UP 2008 Taxation Law (Taxation 2)

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TAXATION LAW 2
Taxation Law 2 Taxation Law 2 Taxation Law 2 Taxation Law 2
TABLE OF CONTENTS

I. I. I. I. Transfer Taxes Transfer Taxes Transfer Taxes Transfer Taxes 6 66 65 55 5
II. II. II. II. Value Value Value Value- -- -Added Tax Added Tax Added Tax Added Tax 78 78 78 78
III. III. III. III. Percentage Tax Percentage Tax Percentage Tax Percentage Tax 99 99 99 99
IV. IV. IV. IV. Excise Tax Excise Tax Excise Tax Excise Tax 10 10 10 103 33 3
V. V. V. V. Documentary Documentary Documentary Documentary Stamp Tax Stamp Tax Stamp Tax Stamp Tax 1 11 106 06 06 06
VI. VI. VI. VI. Remedies Remedies Remedies Remedies 11 11 11 110 00 0
VII. VII. VII. VII. Local Taxation Local Taxation Local Taxation Local Taxation 1 11 128 28 28 28
VIII. VIII. VIII. VIII. Real Property Taxation Real Property Taxation Real Property Taxation Real Property Taxation 139 139 139 139
IX. IX. IX. IX. Tariff and Customs Code Tariff and Customs Code Tariff and Customs Code Tariff and Customs Code 151 151 151 151

TAXATION LAW 2
I. TRANSFER TAXES
-excise taxes imposed upon the privilege of
gratuitously transmitting ones property to
another.

Two Types of Transfer Taxes
Donors Tax Estate Tax
Imposed upon the
privilege to give
Imposed upon the
privilege to transmit
property to heirs
Transfer is between
the living
Transfer is from the
deceased, through
his/her estate, to the
living
Transfer may take
place between
natural and juridical
persons
Transfer takes place
only between natural
persons

A. ESTATE TAX

PRINCIPLES
Definition
-a graduated tax imposed upon the privilege of
the decedent to transmit property at death and is
based on the entire net estate.
-not a direct tax on the property transmitted or
transferred although its amount is based thereon.

Applicable Law
Estate taxation is governed by the statute in
force at the time of the death of the decedent.
The estate tax accrues as of the death of the
decedent and the accrual of the tax is distinct
from the obligation to pay the same. Upon the
death of the decedent, succession takes place
and the right of the State to tax the privilege to
transmit the estate vests instantly upon death.
(Section 3, RR 2-2003)

Transfers Affected
1. Transfers Mortis Causa - Gratuitous
transfers after death, either testate or
intestate.

2. Transfers Inter Vivos Generally attract
donors tax. However, certain transfers inter
vivos are treated as testamentary
dispositions and are accordingly included in
the computation of the gross estate in order
to arrive at the proper estate tax liability.

These transfers are the following:

a. Transfers in contemplation of death (Sec.
85B)
Term does not refer to the general expectation of
death which all entertain. The transfers referred
to are those impelled by the thought of death
(i.e., the motivating factor or controlling motive
is the thought of death), regardless of whether
the transferor was near the possibility of death or
not.

b. Transfer with retention or reservation of
certain rights (Sec. 85B)
It involves cases where the owner transfers his
property during life but still retains the economic
benefits the possession or enjoyment of the
property, or the power to designate the persons
who may exercise such rights. By reason of the
restriction the transferee is incapable of freely
enjoying or disposing of the property until the
transferors death. The transfer may be regarded
as having been intended to take effect in
possession or enjoyment at the transferors
death.

ILLUSTRATION:
X transfers his property to Y in naked ownership
and to Z in usufruct throughout Zs lifetime
subject to the condition that if Z predeceases X,
the property shall return to X. If X dies during Zs
life, the value of the reversionary interest of X at
death is includible in his gross estate (see Articles
756-757 of the Civil Code). The transfer is
taxable as intended to take effect at or after
death because the possibility of reversion to X
makes Zs interest conditional as long as X lives.
NOTE: Transfer with retention or reservation of
certain rights is grouped by the Tax Code under
transfer in contemplation of death.

c. Revocable transfers (Sec. 85C)
Transfers where the transferor has reserved the
right to alter, amend or revoke such transfer,
regardless of WON the power is actually
exercised during his lifetime, and WON the power
should be exercised by him alone or in
conjunction with someone else. The power to
alter, amend or revoke shall be considered to
exist on the date of the decedents death EVEN
THOUGH:
the exercise of the power is subject to a
precedent giving of notice, or
the alteration, amendment or revocation
takes effect only on the expiration of a stated
period after the exercise of the power,
whether or not on or before the date of the
decedents death notice has been given or the
power has been exercised.
If notice has not been given or the power
has not been exercised before the date of
his death, such notice shall be considered
to have been given, or the power
exercised, on the date of his death.

d. Transfers of property arising under a
general power of appointment (Sec. 85D)
Gross estate shall include any property passed or
transferred under a general power of appointment
exercised by the decedent:
by will, or
by deed executed in contemplation of, or
intended to take effect in possession or
enjoyment at, or after his death, or
by deed under which he has retained for his
life or any period not ascertainable without
reference to his death or for any period which
does not in fact end before his death
o the possession or enjoyment of, or the
right to the income from, the property, or
o the right, either alone or in conjunction
with any person, to designate the persons
who shall possess or enjoy the property or
the income therefrom

Q: What is a power of appointment?
The power or right to designate by will or by
deed the person(s) who shall succeed to,
possess or enjoy the property, or the income
therefrom, received from the estate of the
prior decedent. It involves the person
creating the power (donor) and the person to

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whom is given the right to exercise the power
(donee).

Two Kinds of Appointment and their Effects:

Kind of
Appoint
ment
Nature Tax
Implication
s
Effects
General DONEE has
power to
appoint
any person
he chooses
who shall
possess or
enjoy the
property
without
restriction
Makes
appointed
property, for
all legal
intents, the
property of
the DONEE
(includible in
his estate)
DONEE
holds the
appointed
property
with all
the
attributes
of
ownershi
p, under
the
concept
of owner
Special DONEE
must
appoint
successor
to the
property
only within
a limited
group or
class of
persons
Not
includible in
the gross
estate of the
DONEE when
he dies
DONEE
holds the
appointed
property
in trust,
or under
the
concept
of trustee

e. Transfers for insufficient consideration
(Sec. 85G)
Transfers that are not bona fide sales of property
for an adequate and full consideration in money
or moneys worth.

If bona fide sale no value shall be included
in the gross estate [Case B]
If not a bona fide sale - the excess of the fair
market value at the time of death over the
value of the consideration received by the
decedent shall form part of his gross estate.
[Case A]
If inter vivos transfer is proven fictitious
total value of the property at the time of
death included in the gross estate.[Case C]

Case A Case B Case C
FMV, transfer 1,500 2,000 2,500
FMV, death 2,000 2,500 2,000
Consideration
Received
800 2,000 0
Value
Included in
the Gross
Estate
1,200 0 2,000

Exempt Transfers [MTTB] (Sec. 87)

a. Merger of the usufruct in the owner of the
naked title
b. Transmission or delivery of the inheritance
or legacy by the fiduciary heirs or legatee to
the fideicommisary
c. Transmission from the first heirs, legatees
or donees in favor of another beneficiary in
accordance with the desire of the testator
d. All bequests, devises, legacies or transfers
to social welfare, cultural and charitable
institutions, no part of the income of which
inures to the benefit of any individual,
provided that not more than 30% of the said
bequests, devises, legacies or transfers shall
be used for administrative purposes

Excluded Properties [DULUTS 200]
1. PROCEEDS of:
a. Life insurance policy taken out
- by the decedent upon his own life,
- when beneficiary is OTHER THAN the
estate, executor or administrator,
- and designation is IRREVOCABLE
(Sec. 85E)
Thus, proceeds are INCLUDED in the
gross estate:
When beneficiary is the estate,
executor or administrator, whether
designation is revocable or irrevocable
When beneficiary is other than the
estate, executor or administrator, and
designation is REVOCABLE
NOTE: According to the Insurance
Code, the designation is presumed to
be revocable, in case the designation
of the beneficiary is not clear.
b. group life insurance policy taken out
- by a company for its employees, (law
only speaks of policies taken out by the
decedent upon his own life)
c. life insurance policies-issued by the GSIS
to government officials or employees, as
they are exempt by law from taxes of all
kinds (PD 1146, as amended)

2. Death benefits received from the SSS,
accruing by reason of death (RA 1161, as
amended)

3. Amounts received from the Philippine and the
U.S. Governments from the damages suffered
during the last war (RA 227)

4. Benefits received by beneficiaries residing in
the Philippines under laws administered by the
U.S. Veterans Administration (RA 360)

5. Properties held in Trust by the decedent
6. Transfers by way of bona fide Sales

7. Separate or exclusive property of the surviving
spouse is not deemed part of the gross estate of
the decedent spouse. (Sec. 85, NIRC)

8. Net estates which are not in excess of
P200,000 are exempt from estate tax. (Sec. 84,
NIRC)

GROSS ESTATE
Composition
The following properties and interest therein at
the time of decedents death:
Citizens and Resident Aliens all properties,
real or personal, tangible or intangible,
wherever situated
Non-resident Aliens only properties situated
in the Philippines provided that, with respect
to intangible personal property, its inclusion
in the gross estate is subject to the rule of
reciprocity provided for under Sect 104, NIRC

Q: What is residence for estate tax
purposes?

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It refers to the permanent home, the place to
which whenever absent, for business or pleasure,
one intends to return, and depends on facts and
circumstances, in the sense that they disclose
intent. (Corre v. Tan Corre, 100 Phil 321) It is,
therefore, not necessarily the actual place of
residence. The term residence and domicile
are synonymous and are used interchangeably
without distinction. (Collector v. Lara, 102 Phil
813; Velilla v. Posadas, 62 Phil 624).

Q: What is the situs of intangible personal
property?
GR: situs is at the domicile or residence of the
owner. Exception:
When it is inconsistent with the express
provisions of statute, or
Justice does not demand that it should be, as
where the property has in fact a situs
elsewhere.

CASE LAW: Collector v. Lara (102 Phil 813)
When the owner of personal property, during his
lifetime, extended his activities with respect to
his interests so as to avail himself of the
protection and benefits of the laws of the
Philippines, so as to bring his person or property
within the reach of the Philippines, the reason for
a single place of taxation no longer obtains. His
property in the Philippines enjoys the protection
of the government so that the right to collect the
estate tax cannot be questioned.

Q: What are the intangible properties which
are considered by law as situated in the
Philippines?
Franchise which must be exercised in the
Philippines
Obligations or bonds issued by any
corporation or sociedad anonima organized or
constituted in the Philippines
Shares, obligations or bonds issued by any
foreign corporation 85% of the business of
which is located in the Philippines
Shares, obligations or bonds issued by any
foreign corporation if such shares, obligations
or bonds have acquired a business situs in
the Philippines
Shares or rights in any partnership, business
or industry established in the Philippines

Q: What is the reciprocity rule? (Sec. 104,
NIRC)
There is reciprocity if the foreign country of which
the decedent was a citizen and resident at the
time of his death:
did not impose a transfer tax of any
character, in respect of intangible personal
property of citizens of the Philippines not
residing in that foreign country; or
allowed a similar exemption from transfer tax
in respect of intangible personal property
owned by citizens of the Philippines not
residing in that country
[In sum, both states must exempt nonresidents
(citizens of the other state) from transfer taxes in
respect of intangible personal property.]
NOTE:
For the reciprocity rule to apply, there must
be TOTAL reciprocity.
[For instance,] in the Philippines, both estate
and inheritance taxes are imposed on the
estate while in California only inheritance tax
is imposed. The reciprocity rule may not be
availed of. Reciprocity has to be total. (CIR v.
Fisher, 110 Phil 686)
Reciprocity in exemption does not require the
foreign country to possess international
personality in the traditional sense (i.e.,
compliance with the requisites of statehood).
Thus, Tangier, Morroco (Collector v. Campos-
Rueda, 42 SCRA 23) and California, a state in
the American Union (Collector v. de Lara, 102
Phil 813) were held to be foreign countries
within the meaning of Section 104.

Valuation of the Gross Estate (88 of the
NIRC and 5 of RR 2-2003)

GENERAL RULE: The properties comprising the
gross estate shall be valued based on FAIR
MARKET VALUE (FMV) as of the time of death.

Real property-FMV as determined by the
Commissioner OR FMV as shown in the schedule
of values fixed by the provincial and city
assessors, whichever is HIGHER.

Shares of Stock
o Listed shares FMV is the arithmetic mean
between the highest and lowest quotation at
a date of death, OR the date nearest the date
of death, if none is available on the date of
death itself
o Unlisted shares - COMMON shares are
valued based on BOOK VALUE; while
PREFERRED shares are valued at PAR VALUE

Right to usufruct, use or habitation,
annuity - the probable life of the beneficiary
in accordance with the latest basic standard
mortality table is to be taken into account, to
be approved by the Secretary of Finance,
upon recommendation of the Insurance
Commissioner.

Decedents interest Value to be included in
the gross estate is the extent of the interest
therein of the decedent at the time of his death
DEDUCTIONS [ELIT VTMSFH]

1. Expenses, Losses, Indebtedness and
Taxes [ELIT] [fjc cult]

a. Funeral expenses (86-A1) (max.
P2ook)
Allowable deduction is whichever is lower of
-the actual funeral expenses (WON paid)
up to the time of interment, or
-an amount equal to 5% of the gross
estate, but in no case to exceed P200,000.

NOTE: The unpaid portion of the funeral
expenses incurred which is in excess of the
P200,000 threshold is NOT allowed to be
claimed as a deduction under claims against
the estate (see 1(c) below). (Sec. 6(A)(1) of
RR 02-2003)

Examples of funeral expenses
(RR 2-2003, Sec. 6-A1)
o The MOURNING APPAREL of the surviving
spouse and unmarried minor children of
the deceased, bought and used on the
occasion of the burial

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o EXPENSES for the deceaseds WAKE,
including food and drinks
o PUBLICATION CHARGES for death notices
o TELECOMMUNICATIONS EXPENSES
incurred in informing relatives of the
deceased
o Cost of BURIAL PLOT, TOMBSTONES,
MONUMENT or MAUSOLEUM but not their
upkeep. In case the deceased owns a
family estate or several burial lots, only
the value corresponding to the plot where
he is buried is deductible
o INTERMENT and/or CREMATION FEES
and CHARGES
o All other expenses incurred for the
performance of the RITES and
CEREMONIES incident to interment

Expenses NOT deductible as funeral
expenses
o Expenses incurred AFTER INTERMENT,
such as for prayers, masses,
entertainment, or the like
o Any portion of the funeral and burial
expenses BORNE or DEFRAYED by
RELATIVES and FRIENDS of the deceased

ILLUSTRATIONS:
o If five percent (5%) of the gross estate is
P220,000 and the amount actually
incurred is P215,000, the maximum
amount that may be deducted is only
P200,000;
o If five percent (5%) of the gross estate is
P 100,000 and the total amount incurred
is P150,000 where P20,000 thereof is still
unpaid, the only amount that can be
claimed as deduction for funeral
expenses is P100,000. The entire
P50,000 excess amount consisting of
P30,000 paid amount and P20,000
unpaid amount can no longer be claimed
as FUNERAL EXPENSES. Neither can the
P20,000 unpaid portion be deducted from
the gross estate as CLAIMS AGAINST THE
ESTATE.

b. Judicial expenses of testamentary and
intestate proceedings (86-A1)
Allowable deductions are expenses
incurred, in the inventory-taking of
the assets comprising the gross estate,
their administration, the payment of
debts of the estate, as well as the
distribution of the estate among the
heirs,
DURING THE SETTLEMENT OF THE
ESTATE BUT NOT BEYOND THE LAST DAY
PRESCRIBED BY LAW, or the extension
thereof, FOR THE FILING OF THE ESTATE
TAX RETURN (RR 2-2003, Sec. 6-A2)

Examples of judicial expenses
o Fees of executor or administrator
o Attorneys fees
o Court fees
o Accountants fees
o Appraisers fees
o Clerk hire
o Costs of preserving and distributing the
estate
o Costs of storing or maintaining property
of the estate
o Brokerage fees for selling property of the
estate

CASE LAW: Commissioner v. CA (328 SCRA 666)
The notarial fee paid for the extrajudicial
settlement is deductible since such settlement
effected a distribution of the estate to the lawful
heirs. Attorneys fees to be deductible from the
gross estate must be essential to the collection of
assets, payment of debts or the distribution of
property to the persons entitled to it

c. Claims against the estate (86-A1)
Claims debts or demands of a
pecuniary nature which could have been
enforced against the deceased in his
lifetime and could have been reduced to
simple money judgments. May arise out
of contract, tort or operation of law.

Requisites for deductibility [PVN GF](RR
2-2003, Sec. 6-A3):
1) must be a PERSONAL OBLIGATION of the
deceased existing at the time of his
death (except unpaid funeral expenses
and unpaid medical expenses, which are
classified into their own separate
categories)
2) liability must have been contracted in
GOOD FAITH and for adequate and full
consideration in money or moneys worth
3) the claim must be a debt or claim which
is VALID IN LAW and ENFORCEABLE IN
COURT
4) indebtedness NOT CONDONED by the
creditor or the action to collect from the
decedent must not have prescribed.

Substantiation Requirements
1) The duly-notarized debt instrument, If
the claim arose out of a debt instrument
2) A statement showing the disposition of
the proceeds of the loan, if the
indebtedness was incurred within 3 years
before the death of the decedent.

d. Claims against insolvent persons (86-
A1)
Deductible from the gross estate,
provided that the value of the decedents
interest in the claim is included in the
value of the gross estate.

e. Unpaid mortgages. losses and
taxes(86-A1 and RR 2-2003, Sec. 6-
A5)
UNPAID MORTGAGES Deductible
from gross estate, provided:
o That the value of the decedents
interest in the property encumbered
by such mortgage or indebtedness is
included in the value of the gross
estate
o That the deduction shall be limited to
the extent that they were contracted
bona fide and for an adequate and full
consideration in money or moneys
worth, if such unpaid mortgages or
indebtedness were founded upon a
promise or an agreement.

LOSSES deductible from the gross
estate if ALL of the following conditions
are satisfied:

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The losses
o were INCURRED DURING the
SETTLEMENT of the estate
o arose from FIRES, STORMS,
SHIPWRECK or OTHER CASUALTIES,
or from ROBBERY, THEFT or
EMBEZZLEMENT
o are NOT COMPENSATED BY
INSURANCE or otherwise
o are not claimed as a deduction for
income tax purposes in an income tax
return
o were incurred NOT LATER THAN THE
LAST DAY FOR PAYMENT OF THE
ESTATE TAX

TAXES Deductible from the gross estate
IF:
o They have accrued as of the death of
the decedent
o They were unpaid as of the time of
death
NOTE: This deduction DOES NOT include
income tax upon income received after
death, or property taxes not accrued
before his death, or the estate tax due
from the transmission of his estate.

2. Property previously taxed (Vanishing
deductions) (86-A2)

Deduction allowed on the property left behind
by the decedent which he had acquired
previously by inheritance or donation.

Previously, a transfer tax had already been
imposed on the property, either the estate
tax (if property inherited) or the donors tax
(if property donated). Now that the recipient
of the inheritance or donation has died, the
same property will again be subjected to a
transfer tax, the estate tax. Thus, to
minimize the effects of a double tax on the
same property within a short period of time,
i.e. five (5) years, the law allows a deduction
to be claimed on the said property.
Example: Mr. A died in December 2003. In
March 2003, Mr. B (Mr. As father) died and
left Mr. A some properties as inheritance.
May vanishing deductions be claimed as
deductions in computing Mr. As net taxable
estate?
YES, vanishing deductions shall be allowed if
the following conditions are met
(REQUISITES FOR DEDUCTIBILITY): [PINID]

1) Death the present decedent (Mr. A)
died within five years from the receipt of
the property from a prior decedent (Mr.
B) or donor;
2) Identity of the property The property
with respect to which deduction is sought
can be identified as the one received
from the prior decedent or the donor, or
as the property acquired in exchange for
the original property so received.
3) Inclusion of the property The property
must have formed part of the gross
estate situated in the Philippines of the
prior decedent, or the total amount of the
gifts of the donor
4) Previous taxation of the property the
donor's tax on the gift or estate tax on
the prior succession (Mr. Bs succession)
was finally determined and paid
5) No vanishing deduction on the property
was allowed to the estate of the prior
decedent. (Illustration of how this
requirement may NOT be met: In the
example above, if Mr. B received the
same properties as a donation from Mr. C
in July 2002, a vanishing deduction on
the properties was claimed with respect
to Mr. Bs estate. Thus, no more
vanishing deduction may be claimed by
Mr. As estate)

Computation of vanishing deduction
Using the facts above, assume that Mr. A
inherited a car and a house from his father
Mr. B. The FMV of the car was P120,000
and the FMV of the house was P800,000 at
the time of Mr. Bs death. At the time Mr. A
inherited the land, it was subject to a
mortgage of P80,000. Mr. A paid P70,000 of
the mortgage during his lifetime (leaving a
balance of P10,000). The FMV of the
properties at the time of Mr. As death were
P850,000 for the land and P70,000 for the
car. Mr. As gross estate amounted to
P3,200,000 while total deductions (excluding
medical expenses, standard deductions,
family home) amounted to P600,000.

1) First, compare the values of the
property at the time of the prior
decedents death and at the time of
the present decedents death. The
lower amount shall be the initial
basis.
in the example, the initial basis shall
be P800,000 for the land and
P70,000 for the car, for a total of
P870,000
NOTE: The value used as initial basis
is significant only for purposes of
computing the amount of vanishing
deduction. The value included in the
decedents gross estate is ALWAYS
the fair market value at the time of
his death.

2) Then, the value in (1) shall be
reduced by any payment made by
the present decedent on any
mortgage or lien on the property
Mr. A paid P70,000 of the mortgage.
Thus, P870,000 less 70,000 is
P800,000

3) The value as reduced in (2) shall be
further reduced by an amount equal
to:

Value as reduced in (2) X Total amount of
Gross Estate deductions
*

* excluding family home, medical
expenses, standard deduction and
amounts received under RA 4917
800/3200 x 600,000 equals 150,000.
This will be deducted from P800,000,
which gives a balance of P650,000

4) Finally, the remaining balance shall
be multiplied by the corresponding
percentage:

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%
If received by inheritance or
gift:
100%
within one (1) year prior to the
death of the present decedent
80%
More than one year but not
more than two years prior to
the death of the decedent
60%
More than two years but not
more than three years prior to
40%
More than three years but not
more than four years prior to
20%
More than four years but not
more than five years prior to

Since Mr. A received the inheritance in
March 2003 (within 1 year from his death
in December 2003), the balance of
P650,000 shall be multiplied by 100%.
Thus, the allowable vanishing deduction is
P650,000

3. Transfers for public purpose

The whole amount of all the BEQUESTS,
LEGACIES, DEVISES or TRANSFERS to or for the
use of the Government of the Republic of the
Philippines, or any political subdivision thereof,
for exclusively public purposes shall be deductible
from gross estate, provided such amount or
value had been included in the gross estate.

4. Family home (maximum of P1m)
It is the dwelling house, including the land
on which it is situated, where the husband and
wife, or a head or the family, and members of
their family reside, as certified to by the
Barangay Captain of the locality.
It is deemed constituted on the house and
lot from the time it is actually occupied as the
family residence and considered as such for as
long as any of its beneficiaries actually resides
therein. (Arts. 152 and 153, Family Code)
Temporary absence from the constituted family
home due to travel or studies or work abroad,
etc. does not interrupt actual occupancy. The
family home is generally characterized by
permanency, that is, the place to which,
whenever absent for business or pleasure, one
still intends to return. (RR 2-2003, Sec. 6D)

Requisites for Deductibility
1) The family home must be the actual
residential home of the decedent and his
family at the time of his death, as certified
by the barangay captain of the locality.
2) The total value of the family home must
be included as part of the gross estate of
the decedent
3) Allowable deduction must be in an amount
equivalent to the current FMV of the
family home as declared or included in the
gross estate but in no case shall the
deduction exceed P1,000,000

5. Standard deduction (86-A5) (P1m)
An amount equivalent to One million pesos
(P1,000,000) shall be deducted from the gross
estate without need of substantiation.

6. Medical expenses (86-A6) (max. of
P5ook)
All medical expenses (cost of medicine, hospital
bills, doctors fees, etc.) incurred (whether paid
or unpaid)

Requisites for Deductibility:
- The expenses were incurred by the decedent
within one (1) year prior to his death
- The expenses are duly substantiated with
receipts
PROVIDED, that in no case shall the deductible
medical expenses exceed Five Hundred Thousand
Pesos (P500,000).

NOTE: Any amount of medical expenses incurred
within one year from death in excess of P500,000
CANNOT be claimed as a deduction under Claims
against the estate. (RR 2-2003, Sec. 6-F)

7. Amounts received by heirs under R.A.
4917 (86-A7)

Any amount received by the heirs from the
decedents employer as a consequence of the
death of the decedent-employee in accordance
with RA No. 4917 (this law provides that
retirement benefits of private employees shall not
be subject to attachment, levy execution or any
tax) PROVIDED that such amount is included in
the gross estate of the decedent.

QUICK GLANCE:
Resident or
citizen decedent
Non-resident alien
decedent

GROSS ESTATE
all property at the
time of death,
wherever situated

GROSS ESTATE
includes only that part
of gross estate located
in the Philippines

DEDUCTIONS
funeral
expenses
judicial
expenses
claims against
the estate
claims against
insolvents
unpaid
mortgage and
debt
taxes and losses
transfers for
public use
vanishing
deductions
family home
standard
deduction
medical
expenses
amounts
received under
R.A. 4917
share in
conjugal
property

DEDUCTIONS
funeral expenses
judicial expenses
claims against the
estate
claims against
insolvents
unpaid mortgage
and debt
taxes and losses
transfers for public
use
vanishing
deductions
share in conjugal
property

NOTE: To compute for
total allowable
deductions of the first
six items above, this
formula is used:

Gross
estate,
Phils
X
Gross
estate,
world

World
expenses,
losses,
indebtedness
, taxes etc.

NOTE: No deduction shall be allowed in the case
of a non-resident decedent not a citizen of the

TAXATION LAW 2
Philippines, unless the executor, administrator, or
anyone of the heirs, as the case may be, includes
in the return required to be filed under Section
90 of the Code the value at the time of the
decedents death of that part of his gross estate
not situated in the Philippines. (Section 86, NIRC)

Tax Rates Applicable:
If the net estate is:

Tax Credit for Estate Taxes (86-E)

Q: What is a tax credit?
It is a remedy against international double
taxation. To minimize the onerous effect of taxing
the same property twice, tax credit against
Philippine estate tax is allowed for estate taxes
paid to foreign countries.

Q: Who may avail of tax credit?
Only the estate of a decedent who was a citizen
or a resident of the Philippines at the time of his
death can claim tax credit for any estate tax paid
to a foreign country.

Q: What is the amount allowable as tax
credit?
GENERAL RULE: The estate tax imposed by the
Philippines shall be credited with the amounts of
any estate tax imposed by the authority of a
foreign country.
LIMITATIONS:
a. The amount of the credit in respect to the
tax paid to any country shall not exceed
the same proportion of the tax against
which such credit is taken, which the
decedent's net estate situated within such
country taxable under the NIRC bears to
his entire net estate; (PER COUNTRY
BASIS) and

b. The total amount of the credit shall not
exceed the same proportion of the tax
against which such credit is taken, which
the decedent's net estate situated outside
the Philippines taxable under the NIRC
bears to his entire net estate. (OVERALL
BASIS)

ILLUSTRATION:
Assume:
Net Estate Philippines
(reduced by all allowable
deductions, except
standard deduction)
P
1,050,000
Country G Net Estate 300,000
Country H Net Estate 150,000
Tax paid/incurred:
Philippines
Country G
Country H

15,000
5,000
1,400

Net taxable estate is P500,000
(1,050,000 + 300,000 + 150,000
1,000,000 standard deduction). The
Philippine estate tax on P500,000 is
P15,000

Solution Limitation A:

To get tax credit per country under
Limitation A, this formula is followed:

Net Estate in a Particular Country x Phil. estate
tax = Tax credit
Net Estate Worldwide

The result after applying the formula
above is compared to the tax actually
paid for each foreign country. The lower
of the two amounts for each foreign
country will be added to get the total tax
credit allowed under Limitation A.

Amount
Allowed
whichever
is Lower)
Country G (300/1500 x
15,000)
Actually paid to
Country G

3,000
5,000

3,000
Country H (150/1500 x
15,000)
Actually paid to
Country H

1,500
1,400

1,400
Tax credit allowed
under Limitation A
P 4,400

Solution Limitation B:

Net estate in all foreign countries. x Phil. estate
tax = Tax credit
Net Estate Worldwide

The result after applying the formula
above is compared to the tax actually
paid in total to foreign countries. The
lower of the two amounts will be added
to get the total tax credit allowed under
Limitation B.

Amount
Allowed
(Lower)
450/1500 x 15,000 P 4,500
Total foreign income
taxes paid
6,400
Tax credit allowed
under Limitation B
P 4,500

Compare the tax credit allowed under Limitation
A and Limitation B. The lower of the two
amounts is the final allowable tax credit. In this
case, the amount computed under Limitation A
(4,400) is lower, thus it becomes the final
allowable tax credit.

If there is only one foreign country involved, both
Limitations will yield the same answer. To get
the tax credit allowable, use the formula in
Limitation A. The resulting amount will be
compared to the actual tax paid to the foreign
country. The lower amount will be the final
allowable tax credit.
(Source: Reyes, Income Tax Law and
Accounting)
OVER
BUT NOT
OVER
TAX IS PLUS
OF THE
EXCES
S OVER
200,000 Exempt
P 200,000 500,000 0 5% 200,000
500,000 2,000,000 15,000 8% 500,000
2,000,000 5,000,000 135,000 11% 2million
5,000,000 10million 465,000 15% 5million
10,000,000 And Over 1,215,000 20% 10million

TAXATION LAW 2
COMPLIANCE REQUIREMENTS

ESTATE TAX

1. Person Liable for Payment
Primarily, the estate, through the executor or
administrator. Payment shall be made before the
delivery of the distributive share in the
inheritance to any heir or beneficiary. If there
are two or more executors or administrators, all
of them are severally liable for the payment of
the tax.
The estate tax clearance issued by the
Commissioner or the Revenue District Officer
(RDO) having jurisdiction over the estate, will
serve as the authority to distribute the remaining
properties/share in the inheritance to the heir or
beneficiary.

Subsidiarily, heirs or beneficiaries, for the
payment of that portion of the estate which his
distributive share bears to the value of the total
net estate. The extent of his liability, however,
shall in no case exceed the value of his share in
the inheritance.

2. Notice of Death

A written Notice of Death must be given to the
BIR
-within two (2) months after the death of the
decedent or
-within a period after the executor or
administrator or executor qualifies as such:
1. In all cases of transfers subject to tax or
2. Where, though exempt from tax, the gross
value of the estate exceeds P20,000.

ESTATE TAX RETURN
I: When required
1. When the estate is subject to estate tax, OR
2. When, though exempt from tax, the gross
value of the estate exceeds Two hundred
thousand pesos (P200,000), OR
3. Regardless of the gross value of the estate,
when the said estate consists of registered or
registrable property such as real property,
motor vehicle, shares of stock or other similar
property for which a clearance from the
Bureau of Internal Revenue is required as a
condition precedent for the transfer of
ownership thereof in the name of the
transferee,

II: Contents
The executor, or the administrator, or any of the
legal heirs, as the case may be, shall file a return
under oath in duplicate, setting forth:
1. The value of the gross estate of the decedent
at the time of his death, or in case of a
nonresident, not a citizen of the Philippines,
of that part of his gross estate situated in the
Philippines;
2. The deductions allowed from gross estate in
determining the net taxable estate; and
3. Such part of such information as may at the
time be ascertainable and such supplemental
data as may be necessary to establish the
correct taxes.
4. For estate tax returns showing a gross
value exceeding Two million pesos
(P2,000,000) there must be a statement
duly certified to by a Certified Public
Accountant containing the following:
Itemized assets of the decedent with their
corresponding gross value at the time of
his death, or in the case of a nonresident,
not a citizen of the Philippines, of that
part of his gross estate situated in the
Philippines;
Itemized deductions from gross estate
allowed in Section 86; and
The amount of tax due whether paid or
still due and outstanding.

III: When filed
GR: Filed within six (6) months from the
decedent's death.
Exception: The Commissioner shall have
authority to grant, in meritorious cases, a
reasonable extension not exceeding thirty (30)
days for filing the return

IV: Where filed
Except in cases where the Commissioner
otherwise permits, the return shall be filed with:
an authorized agent bank (AAB),
or Revenue District Officer (RDO),
Collection Officer, or
duly authorized Treasurer of the city or
municipality in which the decedent was
domiciled at the time of his death, or
if there be no legal residence in the
Philippines, with the Office of the
Commissioner.

Payment of Estate Tax

I: When paid
At the time the return is filed by the executor,
administrator or the heirs.

Extension of Payment
The Commissioner may allow an extension of
payment, if he finds that the payment on the due
date of the estate tax or of any part thereof
would impose undue hardship upon the estate or
any of the heirs
extension not to exceed five (5)
years, in case the estate is settled judicially,
or two (2) years in case the estate is
settled extrajudicially
Where the taxes are assessed by reason of
negligence, intentional disregard of rules and
regulations, or fraud on the part of the taxpayer,
no extension will be granted by the
Commissioner.
If extension granted, the Commissioner
may require the executor, or administrator,
or beneficiary, as the case may be, to
furnish a BOND in such amount, not
exceeding DOUBLE the amount of the tax
and with such sureties as the
Commissioner deems necessary,
conditioned upon the payment of the said
tax in accordance with the terms of the
extension.

Effects of granting an extension
Payment of the amount in respect of which
the extension is granted on or before the date
of the expiration of the period of the
extension
Suspension of the running of statute of
limitations for deficiency assessment for the
period of any extension
Any amount paid after the statutory due date
of the tax, but within the extension period,

TAXATION LAW 2
shall be subject to interest but not to
surcharge.

Q: Can estate tax be paid in
installments?
Yes. In case the available cash of the estate is
not sufficient to pay its total estate tax liability,
the estate may be allowed to pay the tax by
installment and a clearance shall be released only
with respect to the property the
corresponding/computed tax on which has been
paid. (RR 2-2003)

Government Collection of Unpaid Estate Tax
Due

1. Filing of Action The Government may file an
action against all the heirs for the collection
from each one of them the amount of the tax
proportionate to the inheritance received.
Hereditary property consists only of that part
which remains after the settlement of all
lawful claims against the estate for the
settlement of which the entire estate is first
liable. It achieves payment of the tax and
adjustment of the shares of each heir in the
distributed estate as lessened by the tax.

2. Enforcement of Tax Lien Another remedy,
pursuant to the lien created by Sec. 219 of
the Tax Code upon all property and rights to
property belonging to the taxpayer, is by
subjecting said property of the estate which is
in the hands of an heir or transferee to the
payment of the tax due on the estate. This
remedy seeks only the payment of the tax. As
a holder of property belonging to the estate,
an heir is liable for the tax up to the amount
of the property in his hands. He is individually
answerable for the part of the tax
proportionate to the share he received from
the inheritance. His liability, however, cannot
exceed the amount of his share. After
payment of the tax, he will have a right of
contribution from his co-heirs, to achieve an
adjustment of the proper share of each heir in
the distributable estate. (Commissioner v.
Pineda, 21 SCRA 105)

OBLIGATIONS OF EXECUTOR,
ADMINISTRATOR, OFFICERS, OTHERS

1. Executor or Administrator
When the gross estate is more than P20,000, the
executor, administrator or any of the legal heirs
shall:
a) give a written notice of death to the BIR
within two months after the decedents
death OR after the executor or administrator
shall have qualified
b) file the estate tax return within the time
prescribed by law
c) pay the estate tax within the time prescribed
by law
If the executor or administrator makes a written
application to the Commissioner for
determination of the amount of estate tax and
discharge from personal liability therefor, the
Commissioner shall notify the executor or
administrator of the amount of the tax. Upon
payment of the tax, the executor or administrator
shall be DISCHARGED from PERSONAL LIABILITY
for any deficiency in the tax thereafter found to
be due, and shall be entitled to a receipt or
writing showing such discharge. (92)

2. Judge
No judge shall authorize the executor or
administrator to deliver a distributive share to
any party interested in the estate, unless a
certification from the BIR that the estate tax has
been paid is shown. (94)

3. Register of Deeds
The Register of Deeds shall not register in the
registry of property any transfer of real property
or real rights therein, or any mortgage, by way of
donation or mortis causa or inheritance, without
a certification from the BIR of payment of the
estate tax, and they shall immediately notify the
BIR of non-payment of tax discovered by them.
(95)

4. Bank
If a bank has knowledge of the death of a person
who maintained a joint account or deposit jointly
with another, it shall not allow any withdrawal by
a surviving depositor from the said joint account
unless the Commissioner has certified that the
estate tax has been paid.

EXCEPTION: the administrator or any heir may,
with the authorization of the Commissioner,
withdraw an amount NOT EXCEEDING P20,000.
(95)

5. Lawyer, Notary Public or any
Government Officer
Any lawyer, notary public, or any government
officer who, by reason of his official duties,
intervenes in the preparation or acknowledgment
of documents regarding partition or disposal of
donations mortis causa, legacy or inheritance,
shall furnish the BIR with copies of such
documents and any information whatsoever
which may facilitate the collection of estate tax.
(95)

6. Debtor
A debtor shall not pay his debts to the heirs,
legatees, executor or administrator of his
creditor-decedent without a certification from the
BIR that the estate tax has been paid.

EXCEPTION: if the credit is included in the
inventory of estate of the decedent. (95)

7. Corporate Secretary of other
responsible officer
No transfer to any new owner in the books of any
corporation, sociedad anonima, partnership,
business or industry organized or established in
the Philippines, of any shares, obligations, bonds
or rights by way of donations mortis causa,
legacy or inheritance shall be made, UNLESS a
certification from the BIR that the estate tax has
been paid is shown. (97)

TAXATION LAW 2
ILLUSTRATIONS

o Decedent is an unmarried head of a family

a.
Real and personal properties 5,000,000
family home 2,000,000
Gross estate 7,000,000
Less: Deductions
Ordinary deductions
Funeral expenses 200,000
Other deductions 1,300,000
(1,500,000)
Special deductions
Family Home 1,000,000
Standard deduction 1,000,000
Medical expenses 500,000
(2,500,000)
Net taxable estate 3,000,000
NOTE:
Although the family home is valued at P2 million,
the maximum allowable deduction for the family
home is P1million only.
Medical expenses are not included in the
deductions referred under Section 86(A)(1) of the
Code but are treated as a special item of
deduction under Section 86(A)(6) of the same
Code.

o Decedent is a married man with a
surviving spouse
Family home is exclusive property

Conjugal Exclusive Total
Real&personal
properties 5,000,000 5,000,000
Family home 2,000,000 2,000,000
Other
exclusive
prop 2,500,000 2,500,000
Gross estate 5,000,000 4,500,000 9,500,000
Less:
Ordinary
Deductions

Funeral
expenses 200,000

Other
deductions 1,300,000

Total
Conjugal
deductions (1,500,000) (1,500,000)
Net estate b4
share of
spouse 3,500,000 4,500,000 8,000,000
Less Share of surviving
spouse `
1/2 of 3,500,000 (1,750,000)
Net Estate b4 special ded'ns 6,250,000
Less: Special Deductions
Family Home (1,000,000)
Standard Deduction (1,000,000)
Medical Expenses (500,000)
Net Taxable Estate 3,750,000
Family home is conjugal or
community property
Real and
personal
properties 5,000,000 5,000,000
Family home 2000000 2,000,000
Other exclusive
properties 2,000,000 2,000,000
Gross estate 7,000,000 2,000,000 9,000,000
Less: Ordinary
Deductions

Funeral
expenses 200,000
Other dedns 1,300,000

Total
Conjugal
deductions (1,500,000) (1,500,000)
Net estate b4
share of spouse 5,500,000 2,000,000 7,500,000
Less Share of surviving spouse `
1/2 of 5,500,000 (2,750,000)
Family Home (1,000,000)

Family home is conjugal property,
valued at P1,500,000
Real and personal
properties 5,000,000 5,000,000
Family home 1,500,000 1,500,000
Other exclusive
properties 2,000,000 2,000,000
Gross estate 6,500,000 2,000,000 8,500,000
Less: Ordinary
Deductions

Funeral
expenses 200,000

Other
deductions 1,300,000

Total Conjugal
deductions (1,500,000) (1,500,000)
Net estate b4
share of spouse 5,000,000 2,000,000 7,000,000
Less Share of surviving spouse `
1/2 of 5,000,000 (2,500,000)
Family Home (750,000)

NOTE: Only 750,000 is allowed as a deduction for
the family home, considering that it was conjugal
property valued at P1,500,000. This value is
subdivided into P750,000, which belonged to the
decedent, and P750,000, which belonged to the
surviving spouse. The part owned by the
decedent (P750,000) is compared with the
P1,000,000 maximum deduction, the lower of the
two amounts being the allowable deduction.

TAXATION LAW 2
B. Donors Tax
PRINCIPLES
Definition
Not defined under the Tax Reform Act of 1997 . A
gift is merely subjected to donors tax.

GIFT or DONATION- an act of liberality
whereby a person disposes gratuitously of a thing
or right in favor of another who accepts it. (Art
725, Civil Code)

REQUISITES for a gift to be subject to
donors tax: [ACID]
1. The donor must have CAPACITY
2. There must be an INTENT TO DONATE
3. There must be DELIVERY, either actual or
constructive
4. The donee must ACCEPT the donation

Kinds of Donations
1. Donations inter vivos a donation made
between living persons, which is perfected the
moment the donor knows of the acceptance
of the gift by the donee
21
; subject to donors
tax
2. Donations mortis causa a donation which
takes effect upon the death of the donor;
subject to estate tax

Q: What are considered donations for tax
purposes?
1. Sales, exchanges and other transfers of
property for less than an adequate and full
consideration in money or moneys worth
2. Condonation or remission of debt where the
debtor did not render service in favor of the
creditor
Noteworthy, the element of donative intent is
conclusively presumed in transfers of property for
less than an adequate or full consideration in
money or moneys worth. However, real
property considered capital assets under the Tax
Code are excepted from this rule. (Sec 100 in
relation to Sec 24(d)) Under Section 24(d), the
fair market value itself, if higher than the gross
selling price, is the base for computing the capital
gains tax imposed upon the sale of such capital
assets. Thus, what the seller avoids in the
payment of the donors tax, it pays for in the
capital gains tax.

Applicable Law
The law in force at the time of the perfection/
completion of the donation (Sec 11, RR 2-2003)
NOTE: Any contribution in cash or in kind to any
candidate, political party or coalition of parties for
campaign purposes shall be governed by the
Election Code, as amended. (Sec. 99(C), NIRC)

CASE LAW: Abello v. CIR (Feb. 23, 2005) The
contributions of the ACCRA partners to the
campaign funds of Sen. Angara during the 1987

21
In the case of donations of immovable property,
they must be made in a public document specifying
therein the property donated. The acceptance may be
made in the same Deed of Donation or in a separate public
document, but it shall not take effect unless it is done
during the lifetime of the donor. If the acceptance is made
in a separate instrument, the donor shall be notified
thereof in an authentic form, and this step shall be noted
in both instruments.
national elections constitutes a donation, thus,
subject to gift taxes. However, the SC noted
that succeeding cases shall be governed by RA
7166 enacted by Congress on Nov. 25, 1991.
The RA provides in Sec 13 that political/electoral
contributions, duly reported to the Commission
on Elections, are NOT subject to the payment of
any gift tax.

PROPERTIES INCLUDED

Classes of Donors and their Gross Gift

1. Citizens or Residents of the Philippines all
properties located not only within the
Philippines but also in foreign countries

2. Nonresident Alien all real and tangible
properties within the Philippines, and
intangible personal property, unless there is
reciprocity, in which case it is not taxable

Q: What are the intangible properties which
are considered by law as situated in the
Philippines?
1. Franchise which must be exercised in the
Philippines
2. Obligations or bonds issued by any
corporation or sociedad anonima organized or
constituted in the Philippines
3. Shares, obligations or bonds issued by any
foreign corporation 85% of the business of
which is located in the Philippines
4. Shares, obligations or bonds issued by any
foreign corporation if such shares, obligations
or bonds have acquired a business situs in
the Philippines
5. Shares or rights in any partnership, business
or industry established in the Philippines

Rule on Reciprocity (Sec 104, NIRC)
There is reciprocity if the foreign country of which
the decedent was a citizen and resident at the
time of his death:
1. did not impose a transfer tax of any
character, in respect of intangible personal
property of citizens of the Philippines not
residing in that foreign country; or
2. allowed a similar exemption from transfer tax
in respect of intangible personal property
owned by citizens of the Philippines not
residing in that country
This rule applies to the transmission by gift of
intangible personal property located or with a
situs within the Philippines of a nonresident alien.
EXEMPTIONS
Deductible from gross gifts in order to arrive at
the taxable net gifts.
Not to be treated as exclusions from the gross
gifts of the donor.

