309,292.00, detailed as follows:
Irrevocability of Choice
In case the corporation is entitled to tax credit or refund of the excess of Gross Income 25,240,148.00
the estimated quarterly income taxes paid, the excess amount shown Less: Deductions 18,168,497.00
on its final adjustment return: Taxable Income 7,071,651.00
• May be carried over and credited against estimated quarterly
income tax liabilities Tax Due 2,333,645.00
• For the taxable quarters of the succeeding taxable years. Less Tax Credits/Payments
a. Prior Years Excess 4,325,152.00
Once the option to carry over and apply the excess quarterly income Credits
tax against income tax due for the taxable quarters of the succeeding b. Creditable Tax 7,317,785.00
years has been made: Withheld
• Such option shall be considered Irrevocable for that taxable Total of Tax Credits: 11,642,937.00
period, and Tax Overpayment 9,309,292.00
• No application for cash refund or issuance of tax credit
certificate shall be allowed, therefore. On the face of the 1999 return, petitioner indicated its option by putting
an “x” mark on the box “To be refunded.”
Failure to Make a Choice
On April 28, 2000, petitioner filed with the BIR an administrative claim
CIR v. PERF REALTY CORPORATION for refund in the amount of P9,309,292.00.
GR 163345, July 4, 2008
As respondent did not act on petitioner’s claim, the latter filed a petition
Facts: Respondent PERF did not indicate in its 1997 ITR the option for review before the Court of Tax Appeals (CTA) to toll the running of
whether to request a refund or claim the excess withholding tax as tax the two-year prescriptive period.
credit for the succeeding taxable year. Citing Section 76 of the NIRC,
the CIR opines that such failure is fatal to PERF's claim for refund. On September 12, 2001, the CTA rendered a Decision denying
petitioner’s claim for refund for taxable year 1998. It reasoned that since
Issue: Is the failure to indicate fatal to the claim for refund? – No. petitioner opted to carry over the 1998 tax overpayment as tax credit to
the succeeding taxable year, the same cannot be refunded pursuant to
Held: The failure of respondent to indicate its option in its annual ITR Section 76 of the National Internal Revenue Code (NIRC) of 1997.
to avail itself of either the tax refund or tax credit is not fatal to its claim
for refund. The failure to indicate a choice, however, will not bar a valid Issue: Whether petitioner is perpetually barred to refund its tax
request for a refund, should this option be chosen by the taxpayer later overpayment for taxable year 1998 since it opted to carry-over its excess
on. The requirement is only for purpose of easing tax administration tax. – Yes.
particularly the self-assessment and collection aspects.
Held: (1) Once the carry-over option is taken, actually or
In this case, PERF did not mark the refund box in its 1997 FAR. Neither constructively, it becomes irrevocable. – Section 76 of the NIRC of
did it perform any act indicating that it chose tax credit. In fact, in its 1998 1997 states –
ITR, PERF left blank the portion "Less: Tax Credit/ Payments." That
action coupled with the filing of a claim for refund indicates that PERF Section 76. Final Adjustment Return. – Every corporation liable to tax
opted to claim a refund. Under these circumstances, PERF is entitled to under Section 27 shall file a final adjustment return covering the total
a refund of its 1997 excess tax credits in the amount of P1,280,504.00. taxable income for the preceding calendar or fiscal year. If the sum of
the quarterly tax payments made during the said taxable year is not
equal to the total tax due on the entire taxable income of that year, the
CASES UNDER SECTION 76 corporation shall either:
UNITED INTERNATIONAL PICTURES v. CIR (A) Pay the balance of tax still due; or
GR 168331, October 11, 2012 (B) Carry-over the excess credit; or
By: Anna Sophia Tarhata Piang (C) Be credited or refunded with the excess amount paid, as the case
may be.
Facts: On April 15, 1999, petitioner filed with the Bureau of Internal
Revenue (BIR) its Corporation Annual Income Tax Return for the In case the corporation is entitled to a tax credit or refund of the excess
calendar year ended December 31, 1998 reflecting, among others, a net estimated quarterly income taxes paid, the excess amount shown on its
taxable income from operations in the sum of P24,961,200.00, an final adjustment return may be carried over and credited against the
income tax liability of P8,486,808.00, but with an excess income tax estimated quarterly income tax liabilities for the taxable quarters of the
payment in the amount of P4,325,152.00 arising from quarterly income succeeding taxable years. Once the option to carry-over and apply
tax payments and creditable taxes withheld at source, computed as the excess quarterly income tax against income due for the taxable
follows: quarters of the succeeding taxable years has been made, such
option shall be considered irrevocable for that taxable period and
no application for cash refund or issuance of a tax credit certificate
Gross Income 42,905,466.00
shall be allowed therefore.
Less: Deductions 17,944,266.00
Taxable Income 24,961,200.00
From the aforequoted provision, it is clear that once a corporation
exercises the option to carry-over, such option is irrevocable “for that
Tax Due 8,468,808.00 taxable period.” Having chosen to carry-over the excess quarterly
Less Tax Credits/Payments 12,811,960.00 income tax, the corporation cannot thereafter choose to apply for a cash
Tax Overpayment 4,325,152.00 refund or for the issuance of a tax credit certificate for the amount
representing such overpayment.
corresponding to its reported unutilized creditable withholding taxes for

(2) “For that taxable period” merely identifies the excess income taxable year 2001 in the amount of P69,562,412.00.
tax. – To avoid confusion, this Court has properly explained the phrase
“for that taxable period” in Commissioner of Internal Revenue v. Bank of Issue: Whether or not respondent has established its entitlement for the
the Philippine Islands. In said case, the Court held that the phrase refund or issuance of a tax credit certificate in its favor the entire amount
merely identifies the excess income tax, subject of the option, by of P69,562,412.00 representing its unutilized tax credits for taxable year
referring to the “taxable period when it was acquired by the taxpayer.” ended 31 December 2001, pursuant to the applicable provisions of the
Thus: NIRC of 1997, as amended. – Yes.
x x x Section 76 remains clear and unequivocal. Once the carry-over Held: The respondent had complied with all the prescribed
option is taken, actually or constructively, it becomes irrevocable. It requirements in order to be entitled to a tax refund. – In order to be
mentioned no exception or qualification to the irrevocability rule. entitled to a refund claim or issuance of a tax credit certificate
representing any excess or unutilized creditable withholding tax, it must
Hence, the controlling factor for the operation of the irrevocability rule is be shown that the claimant has complied with the essential basic
that the taxpayer chose an option; and once it had already done so, it conditions set forth under pertinent provisions of law and existing
could no longer make another one. Consequently, after the taxpayer jurisprudential declarations.
opts to carry-over its excess tax credit to the following taxable period,
the question of whether or not it actually gets to apply said tax credit is In Banco Filipino Savings and Mortgage Bank v. Court of Appeals, this
irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once Court had previously articulated that there are three essential conditions
the option to carry over has been made, “no application for tax refund or for the grant of a claim for refund of creditable withholding income tax,
issuance of a tax credit certificate shall be allowed therefor.” to wit:
The last sentence of Section 76 of the NIRC of 1997 reads: “Once the (1) the claim is filed with the Commissioner of Internal Revenue within
option to carry-over and apply the excess quarterly income tax against the two-year period from the date of payment of the tax;
income tax due for the taxable quarters of the succeeding taxable years (2) it is shown on the return of the recipient that the income payment
has been made, such option shall be considered irrevocable for that received was declared as part of the gross income; and
taxable period and no application for tax refund or issuance of a tax (3) the fact of withholding is established by a copy of a statement duly
credit certificate shall be allowed therefore.” The phrase “for that issued by the payor to the payee showing the amount paid and the
taxable period” merely identifies the excess income tax, subject of amount of the tax withheld therefrom.
the option, by referring to the taxable period when it was acquired
by the taxpayer. In the present case, the excess income tax credit, In addition to the abovementioned requisites, the NIRC of 1997, as
which BPI opted to carry over, was acquired by the said bank during the amended, likewise provides for the strict observance of the
taxable year 1998. The option of BPI to carry over its 1998 excess concept of the irrevocability rule, the focal provision of which is
income tax credit is irrevocable; it cannot later on opt to apply for a Section 76 thereof, quoted hereunder for easy reference:
refund of the very same 1998 excess income tax credit.
SEC. 76. Final Adjustment Return. — Every corporation liable to tax
Plainly, petitioner’s claim for refund for 1998 should be denied as its under Section 27 shall file a final adjustment return covering the total
option to carry over has precluded it from claiming the refund of the taxable income for the preceding calendar or fiscal year. If the sum of
excess 1998 income tax payment. the quarterly tax payments made during the said taxable year is not
equal to the total tax due on the entire taxable income of that year, the
corporation shall either:
COMMISSIONER OF INTERNAL REVENUE v. TEAM
[PHILIPPINES] OPERATIONS CORPORATION (A) Pay the balance of tax still due; or
GR 179260, April 02, 2014 (B) Carry-over the excess credit; or
By Anna Sophia Tarhata Piang (C) Be credited or refunded with the excess amount paid, as the case
may be.
Facts: On 15 April 2002, respondent filed its 2001 income tax return
with the BIR, reporting an income tax overpayment in the amount of In case the corporation is entitled to a tax credit or refund of the excess
P69,562,412.00 arising from unutilized creditable taxes withheld during estimated quarterly income taxes paid, the excess amount shown on its
the year, detailed as follows: final adjustment return may be carried over and credited against the
estimated quarterly income tax liabilities for the taxable quarters of the
Sales/Revenues 922,569,303.00 succeeding taxable years. Once the option to carry-over and apply
Less: Cost of Sales/Services 938,543,252.00 the excess quarterly income tax against income tax due for the
Gross Income from Operation (15,973,949.00) taxable quarters of the succeeding taxable years has been made,
Add: Non-Operating & Other 74,995,982.00 such option shall be considered irrevocable for that taxable period
Income and no application for cash refund or issuance of a tax credit
Total Gross Income 59,022,033.00 certificate shall be allowed therefor. (Emphasis supplied)
Less: Deductions 59,022,033.00
Applying the foregoing discussion to the present case, we find that
Taxable Income -
respondent had indeed complied with the abovementioned
Tax Rate 32%
requirements.
Income Tax NIL
Less: Tax Credits/Payments Here, it is undisputed that the claim for refund was filed within the two-
Creditable Tax Withheld for 27,784,217.00 year prescriptive period prescribed under Section 229 of the NIRC of
the First Three Quarters 1997, as amended. Respondent filed its income tax return for taxable
Creditable Tax Withheld for 41,778,195.00 year 2001 on 15 April 2002. Counting from said date, it indeed had until
the Fourth Quarter 14 April 2004 within which to file its claim for refund or issuance of tax
Total Tax Credits/Payments 69,652,412.00 credit certificate in its favor both administratively and judicially. Thus,
Tax Payable/(Overpayment) (P69,562,412.00) petitioner’s administrative claim and petition for review filed on 19 March
2003 and 27 March 2003, respectively, fell within the abovementioned
Respondent marked the appropriate box manifesting its intent to have prescriptive period.
the above overpayment refunded.
Likewise, respondent was able to present various certificates of
On 19 March 2003, pursuant to Section 76 in relation to Section 204 of creditable tax withheld at source from its payors, MPC and MSC, for
the NIRC of 1997, as amended, respondent filed with the BIR, a letter taxable year 2001, showing creditable withholding taxes in the
requesting for the refund or issuance of a tax credit certificate aggregate amount of P70,805,771.42 (although the refund claim was
only P69,562,412.00). Moreover, as determined by the CTA in Division,
respondent declared the income related to the claimed creditable

