Memory Aid in Tax

San Beda College of Law 1
MEMORY AID IN TAXATION LAW
TAXATION LAW
6. levied for a public purpose.

GENERAL PRINCIPLES
REQUISITES OF A VALID TAX
POWER OF TAXATION should be for a public purpose
TAXATION – power by which the the rule of taxation shall be uniform
sovereign through its law-making body that either the person or property taxed
raises revenue to defray the necessary be within the jurisdiction of the
expenses of government from among taxing authority
those who in some measure are that the assessment and collection of
privileged to enjoy its benefits and must certain kinds of taxes guarantees
bear its burdens. against injustice to individuals,
especially by way of notice and
Two Fold Nature of the Power opportunity for hearing be provided
of Taxation the tax must not impinge on the
23 It is an inherent attribute of inherent and Constitutional
sovereignty limitations on the power of taxation
24 It is legislative in character
THEORIES AND BASES OF TAXATION
Extent of Taxing Power 0 Lifeblood Theory
Subject to constitutional and Taxes are what we pay for civilized
inherent restrictions, the power of society. Without taxes, the government
taxation is regarded as comprehensive, would be paralyzed for lack of the
unlimited, plenary and supreme. motive power to activate and operate it.
Hence, despite the natural reluctance to
SCOPE OF LEGISLATIVE TAXING POWER surrender part of one's hard-earned
23 Amount or rate of tax income to the taxing authorities, every
24 Apportionment of the tax person who is able to must contribute
25 Kind of tax his share in the running of the
26 Method of collection government. (CIR v. Algue, Inc.)
27 Purpose/s of its levy, provided it is
for public purpose 0 Necessity Theory
28 Subject to be taxed, provided it is The power to tax is an attribute of
within its jurisdiction sovereignty emanating from necessity. It
29 Situs of taxation is a necessary burden to preserve the
State's sovereignty and a means to give
TAXES – enforced proportional the citizenry an army to resist an
contributions from the persons and aggression, a navy to defend its shores
property levied by the law-making body from invasion, a corps of civil servants
of the State by virtue of its sovereignty to serve, public improvements designed
in support of government and for public for the enjoyment of the citizenry and
needs. those which come within the State's
territory, and facilities and protection
CHARACTERISTICS OF TAXES which a government is supposed to
23 forced charge; provide. (Phil. Guaranty Co., Inc. v. CIR)
24 pecuniary burden payable in money;
25 levied by the legislature; 0 Benefits-Protection / Reciprocity
26 assessed with some reasonable rule Theory
of apportionment; (see theoretical Taxation is described as a symbiotic
justice) relationship whereby in exchange of the
27 imposed by the State within its benefits and protection that the citizens
jurisdiction; get from the Government, taxes are
paid. (CIR v. Algue, Inc.)
TAXATION LAW COMMITTEE

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CHAIRPERSON: Charmaine Torres ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,
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Jr., Ryan Co, Edwin Torres :MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee Guillermo
Note: While taxes are intended for persons, property or other privileges to
general benefits, special benefits to be taxed.
taxpayers are not required. The The court‘s power in taxation is
Government renders no special or limited only to the application and
commensurate benefit to any particular interpretation of the law.
person or property.
Note: The principle of judicial non-
IS THE POWER TO TAX THE POWER TO interference extends to the
DESTROY? administrative realm.
0 “Power to tax is the power to
destroy” (Marshall Dictum) – refers to ASPECTS OF TAXATION
the unlimitedness and the degree or ← Levy or imposition of the tax (tax
vigor with which the taxing power may legislation)
be employed to raise revenue. ← Enforcement or tax administration
1 the financial needs of the State may (tax administration)
outrun any human calculation, so the
power to meet those needs by taxation BASIC PRINCIPLES OF A SOUND TAX SYSTEM
must not be limited even though taxes (KEY: FAT)
become burdensome or confiscatory. ← Fiscal Adequacy – sufficiency to
meet government expenditures and
“Power to tax is not the power to other public needs.
destroy while the Supreme Court sits” ← Administrative Feasibility/
(Holmes Dictum) – the power to tax Convenience – capability of being
knows no limit except those expressly effectively enforced.
stated in the Constitution. ← Theoretical Justice – based on the
taxpayer‘s ability to pay; must be
Marshall and Holmes Dictum Reconciled progressive. (Ability to Pay Theory)
Although the power to tax is almost
unlimited, it must not be exercised in an POLICE EMINENT
TAXATION
arbitrary manner. If the abuse is so POWER DOMAIN
great so as to destroy the natural and 1. Purpose
fundamental rights of people, it is the To raise To promote To facilitate
duty of the judiciary to hold such an act revenue public the State‘s
unconstitutional. purpose need of
through property for
regulations public use
PURPOSES AND OBJECTIVES OF TAXATION
2. Amount of Exaction
Revenue – basically, the purpose of No limit Limited to No exaction;
taxation is to provide funds or the cost of but private
property with which the State regulation, property is
promotes the general welfare and issuance of taken by the
protection of its citizens. the license or State for
surveillance public
Non-Revenue (Key: PR2EP)
purpose
0 Promotion of general welfare
1 Regulation
2 Reduction of social inequality
3 Encourage economic growth
4 Protectionism ← Benefits Received
No special No direct A direct
POWER OF JUDICIAL REVIEW IN TAXATION or direct benefit is benefit
benefit is received; a results in the
As long as the legislature, in imposing
received by healthy form of just
a tax, does not violate applicable the economic compensation
constitutional limitations or restrictions, it taxpayer; standard of to the
is not within the province of the courts to merely society is property
inquire into the wisdom or policy of the general attained owner
exaction, the motives behind it, the benefit of
protection
amount to be raised or the

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CHAIRPERSON : Charmaine Torres ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,
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San Beda College
of Law 3
4. Non-impairment of Contracts registration fees are regulatory

Contracts Contracts Contracts may exactions and not revenue measures.
may not be may be be impaired
impaired impaired
b. The tax imposed on videogram
5. Transfer of Property Rights establishments is not only regulatory but
Taxes paid No transfer Transfer is a revenue measure because the earnings
become part but only effected in
of public restraint in favor of the
of such establishments have not been
funds its exercise State subject to tax depriving the government
of an additional source of income. (Tio
6. Scope
All persons, All persons, Only upon a
v. Videogram Regulatory Board, 151
property and property, particular SCRA 208)
excises rights and property
privileges c. The ―coconut levy funds‖ were
all raised under the state‘s taxing and
SYSTEMS OF TAXATION police powers.
Global System Schedular System The state‘s concern to make it a
strong and secure source not only in the
A system A system employed livelihood of the significant segment of
employed where where the income tax the population, but also of export
the tax system treatment varies and earnings, the sustained growth of which
views is made to depend on is one of the imperatives of the
indifferently the the kind or category
tax base and of taxable income of
economic growth.‖ Philippine Coconut
generally treats in the taxpayer. Producers Federation, Inc. Cocofed v.
common all Presidential Commission on Good
categories of Government (178 SCRA 236, 252)
taxable income of
the individual. CONSTRUCTION OF TAX LAWS
A system which A system which 1. Public purpose is always presumed.
taxes all itemizes the different 2. If the law is clear, apply the law in
categories of incomes and provides accordance to its plain and simple
income except for varied percentages
tenor.
certain passive of taxes, to be
incomes and applied thereto. 3. A statute willnot be construed as
capital gains. It imposing a tax unless it does so
prescribes a clearly, expressly and
unitary but unambiguously.
progressive rate 4. In case of doubt, it is construed most
for the taxable strongly against the Government,
aggregate incomes and liberally in favor of the
and flat rates for taxpayer.
certain passive
5. Provisions of a taxing act are not to
incomes derived
by individuals.
be extended by implication.
6. Tax laws operate prospectively
EXAMPLES OF TAXES LEVIED WITH A unless the purpose of the legislature
REGULATORY PURPOSE, OR COMBINED to give retrospective effect is
EXERCISE OF POLICE POWER AND THE POWER expressly declared or may be
OF TAXATION. implied from the language used.
7. Tax laws are special laws and
a. Motor vehicle registration fees prevail over a general law.
are now considered revenue or tax
NATURE OF TAX LAWS
measures.(Pal v. Edu, G.R No. L-41383,
August 15,1988) 1. Not political in character
This case reversed the doctrine 2. Civil in nature, not subject to ex
previously held in Republic v. Philippine post facto law prohibitions
Rabbit Bus Lines, Inc., 32 SCRA 211, to 3. Not penal in character
the effect that motor vehicle

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Law 4
TAXES ARE PERSONAL TO THE TAXPAYER the tax falls on one person but
1. A corporation‘s tax delinquency the burden thereof can be
cannot be enforced against its shifted or passed on to another.
stockholders. (Corporate Entity 3. As to purpose:
Doctrine) a. General Tax – levied for the
Exception: Stockholders may be general or ordinary purposes of
held liable for unpaid taxes of a the Government
dissolved corporation: b. Special Tax – levied for special
a. if it appears that the corporate purposes
assets have passed into their 4. As to manner of computation:
hands or a. Specific Tax – the computation
b. when the stockholders have of the tax or the rates of the tax
unpaid subscriptions to the is already provided for by law.
capital of the corporation b. Ad Valorem Tax – tax upon the
value of the article or thing
2. Estate taxes are obligations that subject to taxation; the
must be paid by the executor or intervention of another party is
administrator out of the net assets needed for the computation of
and cannot be assessed against the the tax.
heirs. 5. As to taxing authority:
Exception: If prior to the payment a. National Tax – levied by the
of the estate tax due, the properties National Government
of the deceased are distributed to b. Local Tax – levied by the local
the heirs, then the latter is government
subsidiary liable for the payment of 6. As to rate:
such portion of the estate tax as his a. Progressive Tax – rate or
distributive share bears to the total amount of tax increases as the
value of the net estate. (Sec. 9, amount of the income or earning
Rev. Regs. No. 2-2003; see CIR vs. to be taxed increases.
Pineda G.R. No. L-22734. b. Regressive Tax – tax rate
September 15, 1967)) decreases as the amount of
income to be taxed increases.
CLASSIFICATION OF TAXES c. Proportionate Tax – based on a
1. As to subject matter: fixed proportion of the value of
a. Personal Tax – taxes are of fixed the property assessed.
amount upon all persons of a
certain class within the IMPOSITIONS NOT STRICTLY CONSIDERED AS
jurisdiction without regard to TAXES
property, occupation or business 1. Toll – amount charged for the cost
in which they may be engaged. and maintenance of the property
b. Property Tax – assessed on used.
property of a certain class 2. Penalty – punishment for the
c. Excise Tax – imposed on the commission of a crime.
exercise of a privilege 3. Compromise Penalty – amount
d. Customs Duties – duties charged collected in lieu of criminal
upon the commodities on their prosecution in cases of tax
being imported into or exported violations.
from a country. 4. Special Assessment – levied only on
2. As to burden: land based wholly on benefit
a. Direct Tax – both the incidence accruing thereon as a result of
of or liability for the payment of improvements or public works
the tax as well as the impact or undertaken by government within
burden of the tax falls on the the vicinity.
same person. 5. License or Fee – regulatory
b. Indirect Tax - The incidence of imposition in the exercise of the
or liability for the payment of police power.

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Law 5
6. Margin Fee – exaction designed to

stabilize the currency. Normally paid after Normally paid
7. Debt – a sum of money due upon the start of a before
contract or one which is evidenced business commencement of
business
by judgment.
8. Subsidy – a legislative grant of Taxes, being the License fee may be
money in aid of a private enterprise lifeblood of the with or without
deemed to promote the public State, cannot be consideration
welfare. surrendered except
9. Customs duties and fees – duties for lawful
charged upon commodities on their consideration
being transported into or exported
from a country. Non-payment does Non-payment
10. Revenue – a broad term that not make the makes the business
business illegal but illegal
includes taxes and income from
maybe a ground for
other sources as well. criminal
11. Impost – in its general sense, it prosecution
signifies any tax, tribute or duty. In
its limited sense, it means a duty on TEST IN DETERMINING IF THE IMPOSITION IS A
imported goods and merchandise. TAX OR A LICENSE FEE
If the purpose is primarily revenue
Tax Special or if revenue is, at least, one of the real
Assessment and substantial purposes, then the
exaction is a tax. If the purpose is
Imposed on persons, Levied only on land
property and excises
regulatory in nature, it is a license. (PAL
v. Edu)
Personal liability Cannot be made a
attaches on the personal liability of Tax Debt
person assessed in the person assessed
case of non-payment An obligation Created by contract
imposed by law
Not based on any Based wholly on
special or direct benefit
Due to the May be due to the
benefit
government in its government but in
Levied and paid Exceptional both as sovereign capacity its corporate
annually to time and locality capacity
Exemption granted Exemption does not Payable in money Payable in money,

is applicable (Art. apply. property or services
VI, Sec. 28(3) 1987 N.B. If property is
Constitution) exempt from Real Does not draw Draws interest if
Property Tax, it is interest except in stipulated or
also exempt from case of delinquency delayed
Special Assessment.
Not assignable Assignable
Tax License Fee Notsubject to Subject to

compensation or compensation or
Based on the power Emanates from set-off set-off
of taxation police power
Non-payment is No imprisonment in
To generate Regulatory punished by case of non-
revenue imprisonment payment (Art. III,
except in poll tax Sec. 20 1987
Amount is unlimited Amount is limited Constitution)
to the cost of (1)
issuing the license, Imposed only by Can be imposed by
and (2) inspection public authority private individual
and surveillance

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Law 6
TEST IN DETERMINING IF THE IMPOSITION IS A compensation takes place by operation

TAX OR A LICENSE FEE of law. (Domingo v. Garlitos)
If the purpose is primarily revenue or
if revenue is, at least, one of the real DOCTRINE OF EQUITABLE RECOUPMENT NOT
and substantial purposes, then the FOLLOWED IN THE PHILIPPINES
exaction is a tax. If the purpose is A tax presently being assessed
regulatory in nature, it is a license. against a taxpayer which has prescribed
(PAL v. Edu) may not be recouped or set-off against
an overpaid tax the refund of which is
Tax Debt also barred by prescription. It is against
public policy since both parties are
An obligation Created by contract guilty of negligence.
imposed by law
Tax Toll
Due to the May be due to the
government in its government but in Enforced A sum of money for
sovereign capacity its corporate proportional the use of
capacity contributions from something, a
persons and property consideration which
Payable in money Payable in money, is paid for the use of
property or services a property which is
of a public nature;
Does not draw Draws interest if e.g. road, bridge
interest except in stipulated or
case of delinquency delayed A demand of A demand of
sovereignty proprietorship
Not assignable Assignable
No limit as to the Amount of toll
amount of tax depends upon the
Not subject to Subject to
cost of construction
compensation or compensation or or maintenance of
set-off set-off the public
improvement used
Non-payment is No imprisonment in
punished by case of non- Imposed only by the May be imposed by:
imprisonment payment (Art. III, State (1) Government
except in poll tax Sec. 20 1987 (2) Private
Constitution) individuals or
entities
Imposed only by Can be imposed by
public authority private individual Tax Penalty
COMPENSATION OR SET-OFF Enforced Sanction imposed as

General Rule: Taxes cannot be the proportional a punishment for
contributions from violation of a law
subject of compensation or set-off.
persons and or acts deemed
Reasons: property injurious; violation
1. lifeblood theory of tax laws may give
2. taxes are not contractual rise to imposition of
obligation but arise out of duty penalty
to the government
3. the government and the Intended to raise Designed to regulate
taxpayer are not mutually revenue conduct
creditors and debtors of each
other. (Francia v. IAC) May be imposed May be imposed by:
only by the (1) Government
Exception: When both obligations are
government (2) Private
due and demandable as well as fully individuals or
liquidated and all the requisites for a entities
valid compensation are present,

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of Law 7
Tax Tariff General Rule: The power of taxation is

peculiarly and exclusively exercised by
All embracing term A kind of tax the legislature. (See Scope of
to include various imposed on articles Legislative Taxing Power, supra)
kinds of enforced which are traded - refers to tax legislation
contributions upon internationally Exceptions to Non-delegability:
persons for the
attainment of
1. Flexible Tariff Clause: Authority of
public purposes the President to fix tariff rates,
import and export quotas, tonnage
TAXPAYERS’ SUIT and wharfage dues, and other duties
A case where the act complained of or imposts. (Art. VI, Sec.28(2), 1987
directly involves the illegal disbursement Constitution)
of public funds derive from taxation 2. Power of local government units to
(Justice Melo, dissenting in Kilosbayan, levy taxes, fees, and charges. (Art.
Inc vs Guingona, Jr.) X, Sec. 5, 1987 Constitution)
3. Delegation to administrative
TAXPAYERS AND PUBLIC OFFCIALS HAVE LOCUS agencies for implementation and
STANDI collection.
REQUISITES FOR TAXPAYERS’ SUIT - merely refers to tax administration
a. The tax money is being extracted or implementation
and spent in violation of specific
constitutional protections against (3) SITUS OR TERRITORIALITY OF TAXATION
abuses of legislative power. The power to tax is limited only to
b. That public money is being deflected persons, property or businesses within
to any improper purpose (Pascual vs the jurisdiction or territory of the taxing
Secretary of Public Works) power.
← That the petitioner seeks to restrain
respondents from wasting public FACTORS THAT DETERMINE THE SITUS:
funds through the enforcement of an a. Kind or classification of the tax being
invalid or unconstitutional law levied
b. Situs of the thing or property taxed
LIMITATIONS ON THE TAXING c. Citizenship of the taxpayer
d. Residence of the taxpayer
POWER
e. Source of the income taxed
f. Situs of the excise, privilege,
A. INHERENT LIMITATIONS (KEY: SPINE)
business or occupation being taxed
1. Territoriality or Situs of taxation
2. Public purpose of taxes
APPLICATION OF SITUS OF TAXATION
3. International comity
4. Non-delegability of the taxing Kind of Tax Situs
power Personal or Residence or
5. Tax Exemption of the government Community tax domicile of the
taxpayer
(1) TESTS IN DETERMINING PUBLIC PURPOSE
a. Duty Test – whether the thing to be Real property tax Location of property
furthered by the appropriation of (Lex rei sitae)
public revenue is something, which
is the duty of the State, as a Personal property -tangible: where it
government, to provide. tax is physically located
or permanently kept
(Lex rei sitae)
b. Promotion of General Welfare Test -intangible: subject
– whether the proceeds of the tax to Sec. 104 of the
will directly promote the welfare of NIRC and the
the community in equal measure. principle of mobilia
sequuntur personam
← NON-DELEGABILITY OF THE TAXING POWER

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(5) shares or rights in any

Business tax Place of business partnership, business or industry
established in the Philippines.
Excise or Privilege Where the act is
(Sec. 104, 1997 NIRC).
tax performed or where
occupation is
pursued ← EXEMPTION OF THE GOVERNMENT
As a matter of public policy,
Sales tax Where the sale is property of the State and of its
consummated municipal subdivisions devoted to
government uses and purposes is
Income Tax Consider deemed to be exempt from taxation
(1) citizenship, although no express provision in the law
(2) residence, and
is made therefor.
(3) source of income
(Sec. 42, 1997 NIRC)
General Rule: The Government is tax
Transfer tax Residence or exempt.
citizenship of the - However, it can also tax itself.
taxpayer or location
of property RULES:
← Administrative Agencies
Franchise Tax State which granted
← Governmental function - tax
the franchise
exempt unless when the law
expressly provides for tax. (Sec.
SITUS OF TAXATION OF INTANGIBLE PERSONAL
32 B7)
PROPERTY
← Proprietary function – taxable
General Rule: Domicile of the owner
unless exempted by law. (Sec.
pursuant to the principle of the mobilia
27C)
sequuntur personam or movables follow
← GOCCs
the person.
General Rule: Income is taxable at
Exceptions:
the rate imposed upon corporations
← When the property has acquired a
or associations engaged in a similar
business situs in another jurisdiction;
business, industry, or activity.
← When an express provision of the
Exception: GSIS, SSS, PHIC, PCSO
statute provide for another rule. and PAGCOR. (Sec. 27(C), NIRC)
Illustration: For purposes of estate
← Government Educational Institutions
and donor‘s taxes, the following
← Property or real estate tax –
intangible properties are deemed
property actually, directly and
with a situs in the Philippines:
exclusively used for educational
← franchise which must be
purposes – exempt but income
exercised in the Philippines;
of whatever kind and character
← shares, obligations or bonds
from any of their properties,
issued by any corporation
real or personal, regardless of
organized or constituted in the
the disposition, is taxable. (Sec.
Philippines in accordance with
30, last par., NIRC)
its laws;
← Income received by them as
← shares, obligations or bonds by such are exempt from taxes.
any foreign corporation eighty- However, their income from any
five percent (85%) of the of their activities conducted for
business of which is located in
profit regardless of the
the Philippines; disposition, is taxable. (Sec. 30,
← shares, obligations or bonds issued
last par., NIRC)
by any foreign corporation if such
← Income derived from any public
shares, obligations or bonds have
utility or from the exercise of any
acquired a business situs in the
essential governmental function
Philippines; and
accruing to the Government of the
Philippines or to any political

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subdivision thereof is not included in in that capacity. Even where one enters
gross income and exempt from the territory of another, there is an
taxation. (Sec. 32(B)(7)(b), NIRC) implied understanding that the former
5. Donations in favor of governmental does not thereby submit itself to the
institutions are considered as income authority and jurisdiction of the other.
on the part of the donee. However,
it is not considered as taxable B. CONSTITUTIONAL LIMITATIONS
income because it is an exclusion A. GENERAL OR INDIRECT
from the computation of gross CONSTITUTIONAL LIMITATIONS
income. (Sec.32 (B)(3), NIRC)
6. The amount of all bequests, 1. Due Process Clause (Art. III, Sec. 1,
legacies, devises or transfers to or 1987 Constitution)
for the use of the Government or Requisites:
any political subdivision for a. The interests of the public as
exclusively public purposes is distinguished from those of a
deductible from the gross estate. particular class require the
(Sec.86 (A)(3), NIRC) intervention of the State.
7. Gifts made to or for the use of the (Substantive limitation)
National Government or any entity b. The means employed must be
created by any of its agencies which reasonably necessary to the
is not conducted for profit, or to any accomplishment of the purpose
political subdivision of the said and not unduly oppressive.
Government are exempt from (Procedural limitation)
donor‘s tax. (Sec. 101(A)(2), NIRC) The constitutionality of a legislative
8. Local government units are taxing act questioned on the ground of
expressly prohibited by the LGC denial of due process requires the
from levying tax upon National existence of an actual case or
Government, its agencies, and controversy.
instrumentalities, and local
government units. [Sec. 133 (o), 2. Equal Protection Clause (Art. III,
LGC] Sec. 1, 1987 Constitution
9. Unless otherwise provided in the Requisites of a Valid Classification:
Local Government Code (LGC), tax a. based upon substantial
exemptions granted to all persons, distinctions
whether natural or juridical, b. germane to the purposes of the
including GOCC, except local water law
districts, cooperatives duly c. not limited to existing conditions
registered under RA No. 6938, non- only
stock and non-profit institutions, are d. apply equally to all members of
withdrawn upon effectivity of the the class
LGC. (Sec. 193, LGC)
10. Real property owned by the 3. Freedom Of Speech And Of The
Republic of the Philippines or any of Press (Art. III, Sec. 4, 1987
its political subdivisions except when Constitution)
the beneficial use thereof has been There is curtailment of press
granted, for consideration or freedom and freedom of thought and
otherwise, to a taxable person shall expression if a tax is levied in order
be exempt from payment of real to suppress this basic right and
property tax. (Sec. 234, LGC) impose a prior restraint. (Tolentino
vs. Secretary of Finance, GR No.
(5) INTERNATIONAL COMITY 115455, August 25, 1994)
These principles limit the authority
of the government to effectively impose 4. Non-Infringement Of Religious
taxes on a sovereign state and its Freedom And Worship (Art. III, Sec.
instrumentalities, as well as on its 5, 1987 Constitution)
property held and activities undertaken

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A license tax or fee constitutes a must, double

curtailment of religious freedom if therefore taxation
imposed as a condition for its ← be
exercise. (American Bible Society given in
vs. City of Manila, GR No. L-9637, case of
failure to
April 30, 1957)
pay taxes
 Non-Impairment Of Contracts (Art.
III, Sec. 10, 1987 Constitution) B. SPECIFIC OR DIRECT
No law impairing the obligation CONSTITUTIONAL LIMITATIONS
of contract shall be passed. (Sec.
10, Art. III, 1987 Constitution) ← Non-Imprisonment For Debt Or Non-
The rule, however, does not Payment Of Poll Tax (Art. III, Sec.
apply to public utility franchises or 20, 1987 Constitution)
right since they are subject to
amendment, alteration or repeal by ← Rule Requiring That Appropriations,
the Congress when the public Revenue And Tariff Bills Shall
interest so requires. (Cagayan Originate Exclusively From The
Electric & Light Co., Inc. v. House Of Representatives (Art. VI,
Commissioner, GR No. 60216, Sec. 24, 1987 Constitution)
September 25, 1985)
← Uniformity, Equitability And
RULES: Progressivity Of Taxation (Art. VI,
 When the exemption is bilaterally Sec. 28(1), 1987 Constitution)
agreed upon between the Uniformity – all taxable articles or
government and the taxpayer – it kinds of property of the same class
cannot be withdrawn without are taxed at the same rate.
violating the non-impairment Equitability – the burden falls to
clause. those who are more capable to pay.
← When it is unilaterally granted by Progressivity – rate increases as the
law, and the same is withdrawn by tax base increases.
virtue of another law – no violation.
← When the exemption is granted ← Is a tax law adopting a regressive
under a franchise – it may be system of taxation valid?
withdrawn at any time thus, not a ← Yes. The Constitution does not
violation of the non-impairment of really prohibit the imposition of indirect
contracts taxes which, like the VAT, are
regressive. The Constitutional provision
← Presidential power to grant means simply that indirect taxes shall be
reprieves, commutations and minimized. The mandate to Congress is
pardons and remit fines and not to prescribe, but to evolve, a
forfeitures after conviction (ART. progressive tax system. (EVAT En Banc
VII, SEC. 19, 1987 CONSTITUTION) Resolution, Tolentino, et al vs Secretary
of Finance, October 30, 1995)
Due Equal
Uniformity
Process Protection
← Limitations On The Congressional
Taxpayer Taxpayers Taxable
may not shall be articles, or Power To Delegate To The
be treated alike kinds of President The Authority To Fix
deprived under like property of Tariff Rates, Import And Export
of life, circumstances the same Quotas, Etc. (Art. VI, Sec. 28(2),
liberty or and conditions class, shall 1987 Constitution)
property both in the be taxed at
without privileges the same ← Tax Exemption Of Properties
due conferred and rate. There Actually, Directly And Exclusively
process of liabilities should
Used For Religious, Charitable And
law. imposed. therefore,
Educational Purposes. (Art. VI,
Notice be no direct
Sec. 28(3) 7, 1987 Constitution)

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San Beda College of
Law 11
The constitutional provision 7. Non-Impairment Of The

(above cited) which grants tax Jurisdiction Of The Supreme Court
exemption applies only to property In Tax Cases (Art. VIII, Sec. 2 And
or realty taxes assessed on such 5(2)(B), 1987 Constitution)
properties used actually, directly
exclusively for religious, charitable 8. Exemption From Taxes Of The
and educational purposes. (Lladoc Revenues And Assets Of
vs. Commissioner, GR No. L-19201, Educational Institutions, Including
June 16, 1965) Grants, Endowments, Donations
The present Constitution And Contributions. (Art. XIV, Sec.
required that for the exemption of 4(3) And (4), 1987 Constitution)
―lands, buildings and
improvements‖, they should not only OTHER SPECIFIC TAX PROVISIONS IN
be ―exclusively‖ but also ―actually‖ THE CONSTITUTION
and ―directly‖ used for religious and 1. Power of the President to veto any
charitable purposes. (Province of particular item or items in an
Abra vs. Hernando, GR No. L-49336, appropriation, revenue, or tariff bill.
August 31, 1981) (Art VI, Sec. 27(2), 1987
The test of exemption from Constitution)
taxation is the use of the property 2. Necessity of an appropriation before
for the purposes mentioned in the money may be paid out of the public
Constitution. (Abra Valley College treasury. (Art. VI, Sec. 29 (1), 1987
Inc. vs. Aquino, GR No. L-39086, Constitution)
June 15, 1988) 3. Non-appropriation of public money
or property for the use, benefit, or
EXCLUSIVE BUT NOT ABSOLUTE USE support of any sect, church, or
The term ― exclusively used‖ does system of religion. (Art. VI, Sec. 29
not necessarily mean total or absolute (2), 1987 Constitution)
use for religious, charitable and 4. Treatment of taxes levied for a
educational purposes. If the property is special purpose. (Art. VI, Sec. 29
incidentally used for said purposes, the (3), 1987 Constitution)
tax exemption may still subsist. (Abra 5. Internal revenue allotments to local
Valley College Inc. vs. Aquino, Gr No. L- government units. (Art. X, Sec. 6,
39086, June 15, 1988) 1987 Constitution)
Corollarily, if a property, although
actually owned by a religious, charitable
and educational institution is used for a DOUBLE TAXATION
non- exempt purpose, the exemption
from tax shall not attach DOUBLE TAXATION – taxing the same
property twice when it should be taxed
ART. XIV, ART. VI, but once.
SEC 4(3) SEC 28(3)
Grantee Non- stock, Religious, IS DOUBLE TAXATION PROHIBITED IN THE
non profit educational, PHILIPPINES?
educational charitable No. There is no constitutional
institution institutions prohibition against double taxation. It is
Taxes Income tax Property tax
not favored but permissible. (Pepsi Cola
covered Custom
Duties Bottling Co. v. City of Butuan, 1968).
Property tax
(DECS Order KINDS OF DOUBLE TAXATION
No. 137-187) (1) Direct Duplicate Taxation /
Obnoxious – double taxation in the
6. Voting Requirement In Connection objectionable or prohibited sense.
With The Legislative Grant Of Tax This constitutes a violation of
Exemption (Art. VI, Sec. 28(4), substantive due process.
1987 Constitution)

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San Beda College of
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Elements: tax, subject to certain limitations,

a. the same property or subject matter by citizens, including members of
is taxed twice when it should be general professional partnerships or
taxed only once. beneficiaries of estates or trusts
b. both taxes are levied for the same (pro rata), as well as domestic
purpose corporations.
c. imposed by the same taxing  A tax credit is granted for estate
authority taxes paid to a foreign country on
d. within the same jurisdiction the estate of citizens and resident
e. during the same taxing period aliens subject to certain limitations.
f. covering the same kind or character  The donor’s tax imposed upon a
of tax. citizen or a resident shall be
(Villanueva vs. City of Iloilo) credited with the amount of any
donor‘s tax imposed by the authority
(2) Indirect Duplicate Taxation – not of a foreign country, subject to
legally objectionable. The absence
certain limitations.
of one or more of the above-
4. Tax Exemptions
mentioned elements makes the
5. Principle of Reciprocity
double taxation indirect.
6. Treaties with other states
(3) Domestic- this arises when the taxes
METHODS RESORTED TO BY A TAX TREATY IN
are imposed by the local or national
ORDER TO ELIMINATE DOUBLE TAXATION
government (within the same state)
(4) International- refers to the
FIRST METHOD: The tax treaty sets out
imposition of comparable taxes in
the respective rights to tax by the state
two or more states on the same
of source or situs and by the state of
taxpayer in respect of the same
residence with regard to certain classes
subject matter and for identical
of income or capital. In some cases, an
periods.
exclusive right to tax is conferred in one
of the contracting states; however, for
REMEDIES OF DOUBLE TAXATION
other items of income or capital, both
1. Tax Sparing Rule – same dividend
states are given the right to tax although
earned by a NRFC within the Phil. is
the amount of tax that may be imposed
reduced by imposing a lower rate of
by the state of source is limited.
15% (in lieu of the 35%), on the
SECOND METHOD: The state of source is
condition that the country to which
given a full or limited right to tax
the NRFC is domiliced shall allow a
together with the state of residence. In
credit against the tax due from the
this case, the treaty makes it incumbent
NRFC, taxes deemed to have been
upon the state of residence to allow
paid in the Phil. (Sec.28 B 5b) (CIR
relief in order to avoid double taxation.
vs Procter & Gamble) (GR No.
66838, Dec. 2, 1991)
TWO METHODS OF RELIEF ARE USED UNDER THE
2. Tax deductions
SECOND METHOD:
Example: vanishing deduction under
Section 86(A)(2), NIRC
1. The exemption method- the income
3. Tax credits
or capital which is taxable in the state
Instances under the NIRC:
of source or situs is exempted in the
 For VAT purposes, the tax on state of residence, although in some
inputs or items that go into the
instances it may be taken into account
manufacture of finished products in determining the rate of tax applicable
(which are eventually sold) may be to the tax payer‘s remaining income or
credited against or deducted from
capital.(This may be done using the tax
the output tax or tax on the finished
deduction method which allows foreign
product. income taxes to be deducted from gross
 Foreign income taxes may be
credited against the Phil. Income

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San Beda College
of Law 13
income, in effect exempting the INCIDENCE OF TAXATION – point on which

payment from being further taxed.) the tax burden finally rests or settles
2. The credit method- although the down.
income or capital which is taxed in the Illustration: Value added tax. The
state of source is still taxable in the seller is required by law to pay tax, but
state of residence. The tax paid in the the burden is actually shifted or passed
former is credited against the tax, levied on to the buyer.
in the latter.(Commissioner of Internal
Revenue v. S.C Johnson and Son, Inc. et KINDS OF SHIFTING
al., G.R No. 127105, June 25, 1999) a. Forward shifting- when burden of
tax is transferred from a factor of
Exemption production through the factors of
Method Credit Method distribution until it finally settles on
Focus is on the Focus is on the tax the ultimate purchaser or consumer
income or capital b. Backward shifting- when burden is
itself transferred from consumer through
factors of distribution to the factors
NOTE: Computational illustration of production
between a tax deduction and a tax c. Onward shifting- when the tax is
credit: shifted 2 or more times either
forward or backward
Tax deduction method
Gross income (2) CAPITALIZATION – a mere increase in
Less: allowable deductions the value of the property is not income
including but merely an unrealized increase in
foreign taxes paid capital. No income until after the actual
Income subject to tax sale or other disposition of the property
Multiplied by rate in excess of its original cost.
Income tax due EXCEPT: if by reason of appraisal, the
cost basis of property increased and the
Tax credit method resultant basis is used as the new tax
Gross income base for purposes of computing the
Less: allowable deductions allowable depreciation expense, the net
excluding difference between the original cost
foreign taxes paid basis and new basis is taxable under the
Income subject to tax economic benefit principle. (BIR Ruling
Multiplied by rate No. 029, March 19, 1998)
Income tax due
Less: foreign taxes paid (3) TRANSFORMATION – the manufacturer
Net income tax due or producer upon whom the tax has been
imposed, fearing the loss of his market if
he should add the tax to the price, pays
FORMS OF ESCAPE the tax and endeavors to recoup himself
FROM TAXATION by improving his process of production,
thereby turning out his units at a lower
(1) SHIFTING – the process by which the cost.
tax burden is transferred from the
statutory taxpayer (impact of taxation) (4) TAX AVOIDANCE – the exploitation by
to another (incident of taxation) without the taxpayer of legally permissible
violating the law. alternative tax rates or methods of
assessing taxable property or income, in
IMPACT OF TAXATION – point on which tax is order to avoid or reduce tax liability.
Example: ―estate planning‖
originally imposed.
(conveyance of property to a family
corporation for shares) (Delpher Trades
Corp. vs. IAC, 157 SCRA 349)

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San Beda College of
Law 14
(5) TAX EVASION – use by the taxpayer of Examples of Statutory Exemptions

illegal or fraudulent means to defeat or Sec. 27, NIRC
lessen the payment of the tax. Sec. 105 Tariff and Customs
Code
FACTORS IN TAX EVASION Sec. 234 Local Government Code
1. the end to be achieved, i.e. payment Special Laws, such as the
of less than that known by the taxpayer Omnibus Investment Code of 1987
to be legally due, or paying no tax when (EO 226), Philippine Overseas
it is shown that the tax is due; Shipping Act (RA 1407 as amended),
2. an accompanying state of mind Fertilizer Industry Act (RA 3050, as
which is described as being evil, in bad amended), Mineral Resources
faith, willful, or deliberate and not Development Decree of 1974 (PD 463
coincidental; and as amended), Cottage Industry Act
3. a course of action which is unlawful. (RA 318, as amended) and
exemptions in ―Housing for Low
INDICIA OF FRAUD IN TAX EVASION Income Group‖ (PD 1205, as
1. Failure to declare for taxation amended)
purposes true and actual income derived c. Contractual- agreed to by the
from business for 2 consecutive years taxing authority in contracts
(Republic vs Gonzales, L-17962) lawfully entered into by them
2. Substantialunder-declarationof under enabling laws
income tax returns of the taxpayer for 4 d. Treaty
consecutive years coupled with e. Licensing Ordinance
intentional overstatement of deductions 2. As to form
(CIR vs Reyes, 104 PHIL 1061) (1) Express – expressly granted by
organic or statute law
TAX TAX (2) Implied – when particular
AVOIDANCE EVASION persons, property or excises are
deemed exempt as they fall
Validity Legal and not Illegal and outside the scope of the taxing
subject to subject to provision itself.
criminal penalty criminal 3. As to extent
penalty
(1) Total – absolute immunity
(2) Partial – one where a collection
Effect Minimization of Almost
taxes always of a part of the tax is dispensed
results in with
absence of 4. As to object
tax payments (1) Personal – granted directly in
favor of certain persons
(6) TAX EXEMPTION – a grant of immunity (2) Impersonal – granted directly in
to particular persons or corporations favor of a certain class of
from the obligation to pay taxes. property
LEGAL BASIS: No law granting any tax PRINCIPLES GOVERNING TAX EXEMPTION
exemption shall be passed without the a. Exemptions from taxation are
concurrence of a majority of all the highly disfavored in law and are
members of Congress (ART VI. SEC 28(4) OF not presumed.
THE 1987 CONSTITUTION) b. He who claims as exemption must
be able to justify his claim by the
KINDS OF TAX EXEMPTION clearest grant of organic or statute
1. As to source law by words too plain to be
a. Constitutional – immunities from mistaken. If ambiguous, there is no
taxation that originate from the exemption.
constitution. c. He who claims exemption should
b. Statutory – those which emanate prove by convincing proof that he
from legislation is exempted.

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San Beda College of
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d. Taxation is the rule; tax exemption b. Adherence to form- if the tax

is the exception. exemption is granted by the
e. Tax exemption must be strictly Constitution, its revocation may be
construed against the taxpayer and effected through Constitutional
liberally in favor of the taxing amendment only
authority. c. Where the tax exemption grant is in
f. Tax exemptions are not presumed. the form of a special law and not by
g. Constitutional grants of tax a general law even if the terms of
exemption are self-executing. the general act are broad enough to
h. Tax exemptions are personal. include the codes in the general law
unless there is manifest intent to
THE FOLLOWING PARTAKE THE NATURE OF repeal or alter the special law
TAX EXEMPTION (Province of Misamis Oriental vs
1. Deductions for income tax purposes Cagayan Electric Power and Light
2. Claims for refund Co. Inc)
3. Tax amnesty
4. Condonation of unpaid tax liabilities NATURE OF TAX AMNESTY
NOTE: must be strictly construed 1. General or intentional overlooking by
against the taxpayer the state of its authority to impose
penalties on persons otherwise guilty
WHEN EXEMPTIONS ARE CONSTRUED LIBERALLY of evasion or violation of a revenue
IN FAVOR OF GRANTEE or tax law.
1. When the law so provides for such 2. Partakes of an absolute forgiveness of
liberal construction. waiver of the government of its right
2. Exemptions from certain taxes, to collect.
granted under special circumstances 3. To give tax evaders, who wish to
to special classes of persons. relent and are willing to reform a
3. Exemptions in favor of the chance to do so.
government, its political subdivisions
or instrumentalities. RULES ON TAX AMNESTY
4. Exemptions to traditional 1. Tax amnesty
exemptees, such as those in favor of a) like tax exemption, it is never
religious and charitable institutions. favored nor presumed
5. If exemptions refer to the public b) construed strictly against the
property taxpayer (must show complete
compliance with the law)
← May a tax exemption be revoked?
A: Yes. It is an act of liberality which 2.Government not estopped from
could be taken back by the government questioning the tax liability even if
unless there are restrictions. Since amnesty tax payments were already
taxation is the rule and exemption received.
therefrom is the exception, the Reason: Erroneous application and
exemption may be withdrawn by the enforcement of the law by public
taxing authority. (Mactan Cebu officers do not block subsequent
International Airport Authority vs. correct application of the statute. The
Marcos, 261 SCRA 667) government is never estopped by
mistakes or errors of its agents.
RESTRICTIONS ON REVOCATION OF TAX Basis: Lifeblood Theory
EXEMPTIONS
a. Non impairment clause. Where the 3.Defense of tax amnesty, like insanity,
exemption was granted to private is a personal defense.
parties based on material Reason: Relates to the circumstances
consideration of a mutual nature, of a particular accused and not the
which then becomes contractual and character of the acts charged in the
is covered by the non-impairment information.
clause of the Constitution.