1. Dowries or donations made on account of
marriage before its celebration or within one
year thereafter by parents to each of their
legitimate, recognized natural, or adopted
children to the extent of the first P10,000.
However, this exemption may not be availed
of by a non-resident not a citizen of the
Philippines.
Q: Can both parents making a donation
to a child in consideration of marriage
avail of the P10,000 deduction?

TAXATION LAW 2
Yes. If both spouses made the gift, then the
gift is taxable one-half to each donor spouse.
Separate donors tax returns must be filed;
husband and wife are considered as separate
and distinct taxpayers for purposes of donors
tax. (Section 12, RR 2-2003) However, where
there is failure to prove that the donation was
actually made by both spouses, the donation
is taxable as an exclusive act of the husband
(Tang Ho v. BTA, 97 Phil 890), without
prejudice to the right of the wife to question
the validity of the donation without her
consent pursuant to the provisions of the Civil
Code and the Family Code. (Section 12,
supra)

2. Gifts made to or for the use of the National
Government or any entity created by any of
its agencies which is not conducted for profit,
or to any political subdivision of the said
Government

3. Gifts in favor of an educational and/or
charitable, religious, cultural or social welfare
corporation, institution, accredited non-
government organization, trust or
philanthropic organization or research
institution or organization, provided not more
than 30% of said gifts will be used by such
donee for administration purposes

Q: What is a non-profit educational
and/or charitable corporation, etc?
It is a school, college or university and/or
charitable corporation, accredited NGO, trust
or philanthropic organization and/or research
institution or organization:
Incorporated as a non-stock entity,
Paying no dividends,
Governed by trustees who receive no
compensation, and
Devoting all its income, whether students
fees or gifts, donations, subsidies or other
forms of philanthropy, to the
accomplishment and promotion of the
purposes enumerated in its Articles of
Incorporation

4. Encumbrances on the property donated if
assumed by the donee in the deed of
donation

5. Donations made to entities exempted under
special laws, e.g.:
o Aquaculture Department of the Southeast
Asian Fisheries Development Center of the
Philippines
o Development Academy of the Philippines
o Integrated Bar of the Philippines
o International Rice Research Institute
o National Museum
o National Library
o National Social Action Council
o Ramon Magsaysay Foundation
o Philippine Inventors Commission
o Philippine American Cultural Foundation
o Task Force on Human Settlement on the
donation of equipment, materials and
services

6. Donations to persons not strangers where the
total of such net gifts for the calendar year is
not more than P100,000.00

Net Gifts
Net Gift is the net economic benefit from the
transfer that accrues to the donee.
Accordingly, if a mortgaged property is
transferred as a gift, but imposing upon the
donee the obligation to pay the mortgage
liability, then the net gift is measured by
deducting from the fair market value of the
property the amount of the mortgage assumed.
(Section 11, RR 2-2003)
COMPUTATION
How is donors tax computed?
This general formula shall be followed:

Gross gifts made
Less: Deductions from the gross gifts
Net gifts made
Multiplied by applicable rate
Donors tax on the net gifts

If there were several gifts made during the year,
this formula is followed:

Gross gifts made on this date
Less: Deductions from the gross gifts
Net gifts made on this date
Add: all prior net gifts during the year
Aggregate net gifts
Multiplied by applicable rate
Donors tax on the aggregate net gifts
Less: donors tax paid on prior net gifts
Donors tax due on the net gifts to date
RATES OF TAX
The applicable donors tax rate is dependent
upon the relationship between the donor and the
donee.

1. If the donee is a stranger to the donor,
the tax rate is equivalent to 30 % of the net
gifts.

A stranger for purposes of the donors
tax
a. a person who is not a brother, sister
(whether by whole or half-blood), spouse,
ancestor or lineal descendant, or
b. a person who is not a relative by
consanguinity in the collateral line within
the fourth degree of relationship. (Sec.
99(B))
Note that donations made between
business organizations and those made
between an individual and a business
organization shall be considered as
donations made to a stranger (RR 2-
2003)

2. If the donee is not a stranger to the
donor, the tax for each calendar year shall
be computed on the basis of the total net
gifts made during the calendar year:

TAXATION LAW 2
Over But not
Over
Tax Is Plus Of the
Excess
Over
0 100,000 Exempt
100,000 200,000 0 2% 100,000
200,000 500,000 2,000 4% 200,000
500,000 1 million 14,000 6% 500,000
1 million 3 million 44,000 8% 1 million
3 million 5 million 204,000 10% 3 million
5 million 10 M 404,000 12% 5 million
10 M 1,004,000 15% 10 million

Note: A legally adopted child is entitled to all the
rights and obligations provided by law to
legitimate children, and therefore, a donation to
him shall not be considered as a donation made
to a stranger.

OBJECT OF TAXATION
Donors tax shall be imposed whether the
transfer is in trust or otherwise, whether the
gift is direct or indirect and whether the
property is real or personal, tangible or
intangible.
The computation of the donors tax is on a
cumulative basis over a period of one
calendar year

Illustrations:
1. Donation to son by parents on account of
marriage (P100,000):
Husband
Net Taxable Gift = P50,000 10,000 =
P40,000
Tax Due = None, since P40,000 is below the
P100,000 threshold
Wife same as above

2. Donation to son and daughter-in-law by
parents on account of marriage (P100,000):
Husband
o Gift pertaining to the son
Net Taxable Gift = P25,000 10,000 =
P15,000
Tax Due = None, since P15,000 is below
the P100,000 threshold
o Gift pertaining to the daughter-in-law
Net Taxable Gift = P25,000
Tax Due = P25,000 x 30% = P7,500
Wife same as above

3. Donations to donees not considered strangers
for tax purposes were made on:
January 30, 2002 P 2,000,000
March 30, 2002 -- 1,000,000
August 15, 2002 -- 500,000

After the
first
donation
After the
second
donation
After the
third
donation
Net
Taxable
Gift
2,000,000 January
Donation -
P2,000,000
January
Donation -
P2,000,000
March
Donation -
1,000,000
March
Donation -
1,000,000
Total
P3,000,000
August
Donation -
500,000
Total
P3,500,000
Correspon
ding
Donors
Tax (refer
to
schedule)
124,000 P 204,000 P254,000
Tax Due /
Payable
124,000 Donors Tax
P 204,000
Donors Tax
P 254,000
Less: Tax
Previously
Paid
124,000
Less: Tax
Previously
paid
(124k+80k)
204,000
Tax Due
P80,000
Tax Due
P50,000

VALUATION

If the gift is made in property, the fair
market value at that time will be
considered the amount of gift.
Real Property
taxable base = FMV as determined by the
Commissioner of BIR (Zonal Value) or FMV as
shown in the latest schedule of values of the
provincial and city assessor (Market Value
per Tax Declaration), whichever is higher.
If there is no zonal value, the taxable
base is the FMV that appears in the latest tax
declaration
Improvement
value of improvement is the construction
cost per building permit and/or occupancy permit
plus 10% per year after year of construction, or
the FMV per latest tax declaration.

TAX CREDIT

A situation may arise when the property given as
a gift is located in a foreign country and the
donor may be subject to donors tax twice on the
same property: first, by the Philippine
government and second, by the foreign
government where the property is situated. The
remedy of claiming a tax credit is, therefore,
aimed at minimizing the burdensome effect of
double taxation by allowing the taxpayer to
deduct his foreign tax from his Philippine tax,
subject to the limitations provided by law.

Q: Who may claim tax credit?
Tax credit for donors tax may be claimed only by
a resident citizen, non-resident citizen and
resident alien.

Q: What are the limitations on the tax
credit?
1. NET GIFT (foreign country) X PHIL DONORS
ENTIRE NET GIFTS TAX

2. NET GIFT(all foreign countries)X PHILDONORS
ENTIRE NET GIFTS TAX

NOTE: The computation of the donors tax credit
is the same as the computation for estate tax
credit.
COMPLIANCE REQUIREMENTS

DONORS TAX RETURN

I. Who Files

TAXATION LAW 2
Every person, whether natural or juridical,
resident or non-resident, who transfers or causes
to transfer property by gift, whether in trust or
otherwise, whether the gift is direct or indirect
and whether the property is real or personal,
tangible or intangible.

Contents of the Donors Tax Return
1. Each gift made during the calendar year
which is to be included in computing net gifts;
2. The deductions claimed and allowable;
3. Any previous net gifts made during the same
calendar year;
4. The name of the donee;
5. Relationship of the donor to the donee; and
6. Such further information as the Commissioner
may require.

When Filed
Filed within thirty (30) days after the date the
gift is made or completed and the tax due
thereon shall be paid at the same time that the
return is filed.

Where Filed and Paid
Unless the Commissioner otherwise permits, it
shall be filed and the tax paid to an authorized
agent bank, the Revenue District Officer,
Revenue Collection Officer or duly authorized
Treasurer of the city or municipality where the
donor was domiciled at the time of the transfer,
or if there be no legal residence in the
Philippines, with the Office of the Commissioner.
In the case of gifts made by a non-resident, the
return may be filed with the Philippine Embassy
or Consulate in the country where he is domiciled
at the time of the transfer, or directly with the
Office of the Commissioner.
II. II. II. II. VALUE VALUE VALUE VALUE- -- -ADDED TAX ADDED TAX ADDED TAX ADDED TAX
22 22 22 22

I. CONCEPT

VAT is a percentage tax imposed at every
stage of the distribution process on the sale,
barter, or exchange, or lease of goods or
properties, and on the performance of service in
the course of trade or business, or on the
importation of goods, whether for business or
non-business purposes.

It is a business tax levied on certain
transactions involving a wide range of goods,
properties, and services, such tax being payable
by the seller, lessor, or transferor. The tax is so-
called because it is imposed on the value not
previously subjected to VAT (De Leon, The
National Internal Revenue Code Annotated,
2000 edition)

It is also an excise tax, or a tax on the privilege
of engaging in the business of selling goods or
services, or in the importation of goods.

The taxpayer (seller) determines his tax liability
by computing the tax on the gross selling price or
gross receipt (output tax), and subtracting or
crediting the earlier VAT on the purchase or
importation of goods or on the sale of service
(input tax) against the tax due on his own sale.

VAT payable to BIR = OUTPUT TAX INPUT TAX

Computation of the VAT Payable:

II. NATURE & CHARACTERISTICS

It is an indirect tax, the amount of which may
be shifted to or passed on the buyer,
transferee, or lessee of the goods, properties
or services. (Sec. 105)
This rule shall likewise apply to existing
contracts of sale or lease of goods, properties
or services at the time of the effectivity of RA
No. 9337. RR 16-2005
23

22
Credits: 2008 AD, C2005
23
Revenue Regulations (RR) No. 4-2007 dated February 7,
2007 introduced changes to RR No. 16-2005. SUCH as: SEC.
4.106-1. VAT on Sale of Goods or Properties. VAT is imposed
and collected on every sale, barter or exchange, or transactions
deemed sale of taxable goods or properties at the rate of
twelve percent (12%) (starting February 1, 2006) of the gross
selling price or gross value in money of the goods or properties
sold, bartered, or exchanged, or deemed sold in the
Philippines.
Gross taxable sales/receipts xxx
Less: Sales returns xxx
Sales allowances xxx
Sales discounts xxx (xxx)
Net sales xxx
Multiply with the VAT rate 12%
Output tax (12% of Net sales) xxx

Input tax carried over from previous period xxx
Domestic purchases xxx
Importations xxx
Total xxx
Input tax (12% of Total) xxx

Total Input tax (xxx)

VAT payable (Output tax less input tax) xxx
(All amounts in the formula must be NET of VAT)

TAXATION LAW 2
Constitutionality of VAT

ABAKADA Guro Party List, et. al. v Ermita

The validity of raising the VAT rate from 10% to
12% by the President was upheld by SC.

The assailed provisions of RA 9337 are those that
say that the President, upon the recommendation
of the Sec. of Finance, shall raise the rate of VAT
to 12% when VAT as a percentage of the GDP of
the previous year exceeds 2 4/5% and when the
deficit as a percentage of the previous years GDP
exceeds 1 %.

This is NOT an undue delegation of legislative
power. It is simply a delegation of ascertainment
of facts upon which enforcement and
administration of the increased rate under the
law is contingent. It is the ministerial duty of
the President to immediately impose the 12%
rate upon the existence of any of the conditions
specified by Congress.
24

Another assailed provision is Sec. 8 amending
Sec. 110(B), which imposes a limitation on the
amount of input tax (70% of the output tax) that
may be credited against the output tax. The
Court says this does not violate due process. The
excess input tax, if any, is retained in a business
books of accounts and remains creditable in the
succeeding quarter/s. In addition, Sec. 112(B)
allows a VAT-registered person to apply for the
issuance of a tax credit certificate or refund for
any unused input taxes, to the extent that such
input taxes have not been applied against the
output taxes. Such unused input tax may be
used in payment of his other internal revenue
taxes.
25

The input tax is NOT a property or a property
right within the constitutional purview of the due
process clause. A VAT-registered persons
entitlement to the creditable input tax is a mere
statutory privilege. The right to credit input tax
as against the output tax is clearly a privilege
created by law, a privilege that also the law can
remove, or in this case, limit.

[Note: This limitation of creditable input tax has
been eliminated by RA 9361, effective December
2006. Pls refer to the discussion on input taxes
on page30.]

With respect to Sec. 8, amending Sec. 110 (A),
which provides for 60-month amortization of the
input tax on capital goods purchased: It is not
oppressive, arbitrary, and confiscatory. The
taxpayer is not permanently deprived of his
privilege to credit the input tax. For whatever is
the purpose, it involves executive economic
policy and legislative wisdom in which the Court
cannot intervene.

The tax law is uniform: it provides a standard
rate of 0% or 10% (or 12% now) on all goods or
services. The law does not make any distinction
as to the type of industry or trade that will bear

24
The rate was indeed increased to 12%, effective Feb. 1,
2006, as per Revenue Memorandum (RMC) No. 7-06, dated
January 31, 2006
25
This, however, is not accurate. The option to apply for tax
credit certificate or refund is available to the VAT taxpayer only
in case his VAT registration is cancelled, unless he is subject to
VAT zero-rate.
the 70% limitation on the creditable input tax, 5-
year amortization of input tax on purchase of
capital goods, or the 5% final withholding tax by
the government.

It is equitable: The law is equipped with a
threshold margin (P1.5M). Also, basic marine
and agricultural products in their original state
are still not subject to tax. Congress also
provided for mitigating measures to cushion the
impact of the imposition of the tax on those
previously exempt. Excise taxes on petroleum
products and natural gas were reduced.
Percentage tax on domestic carriers was
removed. Power producers are now exempt from
paying franchise tax.

VAT, by its very nature, is regressive. BUT the
Constitution does not really prohibit the
imposition of indirect taxes (which is essentially
regressive). What it simply provides is that
Congress shall evolve a progressive system of
taxation. In Tolentino v. Sec. of Finance, the
Court said that direct taxes are to be preferred,
and as much as possible, indirect taxes should be
minimized but not avoided entirely because it is
difficult, if not impossible, to avoid them.

Tolentino v. Guingona

Regressivity is not a negative standard for
courts to enforce. What Congress is required by
the Consti to do is to evolve a progressive
system of taxation. This provision is placed in
the Consti as moral incentives to legislation, not
as judicially enforceable rights.

The Consti mandate to evolve a progressive
system of taxation simply means that direct
taxes are to be preferred as much as possible,
and indirect taxes should be minimized. Resort
to indirect taxes should be minimized but
not avoided entirely. Also, the regressive
effects are corrected by the zero rating of certain
transactions and through the exemptions. The
transactions which are subject to VAT are those
which involve goods and services which are used
or availed of mainly by higher income groups (
real properties held primarily for sale to
customers, right or privilege to use patent,
copyright...)

III. TRANSACTIONS SUBJECT TO VAT
A. Any sale, barter or exchange of goods and
properties, or similar transactions in the
course of trade or business
B. Any sale of services, or similar transactions,
in the course of trade or business
C. Any lease of goods and properties or similar
transactions, in the course of trade or
business
D. Any importation of goods, whether in the
course of trade or business or not

RMC 9-2006: Reimbursable expenses

Transactions and amounts that are subject to
VAT:
1. If the reimbursable expenses and/or
advanced payments for certain expenses
(e.g. arrastre, wharfage, documentation,
trucking, handling charges, storage fees,
duties and taxes, etc.) made by brokers on

TAXATION LAW 2
behalf of their customers are receipted with
the brokers VAT official receipt.
2. Any advanced payment for expenses incurred
(e.g. transportation, overtime and facilitation
fee to facilitate the clearing of goods through
customs) for the benefit of brokers,
notwithstanding that the same is reimbursed
by their customers.

Reimbursable expenses and/or advanced
payments shall NOT be subject to VAT on the
part of the broker if the following
conditions/procedures are complied with:
1. The reimbursable expenses and/or advanced
payments EXCEPT those incurred for the
benefit of the brokers, are receipted
separately using NON-VAT Official
Acknowledgment Receipts to be issued by the
brokers to the Customers upon collection of
the reimbursements or advances previously
recorded as Receivable For Cash Advances
on Behalf of Customers, which recording was
done upon payment, on behalf of customers,
of the advances to the third-party service
providers who issued official receipts in the
name of the customers and not of the brokers
2. The third-party service providers to whom the
advanced payments or reimbursable
expenses of the customers have been paid by
the brokers shall issue receipts in the name of
the Customers
3. The brokers shall record the reimbursable
expenses of or the advanced payments on
behalf of Customers under the account
Receivable for Cash Advances on Behalf of
Customers
4. For liquidation purposes, the brokers shall
attach the original copy of all said official
receipts issued by the third-party service
providers in the name of the customers to the
NON-VAT official acknowledgment receipts of
the brokers issued to their Customers upon
payment by the latter of the reimbursable
expenses

*The Customers may be able to claim input
tax for the services of the third-party service
providers that are subject to VAT if the same
are receipted by the third-party service
providers VAT official receipts evidencing the
latters reporting of the same for VAT
purposes.

IV. PERSONS LIABLE (Sec. 105)

A. Any person who, in the course of trade or
business
26
,
(1) sells, barters, exchanges goods or
properties, (2) leases goods or properties,
and
(3) renders services.

26
The phrase in the course of trade or business
means the regular conduct or pursuit of a commercial
or an economic activity, including transactions
incidental thereto, by any person regardless of whether
or not the person engaged therein is a non-stock,
nonprofit organization (irrespective of the disposition of
its net income and whether or not it sells exclusively to
members or their guests), or government entity. Sec
105
Exception:
1. When the sales do not exceed P100,000
(meaning not considered to be in the
course of trade or business but only for
subsistence, even if he, in the course of
trade or business, (1) sells, barters,
exchanges goods or properties, (2) leases
goods or properties, and (3) renders
services; hence, he is not liable for either
VAT or percentage tax)

2. Services as defined in this Code rendered
in the Philippines by nonresident foreign
persons shall be considered as being
rendered in the course of trade or business.
RR 16-2005 clarifies this: Non-resident
persons who perform services in the
Philippines are deemed to be in the
course of trade or business, even if
performance is NOT regular.

B. Any person who imports goods
RR 16-2005: the importer, whether
an individual or corporation and
whether or not made in the course of
his trade or business, shall be liable to
pay VAT.

RATES IN GENERAL [12%, 0%]

A. 12% VAT

i. SALE OF GOODS OR PROPERTIES ( 106, A)

On sale, barter, exchange of goods or
properties

Rate: 12% VAT (beginning 1 February 2006,
RMC No. 7-06)

Basis: Of gross selling price or gross value in
money of the goods or properties

PROVIDED, That the President, upon the
recommendation of the Sec. of Finance, shall,
effective January 1, 2006, raise the rate of value-
added tax to 12%, after any of the following
conditions has been satisfied:
1. Value-added tax collection as a percentage of
Gross Domestic Product (GDP) of the previous
year exceeds 2 4/5%; or
2. National government deficit as a percentage of
GP of the previous year exceeds 1 %.

Who Pays: Paid by SELLER

Goods or properties- all tangible and intangible
objects which are capable of pecuniary
estimation, including:
(a)Real properties held primarily for sale to
customers or held for lease in the ordinary
course of trade or business
(b) The right or the privilege to use patent,
copyright, design, or model, plan, secret
formula or process, goodwill, trademark,
trade brand or other like property or right;
(c)The right or the privilege to use in the
Philippines of any industrial, commercial or
scientific equipment
The right or the privilege to use motion
picture films, films tapes and discs
(e) Radio, television, satellite transmission
and cable television time

TAXATION LAW 2

Gross Selling Price (GSP)- The total amount of
money or its equivalent which the purchaser pays
or is obligated to pay to the seller in
consideration of the sale, barter or exchange of
the goods or properties, excluding the value-
added tax. The excise tax, if any, on such goods
or properties shall form part of the gross selling
pricexxx.

1) The consideration stated in the sales
document, or
2) The fair market value (FMV),
Whichever is HIGHER
FMV- whichever is the HIGHER of:
a) FMV as determined by the
Commissioner (zonal value), or
b) FMV as shown in schedule of
values of the Provincial & City
assessors (real property tax
declaration)
If GSP is based on the zonal value or
market value of the property, the zonal
or market value shall be deemed
INCLUSIVE of VAT.
If the VAT is not billed separately, the
selling price stated in the sales document
shall be deemed to be INCLUSIVE of VAT.

RR 16-2005:
Sale of Real Property on installment plan
Sale of real property by a real estate dealer,
the initial payments of which in the year of sale
(down payment + all payments actually or
constructively received during the year of sale)
do not exceed 25% of the gross selling price.
However, in the case of sale of real properties on
the deferred-payment basis, not on the
installment plan, (meaning the initial payments in
the year of sale exceed 25% of the gross selling
price), the transaction shall be treated as cash
sale which makes the entire selling price taxable
in the month of sale.

The real estate dealer shall be subject to VAT on
the installment payments, including interest and
penalties, actually and/or constructively received
by the seller.

Sale of residential lot exceeding P1.5M,
residential house and lot or other residential
dwellings exceeding P2.5M, where the instrument
of sale is executed on or after July 1, 2005, shall
be subject to [12%] VAT. Where the instrument
of sale was executed prior to July 1, 2005, the
price needs only to exceed P1M for the
installment sale of residential house and lot or
other residential dwellings to be subject to 10%
VAT.

Transmission of property to a trustee shall NOT
be subject to VAT IF the property is to be merely
held in trust for the trustor and/or beneficiary.
However, IF the property transferred is one for
sale, lease or use in the ordinary course of trade
or business AND the transfer constitutes a
completed gift, the transfer is subject to VAT as a
deemed sale transaction. The transfer is a
completed gift if the transferor divests himself
absolutely of control over the property, i.e.,
irrevocable transfer of corpus and/or irrevocable
designation of beneficiary.

TRANSACTIONS DEEMED SALE (subject to
12% VAT) ( 106, B) [DR TC]

(1) Transfer, use or consumption not in the
course of business of goods properties
originally intended for sale or for use in the
course of business
(e.g. when a VAT-registered person
withdraws goods from his business for his
personal use.- RR 16-2005)

(2) Distribution or transfer to:
(a) Shareholders or investors as share in
the profits of the VAT-registered persons;
or
(b)Creditors in payment of debt;
(NOTE: Property dividends which
constitute stocks in trade or properties
primarily held for sale or lease declared
out of retained earnings on or after Jan.
1, 1996 and distributed by the company
to its shareholders shall be subject to
VAT based on the zonal value or FMV at
the time of the distribution, whichever is
applicable. - RR 16-2005)

(3) Consignment of goods if actual sale is not
made within 60 days following the date
such goods were consigned; and
(NOTE: Consigned goods returned by the
consignee within the 60-day period are not
deemed sold. - RR 16-2005)

(4) Retirement from or cessation of business,
with respect to inventories of taxable goods
existing as of such retirement or cessation.
(with respect to ALL goods on hand,
whether capital goods, stock-in-trade,
supplies or materials, as of the date of such
retirement or cessation, whether or not the
business is continued by the new owner or
successor. Examples are change of
ownership of the business (e.g. when a sole
proprietorship incorporates, or the
proprietor sells his entire business) and
dissolution of a partnership and creation of
a new partnership which takes over the
business. - RR 16-2005)

TAX BASE on transactions deemed sale
Output tax = market value of the goods deemed
sold as of the time of the occurrence of the
transactions.

CHANGES IN OR CESSATION OF STATUS OF
A VAT-REGISTERED PERSON (12% VAT) (
106, C)

VAT shall apply to goods disposed of or existing
as of a certain date if under the circumstances to
be prescribed in rules and regulations to be
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, the status
of a person as a VAT-registered person changes
or is terminatedxxx.

RR 16-2005:

1) Subject to output taxapplicable to
goods/properties originally intended for sale
or use in business and capital goods which
are existing as of the occurrence of the
following:

TAXATION LAW 2
a) Change of business activity from VAT
taxable status to VAT-exempt status.
b) Approval of a request for cancellation of
registration due to reversion to exempt
status
c) Approval of a request for cancellation of
registration due to a desire to revert to
exempt status AFTER the lapse of 3
consecutive years from the time of
registration by a person who voluntarily
registered despite being exempt under
Sec. 109 (2)
d) Approval of request for cancellation of
registration of one who commenced
business with the expectation of gross
sales/receipts exceeding P1.5M but who
failed to exceed this amount during the
first 12 months of operation

2) NOT subject to output tax
a) Change of control of a corporation by the
acquisition of the controlling interest of
such corporation by another stockholder
or group of stockholders.
b) Change in the trade or corporate name of
the business
c) Merger or consolidation of corporations.
The unused input tax of the dissolved
corporation, as of the date of merger or
consolidation, shall be absorbed the
surviving or new corp.

TAX BASE in case of retirement/cessation of
business
Tax Base= acquisition cost or current market
price of the goods or properties, whichever is
lower.

ii. IMPORTATION OF GOODS (107, A)
On every importation of goods (WON goods
are for use in business)

Rate: 12% (as amended)

Basis: total value used by the Bureau of
Customs in determining tariff and customs
duties, plus customs duties, excise taxes, if any,
and other charges,
Where the customs duties are determined
on the basis of the quantity or volume of the
goods, the value-added tax shall be based on the
landed cost plus excise taxes, if any.


Who Pays: Paid by the importer prior to the
release of such goods from customs custody

Transfer of Goods by Tax-Exempt Persons
(107, B)
If importer is tax-exempt, the subsequent
purchasers, transferees or recipients of such
imported goods shall be considered as importers
who shall be liable for the tax on importation.
The tax due on such importation shall constitute
a lien on the goods superior to all charges or
liens on the goods, irrespective of the possessor
thereof. (as amended by RA 9337)

iii. SALE OF SERVICES & USE/LEASE
OF PROPERTIES ( 108, A)

On sale or exchange of services, use of lease
properties

Rate: 12% (as amended)

Basis: gross receipts derived from the sale or
exchange of services, including the use of lease
of properties.


Sale or Exchange of Services
The performance of all kinds of services in the
Philippines for others for a fee, remuneration or
consideration, including those performed or
rendered by: (CLIMB-SCHERD-TFF)
1. Construction and service contractors;
2. stock, real estate, commercial, customs and
immigration Brokers;
3. Lessors of property, whether personal or real;
warehousing services;
4. lessors or distributors of cinematographic
Films;
5. persons engaged in Milling, processing,
manufacturing or repacking goods for others;
6. proprietors, operators or keepers of Hotels,
motels, rest-houses, pension houses, inns,
resorts;
7. proprietors or operators of Restaurants,
refreshment parlors, cafes and other eating
places, including clubs and caterers;
8. Dealers in securities;
9. lending Investors;
10. Transportation contractors on their transport
of goods or cargoes, including persons who
transport goods or cargoes for hire and other
domestic common carriers by land relative to
their transport of goods or cargoes;
11. Common carriers by air and sea relative to
their transport of passengers, goods or
cargoes from one place in the Philippines to
another place in the Philippines;
12. sales of Electricity by generation companies,
transmission, and distribution companies;
13. services of Franchise grantees of electric
utilities, telephone and telegraph, radio and
television broadcasting and all other franchise
grantees except those under Section 119 of
this Code and non-life insurance companies
(except their crop insurances), including
surety, fidelity, indemnity and bonding
companies;
14. and Similar services regardless of whether or
not the performance thereof calls for the
exercise or use of the physical or mental
faculties.

TAXATION LAW 2
The phrase 'sale or exchange of services'
shall likewise include: (A- FACT-PIE)
1. The lease or the use of or the right or
privilege to use any Copyright, patent, design
or model plan, secret formula or process,
goodwill, trademark, trade brand or other like
property or right
2. The lease or the use of, or the right to use of
any industrial, commercial or, scientific
Equipment;
3. The supply of scientific, technical, industrial
or commercial knowledge or Information;
4. The supply of any Assistance that is ancillary
and subsidiary to and is furnished as a means
of enabling the application or enjoyment of
any such property, or right as is mentioned in
subparagraph (2) or any such knowledge or
information as is mentioned in subparagraph
(3);
5. The supply of services by a nonresident
person or his employee in connection with the
use of Property or rights belonging to, or the
installation or operation of any brand,
machinery or other apparatus purchased from
such nonresident person;
6. The supply of technical Advice, assistance or
services rendered in connection with technical
management or administration of any
scientific, industrial or commercial
undertaking, venture, project or scheme;
7. The lease of motion picture Films, films, tapes
and discs; and
8. The lease or the use of or the right to use
radio, television, satellite transmission and
cable television Time.

Lease of Properties
- subject to the tax herein imposed irrespective
of the place where the contract of lease or
licensing agreement was executed if the property
is leased or used in the Philippines.

'Gross Receipts' -the total amount of money or
its equivalent representing the contract price,
compensation, service fee, rental or royalty,
including the amount charged for materials
supplied with the services and deposits and
advanced payments actually or constructively
received during the taxable quarter for the
services performed or to be performed for
another person, excluding value-added
taxxxx. (as amended by RA 9337,
underscored parts amended or added by RA
9337)

Notes: (unless otherwise indicated, from RR 16-
2005)

1. Persons engaged in milling, processing,
manufacturing or repacking goods for others
are subject to VAT, EXCEPT palay into rice,
corn into corn grits, and sugarcane into raw
sugar

2. For dealers in securities, gross receipts
means gross selling price less cost of the
securities sold. RR 7-95: Pre-need
companies are considered dealers in
securities.

3. Lending investors all persons OTHER than
banks, non-bank financial intermediaries,
finance companies and other financial
intermediaries NOT performing quasi-banking
functions who make a practice of lending
money for themselves or others at interest

4. Subject to VAT: Franchise grantees of electric
utilities, telephone and telegraph, radio
and/or TV broadcasting and all other
franchise grantees (including PAGCOR and its
licensees/franchisees) EXCEPT franchise
grantees of radio and/or TV broadcasting
whose annual gross receipts of the preceding
year do not exceed P10M (which shall be
subject to 3% franchise tax under Sec. 119,
subject to optional registration), and
franchise grantees of gas and water facilities
(under Sec. 109, subject to 2% franchise
tax). With respect to franchise grantees of
telephone and telegraph services, amounts
received for overseas dispatch, message, or
conversation originating from the Philippines
are subject to the percentage tax under Sec.
120 and hence exempt from VAT.

5. In a lease contract, the advance payment by
the lessee may be:
a) a loan to the lessor from the lessee
NOT subject to VAT
b) an option money for the property NOT
subject to VAT
c) a security deposit to insure the faithful
performance of certain obligations of the
lessee to the lessor NOT subject to
VAT. BUT if the security deposit is applied
to rental, it shall be subject to VAT at the
time of its application.
d) or pre-paid rental subject to VAT when
received, irrespective of the accounting
method employed by the lessor

6. On transportation:
All receipts from service, hire, or
operating lease of transportation
equipment not subject to the percentage
tax on domestic common carriers and
keepers of garages shall be subject to
VAT. (Pls refer to Sec. 117 for other
percentage taxes.

Common
carrier
Transporting Kind of
carrier
Tax
Liability
By land Persons Domestic 3%, Sec.
117
Goods/cargo Domestic 12% VAT
By sea

Whether
transporting
persons or
goods/cargo
Domestic Domestic
trip - 12%
VAT
International
trip zero-
rated
International 3%, Sec.
118
By air Domestic Domestic
flight -
12% VAT
International
flight
zero-rated
118

7. Sale of electricity by generation,
transmission, and distribution companies
shall be subject to 12% VAT, EXCEPT sale of
power or fuel generated through renewable
sources of energy, such as, but not limited
to, biomass, solar, wind hydropower,

TAXATION LAW 2
geothermal, ocean energy, and other
emerging energy sources using technologies
such as fuel cells and hydrogen fuels, which
shall be subject to 0% rate of VAT (zero-
rated). The universal charge passed on and
collected by distribution companies and
electric cooperatives shall be excluded from
the computation of gross receipts.

8. Insurance and reinsurance commissions, as
opposed to premiums, whether life or non-
life, are subject to VAT. Non-life insurance
premiums are subject to VAT. Life insurance
premiums are NOT subject to VAT, for they
are subject to percentage tax.

B. 0% VAT (ZERO-RATED
TRANSACTIONS)

A zero-rated sale by a VAT-registered person is a
taxable transaction for VAT purposes, but shall
not result in any output tax.

Input tax on purchases of goods, properties or
services related to such zero-rated sale shall be
available as tax credit or refund. (RR 16-
2005)
27

i. ZERO-RATED SALE OF GOODS OR
PROPERTIES ( 106, (2))

A. Export sales (IF-GONE)

1) The sale and actual shipment of goods from
the Philippines to a Foreign country AND
paid for in acceptable foreign currency or its
equivalent in goods or services, AND
accounted for in accordance with the rules
and regulations of the BSP

2) Sale of raw materials or packaging materials
to a Nonresident buyer for delivery to a
resident local export-oriented enterprise to
be used in manufacturing, processing,
packing or repacking in the Philippines of the
said buyer's goods AND paid for in acceptable
foreign currency AND accounted for in
accordance with the rules and regulations of
the BSP

3) Sale of raw materials or packaging materials
to Export-oriented enterprise whose export
sales exceed seventy percent (70%) of total
annual production. Any enterprise whose
export sales exceed 70% of the total annual
production of the preceding taxable year shall

27
Thus, the benefit of being zero-rated vis--vis being exempt
is that enterprises which enjoy zero-rating of transactions can
avail of input taxes on purchases of goods, properties, or
services (as either tax credit or refund, there being no output
tax against which input tax can be credited). In mathematical
terms, the enterprises enjoy 100% of their input taxes.
On the other hand, exempt enterprises cannot avail of these
input taxes; instead, these input taxes form part of
cost/expense. Thus, the net benefit these enterprises get from
their exempt transactions is 35% (in the case of corporations),
or to the extent that they can be used as deductions from
income in the computation of income tax payable (subject to
rules in income taxation).

There is therefore a 65% difference (100% in the case of zero-
rated transactions, less 35% in exempt transactions). [Editors
note]

be considered an export-oriented enterprise
upon accreditation under the rules &
regulations of Export Development Act, RA
7844 (RR 7-95)

4) Sale of Gold to the Bangko Sentral ng
Pilipinas (BSP);

5) Those considered export sales under the
Omnibus Investment Code of 1987, and
other special laws (ex. Bases Conversion &
Development Act of 1992)
Under Omnibus Investment Code:
a) Phil. port FOB value of export products
exported directly by a registered export
producer
b) Net selling price of export products sold
by a registered export producer to
another export producer, or to an export
trader that subsequently exports the
same (only when actually exported by
the latter)
Constructive Exports:
a) sales to bonded manufacturing
warehouses of export-oriented
manufacturers
b) sales to export processing zones
c) sales to registered export traders
operating bonded trading warehouses
supplying raw materials in the
manufacture of export products under
guidelines to be set by the Board in
consultation with the BIR and Bureau of
Customs
d) sales to diplomatic missions and other
agencies and/or instrumentalities granted
tax immunities, of locally manufactured,
assembled or repacked products, whether
paid for in foreign currency or not.
Provided that export sales of registered
export traders may include commission
income, and that exportation of goods on
consignment shall not be deemed export
sales until the export products consigned
are in fact sold by the consignee, and
provided finally that sales by a VAT-
registered supplier to a
manufacturer/producer whose products
are 100% exported are considered export
sales. A certification to his effect must
be issued by the Board of Investment
which shall be good for 1 year unless
subsequently re-issued. (RR 16-2005)

6) The sale of goods, supplies, equipment and
fuel to persons engaged in International
shipping or international air transport
operations. (added by RA 9337) Provided,
that the same is limited to goods, supplies,
equipment and fuel pertaining to or
attributable to the transport of goods and
passengers from a port in the Phil. directly to
a foreign port without docking or stopping at
any other port in the Phil., and that if any
portion of such fuel, goods, or supplies is
used for purposes other than that mentioned
here, such portion of fuel, goods, and
supplies shall be subject to 12% VAT.

B. Foreign Currency Denominated Sale - sale
to a nonresident of goods, except those
mentioned in Sections 149 and 150 (automobiles
and non-essential goods like jewelry, perfume,
and yachts), assembled or manufactured in the

TAXATION LAW 2
Philippines for delivery to a resident in the
Philippines, paid for in acceptable foreign
currency AND accounted for in accordance with
the rules and regulations of the BSP.

Sales of locally manufactured or assembled
goods for household and personal use to Filipinos
abroad and other non-residents of the Philippines
as well as returning Overseas Filipinos under the
Internal Export Program of the government paid
for in convertible foreign currency AND accounted
for in accordance with the rules and regulations
of the BSP shall also be considered export sales.

C. Sales to persons or entities whose
exemption under special laws or
international agreements to which the
Philippines is a signatory effectively
subjects such sales to zero rate. e.g.
a) sales to enterprises duly registered &
accredited with the
i) Subic Bay Metropolitan Authority,
ii) Philippine Economic Zone Authority
(PEZA),
b) international agreements to which the
Phil. is signatory, such as
i. Asian Development Bank (ADB),
ii. International Rice Research Institute
(IRRI)

Section 6 of RR 4-2007, dated February 7,
2007:
The term effectively zero-rated sale of goods
and properties shall refer to the local sale of
goods and properties by a VAT-registered person
to a person or entity who was granted indirect
tax exemption under special laws or international
agreement.

NOTE: RR 4-2007 removed the distinction
between automatic and effectively zero-
rated transactions found in prior Revenue
Regulations (including RR 16-2005) with respect
to prior application. The following line in RR 16-
2005 has been DELETED by RR 4-2007:
Other cases of zero-rated sales shall require
prior application with the appropriate BIR office
for effective zero-rating. Without an approved
application for effective zero-rating, the
transaction otherwise entitled to zero-rating shall
be considered exempt. The foregoing rule
notwithstanding, the Commissioner may
prescribe such rules to effectively implement the
processing of applications for effective zero-
rating.

CIR vs. Seagate Technology (Philippines)
February 11, 2005
The BIR regulations additionally requiring an
approved prior application for effective zero
rating cannot prevail over the clear VAT nature of
Seagates transactions (subject to zero-rating, as
an entity registered with the PEZA).
Other than the general registration of a taxpayer
the VAT status of which is aptly determined, no
provision under our VAT law requires an
additional application to be made for such
taxpayers transactions to be considered
effectively zero-rated. An effectively zero-
rated transaction does not and cannot
become exempt simply because an
application therefor was not made or, if
made, was denied.

RMC 74-99: Tax Treatment of Sales of Goods
and Services Made by Suppliers from Western
Territory to a PEZA registered enterprise and Sale
Transactions made by PEZA registered
enterprises Within and Without the Zone

CROSS- BORDER DOCTRINE (adhered to by
Phil VAT law)
NO VAT shall be imposed to form part of
the cost of goods destined for CONSUMPTION
OUTSIDE of the territorial border of the taxing
authority. Hence, actual export of goods and
services from the Phil to a foreign country must
be free from VAT. Conversely, those destined for
use or consumption WITHIN the Phil shall be
imposed with the 10% VAT. (now 12%, as
amended)

Tax Treatment of Sales Made:
A. By VAT registered Supplier from Customs
Territory to a PEZA registered enterprise
1) if the buyer is a PEZA registered
enterprise which is subject to the 5%
special tax regime
(a) Sale of Goods this shall be treated
as INDIRECT EXPORT, hence
considered SUBJECT TO 0% VAT.
(b) Sale of Service this shall be treated
SUBJECT TO 0% VAT under the
cross border doctrine

2) if the buyer is a PEZA registered
enterprise which is NOT embraced by
the 5% tax regime
(a) Sale of Goods this shall be
treated as INDIRECT EXPORT,
hence considered SUBJECT TO
0% VAT.
(b) Sale of Service this shall be
treated SUBJECT TO 0% VAT
under the cross border
doctrine

NOTE: Any sale of goods, property or
services made by a VAT registered supplier
from the Customs Territory* to any
registered enterprise operating in the
ecozone, REGARDLESS of the class or type
of the latters PEZA registration, is actually
qualified and thus LEGALLY ENTITLED TO
THE 0% VAT. Accordingly, all sales of goods
or property to such enterprise made by a
VAT registered supplier from the Customs
Territory shall be treated SUBJECT TO 0%
VAT.
Customs Territory means the national
territory of the Phil OUTSIDE of the proclaimed
boundaries of the ECOZONES.

B. By a VAT-Exempt Supplier from the Customs
Territory to a PEZA registered enterprise
Sale of goods, property and services by VAT-
Exempt supplier from the Customs Territory
to a PEZA registered enterprise shall be
treated EXEMPT FROM VAT, regardless of

TAXATION LAW 2
whether or not the PEZA registered buyer is
subject to taxes under the NIRC or enjoying
the 5% special tax regime.

C. By a PEZA Registered Enterprise
1) Sale of Goods by a PEZA registered
enterprise to a buyer from the Customs
Territory (ie domestic sales) -- this case
shall be treated as a technical
IMPORTATION made by the buyer. Such
buyer shall be treated as an IMPORTER
thereof and shall be imposed with the
corresponding VAT.
2) Sale of Services by a PEZA registered
enterprise to a buyer from the Customs
Territory this is NOT embraced by the
5% special tax regime, hence, such seller
shall be SUBJECT TO 10% VAT.

3) Sale of Goods by a PEZA registered
enterprise to Another PEZA registered
enterprise (ie Intra-ECOZONE Sales of
Goods) this shall be EXEMPT from VAT.

4) Sale of Services by ECOZONE enterprise,
to Another ECOZONE enterprise (Intra-
ECOZONE enterprise Sale of Service)
(a) if PEZA registered seller is subject to
5% special tax regime EXEMPT
from VAT
(b) if PEZA registered seller is subject to
taxes under NIRC (ie not subject to
5% special tax regime) subject to
0% VAT pursuant to cross border
doctrine

ii. ZERO-RATED SALE OF SERVICES &
USE/LEASE OF PROPERTIES ( 108,
B)

Zero-rated transactions

1) Processing, manufacturing or repacking
goods for other persons doing business
outside the Philippines which goods are
subsequently exported, where the services
are paid for in acceptable foreign currency
AND accounted for in accordance with the
rules and regulations of the BSP
2) Services other than those mentioned in the
preceding paragraph rendered to a person
engaged in business conducted outside the
Philippines or to a nonresident person not
engaged in business who is outside the
Philippines when the services are performed,
the consideration for which is paid for in
acceptable foreign currency AND accounted
for in accordance with the rules and
regulations of the BSP
3) Services rendered to persons or entities
whose exemption under special laws or
Philippines is a signatory effectively subjects
the supply of such services to zero percent
(0%) rate [as amended by RA 9337]
4) Services rendered to persons engaged in
international shipping or international air
transport operations, including leases of
property for use thereof [as amended by RA
9337]; Provided, however, that the services
referred to herein shall not pertain to those
made to common carriers by air and sea
relative to their transport of passengers,
goods or cargoes from one place in the Phil.
to another place in the Phil., the same being
subject to 12% VAT under Sec. 108
5) Services performed by subcontractors and/or
contractors in processing, converting, of
manufacturing goods for an enterprise whose
export sales exceed seventy percent (70%)
of total annual production.
6) Transport of passengers and cargo by air or
sea vessels from the Philippines to a foreign
country [as added by RA 9337]; (pls see
table on page 29) and;
7) Sale of power or fuel generated through
renewable sources of energy such as, but not
limited to, biomass, solar, wind, hydropower,
geothermal, ocean energy, and other
emerging energy sources using technologies
such as fuel cells and hydrogen fuels. [as
added by RA 9337] Zero-rating shall apply
strictly to the sale of power or fuel generated
through renewable sources of energy, and
shall not extend to the sale of services
related to the maintenance or operation of
plants generating said power.

RR 4-2007 removed the distinction between
automatic and effectively zero-rated transactions
found in prior Revenue Regulations (inc. RR 16-
2005) with respect to prior application.

C. FINAL WITHHOLDING VAT-5% (
114, C)

The Government or any of its political
subdivisions, instrumentalities or agencies,
including government-owned or -controlled
corporations (GOCCs) shall, before making
payment on account of each purchase of goods
and services which are subject to the VAT
imposed in Sections 106 and 108 of this Code,
deduct and withhold a final VAT at the rate of
five percent (5%) of the gross payment thereof:

Provided, That the payment for lease or use of
properties or property rights to nonresident
owners shall be subject to ten percent (10%)
withholding tax at the time of payment.
The payor or person in control of the payment-
considered as the withholding agent.
The VAT withheld shall be remitted within ten
(10) days following the end of the month the
withholding was made.
[NOTE: This 5% final VAT withheld by the
government is an innovation of RA 9337.]