withholding taxes of P69,562,412.00 on its return. Second, Section 5 of RR 12-94, amending Section 10(a) of RR 6-85,
merely provides that claims for refund of income taxes deducted and
Lastly, in compliance with Section 76 of the NIRC of 1997, as withheld from income payments shall be given due course only (1) when
amended, respondent opted to be refunded of its unutilized tax it is shown on the ITR that the income payment received is being
credit (as evidenced by the “x” mark in the appropriate box of its declared part of the taxpayer’s gross income; and (2) when the fact of
2001 income tax return), and the same was not carried over in its withholding is established by a copy of the withholding tax statement,
2002 income tax return; therefore, the entire amount of duly issued by the payor to the payee, showing the amount paid and the
P69,562,412.00 may be a proper subject of a claim for refund/tax income tax withheld from that amount.
credit certificate.
What Section 76 requires, just like in all civil cases, is to prove the prima
facie entitlement to a claim, including the fact of not having carried over
the excess credits to the subsequent quarters or taxable year. It does
WINEBRENNER & IÑIGO INSURANCE BROKERS, INC v. not say that to prove such a fact, succeeding quarterly ITRs are
COMMISSIONER OF INTERNAL REVENUE absolutely needed.
GR 206526, January 28, 2015
By: Anna Sophia Tarhata Piang This simply underscores the rule that any document, other than
quarterly ITRs may be used to establish that indeed the non-carry
Facts: On April 15, 2004, petitioner filed its Annual Income Tax Return over clause has been complied with, provided that such is
for CY 2003. competent, relevant and part of the records. The Court is thus not
prepared to make a pronouncement as to the indispensability of the
About two years thereafter or on April 7, 2006, petitioner applied for the quarterly ITRs in a claim for refund for no court can limit a party to the
administrative tax credit/refund claiming entitlement to the refund of its means of proving a fact for as long as they are consistent with the rules
excess or unutilized CWT for CY 2003, by filing BIR Form No. 1914 with of evidence and fair play.
the Revenue District Office No. 50 of the Bureau of Internal Revenue
(BIR).
There being no action taken on the said claim, a petition for review was
filed by petitioner before the CTA on April 11, 2006. On April 13, 2010, UNIVERSITY PHYSICIANS SERVICES INC.-MANAGEMENT,
CTA Division partially granted petitioner’s claim for refund of excess and INC. v. COMMISSIONER OF INTERNAL REVENUE
unutilized CWT for CY 2003 in the reduced amount of ₱2,737,903.34 in GR 205955, March 07, 2018
its April 13, 2010 Decision. By: Anna Sophia Tarhata Piang
Respondent Commissioner of Internal Revenue (CIR) moved for Facts: On April 16, 2007, petitioner filed its Annual Income Tax Return
reconsideration, praying for the denial of the entire amount of refund (ITR) for the year ended December 31, 2006 with the Revenue District
because petitioner failed to present the quarterly Income Tax Returns No. 34 of the Revenue Region No. 6 of the Bureau of Internal Revenue
(ITRs) for CY 2004. To the CIR, the presentation of the 2004 quarterly (BIR), reflecting an income tax overpayment of 5,159,341.00.
ITRs was indispensable in proving petitioner’s entitlement to the claimed
amount because it would prove that no carry-over of unutilized and Subsequently, on November 14, 2007, petitioner filed an Annual ITR for
excess CWT for the four (4) quarters of CY 2003 to the succeeding four the short period fiscal year ended March 31, 2007, reflecting the income
(4) quarters of CY 2004 was made. In the absence of said ITRs, no tax overpayment of 5,159.341 from the previous period as "Prior Year’s
refund could be granted. In the CIR’s view, this was in accordance with Excess Credit”.
the irrevocability rule under Section 76 of the NIRC.
On the same date, petitioner filed an amended Annual ITR tor the short
Issue: Whether the submission and presentation of the quarterly ITRs period fiscal year ended March 31, 2007, reflecting the removal of the
of the succeeding quarters of a taxable year is indispensable in a claim amount of the instant claim in the ''Prior Year's Excess Credit". Thus, the
for refund. – No. amount thereof was changed from P 5,159,341 to P 2,231,507.
Held: (1) Section 76 of the NIRC does not require that such On October 10, 2008, petitioner filed with the respondent's office, a claim
quarterly ITRs be presented before a refund may be granted. – for refund and/or issuance of a Tax Credit Certificate (TCC) in the
There is no question that those who claim must not only prove its amount of P 2,927,834.00, representing the alleged excess and
entitlement to the excess credits, but likewise must prove that no carry- unutilized creditable withholding taxes for 2006.
over has been made in cases where refund is sought.
In view of the fact that respondent has not acted upon the foregoing
In this case, the fact of having carried over petitioner’s 2003 excess claim for refund/tax credit, petitioner filed with a Petition for Review on
credits to succeeding taxable year is in issue. According to the CTA-En April 14, 2009 before the Court in Division.
Banc and the CIR, the only evidence that can sufficiently show that
carrying over has been made is to present the quarterly ITRs. Some After trial, the CTA Division denied the petition for review for lack of
members of this Court adhere to the same view. merit. It reasoned that UPSI-MI effectively exercised the carry-over
option under Section 76 of the National Internal Revenue Code (NIRC)
The Court however cannot. of 1997.
Proving that no carry-over has been made does not absolutely On motion for reconsideration, UPSI-MI argued that the irrevocability
require the presentation of the quarterly ITRs. rule under Section 76 of the NIRC is not applicable for the reason that it
did not carry over to the succeeding taxable period the 2006 excess
Requiring that the ITR or the FAR of the succeeding year be income tax credit.
presented to the BIR in requesting a tax refund has no basis in law
and jurisprudence. The CTA Division ruled that UPSI-MI's alleged inadvertent inclusion of
the 2006 excess tax credit in the 2007 original ITR belies its own
First, Section 76 of the Tax Code does not mandate it. The law merely allegation that it did not carry over the said amount to the succeeding
requires the filing of the FAR for the preceding – not the taxable period. The amendment of the 2007 ITR cannot undo UPSI-MI's
succeeding – taxable year. Indeed, any refundable amount indicated actual exercise of the carry-over option in the original 2007 ITR, for to
in the FAR of the preceding taxable year may be credited against the do so would be against the irrevocability rule.
estimated income tax liabilities for the taxable quarters of the succeeding
taxable year. However, nowhere is there even a tinge of a hint in any The CTA En Banc ruled that UPSI-MI is barred by Section 76 of the
provisions of the [NIRC] that the FAR of the taxable year following the NIRC from claiming a refund of its excess tax credits for the taxable year
period to which the tax credits are originally being applied should also 2006. The barring effect applies after UPSI-MI carried over its excess
be presented to the BIR.
tax credits to the succeeding quarters of 2007, even if such carry-over