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San Beda College of
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Tax amnesty Tax exemption c.) Local Government Code

Local Taxes, fees, or charges shall
Immunity from all Immunity from civil be assessed within five (5) years from
criminal, civil and liability only the date they became due. In case of
administrative fraud or intent to evade the payment of
liabilities arising taxes, fees or charges the same may be
from non payment
assessed within ten (10) years from
of taxes
discovery of the fraud or intent to
Applies only to past Prospective evade payment. They shall also be
tax periods, hence application collected either by administrative or
retroactive judicial action within five (5) years
application from date of assessment (Sec. 194. LGC)
DOCTRINE OF IMPRESCRIPTIBILTY TAX ENFORCEMENT AND

As a rule, taxes are imprescriptible ADMINISTRATION
as they are the lifeblood of the
2
government. However, tax statutes may SOURCES OF TAX LAWS (Key: SPEC TRA
provide for statute of limitations. BLT)
The rules that have been adopted
1. Statutes
are as follows: 2. Presidential Decrees
a.) National Internal Revenue Code 3. Executive Orders
The statute of limitation for 4. Constitution
assessment of tax if a return is filed is
5. Court Decisions
within three (3) years from the last day 6. Tax Codes
prescribed by law for the filling of the 7. Revenue Regulations
return or if filed after the last day, 8. Administrative Issuances
within three years from date of actual 9. BIR Rulings
filling. If no return is filed or the return
10. Local Tax Ordinance
filed is false or fraudulent, the period to 11. Tax Treaties and Conventions
assess is within ten years from discovery
of the omission, fraud or falsity. REQUISITES OF TAX REGULATIONS
The period to collect tax is within
1. Reasonable
three years from date of assessment. In 2. Within the authority conferred
the case, however, of omission to file or 3. Not contrary to law
if the return filed is false or fraudulent, 4. Must be published
the period to collect is within ten years
from discovery without need of an
NOTE: Administrative regulations must
assessment. always be in harmony with the
provisions of the law. In case of
b.) Tariff and customs code discrepancy between the basic law and
It does not express any general
the implementing rule or regulation, the
statute of limitation; it provided, former prevails.
however, that ‗‘ when articles have
entered and passed free of duty or final
NON-RETROACTIVITY OF BIR RULINGS
adjustment of duties made, with
General Rule: Rulings are not
subsequent delivery, such entry and retroactive if they are prejudicial to the
passage free of duty or settlement of taxpayer. (Sec. 246, NIRC)
duties will, after the expiration of one
Exceptions:
(1) year, from the date of the final
1. Where the taxpayer deliberately
payment of duties, in the absence of misstates or omits material facts
fraud or protest, be final and conclusive from his return or any document
upon all parties, unless the liquidation required of him by the BIR.
of import entry was merely tentative.”
2. Where the facts subsequently
(Sec 1603,TCC) gathered by the BIR is materially

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San Beda College of
Law 17
different from the facts on which POWERS AND DUTIES OF THE BIR
the ruling is based. Assessment and collection of all
3. Where the taxpayer acted in bad national internal revenue taxes, fees,
faith. and charges
1. Enforcement of all forfeitures,
PRINCIPLE OF LEGISLATIVE APPROVAL OF AN penalties, and fines connected
ADMINISTRATIVE INTERPRETATION THROUGH therewith
REENACTMENT 2. Execution of judgments in all cases
Where a statute is susceptible of the decided in its favor by the Court of
meaning placed upon it by a ruling of Tax Appeals (CTA) and the ordinary
the government agency charged with its courts
enforcement and the legislature 3. Give effect to and administer the
thereafter reenacts the provision supervisory and police powers
without substantial change, such action conferred to it by the Code or other
is to some extent confirmatory that the laws
ruling carries out the legislative purpose.
ASSESSMENT – a finding by the taxing
RULE OF NO ESTOPPEL AGAINST THE authority that the taxpayer has not paid
GOVERNMENT the correct taxes. It is also a written
General Rule: The Government is not notice to a taxpayer to the effect that
estopped by the mistakes or errors of its the amount stated therein is due as a
agents; erroneous application and tax and containing a demand for the
enforcement of law by public officers do payment thereof.
not bar the subsequent correct General rule: Taxes are self-assessing
application of statutes. (E. Rodriguez, and thus, do not require the issuance of
Inc. vs. Collector, L-23041, July 31, an assessment notice in order to
1969) establish the tax liability of a taxpayer.
Exception: In the interest of justice and
Exceptions:
fair play, as where injustice will result
to the taxpayer. (see CIR vs. CA, GR No. 1. Tax period of a taxpayer is
117982, Feb. 6, 1997; CIR vs. CA, GR No. terminated [Sec. 6(D), NIRC]
107135, Feb. 3, 1999) 2. Deficiency tax liability arising from a
tax audit conducted by the BIR [Sec.
AGENCIES INVOLVED IN TAX ADMINISTRATION 56(B), NIRC]
1. Bureau of Internal Revenue 3. Tax lien [Sec. 219, NIRC]
– internal revenue taxes 4. Dissolving corporation [Sec. 52(c),
Agents of the CIR NIRC]
a. Commissioner of Customs with
respect to taxes on imported goods SIGNIFICANCE OF ASSESSMENT
b. head of the appropriate a. In the proper pursuit of judicial and
government office with respect to extrajudicial remedies to enforce
energy tax taxpayer liabilities and certain
c. banks duly accredited by the CIR matters that relate to it, such as the
(Sec. 12, 1997 NIRC) imposition of surcharges and
2. Bureau of Customs – customs law interests,
enforcement b. In the application of statute of
3. Provincial, city and municipal limitations,
assessors and treasurers – local and c. In the establishment of tax liens,
real property taxes and
d. In estimating the revenues that may
ORGANIZATION AND FUNCTION OF THE be collected by government in the
BUREAU OF INTERNAL REVENUE (BIR) coming year. (Mamalateo,
BIR shall be under the supervision Victorino. Reviewer on Taxation,
and control of the Dept. of Finance (Sec. 2004)
2, NIRC)

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San Beda College of
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KINDS 4. The authority of the Commissioner

1. SELF- ASSESSMENT- one in which the to assess taxes may be delegated,
tax is assessed by the taxpayer except the power to make final
himself assessments.
2. DEFICIENCY ASSESSMENT- made by the 5. It must be directed to the right
tax assessor himself whereby the party.
correct amount of the tax is
determined after an examination or Authority of a Revenue Officer -
investigation is conducted. The pursuant to a Letter of Authority issued
liability is determined and assessed by the Regional Director
for the following reason: a. To examine taxpayers within the
a. amount ascertained exceeds that jurisdiction of the district in order
which is shown as the tax by the to collect the correct amount of
taxpayer in his return tax;
b. no amount of tax is shown in the b. To recommend the assessment of
return any deficiency tax due in the same
c. taxpayer did not file any return manner that the said acts could
at all have been performed by the
3. ILLEGAL AND VOID ASSESSMENT- Revenue Regional Director.
assessment wherein tax assessor has General Rule: income tax returns are
no power to assess at all confidential.
4. ERRONEOUS ASSESSMENT- assessor has Exception: inquiry into income tax
power to assess but errs in the returns may be authorized-
exercise thereof
1. inspection is authorized upon
BURDEN OF PROOF IN PRE-ASSESSMENT written order of the President of the
PROCEEDINGS Philippines;
Thereisapresumptionof 2. inspection is authorized under
correctness and good faith on the part of Finance Regulations No. 33 of the
the CIR; thus, the burden lies on the Secretary of Finance;
taxpayer. Otherwise, the finding of the 3. production of the tax return is
CIR will be conclusive and he will assess material evidence in a criminal case
the taxpayer. The same is true even if wherein the government is
the CIR is wrong, if the taxpayer does interested in the result; or
not controvert. (Cagayan Robina Sugar 4. production or inspection thereof is
Milling Co. vs. Court of Appeals, GR. No. authorized by the taxpayer himself.
122451, October 12, 2000)
Reasons: a. lifeblood theory Networth Method- inventory method of
b. presumption of regularity in income tax verification.
performance of public
functions  Applies the accounting principle:
NOTE: Assessments by the BIR must have assets – liabilities = networth
on its face the law and facts upon which Condition for its use:
the presumption is made. 1. taxpayer‘s books do not clearly
reflect his income or the taxpayer
PRINCIPLES GOVERNING TAX ASSESSMENTS has no books, or if he has books, he
1. Assessments are prima facie refuses to produce them;
presumed correct and made in good 2. there is evidence of possible source
faith. or sources of income to account for
2. It should be based on actual facts. increases in networth;
3. It is discretionary on the part of the 3. there is a fixed starting point or
Commissioner. opening networth; and
4. there must be proper adjustments to
conform with the income tax laws.

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San Beda College of
Law 19
POWERS AND DUTIES OF THE COMMISSIONER -- accounting records of entries

I. SECTION 4 (power to interpret tax law relating to the business of the
and decide tax cases) person liable for tax or any other
Person
1. Interpret provisions of this Code and -- to produce such books,
other tax laws subject to review of the papers, records, and other data
Secretary of Finance and to give testimony
(Quasi-legislative) 4. to take the Testimony of the person
2. Decide: (Quasi-judicial) concerned, under oath as may be
a) disputed assessment relevant to the inquiry
b) refunds of internal revenue taxes, 5. to cause revenue officers and
fees and charges employees to make a Canvass of any
c) penalties imposed in relation revenue district or region
thereto
d) other matters arising from this Nothing in Section 5 shall be
Code or other laws or portions construed as granting the Commissioner
thereof administered by the BIR the authority to inquire into bank
subject to the exclusive appellate deposits other than as provided for
jurisdiction of the CTA (Sec. 4) under sec. 6 (F) of the Code.
II. SECTION 5 (power to obtain III. SECTION 6 (power to make

information, summon, examine and take assessments, prescribe additional
testimony of persons) requirements for tax administration
and enforcement)
3. For the Commissioner to ascertain:
(a) correctness of any return or in 4. Examination of returns and

making a return where none has determination of tax due
been made A. After a return has been filed the
(b) liability of any person for any Commissioner or his
internal revenue tax or in representative may authorize
correcting such liability i. the Examination of any
(c) tax compliance taxpayer and
ii. the Assessment of the
The Commissioner is authorized: correct amount of tax;
1. to Examine any relevant Book, paper, B. Failure to file a return shall not
record or other data prevent the commissioner from
2. to Obtain any information (costs, authorizing the examination of
volume of production, receipts, sales, any taxpayer;
gross income, etc), on a regular basis * Any tax or deficiency tax so
from: assessed shall be paid upon
i. any person other than the person notice and demand from the
under investigation or Commissioner or his
ii. any office or officer of the representative
national/local government, gov‘t * Any return, statement or
agencies and instrumentalities declaration filed in any
(Bangko Sentral, gov‘t owned and authorized office shall not be
controlled corporations) (e.g. LTO, withdrawn; but within three
Register of Deeds) years from date of filing, the
3. to Summon same may be modified,
i. the person liable for tax or changed or amended;
required to file a return or provided that no notice for
ii. any officer or employee of such audit or investigation of such
person or return, has in the meantime,
iii. any person having in his been actually served upon the
possession/custody/care taxpayer.
-- the books of accounts,

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San Beda College of
Law 20
5. Failure to submit required returns 7. Terminate taxable period

and other documents Commissioner shall declare the tax
If a person period of a taxpayer Terminated and
i. fails to file a required return or send notice to the taxpayer of such
report at the time prescribed or decision with a request for immediate
ii. willfully or otherwise files a payment of the tax when it has come to
false or fraudulent return, the knowledge of the Commissioner:
The Commissioner shall Make or a) that a taxpayer is retiring from
Amend the return from business subject to tax or
i. his own knowledge or b) is intending to leave the Phils.
ii. from such information as he can or
obtain through testimony or c) to remove his property
otherwise which shall be prima therefrom or
facie correct and sufficient for d) to hide or conceal his property
all legal purposes or
e) is performing any act tending to
6. Inventory-taking, Surveillance, obstruct the proceedings for
Presumptive Gross Sales the collection of tax
A. Commissioner may, at any time
during the taxable year 8. Prescribe Real Property Values
(a) order the inventory taking of The Commissioner is authorized to:
goods of any taxpayer or a. Divide the Phils. into different
(b) may place the business zones or areas and
operations of any person b. Determine the fair market value
(natural/juridical) under of real properties located in each
observation or Surveillance, zone or area
if there is reason to
believe that such is not For tax purposes, the value of
declaring his correct income, the property shall be whichever is
sales or receipts for tax higher of:
purposes. a) Fair market value as determined
The findings may be used by the Commissioner; or
as basis for assessing the b) Fair market value as shown in
taxes and shall be deemed the schedule of values of the
prima facie correct. provincial and city assessors.
B. Commissioner may prescribe a 9. Authority to Inquire into Bank

Minimum amount of gross Deposit
receipts, sales and taxable base Notwithstanding R.A. 1405 (Bank
(taking into account the sales and Secrecy Law) the Commissioner is
income of other persons engaged authorized to inquire into the Bank
in similar business): deposits of:
i. When a person has failed to (a) a decedent to determine his gross
issue receipts as required by estate
sec.113 (Invoice requirements (b) a taxpayer who has filed an
for VAT-registered persons) application to compromise
and Sec. 237 (Issuance of payment of tax liability by reason
Receipts or Commercial of financial incapacity
Invoices) or
ii. When the books of accounts The taxpayer’s application for
or records do not correctly compromise shall not be considered
reflect the declarations made unless he waives in writing his
or required to be made in a privilege under RA 1405 and other
return, general or special laws. Such waiver
Such minimum amount shall shall authorize the Commissioner to
be considered correct. inquire into his bank deposits.

   

San Beda College of
Law 21
10. Authority to Register tax agents provided however that the

(a) The Commissioner shall accredit regional evaluation board may
and Register, individuals and compromise:
general professional partnerships 1. assessments issued by
and their rep. who prepare and regional offices involving
file tax returns and other papers deficiency taxes of P500,000
or who appear before the BIR or less and
(b) The Commissioner shall create 2. minor criminal violations as
national and regional may be determined by the
accreditation boards. rules and regulations
3. discovered by regional and
Those who are denied district officials
accreditation may appeal the same
to the Sec. Of Finance who shall rule Regional Evaluation Board is
on the appeal within 60 days from composed of:
receipt of such appeal. Failure to do i. Regional Director as Chairman
so within the prescribed period shall ii. Asst. Regional Director
be deemed as approval for iii. Heads of the Legal, Assessment
accreditation. and Collection Div.
iv. Revenue District Officer having
11. Authority to Prescribe Additional jurisdiction over the taxpayer
Requirements
The Commissioner may prescribe d) power to Assign or reassign
the manner of compliance with any internal revenue officers to
documentary or procedural establishments where
Requirement for the submission or articles subject to excise tax
preparation of financial statements are kept.
accompanying tax returns.
V. SECTIONS 8, 14, 15, 16, 17 (Other
IV. SECTION 7 (Authority to Delegate Powers)
Power ) Duty to ensure the provision and
distribution of forms, receipts,
← The Commissioner may delegate the certificates, and appliances, and the
powers vested in him to acknowledgment of payment of
← subordinate officials with taxes (Sec. 8)
rank equivalent to Division Chief or
higher,subjectto Authority to administer oaths and to
limitations/restrictions imposed take testimony (Sec. 14)
under the rules and regulations
EXCEPT, (the following powers Authority to make arrests and seizures
shall NOT be delegated) (Sec. 15)
← power to Recommend the
promulgation of rules and Authority to employ, assign or reassign
regulations by the Sec. of internal revenue officers involved in
Finance excise tax functions to
← power to Issue rulings of first establishments where articles
impression or to Reverse, revoke subject to excise tax are produced
modify any existing rule of the or kept (Sec. 16)
BIR
← power to Compromise or Abate Authority to assign or reassign internal
any tax liability revenue officers and employees of
the BIR to other or special duties
connected with the enforcement or
administration of the revenue laws
(Sec. 17)

   

San Beda College of
Law 22
ARE LEGAL OFFICERS OF THE BIR AUTHORIZED Income Capital

TO INSTITUTE APPEAL PROCEEDINGS WITHOUT
THE PARTICIPATION OF THE SOLICITOR All wealth, which Fund or property
GENERAL? flows into the which can be used
NO. The Institution or taxpayer other than in producing goods
commencement before a proper court of as a mere return of or services
civil and criminal actions and capital.
proceedings arising under the Tax
Flow of Wealth Fund or property
Reform Act which shall be conducted by
legal officers of the BIR is not in dispute.
Source of wealth Wealth
An appeal from such court, however, is
not a matter of right. It is still the
REQUISITES FOR INCOME TO BE TAXABLE
Solicitor General who has the primary 1. There must be a gain or profit.
responsibility to appear for the
2. The gain must be realized or
government in appellate proceedings. received.
(Commissioner vs. La Suerte Cigar and 3. The gain must not be excluded by
Cigarette Factory, GR No. 144942, July law or treaty from taxation.
4, 2002)
TESTS ON TAXABILITY OF INCOME
SOURCES OF REVENUE 1. Flow of Wealth Test – The
The following taxes, fees and Determining factor for the
charges are deemed to be national
Imposition of income tax is
internal revenue taxes. (Sec. 21, NIRC) whether any gain was derived
1. Income tax from the transaction.
2. Estate and donor's taxes
2. Realization Test - unless the income
3. Value-added tax
is deemed "realized," there is no
4. Other percentage taxes taxable income.
5. Excise taxes
3. Economic-Benefit Principle Test
6. Documentary stamp taxes
-flow Of wealth realized is
7. Such other taxes as are or hereafter
taxable only to the extent that
may be imposed and collected by the taxpayer is economically
the Bureau of Internal Revenue.
benefited.
CRITERIA IN IMPOSING INCOME TAX

II. NATIONAL TAXATION 1. Citizenship Principle – A citizen of
the Philippines is subject to Philippine
A. INCOME TAXATION income tax (a.) on his worldwide
income, if he resides in the Philippines,
DEFINITIONS or (b.) only on his income from sources
INCOME TAX – tax on all yearly profits within the Philippines, if he qualifies as
arising from property, possessions, nonresident citizen.
trade or business, or as a tax on a 2. Residence Principle – resident alien
person‘s income, emoluments, is liable to pay income tax on his income
profits and the like from sources within the Philippines but
– Tax on income, exempt from Tax on his income from
whether gross or net. (27 Am. Jur. sources outside the Philippines.
308) 3. Source Principle – An alien is subject
to Philippine income tax because he
INCOME – all wealth, which flows into the derives income from sources within the
taxpayer other than as a mere Philippines. Thus, a nonresident alien is
return of capital. liable to pay Philippine income tax on
his income from sources within the
CAPITAL – resource of person, which can Philippines such as dividend, interest,
be used in producing goods and rent, or royalty, despite the fact that he
services. has not set foot in the Philippines.

   

San Beda College of
Law 23
CLASSIFICATION OF TAXPAYERS considered non-resident for the

taxable year in which he arrives
Individuals in the Philippines with respect to
a. citizens his income derived from sources
(1) resident citizens (RC) abroad until the date of his
(2) non-resident citizens (NRC) arrival [Sec.22 (E), NIRC]
b. aliens
(1) resident aliens (RA) NOTE: An overseas contract worker
(2) non-resident aliens (NRA) (OCW) is taxable only on income
(a) engaged in trade or derived from sources within the
business within the Philippines. [Sec. 23 (B)(C)]
Phils. (NRAETB) A seaman is considered as an
(b) not engaged in trade or OCW provided The following
business within the requirements are met:
Philippines (NRANETB) 1. receives compensation for services
rendered abroad as a member of
Corporations the complement of a vessel; and
a. Domestic (DC) 2. such vessel is engaged exclusively
b. Foreign in international trade.
(1) resident foreign corporation
(RFC) Based on the above provisions,
(2) non-resident foreign there are three (3) types of
corporation (NRFC) nonresident citizens, namely: (1)
Estates immigrants; (2) employees of a foreign
Trusts entity on a permanent basis; and
Partnerships (3) Overseas Contract workers.
Immigrants and employees of a foreign
A. INDIVIDUALS entity on a permanent basis are
treated as nonresident citizens from
WHO ARE TAXABLE? the time They Depart from the
1. Resident Citizen Philippines. However, overseas
2. Non-resident Citizen contract workers must Be physically
A non-resident citizen means, a Present Abroad most Of the time
Filipino citizen: during the calendar year to qualify as
a. who Establishes to the nonresident citizens.
satisfaction of the Commissioner 3. Resident alien - means an individual
the fact of his physical presence whose residence is within the
abroad with a definite intention Philippines and who is not a citizen
to reside therein; thereof. [Sec.22 (F, NIRC)]
b. who leaves The Philippines 4. Non-resident alien engaged in
during the taxable year to reside trade or business within the
abroad, either as an immigrant Philippines. (NRAETB)
or for Employment on a A non-resident alien means an
permanent basis; individual whose residence is not
c. who works and derives income within the Philippines and who is not
from abroad And whose a citizen thereof. [Sec.22 (G)]
employment thereat requires The Term trade or business
him to be Physically present includes The performance of the
abroad most of the time during functions of a public office. [Sec. 22
the taxable year; (S)]
d. who is previously considered as a The Term trade, business or
non-resident and who arrives in Profession shall not include
the Philippines at anytime during performance of services by the
the taxable Year to reside taxpayer as an employee. [Sec. 22
thereat permanently shall be (CC)]

   

San Beda College of
Law 24
A non-resident alien individual CORPORATIONS EXEMPT FROM INCOME

who shall come to the Philippines TAXATION (FOR INCOME REALIZED AS SUCH)
and stay therein for an aggregate UNDER NIRC
period of more than 180 days during 1. Those enumerated under Sec. 30.
any calendar year shall be deemed a Exempt corporations are subject
non-resident alien doing business in to income tax on their income from
the Philippines Section 22(G) any of their properties, real or
notwithstanding [Sec. 25(A)(1)] personal, or from any other activities
5. Non-resident alien not engaged in conducted for profit, regardless of
trade or business within the the disposition made of such income.
Philippines. (NRANETB) 2. With respect to GOCCs, the general
rule is that these corporations are
ONLY RESIDENT CITIZENS are taxable taxable as any other corporation
for income derived from sources within except:
and without the Philippines. All other a. GSIS
individual income taxpayers are taxable b. SSS
only for income derived from sources c. PHIC
within the Philippines. d. PCSO
e. PAGCOR [Sec. 27 (C)]
 Tax Rates: Please refer to Annex A. 3. Regional or Area Headquarters
under Sec. 22 (DD) – not subject to
B. CORPORATIONS income tax
WHO ARE TAXABLE? Regional operating headquarters

1. Domestic Corporation – created or under Sec. 22(EE) shall pay a tax of
organized in the Phils. or under its 10% of their taxable income.
law [Sec. 22(C), NIRC]
2. Resident Foreign Corporation – ONLY DOMESTIC CORPORATIONS are
engaged in trade or business within taxable for income derived from sources
the Philippines [Sec. 22(H), NIRC] within and without the Philippines. All
3. Non-resident Foreign Corporation – other corporate income taxpayers are
not engaged in trade or business taxable only for income derived from
within the Philippines [Sec. 22(I), sources within the Philippines.
NIRC] 
A Corporation Includes: Tax Rates: Please refer to Annex B.
1. Partnerships, no matter how created
or organized; C. ESTATES AND TRUSTS
2. Joint-stock companies;
3. Joint accounts (cuentas en ESTATE – refers to the mass of properties
participacion) left by a deceased person.
4. Associations; or
5. Insurance companies [Sec. 22(B), RULES ON TAXABILITY OF ESTATE
NIRC]. When a person who owns property
dies, the following taxes are payable
Excludes: under the provisions of the income tax
1. General professional partnerships; law:
2. Joint venture or consortium formed 1. Income tax for individual under Sec.
for the purpose of undertaking 24 and 25 (to cover the period
construction projects or engaging in beginning January to the time of
petroleum, coal, geothermal and death);
other energy operations pursuant to 2. Estate income tax under Sec. 60 if
an operating or consortium the estate is under administration or
agreement under a service contract judicial settlement.
with the Government.

   

San Beda College of
Law 25
ESTATES UNDER JUDICIAL SETTLEMENT separate and individual

A. During the Pendency of the capacity. (Pascual vs.
Settlement Commissioner, GR No. L-78133,
General Rule: An estate under October 18, 1988; Obillos vs.
judicial settlement is subject to Commissioner, GR No. L-68118,
income tax in the same manner as October 29, 1985)
individuals. Its status is the same as
the status of the decedent prior to ESTATES NOT UNDER JUDICIAL SETTLEMENT
his death. Pending the extrajudicial
Exceptions: settlement, either of the following
1. The entitlement to personal situations may arise:
exemption is limited only to 1. If the heirs contribute money,
P 20,000. property, or industry to the estate
2. No additional exemption is with the intention of dividing the
allowed. profits between/among themselves,
3. The distribution to the heirs an unregistered partnership is
during the taxable year of estate created and the estate becomes
income is deductible from the liable for the payment of corporate
taxable income of the estate. income tax; or
Such distributed income shall 2. If the heirs, without contributing
form part of the respective money, property or industry to the
heirs‘ taxable income. estate, simply divide the fruits
Where no such thereof between/among themselves,
distribution to the heirs is made a co-ownership is created and
during the taxable year that the income tax is imposed on the income
income is earned, and such received by each of the heirs,
income is subjected to income payable in their separate and
tax payment by the estate, the individual capacity.
subsequent distribution thereof
is no longer taxable on the part TRUST – A right to the property, whether
of the recipient. real or personal, held by one person for
the benefit of another.
B. TERMINATION OF THE JUDICIAL
SETTLEMENT (WHERE THE HEIRS STILL DO WHEN TRUSTS ARE TAXABLE ENTITIES
NOT DIVIDE THE PROPERTY) 1. A trust, the income of which is to be
1. If the heirs contribute to the accumulated
estate money, property, or 2. A trust in which the fiduciary may, at
industry with intention to divide his discretion, either distribute or
the profits between/among accumulate the income.
themselves, an unregistered
partnership is created and the RULES ON TAXABILITY OF THE INCOME OF A
estate becomes liable for the TRUST
payment of corporate income 1. The income of the trust for the
tax. (Evangelista vs. Collector, Taxable year which is to be
GR No. L-9996, October 15, distributed to the beneficiaries –
1957; Oña vs. Commissioner, GR filing and payment of tax lie on the
No. L-19342, May 25, 1972) beneficiaries.
2. If the heirs, without contributing 2. The income of the trust which is to
money, property or industry to be accumulated or held for future
improve the estate, simply distribution whether consisting of
divide the fruits thereof Ordinary income or gain from the
between/among themselves, a sale of assets included in the
co-ownership is created, and "corpus" of the estate – filing of
individual income tax is imposed return and payment of tax become
on the income received by each
of the heirs, payable in their
   

the burden of the trustee or exclusive benefit of such employees.

fiduciary. (Sec. 60B, NIRC)
Exceptions:
In the case of a revocable trust, the Tax exemption is likewise to be
income of the trust will be enjoyed by the income of the pension
returned by the grantor. trust; otherwise, taxation of those
In a trust where the income is held earnings would result in a diminution of
for the benefit of the grantor, accumulated income and reduce
the income of the trust becomes whatever the trust beneficiaries would
income to the grantor. receive out of the trust fund.
In the case of trust administered in a (Commissioner vs. Court of Appeals,
foreign country, the income of Court of Tax Appeals and GCL
the trust; undiminished by any Retirement Plans, GR No. 95022, March
amount distributed to the 23, 1992)
beneficiaries shall be taxed to
the trustee. ← PARTNERSHIPS
IRREVOCABLE TRUSTS (irrevocable both as KINDS OF PARTNERSHIP FOR TAX PURPOSES
to corpus and as to income) – UNDER THE NIRC
← General Professional Partnerships
Trust itself, through the trustee or (GPP) - formed by persons for:
fiduciary, is liable for the payment of ← the sole purpose of exercising a
income tax. Taxed exactly in the same common profession and
way as estates under judicial settlement ← no part of the income of which
and its status as an individual is that of is derived from engaging in any
the trustor. It is entitled to the trade or business. [Sec. 22(B),
minimum personal exemption (P20,000) NIRC].
and distribution of trust income during ← Taxable or Business Partnership –
the taxable year to the beneficiaries is All other partnerships except
deductible from the trust‘s taxable general professional partnerships no
income. matter, how created or organized. It
includes unregistered joint ventures
REVOCABLE TRUSTS – the trustor, not the and business partnerships.
trust itself, is subject to the payment of However, joint ventures are not
income tax on the trust income. taxables as corporations when it is;
 undertaking construction projects
EXEMPTION OF EMPLOYEES’ TRUST  engaged in petroleum, coal and
Provided: other energy operation under a
the employee‘s trust must be part of a service contract with the
pension, stock bonus or profit government
sharing plan of the employer for the General co-partnerships (GCP)
benefit of some or all of his are partnerships, which are by law
employees; assimilated to be within the context
contributions are made to the trust by of, and so legally contemplated as,
such employer, or such employees, corporations. The partnership itself
or both; is subject to corporate taxation. The
such contributions are made for the individual partners are considered
purpose of distributing to such stockholders and, therefore, profits
employees both the earnings and distributed to them by the
principal of the fund accumulated by partnership are taxable as dividends.
the trust, and The taxable income for a taxable
that the trust instrument makes it year, after deducting the corporate
impossible for any part of the trust income tax imposed therein, shall be
corpus or income to be used for, or deemed to have been actually or
diverted to, purposes other than the constructively received by the
partners in the same taxable year

   

and shall be taxed to them in their c. Each partner in a general

individual capacity whether actually professional partnership shall,
distributed or not. [Sec. 73(D), report as gross income his
NIRC] distributed share in the net
income of the GPP, based on his
LIABILITY OF A PARTNERSHIP agreed ratio, whether he, avails
← General Professional Partnership of itemized or optional standard
.-They are not subject to income deduction.
tax, but are required to file returns
of their income for the purpose of ← Payments made to a partner of a
furnishing information as to the GPP for services rendered shall
share of each partner in the net gain be considered as ordinary
or profit, which each partner shall business income subject to Sec.
include in his individual return. The 24A (Effective January 1, 1982)
partnership shall act as the
withholding agent. ← Share of a partner in Taxable or
The net income (income for Business partnership
distribution) shall be computed in ← Share of a partner in the net
the same manner as a corporation. income of a taxable or business
Date of filing of the return is April partnership (dividend) shall be
15 of each year. subject to a final tax as follows.
← Taxable or Business Partnership - ← ResidentCitizen,Non-
The income tax of this type of resident Citizen and
Partnership is computed and taxed Resident Alien (2000 and
like that of a corporation . This kind onward) – 10% (Sec. 24B2)
of partnership, like a regular ← Non-resident Alien engaged
corporation, is also required to file a in trade or business – 20%
quarterly corporate income tax (Sec. 25 A2)
return. Filing and payment of ← Non-resident alien not
quarterly return is within 60 days engaged in trade or business
after the end of each quarter while – 25% (Sec. 25B)
the annual return is on or before ← Share of a partner in the loss of
April 15 of the following year. a taxable or business partnership
maybe taken by the individual
LIABILITY OF A PARTNER partner in his return of income.
Rules: ← Payments made to a partner of a
← Share of a partner in general business or taxable partnership
professional Partnership for services rendered shall be
← Each partner shall report as considered as compensation
gross income (business income) income subject to sec. 24A.
his distributed share actually or
constructively received in the KINDS OF INCOME TAXES
net income of the partnership.
(Sec. 26, NIRC) [The same share UNDER THE NIRC
shall be subject to creditable
withholding tax of 10%.] They ← Net Income Tax
are liable in their separate and ← Optional Corporate Income tax
individual capacity. ← Minimum Corporate Income Tax
← Improperly Accumulated Earnings
← Share of a partner in the loss of Tax
a general professional ← Preferential Rates or Special Rates
partnership may be taken by the of Income Tax
individual partner in his return ← Gross Income Tax
of income. ← Final Income Tax
← Fringe Benefits Tax
← Capital Gains Tax

   

San Beda College
of Law 28
(1) NET INCOME TAX  NRANETB – 25% on gross

income (Sec. 25B)
DEFINITION: Means gross income less
deductions and/or personal and Corporate Taxpayer
additional exemptions (Sec. 31, NIRC) a. Foreign to Domestic Corp. – 32%
(Sec. 32A)
NET INCOME TAX FORMULA b. Domestic to Domestic Corp. –
Entire Income Exempt; intercorporate
Less: Exclusions and Income subject dividends (Sec. 27D)
to Final Tax (e.g. Passive c. Domestic to Foreign Corp. -
Income)  Resident Foreign Corp. –
Gross Income Exempt (Sec. 28 [A] 7d)
Less: Deductions (and/or additional  Nonresident Foreign Corp. –
exemptions, if applicable) 15% subject to the condition
Net Taxable Income stated in Sec. 28 [B] 5.
Multiply by: Tax Rate (%) Otherwise, it shall be taxed
at 32%. (See Commissioner
Net Income Tax Due
Less: Tax Credit, if any vs. Procter and Gamble, GR
No. 66838, December 2,
Tax Still due, if any 1991)
GROSS INCOME 2. Stock Dividends

General rule: Not subject to tax
DEFINITION: Means all income derived because it does not constitute
from whatever source, including but not income; it represents transfer of
limited to the following (Sec. 32) surplus to capital account. (Sec.
a. Compensation; 73B, 1997 NIRC)
b. Gross income from profession, trade Exceptions:
or business; a. Sec. 73B, 1997 NIRC
c. Gains form dealings in property; (1) there is redemption or
d. Interests; cancellation
e. Rents; (2) the transaction involves
f. Royalties; stock dividends, and
g. Dividends; (3) the ―time and manner‖ of
h. Annuities; the transaction makes it
i. Prizes and winnings; ―essentially equivalent to a
j. Pensions; distribution of taxable
k. Partner‘s share in the net income of dividends‖. (see
the general professional partnership Commissioner vs. Court of
Appeals, Court of Tax
 See Annex D for detailed discussion Appeals & ANSCOR, GR No.
of items. 108576, Jan. 30, 1999)
b. the recipient is other than the
KINDS OF DIVIDENDS shareholder (Bachrach vs.
1. Cash and Property Dividends Seifert, GR No. L-2659, October
Individual Taxpayer 12, 1950)
a. From Domestic Corporations c. change in the stockholder‘s
 RC, NRC, RA – 10% (Sec. equity results by virtue of the
24A) stock dividend issuance.
← NRAETB – 20% (Sec. 25A2)
← NRANETB – 25% on gross3. Liquidating Dividends – When a
income (Sec. 25B) corporation distributes all of its
b. From Foreign Corporations assets in complete liquidation or
 RC, NRC, RA, NRAETB – 5- dissolution, the gain realized or
32% (Sec. 24, 25A1) loss sustained by the
stockholder, whether individual

   

or corporation, is taxable insurance policy for its surrender

income or deductible loss, as the value.
case may be. (Sec. 73A)
A liquidating dividend is not ← Gift, bequest or devise
← dividend income. The Gifts, bequests, and devises
transaction is considered a sale (which are subject to estate or gift
or exchange of property taxes) are excluded, but not the
between the corporation and the income from such property. If the
stockholder. amount received is on account of
services rendered, whether
EXCLUSIONS FROM GROSS INCOME constituting a demandable debt or
NOTE: Under the 1997 Tax Code, the term not, or the use of the opportunity to
―exclusions‖ refers to items that are not use of capital, the receipt is income
included in the determination of gross (Pirovano vs. Commissioner, 14
income either because: SCRA 832)
← they represent return of capital
or are not income, gain or profit; or ← Compensation for personal injuries
← they are subject to another kind or sickness, whether by suit or
of internal revenue tax; or agreement
← they are income, gain or profit NOTE: The phrase ―personal
that are expressly exempt form income injuries‖ should be given a restrictive
tax under the constitution, tax treaty, meaning to refer only to physical
Tax Code, or a general or special law. injuries. The theory for this is that
recoupment on account of such
← Proceeds of life insurance paid by losses is not income, since it is not
reason of the death of the insured to derived from capital, from labor or
his estate or to any beneficiary from both combined. And the fact
(individual, partnership, or that the payment of compensation
corporation, but not a transferee for for such loss was voluntary does not
a valuable consideration), directly or change its exempt status. It was in
in trust. fact compensation for a loss, which
NOTE: if the proceeds are impaired petitioner‘s capital.
retained by the insurer, the interest
thereon is taxable;
← Income exempt under Treaty;
← Return of insurance premium;
NOTE: if such amounts (when added ← Retirement benefits, pension,
to amounts already received before gratuities, etc.
the taxable year under such ← those derived under R.A. 7641
contracts) exceed the aggregate (pertains to private firms
premiums or considerations paid without retirement trust fund);
(whether or not paid during the ← those received by officials and
taxable year), then the excess shall employees of private employers
be included in the gross income. in accordance with a reasonable
However, in the case of a transfer for private benefit plan; Requisites:
a valuable consideration, by
assignment or otherwise, of a life ← in the service of the same
insurance, endowment or annuity employer for at least 10
contract, or any interest therein, years;
only the actual value of such ← at least 50 years old;
consideration and the amount of the ← must be availed of only once
premiums and other sums ← plan approved by the BIR
subsequently paid by the transferee (R.R.2-98);
are exempt from taxation. No loss is ← separation pay because of
realized on surrender of a life death, sickness, or other
physical disability or for any

   

cause beyond the control of the and sanctioned by their national

official or employee (e.g. sports association ;
retrenchment, redundancy or e. 13th month pay and other
cessation of business); benefits up to P30,000.00;
“for any cause beyond the f. GSIS,SSS, Medicare and union
control of said official or dues of individuals;
employee” – connotes g. Gains derived from debt
involuntariness on the part of securities with a maturity of
the official or employee; more than 5 years;
separation must not be asked or ← Gains from redemption of shares
initiated by the official or in Mutual Fund.
employee.
d. social security benefits, EXCLUSIONS VS. DEDUCTIONS
retirement gratuities, pensions
and other similar benefits Exclusions Deductions
received by citizens and aliens [Sec. 32(B)] [Sec. 34]
who come to reside permanently
here from foreign sources Refer to Flow of Refer to the
private or public; wealth which are not Amounts which the
← benefits due to residents under treated as part of law allows to be
gross income subtracted from
the laws of the U.S.
because: gross income in
administered by the U.S. (1) exempted by the order to arrive at
Veterans Administration fundamental law; (2) net income
← SSS benefits; and exempted by statute;
← GSIS benefits. (3) do not come
within the definition
← Miscellaneous items of income
← Passive income derived in the
Philippines by: Pertain to the Pertain to the
computation of gross computation of the
← Foreign governments;
income net income
← Financinginstitutions
owned, controlled or Something earned or Something spent or
enjoying refinancing from received by the paid in earning of
foreign governments taxpayer which do gross income
← International or regional not form part of gross
financialinstitutions income
established by foreign
governments
← Income derived from any public DEDUCTIONS
utility or from the exercise of
any governmental function; DEFINITION: Items or amounts which the
← Prizes and awards made law allows to be deducted from gross
primarily in recognition of income in order to arrive at the taxable
religious, charitable, scientific, income.
educational, artistic, literary, or
civic achievement BASIC PRINCIPLES GOVERNING DEDUCTIONS
Requisites: ← The taxpayer seeking a deduction
← recipient was selected must point to some specific
without any action on his provisions of the statute authorizing
part; and the deduction; and
← recipient is not required to ← He must be able to prove that he is
render substantial future entitled to the deduction authorized
services. or allowed. (Atlas Consolidated
← Prizes and awards granted to Mining&Dev.Corp.vs.
athletes in sports competitions

   