RR 16-2005: The 5% final VAT shall represent
the net VAT payable of the seller. The remaining
5% (or 7%, with the raise of VAT to 12%)
effectively accounts for the standard input VAT,
in lieu of the actual input VAT directly attributable
or ratably apportioned to such sales. (This
means that where the 5% final VAT applies, the
basic formula of output tax less input tax does
not apply.) Should actual input VAT exceed 7%
of the gross payments, the excess may form part
of the sellers expense or cost. On the other
hand, if actual input VAT is less than 7% of gross

TAXATION LAW 2
payment, the difference must be closed to
expense or cost, in effect reducing it.

However, 12% shall be withheld with respect to
the following:
1) Lease or use of properties or property rights
owned by non-residents
2) Services rendered to local insurance
companies, with respect to reinsurance
premiums payable to non-residents; and
3) Other services rendered in the Philippines by
non-residents.

V. TRANSACTIONS EXEMPT FROM VAT
( 109)

(amendments introduced by RA 9337 indicated,
text in ALL CAPS added by RA 9337)

SEC. 109. Exempt Transactions.
1) SUBJECT TO THE PROVISIONS OF
SUBSECTION (2) HEREOF, The following shall be
exempt from the value-added tax:
(a) Sale of nonfood agricultural products;
marine and forest products in their original
state by the primary producer or the owner
of the land where the same are produced;
[DELETED BY RA 9337]
(b) Sale of cotton seeds in their original
state; and copra; [DELETED]
(c) Sale or importation of agricultural and
marine food products in their original state,
livestock and poultry of or kind generally
used as, or yielding or producing foods for
human consumption; and breeding stock and
genetic materials therefor.
Products classified under this paragraph and
paragraph (a) shall be considered in their
original state even if they have undergone
the simple processes of preparation or
preservation for the market, such as freezing,
drying, salting, broiling, roasting, smoking or
stripping.
Polished and/or husked rice, corn grits, raw
cane sugar and molasses, ordinary salt, AND
COPRA shall be considered in their original
state; [AMENDED]
(d) Sale or importation of fertilizers; seeds,
seedlings and fingerlings; fish, prawn,
livestock and poultry feeds, including
ingredients, whether locally produced or
imported, used in the manufacture of finished
feeds (except specialty feeds for race horses,
fighting cocks, aquarium fish, zoo animals
and other animals generally considered as
pets);
(e) Sale or importation of coal and natural
gas, in whatever form or state, and
petroleum products (except lubricating oil,
processed gas, grease, wax and petrolatum)
subject to excise tax imposed under Title VI;
[DELETED]
(f) Sale or importation of raw materials to be
used by the buyer or importer himself in the
manufacture of petroleum products subject to
excise tax, except lubricating oil, processed
gas, grease, wax and petrolatum; [DELETED]
(g) Importation of passenger and/or cargo
vessels of more than five thousand tons
(5,000) whether coastwise or ocean-going,
including engine and spare parts of said
vessel to be used by the importer himself as
operator thereof; [DELETED]
(h) Importation of personal and household
effects belonging to the residents of the
Philippines returning from abroad and
nonresident citizens coming to resettle in the
Philippines: Provided, That such goods are
exempt from customs duties under the Tariff
and Customs Code of the Philippines;
(i) Importation of professional instruments
and implements, wearing apparel, domestic
animals, and personal household effects
(except any vehicle, vessel, aircraft,
machinery other goods for use in the
manufacture and merchandise of any kind in
commercial quantity) belonging to persons
coming to settle in the Philippines, for their
own use and not for sale, barter or exchange,
accompanying such persons, or arriving
within ninety (90) days before or after their
arrival, upon the production of evidence
satisfactory to the Commissioner, that such
persons are actually coming to settle in the
Philippines and that the change of residence
is bona fide;
(j) Services subject to percentage tax under
Title V;
(k) Services by agricultural contract growers
and milling for others of palay into rice, corn
into grits and sugar cane into raw sugar;
(l) Medical, dental, hospital and veterinary
services subject to the provisions of Section
17 of Republic Act No. 7716, as amended
EXCEPT THOSE RENDERED BY
PROFESSIONALS: [AMENDED]
(m) Educational services rendered by private
educational institutions, duly accredited by
the Department of Education, Culture and
Sports (DECS) Department of Education
(DEPED), the Commission on Higher
Education (CHED), THE TECHNICAL
EDUCATION AND SKILLS DEVELOPMENT
AUTHORITY (TESDA), and those rendered by
government educational institutions;
[AMENDED]
(n) Sale by the artist himself of his works of
art, literary works, musical compositions and
similar creations, or his services performed
for the production of such works; [DELETED]
(o) Services rendered by individuals
pursuant to an employer-employee
relationship;
(p) Services rendered by regional or area
headquarters established in the Philippines by
multinational corporations which act as
supervisory, communications and
coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific
Region and do not earn or derive income
from the Philippines;
(q) Transactions which are exempt under
Philippines is a signatory or under special
laws, except those under Presidential Decree

TAXATION LAW 2
Nos. 66, 529 [Petroleum Exploration
Concessionaires under the Petroleum Act of
1949] and 1590; [AMENDED]
(r) Sales by agricultural cooperatives duly
registered with the Cooperative Development
Authority to their members as well as sale of
their produce, whether in its original state or
processed form, to non-members; their
importation of direct farm inputs, machineries
and equipment, including spare parts thereof,
to be used directly and exclusively in the
production and/or processing of their
produce;
(s) Sales by electric cooperatives duly
authority or National Electrification
Administration, relative to the generation and
distribution of electricity as well as their
importation of machineries and equipment,
including spare parts, which shall be directly
used in the generation and distribution of
electricity; [DELETED]
(t) Gross receipts from lending activities by
credit or multi-purpose cooperatives duly
Authority whose lending operation is limited
to their members; [AMENDED]
(u) Sales by non-agricultural, non- electric
and non-credit cooperatives duly registered
with the Cooperative Development Authority:
Provided, That the share capital contribution
of each member does not exceed Fifteen
thousand pesos (P15,000) and regardless of
the aggregate capital and net surplus ratably
distributed among the members;
(v) Export sales by persons who are not
VAT-registered;
(w) Sale of real properties not primarily held
for sale to customers or held for lease in the
ordinary course of trade or business or real
property utilized for low-cost and socialized
housing as defined by Republic Act No. 7279,
otherwise known as the Urban Development
and Housing Act of 1992, and other related
laws, house and lot and other residential
dwellings valued at One million pesos
(P1,000,000) and below RESIDENTIAL LOT
VALUED AT ONE MILLION FIVE HUNDRED
THOUSAND PESOS (P1,500,000) AND
BELOW, HOUSE AND LOT, AND OTHER
RESIDENTIAL DWELLINGS VALUED AT TWO
MILLION FIVE HUNDRED THOUSAND PESOS
(P2,500,000) AND BELOW: Provided, That
not later than January 31st of the calendar
year subsequent to the effectivity of this Act
and each calendar year thereafter, the
amount of One million pesos (P1,000,000)
shall be adjusted to its present value
JANUARY 31, 2009 AND EVERY THREE (3)
YEARS THEREAFTER, THE AMOUNTS HEREIN
STATED SHALL BE ADJUSTED TO THEIR
PRESENT VALUES using the Consumer Price
Index, as published by the national Statistics
Office (NSO); [AMENDED]
(x) Lease of a residential unit with a monthly
rental not exceeding TEN THOUSAND PESOS
(10,000) Eight thousand pesos (P8,000);
Provided, That not later than January 31st of
the calendar year subsequent to the
effectivity of Republic Act No. 8241 and each
calendar year thereafter, the amount of Eight
thousand pesos (P8,000) JANUARY 31, 2009
AND EVERY THREE (3) YEARS THEREAFTER,
THE AMOUNT HEREIN STATED shall be
adjusted to its present value using the
Consumer Price Index as published by the
National Statistics Office (NS0); [AMENDED]
(y) Sale, importation, printing or publication
of books and any newspaper, magazine
review or bulletin which appears at regular
intervals with fixed prices for subscription
and sale and which is not devoted principally
to the publication of paid advertisements;
and
[RA 9337 ADDED THE FOLLOWING TWO
SUBSECTIONS]
(S) SALE, IMPORTATION OR LEASE OF
PASSENGER OR CARGO VESSELS AND
AIRCRAFT, INCLUDING ENGINE, EQUIPMENT
AND SPARE PARTS THEREOF FOR DOMESTIC
OR INTERNATIONAL TRANSPORT
OPERATIONS;
(T) IMPORTATION OF FUEL, GOODS, AND
SUPPLIES BY PERSONS ENGAGED IN
INTERNATIONAL SHIPPING OR AIR
TRANSPORT OPERATIONS;
(U) Services of banks, non-bank financial
intermediaries performing quasi-banking
functions and other non-bank financial
intermediaries; and
(z) Sale or lease of goods or properties or
the performance of services other than the
transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of Five
hundred fifty thousand pesos (P550,000)
ONE MILLION FIVE HUNDRED THOUSAND
PESOS (P1,500,0000: Provided, That not
later than January 31st of the calendar year
subsequent to the effectivity of Republic Act
No. 8241 and each calendar year thereafter,
the amount of Five hundred fifty thousand
pesos (550,000) JANUARY 31, 2009 AND
EVERY THREE (3) YEARS THEREAFTER, THE
AMOUNT HEREIN STATED shall be adjusted
to its present value using the Consumer Price
Index, as published by the National Statistics
Office (NSO). [AMENDED]
The foregoing exemptions to the contrary
notwithstanding, any person whose sale of goods
or properties or services which are otherwise not
subject to VAT, but who issues a VAT invoice or
receipt therefor shall, in addition to his liability to
other applicable percentage tax, if any, be liable
to the tax imposed in Section 106 or 108 without
the benefit of input tax credit, and such tax shall
also be recognized as input tax credit to the
purchaser under Section 110, all of this Code.
[DELETED]

(2) A VAT-REGISTERED PERSON MAY ELECT
THAT SUBSECTION (1) NOT APPLY TO ITS SALE
OF GOODS OR PROPERTIES OR SERVICES:
PROVIDED, THAT AN ELECTION MADE UNDER
THIS SUBSECTION SHALL BE IRREVOCABLE FOR
A PERIOD OF THREE (3) YEARS FROM THE
QUARTER THE ELECTION WAS MADE. [ADDED BY
RA 9337]

TAXATION LAW 2
Notes on exempt transactions (from RR 16-
2005):

VAT-EXEMPT TRANSACTIONS
- Refer to sale of goods or properties and/or
services and the use or lease of properties that is
NOT subject to VAT (output tax) and the seller is
not allowed any tax credit of VAT (input tax) on
purchases. The person making the exempt sale
of goods, properties or services shall not bill any
output tax to his customers because the said
transaction is not subject to VAT.

1. Sale/ import of agricultural, marine food
products in original state; of livestock and poultry
Original state even if they have undergone the
simple processes of preparation or preservation
for the market, such as freezing, drying, salting,
broiling, roasting, smoking or stripping.
Polished and/or husked rice, corn grits, raw cane
sugar and molasses, ordinary salt, AND COPRA
shall be considered in their original state;
[AMENDED]
Livestock or poultry does not include fighting
cocks, race horses, zoo animals and other
animals generally considered as pets. [RR 16-
2005]
Original state including preservation using
advanced technological means of packaging, such
as shrink wrapping in plastics, vacuum packing,
tetra-pack, and other similar packaging methods.
[RR 16-2005]

2. Sale/ import of fertilizers; seeds, seedlings and
fingerlings; fish, prawn, livestock and poultry
feeds
3. Import of personal and household effects of
Phil resident returning from abroad and
nonresident citizens coming to resettle in the
Philippines
4. Import of professional instruments and
implements, wearing apparel, domestic animals,
and personal household effects belonging to
persons coming to settle in the Philippines, for
their own use and not for sale, barter or
exchange

5. Services subject to percentage tax under Title
V:[refer to percentage tax, next part]

6. Services by agricultural contract growers and
milling for others of palay into rice, corn into grits
and sugar cane into raw sugar;
7. Medical, dental, hospital and veterinary
services EXCEPT THOSE RENDERED BY
PROFESSIONALS: [AMENDED]
Laboratory services are exempted. If the
hospital or
clinic operates a pharmacy or drug store, the sale
of
drugs and medicine is subject to VAT. [RR 16-
2005]

8. Educational services rendered by private
educational institutions, duly accredited by
DEPED, CHED, TESDA, and those rendered by
government educational institutions; [AMENDED]
Educational services does not include
seminars, in-service training, review classes
and other similar services rendered by
persons who are not accredited by the
DepED, CHED, and/or TESDA. [RR 16-2005]

9. Services rendered by individuals pursuant to
an employer-employee relationship;
10. Services rendered by regional or area
headquarters established in the Philippines by
multinational corporations which act as
supervisory, communications and coordinating
centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region and do not
earn or derive income from the Philippines;
11. Transactions which are exempt under
international agreements to which the Philippines
is a signatory or under special laws, except those
under Presidential Decree No., 529 [Petroleum
Exploration Concessionaires under the Petroleum
Act of 1949]; [AMENDED]
12. Sales by agricultural cooperatives duly
Authority to their members as well as sale of
their produce. Exemption includes importation of
direct farm inputs, machineries and equipment,
including spare parts thereof, to be used directly
and exclusively in the production and/or
processing of their produce.
13. Gross receipts from lending activities by
credit or multi-purpose cooperatives duly
Authority; [AMENDED]
14. Sales by non-agricultural, non- electric and
non-credit cooperatives duly registered with the
Cooperative Development Authority are exempt
BUT their importation of machineries and
equipment, including spare parts thereof, to be
used by them are SUBJECT to VAT.

15. Export sales by persons who are not VAT-
registered;

16. Sale of real properties the ff. sales are
exempt:
(1) Sale of real properties NOT primarily held for
sale to customers or held for lease in the
ordinary course of trade or business.
(2) Sale of real properties utilized for low-cost
housing as defined by RA No. 7279,
otherwise known as the "Urban
Development and Housing Act of 1992" and
other related laws, such as RA No. 7835 and
RA No. 8763. Low-cost housing" refers to
housing projects intended for homeless low-
income family beneficiaries, undertaken by
the Government or private developers,
which may either be a subdivision or a
condominium registered and licensed by the
Housing and Land Use Regulatory
Board/Housing (HLURB) under BP Blg. 220,
PD No. 957 or any other similar law, wherein
the unit selling price is within the selling
price ceiling per unit of P750,000.00 under
RA No. 7279, and other laws, such as RA
No. 7835 and RA No. 8763.
(3) Sale of real properties utilized for socialized
housing as defined under RA No. 7279, and
other related laws, such as RA No. 7835 and
RA No. 8763, wherein the price ceiling per
unit is P225,000.00 or as may from time to
time be determined by the HUDCC and the
NEDA and other related laws. "Socialized

TAXATION LAW 2
housing" refers to housing programs and
projects covering houses and lots or home
lots only undertaken by the Government or
the private sector for the underprivileged
and homeless citizens which shall include
sites and services development, long-term
financing, liberated terms on interest
payments, and such other benefits in
accordance with the provisions of RA No.
7279and RA No. 7835 and RA No. 8763.
"Socialized housing" shall also refer to
projects intended for the underprivileged
and homeless wherein the housing package
selling price is within the lowest interest
rates under the Unified Home Lending
Program (UHLP) or any equivalent housing
program of the Government, the private
sector or non-government organizations.
(4) Sale of residential lot valued at P1.5M and
below, or house & lot and other residential
dwellings valued at P2.5M and below, where
the instrument of sale/transfer/disposition
was executed on or after July 1, 2005; [to
be adjusted every 3 years from Jan 31,
2009]; If two or more adjacent residential
lots are sold or disposed in favor of one
buyer, for the purpose of utilizing the lots as
one residential lot, the sale shall be exempt
from VAT only if the aggregate value of the
lots does not exceed P1.5M. Adjacent
residential lots, although covered by
separate titles and/or separate tax
declarations, when sold or disposed to one
and the same buyer, whether covered by
one or separate Deed of Conveyance, shall
be presumed as a sale of one residential lot.
[RR 16-2005]

17. Lease of residential units with a monthly
rental per unit not exceeding P10K,
regardless of the amount of aggregate
rentals received by the lessor during the
year.
Lease of residential units where the monthly
rental per unit exceeds 10K but the
aggregate of such rentals of the lessor during
the year do not exceed One Million Five
Hundred Pesos P1.5M shall likewise be
exempt from VAT, however, the same shall
be subjected to three percent (3%)
percentage tax.
In cases where a lessor has several
residential units for lease, some are leased
out for a monthly rental per unit of not
exceeding P10K while others are leased out
for more than P10K per unit, his tax liability
will be as follows:
a. The gross receipts from rentals not
exceeding P10K per month per unit shall
be exempt from VAT regardless of the
aggregate annual gross receipts.
b. The gross receipts from rentals exceeding
P10K per month per unit shall be subject
to VAT IF the aggregate annual gross
receipts from said units only (not
including the gross receipts from units
leased for not more than P10K) exceeds
P1.5M. Otherwise, the gross receipts will
be subject to the 3% tax imposed under
Section 116 of the Tax Code.
The term 'residential units' shall refer to
apartments and houses & lots used for
residential purposes, and buildings or
parts or units thereof used solely as
dwelling places (e.g., dormitories, rooms
and bed spaces) except motels, motel
rooms, hotels and hotel rooms.
The term 'unit' shall mean an apartment
unit in the case of apartments, house in
the case of residential houses; per person
in the case of dormitories, boarding
houses and bed spaces; and per room in
case of rooms for rent. [RR 16-2005]

18. Sale, importation, printing or publication of
books and any newspaper, magazine review or
bulletin which appears at regular intervals with
fixed prices for subscription and sale and which is
not devoted principally to the publication of paid
advertisements;

19. SALE, IMPORTATION OR LEASE OF
PASSENGER OR CARGO VESSELS AND
AIRCRAFT, INCLUDING ENGINE, EQUIPMENT
AND SPARE PARTS THEREOF FOR DOMESTIC OR
INTERNATIONAL TRANSPORT
OPERATIONS;[added by RA 9337]
The exemption from VAT on the importation and
local purchase of passenger and/or cargo vessels
shall be limited to those of 150 tons and above,
including engine and spare parts of said vessels;
Provided, further, that the vessels to be imported
shall comply with the age limit requirement, at
the time of acquisition counted from the date of
the vessel's original commissioning, as follows:
(i) for passenger and/or cargo vessels,
the age limit is 15 years old, (ii) for
tankers, the age limit is 10 years old, and
(iii) for high-speed passenger crafts, the
age limit is 5 years old [RR 16-2005]

20. IMPORTATION OF FUEL, GOODS, AND
SUPPLIES BY PERSONS ENGAGED IN
INTERNATIONAL SHIPPING OR AIR TRANSPORT
OPERATIONS; [added by RA 9337]
Provided, that the said fuel, goods and supplies
shall be used exclusively or shall pertain to the
transport of goods and/or passenger from a port
in the Philippines directly to a foreign port
without stopping at any other port in the
Philippines; Provided, further, that if any portion
of such fuel, goods or supplies is used for
purposes other than that mentioned in this
paragraph, such portion of fuel, goods and
supplies shall be subject to 10% VAT [RR 16-
2005]

21. Services of banks, non-bank financial
intermediaries performing quasi-banking
functions and other non-bank financial
intermediaries; and
22. Sale or lease of goods or properties or the
performance of services other than the
transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount
ofP1,500,0000: [to be adjusted every 3 years
from Jan 31, 2009] [AMENDED]
For purposes of the threshold of P1,5M, the
husband and the wife shall be considered
separate taxpayers. However, the aggregation
rule for each taxpayer shall apply. For instance,
if a professional, aside from the practice of his
profession, also derives revenue from other lines
of business which are otherwise subject to VAT,
the same shall be combined for purposes of

TAXATION LAW 2
determining whether the threshold has been
exceeded. The VAT-exempt sales shall NOT be
included in determining the threshold. [RR 16-
2005]

VI. DETERMINING THE VAT BASE

a) Sale of Goods
VAT Base = gross selling price or gross
value in money of the goods sold or
exchanged

Gross selling price shall include:
charges for packaging, delivery &
insurance
excise taxes if goods are subject
to excise tax

For transactions deemed sale, the output tax
shall be based on the market value of the goods
deemed sold as of the time of the occurrence of
the transactions. However, in case of retirement
or cessation of business, the tax base shall be
the acquisition cost or the current market price of
the goods or properties, whichever is LOWER.

In the case of a sale where the gross selling price
is unreasonably lower than the fair market value,
the actual market value shall be the tax base.

b) Sale of Services
VAT Base = Gross Receipts

Gross receipts means the total amount
of money or its equivalent representing
the contract price, compensation, service
fee, rental or royalty, including the
amount charged for materials supplied
with the services and deposits and
advance payments actually or
constructively received during the taxable
quarter for the services performed or to
be performed for another person,
excluding VAT.
Constructive receipt occurs when the
money consideration or its equivalent is
placed at the control of the person who
rendered the service without restrictions
by the payor. Examples:
1) deposit in banks which are made
available to the seller of services
without restrictions
2) issuance by the debtor of a notice to
offset any debt or obligation and
acceptance thereof by the seller as
payment for services rendered
3) transfer of the amounts retained by
the contractee to the account of the
contractor.

Reimbursable expenses may be
EXCLUDED from the tax base IF the ff.
conditions are complied with:
1) the expenses are supported by
invoices/receipts in the name of the
customer
2) the expenses are paid or will be paid
to a 3
rd
party
3) there is no mark-up on the amounts
billed, and
4) the reimbursable expenses should
NOT be included in the Sellers VAT
Invoice or if so included, these should
be clearly indicated in the VAT
Invoice as reimbursable expenses.

c) Importation of Goods
VAT Base = total value (used by Bureau
of Customs in determining tariff and
customs duties) + customs duties +
excise tax (if any) + other charges

In case the valuation used by Bureau of
Customs in computing customs duties is
by volume or quantity, the LANDED
COST* shall be the tax base.

*LANDED COST = invoice amount +
customs duties + freight + insurance +
other charges + excise tax (if any)

NOTE: The VAT on importation shall be
paid by the importer PRIOR to the release
of such goods from customs custody.
(RR 16-2005)

VII. INPUT TAXES

(amendments introduced by RA 9337 indicated,
text in ALL CAPS added by RA 9337)

CREDITABLE INPUT TAX ( 110, A)

(1) Any INPUT TAX evidenced by a VAT
invoice or official receipt issued in accordance
with Section 113 hereof on the following
transactions shall be creditable against the
OUTPUT TAX:
(a) Purchase or importation of goods:
(i) For sale; or
(ii) For conversion into or intended to
form part of a finished product for sale
including packaging materials; or
(iii) For use as supplies in the course of
business; or
(iv) For use as materials supplied in the
sale of service; or
(v) For use in trade or business for
which deduction for depreciation or
amortization is allowed under this Code,
except automobiles, aircraft and yachts.
[AMENDED]
(b) Purchase of services on which a VAT has
been actually paid.

(2) Input tax on domestic purchase OR
IMPORTATION of goods or properties shall be
creditable: [AMENDED]
(a) To the purchaser upon consummation of
sale and on importation of goods or
properties; and
(b) To the importer upon payment of the
value-added tax prior to the release of the
goods from the custody of the Bureau of
Customs.
Provided, That the input tax on goods purchased
or imported in a calendar month for use in
trade or business for which deduction for
depreciation is allowed under this Code, shall
be spread evenly over the month of acquisition
and the fifty-nine (59) succeeding months if
the aggregate acquisition cost for such goods,
excluding the VAT component thereof, exceeds
One million pesos (P1,000,000):

TAXATION LAW 2
Provided, however, That if the estimated useful
life of the capital good is less than five (5)
years, as used for depreciation purposes, then
the input VAT shall be spread over such a
shorter period:
Provided, finally, that in the case of purchase of
services, lease or use of properties, the input
tax shall be creditable to the purchaser, lessee
or licensee upon payment of the compensation,
rental, royalty or fee. [AMENDED]

(3) A VAT-registered person who is also
engaged in transactions not subject to the value-
added tax shall be allowed tax credit as follows:
(a) Total input tax which can be directly
attributed to transactions subject to
value-added tax; and
(b) A ratable portion of any input tax
which cannot be directly attributed to
either activity.

INPUT TAX- the VAT due from or paid by a VAT-
registered person in the course of his trade or
business on importation of goods or local
purchase of goods or services, including lease or
use of property, from a VAT-registered person. It
includes the transitional input tax determined in
accordance with Section 111 of this Code.

It includes input taxes which can be directly
attributed to transactions subject to the VAT plus
a ratable portion of any input tax which cannot
be directly attributed to either the taxable or
exempt activity. Input tax must evidenced by a
VAT invoice or official receipt issued by a VAT-
registered person in accordance with Secs. 113
and 237 of the Tax. [RR 16-2005]

OUTPUT TAX- the VAT due on the sale or lease
of taxable goods or properties or services by any
person registered or required to register under
Section 236 of this Code.

EXCESS OUTPUT OR INPUT TAX ( 110, C)

If at the end of any taxable quarter:
the output tax exceeds the input tax, the
excess shall be paid by the VAT-registered
person.
the input tax exceeds the output tax, the
excess shall be carried over to the succeeding
quarter or quarters:
Provided, however, that any input tax
attributable to the purchase of capital goods or to
zero-rated sales by a VAT-registered person may
at his option be refunded or credited against
other internal revenue taxes, subject to the
provisions of Section 112.
28
[AMENDED]

28
As amended by RA 9361. RA 9337, effective July 1, 2005,
amended this subsection to read as follows: If at the end of
any taxable quarter the output tax exceeds the input tax, the
excess shall be paid by the VAT-registered person. If the input
tax exceeds the output tax, the excess shall be carried over to
the succeeding quarter or quarters: Provided, That the input
tax inclusive of input VAT carried over from the previous
quarter that may be credited in every quarter shall not exceed
seventy percent (70%) of the output VAT: Provided, however,
That any input tax attributable to zero-rated sales by a VAT-
registered person may at his option be refunded or credited
against other internal revenue taxes, subject to the provisions
of Section 112. HOWEVER, this was again amended by
Congress through RA 9361 passed on Nov. 21, 2006. RR 2-
2007, dated January 11, 2007, provides that this regulation
enforcing the amendment introduced by RA 9361 shall take
effect immediately and shall apply to the quarterly VAT returns
to be filed after the effectivity of RA 9361 (which is 15 days
Determination of Creditable Input Tax (
110, C)

- The sum of the excess input tax carried over
from the preceding month or quarter and the
input tax creditable to a VAT-registered person
during the taxable month or quarter shall be
reduced by the amount of claim for refund or tax
credit for value-added tax and other
adjustments, such as purchase returns or
allowances and input tax attributable to exempt
sale.
The claim for tax credit referred to includes not
only those filed with the BIR but also those filed
with other government agencies, such as the
Board of Investments the Bureau of Customs.

Transitional Input Tax Credits ( 111, A)

Any person liable for VAT or who elects to be a
VAT-registered person shall be allowed INPUT
TAX in his beginning inventory of goods,
materials and supplies
equivalent to eight percent (8%) TWO
PERCENT (2%) of the value of such
inventory OR
the actual VAT paid on such goods,
materials and supplies, whichever is
higher,
which shall be creditable against the OUTPUT
TAX. [AMENDED]

[NOTE: subject to the filing of an inventory
according to rules and regulations prescribed by
the Secretary of finance, upon recommendation
of the Commissioner]

Presumptive Input Tax Credits ( 111, B)

(1) Persons or firms engaged in the processing
of sardines, mackerel and milk, and in
manufacturing refined sugar and cooking oil AND
PACKED NOODLE BASED INSTANT MEALS, shall
be allowed a presumptive input tax, creditable
against the output tax, equivalent to one and
one-half percent (1 1/2%) FOUR PERCENT (4%)
of the gross value in money of their purchases of
primary agricultural products which are used as
inputs to their production. [AMENDED]

"Processing" shall mean pasteurization, canning
and activities which through physical or chemical
process alter the exterior texture or form or inner
substance of a product in such manner as to
prepare it for special use to which it could not
have been put in its original form or condition.

(2) Public works contractors shall be allowed a
presumptive input tax equivalent to one and one-
half percent (1 1/2%) of the contract price with
respect to government contracts only in lieu of
actual input taxes therefrom. [DELETED]

REFUNDS OR TAX CREDITS OF INPUT TAX

Zero-Rated Sales ( 112, A)
Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may apply

after its publication) except VAT returns covering taxable
quarters ending earlier than December 2006.

TAXATION LAW 2
for the issuance of a tax credit certificate or
refund of creditable input tax due or paid
attributable to such sales, except transitional
input tax, to the extent that such input tax has
not been applied against output tax: [within
two (2) years after the close of the taxable
quarter when the sales were made]
PROVIDED, however, That in the case of zero-
rated sales under Section 106(A)(2)(a)(1), (2)
and (B) and Section 108 (B)(1) and (2), the
acceptable foreign currency exchange proceeds
thereof had been duly accounted for in
accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP):
PROVIDED, further, That where the taxpayer is
engaged in zero-rated or effectively zero-rated
sale and also in taxable or exempt sale of
goods of properties or services, and the
amount of creditable input tax due or paid
cannot be directly and entirely attributed to any
one of the transactions, it shall be allocated
proportionately on the basis of the volume of
sales.
PROVIDED, FINALLY, THAT FOR A PERSON
MAKING SALES THAT ARE ZERO-RATED UNDER
SECTION 108 (B)(6), THE INPUT TAXES SHALL
BE ALLOCATED RATABLY BETWEEN HIS ZERO-
RATED AND NON-ZERO-RATED SALES.
[AMENDED]

(B) Capital Goods. - A VAT-registered person
may apply for the issuance of a tax credit
certificate or refund of input taxes paid on capital
goods imported or locally purchased, to the
extent that such input taxes have not been
applied against output taxes. The application may
be made only within two (2) years after the close
of the taxable quarter when the importation or
purchase was made. [DELETED]

Cancellation of VAT Registration. ( 112, C)
A person whose registration has been cancelled
due to retirement from or cessation of
business, or due to changes in or cessation of
status under Section 106(C) of this Code may,
within two (2) years from the date of
cancellation, apply for the issuance of a tax
credit certificate for any unused input tax which
may be used in payment of his other internal
revenue taxes.
Provided, however, that he shall be entitled to a
refund if he has no internal revenue tax
liabilities against which the tax credit certificate
may be utilized.

Where to file the claim for refund/tax credit
certificate ( 112, D)
Claims for refunds/tax credit certificate shall be
filed with the appropriate BIR office (Large
Taxpayers Service (LTS) or Revenue District
Office (RDO)) having jurisdiction over the
principal place of business of the taxpayer;
Provided, however, that direct exporters may
also file their claim for tax credit certificate with
the One Stop Shop Center of the Department of
Finance; Provided, finally, that the filing of the
claim with one office shall preclude the filing of
the same claim with another office.

Period within which refund or tax credit
certificate/refund of input taxes shall be
made
( 112, D)
In proper cases, the Commissioner of Internal
Revenue shall grant a tax credit
certificate/refund for creditable input taxes
within one hundred twenty (120) days from the
date of submission of complete documents in
support of the application filed in accordance
with subparagraph (a) above.
In case of full or partial denial of the claim for
tax credit certificate/refund as decided by the
Commissioner of Internal Revenue, the
taxpayer may appeal to the Court of Tax
Appeals (CTA) within thirty (30) days from the
receipt of said denial, otherwise the decision
shall become final. However, if no action on
the claim for tax credit certificate/refund has
been taken by the Commissioner of Internal
Revenue after the one hundred twenty (120)
day period from the date of submission of the
application with complete documents, the
taxpayer may appeal to the CTA within 30
days from the lapse of the 120-day period. [RR
16-2005]

Manner of Giving Refund ( 112, E)-
Refunds shall be made upon warrants drawn by
the Commissioner or by his duly authorized
representative without the necessity of being
countersigned by the Chairman, Commission on
audit, the provisions of the Administrative Code
of 1987 to the contrary notwithstanding:
Provided, That refunds under this paragraph shall
be subject to post audit by the Commission on
Audit.

Notes from RR 16-2005:

Apportionment of Input Tax on Mixed
Transactions. A VAT-registered person who is
also engaged in transactions not subject to VAT
shall be allowed to recognize input tax credit on
transactions subject to VAT as follows:
1. All the input taxes that can be directly
attributed to transactions subject to VAT may
be recognized for input tax credit; Provided,
that input taxes that can be directly
attributable to VAT taxable sales of goods
and services to the Government or any of its
political subdivisions, instrumentalities or
agencies, including government-owned or
controlled corporations (GOCCs) shall not be
credited against output taxes arising from
sales to non-Government entities; and
2. If any input tax cannot be directly attributed
to either a VAT taxable or VAT-exempt
transaction, the input tax shall be pro-rated
to the VAT taxable and VAT-exempt
transactions and only the ratable portion
pertaining to transactions subject to VAT may
be recognized for input tax credit.

Illustration: ERA Corporation has the following
sales during the month:

Sale to private entities subject to 12% 100,000.00
Sale to private entities subject to 0% 100,000.00
Sale of exempt goods 100,000.00
Sale to gov't. subjected to 5% final
VAT w/holding 100,000.00
Total sales for the month 400,000.00

The following were its input taxes (or passed on
by its VAT suppliers):
Input tax on taxable goods (12%) 5,000.00
Input tax on zero-rated sales 3,000.00

TAXATION LAW 2
Input tax on sale of exempt goods 2,000.00
Input tax on sale to government 4,000.00
Input tax on depreciable capital good
not attributable to any specific activity
(monthly amortization for 60 months) 20,000.00

A. The creditable input tax for the month shall
be computed as follows:
Input tax on sale subject to 12% P5,000.00
Input tax on zero-rated sale
3,000.00
Ratable portion of the input tax not directly
attributable to any activity, computed below

Taxable sales (0% and 12%) X Amount of
input tax
Total Sales not directly
attributable

P200,000.00
----- X P20,000.00 = P10,000.00
400,000.00

Total creditable input tax for the month
(P5,000+ P3,000 +P10,000) P18,000.00

B. The input tax attributable to sales to
government for the month shall be computed as
follows:

Input tax on sale to gov't. P4,000.00

attributable to any activity, computed as follows:

Taxable sales to government X Amount of
input tax
Total Sales not directly
attributable

P100,000.00 X P20,000.00 = P5,000.00

400,000.00

Total input tax attributable to sales to
government P9,000.00 (P4,000 + P5,000)
These amounts are not available for input tax
credit but may be recognized as cost or expense.
That is because as far as sales to government are
concerned, there is a VAT that is finally withheld
(at 5%).

C. The input tax attributable to VAT-exempt
sales for the month shall be computed as follows:
Input tax on VAT-exempt sales P2,000.00
attributable to any activity, computed below:

VAT-exempt sales X Amount of
input tax
Total Sales not directly attributable

P100,000.00 X P20,000.00 = P5,000.00
---
400,000.00

Total input tax attributable to P7,000.00
VAT-exempt sales (P2,000+ P5,000)
- These amounts are not available for input tax
credit but may be recognized as cost or expense.

Determination of Input Tax Creditable
during a Taxable Month or Quarter.
All creditable input taxes
29
xxx
(as illustrated in the previous example
to be P18K) during the month or quarter

any amount of input tax carried-over xxx
from the preceding month or quarter

Less:
amount of claim for VAT refund
or tax credit certificate
(whether filed with the BIR,
the Department of Finance,
the Board of Investments, BOC) (xxx)

other adjustments (purchases returns
or allowances) (xxx)

xxx

VIII. SUBSTANTIATION REQUIREMENTS

RR 16-2005: Substantiation of Input Tax
Credits

(a) INPUT TAXES must be substantiated and
supported by the following documents, and must
be reported in the information returns required
to be submitted to the Bureau:
(1) For the importation of goods import
entry or other equivalent document showing
actual payment of VAT on the imported
goods.
(2) For the domestic purchase of goods
and properties invoice showing the
information required under Secs. 113 and
237 of the Tax Code.
(3) For the purchase of real property
public instrument i.e., deed of absolute
sale, deed of conditional sale,
contract/agreement to sell, etc., together
with VAT invoice issued by the seller.
(4) For the purchase of services official
receipt showing the information required
under Secs. 113 and 237 of the Tax Code.
A cash register machine tape issued to a
registered buyer shall constitute valid proof
of substantiation of tax credit only if it shows
the information required under Secs. 113 and
237 of the Tax Code.

(b) TRANSITIONAL INPUT TAX shall be supported
by an inventory of goods as shown in a
detailed list to be submitted to the BIR.

(c) Input tax on "deemed sale" transactions shall
be substantiated with the invoice required
(please refer to the table on page 46).

(d) Input tax from payments made to non-
residents (such as for services, rentals and
royalties) shall be supported by a copy of the
Monthly Remittance Return of Value Added Tax
Withheld (BIR Form 1600) filed by the resident
payor in behalf of the non-resident evidencing
remittance of VAT due which was withheld by the
payor.

(e) Advance VAT on sugar shall be supported by
the Payment Order showing payment of the
advance VAT.

29
Remember, this does NOT include input tax attributable to
exempt sales, and input tax attributable to sales subject to final
withholding VAT

TAXATION LAW 2
IX. INVOICING REQUIREMENTS ( 113)

A VAT-registered person shall issue:
(1) A VAT invoice for every sale, barter or
exchange of goods or properties; and
(2) A VAT official receipt for every lease of
goods or properties, and for every sale,
barter or exchange of services.

Information Contained in the VAT Invoice or
VAT Official Receipt:
(1) A statement that the seller is a VAT-
registered person, followed by his taxpayer's
identification number (TIN);
(2) The total amount which the purchaser pays or
is obligated to pay to the seller with the
indication that such amount includes the
value-added tax: Provided, That:
(a) The amount of the tax shall be shown as
a separate item in the invoice or receipt;
(b) If the sale is exempt from value-added
tax, the term "VAT-exempt sale" shall be
written or printed prominently on the
invoice or receipt;
(c) If the sale is subject to zero percent
(0%) value-added tax, the term "zero-
rated sale" shall be written or printed
prominently on the invoice or receipt;
(d) If the sale involves goods, properties or
services some of which are subject to
and some of which are VAT zero-rated or
VAT-exempt, the invoice or receipt shall
clearly indicate the breakdown of the
sale price between its taxable, exempt
and zero-rated components, and the
calculation of the value-added tax on
each portion of the sale shall be shown
on the invoice or receipt: "Provided, That
the seller may issue separate invoices or
receipts for the taxable, exempt, and
zero-rated components of the sale.
(3) The date of transaction, quantity, unit cost
and description of the goods or properties or
nature of the service; and
(4) In the case of sales in the amount of one
thousand pesos (P1,000) or more where the
sale or transfer is made to a VAT-registered
person, the name, business style, if any,
address and taxpayer identification number
(TIN) of the purchaser, customer or client.
xxx.

Notes from RR 16-2005:

Only VAT-registered persons are required to print
their TIN followed by the word "VAT" in their
invoice or official receipts. Said documents shall
be considered as a "VAT Invoice" or VAT official
receipt. All purchases covered by
invoices/receipts other than VAT Invoice/VAT
Official Receipt shall not give rise to any input
tax.
VAT invoice/official receipt shall be prepared at
least in duplicate, the original to be given to the
buyer and the duplicate to be retained by the
seller as part of his accounting records.

Invoicing & Recording Deemed Sale
Transactions.
Transaction Invoicing
Requirement
Transfer, use or
consumption not in
the course of business
of goods or properties
originally intended for
sale or for use in the
course of business
Memorandum entry in
the subsidiary sales
journal to record
withdrawal of goods for
personal use
Distribution or
transfer to
shareholders/investors
or creditors
Invoice, at the time of
the transaction, which
should include all the
info prescribed in Sec.
113(B)
Consignment of goods
if actual sale is not
made within 60 days
Invoice, at the time of
the transaction, which
should include all the
info prescribed in Sec.
113(B)

Retirement from or
cessation of business
with respect to all
goods on hand
An inventory shall be
prepared and submitted
to the RDO who has
jurisdiction over the
taxpayers principal
place of business not
later than 30 days after
retirement or cessation
from the business. An
invoice shall be prepared
for the entire inventory,
which shall be the basis
of the entry into the
subsidiary sales journal.
The invoice need not
enumerate the specific
items appearing in the
inventory regarding the
description of the goods.
If the business is to be
continued by the new
owners or successors,
the entire amount of
output tax on the
amount deemed sold
shall be allowed as input
taxes.

X. ACCOUNTING REQUIREMENTS ( 113, B)

Notwithstanding the provisions of Section 233, all
persons subject to VAT under Sections 106 and
108 shall, in addition to the regular accounting
records required, maintain a subsidiary sales
journal and subsidiary purchase journal on
which the daily sales and purchases are recorded.
The subsidiary journals shall contain such
information as may be required by the Secretary
of Finance.
...xxx.

RR 16-2005: A subsidiary record in ledger
form shall be maintained for the acquisition,
purchase or importation of depreciable assets or
capital goods which shall contain, among others,
information on the total input tax thereon as well
as the monthly input tax claimed in VAT
declaration or return.

TAXATION LAW 2
XI. CONSEQUENCES OF ISSUING
ERRONEOUS VAT INVOICE OR VAT
OFFICIAL RECEIPT ( 113, D)
[Added by RA 9337]

(1) If a person who is not a VAT-registered
person issues an invoice or receipt showing
his Taxpayer Identification Number (TIN),
followed by the word "VAT":
(a) The issuer shall, in addition to any
liability to other percentage taxes, be liable
to:
(i) The tax imposed in Section 106 or
108 without the benefit of any input tax
credit; and
(ii) A 50% surcharge under Section 248
(B) of this code;
(b) The VAT shall, if the other requisite
information required under Subsection (B)
hereof is shown on the invoice or receipt,
be recognized as an input tax credit to the
purchaser under Section 110 of this Code.
(2) If a VAT-registered person issues a VAT
invoice or VAT official receipt for a VAT-
exempt transaction, but fails to display
prominently on the invoice or receipt the
term "VAT-exempt Sale", the issuer shall be
liable to account for the tax imposed in
Section 106 or 108 as if Section 109 did not
apply.

Transitional Period ( 113, E) -
Notwithstanding Subsection (B) hereof, taxpayers
may continue to issue VAT invoices and VAT
official receipts for the period July 1, 2005 to
December 31, 2005, in accordance with Bureau
of Internal Revenue administrative practices that
existed as of December 31, 2004.

Under sub-par(2), clarification: If a VAT-
registered person issues a VAT invoice or VAT
official receipt for a VAT-exempt transaction, but
fails to display prominently on the invoice or
receipt the words "VAT-exempt sale", the
transaction shall become taxable and the issuer
shall be liable to pay VAT thereon. The purchaser
shall be entitled to claim an input tax credit on
his purchase. (RR 16-2005)

XIII. REGISTRATION REQUIREMENTS ( 236, F)

Cancellation of Registration. -
(1) General Rule. - The registration of any
person who ceases to be liable to a tax
type shall be cancelled upon filing with the
Revenue District Office where he is
registered, an application for registration
information update in a form prescribed
therefor;

(2) Cancellation of VAT Registration. - IF
(a) He makes written application and can
demonstrate to the Commissioner's
satisfaction that his gross sales or
receipts for the following twelve (12)
months, other than those that are
exempt under Section 109 (A) TO (U),
will not exceed One million five hundred
thousand pesos (P1,500,000); or
(b) He has ceased to carry on his trade or
business, and does not expect to
recommence any trade or business
within the next twelve (12) months.

The cancellation of registration will be
effective from the first day of the
following month.
Persons Required to Register for VAT ( 236,
G)

(1) Any person who, in the course of trade or
business, sells, barters or exchanges goods
or properties, or engages in the sale or
exchange of services, shall be liable to
register for Value-added tax if:
(a) His gross sales or receipts for the
past twelve (12) months, other than
those that are exempt under section 109
(a) to (u), have exceeded One million five
hundred thousand pesos (P1,500,000);
or
(b) There are reasonable grounds to
believe that his gross sales or receipts for
the next twelve (12) months, other than
those that are exempt under Section 109
(A) to (U), will exceed one million five
hundred thousand pesos (P1,500,000).
(2) Every person who becomes liable to be
registered under paragraph (1) of this
Subsection shall register with the Revenue
District Office which has jurisdiction over the
head office or branch of that person, and
shall pay the annual registration fee
prescribed in Subsection (B) hereof. If he
fails to register, he shall be liable to pay the
tax under Title IV as if he were a VAT-
registered person, but without the benefit of
input tax credits for the period in which he
was not properly registered.

Optional Registration for Value-added Tax of
Exempt Person. ( 236, H)
(1) Any person who is not required to
register for Value-added tax under
Subsection (G) hereof may elect to register
for Value-added tax by registering with the
Revenue District Office that has jurisdiction
over the head office of that person, and
paying the annual registration fee in
Subsection (B) hereof.
(2) Any person who elects to register under
this Subsection shall not be entitled to cancel
his registration under Subsection (F)(2) for
the next three (3) years.
For purposes of Title IV of this Code, any
person who has registered value-added tax
as a tax type in accordance with the
provisions of Subsection (C) hereof shall be
referred to as a "VAT-registered person" who
shall be assigned only one Taxpayer
Identification Number (TIN). xxx.
(amended by RA 9337)

RR 16-2005:

Annual registration fee = P500.00

Once registered as a VAT person, the taxpayer
shall be liable to output tax and be entitled to
input tax credit beginning on the first day of the
month following registration.