was allegedly done inadvertently.
Issue: Whether UPSI-MI may still be entitled to the refund of its 2006
excess tax credits in the amount of P2,927,834.00 when it thereafter
filed its income tax return (for the short period ending 31 March 2007)
indicating the option of carry-over. – No.
Held: Only the carry-over option is irrevocable. – We cannot

subscribe to the suggestion that the irrevocability rule enshrined in
Section 76 of the National Internal Revenue Code (NIRC) applies to
either of the options of refund or carry-over. Our reading of the law
assumes the interpretation that the irrevocability is limited only to the
option of carry-over such that a taxpayer is still free to change its choice
after electing a refund of its excess tax credit. But once it opts to carry
over such excess creditable tax, after electing refund or issuance of tax
credit certificate, the carry-over option becomes irrevocable.
Accordingly, the previous choice of a claim for refund, even if
subsequently pursued, may no longer be granted.
In said Annual ITR for taxable year 2005, respondent indicated that its
There are two options available to the corporation whenever it overpays excess creditable withholding tax ("CWT") for the year 2005 was "To be
its income tax for the taxable year: refunded".
1. to carry over and apply the overpayment as tax credit against On May 29, 2006, respondent filed its Quarterly Income Tax Return for
the estimated quarterly income tax liabilities of the succeeding taxable the first quarter of taxable year 2006 showing prior year's excess credits
years until fully utilized; and of P1,500,653.00.
2. to apply for a cash refund or issuance of a tax credit certificate
within the prescribed period. On August 25, 2006, respondent filed its Quarterly Income Tax Return
for the second quarter of taxable year 2006 showing prior year's excess
The provision also provides that “Once the option to carry-over and credits of P1,500,653.00.
apply the excess quarterly income tax against income tax due for the
taxable quarters of the succeeding taxable years has been made, such On November 27, 2006, respondent filed its Quarterly Income Tax
option shall be considered irrevocable for that taxable period and no Return for the third quarter of taxable year 2006 showing prior year's
application for cash refund or issuance of a tax credit certificate shall be excess credits of P1,500,653.00.
allowed therefor.”
On December 29, 2006, respondent filed with the Revenue Region No.
A perfunctory reading of the law unmistakably discloses that the 8 an administrative claim for refund of its alleged excess/unutilized CWT
irrevocable option referred to is the carry-over option only. There for the year 2005 in the amount of P1,500,653.00.
appears nothing therein from which to infer that the other choice, i.e.,
cash refund or tax credit certificate, is also irrevocable. If the intention On April 2, 2007, respondent filed its Annual Income Tax Return for
of the lawmakers was to make such option of cash refund or tax credit taxable year 2006 showing prior year's excess credits of P0.00.
certificate also irrevocable, then they would have clearly provided so.
On December 7, 2007, pending petitioner's action on respondent's claim
Aside from the uncompromising last sentence of Section 76, for refund or issuance of a tax credit certificate of its
Section 228 of the NIRC recognizes such freedom of a taxpayer to excess/unutilized CWT for the year 2005 and before the lapse of the
change its option from refund to carry-over. This law affords the period for filing an appeal, respondent filed the instant Petition for
government a remedy by means of an assessment through the Review.
issuance of a FAN without a prior PAN in case a taxpayer, who had
previously claimed a refund or tax credit certificate (TCC) of excess The CIR alleged: assuming without admitting that respondent filed a
creditable withholding tax, subsequently applies such amount as claim for refund, the same is subject to investigation by the BIR;
automatic tax credit. Section 228(c) contemplates a double respondent failed to demonstrate that the tax was erroneously or illegally
recovery by the taxpayer of an overpaid income tax that arose from collected; xxx in an action for tax refund the burden is upon the taxpayer
an over-withholding of creditable taxes. to prove that he is entitled thereto, and failure to discharge said burden
is fatal to the claim; and claims for refund are construed strictly against
In a case where the application for refund or tax credit is still the claimant, as the same partake of the nature of exemption from
pending before the BIR, but the taxpayer had in the meantime taxation.
automatically carried over its excess creditable tax in the taxable
quarters of the succeeding taxable year(s), the only judicious After trial on the merits, on March 23, 2011, the First Division rendered
course of action of the BIR is to deny the pending claim for refund. the assailed Decision granting the Petition for Review.
To insist on giving due course to the refund claim only because it was
the first option taken, and consequently disallowing the automatic tax On April 14, 2011, petitioner CIR filed a "Motion for Reconsideration",
credit, is to encourage inefficiency or to suppress administrative which was denied for lack of merit by the First Division in a Resolution
feasibility. It simply shows that the lawmakers never intended to make dated June 30, 2011.
the choice of refund or tax credit certificate irrevocable.
Not satisfied, petitioner CIR filed the instant Petition for Review.
The CTA En Banc reversed and set aside the decision dated March 23,
RHOMBUS ENERGY, INC. v. COMMISSIONER OF 2011 of the CTA First Division, citing Commissioner of Internal Revenue
INTERNAL REVENUE v. Mirant (Philippines) Operations, Corporation, it held:
GR 206362, August 01, 2018
By: Anna Sophia Tarhata Piang x x x Section 76 is clear and unequivocal. Once the carry-over option is
taken, actually or constructively, it becomes irrevocable. It mentioned no
Facts: In the meantime, on April 17, 2006, respondent filed its Annual exception or qualification to the irrevocability rule (Commissioner of
Income Tax Return ("ITR") for taxable year 2005, detailed, as follows: Internal Revenue vs. Bank of the Philippine Islands 592 SCRA 231).
Hence, the controlling factor for the operation of the irrevocability rule is
that the taxpayer chose an option; and once it had already done so, it
could no longer make another one. Consequently, after the taxpayer
opts to carry-over its excess tax credit to the following taxable period, Requisites for Tax Refund or Tax Credit Claim
the question of whether or not it actually gets to apply said tax credit is In order to be entitled to a refund claim or issuance of a tax credit
irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once certificate representing any excess or unutilized creditable withholding
the option to carry over has been made, no application for tax refund or tax, it must be shown that:
issuance of a tax credit certificate shall be allowed therefor' (supra). 1. The claim is filed with the CIR within the 2-year period from
the date of payment of tax;
Applying the foregoing rulings to the instant case, considering that 2. It is shown on the return of the recipient that the income
petitioner opted to carry-over its unutilized creditable withholding tax of payment received was declared as part of the gross income;
P1,500,653.00 for taxable year 2005 to the first, second and third 3. The fact of withholding established by a copy of a statement
quarters of taxable year 2006 when it had actually carried-over said duly issued by the payor to the payee.
excess creditable withholding tax to the first, second and third quarters (CIR v. Team Philippines, GR 179260, April 2, 2014)
in its Quarterly Income Tax Returns for taxable year 2006, said option
to carry-over becomes irrevocable. Petitioner's act of reporting in its (III) Capital Gains
Annual Income Tax Return for taxable year 2006 of prior year's excess Section 56(A)(3)
credits other than MCIT as 0.00, will not change the fact that petitioner a. From sale of domestic shares of stock not traded
had already opted the carry-over option in its first, second and third a. File a return within 30 days after each transaction;
quarters Quarterly Income Tax Returns for taxable year 2006, and said b. And a final consolidated return on or before April of
choice is irrevocable. As previously mentioned, whether or not petitioner each year covering all stock transactions of TY
actually gets to apply said excess tax credit is irrelevant and would not b. From sale of real property
change the carry-over option already made. a. File a return within 30 days after sale
Thus, the present petition praying for refund or issuance of a TCC of its (C) Where to File (Sec. 77)
unutilized creditable withholding tax for taxable year 2005 in the amount
of P1,500,653.00 must perforce be denied in view of the irrevocability
SEC. 77. Place and Time of Filing and Payment of Quarterly
rule on carry-over option of unutilized creditable withholding tax.
Corporate Income Tax. –
Issue: Is Rhombus entitled to refund? – Yes.
(A) Place of Filing. - Except as the Commissioner otherwise permits,
the quarterly income tax declaration required in Section 75 and the final
Held: The irrevocability rule took effect when petitioner opted for
adjustment return required in Section 76 shall be filed with the:
the tax refund option. – The evidence on record shows that petitioner
a. Authorized agent banks or
clearly signified its intention to be refunded of its excess creditable tax
b. Revenue District Officer or
withheld for calendar year 2005 in its Annual ITR for the said year.
c. Collection Agent or
Petitioner under Line 31 of the said ITR marked "x" on the box "To be
d. Duly authorized Treasurer of the city or municipality having
refunded". Moreover, petitioner's 2006 and 2007 Annual ITRs do not
jurisdiction over the location of the principal office of the
have any entries in Line 28A "Prior Year's Excess Credits" which only
corporation filing the return or place where its main books of
prove that petitioner did not carry-over its 2005 excess/unutilized
accounts and other data from which the return is prepared are
creditable withholding tax to the succeeding taxable years or quarters.
kept.
(Bold underscoring is supplied for emphasis)
(B) Time of Filing the Income Tax Return. -
Although the CTA En Banc recognized that Rhombus had actually
exercised the option to be refunded, it nonetheless maintained that
As for Quarterly: 60 days following the close of each of the
Rhombus was not entitled to the refund for having reported the prior
first three quarters of the taxable year.
year's excess credits in its quarterly ITRs for the year 2006, viz.:
As for FAR: On or before April 15 or on or before the 15th day
Based on the records, it is clear that respondent marked the box "To be
of the 4th month following the close of the taxable year.
refunded" in its Annual Income Tax Return. It is also clear that the 2005
excess CWT were included in the prior year's excess credits reported in
(C) Time of Payment of the Income Tax. - The income tax due on the
the 2006 Quarter ITRs. The 2006 Annual ITR did not reflect the 2005
corporate quarterly returns and the final adjustment income tax returns
excess CWT in the prior year's excess credits. (Emphasis supplied)
computed in accordance with Sections 75 and 76 shall be paid at the
time the declaration or return is filed in a manner prescribed by the
The CTA En Banc thereby misappreciated the fact that Rhombus had
Commissioner.
already exercised the option for its unutilized creditable withholding tax
for the year 2005 to be refunded when it filed its annual ITR for the
taxable year ending December 31, 2005. Based on the disquisition in (D) Electronic Filing and Payment System
Republic v. Team (Phils.) Energy Corporation, supra, the
irrevocability rule took effect when the option was exercised. In the Electronic Filing and Payment System or EFPS, Defined
case of Rhombus, therefore, its marking of the box "To be This refers to the system developed and maintained by the BIR for
refunded" in its 2005 annual ITR constituted its exercise of the electronically filing tax returns, including attachments, if any, and paying
option, and from then onwards Rhombus became precluded from taxes due thereon, specially through the internet.
carrying-over the excess creditable withholding tax. The fact that
the prior year's excess credits were reported in its 2006 quarterly Purpose for Development and Adoption of EFPS: EFPS was developed
ITRs did not reverse the option to be refunded exercised in its 2005 to provide Philippine taxpayers with top quality and convenient service
annual ITR. As such, the CTA En Banc erred in applying the through a much faster processing and immediate confirmation of filing
irrevocability rule against Rhombus. tax returns and payment of taxes due thereon. EFPS is an alternative
mode of filing returns and payments of taxes which deviates from the
Note: It appears that the Supreme Court ruled in the case of Rhombus conventional manual process of encoding paperbound tax returns which
that both the tax refund option and the carry-over option are irrevocable. is highly susceptible to human errors and intervention.
The EFPS allows the taxpayers to directly encode, submit their tax
Exception to Irrevocability
returns and pay their taxes due online over the internet through the BIR
The exception include business transformation like dissolution, such
website. EFPS would undoubtedly reduce government’s administrative
as when a corporation liquidates and dissolves. In such a case, owing
and operational costs interacting with taxpayers and in collecting their
to the cessation of business, the corporation has no more opportunity to
taxes (RMC No. 5-2002) EFPS is the internet-based system of the BIR
utilize the excess credits. Consequently, it is but fair that the dissolved
for the paperless filing of tax returns, payment of taxes due thereon, and
corporation be allowed to opt for a refund of the unutilized excess credit
submission of information. This system is available through the BIR
even if it previously chose the irrevocable option to carry-over such
Portion (RR 3-2005).
excess credits (CIR v. Mirant, GR 171742, June 15, 2001).
Coverage of the EFPS PAYMENT OF TAXES