San Beda College of
Law 31
Commissioner, GR No. L-26911, KINDS OF DEDUCTIONS

January 21, 1981) a. Optional standard deductions (OSD)
c. Any amount paid or payable which is –10% of the gross income.
otherwise deductible from, or taken The OSD may be availed of
into account in computing gross only by individuals (except
income or for which depreciation or nonresident alien) who are not
amortization may be allowed, shall purely compensation income
be allowed as deduction only if it is earners.
shown that the tax required to be b. Personal and additional exemptions
deducted and withheld therefrom Available only to individuals
has been paid to the BIR. [Sec. (business income and compensation
34(K), NIRC] income earners).
NOTE: Deductions for income tax NRAETB may be entitled to

purposes partake of the nature of tax Personal exemptions (only) subject
exemptions; hence, if tax exemptions to reciprocity, i.e.,
are to be strictly construed, then it a. the country of which he is a
follows that deductions must also be subject or citizen has an income
strictly construed. tax law; and
b. the income tax law of his
TAXPAYERS WHO CANNOT AVAIL OF country allows personal
DEDUCTIONS FROM GROSS INCOME exemption to citizens of the
1. Citizens and resident aliens whose Philippines not residing therein,
income is purely compensation but deriving income therefrom
income (except for premium and not to exceed the amount
payments on health and/or allowed in NIRC.
hospitalization insurance);
2. Non-resident aliens not engaged in The personal exemption shall be
trade or business in the Philippines; equal to that allowed by the income
and tax law of his country to a citizen of
3. Non-resident foreign corporation the Philippines not residing therein,
or the amount provided in the NIRC,
CLASSES OF DEDUCTIONS whichever is lower.
1. Individuals
a. with gross compensation income Individuals not entitled to these
from employer-employee exemptions:
relationship only a. Non-resident Alien not engaged
(1) premium payments on health in trade or business
and/or hospitalization b. Alien individual employed by
insurance Regional or Area Headquarters of
(2) personal additional Multinational Companies
exemptions c. Alien individual employed by
b. gross income from business or Offshore Banking Units
practice of profession d. Alien individual employed by
(1) Optional Standard Deduction Petroleum Service Contractor
(OSD) and Subcontractor
(2) Itemized deductions
(3) premium payments on health c. Itemized deductions
and/or hospitalization a. ordinary and necessary
insurance expenses
(4) personal additional b. interests
exemptions c. Taxes
Losse
2. Corporations d. s
 Itemized Deductions e. bad debts
f. depreciation of property;

   

San Beda College of
Law 32
g. depletion of oil and gas wells support because of mental or

and mines; physical defect.
h. charitable and other
contributions; Parents, brothers, sisters and senior
i. research and development; citizen with the tax payer, whether
j. pension trust contributions of relative or not, may qualify the
employees; and taxpayer, to the personal exemption of
k. premium payments on health P25,000 as head of the family but not to
and/or hospitalization insurance. the additional exemption of P8,000.
(This is the only deduction which
a compensation income earner B. Additional Exemption for
may claim as a deduction.) Dependents [Sec. 35, NIRC]
P 8,000 – For each of the qualified
d. Special deductions dependent children not
a. private proprietary educational exceeding four (4) in
institutions and hospitals that number.
are non-profit (Sec. 34 A, 2) The additional exemption refers
b. insurance companies (Sec. 37) only to qualified dependent children
c. estates and trusts (Sec. 61) such as legitimate, recognized natural,
illegitimate and legally adopted.
PERSONAL EXEMPTIONS The proper claimant of the
additional exemption is the husband
A. Amounts of Personal Exemptions being the head of the family except
[Sec. 35, NIRC] under the following cases:
1. P 20,000 – Single individual or 1. Husband is unemployed
married individual judicially 2. Husband is working abroad like
decreed legally separated an OFW or a seaman
without qualified dependent 3. Husband explicitly waived his
children. right of the exemption in favor
2. P 25,000 – Head of the family or of his wife in the withholding
Married individual judicially exemption certificate.
decreed legally separated
with qualified dependent A Senior Citizen is:
children. 1. any resident citizen of the
3. P 32,000 – For each legally Philippines
married individual. 2. at least sixty 60 years old,
including those who have retired
Head of the Family from both government offices
1. Unmarried or legally separated and private enterprises, and
person with one or both parents, 3. has an income of not more than
or one or more brothers or Sixty thousand pesos (60,000)
sisters, or one or more per annum subject to the review
legitimate, recognized natural or of the National Economic
legally adopted children living Development Authority (NEDA)
with and dependent upon the every three years.
taxpayer for their chief support;
and Parents and dependents qualify
“Chief support” means more the taxpayer, to the personal
than one-half of the exemption of P25,000 as head of the
requirements for support. family but not to the additional
2. Where such brother / sister or exemption of P8,000.
children are not more than 21
years of age, unmarried and not NOTE: NRAETB may deduct personal
gainfully employed, or where Exemption (not additional
such dependents regardless of exemption), but only to the extent
age, are incapable of self – allowed by his country to Filipinos

   

San Beda College
of Law 33
not residing therein, and shall not ORDINARY EXPENSE – normal or usual in
exceed the aforementioned relation to the taxpayer‘s business and
amounts. NRANETB cannot claim the surrounding circumstance.
any personal or additional
exemptions. REQUISITES OF BUSINESS EXPENSE TO BE
DEDUCTIBLE
← Change of Status [Sec. 35, NIRC] ← ordinary and necessary;
← If the taxpayer should marry or ← paid or incurred w/in the taxable
should have additional year;
dependents during the taxable ← paid or incurred in carrying on a
year, he may claim the trade or business;
corresponding exemptions in full ← substantiated with official receipts
for such year. or other adequate records.
← If the taxpayer should die during ← if subject to withholding taxes proof
the taxable year, his estate may of payment to the Bureau of Internal
claim the corresponding Revenue must be shown.
exemptions as if he died at the ← must be reasonable (when the
close of such year. expense is not lavish, extravagant or
← If the spouse or any dependent excessive under the circumstances)
should die or any dependent ← must not be contrary to law, public
should marry or become twenty- policy or morals.
one years old during the year, or
should become gainfully NOTE: While illegal income will form
employed, the taxpayer may part of income of the taxpayer,
claim the exemptions as if the expenses which constitute bribe,
spouse or dependent died or as kickback and other similar payment,
if such dependent married, being against law and public policy are
became twenty one years old or not deductible from gross income.
became gainfully employed at (Subsec. A, 1, c)
the close of such year.
← For any other event and for CAPITAL EXPENDITURE – An expenditure
which there are no specific rules that benefits not only the current period
applicable from the above- but also future periods. It is not
mentioned, the status of the deductible but depreciable, except, if
taxpayer at the end of the year the taxpayer is a non-profit proprietary
shall determine his exemptions. educational institution which may elect
(strictly construed against the either to deduct the capital expense or
taxpayer) depreciate it.
Examples: ←
← became legally separated – See Annex E – Business Expenses
can only claim P 20,000
← 25 years old child became
←
See Annex F – Ceiling on
incapacitated – cannot claim ―Entertainment, Amusement
additional exemption and Recreational Expenses‖
ITEMIZED DEDUCTIONS B. INTEREST
ORDINARY AND NECESSARY INTEREST – shall refer to the payment for

EXPENSES the use or forbearance or detention of
money, regardless of the name it is
called or denominated. It includes the
NECESSARY EXPENSE – appropriate and
amount paid for the borrower's use of,
helpful in the development of taxpayer's
money during the term of the loan, as
business and are intended to minimize
well as for his detention of money after
losses or to increase profits. These are
the due date for its repayment.
the day-to-day expenses.

   

San Beda College of
Law 34
REQUISITES FOR DEDUCTIBILITY (REV. REG. turns around and invests the loan
NO. 13-2000) proceeds in money market placements.
1. There must be an indebtedness; By imposing a limit as to the amount of
2. There should be an interest interest expense that can be deducted
expense paid or incurred upon from gross income, the previous practice
such indebtedness; of tax arbitrage was absolutely nullified.
3. The indebtedness must be that of
the taxpayer; Tax Arbitrage – is a method of
4. The indebtedness must be connected borrowing without entering into a
with the taxpayer's trade, business debtor/creditor relationship, often to
or exercise of profession; resolve financing and exchange control
5. The interest expense must have been problems. In tax cases, back-to-back
paid or incurred during the taxable loan is used to take advantage of the
year; lower of tax on interest income and a
6. The interest must have been higher rate of tax on interest expense
stipulated in writing; deduction.
7. The interest must be legally due;
8. The interest arrangement must not Illustration:
be between related taxpayers; On June 1, 2000 Company X has:
9. The interest must not be incurred to 1. Obtained a loan from ABC Financing
finance petroleum operations; and Corporation in connection with the
10. In case of interest incurred to operation of its business and its
acquire property used in trade, interest expense on the loan
business or exercise of profession, amounted to P 120,000.
the same, was not treated as a 2. Deposit account in DEF Bank and
capital expenditure. derived interest income thereof
11. The interest is not expressly amounting to P200,000 on which the
disallowed by law to be deducted final tax of P40,000 has been
from gross income of the taxpayer. withheld.
Assume that Company X‘s net
RULES ON DEDUCTIBILITY OF INTEREST income before the deduction of
EXPENSE interest expense is P500,000.
General Rule - In general, the amount of
interest expense paid or incurred within The deductible expense shall be
a taxable year of indebtedness in computed as follows:
connection with the taxpayer's trade
business or exercise of profession, shall Year 2000
be allowed as a deduction from the
taxpayer's gross income. Net Income before
interest expense P500,000
Limitation - The amount of interest Less: Interest Expense P120,000
expense paid incurred by a taxpayer in Less: 38% of interest
connection with his trade, business or income from deposit
exercise of a profession from an existing (38% x P200,000) 76,000
indebtedness shall be reduced by an Deductible Interest
amount equal the following percentages Expense 44,000
of interest income earned which had Taxable Income P456,000
been subjected to final withholding
depending on the year when the interest
income earned, viz: Deductible Interest Expense
38% - beginning January 1, 2000 and 1. Interest on taxes, such as those paid
thereafter for deficiency or delinquency, since
taxes are considered indebtedness
Aim of Limitation: To discourage so- (provided that the tax is a
called ―back-to-back‖ loans where a deductible tax, except in the case of
taxpayer secures a loan from a bank, income tax). However, fines,

   

penalties, and surcharges on account capital expenditure. [Sec 34 (B)(3),

of taxes are not deductible. The NIRC]
interest on unpaid business tax shall
not be subjected to the limitation C. TAXES
on deduction.
Interest paid by a corporation on scrip Taxes mean TAXES PROPER, and
dividends therefore no deductions are allowed for:
Interest-on deposits paid by authorized interest
banks of the Bangko Sentral ng surcharges
Pilipinas to depositors, if it is shown penalties or fines incident to
that the tax on such interest was delinquency (Sec. 80, Rev. Reg. 2)
withheld.
Interest paid by a corporate taxpayer REQUISITES FOR DEDUCTIBILITY
who is liable on a mortgage upon 1. must be in connection with
real property of which the said taxpayer‘s business;
corporation is the legal or equitable tax must be imposed by law on, and
owner, even though it is not directly payable by taxpayer (direct tax);
liable for the indebtedness. and
paid or incurred during the taxable year.
NON-DEDUCTIBLE INTEREST EXPENSE
1. An individual taxpayer reporting TAXES NOT DEDUCTIBLE
income on the cash basis incurs an income tax;
indebtedness on which an interest is estate and donor‘s tax;
paid in advance through discount or special assessments;
otherwise: excess electric consumption tax;
0 allowed as a deduction in the foreign income tax, war profits and
year the indebtedness is paid excess profits tax, if the taxpayer
1 if the indebtedness is payable makes use of tax credit; and
periodic amortization on, the final taxes, being in the nature of
amount of interest which income tax.
corresponds to the amount of
the principal amortized or paid NOTE: Taxes allowed as deductions,
during the year shall be allowed when refunded or credited, shall be
as deduction in such taxable included as part of gross income in the
year. year of receipt to the extent of the
Interest paid on indebtedness between income tax benefit of said deduction.
related taxpayer (Tax Benefit Rule)
If the indebtedness is incurred to finance
petroleum exploration For NRAETB and RFC, taxes paid or
Interest on preferred stock, which in incurred are allowed as deductions only
reality is dividend if and to the extent that they are
Interest on unpaid salaries and bonuses connected from income within the
Interest calculated for cost keeping on Philippines.
account of capital or surplus
invested in business which does not EXCEPTIONS to requirement that only such
represent charges arising under persons on whom the tax is imposed by
interest-bearing obligation. law can claim deduction thereof:
Interest paid when there is no Taxes of shareholder upon his interest as
stipulation for the payment thereof. such and paid by the corporation
without reimbursement from him,
OPTIONAL TREATMENT OF INTEREST EXPENSE can be claimed by the corporation as
At the option of the taxpayer, deduction.
interest incurred to acquire property A corporation paying the tax for the
used in trade or business may be holder its bonds or other obligation
allowed as a deduction or treated as containing a tax-free covenant

   

clause cannot claim deduction for whether the accounts of the taxpayer
such taxes paid by it pursuant to are kept and his returns filed upon the
such covenant. accrual basis or upon cash receipts and
disbursements basis.
TAX CREDIT
LIMITATIONS ON CREDIT FOR FOREIGN TAXES
DEFINITION: right of an income taxpayer The amount of credit in respect to the
to deduct from income tax payable the taxes paid or accrued to any country
foreign income tax he has paid to his shall not exceed the same proportion
foreign country subject to limitation. of the tax against which such credit
is taken, which the taxpayer‘s net
WHO CAN CLAIM TAX CREDIT income from sources within such
resident citizens of the Philippines country taxable under Title II
resident aliens under the principle of (income Tax) bears to his entire net
reciprocity income for the same taxable year;
domestic corporations which include and
partnerships except general The total amount of the credit shall not
professional partnership exceed the same proportion of the
beneficiaries of estates and trusts tax against which such credit is
members of beneficiaries of local taken, which the taxpayer‘s net
partnerships income from sources without the
Philippines taxable under Title II
WHO ARE NOT ENTITLED TO TAX CREDIT (Income Tax) bears to his entire net
non-resident citizens income for the same taxable year.
resident aliens, if without reciprocity
resident aliens whose income is derived D. LOSSES
solely from sources within the
Philippines LOSSES – refer to such losses which do
foreign corporations (resident and non- not come under the category of bad
resident) debts, inventory losses, depreciation,
etc., and which arise in taxpayer's
FORMULA FOR COMPUTING profession, trade or business.
LIMITATION 1. Per country
limitation REQUISITES FOR DEDUCTIBILITY
Taxable Actually sustained during the taxable
income from year
foreign country X Phil. = Tax Credit Connected with the trade, business or
Taxable income income tax Limit profession
from all sources Evidenced by a close and completed
transaction
2. Over-all limitation Not compensated for by insurance or
Taxable other form of indemnity
income from Not claimed as a deduction for estate
outside sources X Phil. = Tax Credit tax purposes
Taxable income income tax Limit
Notice of loss must be filed with the
from all sources
Bureau of Internal Revenue within
45 days from the date of discovery
The allowable tax credit is the “lower
of the casualty or robbery, theft or
amount” between the tax credit
embezzlement.
computed under No. 1 and No. 2.
NOTE: The taxpayer‘s failure to record
WHEN CREDIT FOR TAXES MAY BE TAKEN
in his books the alleged loss proves that
The credit for taxes provided by
the loss had not been suffered, hence,
Section 30(C)(3) to (9) may ordinarily be
not deductible. (City Lumber vs.
taken either in the return for the year in
Domingo and Court of Tax Appeals, GR
which the taxes accrued or on which the
No. L-18611, January 30, 1964)
taxes were paid, dependent upon

   

CATEGORY AND TYPES OF LOSSES


SeeAnnex Sfor illustration.
ORDINARY LOSSES
a. Incurred in trade or business, or b. Of property connected, with the
practice of profession trade, business or profession, if
 Net operating loss carry-over the loss arises from fires,
(NOLCO) storms, shipwreck or other

Refers to the excess of allowable casualties, or from robbery,
deductions over gross income of theft, or embezzlement.
the business for any taxable (1) Total destruction
year, which had not been The replacement cost to
previously offset as deduction restore the property to its
from gross income. normal operating condition,

Can be carried over as a but in no case shall the
deduction from gross income for deductible loss be more than
the next 3 consecutive years the net book value of the
immediately following the year propertyas a whole,
of such loss. immediately before

For mines, other that oil and gas casualty.
well, net operating loss incurred (2) Partial Destruction
in any of the first ten years of The excess over the net
operation may be carried over book value immediately
for the next 5 years. before the casualty should
be capitalized, subject to
depreciation over the
 Requirements: remaining useful life of the
(1) The taxpayer was not property.
exempt from income tax in
the year of such net 2. CAPITAL LOSSES (LOSSES ARE DEDUCTIBLE
operating loss; ONLY TO THE EXTENT OF CAPITAL GAINS)
(2) The loss was not incurred in a. Losses from sale or exchange of
a taxable year during the capital assets
taxpayer was exempt from b. Losses resulting from securities
income tax; and becoming worthless and which
(3) There has been no are capital assets.
substantial change in the c. Losses from short sales of
ownership of the business or property.
enterprise. d. Losses due to failure to exercise
There is no substantial privilege or option to buy or sell
change in the ownership of property.
the business when:
(a) not less than 75% in 3. SPECIAL KINDS OF LOSSES
nominal value of the a. Wagering losses - deductible only to
outstanding issued shares the extent of gain or winnings. [Sec.
is held by or on behalf of 34 (D)(6)]; deemed to apply only to
the same persons; or individuals
(b) not less than 75% of the b. Losses on wash sales of stocks - not
paid up capital is held by deductible because these are
or on behalf of the same considered to be artificial loss.
person.
Wash sales – a sale or other
NOTE: The 3 year period shall disposition of stock or securities
continue to run notwithstanding where substantially identical
that the corporation paid its taxes securities are acquired or purchased
under MCIT, or that the individual within 61-day period, beginning 30
availed the 10% OSD. days before the sale and ending 30
days after the sale. [Sec. 38]

   

f. Losses from sales or exchanges of

General rule: Losses from wash sales property between related
are not deductible. taxpayers -losses of this nature is not
Exception: When the sale is made by deductible but gains are taxable.
a dealer in stock or securities and
with respect to a transaction made in g. Losses of farmers - if incurred in the
the ordinary course of the business of operation of farm business, it is
such dealer, losses from such sale is deductible.
deductible.
Elements of Wash Sales: h. Loss in shrinkage in value of stock –
(1) The sale or other disposition of if the stock of the corporation becomes
stock resulted to a loss; worthless, the cost or other basis may be
(2) There was an acquisition or deducted by the owner in the taxable
contract or option for acquisition year in which the stock of its
of stock or securities within 30 worthlessness is made. Any amount
days before the sale or 30 days claimed as a loss on account of shrinkage
after the sale; and in value of the stock through fluctuation
(3) The stock or securities sold were in the market or otherwise cannot be
substantially the same as those deducted from gross income.
acquired within the 61-day
period. E. BAD DEBTS
c. Abandonment losses in petroleum BAD DEBTS – shall refer to those debts

operation and producing well. resulting from the worthlessness or
(1) In case a contract area where uncollectibility, in whole or in part, of
petroleum operations are amounts due the taxpayer by others,
undertaken is partially or wholly arising from money lent or from
abandoned, all accumulated uncollectible amounts of income from
exploration and development goods sold or services rendered.
expenditures pertaining thereto
shall be allowed as a deduction. REQUISITES FOR DEDUCTIBILITY
(2) In case a producing well is 1. Existing indebtedness due to the
abandoned, the unamortized cost taxpayer which must be valid and
thereof, as well as the legally demandable;
undepreciated cost of equipment 2. Connected with the taxpayer's
directly used therein, shall be trade, business or practice of
allowed as deduction in the year profession;
the well, equipment or facility is 3. Must not be sustained in a
abandoned. transaction entered into between
related parties;
d. Losses due to voluntary removal of 4. Actually ascertained to be worthless
building incident to renewal or and uncollectible as of the end of
replacements - deductible expense the taxable year.; and
from gross income. 5. Actually charged off in the books of
accounts of the taxpayer as of the
e. Loss of useful value of capital end of the taxable year.
assets due to charges in business
conditions - deductible expense only EQUITABLE DOCTRINE OF TAX BENEFIT
to the extent of actual loss sustained A recovery of bad debts previously
(after adjustment for improvement, deducted from gross income constitutes
depreciation and salvage value) taxable income if in the year the
account was written off, the deduction
resulted in a tax benefit. (Tax Benefit
Rule)

   

Illustration: out of its not being used

Case A Case B Case C temporarily during the year.
Net The allowance must be charged off
income within the taxable, year.
(loss)
before
Schedule on the allowance must be
write off attached to the return.
for bad P10,000 (P 9,000) P 5,000
debts PROPERTY HELD BY ONE PERSON FOR LIFE
Less:
Accounts
WITH THE REMAINDER TO ANOTHER PERSON
written off The deduction shall be computed as
as bad if the life tenant was the absolute owner
debts 3,000 2,000 6,000 of the property and, as such the expense
Final Net shall accrue to him.
Income
(Loss) P 7,000 (P11,000) (P1,000)
Bad debts PROPERTY HELD IN TRUST
recovery Allowable deduction shall be
in a subse- apportioned between the income
quent year 3,000 2, 000 6, 000
TAXABLE beneficiaries, and the trustees in
INCOME accordance with the pertinent provisions
upon the of the instrument creating or in the
bad debt absence of such provisions, on the basis
recovery P3,000 P -0- P5,000
of the trust income allowable to each.
ASCERTAINMENT OF WORTHLESSNESS
METHODS OF DEPRECIATION
Proof of Two Facts:
The term "reasonable allowance"
0 taxpayer did in fact ascertain the shall include (but not limited to) an
debt to be worthless, in the year allowance computed in accordance,
for which deduction is sought, with the regulations prescribed by the
1 that in so doing, he acted in good Department of Finance, under any of the
faith. (Collector vs. Goodrich following methods.
International Rubber, GR No. L- Straight-line method
22265, Dec. 22, 1967) Declining-balance method
Depends upon the particular facts and Sum of the years-digit method
the circumstances of the case. Any other method which may be
Good faith does not require that the prescribed by the Department of
taxpayer be an ―incorrigible optimist‖ Finance upon recommendation of
but on the other hand, he may not be the Commissioner of Internal
unduly pessimistic. Revenue.
F. DEPRECIATION METHODS OF DEPRECIATION

Kind Formula
DEPRECIATION – the gradual diminution in 1)Straight-line cost- salvage value
the service or useful value of tangible estimated life
2)Declining cost – depreciation x Rate
property due from exhaustion, wear and
balance estimated life
tear and normal obsolescence. 3)Sum of the years nth period x cost- salvage
The term also applies to digits (SYD) SYD
amortization of intangible assets, the
use of which in trade or business is of Illustration: A machine is used in the
limited duration. manufacturing department of Corporation
A, compute the depreciation per annum
REQUISITES FOR DEDUCTIBILITY with the following facts:
The allowance for depreciation must be Cost = P15,000 Salvage Value=
reasonable. P5,000
It must be for property use or
employment in trade or business or

   

Straight Line Method with estimated Depreciation deductible by non-

life = 5 years resident aliens engaged in
15,000 – 5,000 = P2,000 trade/business or non-resident
0 years corporation
0 Only when such property is
Declining balance with rate of 200% Year located in the Philippines.
1: 15,000 – 0 x 200% = P6,000
5 DEPLETION OF OIL AND GAS
Year 2:15,000–6,000 x 200% WELLS AND MINES
=P3,600 5
DEPLETION - exhaustion of natural
Sum of the years digits resources as in mines, oil, and gas wells.
SYD for 5 years = 5+4+3+2+1 or 15 The natural resources are called
Year 1: 5/15 x (15,000 – 5,000) ―wasting assets‖. As the physical units
P3,333.33 representing such resources are
Year 2: 4/15 x (15,000 – 5,000) extracted and sold, such assets move
P2,666.67 towards exhaustion.
Known as cost of depletion
AGREEMENT AS TO USEFUL LIFE ON WHICH allowance for mines, oil gas wells and
DEPRECIATION RATE IS BASED other natural deposits starting calendar
The Bureau of Internal Revenue and year 1976 and fiscal year beginning July
the taxpayer may agree in writing on the 1,1975
useful life of the property to be
depreciated. The agreed rate may be
modified if justified by facts or TO WHOM ALLOWED
circumstances. The change shall not be Only mining entities owning
effective before the taxable year on economic interest in mineral deposits.
which notice in writing by certified mail Economic interest means interest in
or registered mail is served by the party minerals in place investment therein or
initiating. secured by operating or contract
SPECIAL TYPES OF DEPRECIATION agreement for which income is derived,
Petroleum Operations and return of capital expected, from the
0 Depreciation of all properties extraction of mineral.
directly related to production of Mere economic or pecuniary
petroleum shall be allowed advantage to be derived by production
under straight-line (SL) or by one who has no capital investment in
declining balance (DB) method the mineral deposit does not amount to
1 May shift from DB to SL method economic interest.
2 Useful life: 10 years or shorter
life as allowed by the FEATURES
Commissioner Intangible Exploration and
development drilling cost in
3 Useful life of property not petroleum exploration shall
directly related to production: 5 be treated either as:
years under straight line method a. revenue expenditures; or
Mining Operations b. capital expenditures
0 Depreciation on all properties in The total amount deductible for
mining operations other than exploration and development
petroleum operations at the expenditures shall not exceed 50% of
normal rate if expected life is net income from mining operation.
less than 10 years. The excess shall be carried forward
1 If expected life is more than 10 to the succeeding year until fully
years, depreciation shall be any deducted.
number of years between 5
years and the expected life.

   

San Beda College of
Law 41
H. CHARITABLE AND OTHER

CONTRIBUTIONS (a) Scientific; (a) Scientific
(b) Educational; (b) Educational;
(c) Cultural; (c) Cultural;
TAX TREATMENT (d) Character (d) Youth and
building/youth sports
A. Deductible B. Deductible and sports development
In Full Subject To Limitation development (e) Charitable
(e) Charitable (f) Social welfare
1) Recipient is: 1) Recipient is: (f) Social welfare (g) Religious
(a) Government of (a) Government of (g) Health (h) Rehabilitation
the the Philippines; (h) Research of Veterans
Philippines; (b) Any of its
(b) Any of its agencies or And satisfying the If the conditions
agencies or political following in Table A is not
political subdivisions conditions: complied with:
subdivisions; 1. The donation
or For a non-priority must be utilized Subject to
(c) Any fully- activity in any of the not later than limitation:
th
owned areas mentioned in A, the 15 day of (a) Individual -
rd
government and exclusively for a the 3 month 10% taxable
corporation public purpose. following the income
close of its from trade
For priority taxable year. business or
activity in: 2. The profession
1. Science; administrative before
2. Education expense must not contribution
3. Culture exceed 30% of (b) Corporation
4. Health total expenses. - 5% taxable
5. Economic 3. Upon dissolution, income
Development assets must be from trade
6. Human distributed to business or
Settlement another non- profession
7. Youth and profit domestic before
Sports corporation or to contribution
Development the state.
2) Recipient is a 2) Non-government
foreign or organizations
international
organization with
an agreement
with the
Philippine REQUISITES FOR DEDUCTIBILITY
Government on 1. The contribution or gift must be
deductibility, or actually paid.
in accordance 2. It must be given to the organizations
with special law. specified in the code.
3. The net income of the institution
must not inure to the benefit of any
3) Recipient is an 3) Recipient is an private stockholder or individual.
accredited non- accredited domestic
government corporation or
organization, association VALUATION
organized/ operated organized/operated Charitable contribution of property
for (purposes): for (purposes): other than money shall be based on the
acquisition cost of said property.
I. RESEARCH AND DEVELOPMENT

(R&D)

   

San Beda College of
Law 42
TAX TREATMENT provide for the payment of

Either as: reasonable pensions to his
1. Revenue Expenditures employees;
Requisites: 2. The pension plan is reasonable and
a. Paid or incurred during the actuarially sound;
taxable year 3. It must be funded by the employer;
b. Ordinary and necessary expenses 4. The amount contributed must be no
in connection with trade longer subject to the control and
business or profession disposition of the employer;
c. Not chargeable to capital 5. The payment has not yet been
account allowed as a deduction; and
2. Deferred Expenses 6. The deduction is apportioned in
Requisites: equal parts over a period of 10
a. Paid or incurred in connection consecutive years beginning with the
with trade, business, or year in which the transfer or
profession payment is made.
b. Not treated as expense
c. Chargeable to capital account SUMMARY OF RULES ON RETIREMENT BENEFITS
but not chargeable to property PLAN / PENSION TRUST
subject to depreciation or 1. Exempt from Income Tax –
depletion. employees‘ trust under Sec. 60(B)
2. Exclusion from Gross Income –
Amount deductible: amount received by the employee
Amount ratably distributed over from the fund upon compliance of
a period of 60 months beginning with certain conditions under Sec.
the month taxpayer realized 32(B)(6)
benefits from such expenditures. 3. Deduction from Gross Income –
a. Amounts contributed by the
EXCLUSION FROM RESEARCH AND employer during the taxable
DEVELOPMENT EXPENDITURES year into the pension plan to
1. Any expenditure for the acquisition cover the pension liability
or improvement of land or for the accruing during the year –
improvement of property to be used considered as ordinary and
in connection with research and necessary expenses under Sec.
development subject to depreciation 34(A)(1)
and depletion. b. 1/10 of the reasonable amount
2. Any expenditure paid or incurred for paid by the employer to cover
the purpose of ascertaining the pension liability applicable to
existence, location, extent or the years prior to the taxable
quality of any deposit of ore or other year, or so paid to place the
mineral including oil or gas. trust in a sound financial basis –
deductible under Sec. 34(J)
J. PENSION TRUST CONTRIBUTIONS
K. PREMIUM PAYMENTS
PENSION TRUST CONTRIBUTIONS – a ON HEALTH AND/OR
deduction applicable only to the HOSPITALIZATION INSURANCE
employer on account of its contribution
to a private pension plan for the benefit
DEFINITION: It is an amount of premium
of its employee. This deduction is purely
on health and/or hospitalization paid by
business in character. an individual taxpayer (head of family or
married), for himself and members of his
family during the taxable year.
REQUISITES FOR DEDUCTIBILITY REQUISITES FOR DEDUCTIBILITY
The employer must have established a Insurance must have actually been taken
pension or retirement plan to

   

The amount of premium deductible does business carried on by the taxpayer,

not exceed P2,400 per family or individual or corporate, when the
P200 per month during the taxable taxpayer is directly or indirectly a
ear. beneficiary under such policy. [Sec.
That said family has a gross income of 36]
not more than P250,000 for the Losses from sales or exchanges of
taxable year. property between related
In case of married individual, only the taxpayers. [S ec. 36]
spouse claiming additional
exemption shall be entitled to this - TRANSACTIONS BETWEEN RELATED PARTIES
deduction. Between members of the family;
“Family” includes only the
WHO MAY AVAIL OF THE DEDUCTION brothers, sisters (whether by the
Individual taxpayers earning purely whole or half blood), spouse,
compensation income during the ancestors, and lineal
year. descendants of the taxpayer.
Individual taxpayer earning business Except in the case of distributions in
income or in practice of his liquidation:
profession whether availing of 0 between an individual and a
itemized or optional standard corporation more than 50% in
deductions during the year. value of the outstanding stock of
Individual taxpayer earning both which is owned, directly or
compensation, and business or indirectly, by or for such
practice of profession during the individual;
year. 1 between two corporations more
than 50% in value of the
NON-DEDUCTIBLE EXPENSES outstanding stock of each of
which is owned, directly or
REASONS FOR NON-DEDUCTIBILITY indirectly, by or for the same
Personal expenses individual, if either one of such
Capital expenditures corporations, with respect to
Items not normally subject to income the taxable year of the
tax and therefore are not corporation preceding the date
deductible. of the sale of exchange was a
Items taken advantage of by the personal holding company or a
taxpayer to avoid payment of foreign personal holding
income tax. company; or
Between the grantor and a fiduciary of
SPECIFIC ITEMS (SECTION 36) any trust;
Personal, living or family expenses; Between the fiduciary of a trust and the
Amount paid out for new buildings or for fiduciary of another trust if the
permanent improvements, or same person is a grantor with
betterment made to increase the respect to each trust;
value of any property or estate, Between a fiduciary of a trust and a
Except that intangible drilling beneficiary of such trust.
and development cost incurred in
petroleum operations are TAX CONSEQUENCES
deductible; The following are not deductible:
Amount expended in restoring property Interest expense [Sec. 34 (B)(2)]
or in making good the exhaustion Bad debts [Sec. 34 (E)(1)]
thereof for which an allowance has Losses from sales or exchanges of
been made; property [Sec 36 (B)]
Premiums paid on any life insurance policy
covering the life of any officer or 0 OPTIONAL CORPORATE
employee, or of any person financially INCOME TAX
interested in any trade or
SECTION 27 (A)

   

San Beda College of
Law 44
APPLIES TO:
1. Domestic corporations (DC) LIMITATIONS
2. Resident foreign corporations (RFC)
1. The MCIT shall apply only to
RATE OF TAX AND DATE OF EFFECTIVITY domestic and resident foreign
15% of the Gross Income effective corporations subject to the normal
January 1, 2000 corporate income tax (income tax
rates under Sec 27[A] of the CTRP).
CONDITIONS OR REQUIREMENTS 2. In the case of a domestic
1. A tax effort ratio of 20% of Gross corporation whose operations or
National Product activities are partly covered by the
2. A ratio of 40% income tax collection regular income tax system and partly
to total tax revenues covered under a special income tax
3. A VAT tax effort of 4% of GNP system, the MCIT shall apply on
4. A 0.9% ratio of Consolidated Public operations covered by the regular
Sector Financial Position (CPSFP) to corporate income tax system.
GNP 3. In computing for the MCIT due from
a resident foreign corporation, only
OTHER FEATURES the gross income from sources within
1. Available only to firms whose the Philippines shall be considered
ratio of: for such purpose.
Cost of sales WHEN DOES A CORPORATION BECOME

<=55% LIABLE UNDER THE MCIT?
Gross sales or receipts from all
sources MCIT is imposed beginning on
the fourth taxable year immediately
2. The election shall be irrevocable
following the year in which such
for three (3) consecutive years
corporation commenced its business.
The taxable year in which the business
MEANING OF GROSS INCOME
operations commenced shall be the year
General concept –
when the corporation registers with the
Gross sales
BIR.
Less:
(1) Sales Return;
CARRY FORWARD OF THE EXCESS
(2) Discount and allowances
MINIMUM TAX
(3) Cost of goods sold - means
all business expenses
 Any excess of MCIT over the normal
directly incurred to produce
income tax can be carried forward
the merchandise to bring
on an annual basis.
them to their present
location and use.  The excess can be credited against
the normal income tax due in the
next 3 immediately succeeding
(3) MINIMUM CORPORATE taxable years.
INCOME TAX (MCIT)  Any amount of the excess MCIT
SECTION 27 (E) which cannot be credited against the
normal income tax due in the next 3-
WHO ARE COVERED? year period shall be forfeited.
MCIT is imposed on domestic and
resident foreign corporations
1. Whenever such corporation has zero RELIEF FROM MCIT
or negative taxable income; or
2. Whenever the amount of MCIT is The Secretary of Finance is
greater than the normal income tax authorized to suspend the imposition of
due from such corporation the MCIT on any corporation which
determined under Section 27[A]. suffers losses because of:

   

prolonged labor dispute; 4. insurance while

force majeure; or the goods are in
legitimate business reverses. transit.
B. Manufacturing Cost of Sales = All
―Substantial losses from a Gross Income cost of production of
prolonged labor dispute" means losses (Same) finished goods, such
arising from a strike staged by the as
employees which lasted for more than 1. raw materials
six (6) months within a taxable period used;
and which has caused the temporary 2. direct labor;
shutdown of business operations. 3. manufacturing
―Force majeure" means a cause due overhead;
to an irresistible force as by "Act of God" 4. freight cost;
like lightning, earthquake, storm, flood 5. insurance
and the like. This term shall also include premiums;
armed conflicts like war and insurgency. 6. other costs
incurred to bring
―Legitimate business reverses" shall the raw materials
include substantial losses sustained due to the factory or
to fire, robbery, theft, or warehouse.
embezzlement, or for other economic C. Services Cost of Services = All
reason as determined by the Secretary Gross Income = direct costs and
of Finance. Gross receipts less expenses necessarily
sales returns, incurred to provide
TAX RATE: 2% of gross income or allowances, the services required
taxable base pertinent to a discounts and costs by the customers and
trading/merchandising concern or a of services clients including:
service entity a. Salaries and
employee benefits
TAX BASE: Gross Income of personnel,
MEANING OF GROSS INOME consultants and
specialists directly
General concept - gross income means: rendering the
Gross sales service;
Less: b. Cost of facilities
Sales Return; directly utilized in
Discount and allowances providing the
Cost of goods sold - means service.
all business expenses It shall not
directly incurred to produce include interest
the merchandise to bring expense except for
them to their present banks and other
location and use. financial
institutions.
KINDS OF BUSINESS
Gross income excludes passive income
A. Trading or Merchandising Concern subject to final tax.
Gross Income = Cost of Sales = Other income and Extraordinary Income
gross sales/ 1. Invoice cost of the are included since RR 9-98 provides
receipts less sales goods sold; that gross sales include sales
returns, discounts 2. import duties; contributory to income taxable
and allowances and 3. freight in under the regular corporate tax.
cost of goods sold transporting the
goods to the place See Annex T for interplay of normal tax,
optional corporate income tax and
where the goods MCIT.
are actually sold;

   

San Beda College of
Law 46
Amount reserved for the reasonable

needs of the business as defined in the
(4) IMPROPERLY ACCUMULATED Regulations
EARNINGS (IAE) TAX Tax base of improperly accumulated
SECTION 29 earnings tax
EXCLUSIONS
(REVENUE REGULATIONS NO. 2 – 2001)
For corporations using the calendar
DEFINITION: “Improperly accumulated basis the accumulated earnings tax
earnings (IAE)” are the profits of a shall not apply on IAE as of Dec. 31,
corporation that are permitted to 1997.
accumulate instead of being distributed For fiscal year basis, the tax shall not
by a corporation to its shareholders for apply to the 12-month period of
the purpose of avoiding the income tax fiscal year 1997-1998.
with respect to its shareholders or the
shareholders of another corporation. IAE as of the end of a calendar
or fiscal year period on or after Dec.
TAX RATE: 10% of the Improperly 31, 1998 shall be subject to the 10%
Accumulated Taxable Income (in tax.
addition to other taxes).
Rationale behind IAET WHO ARE COVERED?
If the earnings and profits were
distributed, the shareholders would then General Rule: The IAE tax shall apply to
be liable to income tax thereon, every corporation formed or availed
whereas if the distribution were not for the purpose of avoiding the
made to them, they would incur no tax income tax with respect to its
in respect to the undistributed earnings shareholders or the shareholders of
and profits of the corporation. Thus, a any other corporation, by permitting
tax is being imposed; earnings and profits to accumulate
in the nature of a penalty to the instead of being divided or
corporation for the improper distributed. These are:
accumulation of its earnings, and 1. Domestic corporations as
as a form of deterrent to the defined under the Tax Code;
avoidance of tax upon Corporations which are classified as
shareholders who are supposed closely-held corporations.
to pay dividends tax on the
earnings distributed to them by
0 those corporations at least
fifty percent (50%) in value
the corporation.
of the outstanding capital
stock or at least fifty
“IMPROPERLY ACCUMULATED TAXABLE percent (50%) of the total
INCOME” combined voting power of
all classes of stock entitled
Taxable income for the year to vote is owned directly or
Add: indirectly by or for not more
Income exempt from tax; than twenty (20) individuals.
Income excluded from gross Domestic corporations not falling
income; Income subject to final under the aforesaid
tax; definition are, therefore,
Net operating loss carry-over (NOLCO) publicly-held corporations.
Total
Less: Exception: The said tax shall not apply
Income tax paid/payable for the to:
taxable year 1. Publicly held corporations (Sec. 29)
Dividends actually or constructively
paid/issued from the applicable
year‘s taxable income

   

Banks and other non-banks Financial The fact that the earnings or profits of a
intermediaries (Sec. 29) corporation are permitted to
Insurance companies (Sec. 29) accumulate beyond the reasonable
Taxable partnerships (deemed to have needs of the business shall be
actually or constructively received determinative of the purpose to
the taxable income under Sec. 73D) avoid the tax upon its shareholders
General professional partnerships or members unless the corporation,
(exempt; taxable against the by the clear preponderance of
partners) evidence, shall prove the contrary.
Non- taxable joint ventures and
Enterprises duly registered with the “Reasonable needs of the
Philippine Economic Zone Authority business” includes the reasonably
(PEZA) under R.A. 7916, and anticipated needs of the business
enterprises registered pursuant to such as:
the Bases Conversion and 0 Allowance for the increase in
Development Act of 1992 under R.A. the accumulation of earnings up
7227, as well as other enterprises to 100% of the paid-up capital of
duly registered under special the corporation as of Balance
economic zones declared by law Sheet date, inclusive of
which enjoy payment of special tax accumulations taken from other
rate on their registered operations years;
or activities in lieu of other taxes, 1 Earnings reserved for definite
national or local.
corporate expansion projects or
Foreign corporations [RR No. 02-2001] programs as approved by the
Board of Directors or equivalent
EVIDENCE OF PURPOSE TO AVOID body;
INCOME TAX
2 Reserved for building, plants or
equipment acquisition as
The fact that any corporation is a mere approved by the Board of
holding company or investment Directors or equivalent body;
company shall be prima facie
evidence of a purpose to avoid the
3 Reserved for compliance with
tax upon its shareholders or any loan covenant or pre-
members. existing obligation established
under a legitimate business
Instances indicative of purpose to agreement;
avoid income tax upon 4 Earnings required by law or
shareholders: applicable regulations to be
0 Investment of substantial retained by the corporation or in
earnings and profits of the respect of which there is legal
corporation in unrelated prohibition against its
business or in stock or distribution;
securities of unrelated 5 In the case of subsidiaries of
business; foreign corporations in the
1 Investment in bonds and other Philippines, all undistributed
long-term securities; earnings intended or reserved
for investments within the
2 Accumulation of earnings in Philippines as can be proven by
excess of 100% of paid-up
corporate records and/or
capital, not otherwise
relevant documentary evidence.
intended for the reasonable
needs of the business as
The controlling intention of the
defined in these Regulations.
taxpayer is that which is manifested at
the time of accumulation, not
subsequently declared intentions, which
are merely the product of afterthought.