Non-VAT or VAT-exempt persons are also
required to register as NON-VAT persons and pay
the annual registration fee of P500.00 for every
separate or distinct establishment or place of
business before the start of such business and

TAXATION LAW 2
every year thereafter on or before the 31
st
day of
January. Individuals engaged in business where
the gross sales or receipts do NOT exceed
P100,000.00 during any 12-month period, and
cooperatives other than electric cooperatives, are
required to register but will not be made to pay
the P500.00 fee.
Franchise grantees of radio and television
broadcasting whose gross annual receipt for the
preceding calendar year exceeded P10M shall
register within 30 days from the end of the
calendar year. Franchise grantees of the same
whose annual gross receipts do not exceed P10M
derived from the business covered by the law
granting the franchise may opt for VAT
registration. This option, once exercised, shall be
irrevocable (as opposed to VAT-exempt persons,
in general, who choose to be VAT-registered, in
which case VAT registration cannot be cancelled
for 3 years only).

Any person who is VAT-registered but enters into
transactions which are exempt from VAT (mixed
transactions) may opt that the VAT apply to his
transactions which would have been exempt.

Cancellation of VAT registration:
A VAT-registered person may cancel his
registration for VAT as provided for in Sec. 236
(F) (2), and also in the following instances:
1. A change of ownership, in the case of a
single proprietorship;
2. Dissolution of a partnership or corporation;
3. Merger or consolidation with respect to the
dissolved corporation(s);
4. A person who has registered prior to
planned business commencement, but failed
to actually start his business

Some instances where taxpayer will update his
registration by submitting a duly accomplished
Registration Update Form:
1. A person's business has become exempt in
accordance with Sec. 109
2. A change in the nature of the business itself
from sale of taxable goods and/or services to
exempt sales and/or services;
3. A person whose transactions are exempt
from VAT who voluntarily registered under
VAT system, who after the lapse of three
years after his registration, applies for
cancellation of his registration as such; and
4. A VAT-registered person whose gross sales or
receipts for three consecutive years did not
exceed P1,500,000.00 beginning July 1,
2005, which amount shall be adjusted to its
present value every three years using the
Consumer Price Index, as published by the
NSO.
Upon updating his registration, the taxpayer shall
become liable to the percentage tax imposed in
Sec. 116 of the Tax Code. A short period return
for the remaining period that he was VAT-
registered shall be filed within twenty five (25)
days from the date of cancellation of his
registration.

XIV. FILING OF RETURNS & PAYMENT OF VAT

VAT RETURNS( 114)

- Filed by person liable to pay the VAT
* quarterly return of the amount of his gross
sales or receipts within twenty-five (25) days
after the close of each taxable quarter
30

prescribed for each taxpayer:
NOTE: VAT paid on a monthly basis
31

Short Period Return
Any person, whose registration has been
cancelled in accordance with Section 236, shall
file a return and pay the tax due thereon within
twenty-five (25) days from the date of
cancellation of registration:
Provided, That only one consolidated return shall
be filed by the taxpayer for his principal place of
business or head office and all branches.
32

Persons Required to Submit Summary Lists
of Sales/Purchases.
(1) Persons Required to Submit Summary Lists of
Sales. All persons liable for VAT such as
manufacturers, wholesalers, service-providers,
among others, with quarterly total sales/receipts
(net of VAT) exceeding Two Million Five Hundred
Thousand Pesos (P2,500,000.00).
(2) Persons Required to Submit Summary Lists of
Purchases. All persons liable for VAT such as
manufacturers, service-providers, among others,
with quarterly total purchases (net of VAT)
exceeding One Million Pesos (P 1,000,000.00).

When and Where to File the Summary Lists of
Sales/Purchases.
shall be submitted in diskette form to the RDO or
LTDO or LTAD having jurisdiction over the
taxpayer, on or before the twenty-fifth (25th)
day of the month following the close of the
taxable quarter (VAT quarter. However,
taxpayers under the jurisdiction of the LTS, and
those enrolled under the EFPS, shall, through
electronic filing facility submit their Summary List
of Sales/Purchases to the RDO/LTDO/LTAD, on or
before the thirtieth (30th) day of the month
following the close of the taxable quarter.

Information that Must be Contained in the
Quarterly Summary List of Sales to be
Submitted: the monthly total sales generated
from regular buyers/customers, regardless of the
amount of sale per buyer/customer, as well as
from casual buyers/customers with individual

30
The term "taxable quarter" shall mean the quarter
that is synchronized to the income tax quarter of the
taxpayer (i.e., the calendar quarter or fiscal quarter).
[RR 16-2005]
31
The monthly VAT Declarations (BIR Form 2550M) of
taxpayers whether large or non-large shall be filed and
the taxes paid not later than the 20th day following the
end of each month.
The return for withholding of VAT shall be filed and the
withholding VAT paid on or before the tenth (10th) day
of the following month. [RR 16-2005]

32
Any person who retires from business with due notice
to the BIR office where the taxpayer (head office) is
registered or whose VAT registration has been cancelled
shall file a final quarterly return and pay the tax due
thereon within twenty five (25) days from the end of
the month when the business ceases to operate or
when VAT registration has been officially cancelled;
Provided, however, that subsequent monthly
declarations/quarterly returns are still required to be
filed if the results of the winding up of the
affairs/business of the taxpayer reveal taxable
transactions. [RR 16-2005]

TAXATION LAW 2
sales amounting to P100,000.00 or more. For this
purpose, the term "regular buyers/customers"
shall refer to buyers/customers who are engaged
in business or exercise of profession AND those
with whom the taxpayer has transacted at least 6
transactions regardless of amount per transaction
either in the previous year or current year. The
term "casual buyers/customers", on the other
hand, shall refer to buyers/customers who are
engaged in business or exercise of profession
BUT did not qualify as regular buyers/customers
as defined in the preceding statement.

The Quarterly Summary List of Sales to Regular
Buyers/Customers and Casual Buyers/Customers
and Output Tax shall reflect the following:
(1) BIR-registered name of the buyer who is
engaged in business/exercise of profession;
(2) TIN of the buyer (Only for sales that are
subject to VAT);
(3) Exempt Sales;
(4) Zero-rated Sales;
(5) Sales Subject to VAT (exclusive of VAT);
(6) Sales Subject to Final VAT Withheld; and
(7) Output Tax (VAT on sales subject to 10%).
(The total amount of sales shall be system-
generated)

Information that must be Contained in the
Quarterly Summary List of Purchases
(1) The Quarterly Summary List of Local
Purchases and Input Tax
a. BIR-registered name of the
seller/supplier/service-provider;
b. Address of seller/supplier/service-
provider;
c. TIN of the seller;
d. Exempt Purchases;
e. Zero-rated Purchases;
f. (i) Purchases Subject to VAT (exclusive of
VAT) on services;
(ii) Purchases Subject to VAT (exclusive
of VAT) on capital goods; and
(iii) Purchases Subject to VAT (exclusive
of VAT) on goods other than capital goods
(iv) Purchases Subject to Final VAT
Withheld
g. Creditable Input Tax; and (to be
computed not on a per supplier basis
but on a per month basis)
h. Non-Creditable Input Tax (to be
computed not on a per supplier basis
but on a per month basis)
(The total amount of purchases shall be
system-generated)
(2) The Quarterly Summary List of
Importations.
(a) The import entry declaration number;
(b) Assessment/Release Date;
(c) The date of importation;
(d) The name of the seller;
(e) Country of Origin;
(f) Dutiable Value;
(g) All Charges Before Release From
Customs' Custody;
(h) Landed cost:
(i) Exempt;
(ii) Taxable (Subject to VAT);
(i) VAT paid;
(j) Official Receipt (OR) Number of the OR
evidencing payment of the tax; and
(k) Date of VAT payment
For the claimed input tax arising from services
rendered in the Philippines by nonresidents, no
summary list is required to be submitted.

Once any of the taxable quarters total sales
and/or purchases exceed the threshold amounts
as provided above, VAT taxpayer shall be
required to submit the summary lists for the next
3 succeeding quarters, regardless of whether or
not such succeeding taxable quarter sales and/or
purchases exceed the herein set threshold
amounts of P2,500,000.00 for sales and
P1,000,000.00 for purchases.

Penalties in case of failure to submit quarterly
summary list of sales and purchases.
A person who fails to file, keep or supply
a statement, list, or information required herein
on the date prescribed therefor shall pay, upon
notice and demand by the Commissioner of
Internal Revenue, an administrative penalty of
P1,000.00 for each such failure, unless it is
shown that such failure is due to reasonable
cause and not to willful neglect. For this
purpose, the failure to supply the required
information for each buyer or seller of goods and
services shall constitute a single act or omission
punishable hereof. However, the aggregate
amount to be imposed for all such failures during
a taxable year shall not exceed P25,000.00.
In addition to the imposition of the
administrative penalty, willful failure by such
person to keep any record and to supply the
correct and accurate information at the time or
times as required herein, shall be subject to the
criminal penalty under the relevant provisions
of the Tax Code (e.g., Sec. 255, Sec. 256, etc.,),
upon conviction of the offender.
The imposition of any of the penalties under the
Tax Code and the compromise of the criminal
penalty on such violations, notwithstanding, shall
not in any manner relieve the violating taxpayer
from the obligation to submit the required
documents.
Finally, the administrative penalty shall be
imposed at all times, upon due notice and
demand by the Commissioner of Internal
Revenue. A subpoena duces tecum for the
submission of the required documents shall be
issued on the second offense. A third offense
shall set the motion for a criminal prosecution of
the offender.

XV. ENFORCEMENT MEASURES

RR 16-2005:
Administrative and Penal Provisions.

(a) Suspension of business operations. In
addition to other administrative and penal
sanctions provided for in the Tax Code and
implementing regulations, the Commissioner of
Internal Revenue or his duly authorized
representative may order suspension or closure
of a business establishment for a period of not
less than five (5) days for any of the following
violations:
(1) Failure to issue receipts and invoices.
(2) Failure to file VAT return as required
under the provisions of Sec. 114 of the Tax
Code.
(3) Understatement of taxable sales or
receipts by 30% or more of his correct

TAXATION LAW 2
taxable sales or receipt for the taxable
quarter.
(4) Failure of any person to register as
required under the provisions of Sec. 236 of
the Tax Code.

(b) Surcharge, interest and other penalties.
The interest on unpaid amount of tax, civil
penalties and criminal penalties imposed in Title
XI of the Tax Code shall also apply to violations
of the provisions of Title IV of the Tax Code.
III. III. III. III. P PP PERCENTAGE TAXES ERCENTAGE TAXES ERCENTAGE TAXES ERCENTAGE TAXES
TAX ON PERSONS EXEMPT FROM VAT (Sec.
116, NIRC)
3% of gross quarterly sales or receipts.

Q: Who are liable?
GENERAL RULE: Any person who are exempt
from VAT and who is not a VAT-registered
person.
Those whose gross annual sales and
receipts does not exceed P1.5M are
exempted from VAT
EXCEPTION:
Cooperatives shall be exempt from the
3% GRT.
Those earning LESS THAN P100,000
which is neither covered by percentage
tax nor by VAT.

TAX ON DOMESTIC CARRIERS AND KEEPERS
OF GARAGES (Sec. 117, NIRC)
3% of quarterly gross receipts
Gross receipts of common carriers
derived from INCOMING and OUTGOING
freight is NOT subject to local taxes
under the Local Govt Code.

Q: Who are covered? (ReCoLaKe no BA)
1. Cars for Rent or hire driven by lessee;
2. Transportation Contractors, including
persons who transport passengers for
hire;
3. Other domestic carriers by LAND;
4. Keepers of garages.
EXCEPT:
1. Owners of Bancas
2. Owners of Animal-drawn two-wheeled
vehicles

Minimum quarterly gross receipts:
Jeepneys
Manila and other cities P2,400
Provincial P1,200
Public Utility Bus
Not exceeding 30 passengers P3,600
> 30 but not > 50 passengers P6,000
Exceeding 50 passengers P7,200
Taxis
Manila and other cities P3,600
Provincial P2,400
Car for hire (with chauffeur) P3,000
Car for hire (w/o chauffeur) P1,800

TAX ON INTERNATIONAL CARRIERS (Sec.
118, NIRC)
3% of their quarterly gross receipts.
To be subject to this percentage tax, they
MUST BE DOING BUSINESS IN THE
PHILIPPINES.

Q: Who are liable?
1. International air carriers
2. International shipping carriers
Amendment introduced by RA 9337 (July
2005):

TAXATION LAW 2

Common
carrier
Transporting Kind of
carrier
Tax
Liability
By land Persons Domestic 3%, Sec.
117
Goods/cargo Domestic 12% VAT
By sea
Whether
transporting
persons or
goods/cargo
Domestic Domestic
trip - 12%
VAT
International
trip zero-
rated
118
By air Domestic Domestic
flight - 12%
VAT
International
flight
zero-rated
118

TAX ON FRANCHISES (Sec. 119)

Q: Who are liable?
1. Radio and broadcasting companies
a. annual gross receipts of the
preceding year does not exceed
P10M
b. 3% of gross receipts derived from
business covered by law granting the
franchise.
c. The franchisee has the option to
register as VAT taxpayer and pay the
VAT instead.
d. once option is exercised, it is
IRREVOCABLE.

2. Electric, gas and water utilities
2% of gross receipts derived from business
covered by the law granting the franchise.

* Under RA 9337, electric companies are now
subject to VAT and not percentage tax.

OVERSEAS COMMUNICATIONS TAX (Sec.
120)
10% of the amount paid for the services.
Levied upon EVERY overseas dispatch,
message or conversation TRANSMITTED
FROM THE PHILIPPINES by:
- telephone
- telegraph
- telewriter exchange
- wireless
- other communication equipment
services.

Q: Who are liable?
Payable by: the person paying for the services
rendered
Payable to: the person rendering the service,
who will in turn pay the taxes at the end of
the quarter.

Q: Who are exempted? (D GIN)
1. Government and any of its political
subdivisions and instrumentalities;
2. Diplomatic services (any embassy and
consular offices of a foreign govt)
3. International Organizations (if bases in
the Phils. and enjoying privileges,
exemptions and immunities pursuant to
an international agreement)
4. News services (which deals EXCLUSIVELY
with the collection of news and
dissemination to the public)

TAX ON BANKS AND NON-BANK FINANCIAL
INTERMEDIARIES PERFORMING QUASI-
BANKING FUNCTIONS (Sec. 121, NIRC)
tax on gross receipts derived from sources within
the Philippines by all banks and non-bank
financial intermediaries

Definitions (from RR 09-04, Sec 2):

Non-bank Financial Intermediaries refer to
persons or entities whose principal functions
include the lending, investing or placement of
funds or evidences of indebtedness or equity
Deposited with them, Acquired by them or
otherwise Coursed through them, either for their
own account or for the account of others. (LIP
DAC)

Quasi-banking Activities refer to the borrowing
of funds from 20 or more personal or corporate
lenders at any one time for purposes of relending
or purchasing receivables and other similar
obligations.

Exception:
If borrowing of funds is for LIMITED PURPOSE of
financing their own needs or the needs of their
agents or dealers.

Receipts Maturity Rate
1. interest, commissions,
discounts from lending
activities and financial
leasing bases on
remaining maturities of
instruments:

maturity
period is 5yrs
or less

maturity
period is
more than
5yrs
5%

1%
2. dividends & equity
shares in net income of
subsidiaries
0%
3. royalties, rentals of
property (real/personal),
profits from exchange and
all other items treated as
gross income under sec.
32)
7%
4. net trading gains on
foreign currency, debt
securities, derivatives &
other similar financial
instruments
7%
[Note: rates in #s 3 & 4 are as amended by RA
9337]

COMPUTING FOR THE NET TRADING GAINS:

Cumulative Total of the net trading gain/loss
since the first month of the applicable taxable
year
LESS: figures already reflected in the previous
months of the same year
FIGURE TO BE REPORTED IN THE MONTHLY
PERCENTAGE TAX

Net Trading Loss
- may only be deducted from the net trading
gain to arrive at the total gross receipts tax
due.

TAXATION LAW 2
- cannot be deducted on net trading gain
earned on any taxable year other than the
year it was incurred
- may not be carried over to the succeeding
taxable year.

RULE ON PRETERMINATION:
In case the maturity period of an instrument
is shortened by pretermination, the maturity
period shall be reckoned to end as of the
date of pretermination for purposes of
classifying the transaction and applying the
correct rate of tax. (RR 09-04, Sec. 5)

CASE LAW: China Bank v. CTA (GR 146749,
June 10, 3003) The 20% withholding tax on
interest income shall form part of the gross
receipts in computing gross receipts tax on
banks. Gross Receipts is commonly understood
as the entire receipts without any deductions.

TAX ON OTHER NON-BANK FINANCE
INTERMEDIARIES (Sec. 122, NIRC)
tax on gross receipts derived by other non-
bank finance intermediaries, DOING
BUSINESS IN THE PHILIPPINES, from:
- interest
- commissions
- discounts from lending activities
- financial leasing
tax is based on the remaining maturities of
the instruments from which receipts are
derived
MATURITY RATES
maturity period is 5
yrs or less
5%
maturity period is
more than 5 yrs
3%

[Note: The same rule on pretermination applies.]

However, RR 10-2004 has classified
pawnshops as under NON-BANK FINANCIAL
INTERMEDIARIES, thus are now subject to 5%
gross receipts tax. The revenue regulation also
required pawnshops to register, from VAT
taxpayers, as percentage taxpayers.

TAX ON LIFE INSURANCE PREMIUMS (Sec.
123, NIRC)

5% of total premiums collected (whether
in money, notes, credits or any substitute
for money).

Q: Who are liable?
GENERAL RULE: Every person, company or
corporation DOING LIFE INSURANCE BUSINESS
OF ANY SORT IN THE PHILIPPINES.
EXCEPTION: Purely cooperative companies or
associations.

Cooperative companies or associations are
such as are
conducted by the members thereof
with the money collected from among
themselves and
solely for their own protection and
NOT for profit.

PREMIUMS NOT INCLUDED IN THE TAXABLE
RECEIPTS: V- ROAR
1. Premiums Refunded within 6 months after
payment on account of rejection of risks
2. Premiums paid upon reinsurance by a
company that has Already paid the tax.
3. Premiums collected or received by any
branch of a domestic corporation, firm or
association doing business OUTSIDE the
Phils. on account of any life insurance of
the insured who is a NON-RESIDENT, if any
tax on such premiums is imposed by the
foreign country where the branch is
established.
4. Premiums collected or received on account
of any reinsurance, if the insured of
personal insurance, RESIDES OUTSIDE THE
PHILS., if any tax on such premiums is
imposed by the foreign country where the
original insurance has been issued or
perfected.
5. Portions of premiums collected or received
by insurance companies on VARIABLE
CONTRACTS in excess of the amounts
necessary to insure the lives of variable
contract owners.

Variable Contracts benefits under the
contract vary as to reflect investment results of
any segregated portfolios of investments.
(PD612)

CASE LAW: CIR v. Insular Life Assurance (CA
GR SP 46516) MUTUALIZED LIFE INSURANCE
COMPANY is not subject to premium tax or DST
on policies as cooperatives. If a mutualized
life insurance company satisfies all the
elements of cooperative [1. managed by
members; 2. operated with money collected from
members; 3. has for its main purpose the mutual
protection of members and not for profit] as
defined in Sec. 123, it shall not be subject to
premiums tax.

TAX ON AGENTS OF FOREIGN INSURANCE
COMPANIES (Sec. 124, NIRC)

10% of total premiums collected.

Q: Who are liable?
GENERAL RULE: Tax shall be levied upon every
FIRE, MARINE OR MISCELLANEOUS INSURANCE
AGENT authorized to procure policies of insurance
as he may have previously been legally
authorized to transact on risks located in the
Phils FOR COMPANIES NOT AUTHORIZED TO
TRANSACT BUSINESS IN THE PHILS.
EXCEPTION: Premiums paid on reinsurance.

where an owner of property obtains
insurance DIRECTLY from foreign insurance
companies NOT authorized to transact
insurance business in the Phils., he shall pay
a tax of 5% on the premiums paid.

AMUSEMENT TAXES (Sec. 125, NIRC)

Q: Who are liable?
The proprietor, lessee or operator of cockpits,
cabarets, night or day clubs, boxing exhibitions,
professional basketball games, Jai-Alai and
racetracks.

Q: When to pay?

TAXATION LAW 2
return should be filed and tax paid within
20 days after the end of every
quarter

SOURCE RATES
Cockpits 18%
cabarets, night or day clubs 18%
boxing exhibitions 10%
professional basketball games (in
lieu of all other percentage taxes)
15%
Jai-Alai & racetracks (WON they
charge for admissions)
30%

EXEMPTION: If boxing exhibition is a World or
Oriental Championship in any division featuring
at least 1 Filipino contender and promoted
by a Filipino or by a corporation with at
least 60% Filipino equity.

Tax Base: GROSS RECEIPTS
it embraces ALL the receipts of the
proprietor, lessee or operator of the
amusement place; including income from
TV, radio and motion picture rights.

RMC 08-88 transferred the EXCLUSIVE
JURISDICTION to levy tax on gross receipts from
ADMISSIONS to places of amusement to the
local government.

TAX ON WINNINGS (Sec. 126, NIRC)

Q: Who are liable?
1. every person who wins in horse races
2. owners of winning race horses

SOURCE RATES
winnings or dividends (bases on the
actual amount paid to winner for
every winning ticket AFTER
deducting the cost of the ticket)
10%
winnings from double,
forecast/quinella and trifecta bets
4%
prizes, in case of owners of race
horses
10%

tax shall be WITHHELD by the operator,
manager or person in charge of the horse
races before paying the dividends or
prizes
return shall be filed and tax paid within
20 days from the date tax was deducted
and withheld

TAX ON SALE, BARTER OR EXCHANGE OF
SHARES OF STOCK LISTED AND TRADED
THROUGH THE LOCAL STOCK EXCHANGE OR
THROUGH INITIAL PUBLIC OFFERING (IPO)
(Sec. 127, NIRC)

A. Through the Local Stock Exchange
of 1% of the GROSS SELLING PRICE
or GROSS VALUE IN MONEY (GSP/GVM)
of the shares of stocks sold, bartered,
exchanged or otherwise disposed of
through the local stock exchange OTHER
THAN THE SALE BY A DEALER IN
SECURITIES.
Tax shall be paid by seller or
transferor.

B. Through IPO
covers sale, barter, exchange of shares of
stock of CLOSELY HELD CORPORATIONS
tax shall be paid by the issuing
corporation in the primary offering or by
the seller in the secondary offering
tax base is the GSP/GVM
levied in accordance with the proportion
of shares sold, bartered, exchanged or
disposed, to the total outstanding shares
after the listing in the local stock
exchange:

NUMBER OF SHARES RATES
up to 25% of all
shares
4% GSP/GVM
>25% but not over
33.33%
2% GSP/GVM
Over 33.33% 1% GSP/GVM
Closely Held Corporationany corporation at
least 50% in value of the outstanding capital
stock or at least 50% of the total combined
voting power of all classes of stock entitled to
vote is owned directly or indirectly by or for
not more than 20 individuals.

Rules to be applied to determine whether the
corporation is closely held:
1. Stock owned directly or indirectly by
corporations, partnerships, estates or trusts
shall be considered as actually owned by
its stockholders, partners or
beneficiaries in proportion to their shares as
individuals.
2. An individual is considered the constructive
owner of the stock owned by members of his
family (includes only brothers and sisters
whole/half-blood, spouse, ancestors and
lineal descendants)
3. A person having an option to acquire stock
is considered the actual owner of such stock

C. Return on Capital Gains realized from sale of
Shares of Stocks
1. return on capital gains realized from sale
of shares of stock listed and traded in the
local stock exchange
it is the duty of every stockbroker who
effected the sale to collect the tax and
remit it to the BIR within 5 banking days
from date of collection and to submit to
the secretary of the stock exchange a
true and complete return

2. return on public offerings of shares of
stocks
the corporate issuer shall file the return
and pay the tax within 30days from the
date of listing of the shares in the local
stock exchange.

[Note: Both IPOs and sales of stock through
the local exchange are EXEMPT from capital
gains tax and from regular individual or
corporate income tax. Also, such tax is not
deductible from income tax.]

PAYMENT OF PERCENTAGE TAXES

Q: When to file return and pay?
Persons subject to percentage taxes shall file
a QUARTERLY RETURN and PAY the tax due
within 25 days after the end of each taxable
quarter. (Sec. 128 (A)(1), NIRC)

TAXATION LAW 2
However, RR 6-2001 has changed the
period from 25 days after end of quarter to
10 days after end of the month.

Exception: Persons
whose VAT registration is cancelled and
become liable under Sec 116
- liable for the tax due from the
date of cancellation of
registration.
retiring from business
- must file a return and pay within
20 days from closing of the
business.

Q: Where to file?
At the option of the person liable, he may file
- a separate return for each branch or
place of business, or
- a consolidated return

with:
- authorized agent bank,
- Revenue District Office,
- Collection Agent or City/Mun. Treasurer
where the business or principal place of
business is located.

The Commissioner may prescribe
- rules and regulations altering the time
and manner of payment prescribed
herein.
- a minimum amount of gross receipts
where it is found that a person:
1. has failed to issue receipts or
invoices
2. does not file a return, or
3. if records of the books of
accounts do not correctly reflect
the declarations in the return.

IV. IV. IV. IV. EXCISE EXCISE EXCISE EXCISE TAX TAX TAX TAX
Goods Subject to Excise Tax
(Sec. 129, NIRC)
Goods manufactured or produced in the
Philippines for domestic sale or consumption
or other disposition
Things imported
NOTE:
Excise tax is imposed in addition to VAT.
The tax attaches even on articles illicitly
made, or the production of which is
prohibited or punished by law.

Two Classifications of Excise Tax:
Specific tax- tax is based on weight or
volume capacity or other physical unit of
measurement

Ad valorem tax - tax is based on selling
price or other specified value of the good

Purpose and justification of excise taxes:
1. To curtail consumption of certain
commodities, excessive or indiscriminate use
of which is considered harmful to the
individual or community.

2. To protect a domestic industry the products
of which face competition from similar
imported articles

3. To distribute the tax burden in proportion to
the benefit derived from a particular
government service.

4. To raise revenue

When Excise Taxes Accrue
As to domestic products as soon as the
articles are produced, or come into
existence as in the case of distilled spirits
(Sec. 141) and manufactured and other fuel
oils (Sec. 148)

As to imported articles as soon as the
articles are brought into the Philippine
jurisdiction with the intention to unload them
here.

Filing of Return and Payment of Excise Tax
on DOMESTIC Products (Sec. 130)

(A) Persons liable to file a return, filing of return
on removal and payment of tax

1. Person Liable to File a Return-such
person shall file a separate return for
each place of production setting forth,
among others: DAT
o Description and quantity or volume
of products removed
o Applicable tax base
o Tax due
- in the case of indigenous petroleum,
natural gas or liquefied natural gas
excise tax shall be paid by first
buyer, purchaser or transferee
for local sale, barter or transfer
- export products
excise tax shall be paid by
owner, lessee, concessionaire or
operator of the mining claim

TAXATION LAW 2
- should domestic products be
removed from the place of
production without the payment of
tax, the owner or possessor shall be
liable for the tax due

2. Time of Filing of Return and Payment of
Tax
GENERALLY: return shall be filed and
excise tax shall be paid by the
manufacturer or producer before
removal of the domestic products from
place of production unless otherwise
specifically allowed

EXCEPTIONS:
PRODUCT TIME OF PAYMENT
nonmetallic mineral or
mineral products and
quarry sources
upon removal of such
products from locality
where mined and
extracted
locally produced or
extracted metallic
mineral or mineral
products
within 15 days after
end of the calendar
quarter when such
products were
removed subject to
conditions prescribed
by rules and
regulations to be
promulgated by
Secretary of Finance,
upon recommendation
of the Commissioner

taxpayer shall file
bond amount of
excise tax due
IMPORTED mineral or
mineral products,
whether metallic or
nonmetallic
before their removal
from customs duty

3. Place of Filing of Return and Payment of
Tax (GENERAL RULE)
any authorized agent bank or Revenue
Collector Officer, or
duly authorized City or Municipal
Treasurer

4. Exceptions (TO GENERAL RULE SET OUT
ABOVE)
IN GENERAL: Sec of Finance, upon
recommendation of Commissioner, may
by rules and regulations prescribe:

a. time of filing the return at intervals
for a particular class or classes of
taxpayer

b. manner and time of payment under a
tax prepayment, advance deposit and
other similar schemes
IN THE SPECIFIC CASES of:
minerals, mineral products or
quarry resources where the place
of extraction is different from the
place of processing or production,
or
metallic minerals processed
abroad,
file and pay at the Revenue
District Office having jurisdiction
in the locality where it was
mined, extracted or quarried

(B) Determination of Gross Selling Price of Goods
Subject to Ad Valorem Tax

Gross Selling Price= Price - VAT

- PRICE: That at which the goods are sold
at wholesale in the place of production or
through their sales agents to the public
- If the goods are sold in another
establishment where the manufacturer is
the owner or in the profits of which he
has an interest, wholesale price there

NOTE: if price < cost of manufacture +
expenses incurred until the goods are finally
sold a proportionate margin of the profit
(which is not less than 10% of such
manufacturing costs + expenses) shall be
added to the GSP

(C) Manufacturers or Producers Sworn
Statement
It shall show:
- different goods and products
manufactured or produced,
- their corresponding GSP or market value
- Costs of manufacture or production +
expenses incurred or to be incurred until
goods are sold

(D) Credit for Excise Tax on Goods Actually
Exported
In case goods produced or manufactured are
removed and actually exported without
returning to the Philippines:
- GENERAL RULE any excise tax paid
shall be credited or refunded upon
submission of proof of actual exportation
and upon receipt of the foreign exchange
payment
- EXCEPTION (i.e., NOT credible): mineral
products
o EXCEPTION TO EXCEPTION: coal &
coke

Payment of Excise Tax on IMPORTED
Articles (Sec. 131)

(A) Persons Liable
- Paid by:
owner or importer to the Customs
Officers before release from the
customhouse, OR
person found in possession of articles
which are exempt from excise taxes
other than those legally entitled to
exemption
- In case tax-free articles brought in by
exempted persons or entities or
agencies are subsequently sold,
transferred or exchanged in the Philippines
purchaser or recipients shall be
considered importers and shall be liable for
duty and internal revenue tax due
- Importation of cigar, cigarettes, distilled
spirits and wines even if destined to tax
and duty-free shops shall be subject to all
applicable taxes, EXCEPT: (not subject to
tax)

TAXATION LAW 2
1. such are brought directly into Subic
Special Economic and Freeport Zone;
Cagayan Special Economic Zone and
Freeport; Zamboanga City Special
Economic Zone and not transshipped to
any other port in the Philippines

2. importation done by government-
owned and operated duty free shop like
DFP, PROVIDED such products are
labeled tax and duty free and not for
resale

EXCEPTION TO THE EXCEPTION: if such
products are eventually introduced to
Philippine customs territory, then such
articles shall be deemed imported into
Phil and be subject to all import and
excise taxes

NOTE: Removal and transfer from one Freeport
to another Freeport shall not be deemed an
introduction to Phil territory.

VIOLATIONS:
- cigar, cigarettes, distilled spirits and wines in
duty free shops which are NOT LABELED AS
REQUIRED, as well as
- those articles obtained from duty free shops
and subsequently FOUND IN NON DUTY FREE
SHOPS FOR RESALE

PENALTY:
- articles shall be confiscated and perpetrator
punished
- tax due on any such goods, products,
machinery, equipment and other similar articles
shall constitute a lien on the article itself which
shall be superior to all other liens

(B) Rate and Basis of the Excise Tax on Imported
Articles

Unless otherwise specified, imported articles
shall be subject to the same rate and basis
of excise taxes applicable to locally
manufactured articles

Exemption / Conditional Tax-Free Removal
of Certain Articles
a. denatured wine/spirits for treatment of
tobacco leaf
b. domestic denatured alcohol rendered
unfit for oral intake, but VAT should be
paid
c. petroleum products sold to:
international carriers (Philippine or
foreign carriers) on their use or
consumption outside the Philippines,
provided there is reciprocity
exempt entities covered by tax treaties,
conventions, international agreements,
provided there is reciprocity
entities which are by law exempted from
direct & indirect taxes
d. removal of spirits under bond for
rectification
e. removal of fermented liquors to bonded
warehouse
f. removal of damaged liquors
g. removal of tobacco products entirely unfit
for chewing/smoking
Tax on Alcohol Products
Definition
a. distilled spirits substance known as ethyl
alcohol, ethanol or spirits of wine including
whiskey, brandy, rum, gin and vodka, from
whatever source, by whatever process
produced
b. wines all alcoholic beverages produced by
fermentation without distillation from the
juice of any kind of fruit; and fortified
beverages
c. fermented liquor alcoholic beverages
produced by fermentation without distillation
of grain or malt (beer, lager, ale, porter)

Sec. 141 Distilled Spirits (Rates of tax as
per RR 3-2006)
(for rates see Sec. 141)
- Medicinal preparations, flavoring extracts,
other preparations except toilet preparations,
wherein distilled products form chief
ingredient
**same tax as chief ingredient
- Tax shall proportionally increase for any
strength of spirit taxed over proof spirits.
- Tax shall attach as soon as it is in existence
whether it is subsequently separated as pure
or impure spirits or transformed into any
other substance either in the process of
original production or by any subsequent
process.

Sec. 142 Wines (Rates of tax as per RR 3-
2006)
(for rates see sec. 142)
Fortified wines
- containing more than 25% of alcohol by
volume
- natural wines to which distilled spirits are
added to increase their alcoholic strength
- taxed as distilled spirits

Sec. 143 Fermented Liquor (Rates of tax
as per RR 3-2006)
Beer, lager beer, ale. Porter and other fermented
liquor
except tuba, basi, tapuy and similar domestic
fermented liquors
(For rates, see sec. 143)
PENAL PROVISIONS:

VIOLATION BY: PENALTY
Brewer or importer who
knowingly misdeclares
or misrepresents in his
sworn statement any
pertinent data or
information
summary cancellation
or withdrawal of his
permit
Corporation, association
or partnership
fined treble the
amount of deficiency
taxes + surcharges +
interest
Person liable for acts or
omissions prohibited
under this section
criminally liable and
penalized under Sec
254
those who willfully abet
or aid in the
commission of such act
or omission
liable same as
principal
offender not citizen of
Phil
deported after service
of sentence

TAXATION LAW 2
Tax on Tobacco Products
- Definition
a. cigar all rolls of tobacco or any
substitute wrapped in leaf tobacco
b. cigarette all rolls of finely-cut leaf
tobacco or any substitute wrapped in
paper or any other material

Sec. 144 Tobacco Products (Rates of tax
as per RR 3-2006)
(for rates, see Sec. 144)

Sec. 145 Cigars and Cigarettes (Rates of tax
as per RR 3-2006)
(for rates, see sec. 145)
PENAL PROVISIONS: Same with Wines and
Spirits

Tax on Petroleum Products

Sec. 148 Manufactured Oils and other Fuels
(Rates of tax 1997 NIRC, as amended by RA
9337 [2005])
(for rates, see sec. 148)

Tax on Miscellaneous Articles

On Automobiles (Sec. 148 of the NIRC, as
amended by RA 9224)
NATURE: Ad valorem tax on automobiles based
on manufacturers or importers selling price (net
excise tax and VAT)

NET SELLING PRICE RATE

Up to P600T 2%

P600T P1.1M P12,000 + 2% in
excess of P600T

P1.1M P2.1 M P112T + 40% in
excess of P1.1M

over P2.1M P512T + 60% in
excess of P2.1M

NOTE:
imported cars NOT for sale, tax shall be
based on total landed value + transaction
value + customs duty + other charges
cars used exclusively in Freeport zones
are exempt

Sec. 150 Non Essential Goods
Sec. 151 Mineral Products
V VV V. .. . DOCUMENTARY DOCUMENTARY DOCUMENTARY DOCUMENTARY STAMP TAX STAMP TAX STAMP TAX STAMP TAX
General Principles
DEFINITION: Tax on documents, instruments
and papers evidencing the acceptance,
assignment, sale or transfer of an obligation,
right or property thereto

NATURE: It is an excise or privilege tax imposed
on the privilege to enter into the transaction.
o It is only paid once.
o The amount of DST depends on the
nature of the document and the value
appearing upon its face.
o If the transaction is subsequently annulled or
invalidated, the tax may be refunded since
the law presupposes a valid transaction.

Q: Who are required to file the Documentary
Stamp Tax Declaration Return?
a) In case of constructive affixture of
documentary stamps, by the persons
making, signing, issuing, accepting or
transferring documents, instruments, loan
agreements and papers, acceptances,
assignments, sales and conveyances of the
obligation, right or property incident thereto
wherever the document is made, signed,
issued, accepted or transferred when the
obligation or right arises from Philippine
sources or the property is situated in the
Philippines at the same time such act is done
or transaction had;

b) By metering machine user who imprints the
Documentary Stamp Tax due on the taxable
documents; and

c) By Revenue Collection Agent, for remittance
of sold loose documentary stamps.

NOTE: Wherever one party to the taxable
document enjoys exemption from the tax
imposed, the other party who is not exempt
will be the one directly liable to file Documentary
Stamp Tax Declaration and pay the applicable
stamp tax.

Q: What are the implications of failure to
stamp taxable documents?
The untaxed document will:
o not be recorded,
o not be admitted or used in evidence in court
until the requisite stamp or stamps have been
affixed thereto and cancelled
o Not be notarized (No notary public or other
officer authorized to administer oaths will add
his jurat or acknowledgment to any document
subject to Documentary Stamp Tax unless
the proper documentary stamps are affixed
thereto and cancelled.

TAXATION LAW 2
TAX RATES APPLICABLE (1997 NIRC, as amended by RA 9243 [2004])
Document Taxable Unit Tax Due Per Unit Taxable Base
Debentures & Certificates of Indebtedness
DELETED by RA 9243
Original Issue of Shares of Stock with par
value

Original Issue of Shares of Stock without
par value
Stock Dividends
P200.00 or fraction
thereof
P200.00 or fraction
thereof
P200.00 or fraction
thereof
1.00

1.00

1.00
Par value of shares of stocks

-actual consideration for the
issuance of shares of stocks
-Actual value represented by
each share
Sales, Agreements to Sell, Memoranda of
Sales, Deliveries or Transfer of Due-bills,
Certificate of Obligation, or Shares or
Certificates of Stock
-In the case of stocks without par value
P200.00 or fraction
thereof
0.75

-25% of the DST
paid upon the
original issue of said
stock
Par value of such due-bills,
certificate of obligation or
stocks
Bonds, Debentures, Certificate of Stock or
Indebtedness issued in foreign Countries
P200.00 or fraction
thereof
1.50 Par value of such bonds,
debentures or Certificate of
Stocks
Certificate of Profits or Interest in
Property or Accumulation
P200.00 or fraction
thereof
0.50 Face value of such certificate
/ memorandum
Bank Checks, Drafts, Certificate of
Deposit not bearing interest and other
Instruments
On each Document 1.50
Original issue of debt instruments
-For such debt instruments with terms of
less than one year
P200.00 or fraction 1.00
-proportional amount
in accordance w/ the
ratio of its term in
number of days to
365 days
Issue price of any such debt
instrument
Bills of exchange (between points within
the Philippines) and drafts
P200.00 or fraction
thereof
.30 Face value of the bill of
exchange or draft
Bills of Exchange or order drawn in
foreign country but payable in the
Philippines
P200.00 or fraction
thereof
.30 Face value of such bill of
exchange or order or the
equivalent of such value, if
expressed in foreign currency
Foreign Bills of Exchange and Letter of
Credit
P200.00 or fraction
thereof
.30 Face value of bill of exchange/
order or the equivalent of
such value if expressed in
foreign currency
Life Insurance Policies P200.00 or fraction
thereof
.50 Amount of premium collected
Policies Of Insurance upon Property P4.00 premium or
fraction thereof
.50 Premium charged
Fidelity Bonds and other Insurance
Policies
P4.00 premium or
fraction thereof
.50 Premium charged
Policies of Annuities, Annuity or other
instruments
P200.00 or fraction
thereof
0.50 Amount of premium or
installment payment of
contract price collected
Pre-Need Plans P200.00 or fraction .20 Premium or contribution
collected
Indemnity Bonds P4.00 or fraction
thereof
.30 Premium charged
Certificates of Damage or otherwise and
Certificate or document issued by any
customs officers, marine surveyor, notary
public and certificate required by law or
by rules and regulations of a public office
Each Certificate 15.00
Warehouse Receipts (except if value does
not exceed P200.00)
Each Receipt 15.00
Jai-alai, Horse Race Tickets, lotto or
Other Authorized Number Games
P1.00 cost of ticket
and
Additional P0.10 on
every P1.00 or
fraction thereof if
cost of ticket exceeds
P1.00
.10 Cost of the ticket
Bills of Lading or Receipts
(except charter party)
>P100 not > P1000
>P1000
1.00
10.00

Proxies Each Proxy 15.00
Powers of Attorney Each Document 5.00
Lease and other Hiring agreements of
memorandum or contract for hire, use or
rent of any land or tenements or portions
thereof
First 2,000
For every P1,000 or
fractional part thereof
in excess of the first
P2,000 for each year
of the term of the
contract or
agreement
3.00
1.00

Mortgages Pledges of lands, estate, or
property and Deeds of Trust
First 5,000
On each P5,000 or
20.00
10.00
Amount Secured
Amount Secured

TAXATION LAW 2
fractional part thereof
in excess of 5,000
Deed of Sale, instrument or writing and
Conveyances of Real Property (except
grants, patents or original certificate of
the government)
First 1,000
For each additional
P1,000 or fractional
part thereof in excess
of P1,000
15.00
15.00
Consideration or Fair Market
Value, whichever is higher (if
government is a party, basis
shall be the consideration)
Charter parties and Similar Instruments 1,000 tons and below

1,001 to 10,000 tons

Over 10,000 tons
P500.00 for the 1st 6
months +P50/month
or fraction thereof in
excess of 6 mos
-P1,000 for the 1st 6
mos + P100/month
excess of 6 mos
-P1,500 for the 1st 6
mos + P150/month
excess of 6 mos
Tonnage and duration of the
contract
Assignment or transfer of any mortgage,
lease or policy of insurance
Renewal of any agreement/ contract
At the same rate as
that imposed on the
original instrument

When are shares considered issued? Upon
the acquisition of the stockholder of the attributes
of ownership over the shares (the right to vote,
the right to receive dividends, the right to
dispose, etc., notwithstanding that restrictions on
the exercise of any of these rights may be
imposed by the Corporations Articles and/or by-
laws, the SEC, stockholder agreement, court
order, etc.) which acquisition of such attributes of
ownership shall be manifested by the acceptance
by the Corporation of the stockholders
subscription to its shares of stock. The delivery of
the certificates of stock to the stockholders is NOT
essential for the DST to accrue. [RR 13-2004]
What is the basis of DST? The entire shares
of stock subscribed are considered issued for
purposes of DST, even if not fully paid. [RR 13-
2004]

When is a sale or exchange of shares
taxable? There must be actual or constructive
transfer of beneficial ownership of shares of stock
from one person to another. This may be
manifested by:
a) the clear exercise of attributes of ownership
over such stocks by the transferee, or
b) by an actual entry of a change in the name
appearing in the certificate of stock or in the
stock and transfer book of the corporation or
by any entry indicating transfer of beneficial
ownership in any form of registry including
those of a duly authorized scripless registry,
such as those maintained for or by the
Philippine Stock Exchange. [RR 13-2004]

Documents and Papers Not Subject to
Stamp Tax BAD- STAF- LIMB-PC40

a. Policies of insurance or annuities made or
granted by a fraternal or beneficiary society,
order, association or cooperative company
conducted solely by the members thereof for
their benefit.
b. Certificates of oaths administered to any
government official in his official capacity or
of acknowledgment by any government
official in the performance of his official
duties, written appearance in any court by
any government official, in his official
capacity; certificates of the administration of
oaths to any person as to the authenticity of
any paper required to be filed in court by any
person or party thereto, whether the
proceedings be civil or criminal; papers and

documents filed in courts by or for the
national, provincial, city or municipal
governments; affidavits of poor persons for
the purpose of proving poverty; statements
and other compulsory information required of
persons or corporations by the rules and
regulations of the national, provincial, city or
municipal governments exclusively for
statistical purposes and which are wholly for
the use of the bureau or office in which they
are filed, and not at the instance or for the
use or benefit of the person filing them;
certified copies and other certificates placed
upon documents, instruments and papers for
the national, provincial, city or municipal
governments, made at the instance and for
the sole use of some other branch of the
national, provincial, city or municipal
governments; and certificates of the
assessed value of lands, not exceeding Two
hundred pesos (P200) in value assessed,
furnished by the provincial, city or municipal
Treasurer to applicants for registration of title
to land.

c. Borrowing and lending of securities executed
under the Securities Borrowing and lending
Program of a registered exchange, or in
accordance with regulations prescribed by the
appropriate regulatory authority: Provided,
however, That any borrowing or lending of
securities agreement as contemplated hereof
shall be duly covered by a master securities
borrowing and lending agreement acceptable
to the appropriate regulatory authority, and
which agreements is duly registered and
approved by the Bureau of Internal Revenue.
(BIR).

d. Loan agreements the aggregate of which
does not exceed Two hundred fifty thousand
pesos (P250,000), or any such amount as
may be determined by he Secretary of
Finance, executed by an individual for his
purchase on installment for his personal use
or that of his family and not for business or
resale, barter or hire of a house, lot, motor
vehicle, appliance or furniture: Provided,
however, That the amount to be set by the
Secretary of Finance shall be in accordance

TAXATION LAW 2
with a relevant price index but not to exceed
ten percent (10%) of the current amount and
shall remain in force at least for three (3)
years.

e. Sale, barter or exchange of Shares of stock
listed and traded through the local stock
exchange for a period of five (5) years from
the effectivity of this Act.

f. Assignment or transfer of any mortgage,
lease or policy of insurance, or the renewal or
continuance of any agreement, contract,
charter, or any evidence of obligation or
indebtedness, if there is no change in the
maturity date or remaining period of coverage
from that of the original instrument.

g. Fixed income and other securities Traded in
the secondary market or through an
exchange.

h. Derivatives: Provided, That for purposes of
this exemption, repurchase agreements and
reverse repurchase agreements shall be
treated similarly as derivatives.

i. Interbranch or interdepartmental Advances
within the same legal entity.

j. All Forebearances arising from sales or
service contracts including credit card and
trade receivables: Provided, That the
exemption be limited to those executed by
the seller or service provider itself.

k. Bank deposit accounts without a fixed term or
Maturity.

l. All contracts, deeds, documents and
transactions related to the conduct of
business of the Banko Sentral ng Pilipinas.

m. Transfer of property pursuant to Section
40(c)(2) of the National Internal Revenue
Code of 1997, as amended.

n. Interbank call loans with maturity of not
more than seven (7) days to cover deficiency
in reserves against deposit liabilities,
including those between or among banks and
quasibanks.