a. Taxpayer Account Management Program (TAMP) Taxpayers
b. Accredited Importer and Prospective Importer
c. Nation Government Agencies SECTION 56
d. All Licensed Local Contractor
e. Enterprises Enjoying Fiscal Incentives (e.g. PEZA) (A) Pay as You File System [Section 56(A)(2)]
f. Top 5,000 Individual Taxpayers The total amount of tax imposed by this Title shall be paid by the person
g. Corporations with Paid-Up Capital Stock of P10M or above subject thereto:
h. Corporation with Complete Computerized Accounting System • AT THE TIME THE RETURN IS FILED
i. Procuring Government Agencies as to Withholding of VAT
and Percentage Taxes Exception:
j. Government Bidders • In the case of tramp vessels, the shipping agent and/or
k. Insurance Companies and Stock Brokers husbanding agent, and in their absence, the captain
l. Large Taxpayers o Are required to file the return pay the tax due
a. A large taxpayer is a taxpayer who has been o BEFORE THEIR DEPARTURE
classified and notified by CIR for having satisfied • Failure to file and pay, the BOC is authorized to hold the
any or combination of the criteria vessel and prevent its departure:
i. Net VAT paid or payable at least o until proof of payment of the tax is presented, or
P100,000 per quarter o a sufficient bond is filed to answer for tax due.
ii. Excise tax paid or payable at least P1M
iii. Income Tax paid or payable at least P1M (B) Installment Payment [Section 56(A)(2)]
iv. Withholding tax of at least P1M Individuals Only
v. Percentage Tax at least P100,000 per
quarter Conditions:
vi. DST of at least P1M • When a tax due is in excess of P2,000
vii. Gross sales/receipts of P1 Billion
• The taxpayer is an individual (not a corporation)
viii. Net Worth of P300,000 at close of TY
• He may elect to pay the tax in two equal installments
(RR 1-98)
If they are not covered by the criteria or conditions set above
When to Pay
they are not considered as large taxpayer.
m. Non-large taxpayer: those who volunteered • The first installment shall be paid at the time return is filed
n. Top 20,000 Private Corporations • The second installment on or before October 15 following the
close of the calendar year
Effect of Non-Payment
Mandatory Use of Electronic BIR Forms
• If any installment is not paid on or before the date fixed for its
payment:
Coverage • The WHOLE AMOUNT of tax unpaid become due and
Only those non-eFPS filers are covered. RR 6-2014 makes it to be payable together with the delinquency penalties.
mandatory for non-eFPS filers or taxpayers to use eBIR forms covering
36 BIR Forms in the preparation of and filing of their terms.
(C) Capital Gains Tax
a. Accredit Tax Agents/Practitioners and all its client-taxpayers
It shall be filed and paid
b. Accredited Printers of Principal/Supplementary Invoices
a. Within 30 days following the sale, exchange disposition or
c. One-Time Transaction Taxpayers
real property
d. Those engaged who shall file ‘No Payment Return’
b. With any
e. GOCCs
a. Authorized Agent Bank, or
f. LGUs except barangay
b. Revenue Collection Officer,
g. Cooperatives registered with NEA
c. Revenue District Office
h. LWUA
Certificate Authorizing Registration
Penalties (RMC 19-2015) Article by Garry S. Pagaspas
Q. What are the penalties for failure to file returns under the electronic This is a mandatory tax clearance involving transfer of
systems of the BIR by taxpayers mandatorily covered by eFPS or by certain properties. Once issued, it would mean that applicable taxes
eBIRForms? on such transfers of properties are being paid – capital gains tax
among other tax. This is mandatory and the title of the property will not
1. All taxpayers, who are mandatorily covered to file their eFPS or other be transferred in the absence of such CAR. Note that CAR requirement
eBIRForms, who fail to do so: applies to specific transfers of properties only, thus not all properties
• Shall be imposed a penalty of P1,000 per return are required to have certificate authorizing registration in the Philippines,
2. In addition, the taxpayer shall be imposed: civil penalties It only applies to:
• Equivalent of 25% of the tax due to be paid for filings a return a. Real properties covered by TCT
not in according with the regulations, tantamount to wrong b. Condominiums covered by CCT
venue filing. c. Shares of stock of a domestic stock corporation in the PH
3. RDOs are directed to include these non-compliant taxpayers in: (D) Deficiency Assessment [Section 56(B)]
• Priority audit program After the return is filed the CIR shall examine and assess the correct
amount of tax. The deficiency income tax so discovered shall be
• Paid upon notice and demand from Commissioner.
(E) General Professional Partnership (Section 55)
Every general professional partnership shall file, in duplicate, a return of Deficiency Situations
its income, except income exempt under Section 32(B) of this Title, The term ‘deficiency’ means:
setting forth the items of gross income and of deductions allowed by this 1. When amount of tax imposed exceeds amount shown in the
Title, and the names, Taxpayer Identification Numbers (TIN), addresses return of the taxpayer
and shares of each of the partners. 2. If no amount shown or no return, then the amount by which
the amount which tax exceeds amounts previously assessed.
WITHHOLDING OF TAXES Should the BIR find that the taxes were not properly remitted, its action
is against the withholding agent, and not against the taxpayer. In the
case at bar, PAL is the income earner and the payee of the final
SECTION 57 withholding tax, and the Agent Banks are the withholding agents who
are the payors responsible for the deduction and remittance of the tax.
Definition and Concept The failure of the Agent Banks to remit the amounts does not affect
The concept of taxation at source, refers to the deduction made by the and should not prejudice PAL. The BIR’s cause of action is against
payor, as an agent of the government, from payments of income to a the Agent Banks. Thus, PAL is not obliged to remit, let alone prove the
payee of the estimated taxes to be paid by the payee. This is then to remittance of, the taxes withheld. PAL needs only to prove that taxes
facilitate the collection of taxes and to prevent tax evasion. were withheld through Certificates of Final Taxes Withheld issued by the
Agent Banks.
Purpose
1. To provide the taxpayer a convenient manner to meet his
CHAMBER OF REAL ESTATE AND BUILDERS'
probable tax liability;
2. To ensure the collection of the income tax which could ASSOCIATIONS, INC. v. CIR
otherwise be lost or substantially reduced through failure to GR 160756, March 9, 2010
file the corresponding return; By Anna Sophia Tarhata Piang
3. To improve government cash flow; and
4. To minimize tax evasion, thus resulting in a more efficient tax Income Subject to Withholding Tax System
collection system. The withholding tax system is a procedure through which taxes
(including income taxes) are collected. Under Section 57 of RA 8424,
Nature of Withholding Tax the types of income subject to withholding tax are divided into three
It is merely a method of collecting income tax in advance. The perceived categories:
tax is collected at the source of income payment to ensure collection. In
the operation of the withholding tax system, the income payee is the (a) withholding of final tax on certain incomes;
taxpayer, the person on whom the tax is imposed, while the income pay (b) withholding of creditable tax at source and
or a separate entity, acts no more than an agent of the government for (c) tax-free covenant bonds.
the collection of the tax in order to ensure its payment (ING Bank v. CIR,
GR 167679, April 2016). As different from indirect tax like VAT, the Purposes of the Withholding Tax System
withholding tax is still on the burden of the taxpayer and not the We have long recognized that the method of withholding tax at source
withholding agent. is a procedure of collecting income tax which is sanctioned by our tax
laws. The withholding tax system was devised for three primary reasons:
Withholding Agents
The withholding agent is burdened by the law with a public duty to 1. to provide the taxpayer a convenient manner to meet his probable
collect the tax for the government. In the operation of the withholding tax income tax liability;
system, the withholding agent is not the payor, but a separate entity 2. to ensure the collection of income tax which can otherwise be lost or
acting no more than an agent for the government in the collection of the substantially reduced through failure to file the corresponding returns
tax in order to ensure it payments – merely a tax collector. and
3. to improve the government’s cash flow.
Liability for Failure to Withhold a Tax
This results in administrative savings, prompt and efficient collection of
taxes, prevention of delinquencies and reduction of governmental effort
METROBANK v. CIR to collect taxes through more complicated means and remedies.
GR 182582, April 17, 2017
Authority of Secretary to Require Withholding of Taxes
Held: Under the final withholding tax system, the amount of income tax Respondent Secretary has the authority to require the withholding of a
withheld by the withholding agent is constituted as a full and final tax on items of income payable to any person, national or juridical,
payment of the income tax due from the payee on the said income. The residing in the Philippines.
liability for payment of the tax rests primarily on the payor as a
withholding agent. Thus, in case of his failure to withhold the tax or in Such authority is derived from Section 57(B) of RA 8424 which
case of under withholding, the deficiency tax shall be collected from provides:
the payor/withholding agent. The payee is not required to file an
income tax return for the particular income. SEC. 57. Withholding of Tax at Source. –
The finality of the withholding tax is limited only to the payee's income xxx xxx xxx
tax liability on the particular income. It does not extend to the payee's
other tax liability on said income, such as when the said income is further (B) Withholding of Creditable Tax at Source. The [Secretary] may,
subject to a percentage tax. For example, if a bank receives income upon the recommendation of the [CIR], require the withholding of a tax
subject to final withholding tax, same shall be subject to percentage tax. on the items of income payable to natural or juridical persons, residing
in the Philippines, by payor-corporation/persons as provided for by law,
From the foregoing, it may be gleaned that final withholding taxes are at the rate of not less than one percent (1%) but not more than thirty-two
considered as full and final payment of the income tax due, and thus, percent (32%) thereof, which shall be credited against the income tax
are not subject to any adjustments. liability of the taxpayer for the taxable year.
The questioned provisions of RR 2-98, as amended, are well within the