   

San Beda College of
Law 48
A speculative and indefinite purpose will 1. It is constituted as a full and final

not suffice. payment of the income tax due from
Definiteness of plan/s coupled with the payee on a particular type of
action/s taken towards its income subject to final withholding
consummation is essential. tax (FWT).
The finality of the withholding
PERIOD FOR PAYMENT OF DIVIDEND/ tax is limited only to the payee‘s
PAYMENT OF IAET income tax liability and does not
Dividends must be declared and paid extend to other taxes that may be
or issued not later than one year imposed on said income.
following the close of the taxable year, 2. The income subjected to final
otherwise, the IAET, if any, should be income tax is no longer subject to
paid within fifteen (15) days thereafter. the net income tax; otherwise, there
would be a violation of prohibited
double taxation.
(5) INCOME SUBJECT TO 3. The liability for the payment of the
PREFERENTIAL OR SPECIAL tax rests primarily on the payor as
withholding agent.
RATES 4. The payee is not required to file an
income tax return for the particular
Pertains to income derived by a income subjected to FWT. It is the
particular individual or corporation withholding agent who files the
belonging to a class of income taxpayer return.
that is subject to either a preferential or 5. The rate of the final tax is
special rate. multiplied to the gross income.
 Thus, deductions and/or personal
Tax Rates: Please refer to Annex C. and additional exemptions are not
(6) GROSS INCOME TAX allowed.
(GIT)
(8) FRINGE BENEFIT TAX (FBT)
GROSS INCOME TAX (GIT) FORMULA
FRINGE BENEFIT TAX is a final income
Entire Income tax on the employee which shall be
Less: Exclusions and Income subject withheld and paid by the employer on a
to Final Tax (e.g. Passive quarterly basis.
Income)
Gross Income FRINGE BENEFIT means any good,
Multiply by: Tax Rates (%) service, or other benefit furnished or
granted by an employer, in cash or in
Net Income Tax Due kind, in addition to basic salaries, to an
individual employee (except rank and
GIT APPLIES TO file employees) such as, but not limited
to the following:
1. Non-resident alien not engaged in 1. Housing
trade or business (25%); and 2. Expense Account
2. Non-resident foreign corporation. 3. Vehicle of any kind
(32%) 4. Household personnel, such as maid,
 driver and others
Tax Rates: Please refer to Annex A 5. Interest on loan at less than market
and B. rate to the extent of the difference
between the market rate and actual
(7) FINAL INCOME TAX rate granted.
6. Membership fees, dues and other
GENERAL PRINCIPLES expenses borne by the employer for
the employee in social and athletic
clubs and similar organizations

   

Expenses for foreign travel 2000

Holiday and vacation expenses 68% 32% FWT
onwards
Educational assistance to the employee
or his dependents; and
FRINGE BENEFITS NOT SUBJECT TO FBT
Life or health insurance and other non-
lire insurance premiums or similar
Fringe benefits not considered as gross
amounts on excess of what the law
income –
allows.
0 if it is required or necessary to
PERSONS LIABLE the business of employer
1 if it is for the convenience or
The EMPLOYER (as a withholding advantage of employer
agent), whether individual, professional Fringe Benefit that is not taxable under
partnership or a corporation, regardless Sec. 32 (B) – Exclusions from Gross
of whether the corporation is taxable or Income
not, or the government and its Fringe benefits not taxable under Sec.
instrumentalities 33 Fringe Benefit Tax:
0 Fringe Benefits which are
TAX RATE: 32% (from January 1, 2000 authorized and exempted under
onwards) of the Grossed up Monetary special laws, such as the 13th
Value (GMV) of fringe benefits. month Pay and Other Benefits
In the case of aliens, the tax rates to with the ceiling of P30,000.
be applied on fringe benefit shall be as 1 Contributions of the employer
follows: for the benefit of the employee
NRANEBT 25% to retirement, insurance and
Aliens employed by regional HO 15 % hospitalization benefit plans;
Aliens employed by OBU 15% 2 Benefits given to the Rank and
Aliens employed by Petroleum
File Employees, whether granted
Service Contractors and
under a collective bargaining
Subcontractors 15%
agreement or not; and
“GMV” OF THE FRINGE BENEFIT 3 The De minimis benefits –
REPRESENTS benefits which are relatively
small in value offered by the
The whole amount of income realized by employer as a means of
the employee which includes the net promoting goodwill,
amount of money or net monetary contentment, efficiency of
value of property which has been Employees
received; plus The term ―Rank and File
The amount of fringe benefit tax Employees‖ shall mean all
thereon otherwise due from the employees who are holding
employee but paid by the employer neither managerial nor
for and in behalf of the employee. supervisory position as defined
in the Labor Code
―GMV‖ of the fringe benefit shall In the case of rank and file
be determined by dividing the monetary employees, fringe benefits other
value of the fringe benefit by the than those excluded from gross
Grossed up divisor. The Grossed up income under the Tax Code and
divisor is the difference between 100% other special laws, are taxable
and the applicable rates. under the individual normal tax
rate.
DEDUCTIBILITY TO THE TAXABLE
GROSSED UP
YEAR RATE INCOME OF THE EMPLOYER
DIVISOR
1998 66% 34% FWT
General Rule: The amount of taxable
1999 67% 33% FWT
fringe benefit and the fringe benefits
tax shall constitute allowable deductions
from gross income of the employer.

   

San Beda College of
Law 50
Exception: 8. Gifts given during Christmas and

If the basis for computation of the major anniversary celebrations not
fringe benefits tax is the depreciation exceeding P3, 000 per employee per
value, the zonal value or the fair market annum;
value, only the actual fringe benefits tax 9. Flowers, fruits, books or similar
paid shall constitute a deductible items given to employees under
expense for the employer. The value of special circumstances
the fringe benefit shall not be 10. Daily meal allowance for overtime
deductible and shall be presumed to work not exceeding 25% of the basic
have been tacked on or actually claimed minimum wage.
as depreciation expense by the
employer. Provided, however, that if the Time for filing of quarterly remittance
aforesaid zonal value or fair market return of final income taxes withheld
value of the said property is greater than The tax imposed under Sec. 33 shall
its cost subject to depreciation, the be treated as a final income tax on the
excess amount shall be allowed as a employee that shall be withheld and
deduction from the employer's gross paid by the employer, whether a large
income as fringe benefit expense. (Sec. taxpayer or non-large taxpayer, on or
2.33[D], Rev. Reg. No. 3-98) before the 10th day of the month
following the calendar quarter in which
EXAMPLE OF DE MINIMIS BENEFITS NOT the fringe benefits were granted (RR 04-
SUBJECT TO FBT (RR NO. 8-2000 AND 2002).
10-2000)
 For Additional Rules on Fringe
1. Monetized unused vacation leave Benefits, refer to Annex H.
credits of PRIVATE employees not
exceeding (10) days during the year (9) CAPITAL GAINS TAX
and the monetized value of leave
credits paid to government officials SUMMARY OF TAX RATES
and employees
2. Medical cash allowance to 1. Individuals
dependents of employees not a. On sale of shares of stock of a
exceeding P750.00 per employee per domestic corporation not listed
semester or P125 per month; and traded thru a local stock
3. Rice subsidy of P1,000.00 or one (1) exchange, held as capital asset
sack of 50kg. rice per month On the Net Capital Gain
amounting to not more than Not over P100,000 – FT
P1,000:00, of 5%
4. Uniform and clothing allowance not Amount in excess of P100,000 – FT
exceeding P3,000 per annum; of 10%
5. Actual yearly medical benefits not b. On sale of real property in the
exceeding P10,000 per annum; Philippines held as capital asset
6. Laundry allowance not exceeding On the gross selling price, or the
current fair market value at the
P300 per month; time of sale, whichever is higher –
7. Employees achievement awards e. g. FT of 6%
for length of service or safety 2. Corporations
achievement, which must be in the a. On sale of shares of stock of a
form of a tangible personal property domestic corporation not listed
other than cash or gift certificate, and traded thru a local stock
with an annual monetary value of exchange, held as capital asset
not exceeding P10,000 received by On the Net Capital Gain –
the employee under an established Not over P100,000 – FT of
written plan which does not 5%
discriminate in favor paid Amount in excess
employees; of P100,000 – FT of 10%

   

On sale of land/building held as

capital asset The excess of the The excess of the
On the gross selling price, or the gains from sales/ losses from sales or
current fair market value at the exchanges of capital exchanges of capital
time of sale, whichever is higher assets over the assets over the gains
– FT of 6% gains from such from such sales or
(Reyes, Virgilio. Income Tax Law and sales/ exchanges. exchanges.
Accounting – A New Approach, 2002)
CAPITAL GAINS AND LOSSES – TRANSACTION RESULTING IN TAXABLE GAINS BUT

NON-RECOGNITION OF LOSSES
IN GENERAL 0 Sale or exchange between
related parties;
CONCEPT OF CAPITAL ASSETS
1 Wash sales by non-dealers of
Under the tax code, there is no securities and when not subject
definition for the term "capital assets". to the stock transfer tax;
What it gives is the meaning of 2 Exchanges not solely in kind in
ordinary assets: merger and consolidation; and
3 Sales or exchanges that are not
Ordinary assets (Sec. 39, NIRC)
at arms length.
0 Stock in trade of the taxpayer or
other properties of a kind which REQUISITES FOR RECOGNITION OF
would properly be included in CAPITAL GAIN/LOSS
the inventory of the taxpayer;
The transaction must involve
1 Property held by the taxpayer property classified as capital
primarily for sale to customers in asset; and
the ordinary course of business;
The transaction must be a sale or
2 Property used in trade or exchange or one considered as
business and subject to equivalent to a sale or exchange.
depreciation; and
RULES ON THE RECOGNITION OF
3 Real property used in trade or CAPITAL GAINS OR LOSSES
business.
Capital Assets include all property held

INDIVIDUAL CORPORATION
by the taxpayer whether or not 
connected in trade or business but 
Holding Period Capital gains and
not including those enumerated The percentages losses are
above (#1) as ordinary assets. of gain or loss to be recognized to the
taken into account extent of 100%.
shall be the (There is no
CAPITAL GAIN CAPITAL LOSS following: holding period)
a. 100% - if the
The gain derived The loss incurred capital assets has
from the sale or from the sale or been held for 12
exchange of capital exchange of capital mos. or less; and
assets. assets. b. 50% - if the
capital asset has
been held for
more than 12
mos.
NET CAPITAL NET CAPITAL
GAIN LOSS
 Non-  Capital losses
deductibility of are allowed only

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San Beda College of
Law 52
Net Capital to extent of the 1. Exchange solely in kind in legitimate

losses capital gains; mergers and consolidation;
 Capital losses hence, the net includes:
are allowed only capital loss is a. Between the corporations which
to extent of the not deductible. are parties to the merger or
capital gains; Exception: If any
hence, the net domestic bank or
consolidation (property for
capital loss is trust company, a stocks);
not deductible. substantial part of b. Between a stockholder of a
whose business is corporation party to a merger or
the receipt of consolidation and the other
deposits, sells any party corporation (stock for
bond, debenture, stock);
note or certificate c. Between a security holder of a
or other evidence
corporation party to a merger or
of indebtedness
issued by any consolidation and the other
corporation party corporation (securities for
(including one securities)
issued by a
government or 2. Transfer to a controlled corporation
political – exchange of property for stocks
subdivision) resulting in acquisition of corporate
control by a person, alone or
 Net Capital Loss  Not allowed together with others not exceeding
Carry –Over
four.
 Allowed
The net capital loss
“Control” means ownership of
(in an amount not in stocks in a corporation amounting to
excess of the taxable at least 51% of the total voting
income before power of all classes of stocks
personal exemption for entitled to vote.
such year) shall be
treated in the SALE OR EXCHANGE OF ORDINARY ASSETS
succeeding year (but
not beyond 12 months)
General rules of income taxation
as a deduction as
short-term capital loss
apply to both gain and loss.
(at 100%) from the net 
capital gains. See Annex D (Gross Income – Gains
from dealings in property)

See Annex U for illustration. SUMMARY OF TAX TREATMENT OF
GAINS/LOSSES IN THE EXCHANGE OF
SALE OR EXCHANGE OF CAPITAL ASSETS PROPERTIES
The following are considered as sale General Rule: Upon the sale or
orexchange of capital assets: exchange of property, the entire gain or
1. Retirement of bonds loss, as the case may be, shall be
2. Short sales of property recognized. [Sec. 40 (C, 1)]
3. Failure to exercise privilege or
option to buy or sell property Exceptions:
4. Securities becoming worthless 1. Transactions where gains and losses
5. Distribution in liquidation of are not recognized –
corporations a. Exchange solely in kind in
6. Readjustment of interest in a legitimate mergers and
general professional partnership. consolidation
TAX FREE EXCHANGES b. Transfer to a controlled
Sales or exchanges resulting in non- corporation [Sec. 40(C, 2)]
recognition of gains or losses:

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
2. Transactions where gain is Gains derived by dealers in

recognized but not the loss – securities.
Transactions between related All other gains which are specifically
taxpayers [Sec. 36] exempt from income tax under
Illegal transactions [Sec. 96, Rev. existing investment incentives and
Reg. 2] other special laws.
Exchanges of property, not solely
in kind, in pursuance of BASIS FOR COMPUTING GAIN OR LOSS (BIR
corporate mergers and RULING 146-98)
consolidations [Sec. 40, (C, 3)]
The fair market value (FMV) of the sale of
IMPORTANT DISTINCTION shares not traded but listed in the
If it is an ordinary asset, the stock exchange is the highest closing
ordinary gains and losses are considered price on the day the shares were sold,
in determining income or loss from transferred or exchanged.
trade, business or profession. (See Secs. When no sale is made in the stock
32A, 34D) exchange, the FMV shall be the
If it is a capital asset, determine highest selling price on the day
further whether or not it is a real nearest to the day of sale, transfer
property located in the Philippines. If it or exchange.
is, then it is subject to capital gains tax. For shares not listed in the exchange,
(See Secs. 24D, 27D5) (See also Sec s. the FMV shall be the book value
24C, 27D2) If not, the capital gains and nearest the valuation date
losses are considered in determining the
taxable income. (Sec. 39) The above rules shall be used in
computing for the net capital gain/loss
CAPITAL GAINS AND LOSSES – for disposition of shares.
SHARES OF STOCK
IMPORTANT FEATURES
The taxation of shares of stock
whether or not listed and traded in the Sale of shares of stock of a domestic
stock exchange is subject to final tax. corporation listed and traded in a
local stock exchange and that of initial
WHO ARE LIABLE TO THE TAX public offering shall be subject to
Individual taxpayer, citizen or alien Percentage tax (Business Tax)
Corporate taxpayer, domestic or foreign Capital losses sustained during the year
Other taxpayers such as estate, trust, (not listed and traded in a local stock
trust funds and pension among exchange) shall be allowed as a
others. capital loss deductible on the same
taxable year only (no carry-over)
RATES OF TAX The entire amount of capital gain and
capital loss (not listed and traded in
Shares of stock not traded through a a local stock exchange) shall be
local stock exchange – Net capital considered without taking into
gains derived during the taxable account holding period irrespective
year from sale, exchange, or of who is the taxpayer (all 100%)
transfer shall be taxed as follows (on Non-deductibility of losses on wash
a per transaction basis): sales.
Not over P 100,000 - 5%
Over P 100,000 - 10% FILING AND PAYMENT OF TAX
Shares of stock listed through a
local stock exchange – ½ of 1% of Listed and Traded in the Stock Exchange
the gross selling price of the stock. - The stockbroker shall turn over the
EXCEPTIONS TO THE TAX tax collected to the

   

B.I.R. within five (5) banking days taxable under Sec. 24 of the Code
from the date of collection. (does not include an estate or a
trust);
Not traded through the stock exchange - c. The proceeds of which is fully
It shall be paid by the seller on a per utilized in (a) acquiring or (b)
transaction basis upon filing of the constructing a new principal
required return within 30 days residence within eighteen (18)
following each sale or other calendar months from date of sale
disposition of shares of stock. or disposition;
d. Notify the Commissioner within
CAPITAL GAINS AND LOSSES thirty (30) days from the date of
sale or disposition through a
(REAL PROPERTY) prescribed return of his intention to
avail the tax exemption;
PERSONS LIABLE AND TRANSACTIONS AFFECTED
Can only be availed of only once every
ten (10) years;
Individual taxpayers, estates and trusts The historical cost or adjusted basis of
Sale or exchange or other his old principal residence sold,
disposition of real property exchanged or disposed shall be
considered as capital assets. carried over to the cost basis of his
The said sale shall include new principal residence
"pacto de retro sale" and other If there is no full utilization, the portion
conditional sale. of the gains presumed to have been
Domestic Corporation realized shall be subject to capital
Sale or exchange or disposition gains tax.
of lands and/or building which are
not actually used in business and are GROSS INCOME FROM DIFFERENT SOURCES
treated as capital asset.
(SEC. 42)
EXCEPTIONS TO THE TAX Please refer to Annex I.
Gains derived by dealers in real estate
ACCOUNTNG PERIODS AND METHODS OF
RATE AND BASIS OF TAX ACCOUNTING
A final tax of 6% is based on the
gross selling price or fair market value ACCOUNTING PERIODS
or zonal value whichever is higher. A. General rule (Sec. 43)
Note: Gain or loss is immaterial, Taxable income is computed
there being a conclusive presumption of upon the basis of taxpayer‘s
gain. annual accounting period (fiscal or
calendar year) in accordance with
See Annex G – Guidelines in Determining the method of accounting
Whether a Real Property is a Capital employed.
or an Ordinary Asset.
If no method of accounting
employed or method does not
EXEMPTION OF CERTAIN INDIVIDUALS FROM THE
clearly reflect the income,
CAPITAL GAINS TAX ON THE SALE OR
DISPOSITION OF A PRINCIPAL RESIDENCE
computation shall be made in
accordance w/ such method as
Conditions: the opinion of the Commissioner
a. Sale or disposition of the old clearly reflects the income.
principal residence; Taxable income is computed based
By natural persons - citizens or aliens on calendar year if:
provided that they are residents 0 accounting period is other
than a fiscal year
1 taxpayer has no accounting
period
2 taxpayer does not keep
books

   

0 taxpayer is an individual 1 from calendar year to fiscal

3 Fiscal year: accounting period of year
0 months ending on the last day 2 from one fiscal year to
of any month other than another
December 1 Effect of change: Net income,
4 Calendar year: accounting period shall, with the approval of the
from January 1 to December 31 Commissioner, be computed on
the basis of the new accounting
Periods in which items of gross period, subject to Sec. 47.
income included (Sec. 44)
Final or adjustment returns for a
0 Amount of all items of gross
period of less than 12 months
income shall be included in the
Returns for short period resulting
gross income for the taxable
from change of accounting
year in which received by the
period
taxpayer, unless, any such
amounts are to be properly taxpayer is other than an
accounted for in a different individual
period under methods of with the approval of the
accounting permitted Commissioner
If change is from fiscal year to
1 In case of death of taxpayer: calendar year:
include for the taxable year in
which falls the date of his
0 separate final or adjustment
death, all amounts which return be made for the
accrued up to the date of his period between the close of
death; if not otherwise properly the last fiscal year for which
includible in respect of such return was made and the
period or a prior period following December 31
If change is from calendar year to
Period for which deduction and fiscal year:
credits taken (Sec. 45) 0 separate final or adjustment
0 Deductions provided in this Title return be made for the
period between the close of
shall be taken for the taxable
year in which ‗paid or incurred, the last calendar for which
dependent upon the method of return was made and the
accounting upon the basis of date designated as the close
which the net income is of the fiscal year
computed, unless, in order to If change is from one fiscal year to
reflect the income, deductions another:
should be taken as of a different 0 separate final or adjustment
period. return be made for the
1 In case of death of taxpayer: period between the close of
deductions allowed for the the former fiscal year and
taxable period in which falls the the date designated as the
date of his death, amounts close of the new fiscal year
accrued up to the date of his Income computed on basis of short
death if not otherwise properly period
allowable in respect of such In what cases?
period or a prior period. 0 Where a separate final or
adjustment return is made
Change of accounting period (Sec.46) on account of a change in
0 Kinds of changes: accounting period
0from fiscal year to calendar 1 In all other cases where
year a separate final or
adjustment return is
require or permitted by

   

R&R prescribed by Sec. of showing the percentage of

Finance. upon completion during the
recommendation of taxable year of the entire
Commissioner work performed under the
0 Both shall be made for a contract
fractional part of a year.  Deductions from gross
1 Then income is computed on the income: all expenditures
basis of the short period for made during the taxable
which separate final or year on account of the
adjustment return is made. contract: account being
taken of the material and
METHODS OF ACCOUNTING supplies on hand at the
beginning and end of the
0 Cash method taxable period for use in
Recognition of income connection with the work
and expense dependent on under the contract but not
inflow or outflow of cash. yet so applied.
3 Amended return may be
B. Accrual method permitted /required by the
Method under which Commissioner: if upon
income, gains and profits are completion of contract,
included in gross income when taxable income has not been
earned whether received or not, clearly reflected for any
and expenses are allowed as year(s).
deductions when incurred:
although not yet paid. It is the Installment basis
right to receive and not the (1) Sales of dealers in personal
actual receipt that determines property
the inclusion of the amount in Under rules and
gross income regulations prescribed by
1 Examples: the Sec. of Finance, a
0 interest or rent income person who regularly sells or
earned but not yet otherwise disposes of
received personal property on the
1 rent expense accrued installment plan may return
but not yet paid as income there from in any
2 wages due to workers taxable year that proportion
but remaining unpaid of the installment payments
actually received in that
Accounting for long-term contracts year, which the gross profit
realized or to be realized
0 Long-term contracts:
when payment is completed,
building, installation or
bears to the contract price.
construction contracts
covering a period in excess
Example: Sale in 2000
of 1 yr
Contract price (CP)
1 Persons whose gross income (installments
is derived in whole or in part receivable) P200, 000
from such contracts shall Cost 150,000
report such income upon the Gross profit (GP) 50,000
basis of percentage of
completion Installments payable in 2
2 The return is accompanied equal annual installments
by a return certificate of GP/CP ratio
architects or engineers 50,000/200,000 = 25%
Collections in 2000=P100,000

   

Income for 2000  taxpayer must be

0 P100,000 x 25% = P25,000 entitled to benefits
under (1) hereof sales of
Sales of realty and casual sales dealers in personal
of Personalty property
 In cases of: 0 in computing income for
0 casual sale or other the year of change or
casual disposition of any subsequent year:
personalproperty amounts actually
(other than received during any such
inventory on hand of year on account of sales
the taxpayer at the or other dispositions of
close of the taxable property made in any
year) for a price > prior year shall not be
P1,000, or excluded.
1 sale or other
disposition of real Allocation of income and
property, if in either deductions
case the initial 0 Applicable to: cases of 2 or
payments do not more organizations, trades
exceed 25% of the or businesses (incorporated
selling price and organized within the
1 How may income be Philippines)ownedor
returned: same as in controlled directly
sales of dealer in /indirectly by the same
personal property above interest
2 Initial payments: 1 Commissioner is authorized
payments received in to distribute, apportion or
cash or property other allocate gross income or
than evidences of deductions between or
indebtedness of the among such organization,
purchaser during the trade or business, if he
taxable period in which determines that such
the sale or other distribution, apportionment
disposition is made. or allocation is necessary in
order to prevent evasion of
Sales of real property considered taxes or to clearly reflect
as capital asset by the income of any such
individuals organization, trade or
0 Individual who sells of business.
disposes of real
property, considered as FILING OF TAX RETURN AND PAYMENT OF TAX
capital asset and is
otherwise qualified to TAX RETURN – This is a report made by
report the gain under (2) the taxpayer to the BIR of all gross
above may pay the income received during the taxable
capital gains tax in year, the allowable deductions including
installments under rules exemptions, the net taxable income, the
and regulations to be income tax rate, the income tax due,
promulgated by the Sec. the income tax withheld, if any, and the
of Finance. income tax still to be paid or
refundable.
Change from accrual to
installment basis

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San Beda College of
Law 58
PERSONS REQUIRED TO FILE INCOME TAX same information contained in the

RETURN employer‘s annual return.
Individual HOW IS “SUBSTITUTED FILING” DIFFERENT

0 Resident citizen; FROM “NON-FILING”?
1 Non-resident citizen on income
from within the Phil.; Substituted Filing – an individual
taxpayer although required
2 Resident alien on income from under the law to file his income
within the Phil.; tax return, will no longer have
3 NRAETB on income from within to personally file his own income
the Phil. tax return.
4 An individual (citizens / aliens) – but instead the
engaged in business or practice employer’s annual information
of a profession within the Phil. return filed is the considered
regardless of the amount of ―substitute‖ income tax return
gross income; of the employee inasmuch as the
5 Individual deriving compensation information in the employer‘s
income concurrently from two or return is exactly the same
more employers at any time information contained in the
during the taxable year; employee‘s return.
6 Individual whose pure
compensation income derived Non-filing – applicable to certain
from sources within the Phil. types of individual taxpayers
exceeds P60,000. who are not required under the
Taxable Estate and Trust law to file an income tax return.
Example: employee whose
General Professional Partnership
pure compensation income does
Corporation
not exceed P60,000 and has only
0 Not exempt from income tax; one employer for the taxable
1 Exempt from income tax under year and whose tax withheld is
Sec. 30 of NIRC but has not equivalent to his tax due.
shown proof of exemption.
SUBSTITUTED FILING OF INCOME TAX RETURNS
INDIVIDUALS EXEMPT FROM FILING INCOME BY EMPLOYEES RECEIVING PURELY
TAX RETURN COMPENSATION INCOME. [SECTION 4, RR 3-
2002; RMC 01-03]
Individual whose gross income does not
exceed total personal and additional Requisites:
exemptions; 1. The employee receives purely
Individual with respect to pure compensation income (regardless of
compensation income derived from amount) during the taxable year.
sources within the Philippines, the The employee receives the income only
income tax on which has been from one employer during the
correctly withheld; taxable year.
Individual whose sole income has been The amount of tax due from the
subjected to final withholding employee at the end of the year
income tax; equals the amount of tax withheld
Individual who is exempt from income by the employer.
tax. The employee's spouse also complies
with all three (3) conditions stated
SUBSTITUTED FILING – is when the employer‘s above.
annual return may be considered as the The employer files the annual
―substitute‖ Income Tax Return (ITR) of information return (BIR Form No.
employee inasmuch as the information 1604-CF)
provided in his income tax return would
exactly be the

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San Beda College of
Law 59
6. The employer issues BIR Form 2316 REQUIREMENT OF BANKS FOR SUBMISSION OF
(Oct 2002 ENCS) version to each AN ITR FOR LOAN OR CREDIT CARD
employee APPLICATIONS
INDIVIDUALS NOT QUALIFIED FOR SUBSTITUTED Banks may require the submission of
FILING (STILL REQUIRED TO FILE) BIR Form No. 1700 (for employees not
entitled to substituted filing of ITR).
1. Individuals deriving compensation However, for employees entitled to
from two or more employers substituted filing of ITR, the submission
concurrently or successively during of the Joint Certification will suffice.
the taxable year.
2. Employees deriving compensation JOINT CERTIFICATION - It is a sworn
income, regardless of the amount, statement made by the employer and
whether from a single or several employee, which serve the following
employers during the calendar year, purposes:
the income tax of which has not 1. It contains the employee's consent
been withheld correctly (i.e. tax due that BIR Form No. 1604CF may be
is not equal to the tax withheld) considered his substituted return, in
resulting to collectible or refundable lieu of BIR Form No. 1700, which the
return. employee no longer filed.
3. Employees whose monthly gross 2. It contains the employer's
compensation income does not certification that he has reported
exceed P5,000 or the statutory the employee's income to the BIR
minimum wage, whichever is higher, and that he has remitted the taxes
and opted for non-withholding of tax on the employee's income, as
on said income. indicated in BIR Form No. 1604-CF.
4. Individuals deriving other non- 3. It serves as proof of financial
business, non-profession-related capacity in case the employee
income in addition to compensation decides to apply for a bank loan or a
income not otherwise subject to credit-card, or for any other
final tax. purpose, as if he had in fact filed a
5. Individuals receiving purely BIR Form No. 1700.
compensation income from a single
employer although the income tax of INDIVIDUALS REQUIRED TO FILE AN
which has been correctly withheld, INFORMATION RETURN
but whose spouse falls under 1 to 4
above. Individuals not required to file an
6. Non-resident aliens engaged in trade income tax return may nevertheless be
or business in the Philippines required to file an information return
deriving purely compensation pursuant to rules and, regulations
income, or compensation income prescribed by the Secretary of Finance
and other non-business, non- upon recommendation of the
profession-related income. Commissioner.
NOTE: Non-filing of ITR, for employees PLACE OF FILING

who are qualified for the substituted
filing shall be OPTIONAL for the taxable 1. Legal residence - authorized agent
year 2001, the returns for which shall be bank; Revenue District Officer;
filed on or before April 15, 2002. Collection agent or duly authorized
Thereafter, substituted filing where treasurer
applicable shall be MANDATORY. [Sec 5 2. Principal place of business
RR 3-2002) 3. With the Office of the Commissioner

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San Beda College of
Law 60
TIME FOR FILING (PAY AS YOU FILE SYSTEM) parent shall be included in the
return of the parent, except:
April 15 – for those earning sole a. when donor‘s tax has been paid
compensation income or solely business, on such property, or
practice of profession or combination of b. when transfer of such property is
business and compensation. exempt from donor‘s tax
RETURN AND PAYMENT OF ESTIMATED INCOME PERSONS UNDER DISABILITY

TAX BY INDIVIDUAL (SELF-EMPLOYED OR
PRACTICE OF PROFESSION) If a taxpayer is unable to make his
own return, it may be made by his
First quarter - April 15 of current year duly authorized agents;
Second quarter -August 15 of current representative;
year by guardian;
Third quarter – November 15 of current other person charged with the care of
year his person or property;
Final quarter - April 15 of the following who will assume the responsibility of
year. making the return and incurring
penalties provided for erroneous,
Note: When the tax due is in excess of false or fraudulent return.
P2, 000 - the taxpayer may elect to pay
in two (2) equal installments: RETURN OF ESTATE, TRUST AND PARTNESHIP
1st installment - April 15
2nd installment - on or before July 15 Estate and Trust with gross income
of P20,000 or more and partnership
EXTENSION OF TIME TO FILE RETURN (whether professional or business) shall
file their income tax return on or before
The Commissioner may on April 15.
meritorious cases grant a reasonable
extension of time for filing income tax TAX RETURNS OF GENERAL PROFESSIONAL
return and may subject the imposition of PARTNERSHIPS (GPP)
twenty (20) percent interest per annum Each GPP shall file in duplicate, a return
from the original due date. of its income (except those income
exempt)
RETURN OF HUSBAND AND WIFE Shall set forth:
0 items of gross income and
File one (1) return for the taxpayer deductions allowed
year if following requisites
complied; 1 names of partners
0 Married individuals (citizens, 2 TIN
resident or nonresident aliens) 3 address and share of each
1 Do not derived income purely partner
from compensation.
If impracticable to file one return: each TAX RETURN OF A CORPORATION
spouse file a separate return of Those required to file:
income but the return so filed shall be Corporation subject to tax having
consolidated by the Bureau for the existed during the taxable year,
purposes of verification for the year. whether with income or not.
Corporation in the process of liquidation
or receivership.
UNMARRIED MINOR Insurance company doing business in the
Philippines or deriving income
Income of unmarried minors derived therein
from property received by the living Foreign corporation having income from
within the Philippines

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San Beda College
of Law 61
FILING OF RETURN (PAY AS YOU FILE SYSTEM) TIME TO WITHHOLD TAX AT SOURCE
Quarterly returns for the first three
(3) quarters on a strictly sixty (60) day - arises at the time an income is paid
basis and the final or adjusted return on or payable, whichever comes first. The
the 15th day of the fourth (4th) month term ―payable‖ refers to the date the
following the close of either a-fiscal on obligation becomes due, demandable or
calendar year. legally enforceable. (Sec. 2.54.4 Rev.
Regs. 2.98)

See Annex V for Illustration.
NATURE OF WITHHOLDING AGENT’S LIABILITY
WHO SHALL FILE? The withholding agent is directly
The return shall be filed by the and independently liable for the correct
president, vice-president, or other amount of the tax that should be
principal officer, and shall be sworn to by withheld from the dividend remittance.
such officer and by the treasurer or (Commissioner vs. Procter and Gamble,
assistant treasurer. GR No. 66838, December 2, 1991)
WITHHOLDING TAXES CONSEQUENCES FOR FAILURE TO WITHHOLD:

1. liable for surcharges and
WITHHOLDING TAXES penalties;
Kinds: 2. liable upon conviction to a penalty
1. Withholding Tax at Source: equal to the total amount of the
a. Final Withholding Tax tax not withheld, or not accounted
b. Creditable Withholding Tax for and remitted. (Sec. 251, 1997
(Expanded withholding tax) NIRC)
2. Withholding Tax on Compensation 3. any income payment which is
(Wages) otherwise deductible from the
3. Withholding Tax on Creditable payor‘s gross income will not be
Value-Added Tax allowed as a deduction if it is
4. Withholding of Percentage Tax shown that the income tax
required to be withheld is not paid
FINAL CREDITABLE to the BIR. (Sec. 2.58.5, Rev. Reg.
WITHHOLDING WITHHOLDING 2-98)
TAX SYSTEM TAX SYSTEM
WITHHOLDING TAX ON COMPENSATION
The amount of Taxes withheld on Every employer must withhold
income tax withheld certain income from compensation paid, an amount
by the withholding payments are computed in accordance with the
agent is constituted intended to equal or regulations.
as a full and final at least approximate
payment of the the tax due from the Exception:
income due from the payee on the said Where such compensation
payee on the said income.
income of an individual:
income. [Sec. 2.57
(a), Rev. Reg. 2-98] 1. Does not exceed the statutory
minimum wages; or
The liability for The income 2. Five thousand (P5,000) monthly
payment of the tax recipient is still (P60,000 a year)
rests primarily on required to file an  whichever is higher.
the payor or the income tax return
withholding agent. and/or pay the ELEMENTS OF WITHHOLDING ON COMPENSATION
The payee is not difference between 1. There must be an employer-
required to file an the tax withheld and
income tax return the tax due on the
employee relationship
for the particular income. [Sec. 2. There must be payment of
income. 2.57(B), Rev. Regs. compensation or wages for services
2-98] rendered
3. There must be a payroll period.