One-Transaction Rule:
Where only one instrument was prepared, made
signed and executed to cover a loan
agreement/promissory note, pledge/mortgage,
the documentary stamp tax shall be paid and
computed on the full amount of the loan or credit
granted. In this regard, the instrument shall be
treated as covering only one taxable transaction,
subject to the higher documentary stamp tax.
(RR 9-94, Sec. 8)

Payment of Documentary Stamp Tax
(Sec 200)
WHERE: filed and paid at
authorized agent bank within territorial
jurisdiction of Revenue District Officer which
had jurisdiction over residence or principal
place of business of taxpayer
Revenue District Officer, collection agent,
duly authorized treasurer of municipality or
city where the taxpayer has his residence or
principal place of business

EXCEPTION:
Tax may be paid thru purchase and actual
affixture or imprinting the stamp thru
documentary stamp metering machine as
prescribed by the pertinent rules and regulations.

WHEN:
5 days after close of the month when the taxable
document was made, signed issued, transferred
or accepted. (RR 6-01) [Note: 10-day rule
provided in Sec. 200(B) of the NIRC no longer
applicable)

Applicability of DST Law on Electronic
Documents:

The DST rates shall be applicable on all
documents not otherwise expressly exempted by
the law, notwithstanding that they are in
electronic form. As provided for in RA 8792
(Electronic Commerce Act), electronic documents
are the functional equivalent of a written
document under existing laws, and the issuance
thereof is therefore tantamount to the issuance
of a written document, and therefore subject to
DST. (RR 13-04, Sec. 10)

TAXATION LAW 2
V. V. V. V. REMEDIES REMEDIES REMEDIES REMEDIES
STAGES IN BIR AUDIT EXAMINATION
(Framework of discussion)

Audit Stage/Issuance of Letter of Authority

Pre-Assessment Stage

Formal Assessment Stage

Collection Letter/Warrants

Compromise and Abatement

I. AUDIT STAGE (Issuance of Letter of
Authority)

A. Powers of the Commissioner Relative
to the Audit Process (PATRIA-CED)

1. EXAMINE RETURNS and DETERMINE TAX
DUE (5) Authorizing the examination
of any taxpayer and the assessment of
the correct amount of tax, WON a return
has been filed by such taxpayer.

NOTE: Any return filed with the
Commissioner shall not be withdrawn,
BUT the taxpayer may MODIFY, CHANGE
or AMEND such return within three (3)
years from the date of filing, provided
that no notice for audit or investigation of
such return has been actually served on
the taxpayer.

2. CONDUCT INVENTORY-TAKING,
SURVEILLANCE and to prescribe
presumptive gross sales and receipts
(6C)
Inventory-taking at any time
during the taxable year, for the
purpose of determining the correct
tax liabilities.
Surveillance done if there is
reason to believe that the taxpayer
is not declaring his correct income,
sales or receipts for tax purposes.
Prescribe presumptive gross
sales and receipts if:
It is found that the taxpayer has
failed to issue receipts and
invoices, or
When there is reason to believe
that the books of accounts or
other records do not correctly
reflect the declarations made by
the taxpayer

3. Terminate TAXABLE PERIOD (6D)
Terminating taxable period and ordering
the immediate payment of the tax for
the terminated period and any
remaining tax that is unpaid, when the
taxpayer is:
retiring from business subject to
tax, or
intending to leave the Philippines or
to remove his property therefrom or
to hide or conceal his property
performing any act tending to
obstruct the proceedings for the
collection of the tax for the past or
current quarter or year or to render
the same totally or partially
ineffective unless such proceedings
are begun immediately

4. Prescribe REAL PROPERTY VALUES
(6E) Dividing the Philippines into
different zones or areas, and
determining the FMV of real properties
in each zone or area, upon consultation
with competent appraisers from private
and public sectors. For the purpose of
computing any internal revenue tax, the
value of the property shall be
WHICHEVER IS HIGHER OF:
The fair market value as determined
by the Commissioner, or
The fair market value as shown in
the schedule of values of the
provincial and city assessors

5. Inquire into BANK DEPOSIT ACCOUNTS
(6F) Notwithstanding any contrary
provision of R.A. 1405 (Bank Secrecy
Law) and other general or special laws,
the Commissioner is authorized to
inquire into bank deposits of:
A decedent to determine his gross
estate, and
Any taxpayer who has filed an
application for compromise of tax
liability by reason of financial
incapacity the taxpayer must
waive in writing his privilege under
R.A. 1405 and other relevant laws,
before the Commissioner may
inquire into his bank accounts

6. Accredit and register TAX AGENTS
(6G) Accrediting and registering tax
agents (may be individuals or general
professional partnerships) based on the
following criteria:
Professional competence
Integrity
Moral fitness

7. Prescribe additional PROCEDURAL OR
DOCUMENTARY REQUIREMENTS (6H)
in relation to the manner of
compliance of any requirement in
connection with the submission or
preparation of financial statements
accompanying the tax returns.

8. ACCESS LETTER (5B) Obtaining on a
regular basis, from any person OTHER
THAN the person whose tax liability
is subject to audit or investigation,
or from any office or officer of the
national and local governments,
government agencies or
instrumentalities, including BSP and
GOCCs, any information such as, but
not limited to, costs and volumes of
production, receipts or sales and
gross incomes of taxpayers, and the
names addresses, and financial
statements of corporations, mutual fund
companies, insurance companies etc.

TAXATION LAW 2
NOTE: This is known as the Third Party
Information Rule.

9. INTERPRET TAX LAWS and to DECIDE
TAX CASES (4) shall be under the
exclusive and original jurisdiction of the
Commissioner, subject to review by the
Secretary of Finance.

RMC 44-01
VALIDITY: A ruling by the BIR
Commissioner shall be presumed VALID
unless modified, reversed or superseded by
the Secretary of Finance.
REVIEW: A taxpayer who receives an
adverse ruling from the Commissioner may,
within thirty (30) days from the date of
receipt of such ruling, seek its review by the
Secretary of Finance, either by himself/itself
or though his/its duly authorized
representative.
EFFECT OF REVIEW: A reversal or
modification of the BIR ruling shall
terminate its effectivity upon the receipt by
the taxpayer or the BIR of written notice of
reversal or modification, whichever came
earlier.
NOTE: DOF Order 7-02 added that the
Secretary of Finance may review the rulings
MOTU PROPRIO.

Section 246, NIRC: Non-retroactivity of
Rulings
Any revocation, modification or reversal ofany
of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive
application if the revocation, modification or
reversal will be prejudicial to the taxpayers,

EXCEPTION:
a) Where the taxpayer deliberately misstates
or omits material facts from his return or
any document required of him the BIR;
b) Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the ruling is based; or
c) Where the taxpayer acted in bad faith.

B. Letter of Authority

Q: What is a letter of authority?
An official document that empowers a
Revenue Officer to examine and scrutinize a
taxpayers books of accounts and other
accounting records, in order to determine the
taxpayers correct internal revenue tax
liabilities.

Q: Who issues the Letter of Authority?
Commissioner for those units reporting
directly to him
Regional directors for taxpayers covered by
his particular region. If the Commissioner has
already issued an LA to investigate a
particular taxpayer, the Regional director shall
desist from issuing another LA for the same
taxpayer.

Q: What are the cases which need not be
covered by a valid LA?
Cases involving civil/criminal tax fraud which
fall under the jurisdiction of the tax fraud
division of the Enforcement Services, and
Policy cases under audit by the special teams
in national offices

II. PRE-ASSESSMENT STAGE

A. Step 1: Issuance of Notice of
Informal Conference

What is a notice of informal
conference?
A written notice informing a taxpayer
that the findings of the audit conducted
on his books of accounts and
accounting records indicate that
additional taxes or deficiency
assessments have to be paid.
The taxpayer shall then have fifteen
(15) days from the date of his receipt of
the Notice for Informal Conference to
explain his side.

B. Step 2: Informal Conference

What matters are taken up during
the informal conference?
1. Discussion on the merits of the
assessment
2. Attempt of taxpayer to convince the
examiner to conduct a re-
investigation and/or re-examination
3. Evaluate if submission of the waiver
of the statute of limitations is
necessary because evaluation
may extend beyond three years
4. Taxpayer to advise the examiner if
position paper will be submitted

What is a jeopardy assessment?
A tax assessment made by an
authorized Revenue Officer without the
benefit of complete or partial audit, in
light of the ROs belief that the
assessment and collection of the
deficiency tax will be jeopardized by
delay caused by the taxpayers failure
to:
i. Comply with audit and
investigation requirements to
present his books of accounts
and/or pertinent records
ii. Substantiate all or any of the
deductions, exemptions or credits
claimed in his return.
It is usually issued when statutory
prescriptive periods for the assessment
or collection of taxes are about to lapse
due principally to the taxpayers fault.

C. Step 3: Issuance of Pre-
Assessment Notice

What is a pre-assessment notice
(PAN)?
A communication issued by the Regional
Assessment Division or any other concerned
BIR office, informing a taxpayer who has
been audited of the findings of the Revenue
Officer, following the review of these
findings.
The assessment shall be:
in writing, and

TAXATION LAW 2
should inform the taxpayer of the law
and the facts on which the assessment is
made;
otherwise, the assessment shall be void.
(Sec. 228, NIRC)

If the taxpayer disagrees with the findings
in the PAN, he has fifteen (15) days from
his receipt of the PAN to file a written reply
contesting the proposed assessment.

PAN no longer required when :

(a) The finding for any deficiency tax is the
result of MATHEMATICAL ERROR in the
computation of the tax as appearing on
the face of the return; or
(b) A DISCREPANCY has been determined
between the TAX WITHHELD and the
amount ACTUALLY REMITTED by the
withholding agent; or
(c) A taxpayer who opted to claim a refund or
tax credit of excess creditable withholding
tax for a taxable period was determined
to have carried over and automatically
applied the same amount claimed against
the estimated tax liabilities for the taxable
quarter or quarters of the succeeding
taxable year; OR
(d) The EXCISE TAX due on excisable articles
has not been paid; or
(e) An article locally purchased or imported
by an exempt person, such as, but not
limited to, vehicles, capital equipment,
machineries and spare parts, has been
sold, traded or transferred to a non-
exempt person. (Sec. 228, NIRC)

III. FORMAL ASSESSMENT STAGE

What is a Notice of Assessment (Final
Assessment Notice FAN or Formal
Letter of Demand)?
A declaration of deficiency taxes issued to a
taxpayer who fails to respond to a pre-
assessment notice within the prescribed
period of time, or whose reply to the PAN
was found to be without merit. This is
commonly known as the Final Assessment
Notice (FAN).

An assessment contains not only a
computation of tax liabilities, but also a
demand for payment within a prescribed
period. The ultimate purpose of assessment
is to ascertain the amount that each
taxpayer is to pay. An assessment is a
notice to the effect that the amount therein
stated is due as tax and a demand for
payment thereof. (Tupaz v. Ulep, 1999)

The formal letter of demand shall be issued
by the Commissioner or his duly authorized
representative. The letter of demand
calling for the payment of the taxpayers
deficiency taxes shall state the FACTS, the
LAW, RULES and REGULATIONS or
JURISPRUDENCE on which the assessment
is based, OTHERWISE, the formal letter of
demand or assessment notice shall be
VOID. (RR 12-99)

NOTE:
A follow-up letter/demand letter for
payment of taxes is considered a notice
of assessment. [REPUBLIC vs. CA
and NIELSON & CO. (April 30,
1987)]
Where the taxpayer is appealing on the
ground that the assessment is
erroneous, it is incumbent upon him to
prove what is the correct and just
liability by a full and fair disclosure of
all pertinent data. [Bonifacio Sy Po v.
CTA]

Within what time may the
Commissioner issue a notice of
assessment?

If the taxpayer filed a return
internal revenue taxes shall be
assessed within three years after the
last day prescribed by law for the filing
of the return. If a return is filed
beyond the period prescribed by law,
the three-year period shall be counted
from the day the return was filed. A
return filed before the last day
prescribed by law for filing shall be
considered as filed on the last day.
(Sec. 203, NIRC)
NOTE: In short, the period for
assessment is within three years from
the time the return is filed or from the
time the return is due, WHICHEVER IS
LATER.

If the taxpayer DID NOT file a
return internal revenue taxes shall
be assessed within ten years after
the discovery of the failure to file the
return (Sec. 222a, NIRC)

If the taxpayer filed a false or
fraudulent return with intent to
evade tax internal revenue taxes
shall be assessed within ten years
after the discovery of the falsity or
fraud (Sec. 222a, NIRC)

o Fraud or falsity on the return with intent
to evade payment of tax is a question of
fact and the circumstances constituting
fraud must be alleged and proved in the
court below. The finding of the trial court
as to its existence and non-existence is
final and cannot be reviewed by the
Supreme Court unless clearly shown to be
erroneous. [CIR V. Ayala Securities
(1976)]

o Q: Are there tax returns which are
false but not fraudulent? YES. There
must be a distinction between false
returns (due to mistakes, carelessness or
ignorance) and fraudulent returns (with
intent to evade taxes). The fraud
contemplated by law is actual and not
constructive, and must amount to
intentional wrongdoing with the sole
object of avoiding the tax. [Aznar v. CTA
(1974)]
WAIVER: The taxpayer and the
Commissioner may agree in writing,
before the expiration of the time

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TAXATION LAW 2
prescribed in Sec. 203, to extend the
period of assessment (Sec. 222b, NIRC)
The waiver of prescription must be
executed properly per RMO 20-90,
otherwise, invalid and results to
prescription of the right to
assess/collect. [PHIL JOURNALISTS
INC. v. CIR (December 16, 2004)]
Requirements under RMO 20-90:
1. definite agreed date,
2. date of acceptance indicated,
and
3. taxpayer must be furnished with
a copy of the waiver.

Q: What is the nature of prescription on
the right to assess?
The law on prescription, being a remedial
measure, should be LIBERALLY CONSTRUED
in order to afford protection. As a corollary,
the exceptions to the law on prescription
should be clearly construed. Hence,
negligence or oversight on the part of the
BIR cannot prejudice taxpayers, considering
that the prescriptive period was precisely
intended to give them peace of mind. [CIR
v. Goodrich Philippines (1999)]

RMC No. 48-90 Counting of the
Prescriptive Periods (April 23,
1990)
The 3-year prescriptive period expires
on the 1,095
th
day, notwithstanding the
fact that within the period, there is a
leap year which is of 366 days. This
principle applies to ALL
prescriptive periods under the
Code. (applied in ASIABANK v. CIR,
CTA Case No.6095, Oct. 9, 2001)
When is an assessment deemed made?
An assessment is deemed made when the
demand letter or notice is RELEASED,
MAILED OR SENT by the BIR to the
taxpayer. The law does not require that the
taxpayer receive the notice within the
three-year or ten-year period. [CIR vs.
BAUTISTA (May 27, 1959)]

If the taxpayer does not agree with the
assessment, what is his REMEDY?
o To contest an assessment by filing a
letter of PROTEST stating in detail his
reasons for contesting the assessment.
o When no protest is seasonably made by
the taxpayer, the assessment shall
become final and unappealable, and thus
the tax shall be collectible.

Q: What is the nature of an assessment
when it is final and executory?
It is in the nature of an enforcement
judgment such that no inquiry can be made
thereon on the merits of the original case.

Within what time may the taxpayer
protest the assessment?
o Within thirty (30) days by filing a
request for reconsideration or
reinvestigation from receipt of the
assessment.
o Within sixty (60) days from filing of
the protest, all relevant supporting
documents must be submitted,
otherwise the assessment shall become
final. (228)

What are the characteristics of a valid
protest?
A protest is considered validly made if it
satisfies the following conditions:

1) it is made in writing, and addressed
to the Commissioner of Internal
Revenue
2) it contains the information the
following information (from RR 12-85):
name of the taxpayer and address
for the immediate past three
taxable years
nature of request whether
reinvestigation or reconsideration
specifying newly-discovered
evidence he intends to present if it
is a request for reinvestigation
the taxable periods covered
assessment number
date of receipt of assessment notice
or letter of demand
itemized statement of the findings
to which the taxpayer agrees as a
basis for computing the tax due,
which amount should be paid
immediately upon the filing of the
protest. For this purpose, the
protest shall not be deemed validly
filed unless payment of the agreed
portion of the tax is paid first
the itemized schedule of the
adjustments with which the
taxpayer does not agree
a statement of facts and/or law in
support of the protest.
3) It states the FACTS, applicable LAW,
RULES and REGULATIONS or
JURISPRUDENCE on which his protest is
based, otherwise the protest shall be
considered void and without force and
effect.
4) It is filed within the period prescribed by
law

What should the taxpayer do if his
protest is denied or is not acted upon
by the Commissioner?

Situation 1: If the Commissioner
DENIES THE PROTEST filed by the
taxpayer the taxpayer may appeal to
the Court of Tax Appeals within thirty
days from receipt of the decision
denying the protest (Sec. 228, NIRC)

Where there is a request for
reconsideration, final demand letter
from BIR is considered a decision on
a disputed or protested assessment
which is therefore appealable to the
CTA. [CIR v. ISABELA CULTURAL
CORP. (July 11, 2001)]

Situation 2: If the Commissioner did
NOT ACT UPON THE PROTEST within
one hundred and eighty days from
the time the documents were
submitted the taxpayer may either:

TAXATION LAW 2
o Appeal to the CTA within thirty days
from the lapse of the 180-day
period OR
o Wait until the Commissioner decides
before he elevates the case to the
CTA

NOTE: If Situation 1 occurs and the
taxpayer does not file a protest within the
prescribed period, the assessment becomes
FINAL, EXECUTORY and DEMANDABLE. But
if the Situation 2 occurs and the taxpayer
does not file a protest within the prescribed
period, the assessment DOES NOT become
FINAL, EXECUTORY and DEMANDABLE. In
cases of inaction by the Commissioner,
Section 228 of the Tax Code merely gave
the taxpayer an OPTION: first, he may
appeal to the Court of Tax Appeals within
thirty days from the lapse of the 180-day
period, or second, he may wait until the
Commissioner decides on his protest before
he elevates his case. [LASCONA LAND Co
vs. CIR (January 4, 2000)]

When does the 30-day period to appeal
in Situation 1 commence to run?
The 30-day period starts when the taxpayer
receives the decision of the Commissioner
denying the protest. The decision of the
Commissioner must categorically state that
his action on the disputed assessment
is final, otherwise period to appeal will not
commence to run. [ADVERTISING
ASSOCIATES vs. CA (December 26,
1984)]
NOTE: A Division of the CTA shall hear
the appeal. (Sec. 11, RA 1125 as
amended by RA 9282 [2004])

If the taxpayer is not satisfied with the
CTA Divisions ruling, what is his
REMEDY?
FIRST, he may file a motion for
reconsideration before the same
Division of the CTA within fifteen (15)
days from notice thereof. (Sec. 11, RA
1125 as amended by RA 9282 [2004])
THEN, a party adversely affected by a
resolution of a Division of the CTA on a
motion for reconsideration may file a
petition for review with the CTA en
banc. (Sec. 18, RA 1125 as amended
by RA 9282 [2004])

If the taxpayer is not satisfied with the
decision of the CTA en banc, what is his
REMEDY?
A party adversely affected by a decision or
ruling of the CTA en banc may file with the
Supreme Court a verified petition for review
on certiorari pursuant to Rule 45 of the 1997
Rules of Court. (Sec. 19, RA 1125 as
amended by RA 9282 [2004]) .

EFFECTS OF RA 9282 ON THE CTAS JURISDICTION:
The CTA shall exercise

A. EXCLUSIVE APPELLATE JURISDICTION to review by appeal:
Decisions of the Commissioner
of Internal Revenue
1. disputed assessments,
2. refunds of internal revenue taxes, fees or other charges,
3. penalties in relation thereto, or
4. other matters arising under the National Internal Revenue
or other laws administered by the Bureau of Internal
Revenue;
Inaction by the Commissioner of
Internal Revenue
5. disputed assessments,
6. refunds of internal revenue taxes, fees or other charges,
7. penalties in relations thereto, or
8. other matters arising under the National Internal Revenue
Code or other laws administered by the Bureau of
Internal Revenue, where the National Internal Revenue
Code provides a specific period of action, in which case
the inaction shall be deemed a denial;
Decisions, orders or resolutions
of the Regional Trial Courts
local tax cases originally decided or resolved by them in the
exercise of their
original or appellate jurisdiction;
Decisions of the Commissioner
of Customs
liability for customs duties, fees or other money charges,
seizure, detention or release of property affected,
fines, forfeitures or other penalties in relation thereto, or
other matters arising under the Customs Law or other laws
administered by the Bureau of Customs;
Decisions of the Central Board
of Assessment Appeals
exercise of its appellate jurisdiction over cases involving the
assessment and taxation of real property originally decided by
the provincial or city board of assessment appeals;
Decisions of the Secretary of
Finance
customs cases elevated to him automatically for review from
decisions of the Commissioner of Customs which are adverse to
the Government under Section 2315 of the Tariff and Customs
Code;
Decisions of the Secretary of
Trade and Industry
(nonagricultural product,
commodity or article)
Secretary of Agriculture
(agricultural product,
commodity or article)
involving dumping and countervailing duties under Section
301 and 302, respectively, of the Tariff and Customs Code,
and

safeguard measures under Republic Act No. 8800, where
either party may appeal the decision to impose or not to
impose said duties.

TAXATION LAW 2
B. Jurisdiction over cases involving CRIMINAL
OFFENSES:

1. EXCLUSIVE ORIGINAL JURISDICTION
over all criminal offenses arising from
violations of the National Internal Revenue
Code or Tariff and Customs Code and other
laws administered by the Bureau of
Internal Revenue or the Bureau of
Customs:
EXCEPTION: That offenses or felonies
where the principal amount of taxes
and fees, exclusive of charges and
penalties, claimed is less than One
million pesos (P1,000,000.00) or
where there is no specified amount
claimed shall be tried by the regular
Courts and the jurisdiction of the
CTA shall be appellate.
NOTE: Any provision of law or the Rules of
Court to the contrary notwithstanding, the
criminal action and the corresponding civil
action for the recovery of civil liability for
taxes and penalties shall at all times be
simultaneously instituted with, and jointly
determined in the same proceeding by the
CTA, the filing of the criminal action being
deemed to necessarily carry with it the
filing of the civil action, and no right to
reserve the filling of such civil action
separately from the criminal action will be
recognized.

2. EXCLUSIVE APPELLATE JURISDICTION
in criminal offenses:

a) Over appeals from the judgments,
resolutions or orders of the Regional Trial
Courts in tax cases originally decided by
them, in their respected territorial
jurisdiction.

b) Over petitions for review of the judgments,
Courts in the exercise of their appellate
jurisdiction over tax cases originally
decided by the Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit
Trial Courts in their respective jurisdiction.

C. Jurisdiction over TAX COLLECTION CASES:

1. EXCLUSIVE ORIGINAL JURISDICTION
in tax collection cases involving final and
executory assessments for taxes, fees,
charges and penalties.
EXCEPTION: Collection cases where
the principal amount of taxes and
fees, exclusive of charges and
penalties, claimed is less than One
million pesos (P1,000,000.00)
shall be tried by the proper
Municipal Trial Court, Metropolitan
Trial Court and Regional Trial
Court.

2. EXCLUSIVE APPELLATE
JURISDICTION in tax collection cases:

a. Over appeals from the judgments,
Courts in tax collection cases originally
decided by them, in their respective
territorial jurisdiction.

b. Over petitions for review of the
judgments, resolutions or orders of the
Regional Trial Courts in the Exercise of
their appellate jurisdiction over tax
collection cases originally decided by the
Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts,
in their respective jurisdiction.

IV. COLLECTION LETTER/WARRANTS

A. Collection of Deficiency Taxes

Within what time period must
collection of internal revenue taxes
be made?

Return filed was
NOT false or
fraudulent
No return filed, or
the return was false
or fraudulent.
Collection with PRIOR
ASSESSMENT -
should be made
within three years
from the date of
assessment of the
tax.
by distraint or
levy, or by judicial
proceedings
Collection with PRIOR
ASSESSMENT - should
be made within five
years from the date
of assessment (based
on 222c)

by distraint or levy,
or by judicial
proceedings
Collection WITHOUT
PRIOR ASSESSMENT
should be made
within three years
from the date of filing
of return or date
return is due,
whichever is LATER
(based on 203)
by judicial
proceedings
Collection WITHOUT
PRIOR ASSESSMENT
should be made
within ten years
after the discovery of
the falsity, fraud or
omission to file a
return.

by judicial
proceedings

If tax was assessed within the different
period agreed upon by the Commissioner
and the taxpayer, it may be collected by
distraint or levy or by a proceeding in
court within the period agreed upon in
writing before the expiration of the 5-yr
period. (Sec. 222d, NIRC)

When shall the period for assessment or
collection of taxes be suspended? (223)
The running of the statute of limitations provided
in 203 and 222 shall be suspended for the
period: (P-CORN)

1. During which the commissioner is
Prohibited from making the assessment
or beginning distraint or levy or a
proceeding in court, and for sixty (60)
days thereafter

2. When the taxpayer requests for a
Reinvestigation which is granted by the
Commissioner

CIR vs. WYETH (September 30, 1991)
The statutory period of limitation for
collection may be interrupted when, by
the taxpayers repeated requests, the
government has been, persuaded to
postpone collection to make him feel the

TAXATION LAW 2
demand was not unreasonable or that no
harassment or injustice was meant by
government.

RR 12-85 (Difference between
Reconsideration &
Reinvestigation)
RECONSIDERATION refers to a
plea of re-evaluation of the
assessment on the basis of existing
records WITHOUT NEED OF
ADDITIONAL EVIDENCE. It may
involve both question of fact or of law
or both

REINVESTIGATION refers to a
plea of re-evaluation of an
assessment on the basis of NEWLY-
DISCOVERED EVIDENCE that a
taxpayer intends to present in the
reinvestigation. It may also involve a
question of fact or law or both.

PHIL GLOBAL COMMUNICATION
vs. CIR (October 31, 2006) A re-
evaluation of existing records which
results from a request for
reconsideration does not toll the
running of the prescription period for
the collection of an assessed tax.

3. When the taxpayer Cannot be located in
the Address given by him in the return
filed upon which a tax is being assessed
or collected, but if the taxpayer informs
the Commissioner of any change in
address, the running of the statute of
limitations shall not be suspended

4. When the warrant of distraint or levy is
duly served upon the taxpayer, his
authorized representative, or a member
of his household with sufficient discretion,
and No Property is located

5. When the taxpayer is Out of the
Philippines

B. Remedies of the taxpayer against a
tax erroneously or illegally paid

When may taxes be refunded or
credited?
Taxes may be refunded or credited in the
following cases:
Taxes erroneously or illegally
assessed or collected
Penalties imposed without authority
Value of internal revenue stamps
when they are returned in good
condition by the purchaser
Unused stamps that have been
rendered unfit for use (Commissioner
may redeem, change or refund their
value upon proof of destruction)
Any sum alleged to have been
excessively or in any manner
wrongfully collected

Q: What is the nature of a claim for
refund?
It partakes of the nature of an exemption and
is strictly construed against the claimant. The
burden of proof is on the taxpayer claiming
the refund that he is entitled to the same.
[CIR v. Tokyo Shipping (1995)]

Q: When are there erroneously paid, or
illegally assessed or collected taxes?
Taxes are erroneously paid when a taxpayer
pays under a mistake of fact, such as, he is
not aware of an existing exemption in his
favor at the time that payment is made.
Taxes are illegally collected when payments
are made under duress.

Q: What is the difference between a tax
credit and refund?
REFUND takes place when there is actual
reimbursement. TAX CREDIT takes place
upon the issuance of a tax certificate or tax
credit memo, which can be applied against
any sum that may be due and collected from
the taxpayer.

Q: Is payment under protest necessary
in claims for refund?
No. Section 229 of the NIRC is specific on this
point when it provides that a suit or
proceeding for tax refund may be maintained
whether or not such tax, penalty or sum has
been paid under protest or duress.

What is the procedure for obtaining a
refund or tax credit?
First, the taxpayer must file a claim for
refund before the Commissioner within two
years from the date of payment. (Sec. 229,
NIRC) [GENERAL RULE]

EXCEPTIONS to the rule requiring a
claim for refund: When on the face
of the return upon which payment was
made, such payment appears clearly to
have been erroneously paid (e.g.
mathematical errors), the Commissioner
may refund or credit the tax even without
a written claim therefor.
NOTE: A return filed showing an
overpayment shall be considered as a
written claim for credit or refund.
(Sec. 204C, NIRC)

But how shall the date of payment be
determined?

i. If the income tax is withheld at
source the taxpayer is deemed to
have paid his tax liability at the end of
the taxable year.

GIBBS vs. COMMISSIONER (November
29, 1965) A taxpayer whose income is
withheld at the source will be deemed to
have paid his tax liability when the same
falls due at the end of the tax year. It is
from this latter date then, or when the tax
liability falls due, that the 2-year
prescriptive period starts to run with
respect to payments effected thru the
withholding tax system.

ii. If the income is paid on a
quarterly basis the two-year period
is counted from the time of filing the
final adjustment return.

TAXATION LAW 2
CIR vs. TMX SALES (January 16, 1992)
When a tax is paid in installments, the
prescriptive period should be counted
from the date of final payment or the
last installment. This rule proceeds from
the theory that there is no payment until
the entire tax liability is completely paid.
Installments should be treated as
advances or portions of the annual tax
due.

What should the taxpayer do if his claim
for refund is denied or is not acted upon
by the Commissioner?

o SITUATION 1: The Commissioner
denies the claim for refund the
taxpayer may appeal to the CTA within
thirty (30) days from the receipt of the
Commissioners decision AND within two
years from the date of payment. (Note
that 229 states that no such suit or
proceeding shall be filed after the
expiration of the 2-year period regardless
of any supervening cause that may arise
after payment)

o SITUATION 2: The Commissioner does
not act on the claim, and the two-year
period is about to lapse the taxpayer
must file a claim before the CTA before
the 2-year period lapses, otherwise he
may no longer file a claim before the CTA in
case the Commissioner renders an adverse
decision beyond the 2-year period.

NOTE HOWEVER! Is the two-year
period jurisdictional with respect to
the CTA?
NO. Even if the two-year period had
already lapsed, the same is not a
jurisdictional defect which, upon grounds
of justice and equity, may be set aside by
the court. [(COMMISSIONER vs.
PHILAMLIFE (May 29, 1995)]

If the Commissioner grants the refund,
within what time must it be claimed?
Within five years from the date such
warrant or check was mailed or delivered,
otherwise it shall be forfeited in favor of the
government and the amount thereof shall
revert to the general fund.

What can be done with a Tax Credit
Certificate?
Tax credit certificates (TCCs) can be applied
against all internal revenue taxes, excluding
withholding tax. TCCs which remain
unutilized after five years from the date of
issue shall be considered as invalid, unless
revalidated. If not revalidated, the amount
covered by the TCC shall revert to the
general fund

C. Remedies of the State for Collection
of Taxes
GENERALLY, the remedies of distraint,
levy or civil or criminal action may be
pursued SIMULTANEOUSLY. (Sec. 205,
NIRC)
Remedies of distraint and levy
may be repeated if necessary
until the full amount due,
including all expenses, is
collected. (Sec. 217, NIRC)
HOWEVER, the remedies of
distraint and levy shall not be
available where the amount of
the tax involved is not more than
One hundred pesos.

o Q: When may the government
avail of the remedies of
collection? When the assessment
shall have become final, executory
and demandable.

NOTE: A court MAY NOT GRANT AN
INJUNCTION to restrain the collection of any
national internal revenue tax, fee or charge
imposed under the NIRC. (Sec. 218, NIRC)

EXCEPTION: Under Section 11 of RA
1125, as amended by RA 9282, suspension
is allowed when the following conditions
concur:

1. it is an appeal to the CTA from a
decision of the Commissioner of
Internal Revenue or Commissioner of
Customs or the Regional Trial Court,
provincial, city or municipal treasurer
or the Secretary of Finance, the
Secretary of Trade and Industry and
Secretary of Agriculture, as the case
may be, and

2. in the opinion of the Court of Tax
Appeals, the collection may jeopardize
the interest of the Government and/or
the taxpayer.

Q: In case of suspension, what may the
taxpayer be required to do?
Either to deposit the amount claimed or to
file a surety bond for not more than double
the amount with the Court.

Q: What are tax liens? (Sec. 219, NIRC)
When a taxpayer neglects or refuses to pay
his internal revenue tax liability after
demand, the amount so demanded shall be a
lien in favor of the government from the time
the assessment was made by the CIR until
paid with interest, penalties, and costs that
may accrue in addition thereto upon ALL
PROPERTY AND RIGHTS TO PROPERTY
BELONGING to the taxpayer.

HOWEVER, the lien shall not be valid
against any mortgagee, purchaser or
judgment creditor until NOTICE of such lien
shall be filed by the Commissioner in the
Office of the Register of Deeds of the
province or city where the property of the
taxpayer is situated or located.

o Q: What is the difference between
seizure under forfeiture and a seizure to
enforce a tax lien? In the former all the
proceeds derived from the sale of the thing
forfeited are turned over to the Collector of
Internal Revenue; in the latter, the residue of
such proceeds over and above what is
required to pay the tax sought to be realized,
including expenses, is returned to the owner
of the property. [BPI v. Trinidad]

TAXATION LAW 2

ADMINISTRATIVE REMEDIES

1. Distraint-involves the SEIZURE by the
Government of PERSONAL PROPERTY,
tangible or intangible, to enforce the
payment of taxes; followed by the PUBLIC
SALE of such property, if the taxpayer fails to
pay the taxes voluntarily.

What are the kinds of distraint?
a. Actual Distraint resorted to when there
is ACTUAL delinquency in tax payment

b. Constructive Distraint is a preventive
remedy which aims at forestalling a
possible dissipation of the taxpayers
assets when delinquency sets in. Hence,
no actual delinquency in payment is
necessary.

How is ACTUAL distraint of personal
property effected?

Upon failure to pay the delinquent tax at the
time required, the proper officer shall SEIZE
and DISTRAINT any GOODS, CHATTELS, or
EFFECTS, and the PERSONAL PROPERTY,
including STOCKS and other SECURITIES,
DEBTS, CREDITS, BANK ACCOUNTS and
INTERESTS in and RIGHTS to personal
property of the taxpayer in sufficient quantity
to satisfy the tax, expenses of distraint and
the cost of the subsequent sale.

Who is the proper officer authorized to
issue the warrant of distraint?
a. Commissioner or his duly authorized
representative if the amount involved is
in EXCESS of One million pesos
(P1,000,000)
b. Revenue District Officer if the amount
involved is One million pesos (P1,000,000)
or LESS. (Sec. 207A, NIRC)

The officer serving the warrant of distraint
shall:
make an account of the goods, chattels,
effects or other personal property
distrained.
shall leave a copy with the person from
whom the goods were taken, or at the
dwelling or place of business of such
person with someone of suitable age and
discretion.
indicate statement of the sum demanded
and the time and place of sale of the
distrained property. (Sec. 208, NIRC)

How are different kinds of personal property
distrained?

Stocks and other securities by serving a
copy of the warrants of distraint on the taxpayer,
AND upon the president, manager, treasurer or
other responsible officer of the corporation,
company or association which issued the stocks
or securities.

Debts and credits by leaving with the
person owing the debts or having in his
possession or under his control such credits, or
with his agent, a copy of the warrant of distraint.
The person owing the debts shall then pay the
Commissioner instead of his creditor (taxpayer)
on the strength of such warrant.

Bank accounts by serving a warrant of
garnishment upon the taxpayer AND upon the
president, manager, treasurer or other
responsible officer of the bank. The bank shall
then turn over to the Commissioner so much of
the bank accounts as may be sufficient to satisfy
the claim of the Government. (NOTE: distraint
of bank accounts is called GARNISHMENT)

What is the remedy of the taxpayer once the
Commissioner or other proper officer issues
the warrant of distraint?
The taxpayer may request that the warrant be
lifted. The commissioner may, in his discretion,
allow the lifting of the order of distraint. He may
ask for a bond as a condition for the cancellation
of the warrant. (Sec. 207, NIRC)

If the taxpayer does not ask for the lifting of
the warrant, what shall be done with the
seized properties?
The properties will be SOLD in a PUBLIC SALE,
and the procedure shall be as follows:

(1) The Revenue District Officer or his duly
authorized representative (not the officer who
served the warrant), shall cause a notification
of the public sale to be posted in not less than
two (2) public places in the municipality or
city (one of which is the Office of the Mayor)
where the distraint was made. The notice
shall specify the time and place of the sale.
The time of sale shall not be less than twenty
(20) days after notice to the owner and the
publication or posting of such notice.

(2) At the time of the public sale, the revenue
officer shall sell the goods, chattels, or
effects, or other personal property, including
stocks and other securities so distrained at a
PUBLIC AUCTION, to the HIGHEST BIDDER
for CASH or with the approval of the
Commissioner, through a DULY LICENSED
COMMODITY or STOCK EXCHANGES.

(3) Any residue over and above what is required
to pay the entire claim, including expenses of
sale and distraint, shall be RETURNED to the
owner of the property sold. Expenses shall
be limited to actual expenses of SEIZURE and
PRESERVATION of the property pending the
sale, no charge shall be imposed for the
services of the local internal revenue officer
or his deputy. (209)

(4) If the amount offered by the highest bidder is
not equal to the amount of the tax or is very
much less than the actual market value of the
articles offered for sale, the Commissioner or
his deputy may purchase the same in behalf
of the National Government for the amount of
taxes, penalties and costs due thereon. The
property so purchased may thereafter be
resold by the Commissioner or his deputy.
(212)

(5) If the proceeds from the sale of the distrained
properties is not sufficient to satisfy the tax
delinquency, the Commissioner or his duly
authorized representative shall within thirty

TAXATION LAW 2
(30) days after execution of the distraint,
proceed with the levy on the taxpayers real
property. (207B)

May the taxpayer recover his property prior
to consummation of the sale?
YES. If at any time prior to the consummation of
the sale all proper charges are paid to the officer
conducting the sale, the goods or effects
distrained shall be restored to the owner. (Sec.
210, NIRC)

How is CONSTRUCTIVE distraint effected?
a. By requiring a taxpayer or any person in
possession or control of such property to
SIGN a RECEIPT covering the property
distrained and obligate himself to PRESERVE
THE SAME INTACT and UNALTERED and NOT
TO DISPOSE of the same in any manner
whatever, without the Commissioners
authority.
b. If the taxpayer or person in possession or
control refuses to sign the receipt, the
revenue officer shall prepare a list of the
property and leave a copy of such list in the
premises where the properties are located, in
the presence of two (2) witnesses.

Q: When may property of the taxpayer be
placed in constructive distraint?
The property of a taxpayer may be placed in
constructive distraint, if in the Commissioners
opinion:
the taxpayer is retiring from any business
subject to tax
the taxpayer is intending to leave the
Philippines
the taxpayer is intending to remove his
property from the Philippines or to hide or
conceal his property
the taxpayer is planning to perform any act
tending to obstruct the proceedings for
collecting the tax due or which may be due
from him (206)
NOTE: In constructive distraint, the
property is not actually confiscated or
seized by the revenue officer

2. Levy is the same act of seizure as in
distraint, but in this case, of real property, an
interest in or rights to such property in order
to enforce the payment of taxes. The real
property under levy shall be sold in a public
sale, if the taxes involved are not voluntarily
paid following such levy.

How is levy of real property effected?

1) After the expiration of time required to
pay the delinquent tax, real property may
be levied upon, BEFORE,
SIMULTANEOUSLY or AFTER the distraint
of personal property belonging to the
delinquent. The IR officer designated by
the Commissioner or his duly authorized
representative shall prepare a DULY
AUTHENTICATED CERTIFICATE showing
the name of the taxpayer and the
amounts of tax and penalty due from
him. This certificate shall operate with
the force of LEGAL EXECUTION
throughout the Philippines.

2) The certificate shall contain a description
of the property upon which levy is made.
At the same time, written notice of the
levy shall be mailed to or served upon
the Register of Deeds of the province or
city where the property is located and
upon the taxpayer (if he is absent from
the Philippines, to his agent or manager
of business in respect to which the
liability arose or to the occupant of the
property in question)

3) Within twenty (20) days after the levy,
the officer conducting the proceedings
shall proceed to advertise for SALE the
property or a portion thereof as may be
necessary to satisfy the claim and costs
of sale. Such advertisement shall cover a
period of at least thirty (30) days. The
notice shall be posted at the main
entrance of the city or municipal all AND
in a public and conspicuous place in the
barrio or district where the real property
lies. The notice must also be published in
a newspaper of general circulation in the
place where the property is located, once
a week for three (3) weeks.
CONTENTS of notice: statement of
amount of taxes, and penalties due,
time and place of sale, name of
taxpayer, short description of
property.

4) The sale shall be held either at the main
entrance of the municipal or city hall or
on the premises to be sold. Property will
be awarded to the highest bidder. In
case the proceeds of the sale exceeds the
claim and costs of sale, the excess shall
be turned over to the owner of the
property. (213)

5) If there is no bidder for the real property
OR if the highest bid is not sufficient to
pay the taxes, penalties and costs, the IR
Officer conducting the sale shall declare
the property FORFEITED to the
GOVERNMENT in satisfaction of the claim.
(Sec. 215, NIRC) The Commissioner may
resell the property at a public auction
after the giving of not less than twenty
(20) days notice. (Sec. 216, NIRC)

May the taxpayer recover his property
prior to consummation of the sale?
YES. At any time before the day fixed for the
sale, the taxpayer may discontinue all
proceeding by paying the taxes, penalties and
interest. (Sec. 213, NIRC)

May the taxpayer recover his property
after the consummation of the sale?
YES. Within one (1) year from the date of
sale, the taxpayer or anyone for him, may pay
to the Revenue District Officer the total amount
of the following:
public taxes
penalties
interest from the date of delinquency to the
date of sale
interest on said purchase price at the rate
of fifteen percent (15%) per annum from
the date of sale to the date of redemption.
(NOTE: if the property was forfeited in

TAXATION LAW 2
favor of the government, the redemption
price shall include only the taxes, penalties
and interest plus costs of sale no interest
on purchase price since the Govt did not
purchase the property anyway, it was
forfeited)
NOTE: The taxpayer-owner shall not be
deprived of possession of the said property
and shall be entitled to rents and other
income until the expiration of the period for
redemption (Sec. 214, NIRC)

JUDICIAL PROCEEDINGS
Civil and criminal action and proceedings
instituted in behalf of the Government under
the authority of this Code or other law
enforced by the BIR
shall be BROUGHT IN THE NAME OF THE
GOVERNMENT of the Philippines
shall be CONDUCTED BY LEGAL
OFFICERS OF THE BIR
No civil or criminal action for the recovery of
taxes or the enforcement of any fine, penalty
or forfeiture under the NIRC shall be filed in
court without the APPROVAL OF THE
COMMISSIONER approval of the
Commissioner. (Sec. 220, NIRC)

Q: How is a criminal action a collection
remedy?
The judgment in the criminal case shall:
impose the penalty; and
order payment of the taxes subject of
the criminal case as finally decided
by the Commissioner. (Sec. 205,
NIRC)

Q: Is an assessment necessary before
filing a criminal charge for tax evasion?
No, an assessment is not necessary before a
criminal charge can be filed. The criminal
charge need only be proved by a prima facie
showing of a willful attempt to file taxes, such
as failure to file a required tax return. [CIR v.
Pascor Realty (June 29, 1999)]

V. COMPROMISE AND ABATEMENT

1. Compromise (to reduce the amount of tax
payable)

Grounds for a compromise:
The Commissioner may compromise the
payment of any internal revenue tax in the
following cases:

1) A REASONABLE DOUBT as to the validity
of the claim against the taxpayer exists;
or

2) The financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax. (FINANCIAL INCAPACITY)

What are the limits of the
Commissioners power to compromise?
For cases of financial incapacity a
minimum compromise rate equivalent to
ten percent (10%) of the basic
assessed tax
For other cases a minimum
compromise rate equivalent to forty
percent (40%) of the basic assessed
tax
NOTE: When the basic tax involved
exceeds One Million Pesos (P1,000,000),
or where the settlement offered is less
than the prescribed minimum rates, the
compromise must be approved by the
Evaluation Board (composed of the
Commissioner and 4 deputy
commissioners)

May the Commissioner compromise
cases of criminal violations?
Generally, ALL CRIMINAL VIOLATIONS may
be compromised, EXCEPT:
a) those cases already filed in court
b) those involving fraud

2. Abatement (to cancel the entire amount of
tax payable)

When may the Commissioner abate or
cancel a tax liability?
The Commissioner may abate or cancel a tax
liability when:

1) the tax or any portion thereof appears to
be UNJUSTLY or EXCESSIVELY
ASSESSED; or

2) the ADMINISTRATION and COLLECTION
COSTS do not justify the collection of the
amount due. (costs of collection >
amount of tax due)

VI. STATUTORY OFFENSES AND PENALTIES

A. Additions to the Tax

1. Civil Penalties
Surcharge a civil penalty imposed by law
as an addition to the main tax required to be
paid. It is a civil administrative sanction
provided as a safeguard for the protection of
the State revenue and to reimburse the
government for the expenses of investigation
and the loss resulting from the taxpayers
fraud. A surcharge added to the main tax is
subject to interest.