PHILIPPINE AIRLINES v. CIR authority given by Section 57(B) to the Secretary, i.e., the graduated rate
GR 206079-80/206309, January 17, 2018 of 1.5%-5% is between the 1%-32% range; the withholding tax is
imposed on the income payable and the tax is creditable against the
income tax liability of the taxpayer for the taxable year.
Held: Liability to withhold is on the withholding agent. – PAL is
entitled to a refund because it is not responsible for the remittance of tax
Nature of Taxes Withheld at Source
to the Bureau of Internal Revenue. When a particular income is subject
The taxes withheld are in the nature of advance tax payments by a
to a final withholding tax, it means that a withholding agent will withhold
taxpayer in order to extinguish its possible tax obligation. They are
the tax due from the income earned to remit it to the BIR. The withholding
installments on the annual tax which may be due at the end of the
agent is the payor liable for the tax, and any deficiency in its amount
taxable year.
shall be collected from it.
Final Withholding Tax vs. Creditable Withholding Tax "the government’s cause of action against the withholding agent is
not for the collection of income tax, but for the enforcement of the
FWT CWT withholding provision of Section 53 of the Tax Code, compliance
a) The amount of income tax a) Taxes withheld on certain with which is imposed on the withholding agent and not upon the
withheld by the withholding income payments are intended taxpayer."
agent is constituted as a full and to equal or at least approximate
final payment of the income tax the tax due of the payee on said (2) The liability of the withholding agent is different from the
due from the payee on the said income. taxpayer. – Based on the foregoing, the liability of the withholding agent
income. is independent from that of the taxpayer. The former cannot be made
b)The liability for payment of the b) Payee of income is required to liable for the tax due because it is the latter who earned the income
tax rests primarily on the payor report the income and/or pay the subject to withholding tax. The withholding agent is liable only insofar as
as a withholding agent. difference between the tax he failed to perform his duty to withhold the tax and remit the same to
withheld and the tax due on the the government. The liability for the tax, however, remains with the
income. The payee also has the taxpayer because the gain was realized and received by him.
right to ask for a refund if the tax
withheld is more than the tax While the payor-borrower can be held accountable for its negligence in
due. performing its duty to withhold the amount of tax due on the transaction,
c) The payee is not required to c) The income recipient is still RCBC, as the taxpayer and the one which earned income on the
file an income tax return for the required to file an income tax transaction, remains liable for the payment of tax as the taxpayer shares
particular income. return, as prescribed in Sec. 51 the responsibility of making certain that the tax is properly withheld by
and Sec. 52 of the NIRC, as the withholding agent, so as to avoid any penalty that may arise from the
amended. non-payment of the withholding tax due.
RCBC cannot evade its liability for FCDU Onshore Tax by shifting the
RIZAL COMMERCIAL BANKING CORPORATION v. CIR blame on the payor-borrower as the withholding agent. As such, it is
G.R. No. 170257, September 7, 2011 liable for payment of deficiency onshore tax on interest income derived
By Anna Sophia Tarhata Piang from foreign currency loans, pursuant to Section 24(e)(3) of the National
Internal Revenue Code of 1993:
Facts: Petitioner Rizal Commercial Banking Corporation (RCBC) is a
corporation engaged in general banking operations. It seasonably filed Sec. 24. Rates of tax on domestic corporations.
its Corporation Annual Income Tax Returns for Foreign Currency
Deposit Unit for the calendar years 1994 and 1995. xxxx
Before proceedings before the CTA, RCBC was questioned regarding (e) Tax on certain incomes derived by domestic corporations
the deficiency FCDU onshore tax for the taxable years of 1994 and
1995. On this, RCBC contended that because the onshore tax was xxxx
collected in the form of a final withholding tax, it was the borrower,
constituted by law as the withholding agent, that was primarily liable for (3) Tax on income derived under the Expanded Foreign Currency
the remittance of the said tax. Deposit System. – Income derived by a depository bank under the
expanded foreign currency deposit system from foreign currency
The CTA upheld the assessment for deficiency final tax on FCDU transactions with nonresidents, offshore banking units in the Philippines,
onshore income and deficiency documentary stamp tax for 1994 and local commercial banks including branches of foreign banks that may be
1995 and ordered RCBC to pay the amounts plus 20% delinquency tax. authorized by the Central Bank to transact business with foreign
The CTA- En Banc upheld the CTA Division. currency depository system units and other depository banks under the
expanded foreign currency deposit system shall be exempt from all
Issue: Whether or not petitioner is liable for deficiency onshore tax for taxes, except taxable income from such transactions as may be
taxable year 1994 and 1995. – Yes. specified by the Secretary of Finance, upon recommendation of the
Monetary Board to be subject to the usual income tax payable by banks:
Provided, That interest income from foreign currency loans granted by
Held: (1) The withholding agent acts as a tax collector on behalf of such depository banks under said expanded system to residents (other
the government. - In Chamber of Real Estate and Builders’ than offshore banking units in the Philippines or other depository banks
Associations, Inc. v. The Executive Secretary, the Court has explained under the expanded system) shall be subject to a 10% tax. (Emphasis
that the purpose of the withholding tax system is three-fold: (1) to provide supplied)
the taxpayer with a convenient way of paying his tax liability; (2) to
ensure the collection of tax, and (3) to improve the government’s As a final note, this Court has consistently held that findings and
cashflow. Under the withholding tax system, the payor is the conclusions of the CTA shall be accorded the highest respect and shall
taxpayer upon whom the tax is imposed, while the withholding be presumed valid, in the absence of any clear and convincing proof to
agent simply acts as an agent or a collector of the government to the contrary.36 The CTA, as a specialized court dedicated exclusively
ensure the collection of taxes. to the study and resolution of tax problems, has developed an expertise
on the subject of taxation.37 As such, its decisions shall not be lightly
It is, therefore, indisputable that the withholding agent is merely a tax set aside on appeal, unless this Court finds that the questioned decision
collector and not a taxpayer, as elucidated by this Court in the case is not supported by substantial evidence or there is a showing of abuse
of Commissioner of Internal Revenue v. Court of Appeals, to wit: or improvident exercise of authority on the part of the Tax Court.
In the operation of the withholding tax system, the withholding agent is
the payor, a separate entity acting no more than an agent of the Kinds of Withholding
government for the collection of the tax in order to ensure its payments;
the payer is the taxpayer – he is the person subject to tax imposed by [1] At Source
law; and the payee is the taxing authority. In other words, the withholding 1. Final Withholding Tax at Source [Sec. 57(A)]
agent is merely a tax collector, not a taxpayer. Under the withholding 2. Creditable Withholding Tax at Source [Sec. 57(B)]
system, however, the agent-payor becomes a payee by fiction of
law. His (agent) liability is direct and independent from the Final Withholding Tax
taxpayer, because the income tax is still imposed on and due from The amount of income tax withheld by the withholding agent is
the latter. The agent is not liable for the tax as no wealth flowed into constituted as a full and final payment of the income due from the
him – he earned no income. The Tax Code only makes the agent payee on the said income (RR 2-98)
personally liable for the tax arising from the breach of its legal duty to
withhold as distinguished from its duty to pay tax since:
Creditable Withholding Tax The word “certified” are those certificates that are attached to income
Under the creditable withholding tax system, the taxes withheld on tax returns such as:
certain income payment are intended to be equal or at least
approximate the tax due on said income. Certificate of Creditable Tax Withheld at Source
This is a Certificate to be accomplished and issued to recipient of income
(B) Withholding of Creditable Tax at Source. - The Secretary subject to expanded withholding tax paid by a withholding agent. Every
of Finance may, upon the recommendation of the Commissioner, payor required to deduct and withhold taxes shall furnish a payee with a
require the withholding of a tax on the items of income payable to withholding tax statement showing the income payment made and the
natural or juridical persons, residing in the Philippines, by payor- amount of taxes withheld therefrom.
corporation/persons as provided for by law, at the rate of not less
than one percent (1%) but not more than thirty-two percent (32%) Issuing a creditable withholding tax certificate is an obligation of the
thereof, which shall be credited against the income tax liability of payor/withholding agent to the payee.
the taxpayer for the taxable year: Provided, That, beginning
January 1, 2019, the rate of withholding shall not be less than one As to the payee, creditable withholding tax certificate is important during
percent (1%) but not more than fifteen percent (15%) of the income the filing of QITR because this will serve proof of withholding and
payment. required to be attached to the income tax return. Without the Creditable
Tax Withholding Certificate, the taxpayer shall not be allowed the same
as tax credit (RR 2-98).
A CWT, is the tax which is withheld by the buyer/withholding agent from
his payment for the sale of the seller’s ordinary assets or services, and
Significance of the Creditable Withholding Tax Certificate
which tax is creditable against the income tax payable to the seller.
3. Quarterly Corporate Income CIR v. PNB