   

COMPENSATION EXEMPTED INCOME OF RECIPIENT [SEC. 58 (D)]
1. Remunerations received as an Income which any creditable tax is

incident of employment required to be withheld at source
Remunerations paid for agriculture labor shall be included in the return of its
Remunerations paid for domestic recipient.
services The excess of the amount of tax
Remunerations for casual not in the withheld over the tax due on his
course of an employer's trade or return shall be refunded to him,
business. subject to Section 204 (abatement,
Compensation for services of a citizen, refund/credit taxes).
resident of the Philippines, for a If amount withheld at source is less than
foreign government or an the tax due on his return, the
international organization difference is paid in accordance
Damages with Section 56 (payment and
Life insurance assessment of income tax).
Amount received by the insured as All taxes withheld shall be considered as
return of premium trust funds and maintained in a
Compensation for injuries and sickness separate account and not
Income exempt under treaty commingled with any other funds of
Thirteenth (13th) month pay and other the withholding agent.
benefits
GSIS; SSS; Philhealth and other 0 TRANSFER TAXES
contributions,
TAX-FREE COVENANT BOND [SEC. 57(C)]

TRANSFER TAX INCOME TAX
COVENANT BONDS – bonds, mortgages, Tax on transfer of Tax on income
deeds of trust and other similar property.
obligations of domestic/resident foreign
corporation, which contain a Rates are lower Rates are higher
contract/provision by which the obligor --5% to 20% - -- 5% to 32%
agrees; estate tax
to pay any portion of the tax -- 2% to 15 % or
30% - donor‘s
imposed upon the obligee;
tax
to reimburse the obligee for any
portion of the tax; or Lesser exemptions More exemptions
to pay the interest without deduction
for any tax which the obligor may
be required/permitted to pay or to
retain therefrom. (1) ESTATE TAXES
Obligor shall deduct and withhold a tax = DEFINITION: an excise tax on the right of
30% of the interest and other transmitting property at the time of
payments whether interest or other death and on the privilege that a person
payments are payable annually or at is given in controlling to a certain extent
a shorter period; whether bonds, the disposition of his property to take
securities, obligations had been/will effect upon death.
be issued/ marketed and the
interest and other payments paid ESTATE TAX FORMULA
within and without the Philippines if
the interest or other payment is Gross Estate (Sec. 85)
payable to a non-resident alien or a Less: (1) Deductions (Sec. 86)
citizen or resident of the Philippines (2)Net share of the SS in the CPP
Net Taxable Estate

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
Multiply by: Tax rate (Sec. 84) Shares, obligations or bonds issued by
Estate Tax due any foreign corporation eighty-five
Less: Tax Credit [if any] (Sec. 86[E] or per centum (85%) of the business of
110[B] which is located in the Philippines;
Shares, obligations or bonds issued by
Estate Tax Due, if any
any foreign corporation, if such
shares, obligations or bonds have
acquired a business situs in the
GROSS ESTATE Philippines;
Shares or rights in any partnership,
DECEDENT’S GROSS ESTATE INCLUDES (SEC.
business or industry established in
85) the Philippines.
RESIDENT & NON-
RESIDENT CITIZEN, NON-RESIDENT INTANGIBLE PERSONAL PROPERTY, WITH A SITUS
RESIDENT ALIEN ALIEN DECEDENT IN THE PHILIPPINES, OF A DECEDENT WHO IS A
DECEDENT NON-RESIDENT ALIEN SHALL NOT FORM PART OF
THE GROSS ESTATE IF (RECIPROCITY CLAUSE)
1. Real property 1. Real property
wherever situated situated in the (SEC. 104)
Philippines.
the decedent at the time of his death
2. Personal property 2. Personal was a citizen and resident of a
wherever situated property foreign country which at the time of
a) Tangible, and a) Tangible his death
b) Intangible property
situated in
0 did not impose a transfer tax or
the
death tax of any character
Philippines 1 in respect of intangible personal
b) Intangible property of citizens of the
personal Philippines not residing in that
property foreign country; or
with a situs the laws of the foreign country of which
in the the decedent was a citizen and
Philippines
resident at the time of his death
unless
exempted 0 allow a similar exemption from
on the basis transfer taxes or death taxes of
of every character
reciprocity. 1 in respect of intangible personal
property owned by citizens of
THE LAW THAT GOVERNS THE IMPOSITION OF the Philippines not residing in
ESTATE TAX
that foreign country
(Reciprocity).
The statute in force at the time of
death of the decedent shall govern
VALUATION OF THE GROSS ESTATE
estate taxation.
The properties comprising the gross
INTANGIBLE PERSONAL PROPERTIES WITH A
estate shall be valued based on their fair
SITUS IN THE PHIL. (SEC. 104, 1997 NIRC)
market value as of the time of death.
Franchise which must be exercised in
the Philippines; PROPERTY VALUATION
Shares, obligations or bonds issued by
1) Real Property - fair market value
any corporation or sociedad anonima a) as determined by the
organized or constituted in the Commissioner or
Philippines in accordance with its b) as shown in the
laws; schedule of values

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San Beda College
of Law 64
fixed by the possess or enjoy the property or

provincial and city the income therefrom.
assessors
WHICHEVER IS HIGHER Exception: bona fide sale for an
adequate and full consideration in
2) Shares of Stock
Unlisted
money or money‘s worth.
Common Shares -book value
Preferred -par value 3. REVOCABLE TRANSFER
Shares -arithmetic mean A transfer whereby the terms of
between the highest and enjoyment of the property may be
Listed lowest quotation at a altered, amended, revoked or
date nearest the date of terminated by the decedent alone or in
death, if none is conjunction with any other person, or
available on the date of where any such power is relinquished in
death itself.
contemplation of the decedent‘s death.
It is enough that the decedent had the
3)Right to - shall be taken into
usufruct, use or account the probable power to alter, amend or revoke though
habitation, as life of the beneficiary in he did not exercise such power.
well as that of accordance with the
annuity latest basic standard Exception: bona fide sale for an
mortality table, to be adequate and full consideration in
approved by the money or money‘s worth.
Secretary of Finance,
upon recommendation 4. TRANSFER UNDER GENERAL POWER
of the Insurance
OF APPOINTMENT
Commissioner.
A power of appointment is the right
4) Personal - whether tangible or to designate the person or persons who
property intangible, appraised at will succeed to the property of the prior
FMV. ―Sentimental decedent.
value‖ is practically The general power of appointment
disregarded. may be exercised by the decedent:
1. by will; or
2. by deed executed in contemplation
INCLUSIONS IN THE GROSS ESTATE (SEC. 85) of his death; or
3. by deed under which he has retained
1. DECEDENT’S INTEREST for his life or for any period not
To the extent of the interest in ascertainable without reference to
property of the decedent at the time of his death or for any period which
his death. does not in fact end before his
death:
2. TRANSFER IN CONTEMPLATION OF a. the possession or enjoyment of,
DEATH or the right to the income from
1. A transfer motivated by the thought the property; or
of impending death although death b. the right, either alone or in
may not be imminent; or conjunction with any person, to
designate the persons who shall
2. A transfer by which the decedent possess or enjoy the property or
retained for his life or for any period the income therefrom.
which does not in fact end before his
death: Exception: bona fide sale for an
a. the possession or enjoyment of, adequate and full consideration in
or the right to the income from money or money‘s worth.
the property, or
b. the right, either alone or in 5. PROCEEDS OF LIFE INSURANCE
conjunction with any person, to Proceeds of life insurance taken by
designate the person who shall the decedent on his own life shall be

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
included in the gross estate if the The transmission from the first heir,
beneficiary is: legatee or donee in favor of another
a. the estate of the decedent, his beneficiary, in accordance with the
executor or administrator will of the predecessor; and
(regardless whether the designation All bequests, devices, legacies or
is revocable or irrevocable); or transfers to social welfare, cultural and
a third person other than the estate, charitable institutions no part of the net
executor or administrator where the income of which inures to the benefit of
designation of the beneficiary is any individual; Provided, that not more
revocable. than 30% of the said bequests, legacies
or transfers shall be used by such
TRANSFERS FOR INSUFFICIENT institutions for administration purposes.
CONSIDERATION
The value to be included in the gross DEDUCTIONS ON GROSS ESTATE
estate is the excess of the fair market APPLICABLE TO
value of the property at the time of the RESIDENT ALIENS AND CITIZENS
decedent‘s death over the consideration (REVENUE REGULATIONS 2-2003)
received. This is applicable in cases of
transfer in contemplation of death, The following are deductible from
revocable transfer and transfer under the gross estate of citizens and resident
general power of appointment made for aliens:
a consideration but is not a bona fide
1. Expenses, losses, indebtedness,
sale for an adequate and full
taxes, etc. (ordinary deductions)
consideration in money or money‘s
Transfer for public use
worth.
Vanishing deduction
Family home
PRIOR INTERESTS Standard deduction equivalent to one
All transfers, trusts, million pesos (P1,000,000)
estates, Medical expenses
interests, rights, powers and Amounts received by heirs under RA
relinquishment of powers made, 4917 (Retirement Benefits)
created, arising, existing, exercised or Net share of the surviving spouse in the
relinquished before or after the conjugal or community property
effectivity of the NIRC.
PROPERTY RELATIONS BETWEEN HUSBAND AND 0 ORDINARY DEDUCTIONS

WIFE
The property relations between the A. FUNERAL EXPENSES
spouses shall be governed by contract The amount deductible is the
(marriage settlement) executed before lowest among the following:
the marriage. actual funeral expenses
5% of the gross estate
In the absence of such contract, or if P200,000.
the contract is void:
On marriages contracted before August It includes the following:
3, 1988, the system of conjugal Mourning apparel of the surviving spouse
partnership of gains shall govern; and unmarried minor children of the
On marriages contracted on or after deceased, bought and used in the
August 3, 1988 (effectivity of the occasion of the burial.
Family Code of the Philippines), the Expenses of the wake preceding the
system of absolute community of burial including food and drinks.
property shall govern. Publication charges for death notices.
Telecommunication expenses in
EXEMPT TRANSMISSIONS (SEC. 87) informing relatives of the deceased.
The merger of usufruct in the owner of
the naked title;
Fideicommisary substitution;

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San Beda College of
Law 66
5. Cost of burial plot. Tombstone Requisites:

monument or mausoleum but not 1. The liability represents a
their upkeep. In case deceased personal obligation of the
owns a family estate or several deceased existing at the time of
buriallots,onlythevalue his death except unpaid
corresponding to the plot where he obligations incurred incident to
is buried is deductible. his death such as unpaid funeral
6. Interment fees and charges. expenses (i.e., expenses
7. All other expenses incurred for the incurred up to the time of
performance of the ritual and interment) and unpaid medical
ceremonies incident to the expenses which are classified
interment. under a different category of
Expenses incurred after the deductions;
interment, such as for prayers, masses, 2. The liability was contracted in
entertainment, or the like are not good faith and for adequate and
deductible. full consideration in money or
Any portion of the funeral and burial money's worth;
expenses borne or defrayed by relatives 3. The claim must be a debt or
and friends of the deceased are not claim which is valid in law and
deductible. enforceable in court;
4. The indebtedness must not have
B. JUDICIAL EXPENSES OF THE been condoned by the creditor
TESTAMENTARY OR INTESTATE or the action to collect from the
PROCEEDINGS decedent must not have
Expenses allowed as deduction under prescribed.
this category are those:
1. incurred in the inventory-taking D. CLAIMS AGAINST INSOLVENT PERSONS
of assets comprising the gross
estate, Requisites:
2. administration, 1. The amount thereof has been
3. payment of debts of the estate, initially included as part of his gross
as well as the distribution of the estate (for otherwise they would
estate among the heirs. constitute double deductions if they
In short, these deductible items are were to be deducted)
expenses incurred during the settlement 2. The incapacity of the debtors to pay
of the estate but not beyond the last day their obligation is proven.
prescribed by law, or the extension
thereof, for the filing of the estate tax C. UNPAID MORTGAGE
return. In case unpaid mortgage payable is
being claimed by the estate,
C. CLAIMS AGAINST THE ESTATE verification must be made as to who
The word "claims" is generally was the beneficiary of the loan
construed to mean debts or demands of proceeds.
a pecuniary nature which could have  If the loan is found to be merely an
been enforced against the deceased in accommodation loan where the loan
his lifetime and could have been proceeds went to another person,
reduced to simple money judgments. the value of the unpaid loan must be
included as a receivable of the
Claims against the estate or estate.
indebtedness in respect of property may  If there is a legal impediment to
arise out of: recognize the same as receivable of
1. Contract; the estate, said unpaid obligation/
2. Tort; or mortgage payable shall not be
3. Operation of Law. allowed as a deduction from the
gross estate.

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
In all instances, the mortgaged property, deduction allowed diminishes over a

to the extent of the decedent's period of five years. The rate of
interest therein, should always form deduction depends on the period from
part of the gross taxable estate. the date of transfer to the death of the
decedent, as follows:
TAXES
Taxes which have accrued as of the PERIOD DEDUCTION
death of the decedent which were  1 year or less 100%
unpaid as of the time of death.  1 year – 2 years 80%
 2 years – 3 years 60%
The following are not deductible:
income tax on income received after  3 years – 4 years 40%
death  4 years – 5 years 20%
2. property taxes not accrued
before death Requisites:
3. estate tax the present decedent died within 5 years
from transfer of the property from a
G. LOSSES prior decedent or donor.
Requisites: The property must be located in the
It should arise from fire, storm, Phils.
shipwreck, or other casualty, The property formed part of the taxable
robbery, theft or embezzlement; estate of the prior decedent, or of
Not compensated by insurance or the taxable gift of the donor.
otherwise; The estate tax or donor‘s tax on the gift
Not claimed as deduction in an must have been finally determined
income tax return of the taxable and paid.
estate; The property must be identified as the
Occurring during the settlement of one received from the prior
the estate; and decedent, or something acquired in
Occurring before the last day for the exchange therefor.
payment of the estate tax (last No vanishing deduction on the property
day to pay: six months after the was allowable to the estate of the
decedent‘s death). prior decedent.
0 TRANSFER FOR PUBLIC USE 4. FAMILY HOME
Requisites: Conditions:
The disposition is in a last will and The family home must be the actual
testament residential home of the decedent
To take effect after death and his family at the time of his
In favor of the government of the Phil., death, as certified by the Barangay
or any political subdivision thereof Captain of the locality where the
For exclusive public purposes. family home is situated;
The total value of the family home must
Note: This should also include bequests, be included as part of the gross
devices, or transfers to social welfare, estate of the decedent; and
cultural and charitable institutions. Allowable deduction must be in an
amount equivalent to
3. VANISHING DEDUCTION 0 the current fair market value of
the family home as declared or
DEFINITION: The deduction allowed from included in the gross estate, or
the gross estate for properties that were 1 the extent of the decedent's
subject to donor‘s or estate taxes. It is interest (whether
called vanishing deduction because the conjugal/community or exclusive
property), whichever is lower, but
not exceeding P1,000,000

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San Beda College of
Law 68
5. STANDARD DEDUCTION DEDUCTIONS ON GROSS

ESTATE APPLICABLE TO
A deduction in the amount of One
NON-RESIDENT ALIENS
Million Pesos (P1,000,000) shall be
allowed as an additional deduction
The following are deductible from the gross
without need of substantiation. estate of non-resident aliens:
The full amount of P1,000,000 shall
be allowed as deduction for the benefit 1. Expenses, losses, indebtedness and
of the decedent. taxes (ELIT) (ordinary deductions)
6. MEDICAL EXPENSES Formula:

Tax = Phil. Gross
Credit Estate X World
 Any amount of medical expenses
Limit World Gross ELIT
incurred within one year from death
Estate
in excess of Five Hundred Thousand
Pesos (P500,000) shall no longer be
2. Transfer for public use
allowed as a deduction under this
subsection.
3. Vanishing deduction on property in
 Neither can any unpaid amount the Philippines.
thereof in excess of the P500,000
threshold nor any unpaid amount for 4. Conjugal share of the surviving
medical expenses incurred prior to spouse
the one-year period from date of
death be allowed to be deducted
ESTATE TAX CREDIT
from the gross estate as claim
against the estate.
A tax credit is granted for estate
7. AMOUNT RECEIVED BY HEIRS taxes paid to a foreign country on the
estate of citizens and resident aliens
UNDER REPUBLIC ACT NO.
subject to the following limitations
4917
1. One foreign country only
Any amount received by the heirs The tax credit is whichever is
from the decedent's employer as a lower between:
consequence of the death of the 4. Estate tax paid to the foreign
decedent-employee in accordance with country
Republic Act No. 4917 is allowed as a 5. Tax Credit Limit =
deduction provided that the amount of NTE, foreign country X Phil. estate
the separation benefit is included as NTE, world Tax
part of the gross estate of the decedent.
(NTE - Net Taxable Estate)
8. NET SHARE OF THE
SURVIVING SPOUSE IN THE 2. More than one foreign country
CONJUGAL PARTNERSHIP OR The credit shall be that which is
COMMUNITY PROPERTY the lower amount between Limit A
and Limit B.
After deducting the allowable
deductions (only the ordinary Limit A. Whichever is lower
deductions) appertaining to the conjugal between:
or community properties included in the  Estate tax paid to a foreign
gross estate, the share of the surviving country
spouse must be removed to ensure that  Tax Credit Limit =
only the decedent's interest in the NTE, foreign country X Phil. estate
estate is taxed. NTE, world Tax

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San Beda College of
Law 69
Limit B. Whichever is lower WHEN THE GROSS ESTATE EXCEEDS

between: P2,000,000, THE ESTATE TAX RETURN
 Total of estate taxes paid to all SHALL BE ACCOMPANIED BY A STATEMENT
foreign countries WHICH IS CERTIFIED BY AN INDEPENDENT
 Tax Credit Limit = CERTIFIED PUBLIC ACCOUNTANT STATING
NTE outside Phil. X Phil. estate 1. the itemized assets of the decedent
NTE, world Tax with its corresponding gross value at
the time of his death, or in the case
of a non-resident, not citizen of the
Philippines, that part of his gross
SETTLEMENT OF THE
estate situated in the Philippines;
ESTATE TAX 2. the itemized deductions from the
gross estate;
A. FILING 3. the amount of tax due, whether paid
or still due and outstanding.
NOTICE OF DEATH TO BE FILED
In all cases of transfers subject to PLACE WHERE TO FILE THE ESTATE TAX
tax, or where, though exempt from tax, RETURN
the gross value of the estate exceeds
P20,000, the executor, administrator or Resident Citizen
any of the legal heirs, within two 0 with the Accredited
months after the decedent‘s death, or Agent Bank (AAB), Revenue District
within a like period after qualifying as Officer, Collection Officer or duly
such executor or administrator, shall authorized Treasurer of the city or
give a written notice thereof to the municipality where the decedent was
Commissioner. (Sec. 89) domiciled at the time of his death.
AN ESTATE TAX RETURN IS REQUIRED TO BE Non-resident (citizen or alien)

FILED a. has registered executor or
when the estate is subject to estate tax; administrator
or 0 with the Revenue District
when the estate is not subject to estate Office where such executor or
tax but the gross estate exceeds P administrator is registered
200,000; or executor or administrator is not
regardless of the amount of the gross registered
estate, where the gross estate 0 with the Revenue District
consists of registered or registrable Office having jurisdiction over
property such as motor vehicle or the executor‘ or administrator‘s
shares of stock or other similar residence
property for which clearance from no executor or administrator
the BIR is required as a condition 0 with the Office of the
precedent for the transfer of
Commissioner (Sec. 9C, Rev. Reg.
ownership thereof in the name of
2-2003)
the transferee.
B. PAYMENT
TIME FOR FILING OF THE ESTATE TAX RETURN
The estate tax return shall be filed PAYMENT OF THE ESTATE TAX DUE
within six (6) months after the death of The estate tax due shall paid at the
the decedent. time when the estate tax return is filed.
When the Commissioner finds that
Extension: The BIR may, in meritorious the payment of the estate tax on the
cases, grant an extension of not due date would impose undue hardships
exceeding thirty (30) days for the filing upon the estate or any heir:
of the estate tax return. the payment of the estate tax may
be extended for a period not to
exceed five (5) years if

   

there is a judicial settlement of There is nothing in the Tax Code and

the estate; or in the pertinent remedial law that
the payment of the estate tax may implies the necessity of the probate
be extended for a period not to court or estate settlement of court‘s
exceed two (2) years if there is approval of the State‘s claim for estate
an extra-judicial taxes before the same can be enforced
settlement of the estate. and collected by the BIR. On the
NOTE: In case the available cash is not contrary, under Section 94, it is the
sufficient to pay its total estate tax probate or settlement court which is
liability, the estate may be allowed to bidden not to authorize the delivery of
pay tax by installment. (Sec. 9F, Rev. the distributive share to any interested
Reg. 2-2003) party without a certification from the
CIR showing the payment of the estate
LIABILITY FOR PAYMENT tax. (Marcos II vs. Court of Appeals, GR
The estate tax shall be paid by the No. 120880, June 5, 1997)
executor or administrator before delivery
to any beneficiary of his distributive share COLLECTION OF TAX FROM THE HEIRS
of the estate. An estate or inheritance tax,
Such beneficiary to the extent of his whether assessed before or after the
distributive share of the estate shall be death of the deceased, can be collected
subsidiarily liable for the payment of from the heirs even after the
such portion of the estate tax as his distribution of the properties of the
distributive share bears to the value of decedent. (Palanca vs. Commissioner of
the total net estate. (Sec. 9G, Rev. Reg. Internal Revenue, GR No. 16661,
2-2003) January 31, 1962)
No judge shall authorize the
distribution of the estate unless a The Government has two ways of
certification from the Commissioner that collecting taxes due from the estate.
tax has been paid is shown. (Sec. 94) By going after all the heirs and
No shares or other forms of securities collecting from each one of
shall be transferred in the books of any them the amount of the tax
corporation, partnership, business or proportionate to the inheritance
industry organized in the Philippines, received, or
unless a similar certification by the Pursuant to the lien created by
Commissioner is shown. (Sec. 97) Section 219 of the Tax Code
When a bank has knowledge of the upon all property and rights to
death of a person who maintained a property belonging to the
joint account, it shall not allow any taxpayer for unpaid income tax,
withdrawal by the surviving depositor is by subjecting said property of
without the above certification. (Sec. the estate which is in the hands
97) of an heir or transferee to the
Provided: that the administrator of payment of the tax due the
the estate or any one (1) of the heirs of estate. (Commissioner of
the decedent may, upon authorization Internal Revenue vs. Pineda, GR
by the Commissioner, withdraw an No. L –22734, September 15,
amount not exceeding twenty thousand 1967)
pesos (P20,000) without the said
certification.

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San Beda College
of Law 71
(2) DONOR’S TAXES A gift that is incomplete because of

reserved powers, becomes complete
DEFINITION: A tax on the privilege of when either:
transmitting one‘s property or property 1. the donor renounces the power; or

rights to another or others without 2. his right to exercise the reserved
adequate and full valuable power ceases because of the
consideration. happening of some event or
contingency or the fulfillment of
COVERAGE OF THE TAX (SEC. 104) some condition, other than because
of the donor's death.
RESIDENT & NON-  Renunciation by the surviving
RESIDENT CITIZEN, NON-RESIDENT spouse of his/her share in the
RESIDENT ALIEN ALIEN DONOR conjugal partnership or absolute
community after the dissolution
DONOR
of the marriage in favor of the
1. Real property 1. Real property heirs of the deceased spouse or
wherever situated situated in the any other person/s is subject to
Philippines. donor's tax.
 Whereas general renunciation
2. Personal property 2. Personal property by an heir, including the
wherever situated a. Tangible property surviving spouse, of his/her
a. Tangible, and situated in the share in the hereditary estate
Intangible Philippines
left by the decedent is not
b. Intangible
personal property subject to donor's tax, unless
with a situs in the specifically and categorically
Philippines unless done in favor of identified heir/s
exempted on the to the exclusion or disadvantage
basis of of the other co-heirs in the
reciprocity. hereditary estate. (Sec. 11, Rev.
Reg. 2-2003)
REQUISITES
STRANGER - a person who is not a
Capacity of the donor brother, sister, spouse, ancestor and
Donative Intent lineal descendant, or of a relative by
Delivery, whether actual or consanguinity in the collateral within
constructive, of the subject gift the 4th civil degree.
Acceptance by the donee A legally adopted child is entitled to all
the rights and obligations provided
LAW THAT GOVERNS THE IMPOSITION OF by law to legitimate children, and
DONOR’S TAX therefore, donation to him shall not
be considered as donation made to
The donor‘s tax shall not apply stranger.
unless and until there is a completed Donation made between business
gift. The transfer is perfected from the organizations and those made
moment the donor knows of the between an individual and a
acceptance by the donee; it is business organization shall be
completed by the deliver, either considered as donation made to a
actually or constructively, of the stranger.
donated property to the donee. Thus,
the law in force at the time of the VALUATION OF GIFTS OF PROPERTY
perfection/completion of the donation The fair market value of the
shall govern the imposition of the property given at the time of the gift
donor‘s tax. shall be the value of the gift.

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San Beda College
of Law 72
INTANGIBLE PERSONAL PROPERTIES WITH A or philanthropic organization,

SITUS IN THE PHIL. (SAME AS IN ESTATE TAX research institution or
SUBJECT TO THE RECIPROCITY RULE) (SEC. organization, accredited non-
104) government organization (NGO).
Provided, that no more than 30%
Formula: (On a cumulative basis over a of said gifts shall be used by
period of one calendar year) such donee for administration
purposes.
st
1. On the 1 donation of a year 2. Gifts made by a non-resident not
a citizen of the Phil.
Gross gifts xxx a. same as (b)
Less: Deductions from gross xxx b. same as (c) except accredited
gifts non-government organization
Net gifts xxx (NGO)
Multiply by: Tax Rate xxx
A NON-PROFIT EDUCATIONAL AND/OR
Donor‘s tax on the net gifts xxx
CHARITABLECORPORATION,INSTITUTION,
ACCREDITED NON-GOVERNMENT ORGANIZATION,
2. On donation of a subsequent
TRUST OR PHILANTROPHIC ORGANIZATION,
date during the year
RESEARCH INSTITUTION OR ORGANIZATION IS
Gross gifts made on this date XX

1. one incorporated as a non-stock
Less: Deductions from gross gifts XX
entity
Net gifts XX
2. paying no dividends
Add: All prior net gifts within the XX
3. governed by trustees who receive no
year
compensation, and
Aggregate net gifts XX 4. devoting all its income whether
Multiply by: Tax Rate XX
students‘ fees or gifts, donations,
Donor‘s tax on aggregate net gifts XX subsidies or other forms of
Less: Donor‘s tax on all prior net XX philantrophy to the accomplishment
gifts and promotion of the purposes
Donor‘s tax on the net gifts on this XX enumerated in its Articles of
date Incorporation.
EXEMPTION OF CERTAIN GIFTS TAX CREDIT FOR DONOR’S TAXES PAID TO A

FOREIGN COUNTRY
Gifts made by a resident
0 Dowries or gifts made on Donor was a Filipino citizen or resident
account of marriage and before alien
its celebration or within one At time of foreign donation
year thereafter by parents to Donor‘s taxes of any character and
each of their legitimate, description
illegitimate or adopted children Are imposed and paid by the authority of
to the extent of the first P10, a foreign country.
000.
1 Gifts made to or for the use of LIMITATIONS ON TAX CREDIT
the National Government or any
entity created by any of its The amount of the credit in respect to
agencies which is not conducted the tax paid to any country shall not
for profit, or to any political exceed the same proportion of the
subdivision of the said tax against which such credit is
government. taken, which the decedent‘s net
gifts situated within such country
2 Gifts in favor of educational, taxable under the NIRC bears to his
charitable, religious, cultural or entire net gift; and
social welfare corporation,
institutions, foundations, trust

   

The total amount of the credit shall not NOTE: The filing of a notice of donation
exceed the same proportion of the is not required, unlike in estate tax
tax against which such credit is where notice of death is required.
taken, which the decedent‘s net gift
situated outside the Philippines PLACE FOR FILING OF RETURN AND PAYMENT
taxable under the NIRC bears to his OF THE DONOR’S TAX
entire net gift.
1. Resident
FORMULA OF TAX CREDIT LIMIT 0 With an authorized agent bank, the
Revenue District Officer, Revenue
For donor’s taxes paid to one foreign Collection Officer or duly
country authorized Treasurer of the city or
municipality where the donor was
NG situated Tax domiciled at the time of the
in a foreign country X PDT = Credit transfer, or if there be no legal
Entire net gift Limit residence in the Philippines, with
the Office of the Commissioner.
(NG - Net Gifts; PDT - Phil. Donor's Tax) Non-resident
0 Filed with the Philippine Embassy
For donor’s taxes paid to two or more or Consulate in the country where
foreign country he is domiciled at the time of the
transfer, or directly with the
NG outside the Phil. X PDT = Tax Office of the Commissioner.
Entire net gifts Credit
Limit TAX RATE
The allowable tax credit is the If the donee is a stranger, the rate of
lower amount between the tax credit tax shall be 30% of the net gifts.
limit under (a) and (b). If the donee is not a stranger, the
rate shall be from 2% to 15% of the net
gifts.
SETTLEMENT OF THE DONOR’S TAX See Annex W - Donor‘s Tax
TIME FOR FILING OF RETURN AND PAYMENT OF
THE DONOR’S TAX 0 TAX REMEDIES
The donor‘s tax return is filed and UNDER THE NIRC
the donor‘s tax due is paid within thirty
days after the date the gift is made. The
return shall be under oath in TAX REMEDIES OF THE
duplicate setting forth: GOVERNMENT
Each gift made during the calendar year
which is to be included in computing
net gifts; IMPORTANCE
The deductions claimed and allowable;
Any previous net gifts made during the They enhance and support the
same calendar year; government‘s tax collection.
The name of the donee; They are safeguards of taxpayer‘s rights
Relationship of the donor to the donee; against arbitrary action.
and
Such further information as may be TAX COLLECTION CANNOT BE RESTRAINED BY
COURT INJUNCTION (SEC. 218, 1997 NIRC)
required by rules and regulations
made pursuant to law.
Justification: Lifeblood Theory

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San Beda College of
Law 74
Exception: Injunction may be issued by 7. Forfeiture of Property (Sec.

the CTA in aid of its appellate 224-225)
jurisdiction under RA 1125 (as amended 8. Suspension of business
by RA 9282). operations in violation of VAT
(Sec. 115)
Conditions for the Issuance of an 9. Enforcement of Administrative
Injunction by the Court of Tax Appeals Fine
The CTA may enjoin collection of
taxes: The remedies of distraint and levy as
a. If in its opinion the same may well as collection by civil and criminal
jeopardizetheinterestofthe actions may, in the discretion of the
government and/or the taxpayer. Commissioner, be pursued singly or
b. In this instance, the court may independently of each other, or all of
require the taxpayer either to deposit them simultaneously.
the amount claimed or file a surety bond
for not more than double the amount
with the court. (1) COMPROMISE
* Before enforcement of remedies, DEFINITION: A contract whereby the

assessment is necessary to trigger the parties, by reciprocal concessions, avoid
process. If no return is filed, the litigation or put an end to one already
Commissioner is empowered to obtain commenced (Art. 2028, New Civil Code).
information, and to summon/examine,
and take testimony of persons to REQUISITES
determine the amount of tax due. (Sec. 1. The taxpayer must have a tax
5, 1997 NIRC) liability.
2. There must be an offer (by the
TAX REMEDIES UNDER THE 1997 TAX CODE: taxpayer of an amount to be paid by
the taxpayer)
1. Summary – remedies at the 3. There must be an acceptance (by
administrative level or regulation that the Commissioner or taxpayer as the
are executed without ceremony or case may be) of the offer in the
delay; short or concise settlement of the original claim.
2. Substantive – remedies provided for
by law or regulation; an essential part or OFFICERS AUTHORIZED TO COMPROMISE
constituent or relating to what is
essential 1. The Commissioner of Internal
3. Procedural – remedies involving law of Revenue (CIR) with respect to
pleading, evidence, jurisdiction, etc. criminal and civil cases arising from
4. Administrative – remedies available at violations of the Tax Code [Secs. 7(C)
the administration (BIR) level and 204, 1997 NIRC]. This power of
5. Judicial – remedies that are the CIR is discretionary and once
enforced through judicial action, exercised by him cannot be reviewed
which may be civil or criminal or interfered with by the Courts.
(Koppel, Philippines vs.
TAX REMEDIES OF THE GOVERNMENT TO EFFECT Commissioner, GR No. L-1977,
COLLECTION OF TAXES September 21, 1950)
2. By the Regional Evaluation Board
1. Compromise (Sec. 204) composed of:
2. Distraint (Actual and Constructive) a. the Regional Director as
(Secs. 205-208) Chairman,
3. Levy (Sec. 207B) b. Assistant Regional Director,
4. Tax Lien (Sec. 219) the heads of the Legal,
5. Civil Action (Sec. 221) Assessment and Collection
6. Criminal Action (Secs. 221, and 222) Divisions, and

   

c. the Revenue District Officer a. The delinquent account or

having jurisdiction over the disputed assessment is one
taxpayer, as members; resulting from a jeopardy
on assessments issued by the assessment.
regional offices involving basic The assessment seems to be
taxes of P500,000 or less, and arbitrary in nature, appearing
minor criminal violations. to be based on presumptions,
and there is reason to believe
CASES WHICH MAY BE COMPROMISED that its is lacking in legal
and/or factual basis; or
Delinquent accounts The taxpayer failed to file an
Cases under administrative protests administrative protest on
Civil tax cases being disputed before the account of the alleged failure
courts to receive notice of assessment
Collection cases filed in courts or preliminary assessment and
Criminal violations, other than those there is reason to believe that
already filed in court or those its is lacking in legal and/or
involving criminal tax fraud; and, factual basis; or
Cases covered by pre-assessment The taxpayer failed to file a request
notices but taxpayer is not agreeable for
to the findings of the audit office as reinvestigation/reconsideratio
confirmed by the review office. n within 30 days from receipt
(Sec.2, Rev. Reg. 7-2001) of final assessment notice and
there is reason to believe that
EXCEPTIONS its is lacking in legal and/or
factual basis; or
Withholding tax cases; The taxpayer failed to elevate to the
Criminal tax fraud cases; CTA an adverse decision of the
Criminal violations already filed in court; Commissioner, or his authorized
Delinquent accounts with duly approved representative, in some cases,
schedule of installment payments; within 30 days from receipt
Cases where final reports of thereof and there is reason to
reinvestigation or reconsideration believe that its is lacking in
have been issued resulting to legal and/or factual basis; or
reduction in the original assessment The assessment were issued on or
and the taxpayer is agreeable to after Jan. 1, 1998, where the
such decision. demand notice allegedly failed
Cases which become final and to comply with the formalities
executory after final judgment of a prescribed under Sec. 228 of
court, where compromise is the 1997 NIRC; or
requested on the ground of Assessments made based on the
doubtful validity of the assessment ―Best Evidence Obtainable
(RR. 30– 2002); Rule‖ and there is reason to
0 Estate tax cases where compromise believe that the same can be
is requested on the ground of disputed by sufficient and
financial incapacity of the competent evidence.
taxpayer. (RR. 30–2002) The assessment was issued within
the prescriptive period for
COMMISSIONER MAY COMPROMISE THE PAYMENT assessment as extended by the
OF ANY INTERNAL REVENUE TAX WHEN taxpayer's execution of Waiver
of the Statute of Limitations
A reasonable doubt as to the validity of the validity or authenticity of
the claim against the taxpayer which is being questioned or at
exists; or issue and there is strong reason
to believe and

   

evidence to prove that it is not c. The taxpayer is suffering from a

authentic. (RR. 30– 2002) networth deficit (total liabilities
0 The assessment is based on an exceed total assets) computed by
issue where a court of deducting total liabilities (net of
competent jurisdiction made an deferred credits and amounts
adverse decision against the payable to stockholders/owners
Bureau, but for which the reflected as liabilities, except
Supreme Court has not decided business-related transactions)
upon with finality. (RR. 08- from total assets (net of prepaid
2004). expenses, deferred charges, pre-
operating expenses, as well as
The financial position of the taxpayer appraisal increases in fixed
demonstrates a clear inability to assets), taken from the latest
pay the assessed tax [Sec. 204(A), audited financial statements,
1997 NIRC). In such case, the provided that in the case of an
taxpayer should waive the individual taxpayer, he has no
confidentiality privilege on bank other leviable properties under
deposits under RA No. 1405 [Sec. the law other than his family
6(F)(2), NIRC]. home; (Sec. 3, RR. 30–2002).
Financial Incapacity. — The offer
to compromise based on financial c. The taxpayer is a compensation
incapacity may be accepted upon earner with no other source of
showing that: income and the family‘s gross
a. The corporation ceased operation monthly compensation does not
or is already dissolved. Provided, exceed (P10,500/month if single;
that tax liabilities corresponding P21,000/month if married), and
to the Subscription Receivable or that it appears that the taxpayer
Assets distributed/distributable to possesses no other leviable/
the stockholders representing distrainable assets, other than his
return of capital at the time of family home; or
cessation of operation or
dissolution of business shall not be d. The taxpayer has been granted by
considered for compromise; or the SEC or by any competent
tribunal a moratorium or
b. The taxpayer, as reflected in its suspension of payments to
latest Balance Sheet supposed to creditors, or otherwise declared
be filed with the Bureau of bankrupt or insolvent. (Sec. 3, RR.
Internal Revenue, is suffering from 07-2001)
surplus or earnings deficit
resulting to impairment in the The Congressional Oversight
original capital by at least 50%, Committee, under Section 290 of the
provided that amounts payable or 1997 NIRC is empowered to require the
due to stockholders other than BIR:
business-related transactions 0 The submission of all pertinent
which are properly includible in information, including but not
the regular "accounts payable" are limited to industry audits,
by fiction of law considered as collection performance data,
part of capital and not liability, status reports on criminal
and provided further that the actions initiated against
taxpayer has no sufficient liquid persons; and
asset to satisfy the tax liability; or The submission of taxpayer returns.

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San Beda College of
Law 77
MINIMUM COMPROMISE RATES (MCR) OF ANY accept anything less than what is
TAX LIABILITY adjudicated in favor of the
a. In case of financial incapacity: Government. By virtue of such final
MCR = 10% of the basic assessed tax judgment, the Government has
b. Other cases: already acquired a vested right.
MCR = 40% of the basic assessed tax
[Sec. 204(A), 1997 NIRC] NATURE OF A COMPROMISE IN EXTRAJUDICIAL
SETTLEMENT OF THE TAXPAYER’S CRIMINAL
APPROVAL OF THE COMPROMISE BY THE LIABILITY FOR HIS VIOLATION
EVALUATION BOARD IS REQUIRED WHEN
a. the basic tax involved exceeds It is consensual in character, hence,
P1,000,000.00, or may not be imposed on the taxpayer
b. the settlement offered is less than without his consent. The BIR may only
the MCR. suggest settlement of his tax liability
through a compromise. The extra-
NOTE: The MCR may be less than the judicial settlement and the amount of
prescribed rates of 10% or 40%, as the the suggested compromise penalty
case may be, provided it is approved by should conform with the schedule of
the Evaluation Board (composed of the compromise penalties provided under
BIR Commissioner and the four BIR the relevant BIR regulations or orders.
Deputy Commissioners).
REMEDY IN CASE THE TAXPAYER REFUSES OR
COMPROMISE OF CRIMINAL VIOLATIONS FAILS TO ABIDE THE TAX COMPROMISE
General Rule: All criminal violations
under the CTRP may be compromised. Enforce the compromise
0 If it is a judicial compromise, it
Exceptions: can be enforced by mere
Those already filed in court execution. A judicial compromise
Those involving fraud [Sec. 204(B), 1997 is one where a decision based on
NIRC]. the compromise agreement is
rendered by the court on request
EXTENT OF THE COMMISSIONER’S DISCRETION of the parties.
TO COMPROMISE CRIMINAL VIOLATIONS 1 Anyother compromise is
extrajudicial and like any other
Before the complaint is filed with the contract can only be enforced by
Prosecutor’s Office: The CIR has full court action.
discretion to compromise except
those involving fraud. 1 Regard it as rescinded and insist
upon original demand (Art. 2041,
After the complaint is filed with the Civil Code).
Prosecutor’s Office but before the
information is filed with the court: COMPROMISE PENALTY
The CIR can still compromise
provided the prosecutor must give It is an amount of money that the
consent. taxpayer pays to compromise a tax
violation. This is paid in lieu of criminal
After information is filed with the prosecution. A taxpayer cannot be
court: The CIR is no longer compelled to pay a compromise penalty.
permitted to compromise with or If he does not want to pay, the CIR must
without the consent of the institute a criminal action.
Prosecutor. (People vs. Magdaluyo,
GR No. L-16235, April 20, 1961) COMPROMISE VS. ABATEMENT
This is more so, when the court
has rendered a final judgment. As a Compromise involves a reduction of
mere agent of the Government, the the taxpayer‘s liability, while
Commissioner is not authorized to abatement means that the entire tax
liability of the taxpayer is cancelled.

   

San Beda College of
Law 78
ABATEMENT b. Abatement of penalties on

withholding tax assessment under
THE COMMISSIONER MAY ABATE OR CANCEL A meritorious circumstances
TAX LIABILITY WHEN c. Abatement of penalties on
delayed installmentpayment
1. The tax or any portion thereof under meritorious circumstances
appearstobeunjustly or d. Abatement of penalties on
excessively assessed; [Sec. 204(B), assessment reduced after
1997 NIRC]. reinvestigation but taxpayer is
a. When the filing of the still contesting reduced
return/payment is made at the assessment; and
wrong venue; e. Such other circumstances which
b. When the taxpayer‘s mistake in the Commissioner may deem
payment of his tax is due to analogous to the enumeration
erroneous written official advice above. (Sec. 3, Rev. Reg. 13-2001)
of a revenue officer;
c. When the taxpayer fails to file the 3. The Commissioner may also, even
return and pay the tax on time without a claim therefor, refund or
due to substantial losses from credit any tax where on the face of
prolonged labor dispute, force the return upon which payment was
majeure, legitimate business made such payment appears clearly
reverses, provided, however, the to have been erroneously paid
abatement shall only cover the (Sec. 229, 1997 NIRC)).
surcharge and the compromise
penalty and not the interest
imposed under Sec. 249 of the (2) DISTRAINT
Code;
d. When the assessment is brought DEFINITION: It is the seizure by the
about or the result of taxpayer‘s government of personal property,
non-compliance with the law due tangible or intangible, to enforce the
to a difficult interpretation of said payment of taxes. The property may be
law. offered in a public sale, if taxes are not
e. When the taxpayer fails to file the voluntarily paid. It is a summary remedy.
return and pay the correct tax on
time due to circumstances beyond NATURE OF THE WARRANT OF DISTRAINT OR
his control, provided, however, LEVY
the abatement shall only cover
the surcharge and the compromise The warrant is a summary procedure
penalty and not the interest ―forcing‖ the taxpayer to pay. The
imposed under Sec. 249 of the receipt of a warrant may or may not
Code; partake the character of a final decision.
f. Late payment of the tax under If it is an indication of a final decision,
meritorious circumstances (ex. the taxpayer may appeal to the CTA
Failure to beat bank cut-off time, within 30 days from service of the
surcharge erroneously imposed, warrant.
etc.) (Sec. 2, Rev. Reg. 13-2001)
 Duties of the officer serving the
2. The administration and collection warrant of distraint:
costs involved do not justify the 1. Make an account of the personal
collection of the amount due [Sec. properties distrained;
204(B), 1997 NIRC]. 2. Sign the list of personal
a. Abatement of penalties on properties distrained to which
assessment confirmed by the shall be added, a statement of
lower court but appealed by the
the sum demanded and note of
taxpayer to a higher court the time and place of sale;

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San Beda College
of Law 79
3. Leave either with the owner or ACTUAL CONSTRUCTIVE

person from whose possession DISTRAINT DISTRAINT
such personal properties were
taken, or at the dwelling or Both
place of business of such person Are summary remedies for the collection of
with someone of suitable age taxes;
and discretion (Sec. 208, CTRP) NOTE: Refer only to personal property; and
cannot be availed of where the amount of
the tax involved is not more than P100
TWO TYPES OF DISTRAINT
1. Actual: there is taking of REQUISITES FOR THE EXERCISE OF THE REMEDY

possession of the personal
OF DISTRAINT
property from the taxpayer by
the government. Physical 1. The taxpayer must be delinquent
transfer of possession is not (except in constructive distraint) in
always required. This is true in
the payment of tax;
the case of intangible property
2. There must be a subsequent demand
such as stocks and credits. for its payment (assessment);
2. Constructive: the owner is 3. The taxpayer must fail to pay the tax
merely prohibited from disposing
at the time required; and
of his property.
4. The period within which to assess or
collect the tax has not yet
ACTUAL VS. CONSTRUCTIVE DISTRAINT prescribed.
ACTUAL CONSTRUCTIVE PERSONS WHO SHALL SEIZE AND DISTRAINT

DISTRAINT DISTRAINT PERSONAL PROPERTY (ACTUAL DISTRAINT)
Made only on the Made on the property

1. Amount of delinquent tax is more
property of a of any taxpayer,
delinquent taxpayer whether delinquent than P1,000,000 – Commissioner or
or not his duly authorized representatives.
2. Amount of delinquent tax is
There is taking of The taxpayer is P1,000,000 or less – Revenue District
possession merely prohibited Officer. (Sec. 207(A), 1997 NIRC)
from disposing of his
property AUTHORITY OF THE COMMISSIONER TO INQUIRE
INTO BANK DEPOSIT ACCOUNTS
Effected by leaving a Effected by requiring
list of distrained the taxpayer to sign
Distraint includes garnishment of
property or by a receipt of the
service of a warrant property or by the money even in bank deposits because RA
of distraint or revenue officer 1405 (Bank Secrecy Law) covers only
garnishment preparing and divulging of information of deposits. No
leaving a list of such inquiry is made on garnishment for it
property only earmarks a portion of the deposits.
Notwithstanding any contrary
An immediate step Not necessarily so provision of RA 1405, the Commissioner
for collection of is authorized to inquire into the bank
taxes deposits of:
1. a decedent to determine his gross
estate
2. a taxpayer who waives his right by
reason of financial incapacity to pay his
tax liability (Sec.5, NIRC)

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San Beda College of
Law 80
PROCEDURES FOR THE ACTUAL DISTRAINT OR Note: The warrant of distraint shall be
GARNISHMENT sufficient authority to the person owing
the debts or having in his possession or
I under his control any credits belonging
Commencement of distraint to the taxpayer to pay to the
Commissioner the amount of such debts
proceedings
or credits.
Either by the CIR or his duly authorized

representative; or by the Revenue
District Officer
Taxpayer must sign
receipt
II
Service of Warrant of Distraint
(Sec. 208)
III
Posting of Notice
With respect to: (Sec. 209, NIRC)
1. Personal property –
(a) upon the owner of the goods, Notice specifying the time and place
chattels, or other personal of sale and the articles distrained. The
property; or posting shall be made in not less than
(b) upon the person from whose two (2) public places in the city or muni-
possession such properties are cipality where the distraint is made.
taken. One place for posting of such notice is at
2. Stocks and other securities the Office of the Mayor of such city or
(a) upon the taxpayer; and municipality.
(b) upon the president, manager,
treasurer or other responsible
officer of the corporation,
company or association which
issued the said stock and IV
securities. Sale of Property Distrained
3. Bank accounts shall be garnished by
serving a warrant of distraint –
(a) upon the taxpayer; and
(b) upon the president, manager, THE TAXPAYER’S PROPERTY MAY BE PLACED
treasurer, or other responsible UNDER CONSTRUCTIVE DISTRAINT WHEN HE
officer of the bank.
Note: Upon receipt of the warrant of 1. is retiring from any business subject
distraint, the bank shall turn over to the to tax;
Commissioner so much of the bank 2. is intending to –
accounts as may be sufficient to satisfy a. leave the Philippines,
the claim of the government. b. remove his property therefrom,
4. Debts and credits – c. hide or conceal his property,
(a) persons owing or having in his 3. is performing any act tending to
possession the debts; obstruct the proceeding for
(b) or under his control such credits; collecting the tax due or which may
or be due from him (Sec. 223, 1997
(c) upon his agent. NIRC).