Rates of Surcharge:
There shall be imposed a penalty equivalent
to twenty-five percent (25%) of the
amount due, in the following cases:
FAILURE TO FILE ANY RETURN and PAY
THE TAX DUE THEREON on the date
prescribed; or
Filing a return with an internal revenue
officer than those with whom the return
is required to be filed (except when
authorized by the Commissioner); or
FAILURE TO PAY THE DEFICIENCY TAX
within the time prescribed for its
payment in the notice of assessment
FAILURE TO PAY THE FULL OR PART of
the amount of tax shown on any return
required to be filed, or the full amount of
tax due for which no return is required to
be filed, on or before the date prescribed
for its payment. (Sec. 248A, NIRC)

TAXATION LAW 2
The penalty shall be fifty percent (50%) of
the tax or of the deficiency tax, in the
following cases:
WILLFUL NEGLECT to FILE THE RETURN
within the period prescribed
A FALSE OR FRAUDULENT RETURN is
willfully made (248B)
Prima-facie evidence of false or
fraudulent return:
substantial underdeclaration of
taxable sales, receipts or income
(failure to report sales, receipts or
income in an amount exceeding 30%
of that declared per return)
substantial overstatement of
deductions (a claim of deduction in
an amount exceeding 30% of actual
deductions)

2. Interest
20% per annum on any unpaid amount of
tax or higher rate prescribed by rules and
regulations from the date prescribed for
payment until the amount is fully paid.
Deficiency interest the term deficiency
means the amount by which the taxed
imposed under the Code exceeds the
amount shown on the return filed (249B)
Delinquency Interest. - In case of failure
to pay:
tax due on any return required to be
filed, or
tax due for which no return is required,
or
a deficiency tax, or any surcharge or
interest thereon on the due date
appearing in the notice and demand of
the Commissioner, there shall be
assessed and collected on the unpaid
amount, interest at the rate prescribed
until the amount is fully paid, which
interest shall form part of the tax.
(249C)

B. Crimes, Other Offenses and Forfeitures

1. General Provisions
Any person convicted of a crime under
the Code shall:
o be liable for the payment of the tax,
o be subject to the penalties imposed
under the Code.
NOTE: Payment of the tax due after a
case has been filed shall not constitute a
valid defense in any prosecution for
violation of the provisions under the
Code.

Any person who willfully aids or abets in
the commission of a crime penalized
under the Code or who causes the
commission of any such offense by
another shall be liable in the same
manner as the principal.

If the offender is:

OFFENDER PENALTY
Not a citizen of
the Philippines
he shall be deported
immediately after serving
the sentence

A public
officer or
employee
the maximum penalty
prescribed for the offense
shall be imposed on him
shall be dismissed from
public office, and perpetually
disqualified from holding any
public office, to vote, and to
participate in any election

CPA

his license shall be
automatically revoked or
cancelled once he is
convicted
Corporations,
associations,
partnerships
etc
imposed on the partner,
president, general manager,
branch manager, treasurer,
officer-in-charge and
employees responsible for
the violation

The fines imposed for any violation of the
Code shall not be lower than the fines
imposed herein or twice the amount of
taxes, interests and surcharges due from
the taxpayer, whichever is higher.
(253)
All violations of any provision of the Code
shall prescribe after five (5) years.

2. Criminal Offenses

Sec. Offense Who is liable Penalty
254 Willful attempt to
evade or defeat tax.
Any person who willfully attempts in
any manner to evade or defeat any
tax or the payment thereof.
Fine - P30,000 or
100,000; and
Imprisonment - 2 to 4
years; Plus other
penalties
255 Failure to File
Return, Supply
Correct and Accurate
Information, Pay
Tax, Withhold and
Remit Tax and
Refund Excess Taxes
Withheld on
Compensation
Any person required to pay any tax,
make a return, keep any record, or
supply correct and accurate
information

Fine - P10,000 or more;
and Imprisonment - 1 to
10 years; Plus other
penalties
Any person who attempts to make it
appear for any reason that he or
another has in fact filed a return or
statement, or actually files a return
or statement and subsequently
Fine - P10,000 - 20,000;
3 years; Plus other
penalties

TAXATION LAW 2
withdraws the same return or
statement
257 Making false entries,
records, or reports,
or using falsified or
fake accountable
forms.
Any financial officer or Independent
CPA engaged to examine and audit
books of accounts of taxpayers
under Sec.232 (A) and any person
under his direction.
Fine - P50,000 -
100,000; and
Imprisonment - 2 to 6
years

258 Unlawful pursuit of
business
Any person who carries on any
business for which in annual
registration fee is imposed without
paying the tax as required by law.
Fine - P5,000 - 20,000;
and Imprisonment - 6
months to 2 years

A person engaged in the business of
distilling, rectifying, repacking,
compounding or manufacturing any
article subject to excise tax.
Fine - P30,000 - 50,000;
2 years
259 Illegal Collection of
Foreign Payments
Any person who knowingly
undertakes the collection of foreign
payments under Sec. 67 without a
license or without complying with the
implementing rules and regulations.
Fine - P20,000 - 50,000;
2 years
260 Unlawful Possession
of Cigarette Paper in
Bobbins or Rolls, Etc.
Any person, manufacturer or
importer of cigar or cigarettes
Fine - P20,000 -
100,000; and
Imprisonment - 6 years
1 day to 12 years
261 Unlawful Use of
Denatured Alcohol
Any person who for the purpose of
manufacturing any beverage, uses
denatured alcohol or alcohol specially
denatured to be used for motive
power or withdrawn under bond for
industrial uses or alcohol knowingly
misrepresented to be denatured to
be unfit for oral intake or who
knowingly sells or offers for sale
such preparations containing as an
ingredient such alcohol.

Any person who unlawfully recovers
or attempt to recover by distillation
or other process any denatured
alcohol or who knowingly sells or
offers for sale, conceals or otherwise
disposes of alcohol as recovered or
redistilled
Fine - P20,000 -
100,000; and
1 day to 12 years
262 Shipment or
Removal of
Liquor/Tobacco
Products under False
Name or Brand or as
an Imitation of any
Existing or Known
Product Name or
Brand
Any person who ships, transports or
removes
Fine - P20,000 -
100,000; and
1 day to 12 years
263 Unlawful Possession
or Removal of
Articles Subject to
Excise Tax W/o
Payment of the Tax
Any person who owns or is found in
possession of these articles
Value of goods not >
P1,000: Fine not <
than P1,000 not >
P2,000, imprisonment of
not < 60 days, not >
100 days

Value of goods >
P1,000, not > than
P50,000: Fine not <
than P10,000 not >
P20,000, imprisonment
of not < 2 yrs, not > 4
years

Value of goods >
P50,000, not > than
P150,000: Fine not <
than P30,000 not >

TAXATION LAW 2
years

Value of goods >
P150,000: Fine not <
than P50,000 not >
years
264 Failure or Refusal to
Issue Receipts or
Sales or Commercial
Invoices, Violations
Related to the
Printing of Such
Receipts or Invoices
and Other Violations
Any person who, being required
under Section 237 to issue receipts
or sales or commercial invoices
Fine - P 1,000 - 50,000;
4 years
265 Offenses Relating to
Stamps
Fine - P 20,000 -
50,000; and
Imprisonment 4-8 yrs
266 Failure to Obey
Summons
Any person who being duly
summoned to appear to testify, or to
appear and produce books of
accounts, records, memoranda or
other papers, or to furnish info. as
required under the pertinent
provisions of this Code.
Fine - P 5,000 - 10,000;
2 yrs
267 Declaration under
Penalties of Perjury
Any person who willfully files a
declaration, return or statement
containing information which is not
true and correct as to every material
matter
Perjury under the
Revised Penal Code
268 Misdeclaration or
Misrepresentation of
Manufacturers
Subject to Excise Tax
Any manufacturer subject to excise
tax
Summary cancellation or
withdrawal of the permit
to engage in business as
a manufacturer of
articles subject to excise
tax
Forfeiture of
Property Used in
Unlicensed Business
or Dies Used for
Printing False
Stamps, Etc.
Any person who conducts an
unlicensed business
Forfeiture
Forfeiture of Goods
Illegally Stored or
Removed
Any person subject to excise tax who
fails to store the goods in proper
place, or removes goods without
payment of excise tax
Forfeiture
274 Penalty for Second
and Subsequent
Offenses
Maximum of the penalty
prescribed for the
offense
Forfeiture of
Property Used in
Unlicensed Business
or Dies Used for
Printing False
Stamps, Etc.
Any person who conducts an
unlicensed business
Forfeiture
Forfeiture of Goods
Illegally Stored or
Removed
Any person subject to excise tax who
fails to store the goods in proper
place, or removes goods without
payment of excise tax
Forfeiture
274 Penalty for Second
and Subsequent
Offenses
Maximum of the penalty
prescribed for the
offense
275 Violation of Other
Provisions of the Tax
Code or Rules or
Regulations in
General
Any person who violates any
provision of this Code or any rule or
regulation promulgated by the
Department of Finance for which no
specific penalty is provided by law
Fine: not more than P
1,000 or Imprisonment:
not more than 6 months,
or both
276 Penalty for Selling,
Transferring,
Encumbering or in
any way disposing of
property Placed
Any taxpayer, whose property has
been placed under constructive
distraint
Fine: not less than twice
the value of the property
but not less than P 5,000
or Imprisonment: 2 yrs 1
day - 4 yrs or both

TAXATION LAW 2
under Constructive
Distraint
277 Failure to Surrender
Property Placed
under Distraint and
Levy
Any person having in his possession
or under his control any property or
rights to property, upon which a
warrant of constructive distraint or
actual distraint and levy has been
issued
Fine: P 5,000 or more or
Imprisonment: 6 months
1 day - 2 years, or both
278 Procuring Unlawful
Divulgence of Trade
Secrets
Any person procures an officer or
employee of the BIR to divulge any
confidential information regarding
the business, income or inheritance
of any taxpayer, knowledge of which
was acquired by him in the discharge
of his official duties, and which it is
unlawful for him to reveal, and any
person who publishes or prints in
any manner whatever, not provided
by law, any income, profit, loss or
expenditure appearing in any income
tax return
Fine: not more than P
2,000 or Imprisonment:
6 months - 5 years, or
both

3. Penalties Imposed on Public Officers
The law imposes a fine of not less than
P50,000 nor more than P100,000 or
imprisonment for not less than 10 years
nor more than fifteen years on every
official, agent or employee of the BIR or of
any agency or employee of the Government
charged with the enforcement of the Tax
Code, who shall: (CONED- FRAP)

a) Extort or willfully oppress under color of
law;
b) knowingly Demand other or greater sums
than are authorized by law or receive any
fee, compensation or reward, except as
by law prescribed, for the performance of
any duty;
c) willfully Neglect to give receipts, as by
law required, for any sums collected in
the performance of duty, or who willfully
neglect to perform any of the duties
enjoined by law;
d) Conspire or collude with another or
others to defraud the revenues or
otherwise violate the law;
e) willfully make Opportunity for any person
to defraud the revenues, or who do or
omit to do any act with intent to enable

any other person to defraud the
revenues;
f) negligently or by design Permit the
violation of the law by any other person;
g) make or sign any False certificate or
return in any case where the law requires
the making by them of such entry,
certificate or return;
h) having knowledge or information of a
violation of any provision of the Code or
of any fraud committed on the revenues
collectible by the BIR, fail to Report such
knowledge or information to their
superior officer, or to report as otherwise
required by law; or
i) without the authority of law, demand or
Accept or attempt to collect, directly or
indirectly, as payment or otherwise, any
sum of money or other thing of value for
the compromise, adjustment or
settlement of any charge or complaint for

any violation or alleged violation of law.
(235)

VII. COMPLIANCE REQUIREMENTS

What records are required to be kept by
taxpayers? (Sec. 232, NIRC)

Gross
Quarterly
Sales or
Output
Requirements
P50,000 or
less
simplified form of bookkeeping
records duly authorized by the
Secretary of Finance
all transactions and results of
operation are shown
all taxes may be readily and
accurately ascertained at that
time of the year
exceeding
P50,000 but
not more than
P150,000
a journal and ledger or their
equivalent
exceeding
P150,000
books of accounts, examined and
audited by an independent CPA
and their income tax return shall
be accompanied by
certified balance sheets
profit and loss statements
list of income-producing
properties and other relevant
data

NOTES:
Taxpayers may also keep other subsidiary
books at their option, as the needs of their
business may require which shall form part
of the accounting system of the taxpayer.
(Sec. 233, NIRC)

Books or records shall be kept in a native
language, English or Spanish. The keeping
of books and records in any language other
than the three mentioned is prohibited,
unless the taxpayer makes a true and
complete translation of all the entries in
the said books and records. (Sec. 234,
NIRC)

TAXATION LAW 2

All the books and records shall be kept by
the taxpayer until the period for making an
assessment under Sections 203 and 222
have prescribed. (Sec. 235, NIRC)

Examination and inspection of all books
and records shall be made only once in a
taxable year, EXCEPT in these cases:
Fraud, irregularity or mistakes, as
determined by the Commissioner
The taxpayer requests
reinvestigation
Verification of compliance with
withholding tax laws and regulations
Verification of capital gains tax
liabilities
In the exercise of the
Commissioners power to issue an
access letter. (Sec. 235, NIRC)

Who are required to register with the BIR?
Every person subject to any internal revenue
tax shall register once with the appropriate
Revenue District Officer:
Within ten (10) days from date of
employment, or
On or before the commencement of
business, or
Before payment of any tax due, or
Upon filing of a return, statement or
declaration as required under the Code
(Sec. 236, NIRC)

What shall the BIR do after the taxpayer
registers?
The BIR shall assign a Taxpayer Identification
Number (TIN) which the taxpayer shall indicate
in every return, statement or document filed
with the BIR. Only one TIN shall be given a
person. Any person who secures more than
one TIN shall be criminally liable. (236)

VIII. INFORMERS REWARD (Sec. 282 of the NIRC)

To whom given persons instrumental in
the discovery of violations of the NIRC and in
discovery and seizure of smuggled goods.

Conditions to qualify for the reward:
1. Person is not an internal revenue official
or employee, public official, or employee
or relative within 6 th degree of
consanguinity
2. Voluntarily gives definite and sworn
information:
a) Not yet in the possession of BIR
b) Leading to discovery of frauds
c) Resulting in:
i. the recovery of revenues,
surcharges and fees and/or
ii. conviction of the guilty party.
d) Not refer to a case already pending
or previously investigated or
examined by the Commissioner or
his agents or the SOF or his agents.

Amount of reward: 10% of the revenues,
surcharges or fees recovered and/or
fine/penalty imposed, or P1,000,000,
whichever is LOWER.
The same amount shall be given if the
offender offered to compromise and
such offer has been accepted and
collected by the Commissioner.
If no revenue, surcharge or fees be
actually collected, such person is not
entitled to a reward
For discovery and seizure of
SMUGGLED GOODS The cash reward
is 10% of the FMV of the smuggled and
confiscated goods, or P1,000,000,
whichever is LOWER.
The cash rewards shall be subject to income
TAX at the rate of 10%.
Rule of construction Statutes offering
rewards must be liberally construed in favor
of informers and with regard to the purpose
for which they are intended, with mere
technicality yielding to the substantive
purpose of the law.
[Penid v. Virata]

TAXATION LAW 2
START
Commissioner or
Regional Director
Issues Letter of
Authority (LA)
RO sends notice
of informal
conference
Revenue Officer (RO)
conducts Audit w/in 120
days. If 120 days lapse
LA is revalidated,
Taxpayer
responds w/in 15
days
Regional
Assessment
Division issues a
Preliminary
Assessment Notice
(PAN)
Is response w/n
15 days? Is it
meritorious?
Send Formal Letter
of demand and Final
Assessment Notice
(FAN) is issued
NO to
either
ASSESSMENT
ENDS
Yes to
both
File protest w/n 30
days from receipt of
assessment. Submit
supporting papers wi/in
60 days from protest
Protest made w/in
30 days?
Supporting papers
submitted w/in 60
days?
Commissioner decides on
protest within 180 days
YES to
both
Assessment becomes
Final, Warrant of Distraint
& Levy Issued
Commissioner
decides w/n
180 days?
Appeal to the Court of Tax
Appeals w/in 30 days after
lapse of 180 days OR wait for
a decision by the BIR
(Lascona Land oil vs. CIR)
Appeal to the Court of Tax
appeals within 30 days OR file
motion for reconsideration
within 30 days. MR tolls 30
day period to appeal to CTA
Decision
favorable to
taxpayer?
NO
If MR is denied, appeal to
the CTA within remainder
of the 30 days
NO
If CTA decision is unfavorable to
taxpayer, file MR with CTA
Division w/in 15 days. Appeal to
CTA en banc if MR denied.
Appeal to
Supreme Court
NO to
either
YES
Appeal made
on time?
CTA decides on
the appeal
NO YES
ASSESSMENT
ENDS
YES
Taxpayer
responds w/in
15 days
Assessment
becomes Final,
Warrant of Distraint
& Levy Issued
END
Flowchart I: Taxpayers Remedies from Tax Assessment-NIRC

TAXATION LAW 2
START
Flowchart II: Procedures for Distraint and Levy-NIRC
Yes
Commissioner seizes sufficient
personal property to satisfy the
tax, charge & expenses of seizure
(Sec. 207 (A))
Distraining Officer accounts for
the goods distrained (Sec. 208)
RDO posts notice in at least 2 public
places in the municipality/city where
the distraint is made. One place of
posting must be at the mayors office.
Time of sale shall not be less than 20
days after the notice (Sec. 209)
Goods shall be restored to owner,
if charges are paid (Sec. 210)
Officer sells the goods to the
highest bidder for cash or
with the Commissioners
approval, through commodity/
stock exchanges. (Sec. 209)
Real property may be levied
on before, simultaneously, or
after the distraint of personal
property (207 (B))
Delinquent tax
more than 1M?
Person owing any
delinquent tax to
fails to pay w/in
the time required
RDO seizes sufficient
personal property to satisfy
the tax, charges & expenses
of seizure (Sec. 207 (A))
No
Excess of proceeds over the
entire claim, shall be returned
to the owner. No charge shall
be imposed for the services of
the officer (Sec. 209)
W/in 2 days after
the sale, officer
shall report to the
Commissioner.
(Sec. 211)
Commissioner may purchase
property for the National
Government (Sec. 212)
Bid less than
amount of tax/
FMV of goods
distrained?
Property may be resold and
the net proceeds shall be
remitted to the National
Treasury as internal revenue.
(Sec. 212)
Officer
conducts
public auction
Yes
No, bid just right
W/n 10 days after receipt of the
warrant, levying officer shall
report to the Commissioner who
shall have the authority to lift the
warrant of levy (Sec. 207 B)
Internal revenue officer,
designated by the Commissioner,
shall prepare a certificate with the
force of a nationwide legal
execution (Sec. 207 B)
Levy shall be affected by writing upon said certificate a
description of the property. Notice of the levy shall be
served upon the Register of Deeds of LGU where the
property is located and upon the owner (Sec. 207 B)
Excess of proceeds
of the sale over claim
and cost of sale shall
be turned over to the
owner (Sec. 213)
W/n 1 year from sale, the
owner may redeem, by paying
to the RDO the amount of the
taxes, penalties, and interest
thereon from the date of
delinquency to the date of sale,
and 15% per annum interest on
purchase price from the date
of purchase to the date of
redemption. (Sec. 214)
W/n 1 year from forfeiture,
the taxpayer, may redeem
said property by paying full
amount of the taxes and
charges (Sec. 215)
The Commissioner may,
after 20 days notice, sell
property at public auction
or at private sale with
approval of the SoF.
Proceeds shall be
deposited with the National
Treasury (Sec. 216) Levy and distraint
may be repeated until
the full amount due,
and all expenses are
collected. (Sec. 217)
W/n 20 days after levy, officer shall post
notice at the main entrance of the
municipal/city hall & in public place in the
barrio/district where the real estate lies for
at least 30 days by AND publish it once a
week for 3 weeks. Owner may prevent
sale by paying all charges (Sec. 213)
Sale shall be held at the
main entrance of the
municipal/city hall, or on the
premises of the levied
property. (Sec. 213)
W/n 5 days after the sale,
levying officer shall enter
return of the proceedings
upon the records of the RCO,
RDO and RRD (Sec. 213)
Owner shall not be
deprived of the
possession and shall
be entitled to the
fruits until 1 year
expires (Sec. 214)
Officer conducting the
sale shall forfeit the
property to the
Government (Sec. 215)
No bidder or
highest bid
insufficient?
W/n 2 days, he shall make a return
of the forfeiture. Register of Deeds,
upon registration of forfeiture shall
transfer title to the Government w/o
court order. (Sec. 215)
W/in 5 days after sale,
distraining officer shall enter
return of proceedings in the
records of RCO, RDO and
RRD (Sec. 213)
No, bid ok
Yes
RCO - Revenue Collection Officer RDO - Revenue District officer
RRD - Revenue Regional Director LGU- Local Government Unit

TAXATION LAW 2
VI. VI. VI. VI. LOCAL TAXATION LOCAL TAXATION LOCAL TAXATION LOCAL TAXATION
I. BASIC CONCEPTS

a. Local Government Unit - 1987
CONSTI, ART X, SECTION 1.

The territorial and political subdivisions of
the Republic of the Philippines are the
provinces, cities, municipalities, and
barangays. There shall be autonomous
regions in Muslim Mindanao and the
Cordilleras as hereinafter provided.

b. Scope of Local Taxation The
provisions in LGC shall govern the
exercise by PROVINCES, CITIES,
MUNICIPALITIES, and BARANGAYS of
their taxing and other revenue-raising
powers. (Sec 128 LGC)

c. Power to Create Sources of Revenue
-- Each local government unit shall
exercise its power to create its own
sources of revenue and to levy taxes,
fees, and charges subject to the
provisions herein, consistent with the
basic policy of local autonomy. Such
taxes, fees, and charges shall accrue
exclusively to the local government
units. (SEC. 129, LGC)

d. Fundamental Principles -- The
following fundamental principles shall
govern the exercise of the taxing and
other revenue-raising powers of local
government units: (PUPUPICE)

(a) Taxation shall be Uniform in each
local government unit;

NOTE: the uniformity required is only
within the territorial jurisdiction of
an LGU. (IRR)

(b) Taxes, fees, charges and other
impositions shall:
(1) be Equitable and based as far as
practicable on the taxpayer's
ability to pay;
(2) be levied and collected only for
Public purposes;
(3) not be Unjust, excessive,
oppressive, or confiscatory;
(4) not be Contrary to law, public
policy, national economic policy,
or in the restraint of trade;

(c) The collection of local taxes, fees,
charges and other impositions shall
not be let to any Private person;

(d) The revenue collected pursuant to the
provisions of this Code shall Inure
solely to the benefit of, and be
subject to the disposition by, the local
government unit levying the tax, fee,
charge or other imposition unless
otherwise specifically provided
herein; and,

(e) Each local government unit shall, as
far as practicable, evolve a
Progressive system of taxation. (SEC.
130, LGC)

e. Local Taxing Authority. - shall be
exercised by the SANGGUNIAN of the
LGU concerned through an appropriate
ordinance. (SEC. 132, LGC)
HOWEVER, the local chief executive of
the LGUs (except the punong barangay)
possesses veto powers, as laid out in
Sec. 55 of the LGC:
SEC. 55. Veto Power of the Local Chief
Executive.

(a) The local chief executive may veto
any ordinance of the sangguniang
panlalawigan, sangguniang panlungsod,
or sangguniang bayan on the ground
that it is ultra vires or prejudicial to the
public welfare, stating his reasons
therefor in writing.

(b) The local chief executive, except
the punong barangay, shall have the
power to veto any particular item or
items of an appropriations ordinance,
an ordinance or resolution adopting a
local development plan and public
investment program, or an ordinance
directing the payment of money or
creating liability. In such a case, the
veto shall not affect the item or items
which are not objected to. The vetoed
item or items shall not take effect
unless the sanggunian overrides the
veto in the manner herein provided;
otherwise, the item or items in the
appropriations ordinance of the
previous year corresponding to those
vetoed, if any, shall be deemed
reenacted.

(c) The local chief executive may veto
an ordinance or resolution only once.
The sanggunian may override the veto
of the local chief executive concerned
by two-thirds (2/3) vote of all its
members, thereby making the
ordinance effective even without the
approval of the local chief executive
concerned.

II. COMMON LIMITATIONS ON THE
TAXING POWERS OF LOCAL
GOVERNMENT UNITS (SEC 133)

Unless otherwise provided, the exercise of
the taxing powers of provinces, cities,
municipalities, and barangays shall NOT
EXTEND to the levy of the following (IDEC-
GAPE-PGP-RECN):

1. Income tax, except when levied on banks
and other financial institutions;
2. Documentary stamp tax;
3. Taxes on Estates, inheritance, gifts, legacies
and other acquisitions mortis causa, except
as otherwise provided herein;
4. Customs duties, registration fees of vessel
and wharfage on wharves, tonnage dues,
and all other kinds of customs fees, charges
and dues except wharfage on wharves

TAXATION LAW 2
constructed and maintained by the LGU
concerned;
5. Taxes, fees, and charges and other
impositions upon Goods carried into or out
of, or passing through, the territorial
jurisdictions of local government units in the
guise of charges for wharfage, tolls for
bridges or otherwise, or other taxes, fees, or
charges in any form whatsoever upon such
goods or merchandise;
6. Taxes, fees or charges on Agricultural and
aquatic products when sold by marginal
farmers or fishermen;
7. Taxes on business enterprises certified to by
the Board of Investments as Pioneer or non-
pioneer for a period of six (6) and four (4)
years, respectively from the date of
registration;
8. Excise taxes on articles enumerated under
the NIRC, as amended, and taxes, fees or
charges on petroleum products;
9. Percentage or VAT on sales, barters or
exchanges or similar transactions on goods
or services except as otherwise provided
herein;
10. Taxes on the Gross receipts of
transportation contractors and persons
engaged in the transportation of passengers
or freight by hire and common carriers by
air, land or water, except as provided in this
Code;
11. Taxes on Premiums paid by way or
reinsurance or retrocession;
12. Taxes, fees or charges for the Registration
of motor vehicles and for the issuance of all
kinds of licenses or permits for the driving
thereof, except tricycles;
13. Taxes, fees, or other charges on Philippine
products actually Exported, except as
otherwise provided herein;
14. Taxes, fees, or charges, on Countryside and
Barangay Business Enterprises and
Cooperatives duly registered under the
"Cooperative Code of the Philippines"; and
15. Taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities, and local government
units

III.SPECIFIC PROVISIONS ON THE TAXING AND OTHER REVENUE-RAISING POWERS OF LGUS
TAX TAX RATE & TAX BASE
A. PROVINCES
Tax on Transfer of Real Property Ownership (Sec. 135)
- tax on sale, donation or on any other mode of transferring
ownership
NOTE:
sale, transfer or other disposition pursuant to RA 6657
(Comprehensive Agrarian Reform Law) shall be EXEMPT from this
tax.
the Register of Deeds shall require the presentation of evidence of
payment of this tax, BEFORE registering any deed.
the Provincial Assessor shall also make the same requirement
BEFORE cancelling an old tax declaration and issuing a new one.
it shall be the DUTY of the seller,
donor,transferor,executor/administrator to pay the tax
herein imposed within 60 days from the date of execution of
the deed or from the date of decedents death.

Not more than 50% of 1%
of the total consideration
involved in the acquisition of
the property OR of the FMV
in case the monetary
consideration involved in the
transfer is not substantial,
whichever is higher
NOTE: the FMV used shall
be that reflected in the
prevailing schedule of FMVs
enacted by the sanggunian
concerned. (IRR)
Tax on Business of Printing and Publication (Sec. 136)
- imposed on business of persons engaged in the printing and/or
publication of books, cards, posters, leaflets, handbills, certificates,
receipts, pamphlets, and others of similar nature

Not exceeding fifty percent
(50%) of one percent (1%)
of the gross annual
receipts for the preceding
calendar year

- In the case of a newly started business

Not exceed one-twentieth
(1/20) of one percent (1%)
of the capital investment
- In the succeeding calendar year, regardless of when the
business started to operate

NOTE: receipts from the printing and/or publishing of books or other
reading materials prescribed by DECS as school texts or
references shall be EXEMPT from this tax.
Based on the gross
calendar year, or any
fraction thereof

Franchise Tax (Sec. 137)
- imposed on businesses enjoying a franchise (notwithstanding
any exemption granted by any law or other special law)

business enjoying a franchise shall not include holders of
certificates of public convenience for the operation of public utility
vehicles for reason that such certificates are NOT considered as
franchises. (IRR)

of the gross annual
calendar year based on the
incoming receipt, or realized,
within its territorial
jurisdiction

- In the case of a newly started business Not exceed one-twentieth

TAXATION LAW 2
(1/20) of one percent (1%)
of the capital investment
- In the succeeding calendar year, regardless of when the
business started to operate
Based on the gross
calendar year, or any
fraction thereon

Tax on Sand, Gravel and Other Quarry Resources (Sec. 137)

NOTE: The permit to extract sand, gravel and other quarry
resources shall be issued EXCLUSIVELY by the provincial governor,
pursuant to the ordinance of the sangguniang panlalawigan.

Not more than 10% of FMV
in the locality per cubic
meter of ordinary stones,
sand, gravel, earth, and
other quarry resources,
extracted from public
lands or from the beds of
seas, lakes, rivers, streams,
creeks, & other public
waters within its territorial
jurisdiction
Professional Tax (Sec. 139)
- on each person engaged in the exercise or practice of his profession
requiring government examination (ie bar or any board exam
conducted by PRC)

NOTE:
Where to pay the tax?
where he practices his profession; OR
where he maintains his principal office in case he practices in
several places
PROVIDED, that such person who has paid the professional tax
shall be entitled to practice his profession in any part of the Phil
without being subjected to any other national or local tax, license,
or fee for the practice of such profession.
Any employer employing a person subject to this tax shall require
such payment BEFORE the employment and annually thereafter.
A line of profession does NOT become exempt even if conducted
with some other profession for which the tax has been paid.
Professionals EXCLUSIVELY employed in the government
shall be EXEMPT.

At such amount and
reasonable classification as
the sangguniang
panlalawigan may
determine but shall in no
case exceed Three
hundred pesos (P300.00)

Amusement Tax (Sec. 140)
- collected from the proprietors, lessees, or operators of theaters,
cinemas, concert halls, circuses, boxing stadia, and other places of
amusement
NOTE:
In case of theaters or cinemas, the tax shall first be deducted
and withheld by their proprietors, lessees or operators and paid
to the provincial treasurer BEFORE the gross receipts are divided
between said proprietors, lessees, or operators, and distributors
of cinematographic films.
The holding of operas, concerts, dramas, recitals, painting and
art exhibitions, flower shows, musical programs, literary and
oratorical presentations, shall be EXEMPT from this tax while
pop, rock or similar concerts are NOT EXEMPT.

at a rate of not more than
thirty percent (30%) of the
gross receipts from
admission fees.
Annual Fixed Tax For Every Delivery Truck or Van of
Manufacturers or Producers, Wholesalers of, Dealers, or
Retailers in, Certain Products (Sec. 141)
- for every truck, van or any vehicle used by manufacturers,
producers, wholesalers, dealers or retailers in the delivery or
distribution of distilled spirits, fermented liquors, soft drinks, cigars
and cigarettes, and other products as may be determined by the
sangguniang panlalawigan, to sales outlets, or consumers, whether
directly or indirectly, within the province
NOTE: the manufacturers, producers, wholesalers, dealers and
retailers referred above shall be EXEMPT from the tax on peddlers
described elsewhere in LGC.

in an amount not exceeding
Five hundred pesos
(P500.00)
B. MUNICIPALITIES
SCOPE - municipalities may levy taxes, fees, and charges not
otherwise levied by provinces. (SEC. 142,LGC)

Tax on Business
(a) On manufacturers, assemblers, repackers, processors, brewers,
distillers, rectifiers, and compounders of liquors, distilled spirits, and
wines or manufacturers of any article of commerce of whatever

in accordance with the
schedule (refer to Sec 143)

TAXATION LAW 2
kind or nature, NOTE: the rates in Sec 143 (a) shall apply ONLY
to amount of DOMESTIC sales. (IRR)

(b) On wholesalers, distributors, or dealers in any article of
commerce of whatever kind or nature

schedule (Sec 143 again)
(c) On exporters, and on manufacturers , millers, producers,
wholesalers, distributors, dealers or retailers of essential
commodities -- such as:
(1) Rice and corn;
(2) Wheat or cassava flour, meat, dairy products, locally
manufactured, processed or preserved food, sugar, salt and other
agricultural, marine, and fresh water products, whether in their
original state or not;
(3) Cooking oil and cooking gas;
(4) Laundry soap, detergents, and medicine;
(5) Agricultural implements. equipment and post-harvest facilities,
fertilizers, pesticides, insecticides, herbicides and other farm
inputs;
(6) Poultry feeds and other animal feeds;
(7) School supplies; and
(8) Cement.
Not exceeding one-half ()
of the rates prescribed under
subsection (a), (b) and (d)
of Sec 143

(d) On retailers:
With gross sales or receipts for the preceeding CY of:
P400,000 or less
More than P400,000
Provided, however, That barangays shall have the exclusive power
to levy taxes, as provided under Section 152 hereof, on gross sales
or receipts of the preceding calendar year of P50,000 or less, in the
case of cities, and P30,000 or less, in the case of municipalities.

per annum

2%
1%
(e) On contractors and other independent contractors

schedule (Sec 143 again)
(f) On banks and other financial institutions

NOTE: all other income and receipts of banks and financial
institutions NOT otherwise enumerated () shall be EXCLUDED from
the taxing authority of the LGU.(IRR)

on the gross receipts of the
preceding calendar year
derived from interest,
commissions and
discounts from lending
activities, income from
financial leasing,
dividends, rentals on
property and profit from
exchange or sale of
property, insurance
premium.
(g) On peddlers engaged in the sale of any merchandise or article
of commerce

Not exceeding Fifty pesos
(P50.00) per peddler
annually.

(h) On any business, not otherwise specified in the preceding
paragraphs, which the sanggunian concerned may deem proper
to tax: Provided, That on any business subject to the excise, value-
added or percentage tax under the NIRC, as amended, the rate of tax
shall not exceed two percent (2%) of gross sales or receipts of
the preceding calendar year. (this is the catch-all provision)

NOTE: The sanggunian concerned may prescribe
a schedule of graduated tax rates but in no case
to exceed the rates prescribed in the LGC.

Rates of Tax within the Metropolitan Manila
Area
The municipalities within the Metropolitan Manila
Area may levy taxes at rates which shall not
exceed by fifty percent (50%) the maximum
rates prescribed in Sec 143. (SEC. 144, LGC)

Retirement of Business
A business subject to tax pursuant to Sec 143
shall, upon termination thereof, submit a
sworn statement of its gross sales or receipts
for the current year. If the tax paid during the
year be LESS THAN the tax due on said gross
sales or receipts of the current year, the
difference shall be paid before the business is
considered officially retired. (Sec 145)

Payment of Business Taxes
The taxes imposed in sec 143 shall be
payable for EVERY SEPARATE OR DISTINCT
ESTABLISHMENT or PLACE where business
subject to tax is conducted.

TAXATION LAW 2
One line of business does NOT become
exempt by being conducted with some other
businesses for which such tax has been paid.
The tax on a business must be paid by the
person conducting the same.
In cases where a person conducts or operates
2 or more businesses mentioned in Sec 143
a.) which are subject to THE SAME tax rate
tax shall be computed on the COMBINED
TOTAL GROSS SALES/RECEIPTS
b.) which are subject to DIFFERENT tax rates
the gross sales/receipts shall be
SEPARATELY REPORTED for the
computation of taxes.

Condominium corporations are not business
entities, thus not subject to local business
tax. Even though the corporation is
empowered to levy assessments or dues from
the unit owners, these amounts are not
intended for the incurrence of profit by the
corporation, but to shoulder the multitude of
necessary expenses for maintenance of the
condominium. [YAMANE vs. LEPANTO CONDO
CORP. (Oct. 25, 2005)]

Fees and Charges
GENERAL:
The municipality may impose and collect such
reasonable fees and charges on business and
occupation and on the practice of any profession
or calling, commensurate with the cost of
regulation, inspection and licensing BEFORE
any person may engage in such business or
occupation, or practice such profession or calling.

SPECIFIC:
1. For Sealing and Licensing of Weights and
Measures.
at such reasonable rates as shall be prescribed
by the sangguniang bayan.

2. Fishery Rentals, Fees and Charges.
Municipalities shall have the exclusive
authority to grant fishery privileges in the
municipal waters and impose rentals, fees
or charges thereon.

The sangguniang bayan may:
(1) Grant fishery privileges to erect fish corrals,
oysters, mussels or other aquatic beds or
bangus fry areas, within a definite zone of
the municipal waters, as determined by it
(2) Grant the privilege to gather, take or catch
bangus fry, prawn fry or kawag-kawag or fry
of other species and fish from the municipal
waters by nets, traps or other fishing gears
to marginal fishermen free of any rental,
fee, charge or any other imposition
whatsoever.
(3) Issue licenses for the operation of fishing
vessels of three (3) tons or less
Provided, however, That the sanggunian
concerned shall, by appropriate ordinance,
penalize the use of explosives, noxious or
poisonous substances, electricity, muro-ami, and
other deleterious methods of fishing and
prescribe a criminal penalty therefor in
accordance with the provisions of the LGC
Provided, finally, That the sanggunian concerned
shall have the authority to prosecute any
violation of the provisions of applicable fishery
laws. (Sec. 149, LGC)

C. CITIES

SCOPE --- Except as otherwise provided in this
Code, the city, may levy the taxes, fees, and
charges which the province or municipality may
impose: Provided, however, That the taxes, fees
and charges levied and collected by highly
urbanized and independent component cities
shall accrue to them and distributed in
accordance with the provisions of LGC.

The rates of taxes that the city may levy may
exceed the maximum rates allowed for the
province or municipality by not more than fifty
percent (50%) except the rates of professional
and amusement taxes. (Sec. 151, LGC)

IRR:
The city may levy and collect a
percentage tax on ANY business NOT
otherwise specified in the LGC or the
IRR, at rates NOT exceeding 3% of
the gross sales or receipts of the
preceding calendar year.
The rates of the following taxes shall be
uniform for the city and the province:
a. Professional tax shall not
exceed P300
b. Amusement tax the rate shall
not be more than 30% of the gross
receipts from admission fees
The proceeds of the tax on sand, gravel,
and other quarry resources in highly-
urbanised cities shall be distributed as
follows:
highly urbanised city 60%
barangay where the sand, gravel, etc
are extracted 40%

D. BARANGAYS

SCOPE --- The barangays may levy taxes, fees,
and charges, as provided in this Article, which
shall exclusively accrue to them:
(a) Taxes - On stores or retailers with fixed
business establishments at a rate not
exceeding one percent (1%) on such gross
sales or receipts.
IN CASE OF CITIES -- with gross sales
or receipts of the preceding calendar
year of Fifty thousand pesos
(P50,000.00) or less
IN CASE OF MUNICIPALITIES with
gross sales or receipts of Thirty
thousand pesos (P30,000.00) or less
(b) Service Fees or Charges - Barangays may
collect reasonable fees or charges for
services rendered in connection with the
regulations or the use of barangay-owned
properties or service facilities such as palay,
copra, or tobacco dryers.
(c) Barangay Clearance - No city or
municipality may issue any license or permit
for any business or activity unless a clearance
is first obtained from the barangay where
such business or activity is located or
conducted. For such clearance, the
sangguniang barangay may impose a
reasonable fee.
(d) Other fees and Charges. - The barangay
may levy reasonable fees and charges:
(1) On commercial breeding of fighting
cocks, cockfights and cockpits;

TAXATION LAW 2
(2) On places of recreation which charge
admission fees; and
NOTE: places of recreation include
places of amusement where one seeks
admission to entertain himself by seeing or
viewing the show or performance or those
where one amuses himself by direct
participation.
(3) On billboards, signboards, neon signs,
and outdoor advertisements. (Sec. 152,
LGC)

QUICK GLANCE

TYPE OF TAX PR
OVI
NC
E
MU
NIC
IPA
LIT
Y
CIT
Y
BA
RA
NG
AY
Sec. 135 Tax on Transfer
of Real Property Ownership
X X
Sec. 136 Tax on Business
of Printing and Publication
X X
Sec. 137 Franchise Tax
33
X X
Sec. 138 Tax on Sand,
Gravel and Other Quarry
Resources
34

X X
Sec. 139 Professional Tax X X
Sec. 140 Amusement Tax X X
Sec. 141 Annual Fixed Tax
For Every Delivery Truck or
Van of Manufacturers or
Producers, Wholesalers of,
Dealers, or Retailers in,
Certain Products
X X
Sec. 143 Tax on Business X X
Sec. 147 Fees and charges
on regulation/licensing of
business and occupation
(except professional taxes)
X X
Sec. 148 Fees for Sealing
and Licensing of Weights and
Measures
X X
Sec. 149 Fishery Rentals,
Fees and Charges
X X
Sec. 156 Community Tax X X
Sec. 152(a) Tax on Gross
Sales or Receipts of Small-
Scale Stores/Retailers
X
Sec. 152(b) Service Fees
on the use of Barangay-
owned properties
X
Sec. 152(c) Barangay
Clearance
X
Sec. 152(d) Other Fees
and Charges (on commercial
breeding of fighting cocks,
cockfights, cockpits; places
of recreation which charge
admission fees; outside ads)
X
Sec. 153 Service Fees and
Charges
X X X X
Sec. 154 Public Utility
Charges
35

X X X X
Sec. 155 Toll Fees or
Charges
36

X X X X
Sec. 232 Real Property Tax X XX X
Legend:
X Authorized to impose the tax
XX Only if the municipality is within the Metro Manila
Area

IV. SITUS OF TAX

33
The franchise tax provided in Sec. 137 is intended to be in addition to the franchise tax
imposed by the National Government. (de Leon, p. 463)
34
Note that under Sec. 138, the proceeds of this tax are allocated as follows:
(1) Province - Thirty percent (30%);
(2) Component city or municipality where the sand, gravel, and other
quarry resources are extracted - Thirty percent (30%); and
(3) barangay where the sand, gravel, and other quarry resources are
extracted - Forty percent (40%).
35
Applies to public utilities operated and maintained by them within their jurisdiction.
36
Applies to the use of any public road, pier, wharf, waterway, bridge, ferry or
telecommunication system funded and constructed by the local government unit
concerned. Exemptions: (1) officers and enlisted men of the Armed Forces of the
Philippines and members of the Philippine National Police on mission, (2) post office
personnel delivering mail, (3) physically-handicapped, and (4) disabled citizens who are
sixty-five (65) years or older.

RULE 1: In case of persons
maintaining/operating a branch or sales outlet
making the sale or transaction, the tax shall be
recorded in said branch or sales outlet and
paid to the municipality/city where the
branch or sales outlet is located.

RULE 2: Where there is NO branch or sales
outlet in the city/municipality where the sale is
made, the sale shall be recorded in the
principal office and the tax shall be paid to such
city/municipality.