4. Quarterly Individual Income G.R. No. 180290, September 29, 2014
5. Compensation By Anna Sophia Tarhata Piang
6. VAT
7. Percentage Tax Facts: Petitioner questions the validity of respondent’s certificates of
creditable tax withheld at source (withholding tax certificates) and
Returns and Payments of Taxes Withheld at Source (Sec. 58) contends that even if the original certificates were offered in evidence,
respondent failed to present the various withholding agents to: (1)
(A) Quarterly Returns and Payments of Taxes Withheld. - Taxes identify and testify on their contents; and (2) prove the subsequent
deducted and withheld under Section 57 by withholding agents: remittance of the withheld taxes to the Bureau of Internal Revenue.
• shall be covered by a return
Issue: Is proof of actual remittance necessary? – No.
• and paid to, an authorized agent bank, Revenue District
Officer, Collection Agent, or duly authorized Treasurer of the
Held:
city or municipality where the withholding agent has his legal
Withholding Tax Certificate, Purpose and Significance
residence or principal place of business, or where withholding
The certificate of creditable tax withheld at source is the competent proof
agent is corporation, where principal office is located.
to establish the fact that taxes are withheld. It is not necessary for the
person who executed and prepared the certificate of creditable tax
Return for Final Withholding Tax: The return for final withholding tax
withheld at source to be presented and to testify personally to prove the
• shall be filed and the payment made authenticity of the certificates.
• within twenty-five (25) days from the close of each calendar
quarter, In Banco Filipino Savings and Mortgage Bank v. Court of Appeals, this
court declared that a certificate is complete in the relevant details that
Return for Creditable Withholding Tax: The return for creditable would aid the courts in the evaluation of any claim for refund of excess
withholding taxes creditable withholding taxes:
• shall be filed and the payment made
• not later than the last day of the month following the close of In fine, the document which may be accepted as evidence of the third
the quarter during which withholding was made: condition, that is, the fact of withholding, must emanate from the payor
itself, and not merely from the payee, and must indicate the name of the
Duties of Withholding Agent payor, the income payment basis of the tax withheld, the amount of the
1. Furnish each recipient, in respect to his or its receipts during the tax withheld and the nature of the tax paid.
calendar quarter or year, a written statement showing the income or
other payments made by the withholding agent during such quarter or At the time material to this case, the requisite information regarding
year, and the amount of the tax deducted and withheld therefrom. withholding taxes from the sale of acquired assets can be found in BIR
Form No. 1743.1. As described in Section 6 of Revenue Regulations No.
2. Submit to the Commissioner an annual information return 6-85, BIR Form No. 1743.1 is a written statement issued by the payor
containing the list of payees and income payments, amount of taxes as withholding agent showing the income or other payments made by
withheld from each payee and such other pertinent information as may the said withholding agent during a quarter or year and the amount of
be required by the Commissioner the tax deducted and withheld therefrom. It readily identifies the payor,
the income payment and the tax withheld. It is complete in the relevant
Overpayment details which would aid the courts in the evaluation of any claim for
Income upon which any creditable tax is required to be withheld at refund of creditable withholding taxes.
source under Section 57 shall be included in the return of its recipient
• But the excess of the amount of tax so withheld over the The figures appearing on the withholding tax certificate can be
tax due on his return taken at face value
• Shall be refunded to him subject provisions of Section 204; Moreover, as correctly held by the Court of Tax Appeals En Banc, the
• If the income tax collected at source is less than the tax due figures appearing in the withholding tax certificates can be taken at face
on his return, the difference shall be paid in accordance with value since these documents were executed under the penalties of
the provisions of Section 56. perjury, pursuant to Section 267 of the 1997 National Internal Revenue
Code, as amended, which reads:
Registration with Register of Deeds. - No registration of any
document transferring real property shall be effected by the Register of SEC. 267. Declaration under Penalties of Perjury. – Any declaration,
Deeds unless the Commissioner or his duly authorized representative return and other statements required under this Code, shall, in lieu of an
has CERTIFIED that such transfer has been reported, and the capital oath, contain a written statement that they are made under the penalties
gains or creditable withholding tax, if any, has been paid xxx of perjury. Any person who willfully files a declaration, return or
statement containing information which is not true and correct as to
every material matter shall, upon conviction, be subject to the penalties RR 3-2019
prescribed for perjury under the Revised Penal Code.
Validity of eCAR (Section 5)
Thus, upon presentation of a withholding tax certificate complete
The eCAR shall have a validity period of 5 YEARS reckoned from the
in its relevant details and with a written statement that it was made
date of the issuance for purpose of presenting the same to the RD.
under the penalties of perjury, the burden of evidence then shifts
Otherwise, eCAR shall be deemed permanently expired and therefore
to the Commissioner of Internal Revenue to prove that (1) the
of no force and effect. A new eCAR may thus be generated and issued
certificate is not complete; (2) it is false; or (3) it was not issued
upon request of the taxpayer for the reissuance of a new eCAR to
regularly.
replace the expired eCAR.
Proof of actual remittance not necessary
Proof of actual remittance is not a condition to claim for a refund of
Revalidation (Section 6)
unutilized tax credits. Under Sections 57 and 58 of the 1997 National All manually-issued CARs that are either due for revalidation or has not
Internal Revenue Code, as amended, it is the payor-withholding agent, been presented to the RD within the validity period and manually issued
and not the payee-refund claimant such as respondent, who is vested CARs with partial transfer of properties as prescribed in existing BIR
with the responsibility of withholding and remitting income taxes. issuances are considered expired manual CARs already and, as such,
shall no longer be valid for presentation to the RD. The said CARs shall
This court’s ruling in Commissioner of Internal Revenue v. Asian be replaced with an eCAR by the concerned Revenue District Officer
Transmission Corporation, citing the Court of Tax Appeals’ explanation, (RDO) or LT Division who issued the CAR upon presentation of the
is instructive: expired manual CAR.
. . . proof of actual remittance by the respondent is not needed in order WITHHOLDING ON WAGES
to prove withholding and remittance of taxes to petitioner. Section 2.58.3
(B) of Revenue Regulation No. 2-98 clearly provides that proof of
SECTION 79
remittance is the responsibility of the withholding agent and not of the
taxpayer-refund claimant. It should be borne in mind by the petitioner
that payors of withholding taxes are by themselves constituted as Income Tax Collected at Source
withholding agents of the BIR. The taxes they withhold are held in trust A withholding tax is an amount that such an employer withholds from
for the government. In the event that the withholding agents commit employees’ wages and pays directly to the government. The amount
fraud against the government by not remitting the taxes so withheld, withheld is a credit against the income taxes by the employee must pay
such act should not prejudice herein respondent who has been duly during the year. Wages refers to all remunerations for services
withheld taxes by the withholding agents acting under government performed by an employee for his employer including cash value of
authority. Moreover, pursuant to Section 57 and 58 of the NIRC of 1997, the remuneration paid in other kind other than cash.
as amended, the withholding of income tax and the remittance thereof
to the BIR is the responsibility of the payor and not the payee. Therefore, Wages, shall not include:
respondent . . . has no control over the remittance of the taxes withheld a. For agricultural labor paid entirely in products of the farm
from its income by the withholding agent or payor who is the agent of where the labor is performed, or
the petitioner. The Certificates of Creditable Tax Withheld at Source b. For domestic service in a private home, or
issued by the withholding agents of the government are prima facie c. For casual labor not in the course of the employer's trade or
proof of actual payment by herein respondent-payee to the business, or
government itself through said agents. d. For services by a citizen or resident of the Philippines for a
foreign government or an international organization (Sec. 78).
Certificate Authorizing Registration “More than One-Half” Rule
As discussed earlier, this is also a mandatory tax clearance involving If the remuneration paid by an employer to an employee for services
transfer of certain properties. Once issued, it would mean that performed during one-half (1/2) or more of any payroll period of not more
applicable taxes on such transfers of properties are being paid – capital than thirty-one (31) consecutive days constitutes wages, all the
gains tax among other tax. This is mandatory and the title of the remuneration paid by such employer to such employee for such period
property will not be transferred in the absence of such CAR. It will not shall be deemed to be wages; but if the remuneration paid by an
be registered to the new owner in the absence of a CAR. A CAR employer to an employee for services performed during more than one
certifies that taxes applicable to the transfer of registrable property have -half (1/2) of any such payroll period does not constitute wages, then
bee paid. none of the remuneration paid by such employer to such employee for
such period shall be deemed to be wages.
Note that CAR requirement applies to specific transfers of properties
only, thus not all properties are required to have certificate authorizing
registration in the Philippines,
Applicability
Under Section 79(A), except in case of a minimum wage earner, every
employer making payment of wages shall deduct and withhold upon
It only applies to:
such wages as tax.
a. Real properties covered by TCT
b. Condominiums covered by CCT
c. Shares of stock of a domestic stock corporation in the PH Requisites for Withholding Tax on Wages
1. There must be employer-employee relationship, one must be
able to establish the fact that there is an ER-EE relationship
NOTE: RR 22-2016
between the payor and payee.
The issuance of manually prepared certificate authorizing
2. Employee must be a natural person.
registration shall be stopped.
3. Employer must be a resident of the Philippines.
4. Compensation must be paid or payable in cash or in kind.
Currently, the Certificate Authorizing Registration (CAR) is 5. Taxable amount is gross compensation received in
manually prepared and issued, with details simply typewritten on a pre- furtherance of the employer-employee relationship.
printed, serially numbered CAR form. Due to instances in the past where 6. Amount withheld is deductible from employee’s income tax
spurious CARs had been presented to the Registry of Deeds, BIR liability.
developed the Electronic Certificate Authorizing Registration (eCAR) 7. Employer is required to file tax returns and reports regularly
System. The eCAR System is a web-based facility that automates the and provide employees a Certificate of Withholding Tax
processing and generation of CAR with bar code and is linked with the Withheld on Compensation
Land Registration Authority (LRA) thru the LRA – BIR eCAR Verification 8. Employer must make a year-end adjustment
System (LRA-BIR CVS) wherein the LRA-Registry of Deeds will be able
to verify on-line the authenticity of the eCAR presented in support of the
transfer (RR 22-2016).
Liability for Tax (Section 80) Revocable Trust