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
PROCEDURE FOR THE CONSTRUCTIVE DISTRAINT WHEN MAY LEVY BE EFFECTED?

OF PERSONAL PROPERTY
Real property may be levied upon
before, simultaneously, or after the
Taxpayer’s obligation to preserve
distraint of personal property belonging
to the delinquent [Sec. 207(B), 1997 NIRC];
and the remedy by distraint and levy
CIR shall require the taxpayer or any
may be repeated if necessary until the
person having possession or control of
full amount, including all expenses, is
such property to
collected (Sec. 217, 1997 NIRC).
sign a receipt covering the property
distrained and
PROCEDURE OF LEVY ON REAL PROPERTY
obligate himself to
0 preserve the same intact
and unaltered and I
Prepare Certificate of Levy
1 not to dispose of the same in
any manner whatsoever without I
the express authority of the Preparation of a duly authen-ticated
Commissioner of Internal certificate containing:
Revenue. description of the property levied;
name of the taxpayer, and
the amounts of tax and penalty due from
him. This certificate shall operate
with the force of a legal execution
throughout the Philippines (Sec.
Remedy when taxpayer didn’t sign
207B, 1997 NIRC).
receipt
If the taxpayer or person in possession of

the property refuses or fails to sign the
receipt referred to, the revenue officer
effecting the constructive distraint shall II
proceed to prepare a list of such Service of Notice
property and
in the presence of two (2) witnesses
leave a copy thereof in the premises Service of written notice to:
where the property distrained is the delinquent taxpayer; or
located, after which the said property if he is absent from the Philippines, to
shall be deemed to have been placed his agent or manager of the business in
under constructive distraint. respect to which the liability arose; or
to the occupant of the property.
the proper Register of Deeds shall also
(3) LEVY
be notified of the levy (Sec. 207B,
1997 NIRC).
DEFINITION: It refers to the act of seizure
of real property in order to enforce the
payment of taxes. The property may be
offered in a public sale, if after seizure,
the taxes are not voluntarily paid.
III
REQUISITES FOR THE EXERCISE OF THE REMEDY Advertisement of the Time and
OF LEVY Place of Sale
Same as in the remedy of distraint. The advertisement shall contain:

the amount of tax and penalties due;
name of the taxpayer against whom
taxes are levied;

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
short description the property to be and interest thereon from the date of
sold. delinquency to the date of sale,
together with interest on purchase price
The advertisement shall be made at 15% per annum from the date of sale
within 20 days after the levy, and the to the date of redemption. (Sec. 214,
same shall be for a period of at least 30 NIRC).
days. It shall be effectuated by:
a. posting a notice at the main entrance FORFEITURE TO THE GOVERNMENT
of the municipal building or city hall
and in a public and conspicuous place If there is no bidder in the public
in the barrio or district in which the sale or if the amount of the highest bid
real property lies; and is insufficient to pay the taxes, penalties
b. by publication once a week for 3 and costs, the real property shall be
weeks in a newspaper of general forfeited to the Government.
circulation in the municipality or city
where the property is located (Sec. FURTHER DISTRAINT AND LEVY
213, CTRP).
The remedy of distraint and levy
may be repeated if necessary until the
full amount of the tax delinquency due
including all expenses is collected from
the taxpayer. Otherwise, a clever
IV taxpayer who is able to conceal most of
Sale the valuable part of his property would
escape payment of his tax liability by
sacrificing an insignificant portion of his
holdings.
DISTRAINT VS. LEVY
(4) TAX LIEN
DISTRAINT LEVY
DEFINITION: It is a legal claim or charge
Refers to personal Refers to real on property, either real or personal,
property property
established by law as a security in
Forfeiture by the Forfeiture is default of the payment of taxes (51
government is not authorized AmJur 881). Generally, it attaches to
provided the property irrespective of ownership
or transfer thereof.
The taxpayer is not The right of
given the right of redemption is EXTENT AND NATURE
redemption with granted in case of
respect to distrained real property levied
The tax, together with interests,
personal property. upon and sold, or
forfeited to the
penalties, and costs that may accrue in
government. addition thereto is a lien upon all
property and rights to property
Both belonging to the taxpayer.
 Are summary remedies for the collection of
taxes; and The lien shall not be valid against
 Cannot be availed of where the amount of any mortgagee, purchaser, or judgment
the tax involved is not more than P100 creditor until notice of such lien shall be
filed by the Commissioner of Internal
REDEMPTION OF PROPERTY SOLD Revenue in the Office of the Register of
Deeds of the province or city where the
Within 1 year from the date of sale, property of the taxpayer is situated or
the property may be redeemed by the located (Sec. 219, 1997 NIRC).
delinquent taxpayer or anyone from him,
upon payment of the taxes, penalties

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
San Beda College
of Law 83
WHEN DOES IT ATTACH? taxes shall be filed in court without the

approval of the Commissioner.
Not only from the service of the
warrant of distraint but from the time WHERE TO FILE
tax became due and payable.
1. Court of Tax Appeals – where the
LIEN VS. DISTRAINT principal amount of taxes and fees,
exclusive of charges and penalties
LIEN DISTRAINT claimed is One million pesos and
above.
Directed against Need not be 2. Regional Trial Court, Municipal
the property directed against the Trial Court, Metropolitan Trial
subject to the tax property subject to Court – where the principal amount
tax of taxes and fees, exclusive of
charges and penalties claimed is less
Regardless of the Property seized than One million pesos. (Sec. 7, RA
owner of the must be owned by
No. 9282)
property the taxpayer
THE APPROVAL OF THE CIR IS ESSENTIAL IN
CIVIL CASES.However, under Sec. 7, 1997
(5) CIVIL ACTIONS NIRC, the Commissioner may delegate
such power to a Regional Director.
DEFINITION: For tax remedy purposes,
these are actions instituted by the DEFENSES WHICH ARE PRECLUDED BY FINAL AND
government to collect internal revenue EXECUTORY ASSESSMENTS
taxes. It includes filing by the
government with the probate court 1. Invalidity or illegality of the
claims against the deceased taxpayer. assessment; and
2. Prescription of the government‘s
WHEN RESORTED TO? right to assess.
1. When a tax is assessed but the (6) CRIMINAL ACTIONS

assessment becomes final and
unappealable because the taxpayer The judgment in the criminal case
fails to file an administrative
shall not only impose the penalty but
protest with the CIR within 30 days shall also order the payment of taxes
from receipt; or
subject of the criminal case as finally
2. When a protest against assessment is
decided by the Commissioner (Sec. 205,
filed and a decision of the CIR was NIRC).
rendered but the said decision
becomes final, executory, and WHERE TO FILE
demandable for failure of the
taxpayer to appeal the decision to 1. Court of Tax Appeals – on criminal
the CTA within 30 days from offenses arising from violations of
receipt of the decision. the NIRC or TCC and other laws
administered by the BIR and the
NOTE: Judicial action may be resorted BOC, where the principal amount of
to even before assessment although taxes and fees, exclusive of charges
impractical, as stated in Sec. 203, 1997 and penalties claimed is One million
NIRC, ―… and no proceeding in court pesos and above.
without assessment for the collection of
2. Regional Trial Court, Municipal
such taxes shall be begun after the Trial Court, Metropolitan Trial
expiration of such (3year) period.‖ Court – on criminal offenses arising
It should be noted that no civil from violations of the NIRC or TCC
or criminal action for the recovery of and other laws administered by the
BIR and the BOC, where the principal

   

amount of taxes and fees, exclusive CRIMINAL ACTION MAY BE FILED

of charges and penalties claimed is DURING THE PENDENCY OF AN
less than One million pesos or where ADMINISTRATIVE PROTEST IN THE BIR
there is no specified amount
claimed. (Sec. 7, RA No. 9282) It is not a requirement for the
filing thereof that there be a precise
IMPORTANT CONSIDERATIONS computation and assessment of the tax,
since what is involved in the criminal
No criminal action shall be begun action is not the collection of tax but a
without the approval of the criminal prosecution for the violation
Commissioner. (Sec. 220, 1997 NIRC) of the NIRC. Provided, however, that
It shall be brought in the name of the there is a prima facie showing of a
Government and shall be conducted willful attempt to evade taxes. (See
by the legal officers of the BIR. Ungab vs. Cusi, GR Nos. L-41919-24, May
30, 1980 in relation to Commissioner vs.
EFFECT OF ACQUITTAL OF THE Court of Appeals, GR No. 119322, June
TAXPAYER IN A CRIMINAL ACTION 4, 1996)
It does not necessarily result in the (7) FORFEITURE

exoneration of said taxpayer from his
civil liability to pay taxes. DEFINITION: divestiture of property
Rationale: The duty to pay tax is without compensation, in consequence
imposed by statute prior to and of a default or offense.
independent of any attempt on the part
of the taxpayer to evade payment. It is ENFORCEMENT OF THE REMEDY OF
not a mere consequence of the felonious FORFEITURE
acts charged, nor is it a mere civil
liability derived from a crime. (Republic In case of personal property – The
vs. Patanao, GR No. L-14142, May 30, forfeiture of chattels and removable
1961) fixtures of any sort is enforced by
seizure and sale or destruction of
EFFECT OF SUBSEQUENT SATISFACTION the specific forfeited property.
OF CIVIL LIABILITY In case of real property – The forfeiture
of real property is enforced by a
The subsequent satisfaction of civil judgment of condemnation and
liability by payment or prescription does sale in a legal action or proceeding,
not extinguish the taxpayer‘s criminal civil or criminal, as the case may
liability. require.
In case of distilled spirits, liquors,
NO SUBSIDIARY IMPRISONMENT cigars, cigarettes manufactured,
products of tobacco and apparatus
In case of insolvency on the part of used for their production – Upon
the taxpayer, subsidiary imprisonment forfeiture, may be destroyed by
cannot be imposed as regards the tax order of the Commissioner where the
which he is sentenced to pay. sale may be injurious to public
However, it may be imposed in cases health or prejudicial to law
of failure to pay the fine imposed. (Sec. enforcement.
280, 1997 NIRC)

   

Other articles subject to excise tax P 1 M per case, whichever is

which have been manufactured or lower, shall be given to persons
removed in violation of the Code, instrumental in the discovery and
dies for printing or making fake seizure of such smuggled goods.
revenue stamps and labels – Upon
forfeiture may be sold or destroyed This does not apply to all public officials
at the discretion of the whether incumbent or retired, who
Commissioner. Forfeited property acquired the information in the course
shall not be destroyed until at least of performance of their duties during
20 days from seizure. their incumbency.
EFFECT OF THE FORFEITURE OF

PROPERTY PRESCRIPTIVE PERIODS FOR
The effect is to transfer the title to THE ASSESSMENT AND
the specific thing from the owner to the COLLECTION OF TAXES
government. All the proceeds in case of
a sale go to the coffers of the
government (U.S. vs. Surla, GR No. RATIONALE OF PRESCRIPTIVE PERIODS
6536, September 2, 1911). In seizure for
the enforcement of a tax lien, the Such periods are designated to
residue, after deducting the tax liability secure the taxpayers against
and expenses will go to the taxpayer unreasonable investigation after the
(Bank of the Phil. Island vs. Trinidad, lapse of the period prescribed. They are
GR No. 16014, October 4, 1941). also beneficial to the government
because tax officers will be obliged to
INFORMER’S REWARD (Sec 282) act promptly.
A. For violations of the NIRC, a reward
of 10% of the revenues, surcharges, RULES ON PRESCRIPTION
or fees recovered and/or fine or
penalty imposed and collected or P 1 When the tax law itself is silent on
M per case, whichever is lower shall prescription, the tax is
be given to: imprescriptible;
0 any person who voluntarily gives When no return is required, tax
definite and sworn information is imprescriptible;
not yet in the possession of the Note: Remedy of taxpayer is to file a
BIR leading to the discovery of return.
fraud upon the Internal Revenue 3. Defense of prescription is
Laws and/or any violations thereof waivable;
1 an informer where the offender
has offered to compromise the WHAT CONSTITUTES ASSESSMENT?
violation of law comiited by him
and his offer has been accepted An assessment contains not only
and collected by the CIR . This a computation of tax liabilities but also
excludes an Internal Revenue a demand for payment within a
Officer/employee or other public prescribed period.
official/employee, or his relative
within the sixth degree
PRESCRIPTIVE PERIOD FOR THE
This shall not refer to a case already ASSESSMENT OF TAXES
pending or examined by the CIR
General Rule:
B. For the discovery and seizure of Three (3) years after the date
smuggled goods the return is due or filed, whichever is
a reward of 10% of the FMV of the later (Sec. 203, 1997 NIRC).
smuggled and confiscated goods or

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San Beda College of
Law 86
Exceptions: a. Mere understatement in the tax

1. Failure to file a return: ten (10) return will not necessarily imply
years from the date of the fraud (Jalandoni vs. Republic)
discovery of the omission to file b. Sale of a real property for a price
the return (Sec.222[A]); less than its fair market value is
2. False or fraudulent return with not necessarily a false return
intention to evade the tax: ten (Commissioner vs. Ayala
(10) years from the date of the Securities)
discovery of the falsity or fraud c. Fraud is a question of fact and the
(Sec.222 [A]); circumstances constituting fraud
Note: Nothing in Section 222(A) must be alleged and proved in the
shall be construed to authorize the trial court (Commissioner vs.
examination and investigation or Ayala Securities)
inquiry into any tax return filed in d. Fraud is never imputed and the
accordance with the provisions of courts never sustain findings of
any tax amnesty law or decree. fraud upon circumstances that
only create suspicion
 Fraud must be alleged and (Commissioner vs. Javier)
proved as a fact. It must be the e. Mistakes of revenue officers on
product of a deliberate intent to three different occasions remove
evade taxes. It may be element of fraud (Aznar vs. CTA
established by the: and Collector)
a. Intentional and substantial
understatement of tax 3. Agreement in writing to the
liability by the taxpayer; extension of the period to assess
b. Intentional and substantial between the CIR and the
overstatement of deductions taxpayer before the expiration
of exemptions; and/or of the 3-year period. NB: The
c. Recurrence of the above extended period agreed upon
circumstances can further be extended by a
 Falsity constitutes a deviation subsequent written agreement
from the truth due to mistake, made before the expiration of
carelessness or ignorance. the extended period previously
agreed upon (Sec. 222[b]).
There is fraud in the following decided 4. Written waiver of renunciation
cases: of the original three (3) year
1. Fraud must be the product of a limitation, signed by the
deliberate intent to evade taxes taxpayer (Sambrano vs. Court of
(Jalandoni vs. Republic) Tax Appeals, GR No. L-8652,
2. Simple statement that return filed March 30, 1957).
was not fraudulent does not disprove
existence of fraud (Tayengco vs. Note: Notice of the assessment is
Collector) released, mailed or sent to the taxpayer
3. Substantial under-declarations of also within the 3 year period. It is not
income for six consecutive five years required that the notice be received by
demonstrate fraudulence of return the taxpayer within the prescribed
(Perez vs. CTA) period. But the sending of the notice
4. Presence of fictitious expenses, with must clearly be proven. (Basilan Estate,
no evidence presented, proves Inc. vs. Commissioner, GR No. L-22492,
existence of fraud (Tan Guan vs. September 5, 1967)
Commissioner)
AMENDMENT OF RETURN
However, the courts did not consider
the tax returns filed as false or If the amended return is
fraudulent with intent to evade payment substantially different from the original
of tax in the following cases: return, the prescriptive period shall be

   
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San Beda College of
Law 87
counted from the filing of the amended b. When the taxpayer requests for
return. But the said period shall run a reconsideration which is
from the filing of the original return if granted by the CIR;
the same is sufficiently complete to c. When the taxpayer cannot be
enable the Commissioner to make a located in the address given by
proper assessment. (Commissioner vs. him in the return, unless he
Phoenix Assurance Co., GR No. L-19727, informs the CIR of any change in
May 20, 1965) his address.
When Substantive: d. When the warrant of distraint or
a. substantial under declaration levy is duly served, and no
(exceeding 30% of that declared) property is located; and
of taxable sales, receipts or e. When the taxpayer is out of the
income, Philippines (Sec. 223, 1997
b. or a substantial overstatement NIRC).
(exceeding 30% of deductions)
(Sec. 248) A TAX RETURN IS CONSIDERED FILED
FOR PURPOSES OF STARTING THE
PRESCRIPTIVE PERIOD FOR THE RUNNING OF THE PERIOD OF
COLLECTION OF TAXES LIMITATIONS IF
General Periods: a. The return is valid – it has complied

Five (5) years – from assessment substantially with the requirements
or within period for collection agreed of the law; and
upon in writing before expiration of the
5-year period (Sec. 222, 1997 NIRC). b. The return is appropriate – it is a
Ten (10) years – without return for the particular tax required
assessment in case of false or fraudulent by law.
return with intent to evade or failure to
file return (Sec. 222, 1997 NIRC). Note: A defective tax return is the
same as if no return was filed at all.
WHAT IS THE PRESCRIPTIVE PERIOD
WHERE THE GOVERNMENT’S ACTION IS
ON A BOND WHICH THE TAXPAYER PRESCRIPTIVE PERIOD FOR THE
EXECUTES IN ORDER TO SECURE THE VIOLATION OF ANY PROVISION OF THE
PAYMENT OF HIS TAX OBLIGATION? TAX CODE (SEC. 281, 1997 NIRC)
Ten (10) years under Art. Should be filed within five (5) years from
1144(1) of the Civil Code and not three the (a) day of the commission of the
years under the NIRC. In this case, the violation of the law, and if the same
Government proceeds by court action to be not known, from the (b) discovery
forfeit a bond. The action is for the thereof and the institution of the
enforcement of a contractual obligation. judicial proceedings for its
(Republic vs. Araneta, GR No. L-14142, investigation and punishment.
May 30, 1961)
Illustrative case: (Lim vs. Court of
GROUNDS FOR SUSPENSION OF THE Appeals GR Nos. 48134-37, Ocober
RUNNING OF THE STATUTE OF 18 , 1990)
LIMITATIONS 0 charge is failure or refusal to
pay deficiency income tax –
When the CIR is prohibited from committed only after the
making the assessment or finality of the assessment
beginning the distraint or levy or coupled with the taxpayer‘s
a proceeding in court, and for willful refusal to pay the taxes
sixty (60) days thereafter; within the allotted
period. (i.e. cannot be
committed upon filing the
return)

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San Beda College of
Law 88
b. charge is filing of false or A protest is a vital

fraudulent return with intent document which is a formal
to evade the assessment – in declaration of resistance of
addition to the fact of discovery, the taxpayer. It is a
there must be a judicial repository of all arguments.
proceeding for the investigation It can be used in court in
and punishment of the tax case administrative remedies
offense before the 5 year have been exhausted. It is
prescriptive period begins to also the formal act of the
run. taxpayer questioning the
official actuation of the CIR.
This is equivalent to a
II. TAX REMEDIES OF THE pleading.
b. Entering into a compromise
TAXPAYER (Sec. 204, 1997 NIRC).
After Payment
Filing of claim for refund
GENERAL REMEDIES or tax credit within 2 years from
date of payment regardless of
A. ADMINISTRATIVE any supervening cause (Sec. 229,
Before Payment 1997 NIRC).
Protest – filing a petition for
reconsideration or B. JUDICIAL
reinvestigation within 30 Civil Action
days from receipt of a. Appeal to the Court of Tax
assessment Within 60 days Appeals – within 30 days from
from filing of protest, all receipt of decision on the protest
relevant supporting or from the lapse of 180 days due
documents should have been to inaction of the Commissioner
submitted, otherwise, the (Sec. 228, 1997 NIRC).
assessment shall become b. Action to contest forfeiture of
final – cannot be appealed chattel, at any time before the
(Sec. 228, 1997 NIRC). sale or destruction thereof, to
recover the same, and upon giving
Note: Submission of documents proper bond, enjoin the sale; or
within the 60 day period is after the sale and within 6
optional to the taxpayer. months, an action to recover the
net proceeds realized at the sale
"That the relevant (Sec. 231, 1997 NIRC); and
supporting documents c. Action for damages against a
mentioned in the law refers revenue officer by reason of any
to such documents which the act done in the performance of
taxpayer feels would be official duty (Sec. 227, 1997
necessary to support his NIRC).
protest and not what the Criminal Action
Commissioner feels should a. Filing of criminal complaint
be submitted, otherwise, against erring BIR officials and
taxpayer would always be at employees.
the mercy of the BIR which b. Injunction – when the CTA in its
may require production of opinion, the collection by the BIR
such documents which may jeopardize taxpayer.
taxpayer could not produce."
(Standard Chartered Bank Note: With the enactment of the new
vs. CIR, CTA Case No. 5696, CTA law (RA No. 9282) amending RA No.
August 16, 2001) 1125, CTA now has jurisdiction over

   

criminal cases. (See Chapter VI - Court the civil action for the collection
of Tax Appeals.) of deficiency income tax that
the period to appeal
Substantive Remedies commenced to run
0 Questioning the constitutionality or (Commissioner vs. Union
validity of tax statutes or regulations Shipping Corp.)
1 Non-retroactivity of rulings (Sec.246, b. Referral by the Commissioner of
NIRC) request for reinvestigation to
the Solicitor General (Republic
2 Failure to inform the taxpayer in vs Lim Tian Teng Sons)
writing of the legal and factual bases
c. Reiterating the demand for
of assessment makes it void (Sec.
immediate payment of the
228, NIRC)
deficiency tax due to taxpayer‘s
Preservation of books of accounts and continued refusal to execute
once a year examination (Sec. 235, waiver (Commissioner vs. Ayala
NIRC) Securities Corp.)
d. Preliminary collection letter may
ASSESSMENT AND PROTEST
Assessment serve as assessment notice
General rule: Taxes are self assessing (United International Pictures
and thus, do not require the issuance of vs. Commissioner)
an assessment notice in order to
establish the tax liability of a taxpayer. ACTS OF BIR COMMISSIONER
Exceptions: CONSIDERED AS DENIAL OF PROTEST
0 Tax period of a taxpayer is WHICH SERVE AS A BASIS FOR APPEAL
terminated (Sec. 6(D), NIRC) TO THE COURT OF TAX APPEALS
1 Deficiency tax liability arising filing by the BIR of a civil suit for
from a tax audit conducted by
collection of the deficiency tax
the BIR (Sec. 56(B), NIRC)
(Commissioner vs. Union Shipping
2 Tax lien (Sec. 219, NIRC) Corporation, GR No. 66160, May 21,
3 Dissolving Corporation (Sec. 1990)
52(c), NIRC) indication to the taxpayer by the
Protest Commissioner ―in clear and
Direct denial of protest Admnistrative unequivocal language‖ of his final
decision on a disputed denial. (Commissioner vs. Union
assessment - The decision of the Shipping Corporation, GR No. 66160,
Commissioner or his duly authorized May 21, 1990)
representative shall (a) state the facts, BIR demand letter reiterating his
the applicable law, rules and regulation previous demand to pay, sent to the
or jurisprudence on which such decision taxpayer after his protest of the
is based otherwise, the decision shall be assessment. (Surigao Electric Co.,
void, in which case the same shall not Inc. vs. CTA, GR No. L-25289, June
be considered a decision a disputed 28, 1974; Commissioner vs. Ayala
assessment and (b) that the same is his Securities Corporation, GR No. L-
final decision (Sec. 3.1.5, Rev. Regs. No. 29485, March 31, 1976)
12-99) The actual issuance of a warrant of
distraint and levy in certain cases
Indirect denial of protest cannot be considered a final decision
a. Commissioner did not rule on the on a disputed settlement.
taxpayer‘smotionfor (Commissioner vs. Union Shipping
reconsideration of the Corporation, GR No. 66160, May 21,
assessment – it was only when 1990)
respondent received the
summons on

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San Beda College
of Law 90
FILING OF CLAIM FOR tax purposes, there is no payment

TAX REFUND OR TAX CREDIT until the whole or entire tax liability
is fully paid. (Collector vs. Prieto,
GR No. L-11976, August 29, 1961)
GROUNDS FOR FILING A CLAIM FOR TAX
3. Taxpayer merely made a deposit
REFUND OR TAX CREDIT
- counted from the conversion of
1. Tax is collected erroneously or the deposit to payment (Union
illegally. Garment vs. Collector, CTA Case No.
2. Penalty is collected without 416, November 17, 1958)
authority. - Merely making a deposit is not
3. Sum collected is excessive. equivalent to payment until the
amount is actually applied to the
TAX REFUND VS. TAX CREDIT specific purpose for which it was
deposited.
TAX REFUND TAX CREDIT 4. Tax has been withheld from source
(through the withholding tax
The taxpayer asks for The taxpayer asks system)
restitution of the that the money so - counted from the date it falls due
money paid as tax paid be applied to at the end of the taxable year
his existing tax - A taxpayer who contributes to the
liability withholding tax system does not
really deposit an amount to the
Two-year period to Two-year period government, but in truth, performs
file claim with the starts from the date
and extinguishes his tax obligation
CIR starts after the such credit was
payment of the tax allowed (in case for the year concerned. (Gibbs vs.
or penalty credit is wrongly Commissioner, GR No. L-17406,
made). November 29, 1965)
5. End of taxable year vs. date of the
REQUISITES OF TAX REFUND OR TAX filing of the final adjusted return
CREDIT - from the date when the final
adjusted return was filed.
1. Claim must be in writing; - the rationale in computing this
2. It must be filed with the period is the fact that it is only then
Commissioner within two (2) years the corporation can ascertain
after the payment of the tax or whether it made profits or incurred
penalty. losses in its business operations.
Note: No suit or proceeding shall be (ACCRA Investments vs. Court of
begun after the expiration of the Appeals, GR No. 96322, December
said two (2) years regardless of any 20, 1991)
supervening cause that may arise 6. Date when quarterly income tax
after payment. was paid vs. date when final
3. Show proof of payment. adjusted return was filed
- from the date when final adjusted
COMMENCEMENT OF THE TWO (2) YEAR return was filed
PERIOD (JURISPRUDENCE) - The filing of the quarterly income
tax return (Sec. 68) and payment of
1. Tax sought to be refunded is quarterly income tax should only be
illegally or erroneously collected considered mere installments of the
- from the date the tax was paid. annual tax due. (Commissioner vs.
(Commissioner vs. Victorias Milling, TMX Sales, GR No. 83736, January
GR No. L-24108, January 31, 1968) 15, 1992)
2. Tax is paid only in installments or 7. Date when the final adjustment
only in part return was actually filed (ex. Apr.
- from the date the last or final 2) vs. Last day when the
installment or payment because for adjustment return could still be
filed (ex. Apr. 15)

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San Beda College of
Law 91
- from the date the final adjustment Exceptions:

return was actually filed. 1. When the CIR acted with patent
(Commissioner vs. Court of Appeals, arbitrariness. Arbitrariness
GR No 117254, January 21, 1999) presupposes inexcusable or obstinate
8. Tax was not erroneously or illegally disregard of legal provisions.
paid but the taxpayer became (Commissioner vs. Victorias Milling,
entitled to refund because of GR No. L-19667, Nov. 29, 1966)
supervening circumstances 2. Under Sec. 79(C)(2) with respect to
- from the date the taxpayer income taxes withheld on the wages
becomes entitled to refund and not of the employees.
from the date of payment.
(Commissioner vs. Don Pedro Central TAX CREDIT CERTIFICATE
Azucarera, GR No. L-28467, Feb. 28,
1973) 1. May be applied against any internal
PAYMENT UNDER PROTEST IS NOT revenue tax except withholding
NECESSARY UNDER NIRC taxes,
2. Original copy is surrendered to the
A suit or proceeding for tax refund revenue office,
may be maintained ―whether or not such 3. No tax refund will be given resulting
tax, penalty or sum has been paid under from availment of incentives granted
protest or duress‖ (Sec. 229, NIRC). by law where no actual payment was
made (Sec. 204C, 1997 NIRC).
Note: Similarly, payment under protest
is not necessary in refund for local FORFEITURE OF CASH REFUND/TAX
taxes. (See Sec. 196, LGC). CREDIT
However, payment under protest is 1. Forfeiture of refund in favor of the

necessary in claim for refund for real government when a refund check or
property taxes (Sec. 252, LGC) and for warrant remains unclaimed or
customs duties (Sec. 2308, TCC). uncashed within five (5) years from
date of mailing or delivery.
SUSPENSION OF THE TWO-YEAR 2. Forfeiture of Tax Credit – a tax
PRESCRIPTIVE PERIOD credit certificate which remains
unutilized after five (5) years from
1. There is a pending litigation date of issue, shall be invalid, unless
between the Government and the revalidated (Sec. 230, 1997 NIRC).
taxpayer; and
2. CIR in that litigated case agreed to
abide by the decision of the SC as to REGLEMENTARY PERIODS
the collection of taxes relative IN INCOME TAX IMPOSED
thereto (Panay Electric Co. vs.
Collector, GR No. L-10574, May 28,
BY LAW UPON THE TAXPAYER
1958). (PURSUANT TO REV. REG. NO. 12-99,
SEC. 228 OF THE 1997 NIRC, AND RA
INTEREST ON TAX REFUNDS NO. 1125 AS AMENDED BY RA NO.
9282)
General Rule:
Government cannot be required BIR makes a tax assessment
to pay interest on taxes refunded to the 
taxpayer in the absence of a statutory If taxpayer is not satisfied with the
provision clearly or expressly directing assessment file a protest within 30 days
or authorizing such payment. from receipt thereof
(Commissioner vs. Sweeney, GR No. L- 
12178, August 29, 1959)

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San Beda College of
Law 92
Submit supporting documents within excess creditable withholding

60 days from date of the filing of the tax for a taxable period was
protest determined to have carried over
 and automatically applied the
If protest is denied, elevate the matter same amount claimed against
to the Commissioner of Internal Revenue the estimated tax liabilities for
(CIR) within 30 days from receipt of the the taxable quarter or quarters
decision of the CIR‘s duly authorized of the succeeding taxable year;
representative officer or
 4. When the excise tax due on
excisable articles has not been
Appeal to the Division of the Court of paid;
Tax Appeals (CTA) within 30 days from 5. When an article locally
receipt of final decision of CIR or his purchased or imported by an
duly authorized representative (the exempt person, such as, but not
taxpayer has the option to appeal limited to, vehicles, capital
straight to the CTA upon receipt of the equipment, machineries and
decision of the CIR‘s duly authorized spare parts, has been sold,
representative) traded or transferred to non-
 exempt persons.
If the CIR or his duly authorized
representative fails to act on the Notes:
protest within 180 days from date of  As a general rule, payment
submission by taxpayer, the latter may under protest is not required
appeal within 30 days from lapse of the under the NIRC, except when
180-day period with the CTA Division partial payment of
 uncontroverted taxes is
The Party adversely affected by the CTA required under RR 12-99.
Division‘s decision may file one motion The Commissioner may, even
for reconsideration/new trial within 15 without a written claim
days from receipt of decision. If the MR therefor, refund or credit
is denied file a petition for review with any tax, where on the face
the CTA en banc of the return upon which
 payment was made, such
payment appears clearly to
Appeal to the Supreme Court within 15 have been erroneously paid.
days from receipt of the CTA en banc
 In case of the CIR‘s final
decision under Rule 45 of the Rules of denial of the claim for
Court refund, the 30-day period to
appeal with the CTA must be
PRE-ASSESSMENT NOTICE, WHEN NOT within the 2-year peremptory
REQUIRED (SEC. 228, NIRC) period for instituting judicial
action.
1. When the finding for any
deficiency tax is the result of 
See Annex N – Assessment
mathematical error in the Process and Appeal
computation of the tax as
appearing on the face of the
return; or
2. When a discrepancy has been ADDITIONS TO THE TAX
determined between the tax (SECS. 247-252 NIRC)
withheld and the amount
actually remitted by the DEFINITION: increments to the basic tax
withholding agent; or incident due to the taxpayer‘s non-
3. When a taxpayer who opted to compliance with certain legal
claim a refund or tax credit of requirements.

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San Beda College of
Law 93
1. CIVIL PENALTY / SURCHARGE b. in case a false or fraudulent

1. 25% surcharge return is willfully made
a. Failure to file any return and Prima Facie evidence
pay the tax due thereon as  substantial underdeclaration
required under the (exceeding 30% of that
provisions of this Code or declared) of taxable sales,
rules and regulations on the receipts or income,
date prescribed; or  or a substantial
b. Unless otherwise authorized overstatement (exceeding
by the Commissioner, filing a 30% of actual deductions) of
return with an internal deductions (Sec. 248)
revenue officer other than
those with whom the return 2. INTEREST
is required to be filed; or - 20% per annum or such higher rate
c. Failure to pay the deficiency as may be prescribed by the rules
tax within the time and regulations
prescribed for its payment in
the notice of assessment; or a. Deficiency interest (Sec. 249B)
d. Failure to pay the full or b. Delinquency interest (Sec. 249C)
part of the amount of tax c. Interest on Extended Payment
shown on any return (Sec. 249D)
required to be filed under
the provisions of this Code 3. OTHER CIVIL PENALTIES OR
or rules and regulations, or ADMINISTRATIVE FINES
the full amount of tax due
for which no return is a. Failure to file certain
required to be filed, on or information returns (Sec. 250)
before the date prescribed b. Failure of a withholding agent to
for its payment. (Sec. 248) collect and remit tax (Sec. 251)
2. 50% surcharge c. Failure of a withholding agent of
a. in case of willful neglect to refund excess withholding tax
file the return within the (Sec. 252)
period prescribed by the
Code, or III. LOCAL TAXATION
 will not apply in case a
taxpayer, without notice
from the Commissioner,
or his duly authorized POWERS AND LIMITATIONS
representative,
voluntarily files the said NATURE AND SOURCE OF LOCAL
return (only 25% shall be TAXING POWER (SEE. SEC 5, ART. X,
imposed) 1987 CONSTITUTION AND SEC. 129,
LGC)
 50% surcharge shall be
imposed in case the
The Local Government Unit has the
taxpayer files the return
power:
only after prior notice in
a. to create its own sources of
writing from the
revenue and
Commissioner or his duly
b. to levy taxes, fees and charges.
authorized representa-
tive (Sec. 4.2, Rev. Reg.
12-99)

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San Beda College of
Law 94
Congress cannot enact laws h. Each LGU shall, as far as

depriving LGU from exercising such practicable, evolve a
power to tax but it may set guidelines progressive system of taxation.
and limitations for the exercise.
Such taxes, fees, and charges LOCAL TAXING AUTHORITY (SEC. 132, LGC)
shall accrue exclusively to the local Shall be exercised by the Sanggunian
government units. of the LGU concerned through an
appropriate ordinance.
NATURE OF THE TAXING POWER
a. Not inherent; POWER TO PRESCRIBE PENALTIES FOR TAX
b. Exercised only if delegated to VIOLATIONS AND LIMITATIONS THEREON (SEC.
them by law or Constitution; 516, LGC)
c. Not absolute; subject to 1. The Sanggunian is authorized to
limitations provided for by law. prescribe fines or other penalties
for violations of tax ordinances.
Under the present constitutional a. in no case shall fines be less
rule, ―where there is neither a grant nor than P1,000 nor more than
a prohibition by statute, the tax power P5,000
must be deemed to exist although b. nor shall the imprisonment be
Congress may provide statutory less than one (1) month nor
limitations and guidelines. The basic more than six (6) month.
rationale for the current rule is to 2. Such fine or other penalty shall be
safeguard the viability and self- imposed at the discretion of the
sufficiency of local government units by court.
directly granting them general and broad 3. The Sangguniang Barangay may
tax powers.‖ (Manila Electric Co. vs. prescribe a fine of not less than
Province of Laguna, G.R. No. 131359) P100 nor more than P1,000.
ASPECTS OF LOCAL TAXING POWER POWER TO ADJUST LOCAL TAX RATE (SEC.
a. local taxation 191, LGC)
b. real property taxation Adjustment of the tax rates as
prescribed herein should not be oftener
FUNDAMENTAL PRINCIPLES GOVERNING LOCAL than once every five (5) years, and in no
TAXATION (SEC. 130, LGC) case shall such adjustment exceed ten
a. Shall be uniform in each local percent (10%) of the rates fixed under
sub-unit the LGC.
Shall be equitable and based as
much as possible on the POWER TO GRANT LOCAL TAX EXEMPTIONS
taxpayer‘s ability to pay (SEC. 192, LGC)
c. Levied for public purposes Local government units may,
d. Shall not be unjust, excessive, through ordinances duly approved,
oppressive, or confiscatory grant tax exemptions, incentives or
e. Shall not be contrary to law, reliefs under such terms and conditions,
public policy, national as they may deem necessary.
economic policy, or in restraint
of trade TAX EXEMPTIONS EXISTING BEFORE THE
Collection of local taxes andEFFECTIVITY OF THE LGC HAS BEEN ABOLISHED
other impositions shall not be (SEC. 193, LGC)
let to any person Unless otherwise provided in this
g. The revenues collected under Code, tax exemptions or incentives
the Code shall inure solely to granted to, or presently enjoyed by all
the benefit of, and subject to persons, whether natural or juridical,
disposition by, the LGU levying including government-owned or
the tax or other imposition controlled corporations are hereby
unless otherwise specifically withdrawn upon the effectively of the
provided therein

   

San Beda College of
Law 95
LGC c. The grant shall be by ordinance

except the following: passed prior to the 1st day of
8. local water districts, January of any year.
9. cooperatives duly registered under d. Any grant to a type or kind of
R.A. No. 6938, non-stock and non- business shall apply to all
profit hospitals and businesses similarly situated.
10. educational institutions.
LEVYING OF LOCAL TAXES (LOCAL TAX
The power to grant tax exemptions, ORDINANCE)
tax incentives and tax reliefs shall not Requisites:
apply to regulatory fees which are 1. The procedure applicable to local
levied under the police power of the government ordinances in general
LGU. should be observed (Sec. 187, LGC)
Tax exemptions shall be conferred 2. Procedural details (Secs. 54, 55, and
through the issuance of a non- 59, LGC):
transferable tax exemption certificate. a. necessity of a quorum
b. submission for approval by the
GUIDELINES FOR THE GRANTING OF TAX local chief executive
EXEMPTIONS, TAX INCENTIVES AND TAX RELIEFS c. he matter of veto and overriding
(ART. 282[B], RULES AND REGULATIONS the same
IMPLEMENTING THE LGC) d. the publication and affectivity
3. Public hearings are required before
1. On the grant of tax exemptions or any local tax ordinance is enacted
tax reliefs: (Sec.187, LGC)
a. the same may be granted in 4. Within 10 days after their approval,
cases of natural calamities, civil publication in full for 3 consecutive
disturbance, general failure of days in a newspaper of general
crops, or adverse economic circulation. In absence of such
conditions such as substantial newspaper in the province, city or
decrease in prices of agricultural municipality, then the ordinances
or agri-based products. may be posted in at least 2
b. The grant shall be through an conspicuous and publicly accessible
ordinance. places (Sec. 189, LGC)
c. Any exemption or relief granted
to a type or kind of business shall RESIDUAL TAXING POWERS OF THE LOCAL
apply to all business similarly GOVERNMENT UNITS (SEC. 186, LGC)
situated. To levy taxes, fees or charges on any
d. The same shall take effect only base or subject NOT:
during the next calendar year for 1. Specifically enumerated in LGC
a period not exceeding 12 2. Taxed under the provisions of
months as may be provided in the NIRC, as amended, and
the ordinance. 3. Other applicable laws
e. In the case of shared revenues,
the exemption or relief shall only Conditions:
extend to the LGU granting such 1. That the taxes, fees, or charges shall
exemption or relief. not be unjust, excessive, oppressive,
2. On the grant of tax incentives: confiscatory or contrary to declared
a. The same shall be granted only national policy
to new investments in the
locality and the ordinance shall 2. The ordinance levying such taxes,
prescribe the terms and fees or charges shall not be enacted
conditions therefore. without any prior public hearing
b. The grant shall be for a definite conducted for the purpose.
period of not exceeding 1
calendar year.