RULE 3: In the case of manufacturers,
contractors, producers, and exporters having
factories, project offices, plants, and plantations,
the ff sales allocation shall be observed:
30% of sales recorded in the principal office
shall be made taxable by the city/municipality
where the principal office is located
70% shall be taxable by the city/municipality
where the factory, project office, plant,
or plantation is located

Illustration of Rule 1 to 3:
A company has a principal office in Mandaluyong,
while its sales office and factory are in Sta Rosa
sales made in Sta Rosa, will be recorded in
Sta Rosa
sales made in Los Baos, Calamba or
Cabuyao (ie delivered to customers located
in those places), will be recorded in
Mandaluyong
aside from sales made in Sta Rosa, Sta Rosa
also gets 70% of sales recorded in
Mandaluyong, pursuant to Rule 3

RULE 4: In case the plantation is located in a
place other than the place where the factory is
located, the 70% portion in Rule 3 will be
divided as follows:
60% to the city/municipality where the
factory is located
40% to the city/municipality where the
plantation is located

RULE 5: In case of 2 or more factories,
plantations, etc in different localities, the 70%
shall be prorated among the localities where
the factories, plantations, etc are located in
proportion to their respective volume of
production.

NOTE: In case of manufacturers or producers
which engage the services of an independent
contractor to produce or manufacture some of
their products, these rules shall apply except that
the factory or plant and warehouse of the
contractor utilised for the production and storage
of the manufacturers products shall be
considered as the factory or plant and warehouse
of the manufacturer. (IRR)

NOTE: The city or municipality where the
port of loading is located shall not levy and
collect the reasonable fees unless the exporter
maintains in said city or municipality its principal
office, a branch, sales office, or warehouse,
factory, plant or plantation in which case, the
rule on the matter shall apply accordingly. (IRR)

TAXATION LAW 2
V. COMMON REVENUE-RAISING
POWERS

A. Service fees and charges -- LGUs
may impose such reasonable fees and
charges for services rendered. (Sec.
153, LGC)

B. Public Utility charges LGUs may fix
the rates for the operation of public
utilities owned, operated and
maintained by them within their
jurisdiction. (Sec. 154, LGC)

C. Toll fees or charges LGUs, thru
their sanggunian concerned, may fix
the rates for the imposition of toll fees
or charges for the use of any public
road, pier, or wharf, waterway, bridge,
ferry or telecommunication system
funded and constructed by the LGU.

PROVIDED, that no such toll fees or charges
shall be collected from: (1) officers and
enlisted men of AFP and members of PNP on
mission, (2) post office personnel delivering
mail, (3) physically-handicapped, and
disabled citizens who are 65 years or older.

When public safety and welfare so requires,
the sanggunian concerned may discontinue
the collection of the tolls, and thereafter the
said facility shall be free and open for public
use. (Sec. 155, LGC)

VI. COMMUNITY TAX

A. Who may levy
Cities or municipalities may levy a
community tax (Sec. 156, LGC)

NOTE: For purposes of enactment of a local
tax ordinance levying a community tax, the
conduct of a public hearing shall NO longer
be required.

B. Who are liable (Sec. 157 &158, LGC)

1. Individuals -- every inhabitant of the
Philippines eighteen (18) years of age
or over
Who has been regularly employed
on a wage or salary basis for at
least thirty (30) consecutive
working days during any calendar
year, OR
Who is engaged in business or
occupation, OR
Who owns real property with an
aggregate assessed value of P1,000
or more, OR
Who is required by law to file an
income tax return
o shall pay
an annual community tax of
Five pesos (P5.00) AND
an annual additional tax of One
peso (P1.00) for every One
thousand pesos (P1,000.00) of
income regardless of whether
from business, exercise of
profession or from property which
in no case shall exceed Five
thousand pesos (P5,000.00).

NOTE: In the case of husband and
wife, EACH shall pay the basic tax of
P5.00; but the additional tax herein
imposed shall be based upon the total
property owned by them and the total
gross receipts or earnings derived by
them.

2. Juridical Persons -- every
corporation no matter how created or
organized, whether domestic or
resident foreign, engaged in or doing
business in the Philippines
shall pay
o an annual community tax of Five
hundred pesos (P500.00) AND
o an annual additional tax, which,
in no case, shall exceed Ten
thousand pesos (P10,000.00) in
accordance with the following
schedule:

(1) For every P5,000 worth of real
property in the Philippines owned
by it during the preceding year
based on the valuation used for the
payment of real property tax under
existing laws, found in the
assessment rolls of the city or
municipality where the real
property is situated P2; AND

(2) For every P5,000.00 of gross
receipts or earnings derived by it
from its business in the Philippines
during the preceding year P2.00
NOTE: The dividends received by a
corporation from another corporation
however shall, for the purpose of the
additional tax, be considered as part of
the gross receipts or earnings of said
corporation.

C. Who are exempted (Sec. 159, LGC)
(1) Diplomatic and consular
representatives;
(2) Transient visitors when their stay in
the Philippines does not exceed 3 months

D. Manner of Payment
PLACE OF PAYMENT -- community tax
shall be paid in the place of residence of
the individual, or in the place where the
principal office of the juridical entity is
located. (Sec. 160, LGC)

TIME OF PAYMENT community tax shall
accrue on the 1
st
day of January of each
year which shall be paid not later than
the last day of February of each year
if a person reaches 18 or loses the
benefit of exemption
o ON OR BEFORE the LAST DAY OF
JUNE liable for the tax on the day
he reaches 18 or loses
exemption.
MARCH he shall have 20 days to
pay the community tax without
becoming delinquent

TAXATION LAW 2
persons who become resident of Phil or
reaches 18 or loses exemption ON OR
AFTER the 1
ST
DAY OF JULY shall NOT
be subject to community tax for that
year.
corporations established and organised
JUNE shall be liable for the tax for
that year
MARCH shall have 20 days to pay
the tax without becoming delinquent
o ON OR AFTER the 1
ST
DAY OF JULY
shall NOT be subject to community
tax for that year

NOTE: if the tax is not paid within the
prescribed period, there shall be added to the
unpaid amount an interest of 24% per annum
from the due date until it is paid. (Sec. 161,
LGC)

VII. COLLECTION OF TAXES

A. Tax Period -- unless otherwise provided
in this Code, the tax period of all local
taxes, fees and charges shall be the
calendar year. (Sec. 165, LGC)

B. Manner of Payment -- Such taxes, fees
and charges may be paid in quarterly
installments. (Sec. 165, LGC)

C. Accrual of Tax -- All local taxes, fees,
and charges shall accrue on the first
(1st) day of January of each year.
However, new taxes, fees or charges, or
changes in the rates thereof, shall
accrue on the first (1st) day of the
quarter next following the effectivity
of the ordinance imposing such new
levies or rates. (Sec. 166, LGC)

D. Time of Payment -- All local taxes, fees,
and charges shall be paid within the first
twenty days of January or of each
subsequent quarter, as the case may be.
(Jan 20, Apr 20, July 20, and Oct 20).
The sanggunian concerned may, for a
justifiable reason or cause, extend the
time for payment of such taxes, fees, or
charges without surcharges or penalties,
but only for a period not exceeding six
(6) months. (Sec. 167, LGC)

E. Surcharges and Penalties
25% surcharge on taxes, fees or
charges NOT paid on time, AND
interest at the rate NOT exceeding
2% per month of the unpaid taxes,
fees or charges INCLUDING
surcharges, until the amount is fully
paid
NOTE: in no case shall the total
interest exceed 36 months. (Sec.
168, LGC)

F. Collecting Authority All local taxes,
fees and charges shall be collected by the
provincial, city, municipal, or barangay
treasurer, or their duly authorised
deputies. (Sec. 170, LGC)

G. Examination of Books The local
treasurer or his deputy duly authorised in
writing, may examine the books,
accounts and other pertinent records of
any person, partnership, corporation, or
association in order to ascertain, assess
and collect the correct amount of tax.
Such examination shall be made during
the regular business hours, ONLY
ONCE for every tax period, and shall
be certified to by the examining official.
(Sec. 171, LGC)

VIII. CIVIL REMEDIES (BOTH LGU AND
TAXPAYER)

A. Personal Property Exempt from
Distraint or Levy the following
property shall be EXEMPT from distraint
or levy for delinquency in the payment of
any LOCAL tax, fee or charge:
tools and implements necessarily
used by the delinquent taxpayer in
his trade or employment
one horse, cow, carabao, or other
beast of burden, such as the
delinquent taxpayer may select and
necessarily used by him in his
ordinary occupation
his necessary clothing, and that of all
his family
household furniture and utensils
necessary for housekeeping and used
for that purpose by the delinquent
taxpayer, such as he may select, of a
value not exceeding P10,000
provisions, including crops, actually
provided for individual or family use
sufficient for 4 months
the professional libraries of doctors,
engineers, (ehem) lawyers and
judges
one fishing boat and net, not
exceeding the total value of P10,000
by the lawful use of which a
fisherman earns his livelihood
any material or article forming part of
a house or improvement of any real
property (Sec. 185, LGC)

B. Periods of Assessment and Collection
of LOCAL Taxes
GEN RULE: Assessment shall be made
within 5 years from the date they become
due, and collection shall be made within
5 years from the date of assessment by
administrative or judicial action.
EXCEPTION: In case of FRAUD, or
INTENT TO EVADE PAYMENT OF TAX, the
same may be assessed within 10
years from discovery of fraud or
intent to evade payment. (Sec. 194,
LGC)

C. When Running of Prescription of
Above Periods is Suspended The
running of the periods of prescription
above shall be suspended for the time
during which:
the treasurer is legally prevented
from making the assessment or
collection

TAXATION LAW 2
the taxpayer requests for a
reinvestigation and executes a waiver
in writing before expiration of the
period within which to assess or
collect
the taxpayer is out of the country or
otherwise cannot be located (Sec.
194 (d), LGC)

D. Protest of Assessment (see flowchart
III below)

E. Claim for Refund or Tax Credit
No case or proceeding shall be
maintained in any court for the
recovery of any tax, fee, or charge
erroneously or illegally collected until
a WRITTEN CLAIM for refund or
credit has been filed with the local
treasurer.
No case or proceeding shall be
entertained in any court AFTER the
expiration of 2 years from the date of
payment of such tax, or from the
date the taxpayer is entitled to a
refund or credit. (Sec. 196, LGC)

F. Remedy for Illegal or
Unconstitutional Tax Ordinance
STEP 1: Any question on the
constitutionality or legality of tax
ordinances or revenue measures may be
raised on appeal within 30 days from
the effectivity thereof to the Sec of
Justice.

STEP 2: The Sec of Justice shall decide
within 60 days from the date of
receipt of the appeal. However, this
appeal shall not have the effect of
suspending the effectivity of the
ordinance and the accrual and payment
of the tax levied therein.

STEP 3: Within 30 days after receipt
of the decision or the lapse of the 60-
day period without the Sec of Justice
acting upon the appeal, the aggrieved
party may file appropriate proceedings
with a court of competent jurisdiction.
(Sec 187, LGC)

IX. MISCELLANEOUS PROVISIONS

A. Power to Levy Taxes, Fees or
Charges
GEN RULE: LGU may exercise the
power to levy taxes, fees or charges on
ANY BASE OR SUBJECT not otherwise
specifically enumerated in LGC or NIRC.
EXCEPTION: It must NOT be unjust,
excessive, oppressive, confiscatory or
contrary to declared national policy.
(Sec. 186, LGC)

B. Requirements for a Valid Tax
Ordinance (3 Ps)
1. the ordinance shall only be enacted if
there is a prior public hearing
conducted for the purpose (Sec. 187)
2. within 10 days after the approval of
the ordinance, it must be published
in full for 3 consecutive days in a
newspaper of local circulation, or if
no such newspaper, it must be
posted in at least 2 conspicuous and
publicly accessible places. (Sec. 188)

CASE LAW: The requirement of publication in
full for 3 consecutive days is MANDATORY for
a tax ordinance to be valid. The tax
ordinance will be null and void if it fails to
comply with such publication requirement.
[COCA-COLA vs. CITY OF MANILA (Jun. 27,
2006)]

C. Authority to Adjust Rates LGU shall
have the authority to adjust the tax rates
prescribed in LGC NOT oftener than once
every 5 years, but in no case shall such
adjustment exceed 10% of the rates
fixed. (Sec. 191, LGC)

D. Authority to Grant Exemption LGU
may, through ordinances, grant tax
exemptions, incentives or reliefs under
such terms and conditions as they may
deem necessary. (Sec. 192, LGC)

TAXATION LAW 2
START
Local Treasurer (LT) assess
local taxes w/in 5 years from
date they become due or 10
years from discovery of fraud
(Sec. 195)
LT issues notice
of assessment
Taxpayer files written protest is
protest made w/n 60 days from
receipt of notice of assessment
Is protest made
w/in prescribed
period?
LT grants
protest?
Assessment
becomes
final
LT decides on
protest w/in 60
days from filing of
protest
LT Issues notice
canceling
partially/wholly
the assessment
Taxpayer appeals to
court of competent
jurisdiction (regular
courts) w/in 30 days
from receipt of notice or
from lapse of 60 days
LT decides w/in
60 days?
No Yes
Yes
No
Yes
No
Flowchart III: Taxpayers Remedies From Assessment of Local Taxes
other than Real Property Taxes-Local Government Code
End
Appeal to CTA Division but
If the decision is from an
RTC exercising appellate
jurisdiction, appeal should
be made directly no CTA en
banc under Rule 43 of ROC
If Division decides against
taxpayer file MR w/in 15 with
the same division.
If MR is denied, file Petition
for review with CTA en banc
Appeal to
Supreme Court
End

TAXATION LAW 2
START
Tax constitutes a lien superior
to all liens and may only be
extinguished upon payment of
the tax and the related charges.
(Sec. 173)
Flowchart IV: Procedure for Distraint and Levy for Purposes of Satisfying
Local Taxes-Local Govt Code
Time for payment
of Local taxes
expires
Local Treasurer (LT), upon written
notice, seizes sufficient personal
property to satisfy the tax, and
other charges (Sec. 175)
LT issues a certificate
which serves as warrant
for the distraint of personal
property, (Sec. 175)
Officer executing the
distraint accounts for the
goods, distrained (Sec. 175)
Officer posts notice in office of the
chief executive of the LGU where
the property is distrained.& in at
least 2 other public places
specifying the time & place of sale,
and distrained goods. The time of
sale shall not be less than twenty
(20) days after the notice. (Sec. 175)
Before the sale, the goods or
effects distrained shall be
restored to the owner.if all
charges are paid (175d)
Officer sells the goods at public
auction to the highest bidder
for cash. w/in 5 days, the local
treasurer shall report sale to
the local chief executive
concerned (175e)
it shall be considered as sold to
the LGU for the amount of the
assessment made by the
Committee on Appraisal and to
the extent of the same amount,
the tax delinquencies shall be
cancelled. (175e)
If the proceeds of the sale
are insufficient other
property may be distrained
until the full amount due,
including all expenses, is
collected. (175f)
Real property may be levied
on before, simultaneously, or
after the distraint of personal
property (Sec. 176)
Procedure for levying real properties to satisfy local taxes is the same as levy
procedure for satisfying real property taxes (Sec. 258-266) (See Flowchart VII)
Except for the following:
1. Publication is once a week for 3 weeks for local taxes (Sec. 178) and once a
week for 2 weeks for real property taxes (Sec. 260)
2. For local taxes, LGU may purchase levied property if there is no bidder or if
the highest bid is insufficient to cover the taxes and other charges (Sec. 181)
while for real property taxes the LGU may purchase levied property if there is no
bidder (Sec. 263)
Property
distrained
disposed w/in
120 days from
distraint?
Yes
No
Excess of proceeds over
charges shall be returned
to the owner of the
property sold. (175f)
Committee On Appraisal:
Local Treasurer- chairman,
COA representative &LGU
assessor as members

TAXATION LAW 2
VII. VII. VII. VII. REAL PROPERTY TAXATION REAL PROPERTY TAXATION REAL PROPERTY TAXATION REAL PROPERTY TAXATION
I. Kinds of Real Property Tax and Special Levies
Basic real property tax
Additional levy on real property for the
Special Education Fund
Additional ad valorem tax on idle lands
Special levy by local government units

II. Basic Concepts
Definition:
Real property tax has been defined as a direct tax
on the ownership of lands and buildings or other
improvements thereon not specially exempted, and
is payable regardless of whether the property is
used or not, although the value may vary in
accordance with such factor.
NOTE: Real property tax is a fixed proportion of
the assessed value of the property being taxed and
requires, therefore, the intervention of assessors.

Characteristics of real property tax
It is a direct tax on the ownership or use of real
property.
It is an ad valorem tax. Value is the tax base.
It is proportionate because the tax is calculated
on the basis of a certain percentage of the
value assessed.
It creates a single, indivisible obligation.
It attaches on the property (i.e., a lien) and is
enforceable against it.

Nature and scope of power to impose realty
tax
The taxing power of local governments in real
property taxation is a delegated power.

Fundamental principles governing real
property taxation (CAPUE)
1. Real property shall be appraised at its Current
and fair market value.
2. Real property shall be classified for assessment
purposes on the basis of its Actual use.
3. Real property shall be assessed on the basis of
a Uniform classification within each local
government unit.
4. The appraisal, assessment, levy and collection
of real property tax shall not be let to any
Private person.
5. The appraisal and assessment of real property
shall be Equitable. [Section 197, Local
Government Code]

Real properties subject to tax
Generally, Real Property Tax is imposed on lands,
buildings, machineries and other improvements.
The Local Government Code contains no definition
of real property; however, the following terms
are defined:

Improvement It is a valuable addition
made to a property or an amelioration in its
condition amounting to more than a repair or
replacement of parts involving capital
expenditures and labor which is intended to
enhance its value, beauty, or utility or to adopt
it for new or further purposes. [Section
199(m), Local Government Code]
Machinery Machinery embraces machines,
equipment, mechanical contrivances,
instruments, appliances or apparatus, which
may or may not be attached, permanently or
temporarily, to the real property. It includes
the physical facilities for production, the
installations and appurtenant service facilities,
those which are mobile, self-powered or self-
propelled, and those not permanently attached
to the real property which are actually, directly,
and exclusively used to meet the needs of the
particular industry, business or activity and
which by their very nature and purpose are
designed for, or necessary to its
manufacturing, mining, logging, commercial,
industrial or agricultural purposes. [Section
199(o), Local Government Code]
NOTE: this definition of machinery is too all-
encompassing and broad in that everything
that is used even indirectly for the needs of
the industry can be classifies as machinery
which is REAL property, which in turn means
that it is subject to RPT; example would be a
SCREWDRIVER being used in an office
since this is used by the office and indirectly
contributes the to smooth functioning of the
general business then this can be treated as
real property
This was solved by the LGC IRR sec 290 (o)
that now limits and qualifies this: this is
known as the GENERAL PURPOSE RULE
This rule states that if it used in line or for
the general purpose of the business but only
indirectly, then it is NOT to be treated as real
property. This means that a typewriter being
used in the main office of a firm that
manufactures cars is NOT real property as
the typewriter is NOT used to actually make
the car which is the main purpose of the
company.

Generally the SC has held that Art 415 CC
(which enumerates the kinds of real property)
is an exclusive list as to what constitutes real
property. BUT FOR TAX PURPOSES ONLY, it is
common that certain properties be classified
as real property even if according to the
general principles of the CC, they would only
be classified as personal property. LESSON:
the NIRC and the LGC code prevail in
classifying property for tax purposes.

Properties EXEMPT from real property taxes

1. Real property owned by the Republic of the
Philippines or any of its political subdivisions
except when the beneficial use thereof has
been granted for consideration or otherwise to
a taxable person.

Q: Are GOCCs covered by the exemption?
No. The tax exemption of property owned
by the Republic of the Philippines refers to
properties owned by the government and by its
agencies which do not have separate and
distinct personalities, as distinguished from
GOCCs which have separate and distinct
personalities. [National Development Company
v. Cebu City]

Q: What is the scope of the exemption?
The exemption from tax of property owned by
the government obtains even as to properties
owned in a private, proprietary or patrimonial
character. The law makes no distinction
between property held in governmental
capacity and those possessed in a proprietary

TAXATION LAW 2
capacity. [Board of Assessment Appeals of
Laguna v. CTA]

CONFLICTING CASES: Mactan Airport
Authority vs. Pres. Marcos (September 11,
1996) and Manila Intl Airport Authority vs.
CA (July 20, 2006)
Both cases involves the following provisions:
Sec 133(o), LGC: Unless otherwise provided
herein, the LGUs are not allowed to levy (o)
taxes, fees or charges of any kind on the
national govt, its agencies, instrumentalities
and LGUs.
Sec 234(a), LGC: Properties exempt from
PPT (a) real properties owned by the Republic
or any of its political subdivisions
MACTAN Case: The SC held that since Mactan
Airport Authority is a GOCC and GOCCs are not
among those enumerated as exempt, it is not
exempted from RPT. Legislature in amending
the law has specifically deleted GOCCS from
the enumeration in Sec 234(a).
MIAA Case: SC held that MIAA is not a GOCC
since it is neither a stock corporation nor a
non-stock corp as defined in the Administrative
Code. Although not covered by the
enumeration in Sec 234, MIAA is a public utility
which falls under the term instrumentality
outside the scope of LGSs local taxing powers
under Sec 133(o).
NOTE: The MIAA Case may be argued to have
superseded the previous case, being a more
recent ruling decided by SC en banc.

2. Charitable institutions, churches, parsonages,
or convents appurtenant thereto, mosques,
non-profit or religious cemeteries, and all
lands, buildings, and improvements actually,
directly and exclusively used for religious,
charitable, or educational purposes.

CASE LAW: LUNG CENTER of the PHILS vs.
QUEZON CITY (June 29, 2004)

As a general principle, a charitable institution
does not lose its character and its exemption
from taxes simply because it derives income
from paying patients, or receives subsidies
from the government, so long as the money
received is devoted or used altogether to the
charitable object which it is intended to
achieve, and no money inures to the benefit of
persons managing or operating the institution.
TEST: The test whether an enterprise is
charitable or not is whether it exists to carry
out a purpose recognized by law as charitable
or whether it is maintained for gain, profit, or
private advantage.
EXTENT: The portions of Lung Centers real
property that are leased to private entities are
NOT exempt from real property taxes as these
are not actually, directly and exclusively used
for charitable purposes. However, portions of
the land occupied by the hospital and portions
of the hospital used for its patients, whether
paying or non-paying, are exempt from real
property taxes.

3. All machineries and equipment that are
actually, directly and exclusively used by local
water utilities and government-owned or
controlled corporations engaged in the supply
and distribution of water and/or generation and
transmission of electric power.

4. All real property owned by duly registered
Cooperatives as provided for under Republic
Act No. 6938.

5. Machinery and equipment used for Pollution
control and environmental protection. [Section
234, Local Government Code]

NOTE: A taxpayer claiming exemption must submit
sufficient documentary evidence to the local
assessor within thirty (30) days from the date of
the declaration of real property; otherwise, it shall
be listed as taxable in the Assessment Roll. (Sec.
206, LGC)

III. Rates of levy

[BASIC RPT] A province or city or a municipality
within the Metro Manila area shall fix a uniform rate
of basic real property tax applicable to their
respective localities as follows:
1. In the case of a province, at the rate not
exceeding 1% of the assessed value of real
property; and
2. In the case of a city or a municipality within the
Metro Manila area, at the rate not exceeding
2% of the assessed value of real property.
[Section 233, Local Government Code]
[ADDITIONAL LEVY ON REAL PROPERTY FOR
THE SPECIAL EDUCATION FUND] A province,
city or a municipality within the Metro Manila area
may levy and collect an annual tax of one percent
(1%) on the assessed value of real property which
shall be in addition to the basic real property tax.
The proceeds thereof shall exclusively accrue to the
Special Education Fund created under Republic Act
No. 5447. [Section 235, Local Government Code]

[ADDITIONAL AD VALOREM TAX ON IDLE
LANDS] A province or city or a municipality within
the Metro Manila area may levy an annual tax on
idle lands at the rate not exceeding five percent
(5%) of the assessed value of the property which
shall be in addition to the basic real property tax.
[Section 236, Local Government Code]

Sec 237. Idle Lands, Coverage. idle
lands shall include:
(a) Agricultural lands

more than one (1) hectare in area
suitable for cultivation, dairying,
inland fishery, and other agricultural
uses
one-half (1/2) of which remain
uncultivated or unimproved by the
owner or person having legal
interest.
Agricultural lands planted to permanent
or perennial crops with at least fifty
(50) trees to a hectare shall NOT be
considered idle lands. Lands actually
used for grazing purposes shall likewise
NOT be considered idle lands

(b) Lands other than agricultural
located in a city or municipality
more than one thousand (1,000)
square meters in area
one-half (1/2) of which remain
unutilized or unimproved by the

TAXATION LAW 2
owner or person having legal
interest.
Regardless of land area, this Section
shall applies to residential lots in
subdivisions duly, ownership of which
has been transferred to individual
owners, who shall be liable for the
additional tax: Provided, however, That
individual lots of such subdivisions,
ownership of which has not been
transferred to the buyer shall be
considered as part of the subdivision,
and shall be subject to the additional
tax payable by subdivision owner or
operator.

EXEMPTION from idle lands tax:
Exemptions are given due to:
a. force majeure;
b. civil disturbance;
c. natural calamity; or
d. any cause or circumstance which
physically or legally prevents the owner
or person having legal interest from
improving, utilizing or cultivating the
same.

[SPECIAL LEVY BY LOCAL GOVERNMENT
UNITS] A province, city or municipality may
impose a special levy on the lands comprised
a. within its territorial jurisdiction
b. specially benefited by public works projects or
improvements by the LGU concerned.
The special levy shall not exceed 60% of the actual
cost of such projects and improvements, including
the costs of acquiring land and such other real
property in connection therewith.
It shall not apply to lands exempt from basic
real property tax and the remainder of the
land, portions of which have been donated to
the LGU concerned for the construction of such
projects or improvements.
Need for public hearing and publication before
enactment of ordinance imposing special levy.
Special levy accrues on the first day of the
quarter next following the effectivity of the
ordinance imposing the levy. [Section 240,
Local Government Code]

IV. Other Important Provisions

APPRAISAL AND ASSESSMENT OF REAL
PROPERTY

Sec 201. Appraisal of Real Property. All real
property, whether taxable or exempt, appraised
at the current and fair market value prevailing in
the locality where the property is situated

Sec 202. Declaration of real Property by the
Owner or Administrator. shall be the duty of
all persons (natural or juridical) or their duly
authorized representative
owning or administering real property,
including the improvements therein
to prepare and file with assessor, a sworn
statement declaring the true value of their
property, whether previously declared or
undeclared, taxable or exempt, which shall
be the current and fair market value of the
property, as determined by the declarant
The sworn declaration of real property herein
referred to shall be filed with the assessor
concerned once every three (3) years during
the period from January first (1st) to June
thirtieth (30th) commencing with the
calendar year 1992.

Sec 203. Duty of Person Acquiring Real
Property or Making Improvement Thereon.
duty of any person, or his authorized
representative
acquiring at any time real property in any
municipality or city
or making any improvement on real property,
to prepare and file with the a sworn
statement declaring the true value of subject
property
within sixty (60) days after the acquisition of
such property or upon completion or
occupancy of the improvement, whichever
comes earlier.

Sec 204. Declaration of Real Property by the
Assessor. any person, by whom real property
is required to be declared under Section 202
refuses or fails for any reason to make such
declaration within the time prescribed
assessor shall himself declare the property in
the name of the defaulting owner, if known,
or against an unknown owner, as the case
may be, and shall assess the property for
taxation

Sec 205. Listing of Real Property in the
Assessment Rolls.
In every province and city, municipalities
within the Metropolitan Manila Area, there
shall be prepared and maintained by the
assessor
an assessment roll wherein shall be listed all
real property, whether taxable or exempt,
located within the local government unit;
property shall be listed, valued and assessed
in the name of the owner or administrator, or
anyone having legal interest in the property.
undivided real property of a deceased person
may be listed, valued and assessed in the
name of the estate or of the heirs and
devisees without designating them
individually
BUT undivided real property other than
that owned by a deceased may be listed,
valued and assessed in the name of one
or more co-owners: Provided, however,
That such heir, devisee, or co-owner shall
be liable severally and proportionately for
all obligations imposed by this Title and
the payment of the real property tax with
respect to the undivided property.
real property of a corporation, partnership,
or association shall be listed, valued and
assessed in the same manner as that of an
individual.
Real property owned by the Republic of the
Philippines, its instrumentalities and political
subdivisions, the beneficial use of which has
been granted, for consideration or otherwise,
to a taxable person, shall be listed, valued
and assessed in the name of the possessor,
grantee or of the public entity if such
property has been acquired or held for resale
or lease.

Sec 206. Proof of Exemption of Real Property
from Taxation.
Every person who shall claim tax exemption
for such property

TAXATION LAW 2
shall file with assessor within thirty (30) days
from the date of the declaration of real
property sufficient documentary evidence in
support of such claimlike corporate
charters, contracts, titles, articles of
incorporation etc
If the required evidence is NOT submitted
within the period prescribed, the property
shall be listed as taxable in the assessment
roll. However, if the property shall be proven
to be tax exempt, shall be dropped from the
assessment roll.

Sec 208. Notification of Transfer of Real
Property Ownership.
Any person who shall TRANSFER real
property OWNERSHIP to another
shall notify the assessor concerned within
sixty (60) days from the date of such transfer
The notification shall include the mode of
transfer, the description of the property
alienated, the name and address of the
transferee.

Sec 209. Duty of Registrar of Deeds to
Appraise Assessor of Real Property Listed in
Registry.
Duty of the Registrar of Deeds to require
every person who shall present for
registration a document of transfer,
alienation, or encumbrance of real property
to accompany the same with a certificate to
the effect that the real property subject has
been fully paid of all real property taxes due.
Failure to provide such certificate shall be a
valid cause for the refusal of the registration
of the document.

Sec 212. Preparation of Schedule of Fair
Market Values. Before any general revision of
property assessment is made
there shall be prepared a schedule of fair
market values by the assessor of the
provinces, cities and municipalities within
the Metropolitan Manila Area for the
different classes of real property situated in
their respective local government units
for enactment by ordinance of the
sanggunian
schedule of fair market values shall be
published in a newspaper of general
circulation in the province, city or
municipality; in the absence thereof, shall be
posted in the provincial capitol, city or
municipal hall and in two other conspicuous
public places

Sec 214. Amendment of Schedule of Fair
Market Values.
assessor may recommend to the sanggunian
amendments to correct errors in valuation in
the schedule of fair market values
sanggunian shall, by ordinance, act upon the
recommendation within ninety (90) days
from receipt

Sec 215. Classes of Real Property for
Assessment Purposes. For purposes of
assessment, real property shall be classified:
(CRAMS-IT)
1. Residential
2. Agricultural
3. Commercial
4. Industrial
5. Mineral
6. Timberland
7. Special

The city or municipality within the Metropolitan
Manila Area, through their respective
sanggunian, shall have the power to classify
lands as residential, agricultural, commercial,
industrial, mineral, timberland, or special in
accordance with their zoning ordinances.

Sec 216. Special Classes of Real Property.
lands, buildings, and other improvements
thereon
actually, directly and exclusively used for
hospitals, cultural, or scientific purposes
those owned and used by local water districts
government-owned or controlled corporations
rendering essential public services in the
supply and distribution of water and/or
generation and transmission of electric power
shall be classified as special.

Sec 217. Actual Use of Real Property as Basis
for Assessment. Real property shall be
classified, valued and assessed on the basis of its
actual use
(Regardless of ULO)
regardless of where Located
regardless whoever Owns it
regardless whoever Uses it

Sec 220. Valuation of Real Property. In cases
where:

(a) real property is declared and listed for
taxation purposes for the first time
(b) there is an ongoing general revision of
property classification and assessment
(c) a request is made by the person in whose
name the property is declared

assessor shall make a classification, appraisal
and assessment or taxpayer's valuation
Provided, however, That the assessment of
real property shall NOT be increased oftener
than once every three (3) years
EXCEPT in case of new improvements
substantially increasing the value of said
property or of any change in its actual use.

Sec 221. Date of Effectivity of Assessment or
Reassessment.
All assessments/ reassessments made after
the first (1st) day of January of any year
shall take effect on the first (1st) day of
January of the succeeding year
Provided, the reassessment of real property
shall be made within ninety (90) days from
the date if any such cause or causes
occurred, and shall take effect at the
beginning of the quarter next following the
reassessment due to its (ACIDI):
partial or total Destruction
major Change in its actual use
great and sudden Inflation or deflation of
real property values
gross Illegality of the assessment
any other Abnormal cause

Sec 222. Assessment of Property Subject to
Back Taxes. Real property declared for the
FIRST TIME shall be assessed for taxes (back

TAXATION LAW 2
taxes) for the period during which it would have
been liable but in no case of more than ten (10)
years prior to the date of initial assessment
Provided, however, That such taxes shall be
computed on the basis of the applicable
schedule of values in force during the
corresponding period.
If such taxes are paid on or before the end of
the quarter following the date the notice of
assessment was received by the owner NO
interest for delinquency shall be imposed
thereon; otherwise, taxes shall be subject
interest at the rate of two percent (2%) per
month or a fraction thereof from the date of
the receipt of the assessment until such taxes
are fully paid.

Sec 224. Appraisal and Assessment of
Machinery.

(a) The fair market value of brand-new
machinery shall be acquisition cost
In all other cases, the fair market value
shall be determined by dividing the
remaining economic life of the
machinery by its estimated economic
life and multiplied by the replacement
or reproduction cost.

(b) If machinery imported, the acquisition
cost includes (FIB-BADC) Freight,
Insurance, Bank and other charges,
Brokerage, Arrastre and handling, Duties
and taxes, plus Charges at the present site

Sec225. Depreciation Allowance for
Machinery. depreciation allowance shall be
made for machinery at a rate NOT exceeding five
percent (5%) of its original cost or its
replacement or reproduction cost, as the case
may be, for each year of use
Provided, the remaining value for all kinds of
machinery shall be fixed at NOT less than
twenty percent (20%) of such original,
replacement, or reproduction cost for so long
as the machinery is useful and in operation.

ASSESSMENT APPEALS

Sec 226. Local Board of Assessment Appeals.
Any owner or person having legal interest in
the property NOT satisfied with the action of the
assessor in the assessment of his property
May within sixty (60) days from the date of
receipt of the written notice of assessment
appeal to the Board of Assessment Appeals of
the provincial or city
by filing a petition under oath in the form
prescribed for the purpose, together with
copies of the tax declarations and such
affidavits or documents submitted in support
of the appeal.

Sec 229. Action by the Local Board of
Assessment Appeals.

(a) Board shall decide the appeal within one
hundred twenty (120) days from the
date of receipt of such appeal. The Board,
after hearing, render its decision based on
substantial evidence
(b) In the exercise of its appellate jurisdiction,
the Board shall have the power to summon
witnesses, administer oaths, conduct ocular
inspection, take depositions, and issue
subpoena and subpoena duces tecum. The
proceedings of the Board shall be conducted
SOLELY for the purpose of ascertaining
the facts without necessarily adhering to
technical rules applicable in judicial
proceedings.
(c) secretary of the Board shall furnish the
owner of the property or the person having
legal interest therein and the assessor with a
copy of the decision of the Board. In case the
provincial or city assessor concurs in the
revision or the assessment, it shall be his
duty to notify the owner or the person having
legal interest of such fact using the form
prescribed.
(d) The owner, the person having legal interest
or the assessor who is NOT satisfied with the
decision of the Board,
May within thirty (30) days after receipt
of the decision of said Board appeal to
the Central Board of Assessment
Appeals - decision of the Central Board
shall be final and executory

Sec 231. Effect of Appeal on the Payment of
Real Property Tax. Appeal on assessments of
real property shall, in NO case, suspend the
collection of the corresponding realty taxes on the
property involved as assessed but without
prejudice to subsequent adjustment depending
upon the final outcome of the appeal.

SPECIAL LEVY BY LGUs

Sec 241. Ordinance Imposing a Special Levy.
A tax ordinance imposing a special levy shall:
describe with reasonable accuracy the
nature, extent, and location of the public
works projects or improvements to be
undertaken
state the estimated cost
specify the metes and bounds by monuments
and lines and the
number of annual installments for the
payment of the special levy which in no case
shall be less than five (5) nor more than ten
(10) years
*The sanggunian shall NOT be obliged, in the
apportionment and computation of the special levy,
to establish a uniform percentage of all lands
subject to the payment of the tax for the entire
district. May fix different rates for different parts or
sections thereof, depending on whether such land
is more or less benefited by proposed work.

Sec 242. Publication of Proposed Ordinance
Imposing a Special Levy. Before the
enactment of an ordinance imposing a special
levy, the sanggunian concerned shall:
conduct a public hearing
notify in writing the owners to be affected
or the persons having legal interest as to
the date and place thereof and afford the
latter the opportunity to express their
positions or objections relative to the
proposed ordinance.

Sec 244. Taxpayer's Remedies Against Special
Levy. Any owner of real property affected by a
special levy or any person having a legal interest
therein may, upon receipt of the written notice of

TAXATION LAW 2
assessment of the special levy, avail of the
remedies provided for in Chapter 3, Title Two, Book
II of this Code.

Sec245. Accrual of Special Levy. The special
levy shall accrue on the first day of the
quarter next following the effectivity of
the ordinance imposing such levy.

COLLECTION OF REAL PROPERTY TAX

Sec 246. Date of Accrual of Tax. real property
tax for any year shall accrue on the first day of
January
from that date it shall constitute a lien on
the property
superior to any other lien, mortgage, or
encumbrance of any kind whatsoever
extinguished only upon the payment of the
delinquent tax.

Sec 247. Collection of Tax. The collection of
the real property tax with interest thereon and
related expenses, and the enforcement of the
remedies are the responsibility of the city or
municipal treasurer.
treasurer may deputize the barangay
treasurer to collect all taxes on real property
located in the barangay:
Provided, the barangay treasurer is
properly bonded for the purpose
Provided, further, That the premium on
the bond shall be paid by the city or
municipal government concerned.

Sec 249. Notice of Time for Collection of Tax.
treasurer shall post the notice of the dates
when the tax may be paid without interest
publicly accessible place at the city or municipal
hall + notice shall likewise be published in a
newspaper of general circulation in the locality
once a week for two (2) consecutive weeks.
on or before the thirty-first (31st) day of
January each year in the case of the basic
real property tax and the additional tax for
the Special Education Fund (SEF)
or any other date to be prescribed by the
sanggunian concerned in the case of any
other tax levied under this title

Sec 250. Payment of Real Property Taxes in
Installments. The owner or the person
having legal interest may pay the basic real
property tax and the additional tax for Special
Education Fund (SEF) due without interest:
in four (4) equal installments;
the first installment to be due and
payable on or before March Thirty-first
(31st)
the second installment, on or before June
Thirty (30)
the third installment, on or before
September Thirty (30)
and the last installment on or before
December Thirty-first (31st)
*except the special levy the payment of which shall
be governed by ordinance of the sanggunian
concerned.
*The date for the payment of any other tax
imposed under this Title without interest shall be
prescribed by the sanggunian concerned.
*Payments of real property taxes shall first be
applied to prior years delinquencies, interests, and
penalties, if any, and only after said delinquencies
are settled may tax payments be credited for the
current period.

Sec 251. Tax Discount for Advanced Prompt
Payment. If the basic real property tax and
the additional tax accruing to the Special
Education Fund (SEF) are paid in advance as
provided under Section 250
sanggunian may grant a discount NOT
exceeding twenty percent (20%) of the
annual tax due.

Sec 252. Payment Under Protest.

(a) No protest shall be entertained unless the
taxpayer first pays the tax.
There shall be annotated on the tax receipts
the words "paid under protest"
The protest in writing must be filed within
thirty (30) days from payment of the tax to
treasurer who shall decide the protest within
sixty (60) days from receipt.

(b) The tax or a portion paid under protest, shall
be held in trust by the treasurer concerned.

(c) In the event that the protest is finally decided
in favor of the taxpayer, the amount or portion
of the tax protested shall be refunded to the
protestant, or applied as tax credit against his
existing or future tax liability.
(d) In the event that the protest is denied or upon
the lapse of the sixty day period prescribed
in subparagraph (a), the taxpayer may avail
of the remedies as provided for in Chapter 3,
Title II, Book II of this Code.

Sec 253. Repayment of Excessive Collections.
When an assessment of real property tax or
any other tax under this Title found to be illegal
or erroneous and the tax is accordingly reduced
or adjusted
the taxpayer may file a written claim for
refund or credit for taxes and interests with
the treasurer within two (2) years from the
date the taxpayer is entitled to such
reduction or adjustment.
The provincial or city treasurer shall decide
the claim for tax refund or credit within sixty
(60) days from receipt thereof
In case the claim for tax refund or credit is
denied, the taxpayer may avail of the
remedies as provided in Chapter 3, Title II,
Book II of this Code.

Sec 254. Notice of Delinquency in the
Payment of the Real Property Tax.

(a) When real property tax or other tax imposed
under this Title becomes delinquent,
treasurer shall immediately cause a notice of
the delinquency to be posted at the main hall
and in a publicly accessible and conspicuous
place in each barangay of the local
government unit concerned + notice of
delinquency shall also be published once a
week for two (2) consecutive weeks, in a
newspaper of general circulation in the
province, city, or municipality.

(b) notice shall specify:
the date upon which the tax became
delinquent

TAXATION LAW 2
shall state that personal property may be
distrained to effect payment
state that any time before the distraint of
personal property, payment of the tax
with surcharges, interests and penalties
may be made in accordance with the
next following Section
and unless the tax, surcharges and
penalties are paid before the expiration
of the year for which the tax is due
except when the notice of assessment or
special levy is contested administratively
or judicially pursuant to the provisions of
Chapter 3, Title II, Book II of this Code,
the delinquent real property will be
SOLD at public auction, and the title to
the property will be vested in the
purchaser, subject, however, to the right
of the delinquent owner of the property
or any person having legal interest
therein to redeem the property within
one (1) year from the date of sale.

Sec 255. Interests on Unpaid Real Property
Tax. for failure to pay the basic real property
tax or any other tax levied under this Title upon
the expiration of the periods when due
subject the taxpayer to the payment of
interest at the rate of two percent (2%)
per month on the unpaid amount until the
delinquent tax shall have been fully paid
Provided, in NO case shall the total interest
on the unpaid tax or portion thereof exceed
thirty-six (36) months.

Sec 256. Remedies For The Collection Of Real
Property Tax. For collection of the real
property tax and other tax levied under this Title,
the local government unit concerned may avail of
the remedies:
administrative action thru levy on real
property
or by judicial action.

Sec 257. Local Governments Lien. real
property tax and any other tax levied under this
Title constitute a lien on the property subject to
tax
superior to all liens, charges or
encumbrances in favor of any person
irrespective of the owner or possessor thereof
enforceable by administrative or judicial
action
and may only be extinguished upon payment
of the tax and the related interests and
expenses.

Sec 258. Levy on Real Property. After the
expiration of the time required to pay real
property tax or any other tax levied under this
Title, real property subject to such tax may be
levied through the issuance of a warrant
on or before, or simultaneously with, the
institution of the civil action for the
collection of the delinquent tax.
The warrant shall operate with the force of a
legal execution throughout the province, city
or a municipality, within the Metropolitan
Manila Area.
The warrant shall be mailed to or served
upon:
the delinquent owner or person having
legal interest - in case he is out of the
country or cannot be located, the
administrator or occupant of the
property.
At the same time, written notice of the
levy with the attached warrant shall be
mailed to or served upon the assessor
who shall annotate it on the tax
declaration
AND the Registrar of Deeds of the
province, city or municipality within the
Metropolitan Manila Area where the
property is located who shall annotate
the levy on the certificate of title of the
property

Sec 260. Advertisement and Sale. Within
thirty (30) days after service of the warrant of
levy, the local treasurer shall proceed to publicly
advertise for sale or auction the property or a
usable portion thereof as may be necessary to
satisfy the tax delinquency and expenses of sale
The advertisement shall be by posting a
notice at the main entrance of the provincial,
city or municipal building, and in a publicly
conspicuous place in the barangay where the
real property is located + by publication once
a week for two (2) weeks in a newspaper of
general circulation in the province, city or
municipality where the property is located.
advertisement shall specify:
the amount of the delinquent tax
interest due thereon
expenses of sale
the date and place of sale
name of the owner of the or person
having legal interest
description of the property to be sold.
*At any time before the date fixed for the sale, the
owner or person having legal interest may stay the
proceedings by paying the delinquent tax +
interest due + expenses of sale.
*Proceeds of the sale in excess of the delinquent
tax, the interest due thereon, and the expenses of
sale shall be remitted to the owner of the real
property or person having legal interest therein.

Sec 261. Redemption of Property Sold.
Within one (1) year from the date of sale, the
owner of the delinquent real property or person
having legal interest or their representatives shall
have the right to redeem the property upon
payment to treasurer of the:
amount of the delinquent tax
interest due
expenses of sale - from the date of delinquency
to the date of sale
plus interest of not more than two percent
(2%) per month on the purchase price - from
the date of sale to the date of redemption
* payment shall invalidate the certificate of sale
issued to the purchaser and the owner of the
delinquent real property or person having legal
interest shall be entitled to a certificate of
redemption
*From date of sale until the expiration of the period
of redemption, the delinquent real property shall
remain in possession of the owner or person having
legal interest therein who shall be entitled to the
income and other fruits
*the property shall be free from lien of such
delinquent tax, interest due thereon and
expenses of sale.