A. Employer – shall be liable for the withholding and remittance
of the correct amount of tax required to be deducted and to be SEC. 63. Revocable trusts. - Where at any time the power to
withheld. If the employer fails to withhold and remit, such tax revest in the grantor title to any part of the corpus of the trust is
shall be collected from the employer together with vested (1) in the grantor either alone or in conjunction with any
penalties or additions to the tax for failure. person not having a substantial adverse interest in the disposition
of such part of the corpus or the income therefrom, or (2) in any
B. Employee – it will collected from the employee is shown that person not having a substantial adverse interest in the disposition
the employee fails or refuses to file the withholding exemption of such part of the corpus or the income therefrom, the income of
certificate or willfully supplies false or inaccurate information. such part of the trust shall be included in computing the taxable
income of the grantor.
Filing of Return and Payment of Taxes Withheld (Section 81)
The taxes deducted and withheld by the employer on wages shall be In this case, if the grantor can revoke a trust at any time so if
• Covered by a Return, and it is a revocable trust, separate and distinct personality is not applicable
• Paid to an authorized agent bank, collection agent or duly and thus the income of the trust is added to the income of the grantor
authorized Treasurer of the city where employer resides or his and the grantor is taxed in case of a revocable trust.
principal place of business.
Income for Benefit of Grantor
The returns shall be filed and payment made within 25 days from the
close of each calendar quarter.
SEC. 64. Income for Benefit of Grantor. –
(A) Where any part of the income of a trust -