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
San Beda College of
Law 96
LIMITATIONS OF THE RESIDUAL POWER charges and dues except

1. Constitutional limitations on wharfage on wharves
taxing power constructed and maintained by
2. Common limitations prescribed the local government unit
in Sec. 133 of the LGC concerned;
3. Fundamental principles 5. Taxes, fees, charges and other
governing the exercise of the impositions upon goods carried
taxing power of the LGUs into or out of, or passing
prescribed under Sec. 130 of through, the territorial
the LGC jurisdictions of local government
4. The ordinance levying such units in the guise of charges for
residual taxes shall not be wharfage, tolls for bridges or
enacted without any prior otherwise.
public hearing conducted for 6. Taxes, fees or charges on
the purpose and agricultural and aquatic products
5. The principle of preemption. when sold by marginal farmers
or fishermen;
PRINCIPLE OF PREEMPTION OR EXCLUSIONARY 7. Taxes on business enterprises
DOCTRINE certified by the Board of
Where the National Government Investments as pioneer or
elects to tax a particular area, it non-pioneer for a period of 6
impliedly withholds from the local and 4 years, respectively, from
government the delegated power to tax the date of registration;
the same field. This doctrine principally 8. Excise taxes on articles
rests on the intention of the Congress. enumerated under the NIRC, as
amended, and taxes, fees or
Excluded impositions (pursuant to the charges on petroleum products;
doctrine of preemption): 9. Percentage or value-added tax
a. Taxes which are levied under the (VAT) on sales, barters or
NIRC, unless otherwise provided exchanges or similar transactions
by LGC of 1991; on goods or services except as
b. Taxes, fees, etc. which are otherwise provided herein;
imposed under the Tariffs and 10. Taxes on the gross receipts of
Customs Code; transportation contractors and
c. Taxes, fees, etc., the imposition persons engaged in the
of which contravenes existing transportation of passengers or
governmental policies or which freight by hire and common
violates the fundamental carriers by air, land or water,
principles of taxation; except as provided in the Code;
d. Taxes, fees and other charges 11. Taxes on premiums paid by way
imposed under special law. of Reinsurance or retrocession;
12. Taxes, fees or charges for the
COMMON LIMITATIONS ON LOCAL registration of motor vehicles
TAXING POWER (SEC. 133, LGC) and for the issuance of all kinds
Local government units cannot levy: of licenses or permits for the
1. Income tax, except on banks and driving thereof, except tricycle;
other financial institutions; 13. Taxes, fees or other charges on
2. Documentary stamp tax; Philippine products actually
3. Estate tax, inheritance, gifts, exported, except as otherwise
legacies and other acquisitions provided in the Code;
mortis causa except as 14. Taxes, fees or charges on
otherwise provided Countryside and barangay
4. Customs duties, registration fees business enterprises and
of vessels and wharfage on cooperatives duly registered
wharves, tonnage dues and all under R.A. 6810 and R.A. 6938,
other kinds of customs fees,

   

San Beda College of
Law 97
(Cooperatives Code of the (B) MUNICIPALITIES

Philippines) ; and (SEC. 143, LGC)
15. Taxes, fees or charges of any
kind on the National 1. Municipal Taxes- taxes on the
Government, its agencies and businesses of the following:
instrumentalities, andlocal a. On manufacturers, assemblers,
government units. repackers, processors, brewers,
distillers, rectifiers, and
CLASSIFICATION OF COMMON compounders of liquors, distilled
LIMITATIONS spirits, and wines or
1. Taxes which are levied under the manufacturers of any article of
NIRC unless otherwise provided by commerce of whatever kind or
the LGC b. On wholesalers, distributors, or
 Numbers 1, 2, 3, 8, 9, 10 dealers in any article of
2. Taxes, fees, etc. which are imposed commerce of whatever kind or
under the Tariffs and Customs Code c. On exporters, and on
 Number 4 manufacturers, millers,
3. Taxes, fees and charges where the producers, wholesalers,
imposition of which contravenes distributors, dealers or retailers
existing governmental policies or of essential commodities
whichareviolativeofthe d. On retailers
fundamental principles of taxation e. On contractors and other
 Numbers 5, 6, 7, 11, 13, 14, 15 independent
4. Taxes, fees, and charges imposed f. On banks and other financial
under special laws. g. On peddlers engaged in the sale
 Number 12 of any merchandise or article of
commerce
TAXES AND OTHER IMPOSITIONS THAT h. On any business, not otherwise
specified in the preceding
THE LOCAL GOVERNMENT MAY LEVY
paragraphs, which the
(A) PROVINCES sanggunian concerned may deem
(SECS. 134-141, LGC) proper to tax.
1. Tax on Transfer of Real Property
2. Tax on Business of Printing and 2. Municipal non-revenue fees and
Publication charges
3. Franchise Tax The municipality may impose
and collect such reasonable fees and
4. Tax on Sand, Gravel and other
Quarry Resources extracted from charges on business and occupation
Public Land except professional taxes reserved for
5. Professional Tax provinces. (Sec. 147. LGC)
6. Amusement Tax
7. Annual Fixed Tax for every RATES OF TAX WITHIN THE METROPOLITAN
Delivery Truck or Van of MANILA AREA (SEC. 144, LGC)
Manufacturers or Producers,
Wholesalers of, Dealers, or - Not to exceed by 50% the
Retailers in, certain products maximum rates prescribed in the
preceding Section.
See Annex J for the rates and details.

   

San Beda College of
Law 98
PAYMENT OF BUSINESS TAXES sales or receipts for the

a. It shall be payable for every preceding calendar year of
separate or distinct P50,000 or less (for barangays in
establishment or place where the cities) and P30,000 or less
business subject to the tax is (for barangays in municipalities)
conducted and one line of b. Rate = not exceeding 1% of such
business does not become gross sales or receipts.
exempt by being conducted with c. Service Fees or Charges – For
some other business for which services rendered in connection
such tax has been paid. with the regulation or the use of
b. The tax on a business must be barangay-owned properties or
paid by the person conducting service facilities such as palay,
the same. copra or tobacco dryers
c. In cases where a person d. Barangay Clearance – No city or
conducts or operates 2 or more municipality may issue any
of the businesses mentioned in license or permit fee for any
Section 143 of LGC business or activity unless a
- which are subject to the clearance is first obtained from
same rate of tax, the tax shall be the barangay where such
computed on the combined total business or activity is located or
gross sales or receipts of the said 2 conducted.
or more related businesses. e. Other Fees and Charges – The
- which are subject to barangay may levy reasonable
different rates of tax, the gross fees and charges:
sales or receipts of each business 1. On Commercial breeding of
shall be separately reported for the fighting cocks, cockfights
purpose of computing the tax due and cockpits;
from each business. 2. On places of Recreation
which charge admission fees;

See Annex K for the rates and and
details. 3. On Billboards, signboards,
neon signs and outdoor
(C) CITIES advertisements.
(SEC. 151, LGC)
SITUS OF LOCAL TAXATION
The city may levy the taxes, fees,
and charges which the province or A. Situs According to the Cases
municipality may impose. With respect to excise tax, the
 The tax rates that the city may levy tax is upon the performance of an act,
may exceed the maximum rates enjoyment of a privilege or the engaging
allowed for the province or in an occupation. The power to levy such
municipality by not more than 50% tax is not dependent on the domicile of
except the rates of professional and the taxpayer, but on the place in which
amusement taxes. the act is performed or the occupation is
engaged in; not upon the location of the
(D) BARANGAYS office, but the place where the sale is
(SEC. 152, LGC) perfected. (Allied Thread Co., Inc. v.
City Mayor of Manila, L-40296)
Barangays may levy the following taxes,
fees, and charges which shall accrue With respect to sale, it is the
exclusively to them: place of the consummation of the sale,
associated with the delivery of the
things which are the subject matter of
a. Taxes – On stores or retailers
the contract that determines the situs of
with fixed business
the contract for purposes of taxation,
establishments with the gross and not merely the place of the

   

perfection of the contract. (Shell Co., operated and maintained by LGUs

Inc. v. Municipality of Sipocot, within their jurisdiction.
Camarines Sur 105 Phil 1263) Toll fees or charges for the use of any
public road, pier or wharf,
B. Situs According to Sec. 150, LGC waterway, bridge, ferry or
telecommunication system funded
Branch or sales office – a fixed place in and constructed by the local
the locality which conducts the government unit concerned
operation of the business as an Exceptions:
extension of the principal office 0 Officers and enlisted men of the
AFP and PNP;
Principal office- the head or the main 1 Post office personnel delivering
office of the business; the city or the mail; and
municipality specifically mentioned in
the Articles of Incorporation or official
2 Physically handicapped and
disabled citizens who are
registration papers as being the official
sixty-five (65) years or older.
address of said principal office shall be
(Sec. 152, LGC)
considered the situs thereof.
When public safety and welfare so
Place of sale (with branch or sales
requires, the sanggunian concerned may
outlet therein):
discontinue the collection of the tolls,
0Municipality or city where the
and thereafter the said facility shall be
branch or outlet is located.
free and open for public use.
1 Place of sale (no branch or
sales outlet): COMMUNITY TAX
0 Municipality or city of principal Cities or municipalities may levy a
office (not in the place of sale) community tax.
2 If manufacturer, assembler,
contractor, producer, or exporter Individuals Liable (Sec. 157)
(MACPE) with factory, project office, 0 every inhabitant of the
plant or plantation (FPPP) Philippines;
3 30% of recorded sales in the principal 1 eighteen (18) years of age or
office: city or municipality where over;
the principal office is located
2 under any of the following
4 70% of recorded sales in the instances:
principal office: city or municipality
where the FPPP is located
3 who has been regularly
employed on a wage or salary
0 pro rata if FPPP are located in
basis for at least thirty (30)
different municipalities or cities
consecutive working days
in proportion to their respective
volumes of production. during any calendar year; or
5 If plantation is located in some 4 who is engaged in business or
occupation; or
other place than where the factory
is located, the foregoing 70% shall 5 who owns real property with
be subdivided as follows: an aggregate assessed value
0 60% to the city or municipality of P1,000 or more; or
where the factory is located 6 who is required by law to file
1 40% to the city or municipality an income tax return
where the plantation is located.
Tax Rate = P5.00 and an annual
COMMON REVENUE-RAISING POWERS additional tax of P1.00 for every
OF LGUs (SEC. 153 TO 155) P1,000 of income regardless of
Service fees and charges for services whether from business, exercise of
rendered profession or from property which in
Public Utility Charges for the operation no case shall exceed P5,000.
of public utilities owned, In case of husband and wife,
the additional tax herein imposed

   

shall be based upon the total date until it is paid shall be added to the
property owned by them and the amount due.
total gross receipts or earnings
derived by them. A community tax certificate may
also be issued to any person or
Juridical Persons (Sec. 158) corporation not subject to the
Every corporation no matter how community tax upon payment of P1.00
created or organized, whether (Sec. 162, LGC).
domestic or resident foreign,
engaged in or doing business in the PRESENTATION OF COMMUNITY TAX
Philippines shall pay an annual CERTIFICATE ON CERTAIN OCCASIONS – (SEC.
community tax. 163)
A. Individual
Tax Rate = P500 and an annual When an individual subject to
additional tax which in no case shall the community tax
exceed P10,000 in accordance with the acknowledges any document
following schedule: before a notary public;
For every P5,000 worth of real takes the oath of office upon
property owned by it during the election or appointment to
preceding year based on the any position in the
valuation used for the payment government service;
of the real property tax - P2.00; receives any license, certificate or
and permit from any public
For every P5,000 of gross receipts or authority; pays any tax or
earnings derived by it from its fee;
business in the Philippines receives any money from any
during the preceding year - public fund;
P2.00. transacts other official business; or
receives any salary or wage
The dividends received by a fromanypersonor
corporation shall, for the purpose of the corporation.
additional tax, be considered as part of The presentation of the community
the gross receipts or earnings of said tax certificate shall not be required in
corporation. connection with the registration of a
voter.
THE FOLLOWING ARE EXEMPT FROM
THE COMMUNITY TAX (SEC. 159) Corporation
1. Diplomatic and consular 0 receives any license,
representatives; and certificate or permit from any
Transient visitors when their stay in the public authority;
Philippines does not exceed three (3) 1 pays any tax or fee;
months.
2 receives money from public
funds; or
PLACE OF PAYMENT: place of residence
of the individual, or in the place where 3 transacts other official
the principal office of the juridical business.
entity is located. The city of municipal treasurer
deputizes the barangay treasurer to
TIME OF PAYMENT: accrues on the 1st collect the community tax in their
day of January of each year which shall respective jurisdictions. (Sec. 164, LCG)
be paid not later than the last day of
February of each year. The proceeds of the community tax
actually and directly collected by the
PENALTIES FOR DELINQUENCY: an city or municipal treasurer shall accrue
interest of 24% per annum from the due entirely to the general fund of the city or
municipality concerned.

   

Proceeds of the community tax Interests on Other Unpaid Revenues –

collected through the barangay (Sec. 169, LGC)
treasurers shall be apportioned as An interest thereon at the rate
follows: not exceeding 2% per month from the
50% accrues to the general fund of date it is due until it is paid, but in no
the city or municipality case shall the total interest on the
concerned; and unpaid amount or portion thereof
50% accrues to the barangay where exceed thirty-six (36) months.
the tax is collected.
COLLECTION OF LOCAL REVENUES BY THE
COLLECTION OF LOCAL TAXES TREASURER – (SEC. 170 LGC)
All local taxes, fees and charges
Tax Period and Manner of Payment – shall be collected by the provincial,
(Sec. 165, LGC) city, municipal or barangay treasurer, or
Unless otherwise provided, the their duly authorized deputies.
tax period shall be the calendar The provincial, city or municipal
year. treasurer may designate the barangay
Such taxes, fees, and charges treasurer or his deputy to collect local
may be paid in quarterly taxes, fees or charges.
installments. In case a bond is required for the
purpose, the provincial, city or
Accrual of Tax – (Sec. 166, LGC) municipal government shall pay the
Unless otherwise provided, shall premiums thereon in addition to the
accrue on the first day of January of premiums of the bond that may be
each year. required under the Code.
However, new taxes, fees or
charges, or changes in the rates
thereof, shall accrue on the first LOCAL TAX REMEDIES
day of the quarter next following
the effectivity of the ordinance
UNDER THE LGC
imposing such new levies or rates.
Time of Payment – (Sec. 167, LGC) TAX REMEDIES OF THE LOCAL

Unless otherwise provided shall GOVERNMENT UNITS (LGUs)
be paid within the first twenty (20)
days of January or of each CIVIL REMEDIES OF THE LOCAL GOVERNMENT
subsequent quarter as the case may UNITS (LGU) TO EFFECT COLLECTION OF
be. TAXES
May, for a justifiable reason or 0 Local Government’s Lien – Local
cause, be extended without taxes, fees, charges and other
surcharges or penalties, but only for revenues constitute a lien, superior
a period not exceeding six (6) to all liens, charges or
months. encumbrances in favor of any
person,enforceablebyany
Surcharges and Penalties on Unpaid appropriate administrative or
Taxes, Fees or Charges – (Sec. 168, judicial action.
LGC)
Surcharge not exceeding 25% of 1 Civil Remedies
the amount of taxes, fees or charges
including surcharges, until such by administrative action through
amount is fully paid. distraint of personal property
But in no case shall the total and by levy upon real property
interest on the unpaid amount or
portion thereof exceed thirty-six by judicial action
(36) months.

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San Beda College of
Law 102
Either of these remedies or all may GROUNDS FOR THE SUSPENSION OF

be pursued concurrently or THE RUNNING OF THE PRESCRIPTIVE
simultaneously at the discretion of the PERIODS
LGU concerned. a. The treasurer is legally
prevented from the assessment
JURISDICTION OF COURTS OVER LOCAL or collection of the tax;
TAXATION CASES b. The taxpayer requests for a
reinvestigation and executes a
a. With the amendment brought by waiver in writing before the
RA No. 9282, the Court of Tax expiration of the period within
Appeals now has appellate which to assess or collect; and
jurisdiction over local taxation c. The taxpayer is out of the
cases decided by the Regional country or otherwise cannot be
Trial Court in the exercise of its located (Sec. 194, LGC).
appellate or original jurisdiction.
b. Regular judicial courts are not 2. TAX REMEDIES OF
prohibited from enjoining the THE TAXPAYER
collection of local taxes, subject
to Rule 58 (Preliminary REMEDIES OF THE TAXPAYER IN LOCAL
Injunction) of the Rules of Court. TAXATION
Note: Unlike the NIRC, the Local Tax A. ADMINISTRATIVE

Code does not contain any specific Before assessment
provision prohibiting courts from a. Appeal – any question on
enjoining the collection of local taxes. constitutionality or legality of tax
Such statutory lapse or intent may have ordinance within 30 days from
allowed preliminary injunction where effectivity thereof to Secretary of
local taxes are involved. But it cannot Justice (Sec. 187 LGC)
negate the procedural rules and b. Declaratory relief whenever
requirements under Rule 58 of the Rules applicable.
of Courts. (Valley Trading Co. vs. CFI of
Isabela, GR No. 49529, March 31, 1989) After assessment
a. Protest – within 60 days from receipt
of assessment (Sec. 195 LGC).
PRESCRIPTIVE PERIODS FOR THE ASSESSMENT Payment under protest is not
AND COLLECTION necessary.
OF LOCAL TAXES
PRESCRIPTIVE PERIODS OF ASSESSMENT b. Payment & subsequent refund or
1. Local taxes, fees, or charges – five tax credit – within 2 years from
(5) years from the date they became payment of tax to local treasurer
due. (Sec. 194, LGC). (Sec. 196 LGC). It is to be noted
2. When there is fraud or intent to that, unlike in internal revenue
evade the payment of taxes, fees taxes, the supervening cause applies
or charges – ten (10) years from in local taxation because the period
discovery of the fraud or intent to for the filing of claims for refund or
evade the payment (Sec. 194, LGC). credit of local taxes is counted not
necessarily from the date of
PRESCRIPTIVE PERIOD OF COLLECTION payment but from the date the
Local taxes, fees, or charges taxpayer is entitled to a refund or
may be collected within five (5) years credit.
from the date of assessment by
administrative or judicial action. No c. Right of redemption – 1 year from
such action shall be instituted after the the date of sale or from the date of
expiration of such period (Sec. 194, forfeiture (Sec. 179, LGC).
LGC).

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
San Beda College of
Law 103
B. JUDICIAL NATURE AND CLASSES

1. Court action
 within 30 days after receipt of CHARACTERISTICS OF REAL PROPERTY
decision or lapse of 60 days of TAX
Secretary of Justice‘s inaction 1. Direct tax on the Ownership of
(Sec. 187 LGC) real property
 within 30 days from receipt 2. Ad valorem tax. The value is
when protest of assessment is based on the tax base.
denied (Sec. 195 LGC) 3. Proportionate – the tax is
 if no action is taken by the calculated on the basis of a
treasurer in refund cases and the certain percentage of the value
two year period is about to lapse assessed.
(Sec. 195 LGC) 4. Indivisible single obligation
 if remedies available does not 5. Local tax
provide plain, speedy and
adequate remedy. TAXING AUTHORITIES (SEC. 233, LGC)
2. Action for declaratory relief
3. Injunction – if irreparable damage Rate of Basic Real
would be caused to the taxpayer and LGU Property Tax
no adequate remedy is available.
1. Province not exceeding 1% of
assessed value
IV. REAL PROPERTY 2. City not exceeding 2%
TAXATION
3. Municipality not exceeding 2%.
within Metro
DEFINITIONS: Manila
REAL PROPERTY TAXATION – A direct
tax on ownership of lands and
buildings or other improvements FUNDAMENTAL PRINCIPLES GOVERNING
thereon payable regardless of REAL PROPERTY TAXATION (SEC. 198,
whether the property is used or LGC)
not, although the value may vary 1. Real property shall be appraised at
in accordance with such factor. its current and Fair market value;
Under the LGC, it covers 2. Real property shall be classified for
the administration, appraisal, assessment purposes on the basis of
assessment, levy and collection actual Use.
of Real Property Tax, i.e. tax on 3. Real property shall be assessed on
land and building and other the basis of Uniform classification
structures and improvements on within each LGU
it, including machineries. 4. The appraisal, assessment, levy and
collection of RP Tax shall not be let
REAL PROPERTY – subject to the to any Private person
definition given by Art. 415 of 5. The appraisal and assessment of real
the Civil Code. property shall be Equitable.
IMPROVEMENT – valuable addition made EXTENT OF THE POWER TO LEVY

to a property or amelioration in  Basic real property tax;
its condition amounting to more  1% additional real estate tax to
than a mere replacement of finance the Special Education
parts involving capital Fund; (Sec. 236)
expenditures and labor.  5% additional ad valorem tax on
Idle lands; (Sec. 236, LGC) and
 Special levy or special
assessments (may be imposed

   

even by municipalities outside the property or person having

Metro Manila) on lands comprised legal interest therein from
within its territorial jurisdiction improving, utilizing or
specially benefited by public cultivating the same.
works, projects or improvements
funded by the local government CLASSIFICATION OF LANDS FOR
unit concerned. PURPOSES OF ASSESSMENT SEC. 218
Provided: (A)
Special levy shall not exceed 60% of
the actual cost of
such projects and Commercial
improvements, including the Agricultural
costs of acquiring land and Residential
such other real property in Mineral
connection therewith Industrial
not apply to lands exempt from Timberland
basic real property tax and Special
the remainder of the land
have been donated to the SPECIAL CLASSES OF REAL PROPERTY
local government unit
(SEC. 216, LGC)
concernedforthe
construction of said
Hospitals
projects. (Sec. 240, LGC).
Cultural and Scientific purposes
owned and used by Local water
FOR PURPOSES OF REAL PROPERTY
districts
TAXATION IDLE LANDS SHALL INCLUDE: GOCCs rendering essential public
(SEC. 237, LGC)
services in the supply and
Agricultural lands more than one hectare distribution of water and/or
in area one-half of which remain
generation or transmission of
uncultivated or unimproved by the
electric power.
owner of the property or person
having legal interest therein.
PROPERTIES EXEMPT FROM REAL
Agricultural lands planted to
PROPERTY TAX (SEC. 234, LGC)
permanent or perennial crops with
Exemption is limited only to the
at least 50 trees to a hectare shall
following:
not be considered idle lands.
Real property owned by the
Lands actually used for grazing
government except when the
purposes shall likewise not be
beneficial use thereof has been
considered idle lands; and
granted to a taxable person;
Lands other than agricultural located in
Charitableinstitutions,
a city or municipality more than one
churches, personages or
thousand square meters in area one-
half of which remain unutilized or
convents appurtenant thereto,
unimproved by the owner of the mosques, non-profit or religious
property or person having legal cemeteries and all lands,
interest therein. buildings and improvements
actually, directly and
IDLE LANDS EXEMPT FROM TAX (SEC. exclusively used for religious,
238, LGC) charitable or educational
purposes (Art. VI, Sec. 28,
By reason of: Constitution);
force majeure Machineries and equipment that are
civil disturbance actually, directly and
natural calamity exclusively used by local water
or any cause which physically or utilities and GOCC‘s engaged in
legally prevents the owner of the supply and distribution of
water and/or electric power;

   

San Beda College of
Law 105
4. Real property owned by duly DECLARATION BY PROVINCIAL / CITY /

registered cooperatives as MUNICIPAL ASSESSOR (SEC. 204)
provided for in RA 6938; and
5. Machinery and equipment used WHEN: Only when the person under Sec.
for pollution control and 202 refuses or fails to make a
environmental protection. declaration within the prescribed time.
ACTUAL USE OF PROPERTY AS BASIS No oath by the assessor is required.

FOR ASSESSMENT (SEC. 217 LGC)
Notes: Proof of Exemption of Real
Real property shall be classified, Property from Taxation - (Sec. 206)
valued and assessed on the basis of
actual use regardless of where located, WHO: By any person or for whom real
whoever owns it, and whoever uses it. property is declared.
Unpaid realty taxes attach to the  Claim for exemption must be filed
property and is chargeable against the with the assessor together with
person who had actual or beneficial use sufficient documentary evidence to
and possession of it regardless of support claim
whether or not he is the owner. To
impose the real property tax on the WHEN: within 30 days from the date of
subsequent owner which was neither the declaration of property.
owner nor the beneficial user of the
property during the designated periods IF PROPERTY IS DECLARED FOR THE FIRST TIME
would not only be contrary to law but – (SEC.222)
also unjust. (Estate of Lim vs. City of If Declared for the first time, real
Manila, GR No. 90639, February 21, property shall be assessed for back
1990) taxes:
For not more than 10 years prior to
date of initial assessment
PROCEDURE Taxes shall be computed on the basis
of applicable schedule of values in force
STEP 1: DECLARATION OF REAL during the corresponding period.
PROPERTY
STEP 2: LISTING OF REAL
DECLARATION BY OWNER OR ADMINISTRATOR PROPERTY IN THE ASSESSMENT
(SEC. 202-203) ROLLS (SECS. 205, 207)
 File a sworn declaration with the
assessor
 All declarations shall be kept and
- once every 3 years during
filed under a uniform
the period from January 1
classification system to be
to June 30.
established by the provincial, city
 For newly acquired property –
or municipal assessor.
WHEN: Must file with the assessor within
60 days from date of transfer
WHAT: Sworn statement containing the STEP 3: APPRAISAL AND
fair market value and description of the VALUATION OF REAL PROPERTY
property. (SECS. 212-214, 224-225)
For improvement on property
WHEN: Must file within 60 days upon DETERMINATION OF FAIR MARKET VALUE (FMV)
completion or occupation (whichever For land
comes earlier)  Assessor of the province/city or
WHAT: Sworn statement containing the municipality may summon the
fair market value and description of the owners of the properties to be
property. affected and may take depositions
concerning the property, its

   

ownership, amount, nature and 1 provided in no case shall the

value (Sec. 213, LGC) total interest exceed thirty-six
Assessor prepares a schedule of FMV (36) months.
for different classes of
properties.
Sanggunian enacts an ordinance For Advance and Prompt Payment
The schedule of FMV is published in a
newspaper of general 0 Advance payment – discount not
circulation in the province, city exceeding 20% of annual tax (Sec.
or municipality concerned or in 251, LCG)
the absence thereof, shall be 1 Prompt payment – discount not
posted in the provincial capitol, exceeding 10% of annual tax due
city or municipal hall and in two (Art 342 IRR)
other
conspicuous public places COLLECTION OF TAX (SEC. 247)
therein (Sec. 212, LGC) It shall be the responsibility of the
city or municipal treasurer concerned.
For machinery The city or municipal treasurer may
For Brand new machinery: FMV is the deputize the barangay treasurer to
acquisition cost collect all taxes on real property located
In all other cases: FMV in the barangay; provided, the barangay
= Remaining eco. life X Replacement treasurer is properly bonded.
Estimated Eco.Life Cost
PERIOD TO COLLECT (SEC. 270)
STEP 4: DETERMINE ASSESSED within five (5) years from the date
VALUE (SEC. 218) they become due
within ten (10) years from discovery
Determine Assessed Value of fraud, in case there is fraud
Procedure or intent to evade
Take the schedule of FMV
Assessed Value = FMV x Assessment SUSPENSION OF PRESCRIPTIVE PERIOD (SEC.
level 270)
Tax = Assessed value x Tax rate 1. local treasurer is legally
prevented to collect tax.
the owner or property requests for
STEP 5: PAYMENT AND COLLECTION
reinvestigation and writes a
OF TAX waiver before expiration of
period to collect.
Accrual of Tax: January of every year the owner of property is out of the
and such will constitute as a country or cannot be located.
superior lien. (Sec. 246)
REAL PROPERTY TAX
Time and Manner of Payment: (Sec.
250) REMEDIES UNDER THE LGC
0 basic real property tax in 4 equal
installments (March 31, June 30, 0 TAX REMEDIES OF THE LOCAL
September 30, December 30) GOVERNMENT TO EFFECT
1 special levy – governed by COLLECTION OF TAXES
ordinance
0 ADMINISTRATIVE
Interest for Late Payment (Sec. 255) Real Property tax lien (Secs. 257, LGC) –
0 two percent (2%) for each month superior to all liens, charges or
on unpaid amount until the encumbrances;
delinquent amount is paid Distraint (Sec. 254[B], LGC);
Levy (Sec. 254[A], 258 LGC);
Purchase of property by local treasurer
for want of bidder (Sec. 263, LGC).

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
San Beda College of
Law 107
B. JUDICIAL b) in case of denial of refund or

Civil Action ( Sec. 266, 270 LGC) credit, appeal to LBAA as in
protest case.
PRESCRIPTIVE PERIODS FOR THE
COLLECTION OF REAL Redemption of real property (Sec. 261
PROPERTY TAXES LGC)
Remedy against the Assessment/Appeal
1. Basic real property tax and any 1st: within 60 days from notice of
other tax levied under the title on
assessment of provincial, city or
Real Property Taxation– five (5)
municipal assessor to LBAA (Sec. 226
years from the date they became
LGC)
due. (Sec. 270, LGC). 2nd: within 30 days from receipt of
2. When there is fraud or intent to decision of LBAA to CBAA (Sec. 230
evade the payment of taxes – ten
rd
LGC)
(10) years from discovery of the 3 : within 30 days from receipt of
fraud or intent to evade the decision of CBAA to Court of Tax
payment (Sec. 270, LGC).
Appeals en banc
4th: within 15 days from receipt of
GROUNDS FOR THE SUSPENSION OF decision of Court of Tax Appeals en
THE RUNNING OF THE PRESCRIPTIVE banc to the Supreme Court
PERIODS
APPEALS IN REAL PROPERTY
The treasurer is legally prevented from
TAXATION
the assessment or collection of the
tax;
The taxpayer requests for a PROVINCIAL, CITY OR MUNICIPAL
reinvestigation and executes a ASSESSOR
waiver in writing before the
expiration of the period within within 60 days
which to assess or collect; and Owner/Person with legal
The taxpayer is out of the country or interest must file:
otherwise cannot be located (Sec. Written Petition under Oath
270, LGC). With Supporting Documents
0 TAX REMEDIES OF THE

LOCAL BOARD OF ASSESSMENT APPEALS (LBAA should
TAXPAYER decide within 120 days from receipt of petition)
A. ADMINISTRATIVE within 30 days

Protest – payment under protest is
required within 30 days to provincial, CENTRAL BOARD OF ASSESSMENT
city, or municipal treasurer. No protest APPEALS
shall be entertained unless the tax is
first paid. (Sec. 252 LGC) within 30 days
Claim for Tax Refund or Credit (Sec.
253)
the taxpayer may file a written COURT OF TAX APPEALS (EN BANC)
claim for refund or credit with
the provincial or city treasurer within 15 days
within two years from the date
the taxpayer is entitled to such
reduction or adjustment. SUPREME COURT

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
San Beda College of
Law 108
B. JUDICIAL  Berthing fee

1. Court Action – appeal of CBAA‘s  Harbor fee
decision to Court of Tax Appeals en  Tonnage due
banc.
2. Suit assailing validity of tax; MEANING AND SCOPE OF THE TARIFF AND
recovery of refund of taxes paid CUSTOMS LAWS
(Sec. 64 PD 464). Include not only the provisions of the
3. Suit to declare invalidity of tax due Tariff and Customs Code (TCC) and
to irregularity in assessment and regulations pursuant thereto, but all
collection (Sec. 64 PD 464)
other laws and regulations that are
4. Suit assailing the validity of tax sale subject to the Bureau of Customs (BOC)
(Sec. 83 PD 464) (Sec. 267 LGC) or otherwise within its jurisdiction.
As to its scope, therefore, tariff and
CONDONATION OF REAL PROPERTY TAXES customs laws extend not only to the
1. By the Sanggunian provisions of the TCC but to all other
Real property taxes may be laws as well, the enforcement of which
condoned wholly or partially in a is entrusted to the BOC.
given local government unit when:
a. There is general failure of crops;
b. There is substantial decrease in THE BUREAU OF CUSTOMS
the price of agricultural or agri-
based products; or FUNCTIONS OF THE BUREAU OF
c. There is calamity. CUSTOMS
2. By the President of the Philippines
 when public interest so requires. 1. Assessment and collection of
revenues from imported articles and
all other impositions under the tariff
and customs laws;
V. TARIFF AND 2. Control smuggling and related
CUSTOMS CODE frauds;
3. Supervision and control over the
entrance and clearance of vessels
DEFINITIONS and aircraft engaged in foreign
TARIFF: Customs duties, toll or tribute commerce;
payable upon merchandise to the 4. Enforcement of TCC and related
Government. laws;
5. Supervision and control over the
CUSTOM DUTIES: Tax assessed upon handling of foreign mails arriving in
merchandise from or exported to, a the Philippines;
foreign country. (Garcia v. Executive 6. Supervise and control all import and
Sec., GR No. 101273, July3, 1992)) export cargoes for the protection of
government revenue;
Note: Customs and tariffs are 7. Exclusive original jurisdiction over
synonymous with one another. They seizure and forfeiture cases under
both refer to the taxes imposed on the tariff and customs laws.
imported or exported wares, articles, or
merchandise. JURISDICTION OF COLLECTOR OF
CUSTOMS OVER IMPORTATION OF
OTHER TYPES OF FEES CHARGED BY THE ARTICLES
BUREAU OF CUSTOMS 1. Cause all articles for importation to
be entered in the customhouse,
 Arrastre charge 2. Cause all such articles to be
 Wharfage due – counterpart of appraised and classified,
license, charged not for the use of 3. Assess and collect the duties, taxes
any wharf but for a special fund and other charges thereon, and
known as the Port Works Fund.

   

Hold possession of all imported articles prepared edible fats; animal or

until the duties, taxes and other vegetable waxes;
charges are paid thereon. (Sec. 2 Prepared foodstuffs;
1206, TCC) beverages, spirits and vinegar;
tobacco and manufactured
TERRITORIAL JURISDICTION OF THE tobacco substitutes;
BOC 3 Mineral products;
All seas within the jurisdiction of the 4 Products of chemical or
Philippines allied industries;
All coasts, ports, airports, harbors, bays, 5 Plastics and articles thereof;
rivers and inland waters whether rubber and articles thereof;
navigable or not from the sea. (1st 6 Raw hides and skins;
par, Sec. 603, TCC) leather, etc.;
7 Wood and articles of wood, etc.;
CUSTOMS DUTIES 8 Pulp of wood, etc.;
9 Textiles and textile articles;
10 Articles of stone;
WHEN TARIFF AND CUSTOMS APPLIED
plaster, cement, etc.;
Only after importation has begun but
11 Footwear, headgear, etc.;
before importation is terminated.
12 Natural or cultured pearls
precious/semi-precious stones;
Importation begins:
13 Base metals and articles of
when the conveying vessel or
base metals;
aircraft
14 Machinery and mechanical
enters the jurisdiction of the Phil.
appliances; electric equipment;
with intention to unload therein
sound recorders, etc;
15 Vehicles, aircraft, vessels and
Importation is deemed terminated:
associated transport equipment;
16 Optical, photographic, medical,
upon payment of the duties, taxes and
surgical instruments, etc.;
other charges due upon the articles.
17 Arms, ammunition, parts
and accessories;
and legal permit for withdrawal shall
18 Miscellaneous
have been granted.
manufactured articles; and
19 Works of art, collector's pieces
0 In case the articles are free of arid antiques (Sec. 104, Title
duties, taxes and other charges, until 1, TCC).
they have legally left the jurisdiction of
the customs (Sec. 1202, TCC) Prohibited from being imported
(Prohibited importation)
INTENTION TO UNLOAD 0 Absolutely prohibited such as:
Even if not yet unloaded, and there is weapons of war; gambling
unmanifested cargo, forfeiture may take devices; narcotics or prohibited
place because importation has already drugs; immoral, obscene or
begun. insidious articles; and those
prohibited under special laws
ARTICLES UNDER TCC (Sec.102, TCC).
May either be:
Subject to duty – 1 Qualifiedly prohibited
Where such conditions as to
0 Live animals and animal warrant a lawful importation do
products; not exist, the legal effects of the
0 Vegetable products; importation of qualifiedly
1 Animal or vegetable fats; oils prohibited articles are the same
and their cleavage products; as those of absolutely prohibited
articles. (Auyong Hian vs. CTA,

   

San Beda College of
Law 110
GR No. L-28782, September 12, LIABILITY OF IMPORTER FOR CUSTOM DUTIES

1974)  A personal debt which can be
discharged only by payment in
3. Conditionally-free from tariff and full thereof;
customs duties (conditionally-free  A lien upon the imported articles
importation) while they are in custody or
 Those provided in Sec. 105, TCC; subject to the control of the
 Those granted to government government. (Sec. 1204, TCC).
agencies, GOCCs with
agreements with foreign EXTENT OF IMPORTER’S LIABILITY
countries; The liability of an importer is
 Those given to international limited to the value of the imported
institutions entitled to merchandise. In case of forfeiture of
exemption by agreement or the seized material, the maximum civil
special laws; and penalty is the forfeiture itself.
 Those that may be granted by (Mendoza vs. David, GR No. L-9452,
the President upon NEDA‘s March 27, 1961)
recommendation.
DRAWBACK
4. Free from TC duties (duty-free) A device resorted to for enabling a
Imported goods must be commodity affected by taxes to be
entered in a customhouse at their exported and sold in foreign markets
port of entry otherwise they shall be upon the same terms as if it had not
considered as contraband and the been taxed at all. (Uy Chaco Sons vs.
importer is liable for smuggling (See Collector of Customs, GR No. 7618,
Sec. 101, TCC). March 27, 1913)
All articles when imported from
any country into the Philippines shall IMPORT ENTRY
be subject to duty upon each It is a declaration to the BOC
importation, even though previously showing particulars of the imported
exported from the Philippines, article that will enable the customs
except as otherwise specifically authorities to determine the correct
provided for in the TCC or other duties. An importer is required to file an
laws. import entry. It must be accomplished
from disembarking of last cargo from
LIABILITY FOR CUSTOMS DUTIES vessel.
General Rule: All importations /
exportations of goods are subject to TRANSACTION VALUE UNDER RA NO. 8181
customs duties (Sec. 105, TCC). It is the invoice value of the
goods plus freight, insurance, costs,
Exceptions: expenses and other necessary expenses.
(1) Exemptions under the TCC; This replaces the Home Consumption
(2) Exemptions granted to Value as basis of valuation of goods.
government agencies,
instrumentalities or GOCCs with CLASSIFICATION OF CUSTOM DUTIES
existing contracts, A. Regular Duties – those which are
commitments, agreements, or imposed and collected merely as a
obligations with foreign source of revenue.
countries; 1. Ad valorem duty: This is a duty
(3) Exemptions of international based on the value of the
organizations pursuant to imported article.
agreements or special laws; and 2. Specific duty: This is a duty
(4) Exemptions granted by the Pres. based on the dutiable weight of
of the Phil. upon goods (either the gross weight,
recommendation of NEDA (Sec. legal weight, or net weight).
105, TCC).