Sec 262. Final Deed to Purchaser. In case
the owner or person having legal interest fails to

TAXATION LAW 2
redeem the delinquent property, the treasurer
shall execute a deed conveying to the
purchaser said property, free from lien of the
delinquent tax, interest due thereon and
expenses of sale

Sec 263. Purchase of Property By the Local
Government Units for Want of Bidder. In
case there is NO bidder for the real property, the
real property tax and the related interest and
costs of sale
the treasurer conducting the sale shall
purchase the property in behalf of the
local government unit concerned to
satisfy the claim
shall be the duty of the Registrar of Deeds to
transfer the title of the forfeited property to
the local government unit concerned without
the necessity of an order from a
competent court.
*Within one (1) year from the date of such
forfeiture, the taxpayer or any of his
representative, may redeem the property by paying
to the treasurer the full amount of the real property
tax and the related interest and the costs of sale. If
the property is not redeemed as provided herein,
absolute ownership thereof shall be vested on the
local government unit concerned.

Sec 264. Resale of Real Estate Taken for
Taxes, Fees, or Charges. The sanggunian
sell and dispose of the real property acquired
under the preceding section at public auction;
proceeds of the sale shall accrue to the general
fund of the local government unit.
may by ordinance
upon notice of not less than twenty (20) days

Sec 265. Further Distraint or Levy. Levy
may be repeated if necessary until the full
amount due, including all expenses, is
collected.

Sec 266. Collection of Real Property Tax
Through the Courts. The local government
unit concerned may enforce the collection of the
basic real property tax or any other tax levied
under this Title
by civil action in any court of competent
jurisdiction - civil action shall be filed by the
treasurer within the period prescribed in
Section 270 of this Code.

Sec 267. Action Assailing Validity of Tax Sale.
No court shall entertain any action assailing
the validity or any sale at public auction of
real property or rights until:
taxpayer shall have deposited with the court
the amount for which the real property
was sold, together with interest of two
percent (2%) per month from the date of
sale to the time of the institution of the
action
amount so deposited shall be:
paid to the purchaser at the auction sale
if the deed is declared invalid
shall be returned to the depositor if the
action fails.
*Neither shall any court declare a sale at public
auction invalid by reason or irregularities or
informalities in the proceedings - unless the
substantive rights of the delinquent owner of the
real property or the person having legal interest
have been impaired.

Sec 268. Payment of Delinquent Taxes on
Property Subject of Controversy. In any
action involving the ownership or possession of,
or succession to, real property, the court may,
motu propio or upon representation of the
treasurer - award such ownership, possession, or
succession to any party to the action
upon payment to the court of the taxes with
interest due on the property and all other
costs that may have accrued
subject to the final outcome of the action.

Sec 270. Periods Within Which To Collect Real
Property Taxes. The basic real property tax
and any other tax levied under this Title shall be:
collected within five (5) years from the date
they become due
No action for the collection of the tax,
whether administrative or judicial, shall be
instituted after the expiration of such period
In case of fraud or intent to evade
payment of the tax, such action may be
instituted for the collection of the same
within ten (10) years from the discovery
of such fraud or intent to evade payment.

The period of prescription within which to collect
shall be suspended for the time during which
(PRO):

(1) The local treasurer is legally Prevented from
collecting the tax;
(2) The owner of the property or the person
having legal interest therein requests for
Reinvestigation and executes a waiver in
writing before the expiration of the period
within which to collect; and
(3) The owner of the property or the person
having legal interest therein is Out of the
country or otherwise cannot be located.

DISPOSITION OF PROCEEDS

Sec 271. Distribution of Proceeds. proceeds
of real property tax, including interest thereon +
proceeds from the use, lease or disposition, sale
or redemption of property acquired at a public
auction shall be distributed as follows:

(a) In the case of provinces:
(1) Province Thirty-five percent (35%)
shall accrue to the general fund;
(2) Municipality Forty percent (40%) to
the general fund of the municipality
where the property is located; and
(3) Barangay Twenty-five percent (25%)
shall accrue to the barangay where the
property is located.

(b) In the case of cities:
(1) City Seventy percent (70%) shall
accrue to the general fund of the city;
and
(2) Thirty percent (30%) shall be distributed
among the component barangays of the
cities where the property is located in the
following manner:
(i) Fifty percent (50%) shall accrue to
the barangay where the property is
located;

TAXATION LAW 2
(ii) Fifty percent (50%) shall accrue
equally to all component barangays
of the city; and

(c) In the case of a municipality within the
Metropolitan Manila Area:
(1) Metropolitan Manila Authority
Thirty-five percent (35%) shall accrue to
the general fund of the authority;
(2) Municipality Thirty-five percent (35%
shall accrue to the general fund of the
municipality where the property is
located;
(3) Barangays Thirty percent (30%) shall
be distributed among the component
barangays of the municipality where the
property is located in the following
manner:
(i) Fifty percent (50%) shall accrue to
the barangay where the property is
located;
(ii) Fifty percent (50%) shall accrue
equally to all component barangays
of the municipality.

(d) The share of each barangay shall be
released, without need of any further action,
directly to the barangay treasurer on a
quarterly basis within five (5) days after the
end of each quarter and shall not be subject
to any lien or holdback for whatever purpose.

Sec 272. Application of Proceeds of the
Additional One Percent SEF Tax. The
proceeds from the additional one percent (1%)
tax on real property accruing to the Special
Education Fund (SEF):
shall be automatically released to the local
school boards
Provided, in case of provinces, the
proceeds shall be divided equally
between the provincial and municipal
school boards
the proceeds shall be allocated for the:
operation and maintenance of public
schools
construction and repair of school
buildings, facilities and equipment
educational research
purchase of books and periodicals
sports development as determined and
approved by the Local School Board.

Sec 273. Proceeds of the Tax on Idle
Lands. proceeds of the additional real property
tax on idle lands shall accrue to the:
respective general fund of the province
or city where the land is located
In the case of a municipality within the
Metropolitan Manila Area, the proceeds shall
accrue equally to the Metropolitan Manila
Authority and the municipality where the
land is located.

Sec 274. Proceeds of the Special Levy. The
proceeds of the special levy on lands benefited by
public works, projects and other improvements
shall accrue to the general fund of the local
government unit which financed such public
works, projects or other improvements.

SPECIAL PROVISIONS

Sec 276. Condonation or Reduction of Real
Property Tax and Interest. sanggunian by
ordinance passed prior to the first (1st) day of
January of any year + upon recommendation of
the Local Disaster Coordinating Council, may
condone or reduce, wholly or partially, the
taxes and interest thereon for the succeeding
year or years in the city or municipality affected
by the calamity in cases of:
general failure of crops
substantial decrease in the price of
agricultural or agribased products
calamity in any province, city or municipality

Sec 277. Condonation or Reduction of Tax by
the President of the Philippines. President
may, when public interest so requires,
condone or reduce the real property tax and
interest for any year in any province or city or a
municipality within the Metropolitan Manila Area.

TAXATION LAW 2
START
Flowchart V: Procedure for Assessment of Land Value for Real Property Tax
Purposes-Local Govt Code
Owner declares real
property once every 3
years (sec. 202) w/n
Jan 1 to June 30
Assessor declares
real property if owner/
administrator fails to
do so (sec. 204)
Assessor prepares
assessment rolls
wherein real property
shall be listed, valued
and assessed (sec. 205)
For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto
Owner may claim
for tax exemption
(sec. 206)
Submit documents
supporting exemption w/
in 30 days from
declaration (sec. 206)
Required
Documents
submitted w/in
30 days?
Property
proven as tax
exempt?
Property shall be
dropped from
assessment roll
(sec. 206)
Property shall be
listed as taxable in
the assessment
roll (sec. 206)
Within 30 days from
assessment, assessor
sends notice to owner
(sec. 223)
Owner may protest
assessment within 60
days from receipt of notice
to the Local Board of
Assessment Appeals
(LBAA) (Sec. 226)
LBAA must decide
within 120 days
from receipt of
appeal (sec. 229)
If LBAA rejects protest, owner
may appeal to the Central
Board of Assessment Appeals
(CBAA) w/in 30 days from
receipt of notice (Sec. 229)
If CBAA rejects protest,
owner may appeal to
the CTA en banc within
30 days from receipt of
decision
Appeal to the
Supreme Court w/
in 15 days
Yes
Yes
Is real property
tax exempt?
No
END
No
Yes
No
END

TAXATION LAW 2
START
Flowchart VI: Taxpayers Remedies Involving Collection of Real Property
Tax-Loc Govt Code
Assessor submits
assessment roll to
local treasurer
(sec. 248)
LT posts notice of deadline for
payment at a conspicuous place at
the LGU hall OR publish the same
in a newspaper of general
circulation in the LGU 1x a week for
2 consecutive weeks (sec. 249)
LT collects the tax
starting Jan 1 of
the calendar year.
(Sec. 257)
For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto
Owner pays the tax.
Written protest must be
filed with the local
treasurer w/in 30 days
from payment. (sec. 252)
LT must decide w/
in 60 days from
receipt of protest
(sec. 252)
LT decides w/in
60 days?
LT grants
protest?
Amount of tax
protested shall be
refunded or
applied as tax
credit (Sec. 252)
Taxpayer may appeal within within 60
days from receipt of notice (or expiration
of 60 days) to the LBAA (Sec. 226)
LBAA must decide
within 120 days
from receipt of
appeal (sec. 229)
If LBAA rejects protest/
refund, owner may
appeal to the CBAA w/
in 30 days from receipt
of notice (Sec. 229)
If CBAA rejects protest/
refund, owner may appeal to
the CTA en banc within 30
days from receipt of decision
(Rule 43, ROC)
Appeal to the
Supreme Court w/
in 15 days
No
Yes Yes
No
Taxpayer happy.
END
Refund or tax credit must
be claimed with the local
treasurer w/in 2 years from
the date taxpayer is entitled
to such (sec. 253)
LT acts on claim
for refund/tax
credit w/in 60
days?
LT grants
refund/tax
credit?
No
Yes Yes
No
Taxpayer may appeal
w/in 60 days from
receipt of notice (or
expiration of 60 days)
to LBAA (Sec. 226)
LT- Local Treasurer
LGU - Local Government Unit
LBAA- Local Board of Assessment Appeals
CBAA- Central Board of Assessment Appeals
CTA- Court of Tax Appeals
END

TAXATION LAW 2

TAXATION LAW 2
VIII. VIII. VIII. VIII. TARIFF AND CUSTOMS CODE TARIFF AND CUSTOMS CODE TARIFF AND CUSTOMS CODE TARIFF AND CUSTOMS CODE
Provisions cited are that of
I. ARTICLES SUBJECT TO DUTY

A. Export (suspended except on logs) and
import duties

B. Meaning of importation

Sec. 1201
All articles imported into the Philippines, whether
subject to duty or not, shall be entered through
the customhouse at a port of entry

Sec. 1202
Importation BEGINS:
vessel or aircraft enters the jurisdiction of
Philippines with intention to unlade

TERMINATED:
1) payment of duties, taxes and other charges
2) secured to be paid and legal permit for
withdrawal has been granted
3) articles have legally left the jurisdiction of
customs

C. Classes of importation

1. Dutiable importation

All articles, when imported from any foreign
country into the Philippines, shall be subject to
duty upon each importation, even though
previously exported from the Philippines,
except as otherwise specifically provided for in
this Code or in other laws. (100)

2. Prohibited importations (POPP-LAW-
DING)

Sec. 101

a. Dynamite, gunpowder, ammunitions and other
explosives, firearm and weapons of war, and
detached parts thereof, except when authorized
by law.

b. Written or printed article in any form
containing:
1) any matter advocating or inciting treason,
rebellion, insurrection or sedition against the
Government of the Philippines
2) forcible resistance to any law of the Philippines
3) containing any threat to take the life of or inflict
bodily harm upon any person in the Philippines.

c. Written or printed articles, photographs,
engravings, lithographs, objects, paintings,
drawings or other representation of an obscene
or Immoral character.

d. Articles, instruments, drugs and substances
designed, intended or adapted for Preventing
human conception or producing unlawful
abortion, or any printed matter which
advertises or describes or gives directly or
indirectly information where, how or by whom
human conception is prevented or unlawful
abortion produced.

e. Roulette wheels, Gambling outfits, loaded dice,
marked cards, machines, apparatus or
mechanical devices used in gambling, or in the
distribution of money, cigars, cigarettes or
other articles when such distribution is
dependent upon chance, including jackpot and
pinball machines or similar contrivances.

f. Lottery and sweepstakes tickets,
advertisements thereof and lists of drawings
therein.
except those authorized by the Philippine
Government

g. Any article manufactured in whole or in part of
gold silver or other Precious metal, or alloys
thereof, the stamps brands or marks of which
do not indicate the actual fineness or quality of
said metals or alloys.

h. Any Adulterated or misbranded article of food
or any adulterated or misbranded drug in
violation of the provisions of the "Food and
Drugs Act."

i. Marijuana, opium poppies, coca leaves, or any
other Narcotics or synthetic drugs which are or
may hereafter be declared habit forming by the
President of the Philippines, any compound,
manufactured salt, derivative, or preparation
thereof,
except when imported by the Government of
the Philippines or any person duly authorized by
the Collector of Internal Revenue for medicinal
purposes only.

j. Opium pipes and parts thereof, of whatever
material.

k. All other articles the importation of which is
Prohibited by law.

Sec. 1207
It is the duty of the Collector to exercise
jurisdiction to
- prevent importation (prohibited importation) or
- secure compliance with legal requirements
(articles that may be imported subject to
conditions)

TAXATION LAW 2
3. Conditionally-free importation (Sec. 105)

ARTICLE CONDITIONS
Aquatic products - Caught, gathered and imported by fishing
vessels of Phil registry
- Not have landed in foreign territory, or if
landed, solely for transshipment
Equipment used for the salvage of vessels or aircraft
not available locally
- bond = 1 x of ascertained duties, taxes
and charges
- must be exported within 6 months
Costs of repair made in foreign country of Phil
vessels aircrafts
- Phil must not have adequate facilities to
make repair
- Vessel was compelled by weather or
casualty to go to foreign port for repair
- Excludes value of article used for repair
Articles brought into Phil for repair, processing or
reconditioning
- to be re-exported
- bond = 1 x of ascertained duties, taxes
and charges
- must be exported within 6 months
Trophies, prizes (medals, badges, cups)
Those received as honorary distinction

Personal and household effects of returning Phil
residents
- formally declared and listed before
departure
- including those purchased abroad necessary
and appropriate and used for comfort and
convenience
- must have been using item abroad for more
than 6 mos
- must accompany them or arrive within
reasonable time
- not in commercial quantities
- total DV not exceed P2,000
in excess of P2,000 50% ad
valorem
- returning resident has not previously
availed of this benefit within 1 year
- if resident was abroad for less than 6 mos
50% ad valorem (DV <P2T)
Effects of travelers, tourist (wearing apparel,
personal adornment, toiletries, portable tools and
instruments, costumes)
- arrive with or at a reasonable time
- necessary and appropriate for wear
and use according to nature of
journey, comfort and convenience
- articles NOT for hire, sale, barter
- Collector may require: written
commitment or bond
Personal and household effects, vehicles of foreign
consultants and experts hired or rendering service to
govt
- including staff and families
- accompany them or arrive at a reasonable
time
- in quantities and kind necessary and
suitable to the profession, rank or position
- for their own use, NOT for sale, barter, hire
- Collector may require: written commitment
or bond
Professional instruments
Tools of trade
Wearing apparel
Domestic animals
Personal & household effects
belong to persons coming to settle in Phil &
overseas Filipinos
- in quantities and kind necessary and
suitable to the profession, rank or position
- for their own use, NOT for sale, barter, hire
- change of residence is bona fide
- privilege of free entry was never granted to
them before or qualifies under LOI 105,
163, 210
Articles used exclusively for public entertainment;
display in public expos;
exhibition or competition for prizes; devices for
projecting picture
- must file bond (1 X)
- exported within 6 mos
- not exhibited for profit
- otherwise, confiscation+ penalty
Brought by foreign film producers for making or
recording motion pictures on location in Phil

Photographic and cinematographic films,
undeveloped, exposed outside Phil by resident
Filipinos or Phil producing companies
- must file bond (1 X)
- exported within 6 mos (unless extended by
Collector for another 6 mos)
- principal actors are Filipinos
- affidavit by importer that the exposed films
are same films previously exported
Importations used by foreign embassies, legations,
agencies of foreign govt
- Reciprocity: such foreign country must
grant same privilege to Phil agencies
Articles for personal or family use of members and - such privileges must be accorded in a

TAXATION LAW 2
attaches of foreign embassies, legations, consular
officers and other reps of foreign govt
special agreement between Phil and the
foreign country
- privilege may be granted only upon specific
instructions of Sec of Finance which will be
given only upon request of DFA
Articles donated to or for account of relief
organization
- org not for profit
- for free distribution to the needy
Containers, holders and similar receptacles - except those that are reusable for shipment
or transportation of goods
Supplies of vessel or aircraft - for use or consumption of passengers on
board
- any surplus or excess shall be dutiable
Articles and salvage after 2 years from filing protest - vessels must have been wrecked or
abandoned in Phil waters
Coffins or urns containing human remains, bones
ashes
Personal and household effects of deceased EXCEPT
vehicles
- not exceed P10,000

Samples
- unsaleable
- no appreciable commercial value
- Models not for practical use

Sample medicines

Commercial samples

- marked sample sale punishable by law
- for purpose of introducing new product
- imported by person duly registered and
identified to be engaged in that trade
- importations authorized by Sec of Finance

- authorized by DOH
- not available in Phil

- not exceed P10,000
in excess of P10,000, it may be entered
in bond or for consumption
- bond (2x) conditioned on exportation w/n
6 mo
Animals and plants
for scientific, experimental, propagation,
botanical, breeding zoological and defense purposes

Economic, technical, vocational, scientific,
philosophical, historical and cultural books and
publications

Phil articles previously exported and returned
without increasing value or improved condition

Foreign articles previously exported when returned
after having been exported and loaned for use
temporarily abroad solely for exhibition

Foreign container used in packing exported Phil
products
Note that if a drawback or bounty was allowed
to any Phil article under this subsection, upon
re-importation article shall be subject to duty
equal to the bounty or drawback
Articles and supplies imported by and for use of
scheduled airlines operating under congressional
franchise
(Aircraft, equipment & machinery, spare parts
commissary and catering supplies, aviation gas, fuel
& oil)
- such articles are not available locally in
reasonable quantity, quality and price
- necessary or incidental to proper operations
machineries, equipment, tools for production, plants
to convert mineral ores into saleable form, spare
parts, supplies, materials, accessories, explosive,
chemicals, transpo and communication facilities
imported by and used by new mines and old mines

aircrafts imported by agro industrial companies,
spare parts and accessories
- such articles are not available locally inn
reasonable quantity, quality and price
- necessary or incidental to proper operations

- used in their agri and industrial operations
Spare parts of vessels or aircrafts of foreign registry
engaged in foreign trade
- brought to Phil as replacement or for
emergency repair
- spare parts utilized to secure safety,
seaworthiness or airworthiness, enable it to
continue voyage or flight
Articles of easy identification exported from Phil for
repair and subsequently reimported
- cannot be repaired locally
- cost of repair made on article shall pay
30% ad valorem
Trailer chassis imported by shipping companies for
handling containerized cargo
- bond (1 x) to cover 1 year
- must be properly identified and registered
with LTO

TAXATION LAW 2
- subject to customs supervision fee
- deposited in Customs zone when not in use
- upon expiration of period (1 yr or as
extended by Commissioner) duties and
taxes shall be paid
Personal and household effects (including one car)
officer/ Ee of DFA, attach, staff assigned to Phil
diplomatic mission abroad
personnel of Reparations Mission in Tokyo
AFP military personnel in SEATO
AFP military personnel accorded diplomatic rank
on duty abroad
returning from regular assignment, reassignment,
dies, resigns, retires
- Car must have been purchased or ordered
before the mission or consulate received his
order of recall
- the value of personal and household effects
shall not exceed 30% of his total salary

II. RATES OF DUTY

A. General Rules

Sec. 104
There shall be levied, collected and paid upon all
imported articles the rates of duty indicated.

Max rate: NOT exceed 100% ad valorem

Rates of duty shall apply to ALL products whether
imported directly or indirectly of all foreign
products which do not discriminate against
Philippine products
If foreign country discriminates
additional 100% across-the-board duty
on their products

Rates of duty shall be subject to periodic
investigation by Tariff Commission and may be
revised by President upon recommendation of
NEDA.

Sec 106
DRAWBACKS - in the nature of refund or tax credit

a) Fuel used for Propulsion of Vessels engaged in
trade with foreign countries or coastwide trade
refund or credit not exceeding 99% of
duty imposed by law on such fuel

b) petroleum oils and oils from bituminous
minerals, crude oils imported by non electric
utilities and then sold to electric utilities for
generation of electric power
refund or credit not exceeding 50% of duty
imposed by law

c) exportation of articles manufactured or
produced in Phil (including packing + covering
+ marking/labeling) of imported materials for
which duties have been paid

CONDITIONS:

1. imported material was actually used in the
production of article to be exported
2. refund or credit shall not exceed 100% of
duties paid on the imported material
3. no determination by NEDA of the requirement
for certification on non availability of locally
produced or manufactured competitive
substitutes for the imported material (I think
this means there are no local substitutes for
the material..)
4. exportation must be made 1 year after
importation of material claim for refund or
credit must be made 6 months from
exportation
5. when 2 or more result from the used of same
imported material, apportionment shall be
made

every application for drawback must pay P500
filing, processing and supervision fees
claims shall be paid by Bureau of Customs
within 60 days after receipt of properly
accomplished claims

B. Basis of Duty

Sec. 201 Basis of Dutiable Value (note: RA 8181
amended this section)
The DV shall be the Transaction Value which is the
price actually paid or payable for the goods when
sold for export to the Phil, adjusted by:

a. commissions and brokerage fees
costs of containers
costs of packing

b. value of materials, components, parts and item
incorporated in the imported good;
tools, dies, moulds used I the production;
materials consumed in the production;
engineering, development, artwork, design,
plans and sketches undertaken not in Phil
such goods and services were supplied by
buyer to seller free of charge or at a reduced
rate to the extent that value was not included
in the price paid

c. royalties and license fees that buyer paid

d. any part of the proceeds of a subsequent
resale, disposal or use of good that accrues to
the seller

e. transportation cost from port of export to port
of entry in Phil

f. loading, unloading and handling charges
(arrastre)

g. insurance

Alternative Methods
37
:
1. TV of identical goods sold for export in Phil at
or about the same time as good being valued
2. TV of similar goods sold for export in Phil at or
about the same time as good being valued

37
Methods are applied successively. Alternative methods are
used when value cannot be determined through successive
application of previous methods.

TAXATION LAW 2
if DV still cannot be determined using through
the successive application of the methods above,
the order of succession of the ff may be reversed
upon request of the importer:

3. unit price at which the imported or similar or
identical good is sold domestically
same condition as when imported to persons
not related to seller at or about the same time
of the importation of the goods being valued

COMPUTED VALUE = cost of raw materials + profit
and general expenses + freight + insurance
fees + transpo expenses

4. using other means consistent with accepted
principles of GATT

values shall be ascertained by Commissioner
from reports of revenue and commercial
attaches
values shall be published in at least 1
newspaper of general circulation
party dissatisfied with the values can file
protest 15 days from date of publication
if it becomes necessary to delay the final
determination of DV, release of imported goods
may be had by filing cash bond (imposable
duties and taxes + 25% thereof)

Reasonable Doubt refers to any condition that
creates a probable cause to make the
Commissioner of Customs believe in the
inaccuracy of the invoice value of imported
goods as declared by importer.

It may include the following situations:

1. if sale price is subject to some consideration
which value cannot be determined such as:
a. seller fixes price on condition that buyer
will also buy other goods in specified
quantities
b. price of imported goods is dependent
upon price at which buyer sells other
goods to seller
c. price is established on the basis of a
form of payment extraneous to the
Imported goods

2. part of proceeds of subsequent resale ,
disposal or use of goods will accrue to the
seller

3. buyer and seller are related to one another
and relationship affected the price. They
are related if:
-officers or directors of one anothers
business
-legally recognized partners in business
-Er-Ee (removed in RA 8181, but included
in CA 2-99)
-Any person owns, controls or holds 5% or
more of the outstanding voting stocks of
both of them
-One of them directly or indirectly controls
the other
-Both directly or indirectly controlled by
third person
- members of same family including
brothers and sisters (whether full or
half), spouse, ancestors and lineal
descendants (note change in CA 2-99)

identical Goods same in all respects
including physical characteristics, quality
and reputation.

Similar Goods although not alike in all
respects, have like characteristics and
component materials which enable them to
perform the same functions and be
commercially interchangeable

Sec. 202 Bases of Dutiable Weight
a) gross weight: weight of article + weight of all
containers, packages, holders and packing
where articles were contained during
importation
b) legal weight: weight of article + weight of
immediate containers, holders where such
articles are usually contained at the time of
their sale to the public in retail quantities
c) net weight: only the actual weight of article
d) articles affixed to cardboard, cards, paper,
wood shall be dutiable together with weight of
such holders
e) when a single package contains articles
dutiable according to different weights, the
common exterior of the receptacle shall be
prorated.

Sec. 203 Rate of Exchange
Value quoted in foreign currency shall be converted
into Phil currency at the exchange rate published
by Central Bank

Sec. 204 Effective Date of Rates of Import Duty
Imported articles shall be subject to rates of import
duty existing at the time of entry or withdrawal
from warehouse

For articles abandoned, forfeited or seized by
government and sold at public auction, the rate of
duty shall be the rates in force at the time of
auction

Duty based on weight, volume and quantity shall
be levied and collected on the weight, volume and
quantity at time of entry into warehouse or date of
abandonment/forfeiture/seizure.

Sec. 205
Imported article deemed entered in Phil for
consumption when:
- entry form is properly filed and accepted
together with related documents
- duties, taxes, fees and other charges are paid
or secured to be paid imported article

deemed to be withdrawn from warehouse
in the Phil for consumption when:
- entry form is properly filed and accepted
together with related documents
- duties, taxes, fees and other charges are paid
or secured to be paid

Sec. 1308
Contents of Commercial Invoice
a. place, date, person by whom and the person to
whom articles are sold
If imported other than in a purchase, place
from which shipped, date when the person to
whom and by whom they are shipped
b. port of entry
c. detailed description of the articles (sufficient for
tariff classification and statistical purposes)
d. quantities

TAXATION LAW 2
e. if articles bought in pursuance to purchase,
purchase price in the currency of purchase and
the unit of quantity in which the articles were
bought
f. if articles shipped otherwise than purchase,
value of each article in unit which the article is
usually bought and sold and in the currency
they are usually transacted
OR price in the currency manufacturer would
receive if sold in ordinary course of trade in
usual wholesale quantities
g. all charges
h. discounts, rebates, drawbacks, bounties
i. current home consumption value or price
j. other facts necessary for proper examination,
appraisement and classification of the articles

Sec. 1309 Certificate of Invoice
Commercial invoice must be presented to the
consular officer of the Phil for certification at the
time or before or immediately after the shipment of
article

Consular invoice shall be certified in consular
district where articles were manufactured or
purchased or shippers.
In the absence of Phil consul, the invoice may
be certified by consular officer in the district
nearest the place of exportation or person
designated by DFA

Sec. 1310
All importations exceeding P10, 000 in DV shall be
entered only
1. upon presentation of consular invoice under
penalties of falsification, perjury. All
importations exceeding P10, 000 in DV shall be
entered only upon presentation of consular
invoice under penalties of falsification, perjury
OR
2. Affidavit showing cause why it is not possible to
produce invoice + bond

Exempt from consular invoice requirement:
a. conditionally free importations
b. tax free importations
c. importations of government agencies and
instrumentalities
d. importations on consignment basis under RA
3137 and RA 6135 for re export

Sec. 1313 Information Furnished on Classification
and Value
Classification:
When article not specifically classified in code, the
interested party, importer or foreign exporter may
submit a sample with full description of component
materials in a written request.

Value:
Upon written application, Collector shall furnish
importer within 30 days the latest information as to
the DV of articles to be imported.

Importer must present all pertinent papers and
documents, act in good faith and unable to obtain
information due to unusual conditions

Information given is not an appraisal nor is it
binding upon the Collectors right of appraisal.

Customs Administrative Order # 2-99
(effective Jan 1, 1999)
DETERMINATION OF DUTIABLE VALUE

Dutiable Value (DV) shall be determined using one
of the 6 methods of valuation.
These methods must be applied in sequence.
However, method 4 and 5 may be reversed at
request of importer(unless there shall be difficulty
in using method 5 in which case Commissioner
shall reject request)

Method # 1
TRANSACTION VALUE
Price actually paid or payable for goods when sold
for export to Phil
+ commissions & brokerage fees
+ cost of containers
+ cost of packing (labor, materials)
+ assists (value of goods and services supplied
by the buyer free of charge or at a reduced price
for use in connection with the production and
sale for export of the good)
+ royalties & license fees
+ value of any part of the proceeds of
subsequent resale, disposal or use of imported
goods that accrue directly or indirectly to seller
+ cost of transport
+ loading, unloading, handling
+ insurance

DV must NOT include:
- charges for construction, erection, assembly
maintenance or technical assistance
undertaken after importation
- cost of transport after importation
- duties and taxes of Phil
- other permissible deduction under WTO
Valuation Agreement

CONDITIONS so the Transaction Value shall be the
DV (CREPD)
1. sale for Export to Phil
2. no restrictions as to the Disposition or use of
goods by buyer except:
- those imposed by law or Phil authorities
- limit the geographical area where goods may
be resold
- do not substantially affect the value of the
goods
3. not be subject to some Condition or
consideration for which value cannot be
determined
4. no part of the Proceeds of any subsequent
disposal shall accrue to the seller
5. buyer and seller are not Related or if they are,
relationship did not affect the price

DEEMED RELATED IF: same with Sec. 201 as
amended by RA 8181 except for the following:

Customs Admin Order
2-99
Sec. 201 as amended
by RA 8181
Employer-Employee None
Together they directly
or indirectly control a
third person
None
Related by affinity or
consanguinity up to 4
th

civil degree
members of same
family including
brothers and sisters
(whether full or half),
spouse, ancestors and
lineal descendants

IF RELATED, USE OF TV ACCEPTABLE IF:
1. circumstances surrounding transaction show
that relationship did not influence the price

TAXATION LAW 2
2. TV closely approximates:
- TV of unrelated buyers of identical or similar
goods
- Deductive value of identical or similar goods
determined according to method #4
- Computed value of identical or similar goods
determined according to method #5

Method # 2
TRANSACTION VALUE OF IDENTICAL GOODS
The DV shall be the transaction value of identical
goods sold for export to the Phil and exported at or
about the same time as the goods being valued.
Identical goods must be same commercial level and
substantially same quantity as the goods being
valued.

Identical goods
- Same in all respects (physical characteristics,
quality and reputation)
- Produced in the same country as the goods
being valued
- Produced by producer of the goods being
valued

excludes imported goods for which engineering,
development, artwork, design work, plans and
sketches is undertaken in the Phil and provided
by the buyer to the producer free of charge or
at a reduced rate

When no identical goods produced by the
same person
identical goods produced by different
producer in the same country

If NO identical goods at same commercial
level and same quantity,
TV of identical goods at a different
commercial level and different quantity
may be utilized
TV shall be adjusted upward or downward
to account for the difference

Method #3
TRANSACTION VALUE OF SIMILAR GOODS
The DV shall be the transaction value of similar
goods sold for export to the Phil and exported at or
about the same time as the goods being valued.
Similar goods must be same commercial level and
substantially same quantity as the goods being
valued.

Similar goods:
- like characteristics and like component
materials
- capable of performing same functions
- commercially interchangeable
- produced in same country
- produced by dame producer
excludes imported goods for which engineering,
development, artwork, design work, plans and
sketches is undertaken in the Phil and provided by
the buyer to the producer free of charge or at a
reduced rate

When no similar goods produced by the same
person
similar goods produced by different producer
in the same country

If NO similar goods at same commercial level
and same quantity,
TV of similar goods at a different commercial
level and different quantity may be utilized
TV shall be adjusted upward or downward to
account for the difference

Method # 4
THE DEDUCTIVE VALUE
DV is determined on the basis of sales in the Phil of
goods being valued of identical or similar imported
goods less certain expenses resulting from
importation and sale of goods.

Deductive Value is determined by making a
deduction from the established price per unit for
the aggregate of the ff elements:
a. Commissions OR
b. additions made in connection with profit and
general expenses AND
c. transport, insurance and associated costs
d. customs duties and other national taxes

PRICE - COMMISIONS/ADDITIONS - COSTS -
DUTIES/TAXES
= DEDUCTIVE VALUE

CONDITIONS:
1. sold in the Phil in the same condition as
imported
2. sales taken place at or about the same time of
importation of good being valued
3. if no sale took place at or about the time of
importation
use sales at the earliest date after
importation (of the similar or identical good)
but before expiration of 90 days
4. if no sale meet the above conditions, importer
may choose the use of sales of goods being
valued after further processing

at or about the same time
45 days prior to and 45 days after importation

Method # 5
THE COMPUTED VALUE
DV is determined on the basis of cost of production
+ profit + general expenses reflected in sales from
exporting country to the Phil of goods of same class
or kind

DV is calculated by:
determine aggregate of relevant costs,
charges and expenses or value of (1)
materials and (2) production or processing
costs
+ costs (containers, packing, assists,
engineering, artwork, plans and sketches
undertaken in Phil and charged to producer
+ profits and general expenses
+ cost of transport, insurance and
charges to the port or place of importation

Method # 6
THE FALLBACK VALUE
- DV cannot be determined using any of the
above methods
- Use other reasonable means consistent with
principles and general provisions of GATT
C. Special Duties

Sec. 301 Dumping Duty
When Sec of Finance receives a petition or has
reason to believe that a specific foreign article is
being imported into, or sold/ likely to be sold in
Phil, at a price less than its normal value

TAXATION LAW 2
within 20 days, must determine prima facie case
for dumping

Sec. 302 Countervailing Duty
When an article is granted any bounty, subsidy or
subvention upon its production, manufacture or
exportation in the country of origin and importation
of which is likely to injure an established industry
or retard the establishment of industry in Phil
countervailing duty = ascertained or estimated
amount of bounty, subsidy or subvention

Injury criterion shall be applied only on imports
from countries which adhere to GATT
If article was allowed a drawback, only the
excess of the amount of drawback over the
total duties and taxes shall constitute bounty,
subsidy, subvention
When the conditions which necessitated the
imposition of countervailing duties have ceased
must discontinue imposition

Sec. 303 Marking
a. marking of articles
marked in official language of Phil and in
conspicuous places to indicate to the ultimate
purchaser the name of country of origin

b. marking of containers
failure to mark 5% ad valorem

failure or refusal to mark within 30 days
from date of notice shall constitute act o
abandonment.

no imported article shall be delivered until
it has been inspected, examined or
appraised

Sec. 304 Discrimination by Foreign Countries
The president may proclaim new and additional
duties in an amount not exceeding 100% ad
valorem on articles from country where:
1. imposes an unreasonable charge, exaction not
equally enforceable in other laws
2. discriminate against the commerce of Phil in
such a way that it places Phil commerce at a
disadvantage

D. Flexible Tariff Rates

Sec.401
Pres is empowered to:
1. increase, reduce or remove existing rates
2. establish quota or ban import of any
commodity
3. impose an additional duty not exceeding 10%
ad valorem

the pres power to increase or decrease rates of
import duty shall include authority to modify the
form of duty

any order of Pres shall take effect 30 days after
promulgation
except if the imposition of additional duty is less
than 10%, it shall take effect upon the discretion of
the President.

III. IMPOSITION OF DUTIES

A. Persons liable
Deemed Owner of Imported Articles:
1. consignee
2. holder of bill of lading
3. if consigned to order, the consignor
4. underwriters of abandoned articles and salvors
of articles saved at a wreck

the liability of importer for the duties, taxes,
fees and other charges constitute a personal
debt due to the government which may be
discharged only upon full payment. It also
constitutes a lien upon the articles imported
while articles are in custody or subject to
control of government

all importations by the government, its
branches, instrumentalities, GOCCs, agencies or
instrumentalities owned or controlled by
government are subject to similar duties, taxes
and fees except for those provided in Sec. 105
(conditionally free imports)

B. Declaration

Imported articles must be entered in customhouse
at the port of entry within 30 days from date of
discharge by:
1. importer, being holder of B of L
2. customs broker
3. agent

Import entries:
1. Informal entry
- articles of commercial nature intended for
sale, barter or hire the DV is P2,000 or less
- personal and household effects, not in
commercial quantity, for personal use

2. Formal entry
- may be for immediate consumption, or under
irrevocable domestic letter of credit, bank
guarantee or bond for:
a. placing article in customs bonded
warehouse
b. constructive warehousing and immediate
transportation to other Phil ports upon
proper examination and appraisal
c. constructive warehousing and immediate
exportation

Written Declaration of Import Entry must contain
statements that declare:
1. full account of value or price
2. the invoice and entry contains just and faithful
account of the value or price of articles; nothing
has been omitted or concealed
3. to the best of knowledge of declaring, all the
invoices and B of L are the only ones in exiting
in relation to the importation in question
4. the invoices, entries and B of L are genuine and
true

signed by importer, consignee or holder of bill,
manager of corporation, firm or association,
licensed customs broker

Form of Import Entry:
- shall be signed by person making entries
- have required # of copies as prescribed by RR
Contents:
- name of importing vessel or aircraft
- # and marks of packages,
- quantity
- description of article

TAXATION LAW 2
- value set in the invoice

C. Examination, Appraisal and Classification
(1405-08)

Procedure:
1. appraisers shall ascertain, estimate, determine
the value or price of articles
file action within 1 year
2. examiners shall render a report
3. appraisers shall describe all articles on the face
of entry in tariff
15 days

An appraisal, fully passed upon and approved by
Collector, may not be altered or modified except:
1. statement of error
2. request for reappraisal and/or classification

if duty assessed amount is lower than the entered
value

D. Assessment of Taxes

E. Liquidation (1601-03)
Liquidation shall be made on the face of entry
showing the particulars

Daily record of entries liquidated shall be posted on
the public corridor of customs house

Tentative Liquidation-if to determine the exact
amount due some future action is required,
liquidation is deemed tentative as to items affected
and shall be subject to future and final adjustment
and settlement within 6 months

Finality of Liquidation: After expiration of 1 year
from date of final payment of duties

In the absence of protest, final and conclusive
between the parties unless liquidation was
tentative

IV. REMEDIES OF THE GOVERNMENT

A. Extrajudicial

1. Enforcement of Tax Lien

Sec. 1508
When an importer has an outstanding and
demandable account with the Bureau of
Customs,
- Collector shall hold the delivery of the
article
- Upon notice, he may sell such
importation or a portion of it to satisfy
the obligation
importer may settle his obligation anytime
before the sale

2. Seizure and Forfeiture

Sec 2205
WHO: customs official
Fisheries Commissions
Philippine Coast Guard

to make seizure of any vessel, aircraft,
cargo, animal or any movable property when
the same is subject to forfeiture or liable for
any fine under the tariff and customs law

ADMINISTRATIVE PROCEEDINGS
(Secs 2301 2316)

When seizure is made:
1. Collector shall issue a warrant for the
detention of the property

Cash bond
- if importer wishes to secure release of
article for legitimate use
- amount fixed by Collector
- conditioned on payment of appraised
value of article and/or fine, expenses,
costs

article will NOT be released if:
- prima facie evidence of fraud in the
importation]
- article is prohibited by law

2. Report to Commissioner and Chairman of
Commission of Audit

3. written notice to owner or importer
he shall he given opportunity to be heard

Notification to an unknown owner
- posting for 15 days in the public corridor
of customhouse
- publication in newspaper
- other means Collector considers desirable

4. Collector shall make a list and particular
description and classification of the seized
property, appraisal based on local
wholesale values by
- at least 2 appraising officials
- absent such, 2 competent disinterested
citizens

If within 15 days from notification, no
owner or agent is found or appears before
Collector
property forfeited to Government and
sold at auction

SETTLEMENT
While case is pending, Collector may accept
settlement of any seizure case
- upon approval of Commissioner
- payment of fine ( 25% - 80% of the
landed cost of the article)
In case of forfeiture, should pay the
domestic market value of the seized
article

Settlement NOT allowed:
o Fraud in importation
o importation prohibited by law
o release would be contrary to law

PROTEST
- written protest
- payment before protest is necessary
(amount due + docket fee)

When: at the time payment of the amount
claimed to be due is made within 15 days
thereafter

Form: filed according to RR; point out the
particular decision or ruling grounds used as
basis for the protest

TAXATION LAW 2
Scope: limited to the subject matter of a single
adjustment (refers to the entire content of one
liquidation including duties, fees, surcharges
and fines) or other independent transaction

failure to protest will render the action of the
Collector final and conclusive except for
manifest error

upon demand of Collector, the importer shall
furnish samples of the articles which are the
subject of the protest

HEARING: 15 days after filing of protest
DECISION: within 30 days

REVIEW BY COMMISIONER: 15 days after
notification in writing of Collectors decision
if decision of Collector is adverse to
government automatic review

DECISION OF COMMISIONER: within 30 days
notice to party who brought case ( if seizure
case, personal service if practicable)

REVIEW BY SECRETARY OF FINANCE
if decision of Collector is adverse to
government automatic review

Inaction of Commissioner or Secretary for
30 days from receipt of records of the case
decision under review becomes final and
executory

APPEAL TO CTA: within 30 days from receipt of
copy of decision

COMPROMISE
Commissioner may compromise any case
subject to approval by Secretary

B. Judicial
(see flowchart IX)
V. REMEDIES OF THE TAXPAYER

A. Refund (1707-08)

When:
1. manifest clerical error made in invoice
or entry
2. error in return of weight, measure and
gauge
- certified, under penalties of
falsification or perjury, by
examining official
3. error in the distribution of charges on
invoices
- not involving any question of law
- certified, under penalties of
falsification or perjury, by
examining official

Conditions
1. errors discovered before payment OR
discovered within 1 year after the final
liquidation
2. written request and notice from
importer OR statement of error
certified by the Collector

How:
1. Claim made in writing
2. Collector shall verify with the records
in his office
3. certify claim to Commissioner with his
recommendation and necessary papers
4. Commissioner shall then cause the
claim to be paid if found correct

If the result of the refund would result
to a corresponding refund of the
internal revenue taxes on the same
importation, Collector shall certify to
Commissioner who shall cause the said
excess to be paid, refunded or credited
in favor of the importer

B. Protest (2308-09. 2312)

- written protest
- payment before protest is necessary
(amount due + docket fee)

When: at the time payment of the amount
claimed to be due is made within 15 days
thereafter

Form: filed according to RR point out the
particular decision or ruling ground used as
basis for the protest

Scope: limited to the subject matter of a
single adjustment (refers to the entire
content of one liquidation including duties,
fees, surcharges and fines) or other
independent transaction

failure to protest will render the action
of the Collector final and conclusive
except for manifest error

upon demand of Collector, the importer
shall furnish samples of the articles
which are the subject of the protest

C. Abandonment (1801-03)

Article is deemed abandoned when:
1. owner, importer or consignee expressly
signifies in writing to Collector his
intention to abandon
2. after due notice, fails to file an entry
within 30 days from date of discharge
of last package from vessel or aircraft
3. after filing entry, fails to claim his
importation 15 days from date of
posting of the notice to claim such
importation

Effect:
- deemed to have renounced his interest
and property rights
- ipso facto deemed property of the
Government

any official or employee who:
- had knowledge of the existence of
abandoned article
- custody or charge of such article
fails to report within 24 hours from
time article deemed abandoned shall be
punished accdg to sec. 3604 ( fine: P5000
P50,000mprisonment: 1 yr 10 yrs
perpetual disqualification to hold public
office, vote and participate in election)

TAXATION LAW 2
VI. Pertinent Amendments by RA 9135

1. Post-entry Audit & Examination

Sec. 3513. Importers are required to keep at
their principal place of business for a period
three (3) years from importation, all records
of their importations and/or books of
accounts, business and computer systems.
Brokers are likewise required to do so with
respect to transactions they handle.

Sec 3515.
Customs Officers authorized by the Bureau of
Customs may enter during office hours
premises where records are kept by
importers/customs brokers to conduct audit
of books, records or documents for the
purpose of collecting the proper duties and
taxes.

2. Acquisition of grossly undervalued
goods

Sec 2317.
In order to prevent undervaluation of goods
subject to ad valorem duty, the
Commissioner of Customs may acquire
imported goods for a price equal to their
declared customs value plus any duties
already paid on the goods, payment for which
shall be made within ten (10) working days
from issuance of a warrant signed by the
Commissioner of Customs for the acquisition
of such goods.

TAXATION LAW 2

TAXATION LAW 2

UP 2008 Taxation Law (Taxation 2)

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