ESTATES AND TRUSTS 1. Is, or in the discretion of the grantor or of any person
not having a substantial adverse interest in the
SECTION 62-65 disposition of such part of the income may be held or
accumulated for future distribution to the grantor, or
Estate, Defined to Tax Purposes 2. May, or in the discretion of the grantor or of any person
The NIRC did not define estate in connection to taxation, but it may be not having a substantial adverse interest in the
meant to refer to the mass of properties and assets left behind by the disposition of such part of the income, be distributed to
deceased. It may also refer to all the assets and liabilities of the the grantor, or
decedent existing at the time of his death. 3. Is, or in the discretion of the grantor or of any person
not having a substantial adverse interest in the
The income that is subject to income taxation is the income received by disposition of such part of the income may be applied to
estates of deceased persons during the period of administration and of the payment of premiums upon policies of insurance on
the settlement of the estate. the life of the grantor, such part of the income of the
Trusts, Defined for Tax Purposes trust shall be included in computing the taxable income
In its technical term, a trust is a right of property, real or personal, held of the grantor.
by one party for the benefit of another. There isa confidence given by a In this case, the trust created in the benefit of the grantor.
person, the grantor; reposed in another called the trustee or the fiduciary Thus no separate and distinct personality. This shall be treated as
for the benefit of the beneficiary. Same income taxes imposed upon similar to a revocable trust.
individuals shall apply to income of any kind of property held in trust.
Fiduciary Returns
Tax Treatment
SEC. 65. Fiduciary Returns. - Guardians, trustees, executors,
General Rule: They are treated as separate persons, they are taxable
administrators, receivers, conservators and all persons or
on the basis of income earned or realized pending the settlement of the
estate for all properties held and they will be taxed like individuals. corporations, acting in any fiduciary capacity, shall render, in
duplicate, a return of the income of the person, trust or estate
Exception: Employees’ Pension Trust which is a profit sharing plan for whom or which they act, and be subject to all the provisions
for the benefit of the employee is not taxable. Employees’ pension trust, of this Title, which apply to individuals in case such person, estate
any income earned from the investment of pension trust is exempted or trust has a gross income of Twenty thousand pesos (P20,000)
from tax. or over during the taxable year. Such fiduciary or person filing the
return for him or it, shall take oath that he has sufficient
Estate: Note that the beneficiary of the estate are separate and distinct knowledge of the affairs of such person, trust or estate to enable
from the taxable estate. It is the estate that is taxed or the executor or him to make such return and that the same is, to the best of his
administrator. The persons managing the properties should take care of knowledge and belief, true and correct, and be subject to all the
the payment of the tax. provisions of this Title which apply to individuals: Provided, That
a return made by or for one or two or more joint fiduciaries filed
Consolidation of Two or More Trusts in the province where such fiduciaries reside; under such rules
When two or more trusts are created from the same trustor. The taxable and regulations as the Secretary of Finance, upon
income of the trust is consolidated and the payment of the trust is recommendation of the Commissioner, shall prescribe, shall be a
shared by proportion of the trust depending on the share of the income. sufficient compliance with the requirements of this Section.
Exemptions These fiduciary returns are those filed for the benefit of
Under the TRAIN Law, Section 62 on the P20,000 exemption is already another like the trustor or estate. The income tax return of estates and
repealed. Dean Quibod says that estates and trusts, as individuals, are trusts are the same with the ITR of the individuals.
also entitled to deductions.. The taxable income of estates and trusts
shall be deducted by the amount of income distributed by the
beneficiaries, meaning the amount of income given to the beneficiaries
END OF TAXATION I
is treated as a deductible amount from the taxable income of estates
and trusts. Estates and trusts now pay tax on graduated basis, hence “..but in this world nothing can be said to be certain, except
the first P250,000 is exempted.
death and taxes.”
- Benjamin Franklin

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ABAKADA v. ERMITA ..........................................................

C. Comparison with Other Powers ............... 21 B. Constitutional Limitations .........................42

TOLENTINO v. SECRETARY OF FINANCE ....................... 50 CIR v. TRANSFIELD ............................................................ 68

PRELIMINARIES .......................................... 78 5. Percentage of Completion Method ........... 88

CIR v. MANNING ............................................................... 105 Improperly Accumulated Earnings Tax (Section

Special Domestic Corporations ................... 117 ITEMS NOT DEDUCTIBLE ............................145

RETURNS, PAYMENTS, AND

PAYMENT OF TAXES ................................... 156

WITHHOLDING ON WAGES ........................ 160

the government without infringing upon the theory of separation of

A. Definition The exception, however, lies in the case of municipal corporations, to

documents requested by BIR. Similar Letters of Authority were issued

FILM DEVELOPMENT COUNCIL v. COLON HERITAGE

Disposition: Issue: Whether Secs. 13 and 14 of RA 9167 are unconstitutional. –

Indicative of the legislative intent to carry out the Constitutional mandate

Section 28(2) of Article VI of the Constitution provides for such. There is

Factors to Determine Whether Tax Subject/Object

Police Power and Power of Taxation PAMBANSANG KOALISYON v. EXECUTIVE SECRETARY

The amount of tax collected is The license fee should not

GEROCHI v. DEPARTMENT OF ENERGY

Disposition: PAMBANSANG KOALISYON v. EXECUTIVE SECRETARY

The power of taxation, on the other hand, is circumscribed by inherent

Requisites to Qualify Taking as an

1 I. Fiscal Adequacy The principle of fiscal adequacy as a characteristic of a sound tax

Petitioners assert that the substantiation requirements for claiming input

Taxes, being the lifeblood of the government, should be

Exception: When the law itself expressly provides for a liberal

CIR v. ACOSTA In 1994, respondent received a Preliminary Assessment Notice for

Two Forms of Double Taxation

NURSERY CARE CORPORATION v. ACEVEDO ERICSSON TELECOM v. CITY OF PASIG

Modes of Eliminating Double Taxation

[2a] In the exemption method, the income or capital which is taxable

The similarity in the circumstances of payment of taxes is a

In CIR v. S.C. Johnson (1999), tax credit method is applied where

Tax credit generally refers to an amount that is subtracted directly from

As illustrated in CIR v. S.C. Johnson (1999), the tax deduction method

Tax deduction is a subtraction from income for tax purposes, or an

Tax Credit Tax Deduction

Tax Reduction as Atty. Donalvo posits, is more of a legislative measure.

Public Purpose is the Heart of Taxation

Economic Nationalism Should be Read with

International Comity: Respect between Foreign Equals V. Exemption of Government Entities

Can the sovereign tax another sovereign? Government Entities

2006 MIAA Ruling In Effect Reversed 1996 MCIAA Ruling

Equal Protection, Explained

In this case, the tax law is uniform as it provides a standard rate of 0%

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue

However, due to the legislative classification freeze, they continued

At this point, what is important to note is that, as a result of the Senate

Thus, all the changes or modifications made by the Bicameral

SOUTHERN CROSS v. CEMENT MANUFACTURERS

• Churches and personages or convents appurtenant thereto

Exemption Granted: Exempt for taxes and duties.

[2] Proprietary Educational Institutions Judicial Power of the Supreme Court

TOLENTINO v. SECRETARY OF FINANCE

ARTICLE III, SECTION 5 Claims of Religious Freedom

Held: The constitutional guaranty of the free exercise and enjoyment of

Scope and Coverage of the Non-Impairment Clause ARTICLE XII, SECTION 11

those agreed to by the taxing authority in contracts, such as those

Escape From Taxation Ways of Shifting Taxation