   

San Beda College
of Law 111
3. Alternating duties: This is a 3. Marking duty

duty which alternates ad 4. Discriminatory duty
valorem and specific.
4. Compound Duty: This is a duty NATURE OF SPECIAL CUSTOMS DUTIES
consisting of ad valorem and Special customs duties are
specific duties. additional import duties imposed on
specific kinds of imported articles under
B. Special duties – those which are certain conditions.
imposed and collected in addition to
the ordinary customs duties usually PURPOSE OF SPECIAL CUSTOMS DUTIES
to protect local industries against The special customs duties are
foreign competition. imposed for the protection of consumers
and manufacturers, as well as Phil.
1. Dumping duty products from undue competition posed
2. Countervailing duty by foreign-made products.
SPECIAL DUTIES COMPARED
DISCRIMINATORY
DUMPING DUTY COUNTERVAILING DUTY MARKING DUTY
DUTY
1. Nature Imposed upon foreign Imposed upon Imposed upon

Imposed upon goods enjoying subsidy those not goods coming
foreign products thus allowing them to properly marked from countries
with value lower sell at lower prices to as to place of that discriminate
than their fair the detriment of local origin of the against Philippine
market value to the products similarly goods. products.
detriment of local situated.
products.
2. Amount/Rate Equivalent to the 5% ad valorem Any amount not

Difference between bounty, subsidy, or of articles exceeding 100%
the actual price subvention. ad valorem of the
and the normal subject articles
value of the article.
3. Imposing Authority Secretary of Finance Commissioner of President of the

Special committee Customs Philippines
on Anti-Dumping
(composed of the
Secretary of Finance
as Chairman;
Members: the
Secretary of DTI,
and either the
Secretary of
Agriculture if article
in question is
agricultural product
or the Secretary of
labor if non-
agricultural product

   

San Beda College of
Law 112
FLEXIBLE TARIFF CLAUSE THE TARIFF COMMISSION (TC)

The President may fix tariff rates,
import and export quotas, etc. under FUNCTIONS OF THE TARIFF
TCC (See Sec. 28, Art. VI, Constitution COMMISSION
and Sec. 401, TCC) 1. Investigative Powers (Sec. 505,
1. to increase, reduce or remove TCC)
existing protective rates of import a. the administration of and the
duty (including any necessary change fiscal and industrial effects of
in classification). the tariff and customs laws of
The existing rates may be this country now in force or
increased or decreased to any level, which may hereafter be enacted;
on one or several stages but in no b. the relations between the rates
case shall the increased rate of of duty on raw materials and the
import duty be higher than a finished or partly finished
maximum of one hundred (100%) per products;
cent ad valorem c. the effects of ad valorem and
2. to establish import quota or to ban specific duties and of compound
imports of any commodity, as may specific and ad valorem duties;
be necessary; and d. all questions relative to the
3. to impose an additional duty on all arrangement of schedules and
imports not exceeding ten (10%) per classification of articles in the
cent ad valorem whenever several schedules of the tariff
necessary: law;
e. the tariff relations between the
LIMITATIONS IMPOSED REGARDING THE Philippines and foreign
FLEXIBLE TARIFF CLAUSE countries, commercial treaties,
preferential provisions,
a. Conduct by the Tariff Commission of economic alliances, the effect of
an investigation in a public hearing. export bounties and preferential
The Commission shall also hear transportation rates;
the views and recommendations of f. the volume of importations,
any government office, agency or compared with domestic pro-
instrumentality concerned. duction and consumption;
The Commission shall submit g. conditions, causes, and effects
their findings and recommendations relating to competition of
to the NEDA within thirty (30) days foreign industries with those of
after the termination of the public the Philippines, including
hearings. dumping and cost of production;
The NEDA thereafter submits its and
recommendation to the President. h. in general, to investigate the
b. The power of the President to operation of customs and tariff
increase or decrease the rates of laws, including their relation to
import duty within the the national revenues, their
abovementioned limits fixed in the effect upon the industries and
Code shall include the modification labor of the country and to
in the form of duty. submit reports of its
In such a case the corresponding investigation as provided.
ad valorem or specific equivalents of
the duty with respect to the imports 2. Administrative Assistance to the
from the principal competing foreign President and Congress (Sec. 506,
country for the most recent TCC)
representative period shall be used
as bases (Sec. 401, TCC).

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San Beda College of
Law 113
TAX REMEDIES UNDER THE 4. Seizure, Search, Arrest (Sec.

TARIFF AND CUSTOMS CODE 2205, 2210, 2211 TCC)
(TCC) B. JUDICIAL
1. this remedy is normally
TAX REMEDIES OF THE availed of when the tax lien
GOVERNMENT is lost by the release of the
goods
A. ADMINISTRATIVE  Civil Action (Sec. 1204,
1. Tax Lien (Sec. 1204 TCC) TCC)
 attaches on the goods,  Criminal Action
regardless of ownership, while
still in the custody or control TAX REMEDIES OF THE TAXPAYER
of the Government
 availed of when the A. ADMINISTRATIVE
importation is neither 1. Protest
prohibited nor improperly a. Any importer or interested
made party if dissatisfied with
2. Administrative Fines and published value within 15
Forfeitures days from date of
 applied when the publication, or within 5 days
importation is unlawful, from the date the importer
 and it may be exercised even is entitled to refund if
where the articles are not or payment is rendered
no longer in Custom‘s erroneous or illegal by
custody events occurring after the
- unless the importation is payment.
merely attempted in which b. Taxpayer – within 15 days
case it may be effected only from assessment. Payment
while the goods are still under protest is necessary.
within the Customs (Sec. 2308, 2210 TCC)
jurisdiction or in the hands 2. Refund
of a person who is aware a. A written claim for refund
thereof (Sec. 2531 & 2530, may be submitted by the
TCC) importer in abatement cases
 under Sec. 2530(a) of the on missing packages,
TCC, in order to warrant deficiencies in the contents
forfeiture, it is not necessary of packages or shortages
that the vessel or aircraft before arrival of the goods in
must itself carry the the Philippines, articles lost
contraband. The or destroyed after such
complementary if collateral arrival, dead or injured
use of the Cessna plane for animals, and for manifest
smuggling operation is clerical errors; and
sufficient for it to be b. Drawback cases where the
deemed to have been used in goods are re-exported (Sec.
smuggling. (Llamado vs. 1701-1708 TCC).
Commissioner of Customs, 3. Settlement of any seizure by
GR No. L-28809, May 16, payment of fine or redemption
1983)  But this shall not be allowed
3. Reduction of customs duties / in any case where
compromise importation is absolutely
 subject to approval of Sec. prohibited, or the release
of Finance (Sec. 709, 2316 would be contrary to law, or
TCC) when there is an actual and

   

San Beda College of
Law 114
intentional fraud (Sec. 2307 Note: Before filing a protest, there

TCC). must first be a payment under protest.
4. Appeal WHEN CUSTOMS PROTEST APPLICABLE

Within 15 days to the
Commissioner after The customs protest is required to be
notification by Collector of filed only in case the liability of the
his decision (Sec. 2313 taxpayer for duties, taxes, fees and
TCC). other charges is determined and the
taxpayer disputes said liability.
JUDICIAL
0 Appeal WHEN CUSTOMS PROTEST NOT REQUIRED
0 Within 30 days from receipt
of decision of the Where there is no dispute, but the
Commissioner or Secretary of claim for refund arises by reason of the
Finance to the division of the happening of supervening events such as
CTA (Sec. 2403 TCC, Sec. 7 when the raw material imported is
RA 1125, as amended by Sec. utilized in the production of finished
9 RA 9282) products subsequently exported and a
1 Since Sec.11 of RA 1125 as duty drawback is claimed.
amended by RA 9282
empowers the Tax Court to REQUIREMENTS FOR MAKING A PROTEST
issue injunctions, it would
appear that an importer may Must be in writing
appeal without first paying Must point out the particular decision or
the duties, such as in ruling of the Collector of Customs to
seizure, but not in protest which exception is taken or
cases. objection made;
1 Action to question the Must state the grounds relied upon for
legality of seizure relief;
Must be limited to the subject matter of
2 Abandonment (Sec. 1801 TCC) a single adjustment;
expressly (Sec. 1801 TCC) Must be filed when the amount claimed
impliedly – is paid or within 15 days after the
0 failure to file an import payment;
entry within 30 days Protestant must furnish samples of goods
from the discharge of under protest when required.
goods or
1 having filed an entry PROCEDURE IN CUSTOMS PROTEST
fails to claim within 15 CASES
days but it shall not be
so effective until so The Collector acting within his
declared by the jurisdiction shall cause the imported
collector. (Sec. 1801, as goods to be entered at the customhouse
amended by RA 7651) 
The Collector shall assess, liquidate, and
TWO KINDS OF PROCEEDINGS IN collect the duties thereon, or detain the
THE BUREAU OF CUSTOMS (BOC) said goods if the party liable does not
pay the same
A. CUSTOMS PROTEST CASES 
The party adversely affected (the
DEFINITION: These are cases which deal protestant) may file a written protest on
solely with liability for customs duties,
his foregoing liability with the Collector
fees, and other charges.
within 15 days after paying the

   

liquidated amount (the payment under Thus, It is of no defense that the

protest rule applies) owner of the vessel sought to be
 forfeited had no actual knowledge that
Hearing within 15 days from receipt of his property was used illegally. The
the duly presented protest. Upon absence or lack of actual knowledge of
termination of the hearing, the Collector such use is a defense personal to the
shall decide on the same within 30 days owner himself, which cannot in any way
absolve the vessel from the liability of
  forfeiture. (Commissioner of Customs
vs. Manila Star Ferry, Inc., GR Nos.
If decision is adverse to If decision is adverse to 31776-78, October 21, 1993)
the protestant the government
  SMUGGLING
An act of any person who shall:
Appeal with the Automatic Review by
Commissioner within the Commissioner 0 Fraudulently import any article
15 days from notice  contrary to law, or
1 Assist in so doing, or
 Automatic review by
2 Receive, conceal, buy, sell,
Appeal with the Court the Secretary of
facilitate, transport, conceal or
of Tax Appeals Division Finance sell such article knowing its
within 30 days from  illegal importation (Sec. 3601,
notice TCC)
 If decision of 3 Export contrary to law. (Sec.
Commissioner or 3514, TCC)
Appeal with the
CTA en banc Secretary of Finance is The Philippines is divided into various
 adverse to the ports of entry – entry other than
protestant, he may port of entry, will be
Appeal by certiorari SMUGGLING.
appeal to the CTA and
with the Supreme PORT OF ENTRY
SC under the same
Court within 15 days A domestic port open to both
procedure on the left. foreign and coastwise trade including
from notice ―airport of entry‖. (Sec. 3514, TCC)
ALL articles imported into the
Philippines whether subject to duty or
not shall be entered through a
customshouse at a port of entry.
REASONS FOR THE AUTOMATIC REVIEW OF ENTRY: in Customs law means-
DECISIONS ADVERSE TO THE GOVERNMENT the documents filed at the
Customs house
0 To protect the interest of the thesubmissionand
Government acceptance of the
1 A favorable decision will not be documents
the procedure of passing goods
appealed by the taxpayer and
through the customs house
certainly a Collector will not
(Rodriguez vs. Court of
appeal his own decision.
Appeals, GR No. 115218,
2 Lifeblood Theory September 18, 1995)
B. SEIZURE AND FORFEITURE CASES CONTRABAND: Articles of prohibited
importations or exportations. (Sec. 3514,
DEFINITION: These refer to matters TCC)
involving smuggling. It is administrative
and civil in nature and is directed
against the res or imported articles and
entails a determination of the legality of
their importation. These are actions in
rem.

   

San Beda College of
Law 116
EVIDENCE FOR CONVICTION IN agent in charge of the means of

SMUGGLING CASES conveyance used as aforesaid has no
Mere possession of the article in knowledge of or participation in the
question - unless defendant could unlawful act:
explain that his possession is lawful to Provided, however, that a prima
the satisfaction of the court (Sec. 3601, facie presumption shall exist against the
TCC). Payment of the tax due after vessel, vehicle or aircraft under any of
apprehension is not a valid defense the following circumstances:
(Rodriguez vs. Court of Appeals, GR No. 1. If the conveyance has been used
115218, September 18, 1995) for smuggling at least twice
before;
THINGS SUBJECT TO CONFISCATION IN 2. If the owner is not in the
SMUGGLING CASES business for which the
Anything that was used for conveyance is generally used;
smuggling is subject to confiscation, like and
the vessel, plane, etc. (Llamado vs. 3. If the owner is financially not in
Commissioner of Customs, GR No. L- a position to own such
28809, May 16, 1983). conveyance.
Exception: Common carriers that are DOCTRINE OF HOT PURSUIT

not privately chartered cannot be Requisites:
confiscated. 1. Over Vessels
a. An act is done in Phil. Waters
RIGHT OF CUSTOMS OFFICERS TO which constitutes a violation of
EFFECT SEIZURE & ARREST (SEC. 2205) the tariff and customs laws
1. May seize any vessel, aircraft, cargo, b. a pursuit of such vessel began
article, animal or other movable within the jurisdictional waters
property when the same is subject to which
forfeiture or liable for any time as (i) may continue beyond the
imposed under tariff and customs maritime zone, and
laws, rules & regulations (ii) the vessel may be seized on
2. May exercise such powers only in the high seas.
conformity with the laws and
provisions of the TCC 2. Over Imported Articles
a. There is a violation of the tariff
COMMON CARRIERS; FORFEITURE and customs laws
1. Common carriers are generally not b. As a consequence they may be
subject to forfeiture although if the pursued in the Phil.
owner has knowledge of its use in c. With jurisdiction over them at
smuggling and was a consenting any place therein for the
party, it may also be forfeited. enforcement of the law. (2nd
2. If a motor vehicle is hired to carry par. Sec. 603, TCC)
smuggled goods but it has no
Certificate of Public Convenience
(CPC), it is not a common carrier. It REGIONAL TRIAL COURTS (RTC)
is thus subject to forfeiture, and VS.
lack of personal knowledge of the BUREAU OF CUSTOMS (BOC)
owner or the carrier is not a defense
to forfeiture.  The RTCs do not have jurisdiction
over seizure and forfeiture
PROPERTIES NOT SUBJECT TO proceedings conducted by the BOC
FORFEITURE IN THE ABSENCE OF PRIMA and to interfere with these
FACIE EVIDENCE proceedings. The Collector of
The forfeiture of the vehicle, vessel Customs has exclusive jurisdiction
or aircraft shall not be effected if it is over all questions touching on the
established that the owner thereof or his

   

seizure and forfeiture of dutiable

goods.  
 No petitions for certiorari, If decision is not If decision is not
prohibition or mandamus filed with favorable to the favorable to the
the RTC will lie because these are in aggrieved owner or government
reality attempts to review the importer
Commissioner's actuations. Neither  
replevin filed with the RTC will
issue. Rationale: Doctrine of Appeal by the Automatic Review
Primary Jurisdiction. aggrieved owner or by the
Even if a Customs seizure is illegal, importer Commissioner
exclusive jurisdiction (to the
exclusion of regular courts) still
belongs to the Bureau of Customs PERSONS HAVING POLICE AUTHORITY
(Jao v. Court of Appeals, GR No. TO ENFORCE THE TARIFF & CUSTOMS
104604, October 6, 1995). LAWS AND EFFECT SEARCHES,
SEIZURES AND ARRESTS (SEC. 2203,
GOODS IN CUSTOM’S CUSTODY BEYOND TCC)
REACH OF ATTACHMENT 1) officials of the BOC, district
Goods in the custom‘s custody collectors, police officers, agents,
pending payment of customs duties are inspectors, and guests of the BOC;
beyond the reach of attachment. As long officers of the Phil. Navy and other
as the importation has not been members of the AFP and national law
terminated, the imported goods remain enforcement agencies when authorized
under the jurisdiction of the Bureau of by the Commissioner of Customs
Customs. (Viduya vs. Berdiago, GR No. officials of the BIR on all cases falling
L-29218, October 29, 1976) within the regular performances of their
duties, when the payment of internal
ADMINISTRATIVE AND JUDICIAL taxes are involved;
PROCEDURES RELATIVE TO CUSTOMS officers generally empowered by law to
SEIZURES AND FORFEITURES effect arrests and execute processes of
courts, when acting under the direction
Determination of probable cause and of the Collector.
issuance of warrant
 REQUIREMENTS FOR CUSTOMS
FORFEITURE
Actual seizure of the articles The wrongful making by the owner,
 importer, exporter or consignee of
Listing of description, appraisal and any declaration or affidavit, or the
classification of seized property wrongful making or delivery by the
 same persons of any invoice, letter
Report of seizure to the Comm. of or paper - all touching on the
Customs and the Chairman, Comm. importation or exportation of
on Audit merchandise.; and
 That such declaration, affidavit, invoice,
letter or paper is false. (Farolan, Jr.
Issuance by the Collector of a vs. Court of Tax Appeals, GR No.
warrant of detention 42204, January 21, 1993)

Notification to owner or importer PLACES WHERE SEARCHES & SEIZURES
 MAY BE CONDUCTED
enclosures
Formal hearing
 dwelling house (there must be search
warrant issued by a judge)
District collector renders his
decisions

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
San Beda College of
Law 118
(c) vessels or aircrafts and persons ACQUITTAL IN CRIMINAL CHARGE NOT

or articles conveyed therein RES JUDICATA IN SEIZURE OR
(d) vehicles, beasts and persons FORFEITURE PROCEEDINGS
(e) persons arriving from foreign Reasons:
countries. 1) Criminal proceedings are actions in
personam while seizure or forfeiture
Note: Burden of proof in seizure or proceedings are actions in rem.
forfeiture is on the claimant. (Sec. 2) Customs compromise does not
2535, TCC) extinguish criminal liability. (People
vs. Desiderio, GR No. L-208005,
REQUIREMENTS FOR MANIFEST November 26, 1965)
A manifest in coastwise trade for
cargo and passengers transported from Note: At any time prior to the sale, the
one place or port in the Philippines to delinquent importer may settle his
another is required when one or both of obligations with the Bureau of Customs,
such places is a port of entry (Sec. 906, in which case the aforesaid articles may
TCC). Manifests are also required of be delivered upon payment of the
vessel from a foreign port (Sec. 1005, corresponding duties and taxes and
TCC). compliance with all other legal
requirements (Sec. 1508, TCC)
IS MANIFEST REQUIRED ONLY FOR
IMPORTED GOODS? ABATEMENT
NO. Articles subject to seizure The reduction or non-imposition of
do not have to be imported goods. customs duties on certain imported
Manifests are also required for articles materials as a result of:
found on vessels or aircraft engaged in 1) Damage incurred during voyage;
coastwise trade. (Rigor vs. Rosales, GR 2) Deficiency in contents packages
No. L-33756, October 23, 1982) 3) Loss or destruction of articles
after arrival
UNMANIFESTED CARGO IS SUBJECT TO 4) Death or injury of animals
FORFEITURE whether the act of
smuggling is established or not under the FRAUDULENT PRACTICES CONSIDERED
principle of res ipsa loquitur. It is AS CRIMINAL OFFENSES AGAINST
enough that the cargo was unmanifested CUSTOMS REVENUE LAWS
and that there was no showing that 1) Unlawful importation;
payment of duties thereon had been 2) Entry of imported or exported article
made for it to be subject to forfeiture. by means of any false or fraudulent
practices, invoice, declaration,
SETTLEMENT OF FORFEITURE CASES affidavit, or other documents;
General Rule: Settlement of cases by 3) Entry of goods at less than their true
payment of fine or redemption of weights or measures or upon a
forfeited property is allowed. classification as to quality or value;
4) Payment of less than the amount
Exceptions: due;
1. the importation is absolutely 5) Filing any false or fraudulent claim
prohibited or for the payment of drawback or
2. the surrender of the property to refund of duties upon the
the person offering to redeem exportation of merchandise; or
would be contrary to law, or 6) Filing any affidavit, certificate or
3. when there is fraud. (Sec. 2307, other document to secure to himself
TCC) or others the payment of any
drawback, allowance or refund of
duties on the exportation of mdse.
greater than that legally due
thereon. (Sec. 3602, TCC)

   

San Beda College of
Law 119
7. to assess damage against

VI. COURT OF appellant if appeal to CTA is
found to be frivolous or dilatory;
TAX APPEALS 8. to suspend the collection of the
(RA 1125 as amended tax pending appeal; and
9. to render decisions on cases
by RA 9282) brought before it
10. to issue order authorizing

See ANNEX O for comparison of CTA distraint of personal property
as created by RA No. 1125 and the and levy of real property
amendments made by RA No. 9282.
DISTRAINT OF PERSONAL PROPERTY
AND LEVY OF REAL PROPERTY
NATURE AND POWERS Upon the issuance of any ruling,
order or decision by the CTA favorable to
ELEVATION OF RANK the national government, the CTA shall
shall be of the same level as the issue an order authorizing the BIR,
Court of Appeals, possessing all the through the Commissioner:
inherent powers of a Court of Justice
1. to seize and distraint any goods,
COMPOSITION chattels, or effects and the personal
property, including stocks and other
 Consists of a Presiding Justice and
securities, debts, credits, bank
five (5) Associate Justices
accounts, and interests in and rights
 May sit en banc or in two (2)
to personal property and/or
Divisions, each Division consisting of
2. levy the real property of such
three (3) Justices. The Presiding
persons in sufficient quantity to
Justice and the most Senior
satisfy the tax or charge together
Associate Justice shall serve as
with any increment thereto incident
chairmen of the two divisions
to delinquency.
QUORUM
This remedy shall not be exclusive
 Four (4) Justices shall constitute a and shall not preclude the Court from
quorum for sessions EN BANC.
availing of other means under the Rules
 Two (2) Justices for sessions of a of Court.
DIVISION.
PROVIDED: in case the required quorum
cannot be had due to any vacancy,
JURISDICTION
disqualification, inhibition, disability, or
I. EXCLUSIVE APPELLATE JURISDICTION
any other lawful cause, the Presiding
TO REVIEW BY APPEAL
Justice shall designate any Justice of
other Divisions of the Court to sit
temporarily therein. (a) Decisions of the Commissioner
of Internal Revenue
1. in cases involving disputed
POWERS
1. to administer oaths; assessments, refunds of
2. to receive evidence; internal revenue taxes, fees
or other charges, penalties
3. to summon witnesses by
in relation thereto,
subpoena;
4. to require production or papers 2. or other matters arising
or documents by subpoena duces under the NIRC or other laws
administered by the BIR;
tecum;
(b) Inaction by the Commissioner of
5. to punish contempt;
6. to promulgate rules and Internal Revenue
regulations for the conduct of its 1. in cases involving disputed
assessments, refunds of
business;
internal revenue taxes, fees

   

San Beda College
of Law 120
or other charges, penalties Tariff and Customs Code, and

in relation thereto, safeguard measures under RA
2. or other matters arising No, 8800, where either party
under the NIRC or other laws may appeal the decision to
administered by the BIR, impose or not to impose said
where the NIRC provides a duties.
specific period for action, in
which case the inaction shall II. JURISDICTION OVER CASES
be deemed a denial; INVOLVING CRIMINAL CASES
Decisions, orders or resolutions
of the RTC (a) Exclusive original jurisdiction
– in local tax cases originally over all criminal cases arising from
decided or resolved by them in violations of the NIRC or Tariff and
the exercise of their original or Customs Code and other laws
appellate jurisdiction; administered by the BIR or the
(d) Decisions of the Commissioner Bureau of Customs
of Customs  Provided however, where the
1. in cases involving liability principal amount of taxes and
for customs duties, fees or fees, exclusive of charges and
other money charges, penalties claimed is less than
seizure, detention or release one million pesos (P1, 000, 000.
of property affected, fines, 00) or where there is no
forfeitures or other specified amount claimed - the
penalties in relation offenses or penalties shall be
thereto, tried by the regular courts and
2. or other matters arising the jurisdiction of the CTA shall
under the Customs Law or be appellate.
other laws administered by  Any provision of law or the Rules
the Bureau of Customs; of Court to the contrary
(e) Decisions of the Central Board notwithstanding, the criminal
of Assessment Appeals action and the corresponding
– in the exercise of its appellate civil action for the recovery of
jurisdiction over cases involving civil liability for taxes and
the assessment and taxation of penalties shall at all times be
real property originally decided simultaneously instituted with,
by the provincial or city board of and jointly determined in the
assessment appeals; same proceeding by the CTA,
(f) Decisions of the Secretary of the filing of the criminal action
Finance being deemed to necessarily
– on customs cases elevated to carry with it the filing of the
him automatically for review civil action, and no right to
from decisions of the reserve the filing of such civil
Commissioner of Customs which action separately from the
are adverse to the Government criminal action will be
under Section 2315 of the Tariff recognized.
and Customs Code;
(g) Decisions of the Secretary of (b) Exclusive appellate jurisdiction
Trade and Industry in the case in criminal offenses
of nonagricultural product,  Over appeals from the
commodity or article, and the judgments, resolutions or orders
Secretary of Agriculture in the of the RTC in tax cases originally
case of agricultural product, decided by them, in their
commodity or article, respective territorial
– involving dumping and jurisdiction.
countervailing duties under Secs.  Over petitions for review of the
301and 302, respectively, of the judgments, resolutions, or

   

San Beda College of
Law 121
orders of the RTC in the exercise “OTHER MATTERS”

of their appellate jurisdiction Those controversies which can be
over tax cases originally decided considered within the scope of the
by the Metropolitan Trial Courts, function of the BIR / BOC under ejusdem
Municipal Trial Courts, and generis rule (e.g. action for the nullity of
Municipal Circuit Trial Courts in distraint and levy; questioning the
their respective jurisdiction. propriety of the assessment; collection
of compromise penalties).
III. JURISDICTION OVER TAX
COLLECTION CASES APPEAL
(a) Exclusive original jurisdiction
in tax collection cases involving WHEN
final and executory assessments Within 30 days after the receipt of
for taxes, fees, charges and such decision or ruling or after the
penalties. expiration of the period fixed by law for
 In collection cases where the action.
principal amount of taxes and
fees, exclusive of charges and MODES OF APPEAL
penalties, claimed is less than (1) By filing a petition for review under
one million pesos (P 1, 000, 000. a procedure analogous to that
00) – shall be tried by the proper provided for under Rule 42 of 1997
Municipal Trial Court, Rules on Civil Procedure
Metropolitan Trial Court, and  decision, ruling, or inaction of
Regional Trial Court. the Commissioner of Internal
Revenue, Commissioner of
(b) Exclusive appellate jurisdiction Customs, the Secretary of
in tax collection cases Finance, the Secretary of Trade
 Over appeals from the and Industry or the Secretary of
judgments, resolutions or orders Agriculture or the Regional Trial
of RTC in tax collection cases Courts
originally decided by them, in  this appeal shall be heard by a
their respective territorial Division of the CTA
jurisdiction. (2) By filing a petition for review under
 Over petitions for review of the a procedure analogous to that
judgements, resolutions or provided for under Rule 43 of 1997
orders of the RTC in the exercise Rules on Civil Procedure
of their appellate jurisdiction  decisions or rulings of the
over tax collection cases Central Board of Assessments
originally decided by the Appeals and the Regional Trial
Metropolitan Trial Courts, Courts in the exercise of its
Municipal Trial Courts and appellate jurisdiction
Municipal Circuit Trial Courts, in
 this appeal shall be heard by the
their respective jurisdiction.
CTA en banc.

In criminal and collection cases, the
PROCEDURE
Government may directly file the A. Any party adversely affected by a
said cases with the CTA covering ruling, order or decision of a Division
amounts within its exclusive and of the CTA may file a motion for
original jurisdiction. reconsideration or new trial before
 the same Division within 15 days
See ANNEX P – Comparative from notice
Diagrams on CTA jurisdiction.

   

San Beda College of
Law 122
B. Any party adversely affected by a GENERAL RULE: New issues cannot be

resolution of a Division of the CTA on raised for the first time on appeal.
a motion for reconsideration or new
trial may file a petition for review EXCEPTIONS:
with the CTA en banc. a. Defense of prescription
Reason: This is a statutory right.
C. Any party adversely affected by a (Visayan Land Transportation vs.
decision or ruling of the CTA en banc Collector)
may file with the Supreme Court a b. Errors of administrative officials
verified petition for review on Reason: State can never be in
certiorari pursuant to Rule 45 of the estoppel and lifeblood theory.
1997 Rules on Civil Procedure. (Commissioner vs. Procter and
Gamble Phils. Mfg. Corp, GR No.
THIRTY (30) DAY PRESCRIPTIVE PERIOD FOR 66838, April 15, 1988)
APPEAL
Starts to run from the date the NOTE: However, this was reversed in
taxpayer receives the appealable Supreme Court‘s subsequent resolution
decision. If the taxpayer‘s request for wherein it was held that ―in the absence
reconsideration (i.e., the protest is of explicit statutory provisions to the
denied or the original assessment is contrary, the Government must follow
maintained, the appealable decision is the same rules of procedure which bind
the decision denying the request for private parties.‖ (Commissioner vs.
reconsideration. Procter and Gamble, GR No. 66838,
The said period is jurisdictional and December 2, 1991, Resolution)
non-extendible. Requests or motions for
reconsideration, however, operate to TAX COLLECTION NOT SUSPENDED DURING
suspend the running of the period to APPEAL
appeal. A pro forma request for
reconsideration or one which is directed General Rule: No appeal taken to the
to the Secretary of Finance does not CTA shall suspend the payment, levy or
suspend the running of the 30-day distraint, and/or sale of any property of
reglementary period. the taxpayer.
ONLY A FINAL DECISION IS APPEALABLE TO Exception: The CTA is empowered to

THE COURT OF TAX APPEALS suspend the collection of internal
revenue taxes and custom duties only
Preliminary collection letters, post when there was a –
reporting notices and pre-assessment showing that collection of the tax may
notices are not appealable, because jeopardize the interest of the
they are not the final decision of the government and / or the taxpayer;
Commissioner. deposit of the amount claimed or file a
An assessment can be appealed if surety bond for not more than
taxpayer does not seek a double the amount of tax with the
reconsideration. Court when required; and
At times there is an exchange of showing by taxpayer that appeal is not
communications between taxpayer frivolous nor dilatory.
and Commissioner states that his
action is final, then, period for CAN THE CTA ENJOIN COLLECTION OF TAXES?
appeal begins to run.
Commissioner must state that his Sec. 11 of RA No. 1125 as amended by
decision is final, for period of appeal Sec. 9 of RA No. 9282 grants CTA
to run. power to suspend collection of tax if
Final decision cannot be implied from such collection works to serious
issuance of warrant of distraint and prejudice of either taxpayer or
levy, unless it is issued after a government.
request for reconsideration.

   

However, Sec. 218 of the Tax Code Atlas Consolidated, GR No. 86785,
provides no court may grant November 21, 1991)
injunction to restrain collection of
any tax, fee or charge imposed by
Tax Code.
VII.VALUE–ADDED TAX
The provision in Tax Code refers to (VAT)
courts other than the CTA. (Blaquera TITLE IV OF NIRC
vs. Rodriguez, GR No. L-11295,
March 29, 1958)
DEFINITION: The value-added tax is an
Appeal to the CTA does not indirect tax and the amount of tax may
automatically suspend collection be shifted or passed on to the buyer,
unless CTA issues suspension order at transferee or lessee of the goods,
any stage of proceedings. properties or services. This rule shall
likewise apply to existing contracts of
SIMULTANEOUS FILING OF AN APPLICATION FOR
sale or lease of goods, properties or
REFUND OR CREDIT AND INSTITUTION OF A CASE
BEFORE THE CTA ALLOWED
services at the time of the effectivity of
Republic Act No. 7716.
The law fixes the same period of
two (2) years for filing a claim for refund VAT replaced Sales Tax as imposed by
with the Commissioner and for filing a previous Tax Laws.
case with the CTA. The two-year period
for both starts from the date after the HISTORY:
payment of the tax or penalty, or from Executive Order No. 273
the approval of the application for Republic Act No. 7716
credit. Republic Act No. 8241
Republic Act No. 8424 (took effect
Observation: If we are not going to on 1 January 1998)
allow the taxpayer to file a refund
before the CTA and let him wait for the TRANSACTIONS COVERED BY VAT:
CIR‘s decision, and the latter failed to Sale of Commodities or Goods (in the
render a decision within the 2-year course of trade or business only)
period, the said taxpayer can no longer Sale of Services (in the course of
file a refund before the CTA because his trade or business only)
right to appeal has prescribed. Exportation (in the course of trade
or business only)
WEIGHT OF DECISION OF CTA Importation (whether or not in the
course of trade or business)
 Decisions of Tax Court have
persuasive effect and may serve as PERSONS LIABLE FOR VAT
judicial guides. They have more Any person who, in the course of
persuasive value than BIR Rulings. trade or business, sells barters,
exchanges, leases goods or properties,
CTA‘s findings of fact are entitled to the
highest respect. (Raymundo vs. de renders services, and any person who
Joya, GR No. L-27733, December 3, imports goods shall be subject to the
1980) value-added tax (VAT) imposed in
Sections 106 to 108 of the National
The Supreme Court will not set aside
Internal Revenue Code.
conclusions reached by Tax Court
which by the very nature of its
function, is dedicated exclusively to “IN THE COURSE OF TRADE OR
the consideration of tax problems BUSINESS”
and has developed an expertise on The regular conduct or pursuit of a
the subject, unless there has been commercial or an economic activity,
an abuse or an improvident exercise including transactions incidental
of authority on its part. thereto, by any person regardless of
(Commissioner vs. Court of Appeals

   

whether or not the person engaged of the quantity or volume of the

therein is a non-stock, nonprofit private goods, the value-added tax shall be
organization (irrespective of the based on the landed cost plus excise
disposition of its net income and taxes, If any. customs duties.
whether or not it sells exclusively to
members or their guests), or government B. Zero-rated (0%) rate of tax
entity.
Therefore if the disposition of goods Export Sales as provided in Section
or services is NOT in the course of trade 106(A)(2)(a)
or business then it is not subject to VAT; Foreign Currency Denominated Sale as
with the exception of importation of provided in Section 106 (A)(2)(b)
course. Sale to persons or entities which is VAT
exempt under special laws or
The rule of regularity, to the international agreements to which
contrary notwithstanding, services as the Philippines is a signatory as
defined in this Code rendered in the provided in Section 106 (A)(2)(c)
Philippines by non-resident foreign Transactions subject to zero-rated (0%)
persons shall be considered as being as provided in Section 108(B)
course of trade or business.
Importation is subject to VAT REGISTRATION UNDER THE VAT SYSTEM
regardless of whether or not it is in the (SECTION 236 OF THE NIRC)
course of trade or business
General Rule: Failure to register is
The reason for the rule is to protect subject to temporary closure of the
our local or domestic goods or articles establishment for 5 days as provided in
and to regulate the entry or introduction Section 115(b).
of foreign articles to our local market.
Regulation is one of the purposes of Exception: It does not apply to an
Taxation. exporter who fails to register. The effect
is, instead of treating the transaction as
Tax Rates: zero-rated (0%), it is treated as an
10% - the rate used in sale of exempt transaction.
commodities and goods, sale of
services, and importation. What is the difference? In zero-rated
Zero-rated (0%) - the rate used in (0%) transactions, tax credit is
exportation. available. However, in exempt
transactions, tax credit is not available.
MANNER OF COMPUTING THE VAT:

A. 10% rate of Tax EXEMPT TRANSACTIONS (SECTION 109):
In Section 109(a) and (c), food and non-
In sale of commodities and goods, 10% is food products are VAT-exempt as
multiplied with the Gross Selling long as these products are in its
Price. original state. The simple process of
In sale of services, 10% is multiplied with preparation or preservation for the
the Gross Receipts. market such as freezing, drying,
In importation, 10% is multiplied with salting, broiling, roasting, smoking,
the rates used by the Bureau of or stripping does not remove the
Customs in imposing tariff and product from its category of being in
customs duties plus customs duties, its original state.
excise taxes, if any, and other However, even if the products were no
charges, such tax to be paid by the longer in its original state, it can
importer prior to the release of such still be VAT-exempt under Section
goods from customs custody: 109(r), if sold by agricultural
Provided, That where the customs cooperatives duly registered by
duties are determined on the basis Cooperative Development Authority.

   

Under Section 109(m), private subsequently sold, transferred or

educational institutions are exempt exchanged in the Philippines to non-
from VAT if duly accredited by the exempt persons or entities, the
DECS or by the CHED. In case of purchasers, transferees or recipients
government educational institution, shall be considered the importers
no accreditation is required. thereof, who shall be liable for any
internal revenue tax on such
Transactions in the field of Arts are VAT- importation. The tax due on such
exempt only, as provided in Section importation shall constitute a lien
109(n), if the seller is the artist on the goods superior to all charges
himself or the artist‘s services or liens on the goods, irrespective of
performed for the production of such the possessor thereof.
works.
TRANSACTIONS DEEMED SALE:
Section 109(p) makes Regional or Area
Headquarters exempt from VAT. The following transactions shall be
deemed sale therefore making them
Under Section 109(w) in order for the covered by VAT:
sale or lease of real property to be
exempted from VAT, the transaction Transfer, use or consumption not in the
must NOT be conducted in the course of business of goods or properties
ordinary course of trade or business. originally intended for sale or for use in
It complements Section 106(A)(1)(a) the course of business;
where it states that in order for the Distribution or transfer to:
sale or lease of real property to be 0 Shareholders or investors as
covered by VAT, it must be made in share in the profits of the VAT-registered
the ordinary course of trade or persons; or
business. 1 Creditors in payment of debt;
Consignment of goods if actual sale is
Revenue Regulations No. 6-97 adds a not made within sixty (60) days following
requirement in order for the lease of the date such goods were consigned; and
residential units with a monthly
Retirement from or cessation of
rental of not more than P8,000.00,
business, with respect to inventories of
as provided in Section 109(x), to be
taxable goods existing as of such
VAT exempt, that the annual gross
retirement or cessation.
receipts must not exceed
P550,000.00.
How to determine the VAT: The tax
shall be computed by multiplying the
Section 109(z) provides that the sale or
total amount indicated in the invoice by
lease of goods or performances of
one-eleventh (1/11).
services other than those mentioned
in the preceding paragraphs are VAT
Example: the total amount indicated in
exempt if the Gross Annual Receipts
the invoice is P110. P110/11 = P10. P10
do not exceed P550,000.00.
is the amount of VAT.
However, the limitation of
P550,000.00 does apply for those
TAX CREDIT AND REFUND
transactions from Section 109(a) to
(y), except (x) because Revenue
Formula for Tax Credit:
Regulations No. 6-97 imposes a
Output
P550,000.00 limitation.
Less: Input
VAT due.
In cases of tax-free importation of goods
into the Philippines by persons,
If Input is greater than Output, Tax
entities or agencies exempt from tax
Credit is available.
where such goods are

   

"INPUT TAX" means the value-added tax reduced by the amount of claim for
due from or paid by a VAT-registered refund or tax credit for value-added tax
person in the course of his trade or and other adjustments, such as purchase
business on importation of goods or local returns or allowances and input tax
purchase of goods or services, including attributable to exempt sale.
lease or use of property, from a VAT-
registered person. It shall also include the The claim for tax credit referred to
transitional input tax determined in in the foregoing paragraph shall include
accordance with Section 111 of the NIRC. not only those filed with the Bureau of
Internal Revenue but also those filed
"OUTPUT TAX" means the value-added with other government agencies, such as
tax due on the sale or lease of taxable the Board of Investments or the Bureau
goods or properties or services by any of Customs.
person registered or required to register
under Section 236 of the NIRC. The Commissioner within 120 days,
in proper cases, from the date of
If at the end of any taxable quarter the submission of complete documents in
output tax exceeds the input tax, support of the application shall grant a
the excess shall be paid by the VAT- refund or issue the tax credit certificate
registered person. If the input tax for creditable input taxes.
exceeds the output tax, the excess
shall be carried over to the
Remedy in case of full, or partial
succeeding quarter or quarters. Any
denial, or failure on the part of the
input tax attributable to the
Commissioner to act upon the
purchase of capital goods or to zero-
application for tax credit or refund: the
rated sales by a VAT-registered
taxpayer affected may, within thirty (30)
person may at his option be
days from the receipt of the decision
refunded or credited against other
denying the claim or after the expiration
internal revenue taxes, subject to
of the one hundred twenty day-period,
the provisions of Section 112.
appeal the decision or the unacted claim
with the Court of Tax Appeals.
OPTIONS OF A TAXPAYER AS PROVIDED
IN SECTION 112: RETURN AND PAYMENT OF VAT
to claim for tax credit; or
to claim for refund Every person liable to pay the value-
added tax shall file a quarterly return of
The claim, which must be in writing, the amount of his gross sales or receipts
for both cases, must be filed within 2 within 25 days following the close of
years after the close of the taxable each taxable quarter prescribed for each
quarter when the sales were made for: taxpayer: Provided, however, That VAT-
the issuance of a tax credit certificate; registered persons shall pay the value-
b) refund of creditable input tax due or added tax on a monthly basis.
paid attributable to such sales.
Any person, whose registration has
HOW TO DETERMINE CREDITABLE been cancelled in accordance with
INPUT TAX Section 236, shall file a return and pay
The sum of the excess input tax the tax due thereon within 25 days from
carried over from the preceding month the date of cancellation of registration:
or quarter and the input tax creditable Provided, That only one consolidated
to a VAT-registered person during the return shall be filed by the taxpayer for
taxable month or quarter shall be his principal place of business or head
office and all branches.

   


   


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San Beda College of Law 1

MEMORY AID IN TAXATION LAW

6. levied for a public purpose.

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

4. Non-impairment of Contracts registration fees are regulatory

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

6. Margin Fee – exaction designed to

Exemption granted Exemption does not Payable in money Payable in money,

Tax License Fee Notsubject to Subject to

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

TEST IN DETERMINING IF THE IMPOSITION IS A compensation takes place by operation

COMPENSATION OR SET-OFF Enforced Sanction imposed as

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

Tax Tariff General Rule: The power of taxation is

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

(5) shares or rights in any

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

A license tax or fee constitutes a must, double

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

The constitutional provision 7. Non-Impairment Of The

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

Elements: tax, subject to certain limitations,

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

income, in effect exempting the INCIDENCE OF TAXATION – point on which

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

(5) TAX EVASION – use by the taxpayer of Examples of Statutory Exemptions

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

d. Taxation is the rule; tax exemption b. Adherence to form- if the tax

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

Tax amnesty Tax exemption c.) Local Government Code

DOCTRINE OF IMPRESCRIPTIBILTY TAX ENFORCEMENT AND

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

KINDS 4. The authority of the Commissioner

TAXATION LAW COMMITTEE

MEMORY AID IN TAXATION LAW

POWERS AND DUTIES OF THE COMMISSIONER -- accounting records of entries

II. SECTION 5 (power to obtain III. SECTION 6 (power to make

(a) correctness of any return or in 4. Examination of returns and